What Thomas Nugent Does Not Know About the Demand for Money
The nitwits at the National Review never cease to disappoint us. Latest case in point is Thomas Nugent:
The last vestiges of monetarism may have been put to rest on June 28, 2007. Wayne Angell, retired member of the Federal Reserve Board, appearing that night on Larry Kudlow’s show on CNBC, observed that the Fed was targeting the federal funds rate and, as such, implied that it could not control the money supply at the same time. Rather, Angell said growth in the monetary aggregates reflected the shifting demand for money, or in other words that the market determined the amount of money by demanding more (or less) of it.
Mind you – I don’t claim to be a monetarist, but I can spot the logical flaw in the following stupidity from Mr. Nugent:
The Journal piece also included this revealing Laffer paraphrase on inflation: “The ‘velocity’ of money is soaring as the world demands more of it (money), [Laffer] says, so there is no inflation threat.” In other words, Laffer is implying that the demand for money is dramatically increasing, even though the Fed deserves high marks for controlling the growth in the money supply as measured by the monetary base.
Let’s think this through in terms of the standard IS-LM model noting that money demand depends on part on income and in part on other factors. If the demand for money rises not because of an increase in income but due to changes in the demand for liquidity (e.g., increased risk aversion), then the LM curve shifts inward absent a change in the money supply. The resulting higher interest rates tend to lower income along the IS curve. Of course, the Federal Reserve could and should accommodate such money demand instability to keep interest rates from rising so as to avoid a recession. But note – velocity declines in this case.
Art Laffer and Thomas Nugent appear to be babbling about an outward shift of the IS curve, which would tend to raise income and the demand for money. Were we are full employment when the IS curve shifted out, anyone would had bothered to read a 1970 paper by William Poole would recognize interest rate targeting and accommodations of such increases in money demand would be inflationary. Yet, 37 years later – we have Thomas Nugent babbling about this topic proving that he is as clueless as the rest of the nitwits at the National Review.