Former Fed Govenor Stephen Miran Talks Fed, Relationship with Trump

**SPEAKER_1** (0:02)
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**SPEAKER_2** (0:07)
Okay, let's talk about the Fed. Recent Fed governor and White House economic advisor, Stephen Miran, now a senior strategist at Hudson Bay Capital, arguing policy makers should pay less attention to backward looking data and potentially more attention to the money supply. He writes, Federal Reserve officials often claim to look at everything. Ironically, in recent years, their data set has excluded measures of monetary growth. Stephen joins us now for more. Stephen, it's good to see you, sir.

**Stephen Miran** (0:32)
Morning. Thanks for having me back.

**SPEAKER_2** (0:33)
Welcome back to the program. I read the note that you and the team put out.
Fantastic reading. I want to say up front before we start this conversation, because I think some economists listening to this will say, oh, not money supply. Here we go.
You say in this note, this report that you've put out, that you're not suggesting we should target monetary supply again, that you think there's information that's worth looking at in money supply. So let's start here. This is something we used to do at the Federal Reserve. You had the quantum of money and the velocity of money. And because the velocity of money was largely considered to be stable, we could focus on money supply. That changed, and then people stopped focusing on supply. So let's start there. Why we used to look at it, why we stopped, and why you think it's worth looking at again.

**Stephen Miran** (1:13)
Sure. So there's, as you point out, there's this school of economics called monetarism, heavily associated with Milton Friedman, who was a mentor for Kevin Warsh, and someone who Chairman Warsh invokes frequently.
And monetarism is basically the notion that the money supply determines growth in or leads to or predicts growth in nominal GDP and in real output and in the price level. And so therefore, by controlling the money supply growth, you can control the growth of nominal GDP. And if inflation seems too high, you can put a damper on money growth and it'll come down. Now, as you point out, that stopped being useful in the 80s and 90s, because this velocity of money that enters into the equation, what economists call money demand, started to move around and be volatile. And so if money demand is moving around at the same time as money supply, then you can sort of see on any supply and demand chart, the equilibrium point is going to be jumping around. And so changes in the money supply no longer serve to be useful in predicting changes in inflation and changes in growth. Now, what we did is we looked at a number of things that Chairman Warsh has written and said over the last 10, 15 years, and found that he repeatedly focuses on this as a useful input into predicting inflation, into predicting growth. This is not to say we're going back to targeting money growth, but just that it contains information that information shouldn't be thrown out. And what we did was to survey the literature. There's been an active frontier of research in this in the last 10 years or so. What I would describe as rescuing monetarism. And the way that it rescues it is to say, hey, this stuff still works. It's just that you weren't measuring money correctly. And the reason why velocity started whipping around is because of financial innovation. When you introduce new forms of money, sometimes it's used as a store of value and not for transactions. And if a money market fund is used as a store of value and not for transactions, then an increase in money supply driven by an increase in the money market fund isn't going to predict GDP growth. And so what these new forms of measuring money do is they basically weight the different types of money based on how money-like they are, in the same way that a price index will weight housing more than video games because you spend more on housing than on video games. When you do that, the whole theory actually becomes quite usable again, and serve to predict well the disinflationary pressure after the GFC, which again, people break these models over the coals because M2 was exploding, and yet we were in a deflationary poor growth environment. And there were all these hysterical letters and op-eds about exploding money supply was going to lead to hyperinflation. It didn't materialize, and it was egg on the face for monetarists. But it turns out that if you measure money correctly, you actually would have gotten the post-GFC environment correctly, you would have gotten the post-COVID environment correct too.

**SPEAKER_2** (3:43)