{"id":332779,"date":"2026-03-16T20:19:15","date_gmt":"2026-03-16T20:19:15","guid":{"rendered":"https:\/\/www.newsbeep.com\/nz\/332779\/"},"modified":"2026-03-16T20:19:15","modified_gmt":"2026-03-16T20:19:15","slug":"money-still-matters-alex-j-pollock","status":"publish","type":"post","link":"https:\/\/www.newsbeep.com\/nz\/332779\/","title":{"rendered":"Money Still Matters \u2013 Alex J. Pollock"},"content":{"rendered":"\n

Most economists and central banks utterly failed to predict the inflationary outbreak in the wake of the monetary expansion that accompanied the Covid period. That is the starting point of Tim Congdon\u2019s new book, Money and Inflation at the Time of Covid<\/a>. Considering the Federal Reserve, Congdon writes: \u201cIn 2020 none of the Federal Open Market Committee\u2019s 18 members expected inflation above 2.5 percent in 2021. In fact, consumer prices rose by 7 per cent in the year to December 2021.\u201d After that came 6.5 percent in 2022.\u00a0<\/p>\n

This miss of the looming high inflation by all the Federal Reserve Board governors and the Federal Reserve Bank presidents was an embarrassing whiff to be sure. These Open Market Committee members\u2019 corresponding interest rate forecasts missed by more than a mile, as well.<\/p>\n

The Federal Reserve was not alone in this failure of foresight. The Bank of England \u201cwas hopelessly wrong in its inflation forecasts for 2022 and 2023,\u201d Congdon writes. Joining them in proving forecasts may be vain were \u201cthe European Central Bank, the Bank of Canada, the Reserve Bank of New Zealand, Norway\u2019s Norges Bank and the Swedish Riksbank \u2026 all seven organizations committed serious errors in forecasting in the 2020s.\u201d<\/p>\n

Did no one get the coming inflation right? Well, Cogden is forced to admit and is \u201cpleased to say,\u201d he did, and he documents it. \u201cIn late March and April 2020, I could see that the astonishing money explosion then under way would have inflationary consequences.\u201d In language that highlights that there are two related, interacting and essential kinds of inflation\u2014asset price inflation and consumer price inflation\u2014he continues, \u201cthe first result would be too much money chasing too few assets, so that the prices of shares and houses would be buoyant in late 2020 and 2021; the second inflation would be too much money chasing too few goods and services. Consumer inflation might reach double digits at an annual rate in 2022 or 2023.\u201d\u00a0<\/p>\n

\u201cOn 30 March 2020,\u201d Congdon tells us, \u201cI sent out a special email to subscribers,\u201d which concluded that with the rapid money growth being created, \u201cthe message from history is that the annual increase in consumer prices will climb towards the 5 per cent-10 per cent area.\u201d It did. Then, in June 2020, he published an op-ed in the Wall Street Journal, \u201cGet Ready for the Return of Inflation.\u201d Inflation returned. That same June saw a co-authored think tank essay that argued, \u201cThe extremely high growth rates of money will instigate an inflationary boom [but] central banks seem heedless of the inflation risks.\u201d They were heedless: \u201cIn 2020, the year in which the USA saw the fastest growth in broadly defined M3 money since the Second World War, the minutes of the Federal Open Market Committee contained not one reference to any money aggregate.\u201d\u00a0<\/p>\n

Why was Congdon able to get right in the early 2020s what so many other experts and institutions got wrong? The wrong answers, he convincingly contends, came from the fact that \u201cin recent decades, central banks have stopped referring to the quantity of money in their policy briefings and economic commentary. The silence on money may have accurately reflected what top central bankers believed, but what they believed proved false.\u201d There is no question that the beliefs, and fashions in the beliefs, of central bankers are among the essential macroeconomic factors.<\/p>\n

Congdon\u2019s successful forecasts, in contrast, came from a continuing focus on the (one might think obvious) relationship between and the creation of money and inflation of both asset prices and consumer prices in the medium term. \u201cThe neglect of money aggregates in Bank of England research is therefore the dominant culprit for the fiasco of its inflation forecasts,\u201d he says.<\/p>\n

This leads to the core conclusion of the book:\u00a0<\/p>\n

The behavior of money growth must be restored to a central position in policy-oriented macroeconomic analysis.<\/p>\n

Here is the conclusion as re-stated in the coda that ends the book: Central bankers \u201cmust restore references to money aggregates in their research and policy statements,\u201d for without this, they will be \u201cignorant and dangerous\u201d (about the likely results of their own actions).<\/p>\n

Congdon is arguing for a revised version of the classic Quantity Theory of Money and points out \u201cthe ancientness\u201d of the theory. The classic theory is represented in the famous equation MV = PT, meaning that Money supply times the Velocity of money equals the Price level times the Transactions volume of real GDP. Thus, Money\u2019s growing faster than the real economy makes Prices go up\u2014as long as Velocity is fairly stable. This relationship of money expansion to inflation is intuitively appealing, and it is an enduring truth that creating a lot of excess money tends to push prices up. Central banks are very good at doing this. But critics of the classic formula are quick to point out that Velocity, which is by algebra merely the ratio of the nominal size of the economy to the money supply, is not always stable. That means the relationship is not mechanical. It is nonetheless essential, as the book argues.<\/p>\n

Congdon is of course well aware of the historical debates. He quotes Paul Samuelson, the brilliant, Nobel Prize-winning author of the celebrated economics textbook that went through 19 editions. In this textbook, Congdon relates, the quantity theory \u201cwas said to be a \u2018special, simplified doctrine,\u2019 which most economists would not accept.\u201d\u00a0<\/p>\n

If the components of economics were mechanical, economists would by now have discovered the mechanisms, found binding formulas, and agreed with each other instead of forming perpetually competing schools.<\/p>\n

When it comes to brilliance, especially in economic forecasting, we must always remember Bottum\u2019s Principle: It is easier to be brilliant than right! The failed 2020s forecasts were not the result of any lack of IQ or university degrees. Congdon cannot resist rhetorically enjoying a separate, completely failed forecast in the brilliant Samuelson\u2019s textbook: \u201cA recurrent assertion [that] the planned, communist economy of the Soviet Union would ultimately overtake the free market, capitalist economy of the USA.\u201d\u00a0<\/p>\n

Congdon\u2019s updated quantity theory, which is less simple but appears to be more adequate than the classic version, requires three principal additional elements. First, it is based on broad money, not narrow money. Second, it must include asset price inflation as well as consumer price inflation and the effects of price changes of equities and real estate, especially residential housing. And third, it operates on a medium-term basis.<\/p>\n

First, consider broad money. \u201cMoney\u201d can be thought of, Congdon says, as only the monetary liabilities of the central bank or \u201cbase money\u201d; or as including the demand deposits of the private banks, to get to \u201cnarrow money\u201d; or as including \u201call the deposit liabilities of the banking system,\u201d when \u201cthe system is consolidated to embrace both the central bank and the commercial banks.\u201d This is \u201cbroad money.\u201d He specifies that for his approach, \u201cthe phrase \u2018the quantity of money\u2019 should always be understood to mean \u2018broad money.\u2019\u201d He makes a particular point of distinguishing this from the narrow money monetarism of Milton Friedman and the Chicago School. He concludes that to determine whether \u201ctoo much money is chasing\u201d assets and consumer goods with inflationary consequences, one must think in terms of broad money.<\/p>\n

Next, asset prices. In Congdon\u2019s quantity theory, \u201cChanges in the value of variable-income assets (equities, real estate)\u2014often due to changes in the quantity of money\u2014are a central feature.\u201d \u201cHouseholds care far more about the stock market and house prices than they do about bond yields.\u201d So we need to \u201cemphasize the impact of changes in money growth on the prices of assets like housing, commercial property and corporate equity, and the further effects of movements in these asset prices \u2026 on demand and output.\u201d Here we have the same theory as did the Federal Reserve with its Quantitative Easing gamble to create \u201cwealth effects.\u201d Thus, \u201cin the author\u2019s view, a forecast of the values of the equity market and the stock of residential houses \u2026 has to be part of any meaningful macroeconomic forecast.\u201d\u00a0<\/p>\n

Finally, focus on the medium term. The money-creation to inflation effects may not be as immediate or precise as the classic quantity theory formula might imply, but on Congdon\u2019s view, they should be expected in the medium term. Milton Friedman made \u201clong and variable lags\u201d a famous part of the discussion. Congdon further adds, \u201cThis is not an assertion that changes in the quantity of money and the price level are always equi-proprotional in actual experience.\u201d He cites as an example \u201cthe steep collapse in velocity in 2008.\u201d But over time, \u201cthe medium term relationship between money and inflation must also be quite close,\u201d he maintains.\u00a0<\/p>\n

I do think one recurring metaphor in the book needs revision. In many places, Congdon (like other economists) refers to economic activities as \u201cmechanisms\u201d\u2014in particular, \u201cthe transition mechanism\u201d for monetary changes. In my view, there is no \u201cmechanism\u201d involved. Economic events are neither mechanical nor subject to the mathematical determination that mechanisms are. They are rather interactions of human actions, ideas, intentions, strategies, beliefs, subjective valuations, hopes, and fears\u2014including, for better or worse, the ideas and beliefs of central bankers.\u00a0<\/p>\n

If the components of economics were mechanical, economists would by now have discovered the mechanisms, found binding formulas, and agreed with each other instead of forming perpetually competing schools. They would not have suffered the humiliating forecasting mistakes they so often have. Nonetheless, the mind can achieve powerful general insights in economics, like many in this book.<\/p>\n

\u00a0Reviewing his own text, Congdon says, \u201cTalking of repetition, there is a lot of it in this book, perhaps too much.\u201d He is right about that, and his discussion would have benefited from a reduction in repetition. Congdon adds, \u201cThe book is to a large extent an exercise in \u2018I told you so.\u2019\u201d Well, yes, but the victory lap he takes is well-deserved.<\/p>\n

All in all, I believe Congdon\u2019s sharply pointed contrast between successful and failed forecasts is convincing, his defense of an updated quantity theory of money is well-argued, and his suggestions for central banking lessons are highly relevant.<\/p>\n","protected":false},"excerpt":{"rendered":"Most economists and central banks utterly failed to predict the inflationary outbreak in the wake of the monetary…\n","protected":false},"author":2,"featured_media":332780,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[11],"tags":[138,219,111,139,69],"class_list":["post-332779","post","type-post","status-publish","format-standard","has-post-thumbnail","category-economy","tag-business","tag-economy","tag-new-zealand","tag-newzealand","tag-nz"],"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/posts\/332779","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/comments?post=332779"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/posts\/332779\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/media\/332780"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/media?parent=332779"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/categories?post=332779"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/tags?post=332779"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}