Friday, May 8, 2015

I love this graph from Paul Krugman

I love this graph. When you just graph the monetary base you give the impression that the Fed is (1.) in complete control and (2.) very expansionary. It takes careful argument to walk people back from each of those impressions. Depending on who you're talking to you usually only get halfway through convincing them that the last one is not true and don't make much progress at all on the first one. Market monetarists are weirdos that get that the second one isn't true but maintain adamantly that the first one is true - practically tautologically in some cases. When you put M2 over the base it makes clear why the second one isn't true and strongly suggests that the first one isn't true either (unless you think there was some radical change in preferences on the part of the Fed at the beginning of the recession).

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