Tight money

Picking up where I left off yesterday: Tight money depresses output and increases costs. 

That is exactly what happens with cost-push inflation, too. First, cost pressure creates the need for more money; and second, the refusal to satisfy the need for more money keeps money tight and keeps depressing output.

But how do you even know if money is tight?

John Quiggin compares the interest rate to its "long run average" value to determine whether money is easy or tight. Scott Sumner rejects this, and compares NGDP growth to its long run average value to make that determination. Sumner is clear:

Woodford and Bernanke are right; the stance of monetary policy depends on outcomes like NGDP growth and inflation, not interest rates and the money supply.

Sumner makes the monumental mistake of applying "other things equal" to the real world: He assumes that nothing else has changed that could possibly be depressing growth, so that if NGDP growth is slow it must be because money is tight. And yet if there is some other factor causing slow growth -- or if there could be such a factor -- then Sumner's evaluation cannot tell us whether money is easy or tight.

But what has changed? What could possibly be responsible for slow growth? In 2020, covid. But for decades before 2020? Debt and debt service: The cost of accumulated private debt. And with excessive debt slowing the economy, you cannot use NGDP growth as a yardstick to determine if money is easy or tight.

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Scott Sumner says the economy's bad because money's tight. He's right about that, but he doesn't know how to show tight money. To see tight money, look at circulating money relative to accumulated private debt, or relative to total debt, public and private. Or look at narrow money relative to broad. 

Or just look at the bills that come due, relative to the money available to make the payments. That's how we know for sure money is tight.