• Tag Archives Monetary Policy
  • Business Cycles and Inflation – Part I

    Incrementum Advisory Board Meeting Q4 2017 – Special Guest Ben Hunt, Author and Editor of Epsilon Theory
    The quarterly meeting of the Incrementum Fund’s Advisory Board took place on October 10 and we had the great pleasure to be joined by special guest Ben Hunt this time, who is probably known to many of our readers as the main author and editor of Epsilon Theory. He is also chief risk officer at investment management firm Salient Partners. As always, a transcript of the discussion is available for download below.
    As usual, we will add a few words here to expand a little on the discussion. A wide range of issues relevant to the markets was debated at the conference call, but we want to focus on just one particular point here that we only briefly mentioned in the discussion. In fact, as you will see we are about to go off on quite a tangent (note: Part II will be posted shortly as well).
    Among the things Ben Hunt specializes in are the narratives accompanying economic and financial trends, and not to forget, economic and monetary policy, which inform the ‘Common Knowledge Game’ (in his introductory remarks, Ronald Stoeferle provides this brief definition: ‘It’s not what the crowd believes that’s important; it’s what the crowd believes that the crowd believes’). This reminded us of something George Soros first mentioned in a speech he delivered in the early 1990s:
    Economic history is a never-ending series of episodes based on falsehoods and lies, not truths. It represents the path to big money. The object is to recognize the trend whose premise is false, ride that trend, and step off before it is discredited.

    This post was published at Acting-Man on November 17, 2017.


  • Draghi Speech: Everything Is Awesome In Europe, No Signs Of Systemic Risks

    Mario Draghi gave the keynote speech at the Frankfurt European Banking Congress this morning in which he focused on the strong outlook for the Eurozone economy and how his monetary policy is playing a vital role. The speech was peppered with upbeat phrases and adjectives like solid, robust, unabated, endogenous propagation, resilient, remarkable and ongoing. According to Draghi.
    The euro area is in the midst of a solid economic expansion. GDP has risen for 18 straight quarters, with the latest data and surveys pointing to unabated growth momentum in the period ahead. From the ECB’s perspective, we have increasing confidence that the recovery is robust and that this momentum will continue going forward. Draghi is confident that future growth will be unabated for three reasons.
    Previous headwinds have dissipated; Drivers of growth are increasingly endogenous rather than exogenous; and The Eurozone economy is more resilient to new shocks. In terms of previous headwinds, Draghi notes that global growth and trade have recovered, while the eurozone has de-leveraged.

    This post was published at Zero Hedge on Nov 17, 2017.


  • Hayek on Good and Bad Unemployment Policies

    In 1944 Professor Hayek emphasised that sustainable employment de pends on an appropriate distribution of labour among the different lines of production. This distribution must change as circumstances change. Sustain able employment thus depends on appropriate changes in relative real wage-rates. If established producers – both unions and capitalists – prevent such relative changes from becoming effective, there follows an unnecessary rise in unemployment. Sustainable employment now depends on successfully tackling these established labour and capital monopolies. – Sudha R. Shenoy
    One of the obstacles to a successful employment policy is, paradoxically enough, that it is so comparatively easy quickly to reduce unemployment, or even almost to extinguish it, for the time being. There is always ready at hand a way of rapidly bringing large numbers of people back to the kind of employment they are used to, at no greater immediate cost than the printing and spending of a few extra millions. In countries with a disturbed monetary history this has long been known, but it has not made the remedy much more popular. In England the recent discovery of this drug has produced a somewhat intoxicating effect; and the present tendency to place exclusive reliance on its use is not without danger.
    Though monetary expansion can afford quick relief, it can produce a lasting cure only to a limited extent. Few people will deny that monetary policy can successfully counteract the deflationary spiral into which every minor decline of activity tends to degenerate. This does not mean, however, that it is desirable that we should normally strain the instrument of monetary expansion to create the maximum amount of employment which it can produce in the short run. The trouble with such a policy is that it would be almost certain to aggravate the more fundamental or structural causes of unemployment and leave us in the end in a position worse than that from which we started.

    This post was published at Ludwig von Mises Institute on 11/16/2017.


  • BoE Deputy Governor Gives Crazy Speech Warning Markets Have Underestimated Rate Rises

    On 2 November 2017, the Bank of England raised rates for the first time in a decade and Sterling’s initial rise was promptly sold off by forex traders as we discussed.
    The 7-2 vote by the Monetary Policy Committee was not the unanimous decision some had expected, while Cunliffe and Ramsden saw insufficient evidence that wage growth would pick up in line with the BoE’s projections from just over 2% to 3% in a year’s time. Ben Broadbent, MPC member, deputy governor and known to be a close confidant of Governor Carney, gave a speech today at the London School of Economics (LSE) in which he warned markets that Brexit issues didn’t necessarily mean that interest rates have to remain low.
    Bloomberg reports that Broadbent stated that the Brexit impact on monetary policy depends on how it affects demand, supply and the exchange rate.
    “There are feasible combinations of the three that might require looser policy, others that lead to tighter policy.”
    Which sounds alot like he doesn’t know, although he stuck to the central bankers trusty tool, reassuring LSE students the Phillips Curve “still seems to have a slope”.

    This post was published at Zero Hedge on Nov 16, 2017.


  • The Moment Gary Cohn Realized His Entire Economic Policy Is A Disaster

    Ever since 2012 (see “How The Fed’s Visible Hand Is Forcing Corporate Cash Mismanagement“) we have warned that as a result of the Fed’s flawed monetary policy and record low rates, corporations have been incentivized not to invest in growth and allocate funds to capital spending (the result has been an unprecedented decline in capex), but to engage in the quickest, and most effective – if only in the short run – shareholder friendly actions possible, namely stock buybacks.
    We got a vivid confirmation of that recently when Credit Suisse showed that the only buyer of stock since the financial crisis has been the corporate sector’, i.e. companies repurchasing their own shares…

    This post was published at Zero Hedge on Nov 15, 2017.


  • Sweden: The World’s Biggest Housing Bubble Cracks

    Sweden’s property bubble is probably the world’s biggest, despite which it gets relatively little coverage in the mainstream financial media – although that might be about to change. Warnings about this bubble are not new. In March 2016, Moody’s issued a very explicit warning that Sweden’s negative interest rates were propagating an unsustainable housing bubble.
    The central banks of Switzerland, Denmark and Sweden (all rated Aaa stable) have been among the first to push policy rates into negative territory. A year into this novel experience, Moody’s Investors Service concludes that, from among the three countries, Sweden is most at risk of an – ultimately unsustainable – asset bubble…
    “The Riksbank has not been successful in engineering higher inflation, while Sweden’s GDP growth continues to be among the strongest in the advanced economies,” says Kathrin Muehlbronner, a Senior Vice President at Moody’s.
    “At the same time, the unintended consequences of the ultra-loose monetary policy are becoming increasingly apparent – in the form of rapidly rising house prices and persistently strong growth in mortgage credit”, adds Ms Muehlbronner. In Moody’s view, these trends will likely continue as interest rates will remain low, raising the risk of a house price bubble, with potentially adverse effects on financial stability as and when house prices reverse trends.

    This post was published at Zero Hedge on Nov 15, 2017.


  • White House Considering Mohamed El-Erian For Fed Vice Chair

    In what will come as a big surprise to many Fed watchers, moments ago the WSJ reported that among other candidates, Mohamed El-Erian, former deputy director of the IMF, former head of the Harvard Management Company, Bill Gross’ former partner at Pimco until the duo’s infamous falling out, and one of the few people who – together with John Taylor – actually deserve the nomination, is being considered for the Fed Vice Chairman role. DJ also added that Kansas banking regulator Michelle Bowman is also being considered. From the WSJ:
    The White House is considering economist Mohamed El-Erian as one of several candidates to potentially serve as the Federal Reserve’s vice chairman, according to a person familiar with the matter.
    The process of selecting the Fed’s No. 2 official began this month after President Donald Trump nominated Fed governor Jerome Powell to succeed Fed Chairwoman Janet Yellen when her term expires next February.
    The WSJ adds that there is a broad range of candidates under consideration for post, and that the White House will focus on monetary policy experience for post.

    This post was published at Zero Hedge on Nov 14, 2017.


  • U.K. Litigation Cases On Defaulted Consumer Debts Soar Beyond 2008 Levels

    Last month, S&P warned that UK lenders could incur 30 billion of losses on their consumer lending portfolios consisting of credit cards, personal and auto loans if interest rates and unemployment rose sharply. Much like in the U. S., S&P warned that “loose monetary policy, cheap central bank term funding schemes and benign economic conditions” had fueled an “unsustainable” yet massive expansion of consumer credit that will inevitably end badly. Per The Guardian:
    The rapid rise in UK consumer debt to 200bn from car finance, personal loans and credit cards is unsustainable at current growth rates and should raise ‘red flags’ for the major lenders, ratings agency Standard & Poor’s has warned.
    In detailed analysis of the sector, S&P warned that losses from this form of lending suffered by banks and other financial institutions could be ‘sharp and very sudden’ in an economic downturn and may be exacerbated if the Bank of England increased interest rates.
    It also warned that it could downgrade banks’ credit ratings if the high growth rate persisted or banks took on too much risk in this sector. But it did not fear any system-wide impact from consumer credit.
    ‘Loose monetary policy, cheap central bank term funding schemes and benign economic conditions have supported consumer credit supply and demand,’ S&P said.
    Annual growth rates in UK consumer credit of 10% a year have outpaced household income growth, which is closer to 2%, and become a focus for the Bank which is scrutinising lenders’ approach to the sector.
    ‘We believe the double-digit annual growth rate in UK consumer credit would be unsustainable if it continued at the same pace,’ S&P said.

    This post was published at Zero Hedge on Nov 14, 2017.


  • Key Events In The Coming Week: Taxes, Inflation, Yellen, Draghi, Kuroda And Brexit

    This week’s economic calendar features several key data releases and Fedspeak. The main data release in US include: CPI inflation, retail sales, industrial production, housing data and monthly budget statement. We also get the latest GDP and CPI reading across the Euro Area; the employment report in the UK and AU, Japan GDP, China IP, retail sales and FAI. In Emerging markets, there are monetary policy meetings in Indonesia, Chile, Egypt and Hong Kong.
    Market participants will also want to pay close attention to tax reform progress in Washington. The House Ways and Means Committee had voted along party lines (24-16) to deliver its bill to the full House. The Senate Finance Committee’s proposal was also revealed last week and is slated for markup this week. Both versions are essentially opening gambits by the two chambers and the hard work begins when the two bills are ‘reconciled’. As a reminder, the Senate version is likely to be closer to the final version. In our view, there is a decent chance that some version of tax reform can be achieved, but this is likely to be a Q1 event and there are numerous potential stumbling blocks along the way.
    With respect to the data, October inflation and retail sales reports are the main focus. Tuesday, DB expects headline PPI (+0.1% forecast vs. +0.4% previously) to moderate following a spike in gasoline prices last month due to hurricane-related supply disruptions. However, core PPI inflation (+0.2% vs. +0.1%) should firm. Analyst will focus on the healthcare services component of the PPI, as this is an input into the corresponding series in the core PCE deflator – the Fed’s preferred inflation metric. Recall that healthcare has the largest weighting in the core PCE.

    This post was published at Zero Hedge on Nov 13, 2017.


  • Philly Fed President Unconvincing As He “Lightly” Pencils In December Hike

    Speaking in at a conference in Tokyo, the head of the Philly Fed, Patrick Harker said that he has penciled in a further rate hike by the Fed at its December meeting on 12-13 December 2017. However, his use of the word ‘lightly’ suggested that there may be a degree of wavering on his part. According to Reuters.
    A Federal Reserve official said on Monday he expects to back an interest rate hike next month despite caution over low-inflation, as U. S. central bank policy needs to be positioned to deal with future economic shocks.
    Philadelphia Fed President Patrick Harker said he has ‘lightly penciled in’ a December rate hike. However, he flagged he had slightly less conviction about the policy decision than he had last month as he ‘continues to elicit caution’ about weak inflation and also about the way in which it is measured. Harker said he expects the Fed to raise rates three times next year as long as inflation remains on track, and the projected tightening could take policy to what he would describe as a neutral stance. Harker, a centrist voter on the Fed’s monetary policy committee this year under an internal rotation, said the Fed must continue normalizing policy as the economy is ‘more or less at full strength’ and there remains ‘very little slack’ in the labor market. ‘Removing accommodation is the right next step for a few reasons,’ he said in prepared remarks to a Global Interdependence Center conference in Tokyo…

    This post was published at Zero Hedge on Nov 13, 2017.


  • China Accounts For A Third Of Global Corporate Debt And GDP… And The ECB Is Getting Very Worried

    There is a certain, and very tangible, irony in the central banks’ response to the Global Financial Crisis, which was first and foremost the result of unprecedented amounts of debt: it was to unleash an even greater amount of debt, or as BofA’s credit strategist Barnaby Martin says, “the irony in today’s world is that central banks are maintaining loose monetary policies to generate inflation…in order to ease the pain of a debt “supercycle”…that itself was partly a result of too easy (and predictable) monetary policies in prior times.”
    The bolded sentence is all any sane, rational human being would need to know to understand the lunacy behind modern monetary policy and central banking. Unfortunately, it is not sane, rational people who are in charge of the money printer, but rather academics fully or part-owned, by Wall Street as Bernanke’s former mentor once admitted (see “Bernanke’s Former Advisor: “People Would Be Stunned To Know The Extent To Which The Fed Is Privately Owned“). Actually, when one considers where the Fed’s allegiance lies (to its owners), its actions make all the sense in the world. The problem, as Martin further explains, is that “clearly if central banks remain too patient and predictable over the next few years this risks extending the debt supercycle further.”
    Translated: the bubble will get even bigger. Unfortunately, it is already too big. As Martin shows in chart 9 below, which breaks down global non-financial debt growth over the last 30yrs split by type (household debt, government debt and non-financial corporate debt), “it is currently hovering around the $150 trillion mark and has shown few signs of declining materially of late. Yet, the “delta” of debt growth over the last 10yrs has been on the non-financial corporate side. Government debt growth has slowed down recently as countries have clawed back to fiscal prudence. Households have also deleveraged over the last few years given their rapid debt accumulation prior to the Lehman event.”

    This post was published at Zero Hedge on Nov 10, 2017.


  • GOP Tax Plan Increases the Most Insidious Tax

    Last Thursday, congressional Republicans unveiled their tax reform legislation. On the same day, President Trump nominated current Federal Reserve Board Governor Jerome Powell to succeed Janet Yellen as Federal Reserve chair. While the tax plan dominated the headlines, the Powell appointment will have much greater long-term impact. Federal Reserve policies affect every aspect of the economy, including whether the Republican tax plan will produce long-term economic growth.
    President Obama made history by appointing the first female Fed chair. President Trump is also making history: If confirmed, Powell would be the first former investment banker to serve as chairman of the Federal Reserve. Powell’s background suggests he will continue Janet Yellen’s Wall Street-friendly low interest rates and easy money policies.
    Powell is an outspoken opponent of the Audit the Fed legislation. In 2015, Powell delivered an address at Catholic University devoted to attacking Audit the Fed. Like most Fed apologists, Powell claims the audit would compromise the Fed’s independence and allow Congress to control monetary policy. However, like all who make this claim, Powell cannot point to anything in the text of the audit bill giving Congress any power over the Federal Reserve. Powell’s concerns about protecting the Fed’s independence are misplaced, as the Fed has never been free of political influence. The Fed has a long history of bowing to presidential pressure to tailor monetary policy to help advance the president’s political and policy agenda.

    This post was published at Ludwig von Mises Institute on November 6, 2017.


  • Turkey: A Case Study in the Borrower’s Dilemma

    Editor’s Note: Before we begin, allow us to mention a short survey we’ll be sending in next week’s This Week in Geopolitics. This will provide you with an opportunity to tell us what topics you’re most interested in. We want our content to reflect not only what is happening in the world, but also the interests of our readers. Stay tuned to see how your answers will shape our upcoming material.
    The motivations that underlie a country’s decision to borrow money are not always strictly economical. Take Turkey, whose ratio of gross external debt (all public and private sector debt) to GDP has increased from 39% in 2012 to 52% today. Turkish President Recep Tayyip Erdogan has been pushing to increase investment by increasing available credit to spur economic activity. This is a political goal, though one motivated by economic objectives. The problem Erdogan encountered, however, is that there was not enough domestic capital available to meet Turkey’s lending needs.
    When a country chooses to borrow, it has two sets of choices. First, should it borrow domestically or from abroad? Second, should its debt be denominated in domestic or foreign currency? Each option has its own implications, but it is particularly constraining when a country borrows from abroad in a foreign currency.
    When debt is borrowed in another country’s currency, the borrowing country no longer has the option to depreciate its own currency through monetary policy in order to decrease the relative value of its debt. The other risk involved in foreign currency borrowing – beyond the risk already inherent in borrowing – is that the borrower’s currency will decline in value and increase the cost of debt service.

    This post was published at Mauldin Economics on NOVEMBER 6, 2017.


  • More Rigorous Populism Might Have Produced a Better Fed Chair

    As I noted in my reaction to reports of Jerome Powell’s nomination, Trump’s endorsement was a significant defeat for the growing movement among Hill Republicans to force the Fed to adopt ‘rules-based monetary policy.’ Since I’ve already written on why I think such reform plans would largely fail to achieve their desired ends, I’m not particularly bothered by the defeat – but I do think there is a lesson to be gained here on libertarian strategy.
    As Jeff Deist noted at the Mises Institute’s 35th Anniversary, along with some genuine disagreements regarding economics and political theory, Murray Rothbard and F. A. Hayek held very different opinions on the best strategy going forward to promote liberty. While both agreed, following Mises’s insights, that winning ‘hearts and minds’ was absolutely essential to a free society – government would not be limited by pursuing and tricking the populist into something it wasn’t prepare to adopt – they disagreed on the best way of accomplishing this task.
    While Rothbard favored a libertarian-populist strategy aimed at educating and energizing laypeople, Hayek thought it was best to influence academics and intellectuals, what he termed ‘second handlers of ideas.’ A more classically liberal intelligentsia would influence policymakers and from that good – or at least better – public policy would follow.
    While it may be a step too far to suggest that this approach can never lead to any form of substantial policy victory in Washington – and certainly no intellectual movement should be limited to a single strategy – Trump’s nomination of Powell I think does highlight one of the major flaws with Hayek’s strategy.

    This post was published at Ludwig von Mises Institute on November 6, 2017.


  • Trump Picks ‘Safe’ Choice to Lead the Federal Reserve: 5 Questions Answered

    Editor’s note: Markets breathed a sigh of relief after President Donald Trump named Jerome Powell his pick to be the next chair of the Federal Reserve. If confirmed, Powell – considered a ‘safe’ choice – would take over from current Chair Janet Yellen in February, becoming one of the world’s most powerful people. So what’s the big deal? Economist Greg Wright explains why who leads the US central bank matters to us all.
    What Does the Fed Do?
    The Federal Reserve oversees all banks and financial institutions based in the US, including branches of foreign companies, and also sets US monetary policy.
    The main way it does the latter is through its target interest rate. This benchmark influences the pace of economic growth, the level of employment and the price of goods, services, and assets around the world. As the engine behind the world’s most important economy, the Fed’s influence is hard to overstate.
    As a result, the Fed affects the likelihood that you – and millions of others around the world – will keep your job, will be able to afford a new home and will be able to retire when you want. And while most Fed decisions are made by a seven-member Board of Governors, the chair’s voice is by the far the most important. For this reason, the Fed chair is sometimes referred toas the ‘second-most-powerful person in the world’ – after the US president.

    This post was published at FinancialSense on 11/03/2017.


  • Choosing the Fed Chairman

    Many expect Mr. Jerome H. Powell to be President Trump pick for Fed Chairman. Trump is resisting pressure by conservatives to make a larger change at the Fed. Many conservatives, including Vice President Mike Pence, preferred John B. Taylor, who is an economist at Stanford and an outspoken critic of the Fed’s monetary policy. Taylor previously served in the Treasury Department during the Bush administration. However, he is best known as an academic economist with no real experience hands-on. He wrote an approach to monetary policy, known as the ‘Taylor Rule,’ where he suggested that the Fed should be raising rates more quickly. That was obviously based on the economic theory of the Quantity of Money leads to inflation. He also has closely advised House Republicans on legislation that would require the Fed to adopt such a policy rule taking a hawkish approach to monetary policy.
    Representative Warren Davidson, a Republican on the House Financial Services Committee’s monetary policy panel, is one of the people who want a change in policy toward more conservative and austerity. He is circulating a letter opposing Yellen’s reappointment. Personally, I believe Yellen has done a good job. She has been under international pressure not to raise rates from the IMF and just about everyone else because Europe is still floundering and higher rates would be expected to push the ECB and emerging markets off into the deep-end of the pool.

    This post was published at Armstrong Economics on Nov 3, 2017.


  • What Do You Mean ‘No Inflation?’

    When the Fed launched its aggressive monetary policy in the wake of the 2008 financial crisis, many free-market economists predicted it would result in massive price inflation. That never materialized. As a result, Keynesian economists like Paul Krugman love to finger-point and mock those who criticize easy money policies designed to ‘stimulate aggregate demand.’ They claim the lack of price inflation proves they were right all along. You can massively increase the money supply during a downturn to stimulate the economy without sparking inflation. Free-market people are wrong.
    But just because we don’t see price inflation doesn’t mean there isn’t any inflation at all. After all, the new money has to go someplace. If we don’t see it manifested in rising prices, it’s because we’re looking in the wrong place.
    In response to the Great Recession, the Federal Reserve plunged interest rates to near zero and held them at historically low levels for several years. It also engaged in three rounds of quantitative easing – in essence, printing money out of thin air. Over a span of nearly seven years, the Fed’s balance sheet increased 427%. With all of that new money entering into the economy, one would expect a significant increase in price inflation. And yet the rise in the consumer price index has been muted. In fact, officials at the Federal Reserve constantly fret about the lack of price inflation.
    So where did all that money go?

    This post was published at Schiffgold on NOVEMBER 2, 2017.


  • BofA Has Two Questions For Ex-Carlyle Partner And Multi-Millionaire Fed Chair, Jay Powell

    On Thursday afternoon, around 3pm, Donald Trump will officially nominate Jerome Powell to be the next Chair of the Federal Reserve, replacing Janet Yellen when her term is up on February 1st. According to virtually every financial analyst, the former Carlyle Partner, Jay Powell, represents “continuity” on the Federal Reserve and would conduct monetary policy in a similar fashion as Yellen. As a result, Powell will proceed with the current balance sheet normalization schedule and continue to guide markets toward the “dots”. He is also expected to put a greater priority on scaling back financial market regulation, working with Randy Quarles who is the newly appointed Vice Chair for Supervision.
    While we presented key recent soundbites from Powell speeches yesterday, here is some more background:
    Jerome Powell is a trained lawyer and not an economist. Powell has been a Fed Governor since 2012 and was involved in the decision-making behind QE3 and then policy normalization in recent years. Prior to joining the Board, he was a visiting scholar at the Bipartisan Policy Center, a partner at the Carlyle Group, and worked at the Treasury under the GWH Bush administration.
    Powell is a Republican who built a vast wealth as a partner at Carlyle. Powell’s latest financial disclosure from June lists his net worth between $19.7 million and $55 million. If he gets the job, Powell would be the richest Fed chair since banker Marriner Eccles, who held the position from 1934 to 1948, according to the Washington Post.

    This post was published at Zero Hedge on Nov 2, 2017.


  • 10 Years After: Bank of England Raises Interest Rate for First Time in More Than Decade (Goin’ Home)

    This is a syndicated repost courtesy of Snake Hole Lounge. To view original, click here. Reposted with permission.
    (Bloomberg) – Bank of England policy makers raised interest rates for the first time in a decade, yet expressed concern for Britain’s Brexit-dented economy by indicating that another increase isn’t imminent.
    Led by Governor Mark Carney, the Monetary Policy Committee voted 7-2 on Thursday to increase the benchmark rate to 0.5 percent from 0.25 percent. The minutes of their meeting underscored worries that the economy is fragile as the 2019 split with the European Union nears.
    Crucially, policy makers omitted language from previous statements saying that more hikes could be needed than financial markets expect. That implies that officials are comfortable with pricing for two more quarter-point increases, roughly one by late next year and another in 2020.
    The more dovish outlook than investors anticipated pushed the pound down nearly 1 percent against the dollar to as low $1.3096 and gilts rose. U. K. money markets pushed back expectations for the next shift to September 2018 from August 2018 previously.

    This post was published at Wall Street Examiner by Anthony B Sanders ‘ November 2, 2017.


  • Can Gradual Interest-Rate Tightening Prevent a Bust?

    Fed policy makers are of the view that if there is the need to tighten the interest rate stance the tightening should be gradual as to not destabilize the economy.
    The gradual approach gives individuals plenty of time to adjust to the tighter monetary stance. This adjustment in turn will neutralize the possible harmful effect that such a tighter stance may have on the economy.
    But is it possible by means of a gradual monetary policy to undo the damage inflicted to the economy by previous loose monetary policies? According to mainstream economic thinking, it would appear that this is the case.
    In his various writings, the champion of the monetarist school of thinking, Milton Friedman, has argued that there is a variable lag between changes in money supply and its effect on real output and prices. Friedman holds that in the short run changes in money supply will be followed by changes in real output. In the long run, according to Friedman, changes in money will only have an effect on prices.

    This post was published at Ludwig von Mises Institute on November 2, 2017.