The return of monetarism?

Rob Armstrong (0:05)

PUSHKIN PUSHKIN Milton Friedman, who is by my reckoning the third most famous economist in the history of the world, once said the following, inflation is always and everywhere a monetary phenomenon, in the sense that it is and can only be produced by a more rapid increase in the quantity of money than in output.

I do not understand what that means. Today on the show, what is monetarism and why is it coming back? This is Unhedged, the markets and finance podcast. From the Financial Times and Pushkin, I am Rob Armstrong, coming to you from an uncomfortably sticky, but otherwise beautiful New York City, and I am joined by the greatest of the neo-monitorists, Brendan Greeley of Princeton University and the FT. Brendan, welcome back to the show.

Brendan Greeley (1:04)

Thank you. But neither the first nor the second most famous economist of all time. Just ranked among the neo-monitorists. I appreciate that.

Rob Armstrong (1:14)

Brendan, we've just heard the most famous definition of monetarism by the most famous monetarist.

I think I speak for both myself and the audience when I say we could not understand it. So maybe you can do a better job for us. Tell us what monetarism is.

Brendan Greeley (1:34)

Look, the challenge with monetarism is that it is two things. It is a pretty rigorous theory. It is also probably the way your uncle thinks about money. The easiest way to think about it is the amount of money in the economy and the speed at which it moves from hand to hand, the speed at which it gets spent together have an effect on inflation. So, when you have more money in the economy, moving quicker from hand to hand, and the same amount of goods, the price of those goods are going to go up. So, that intuitively makes a lot of sense.

Rob Armstrong (2:07)

Of course, the devil is in the details in economics as in the rest of life. But why are we talking about this now? Why is monetarism as an idea making a comeback right now?

Brendan Greeley (2:20)

Well, Kevin Warsh, the new chairman of the Fed, has announced the make up of a couple of different task forces that are going to change Fed policy. Usually, when somebody in government announces a task force, that's a sure sign that nothing is going to happen. But I think, I actually think in this case, something will happen. There were a couple of rethinks under Powell. They tended to have the Fed thinking, well, you know what, we're doing a pretty good job, so we're not going to change much. Warsh has been a critic of how the Fed measures things, how the Fed talks, how the Fed uses its tools.

And the people who he appointed to these task forces are serious people. So this has opened the door to a change. And as we both know, when a door is actually open, everybody who's ever had an idea is going to sprint as quickly as possible in the direction of that door before it closes.

Rob Armstrong (3:10)

And so one of the people who has such an idea is Stephen Miran, who has served as an advisor to President Trump.

Brendan Greeley (3:17)

Yeah, so Stephen Miran and Nouriel Roubini published a paper for Hudson Bay Capital Management saying, we should think about monetarism again. It's a good idea. It would be a way to help the Fed understand inflation and make its policies more effective.

That's the idea they're sprinting towards the open door.

Rob Armstrong (3:35)

Okay, but what I don't get, Brendan, is exactly why this had to be rehabilitated in the first place. The way you describe monetarism makes so much sense to me. All it says is, if there's more money chasing the stuff, then there is stuff. The price of the stuff has to go up. And in some sense, this is surely correct and is the basis of a workable theory of inflation.

Why does monetarism even need to make a comeback at this point?

Brendan Greeley (4:06)

Yeah, but there's a difference between an insight, a theory and a model. Where it's difficult to take that insight or that theory and turn it into a model is exactly at the point of measurement, and so this is historically the challenge that we've always had.

So the idea of monetarism is pretty old. When we look at 16th century Spain, you get this new flood of silver coming ashore from Mexico and the Andes, and people in Spain and people in France started to notice that prices were increasing in their lifetimes. And that was something that they hadn't really experienced before, and so they had to think about why, and there were various explanations for why. They understood commerce at the time. So, the theories were that the silver coming in increased credit, which increased prices.