Hawks, Doves And Chickens

Gallus Gallus Domesticus and the Ghost of 1937

Just before writing this comment, we happened to come across a truly funny tweet by the WSJ’s Greg Ip, which you can see below, including our reply: 

Jon Hilsenrath seems to seriously believe the markets weren’t “prepared” enough for a ridiculous rate hike of 25 bps at most, from the current level of – zero!

Of course we would like to thank Ms. Yellen and the merry pranksters for helping to set up a better shorting opportunity, but all kidding aside, we actually believe that Hilsenrath is in a way correct. They are dead scared of being seen as setting off a market crash, and they know of course that more than six years of humungous money printing have achieved little besides blowing another bubble. In fact, the real economy, though not yet in recession, looks decidedly lame.

FOMC members are probably wondering why that is so, considering their intellectual background. Their economic theorizing seems to be an odd mixture of Keynesianism and Monetarism, sort of mixing the worst aspects of the two schools of thought. We happen to believe that Joseph Salerno was actually on to something when he referred to this as the “John Law School of Economics”, because that’s what it basically is. In “Money, Sound and Unsound” Salerno writes:

The stable money doctrine was soon discredited, only to be replaced by the vastly more inflationary spending doctrine propounded by John Maynard Keynes, himself a former advocate of stable money. In its essentials, Keynes’s doctrine harked back to John Law and the so-called “monetary cranks” of the nineteenth century. Keynes maintained that depression was simply the result of a deficiency of total spending or “aggregate demand,” which was a chronic condition of the market economy. The only remedy for this problem, he argued, was government budget deficits that directly injected money spending into the economy combined with an expansionary monetary policy to lower interest rates and stimulate private investment spending.

[…]

By the late

1970s, Keynesianism as a policy program had lost its credibility and it was supplanted by monetarism, a movement led by Milton Friedman which had been growing in influence in academic economics since the early 1960s. But monetarism was nothing more than Fisher’s stable money principle supported by a seemingly more sophisticated version of the quantity theory of money restated in Keynesian terminology.

[…]

By the early 1990s, a new theoretical consensus in macroeconomics had emerged known as New Keynesian economics, which synthesized elements of Keynesianism, monetarism, and New Classical economics, an offshoot of monetarism.