I Agree with Scott Sumner
By Arnold Kling
On most monetary issues, I don’t. But I like this post, where he comes out four square in favor of using the monetary base as his measure of the money supply.
So when people start asking me about the banking system and reserves and loans my eyes just glaze over. Most of the base is normally cash, and monetary policy consists of changing the supply of cash relative to demand. The nominal size of the entire banking system and all its components; capital, loans, reserves, deposits, etc., is determined endogenously, just like the nominal size of the plastic surgery industry, or nominal size of the ice cream industry. Normally, a permanent 20% increase in the base would be expected to increase the nominal size of the banking, plastic surgery, and ice cream industries by 20%. But other things are often not equal.
Now, we can argue about whether there is a way to manipulate expected future paths of the monetary base to affect nominal GDP in the near term. In other words, we can argue about whether monetary policy can work with a lead rather than with a lag. We can argue about the extent to which the current recession can be “cured” by raising nominal GDP. But I agree with using the monetary base as the key indicator, and I agree with his reasoning for doing so. Read the whole thing.