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Sunday, July 31, 2005

Two Lines on a FuzzChart

This NRO BuzzCharts quotes Abraham Lincoln.  It reminds me of another quote from Lincoln:

It is better to remain silent and be thought a fool than to open one's mouth and remove all doubt.

BuzzCharts removes all doubt:

Supply vs. Supply - To raise rates or not to raise rates?, By Jerry Bowyer, NRO BuzzCharts: … Supply-siders, as against other free-market types like the Austrians and monetarists, emphasize marketplace indicators of inflation and deflation. Supply-side economists tend to be practical people who are as often as not forecasters, investment advisors, and business consultants — as opposed to theoreticians. They recognize that it is simply impossible for any central planner to “count” the number of dollars in circulation. They therefore look to … gold prices, interest rates, and foreign exchange rates — as the most reliable guides...

I assume the Fed is the central planner in this statement.  Let’s see if we can get this straight once and for all.  The Fed targets an interest rate, not the money supply.  The form of the interest rate rule is debated, e.g. how to weight the inflation and output terms, but the target itself is not.  The days are long past when a monetary target was implemented or seriously considered.  One reason is precisely because it is difficult to define and measure the money supply, i.e. “to “count” the number of dollars in circulation.”  The article seems to imply this makes an inflation target impractical, but what does that have to do with measuring inflation?  It isn’t necessary to count the dollars in circulation to measure prices.  If prices aren’t good “marketplace indicators,” and therefore do not properly direct the flow of resources, then why the faith in markets?  This line of reasoning makes no sense. 

Finally, take a close look at the yellow line in the diagram.  Pay no attention to the fact that it is uncorrelated with the other line in the diagram and don’t wonder why they are plotted together.  Instead, note that it is described as flat.  Not also that Luskin whined incessantly when Krugman described a half a percent increase over five years as flat.  Will Luskin demand a retraction from Bowyer of Buzzcharts for using the word "flat?"

    Posted by on Sunday, July 31, 2005 at 01:26 AM in Economics, Monetary Policy, Press | Permalink  TrackBack (0)  Comments (6)

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