Reading Paul Kasriel - What Might Milton Friedman Have To Say?

Paul Kasriel, the chief economist of Northern Trust, has published the latest "U.S. Economic & Interest Rate Outlook" today. There are couple of interesting things related to Milton Friedman in the report. As Paul Kasriel writes:

Friedman’s inflation monetary phenomenon was related to the growth in the money supply held by the nonbank public, not the monetary base. After all, the monetary base soared in the early 1930s, albeit not to the extent that it did in the past year, even as the M2 money supply contracted at double digit rates...

See chart below, click on chart to enlarge, courtesy of Northern Trust.

Milton Friedman did not judge the growth in the monetary base in the early 1930s to be inflationary and it is doubtful that he would judge the recent explosion in the monetary base to be inflationary either given the lack of response in the broad money supply.

More interesting, in the course of "failed states", there are opinions related to government spending and deficits:

... The more funds the government acquires, the more productive resources it controls and/or directs. Given a finite amount of productive resources at any point in time, the more resources under the control of the government, the fewer resources will be left to be used by the private sector. As you will see the importance of it in a minute, the economy’s long-run potential growth rate basically is related positively to the growth in the labor force and the growth in the productivity of that labor force.

Let’s assume that an increase in government spending will be used to acquire resources for the provision of health care for retirees. Retirees, by definition, are no longer part of the labor force. Although a healthier senior population might result in lower golf scores for this cohort, it does nothing to increase the productivity of the current labor force. Thus, this increase in government spending does not positively affect the long-run rate of growth of the economy. It could conceivably negatively affect the long-run rate of growth in the economy. Remember, that the more resources controlled by the government implies fewer resources controlled by the private sector...

Only hope remains with us to believe that governments of "failed states" are wise enough....