Low Inflation Is No “Mystery” - Maudlin

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...As for the lack of demand-side growth, the explanations are confusing. Yellen says low inflation is a
mystery, others say it’s because of new technologies, global trade, and rising productivity. Slow real GDP
growth is blamed on global trade, a Great Stagnation in productivity and the lack of investment by private
companies. QE gets credit for the things that went up, but things that didn’t are explained away, denied, or
determined to be mysteries.



We have promoted an alternative narrative that agrees with the 2008 Janet Yellen – QE didn’t work. It
flooded the banking system with cash. But instead of boosting Milton Friedman’s key money number
(M2), the excess monetary base growth went into “excess reserves” – money the banks hold as deposits,
but don’t lend out. Money in the warehouse (or in this case, credits on a computer) doesn’t boost demand!
This is why real GDP and inflation (nominal GDP) never accelerated in line with monetary base growth.



The Fed boosted bank reserves, but the banks never lent out and multiplied it like they had in previous
decades. In fact, the M2 money supply (bank deposits) grew at roughly 6% since 2008, which is the same
rate it grew in the second half of the 1990s.



So, why did stock prices rise and unemployment fall? Our answer: Once changes to mark-to-market
accounting brought the Panic of 2008 to an end, which was five months after QE started, entrepreneurial
activity accelerated. New technology (fracking, the cloud, Smartphones, Apps, the Genome, and 3-D
printing) boosted efficiency and productivity in the private sector. In fact, if we look back we are
astounded by the new technologies that have come of age in just the past decade. These new technologies
boosted corporate profits and stock prices and, yes, the economy grew too.



The one thing that did change from the 1990s was the size of the government. Tax rates, regulation and
redistribution all went up significantly. This weighed on the economy and real GDP growth never got back
to 3.5% to 4%.



Occam’s Razor – a theory about problem solving – says, when there are competing hypothesis, the one
with the “fewest assumptions” is most likely the correct one.



...Our narrative is far simpler. It looks at M2 growth, gives credit to entrepreneurs, and blames big
government. After all, the US economy grew rapidly before 1913 when there was no Fed, and during the
1980s and 90s, when Volcker and Greenspan were not doing QE. And history shows that inventions boost
growth, while big government and redistribution harm it. Because it has the fewest assumptions, Occam’s
Razor suggests this is the more likely hypothesis.