Advertisement

Milton Friedman on Quantitative Easing

One remarkable aspect of the recent conservative assault on QE2 is that the conventional wisdom on the American right is now well to the right of where Milton Friedman was ten years ago. Take these remarks on Japan from 2000:

In 1989, the Bank of Japan stepped on the brakes very hard and brought money supply down to negative rates for a while. The stock market broke. The economy went into a recession, and it’s been in a state of quasi recession ever since. Monetary growth has been too low. Now, the Bank of Japan’s argument is, “Oh well, we’ve got the interest rate down to zero; what more can we do?”

It’s very simple. They can buy long-term government securities, and they can keep buying them and providing high-powered money until the high powered money starts getting the economy in an expansion. What Japan needs is a more expansive domestic monetary policy.

The Japanese bank has supposedly had, until very recently, a zero interest rate policy. Yet that zero interest rate policy was evidence of an extremely tight monetary policy. Essentially, you had deflation. The real interest rate was positive; it was not negative. What you needed in Japan was more liquidity.

Advertisement

According to Mike Pence and Paul Ryan, this is left-wing lunacy. The only solution to any economic problems is tax cuts for rich people.