Arnold Kling  

Dinner with Tim Congdon

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The other night, RealClearPolitics hosted a dinner with Tim Congdon, the author of Money in a Free Society. Congdon is a British disciple of Milton Friedman. Scott Sumner knows who he is, but not vice-versa.

Unlike Sumner, Congdon uses a measure of the money supply as an indicator of the stance of monetary policy. Congdon favors a broad measure, M3 in the case of the United States. Actually, to Congdon's dismay, the U.S. stopped publishing official measures of M3 in 2006. However, he thinks that unofficial measures show the excess of money growth leading up to the financial crisis and a steep decline since.

Congdon is dismayed by the politics in the U.S. concerning macroeconomic policy. What I think he is finding is that the people who are most concerned with unemployment happen to be the ones who believe that we are in a liquidity trap, and therefore that monetary policy is ineffective. Congdon thinks the liquidity trap is nonsense, which of course I agree with. Meanwhile, the people who think that monetary policy is effective are the ones who are filled with fear of inflation. Congdon sees no signs of inflation, and I agree with him on that, also. In my view (and I imagine his, although he did not state it), the inflation threat is longer term and comes from the huge debt load. So Congdon's only allies here would be Scott Sumner and the "market monetarists," but when I asked Congdon about market monetarism and about Sumner, he did not know what I was talking about.

I did not blog about Congdon's book when I received a review copy. It deals primarily with the controversies about monetarism and Keynesianism in the 1970s and 1980s. As he pointed out at dinner, it appeared as of 1990 that Friedman had won and that Keynesianism was dormant. Then, in 2008, a Keynesian volcano erupted (Congdon's metaphor), and in Congdon's view the monetarists lapsed into right-wing nuttery, obsessing over inflation. Hence, the need for his book.

Most of the other attendees at dinner were well-known journalists (I sat between Robert Samuelson and Richard Miniter.) They were not inclined, and perhaps not equipped, to discuss the issues in his book, so we ended up talking more about the European debt crisis or other matters further afield. As the dinner participants introduced themselves, I was struck by how many of the journalists were no longer with the publications with which their names are associated in my mind. More had moved down the circulation ladder than up.

On the European debt crisis, Congdon's concern is that on a mark-to-market basis, most European banks are insolvent, due to their large holdings of sovereign debt, which for a number of countries is now trading at a discount reflecting the market's fear of default. He thinks that the banks should be bailed out with long-term loans (presumably from European taxpayers). He expects the banks to be bailed out in some way, because the alternative is a total financial collapse and something like a Great Depression in Europe.

Somehow, the governments and the banking sector remind me of two drunks leaning on one another, trying to make it home. Have a nice day.


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COMMENTS (7 to date)
Tim Worstall writes:

Just one little clarification I would add.

When Tim Congdon says "European Banks" he doesn't mean what an American might mean by the phrase. He means banks on the continent of Europe, that is, he's not including the UK banks.

And he'd probably exclude a German bank or two (Deutsche) and most Scandanavian ones too.

Actually, if we come right down to it, what he really means is the French banks.....

Nick Rowe writes:

Thanks for telling us about this, Arnold.

Your paragraph beginning "Congdon is dismayed by the politics in the U.S. concerning macroeconomic policy." is especially important and poignant. And the fact his views were arrived at totally independently of blogosphere market monetarists tends to confirm their validity. It shows we are not all just being bamboozled into thinking this by a smooth-talking Scott Sumner.

Charles R. Williams writes:

The issue with M3 is that while it is broad enough to be relevant many of the components of M3 are beyond the control of the fed.

Monetary policy is impotent not because of some liquidity trap but because the fed has little control over money.

The people who were concerned about a hyper-inflationary increase in the money supply were living in the past - a time when the fed did control money.

david stinson writes:

It's interesting that Tim Congdon had not heard of Scott Sumner given Sumner's higher profile of late and his appearance in the Economist, WSJ, at LSE, Adam Smith Institute, etc.

I've read of other UK monetarists seeming to put a lot of stock in M3. I don't recall coming across a good explanation for that, however.

Various writes:

I got a great chuckle from your "2 drunks" analogy in the last sentence of your post. I also think it is highly appropriate. There is a reasonable chance that the 2 drunks will make it home safely. There is also a reasonable chance that one of them will step on a twig the wrong way, thus dissolving their mutual journey into disaster.

Jeremy, Alabama writes:

I think there is inflation. I agree with David Goldman, who says that things you want to go up (like a recovery in house prices) are going down, while other things (energy, food) are going up. The government "basket" from which it calculates inflation is flawed.

I could give a thousand examples e.g. half n half cream has gone up from $1.65 (which price it was at for years) to $1.95 in the last 6 months. Cereals have not gone up but the two-for-one deals have almost disappeared. Etc etc.

W. Peden writes:

David Stinson,

I suspect it's on the (I think false) assumption that the American M3 is comparable to the UK's M4 or adjusted M4, which are useful monetary aggregates. (There was also a fairly good money supply measure in the UK called M3 in the 1970s and 1980s that was targeted quite a lot, and which was good until the difference between building societies and banks broke down and demutualisation artifically boosted M3 deposits.)

In contrast to M4 and adjusted m4, M3 seems to have a lot of monetary substitutes e.g. repos and MMF balances. As Friedman put it, money is a special topic in the theory of capital. Repos and MMFs are subjects of the theory of capita, but they aren't really special topics.

For all its flaws, M3 has been less misleading than M2 lately, since M2 suffers from excluding most of the volume of time deposits. I think it's Congdon objection to excluding so much money that can be adjusted at par (and usually within a year) that makes him more interested in M3 than M2. Frankly, however, currently there is no good measure of the US money stock and no central bank that is interested in it; no wonder US monetary policy is so incoherent.

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