Only An Economist Could Believe In the Impossibility That Is Monetarism
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Economies aren’t blobs or machines that occasionally pull over to dollar “filling stations.” In reality, economies are just individuals interconnected with individuals and machines the world over.

Consider what economies are with investment banks like Goldman Sachs top of mind. What are Goldman’s brilliant investment bankers doing when they call on businesses large and small? Hopefully the answer is obvious, but if not, Goldman’s talented employees aggressively court businesses with an eye on not just matching them with capital born of savings, but matching them with savings in a way that maximizes their long-term ability to grow.

The simple, rather obvious truth is that businesses cannot grow without capital, and investment bankers are rightly paid very well insofar as they’re able to connect them with capital. Basic stuff, or so it would seem basic stuff. Enter the members of the Monetarist School.

In a recent letter-to-the-editor published at the Wall Street Journal, Johns Hopkins economists Steve Hanke and John Greenwood predicted a looming U.S. recession. What’s their evidence? What they imagine is a slowdown in the growth of so-called “money supply,” or M2. Hanke and Greenwood believe that the Federal Reserve has starved the U.S. economy of money such that a recession in 2024 is “baked in the cake” based on a 4.5% contraction of M2 since March of 2022. In their rendering of the most dynamic economy in the world, the U.S. economy pulled up to the filling station only to find it bereft of dollars.

Worse for the late Milton Friedman, they claim that their magical monetary projections were the thinking of a man who isn’t around to speak for himself. Quoting Hanke and Greenwood paraphrasing Friedman, “the Fed is way too tight” from a “Friedmanesque, quantity-theory-of-money perspective.” Did the free-market hero in Friedman really believe that the U.S. economy’s vitality was an effect of central planners at the Federal Reserve setting just the right cost of credit so that there would be enough “supply” of dollars to enable non-stop growth? For the sake of Friedman, one can only hope that if he’s looking down at his disciples, that he’s looking with dismay in the way that Keynes viewed his own worshipful flock.

Seriously, how did economic thinking descend to such depths? Not only is credit produced globally, but it circulates globally. Per the late Robert Mundell, an economist who didn’t embrace “free market” monetarism, “the only closed economy is the world economy.” What this tells us is that assuming the Fed is “tight” in the way that Hanke and Greenwood imagine, the happy truth is that money sources the world over (including Goldman Sachs) will make up for the Fed’s alleged tightness in seconds. Lest readers forget, that’s what investment banks do.

Better yet, it’s no reach to suggest that Goldman Sachs, Morgan Stanley, and myriad other financial services companies the world over do a much better, much more economy-enhancing job of matching genius with capital than do central bankers earning a salary that truly creative financial minds would haughtily turn their noses up to. Precisely because they aim to earn high salaries and enormous bonuses, investment bankers relentlessly traverse the world in search of good businesses in need of “money” that can be exchanged for real resources.

Which means what the Fed does really doesn’t much matter. Assuming it’s tight, that’s not a signal of a looming “recession” as much as it signals immense opportunity for markets and market forces to substitute themselves for central planners. To those not of the Monetarist School, this would be a good thing. And the stuff of actual growth.

John Tamny is editor of RealClearMarkets, President of the Parkview Institute, a senior fellow at the Market Institute, and a senior economic adviser to Applied Finance Advisors ( His latest book, set for release in April of 2024 and co-authored with Jack Ryan, is Bringing Adam Smith Into the American Home: A Case Against Homeownership

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