Is a Medicare Cost Slowdown Closing the Budget Gap?

Peter Orzag, former White House budget analyst, points @ Bloomberg to a possible breakthrough in health care costs that could dramatically impact the debate over deficits - at least that part of the debate which is based on honest, informed analysis (which often appears, at least among our elites, to be the terrain amidst this brouhaha that is the smallest and least often heard):

Past Increases in Health Care Costs

New evidence that the slowdown in health care costs over the past five years is happening not only because of a weak economy comes from the Economic Report of the President, released last week by the President’s Council of Economic Advisers. If the slowdown were to continue in the future, the report shows, Medicare spending would basically remain flat as a share of the economy.

Nevertheless, new data suggest Medicare spending growth may be picking up a bit. So it’s important to take more aggressive action to improve value in health care.

"America's Latest Phony Fiscal Crisis"

Former chief economist for the IMF, Simon Johnson @ Bloomberg:

In most countries that experience a fiscal crisis, there is no ambiguity about the situation. 

The government is unable to sell debt at a reasonable interest rate. This probably coincides with a broader shift out of domestic assets, as smart investors read the writing on the wall or in the newspapers. The currency collapses and, often, inflation accelerates. The government is forced to slash spending and, cap in hand, asks for help from the world’s least popular ambulance service: the International Monetary Fund.

British burn White House - War of 1812

No part of this description fits the modern U.S. Rates on government debt are very low, the currency isn’t depreciating rapidly and inflation seems stable. There is no imaginable circumstance under which the U.S. would need to borrow from the IMF. Yet this great land of innovation has undeniably invented its unique kind of fiscal crisis.

Or, to be more precise, we have reinvented the uniquely American way of ruining our fiscal affairs. At the beginning of the 19th century, Thomas Jefferson was obsessed with the idea that debt was bad and that the U.S.’s obligations -- inherited mostly from the War of Independence -- must be eliminated at all costs. (Jefferson himself had had some bad personal experiences with debt.)

Budget Wars: House Progressive Caucus v. Paul Ryan

Click "Read More" below for the complete PDF from National Priorities Project of the House Progressive Caucus budget analysis v. Paul Ryan's GOPers and the Senate Dems.

Who's Booming?

With a nod toward a nominal stock market rebound to what it hit 6 years ago (if you don't adjust for inflation) - from Economic Policy Institute we have a breakdown of who owns personal shares of the stock market and is benefiting from this "boom" :

Patriot Games

Think Progress:

Even as American corporations are raking in record profits, the largest among them are shifting larger amounts of money away from the United States and into offshore tax havens that allow them to pad their bottom lines even more, according to multiple analyses of legal filings made since the beginning of 2013.

The Wall Street Journal found that the 60 largest companies moved $166 billion offshore in 2012, shielding 40 percent of their earnings from American taxes and costing the U.S. billions in lost revenue:

The amount of money at stake is significant, particularly when the U.S. budget deficit is high on the political agenda. Just 19 of the 60 companies in the Journal’s survey disclose the tax hit they could face if they brought the money back to their U.S. parent. Those companies say they might have to pay $98 billion in additional tax—more than the $85 billion in automatic-spending cuts triggered this month after the White House and Congress couldn’t agree on an alternative.

"We do not, repeat do not, face any kind of deficit crisis either now or for years to come"

More from Professor Krugman @ NYTs:

People still talk as if the deficit were exploding, as if the United States budget were on an unsustainable path; in fact, the deficit is falling more rapidly than it has for generations, it is already down to sustainable levels, and it is too small given the state of the economy.

Start with the raw numbers. America’s budget deficit soared after the 2008 financial crisis and the recession that went with it, as revenue plunged and spending on unemployment benefits and other safety-net programs rose. And this rise in the deficit was a good thing! 

Federal spending helped sustain the economy at a time when the private sector was in panicked retreat; arguably, the stabilizing role of a large government was the main reason the Great Recession didn’t turn into a full replay of the Great Depression. 

But after peaking in 2009 at $1.4 trillion, the deficit began coming down. The Congressional Budget Office expects the deficit for fiscal 2013 (which began in October and is almost half over) to be $845 billion. That may still sound like a big number, but given the state of the economy it really isn’t. 

Bear in mind that the budget doesn’t have to be balanced to put us on a fiscally sustainable path; all we need is a deficit small enough that debt grows more slowly than the economy. To take the classic example, America never did pay off the debt from World War II — in fact, our debt doubled in the 30 years that followed the war. But debt as a percentage of G.D.P. fell by three-quarters over the same period. 

Krugman v. "The World"...again

The Professor explains - @ NYTs - why our "smart people" - who among other things claim to listen to "the market" as arbiter of their reality - pretty much don't have a clue about much of anything other than their recycled insider-elite ideology:

Four years ago, as a newly elected president began his efforts to rescue the economy and strengthen the social safety net, conservative economic pundits — people who claimed to understand markets and know how to satisfy them — warned of imminent financial disaster. Stocks, they declared, would plunge, while interest rates would soar.

Even a casual trawl through the headlines of the time turns up one dire pronouncement after another. “Obama’s radicalism is killing the Dow,” warned an op-ed article by Michael Boskin, an economic adviser to both Presidents Bush. “The disciplinarians of U.S. policy makers return,” declared The Wall Street Journal, warning that the “bond vigilantes” would soon push Treasury yields to destructive heights. 

Sure enough, this week the Dow Jones industrial average has been hitting all-time highs, while the current yield on 10-year U.S. government bonds is roughly half what it was when The Journal published that screed. 

O.K., everyone makes a bad prediction now and then. But these predictions have special significance, and not just because the people who made them have had such a remarkable track record of error these past several years. 

No, the important point about these particular bad predictions is that they came from people who constantly invoke the potential wrath of the markets as a reason we must follow their policy advice. Don’t try to cover America’s uninsured, they told us; if you do, you will undermine business confidence and the stock market will tank.

Don’t try to reform Wall Street, or even criticize its abuses; you’ll hurt the plutocrats’ feelings, and that will lead to plunging markets. Don’t try to fight unemployment with higher government spending; if you do, interest rates will skyrocket. 

And, of course, do slash Social Security, Medicare and Medicaid right away, or the markets will punish you for your presumption. 

(Long Past) Time for a financial transaction tax

Katrina vanden Heuvel @ WaPo:

(A)fter years of Wall Street excess, and at a moment when new revenues are badly needed, the time has surely come for a financial transaction tax .

Indeed, support for such a tax has never been stronger — or broader. Many on the progressive left have long favored it . Now, though, another group of bleeding-heart liberals, otherwise known as the American people, is on board. When it comes to cutting the deficit, 6 in 10 Americans prefer taxing the financial industry to cutting social spending.

But this idea doesn’t just have the masses on its side; it has the elites, and even some Republican elites. Once championed by the granddaddy of liberal economics, John Maynard Keynes, the banner of a financial transactions tax has been picked up by conservative economists including Sheila Bair, George W. Bush’s appointee to the Federal Deposit Insurance Corp.

"Corporate Profits Are Eating the Economy"

Derek Thompson @ The Atlantic:

Here are two things that are true about the economy today.

(1) The Dow Jones industrial average is poised to set a new record as corporate profits stretch to all-time highs.

(2) There are still fewer working Americans today than there were before the start of the Great Recession.

The fact that these two things can be true at the same time might outrage you. But it shouldn't surprise you. In the last 30 years, there has been a great divergence between growth and workers' incomes, as the New York Times reminds us today. Corporate profits have soared, in the last decade especially, particularly because of three things:

Globalization has pushed down the cost of labor available to multinational corporations; technology has allowed companies to make more with fewer workers, in general; and Big Finance has gobbled up the economy, as the banks' share of total corporate profits has tripled to about one-third since the middle of the last century, according to Evan Soltas.

Here's the short story of corporate profits, GDP, and workers' income since the Great Recession. As you can see, corporations rode a wild roller coaster, but they quickly found their way back on top. GDP has been sluggish and overall labor income has struggled to keep up with even that sluggish pace.


Here's the longer view. Zoom out to the turn of the century, and you can see that this isn't a "recession" trend. It's just a trend that the recession has amplified. Corporate profits starting eating the economy around 2003, around the time the housing market started delivering massive profits to finance companies.

"The Sequestering of Barack Obama"

Robert Kuttner @ The American Prospect takes a hard look at the economics and politics of the sequester in the context of President Obama's overall strategic and substantive performance on the economy - a sobering critique:

President Obama has miscalculated both the tactical politics of the sequester and the depressive economic impact of budget cuts on the rest of his presidency. The sequester will cut economic growth in half this year. But it’s now clear, one way or another, that we will get cuts in the $85 billion range that the sequester mandates this fiscal year. All that remains are the details.

Obama’s miscalculation began in his fist term, with his embrace of the premise that substantial deficit cutting was both politically expected and economically necessary, and his appointment of the 2010 Bowles-Simpson Commission as the expression of that mistaken philosophy. Although the Commission’s plan was never carried out, its prestige and Obama’s parentage of it locked the president into a deflationary deficit reduction path.

This past week, we’ve seen how the Republicans took advantage of Obama’s self-inflicted wound. With the March 1 deadline looming, the White House assumed that if the president gave enough publicity to the harm of pending automatic cuts, the Republicans would just cave. But the Republican leadership calculated that the ensuing political and economic damage would be worse for Obama, so they hung tough.

Obama also assumed that military cuts would be enough to move Republicans to  compromise. But with two wars winding down, most Republicans decided that this year they were deficit hawks more than defense hawks.

The president also played the populist card, calling for tax increase on the wealthy to spare the rest of the country program cuts. But that didn’t move the Republicans either.

The Republican leadership also deftly evaded the risk of being blamed for shutting down the government. They offered the Democrats a continuing resolution to allow government to keep operating, but at $85 billion below current spending levels. That shifted the onus to Democrats if they refused to take the deal and Congressional leaders advised the president that they were not prepared to take that risk.

Finally, Republicans took some of the sting—and responsibility—out of the sequester by offering to give Obama new flexibility in how he implemented it, thus making it even more his problem.

Next to come is the long awaited grand bargain of the austerity lobby, in which Republicans agree to close some tax loopholes (which start out grotesquely swollen) and Democrats agree to breach the previously sacrosanct fortresses of Social Security and Medicare.

On all counts, advantage: Republicans.

Long term, colluding in the politics of budget austerity has left Obama with no real capacity to offer the public investment that the economy needs for a robust, broadly-based recovery, and leaves him with the prospect of a weak economy between now and the end of his term--unless he drastically shifts course and repudiates the entire view of the budget and the economy.

Hippies

Professor Krugman @ NYTs:

We’re just a few weeks away from a milestone I suspect most of Washington would like to forget: the start of the Iraq war. What I remember from that time is the utter impenetrability of the elite prowar consensus. If you tried to point out that the Bush administration was obviously cooking up a bogus case for war, one that didn’t bear even casual scrutiny; if you pointed out that the risks and likely costs of war were huge; well, you were dismissed as ignorant and irresponsible.

It didn’t seem to matter what evidence critics of the rush to war presented: Anyone who opposed the war was, by definition, a foolish hippie. Remarkably, that judgment didn’t change even after everything the war’s critics predicted came true. Those who cheered on this disastrous venture continued to be regarded as “credible” on national security (why is John McCain still a fixture of the Sunday talk shows?), while those who opposed it remained suspect. 

And, even more remarkably, a very similar story has played out over the past three years, this time about economic policy. Back then, all the important people decided that an unrelated war was an appropriate response to a terrorist attack; three years ago, they all decided that fiscal austerity was the appropriate response to an economic crisis caused by runaway bankers, with the supposedly imminent danger from budget deficits playing the role once played by Saddam’s alleged weapons of mass destruction. 

Now, as then, this consensus has seemed impenetrable to counterarguments, no matter how well grounded in evidence. And now, as then, leaders of the consensus continue to be regarded as credible even though they’ve been wrong about everything (why do people keep treating Alan Simpson as a wise man?), while critics of the consensus are regarded as foolish hippies even though all their predictions — about interest rates, about inflation, about the dire effects of austerity — have come true. 

So here’s my question: Will it make any difference that Ben Bernanke has now joined the ranks of the hippies? 

Earlier this week, Mr. Bernanke delivered testimony that should have made everyone in Washington sit up and take notice. True, it wasn’t really a break with what he has said in the past or, for that matter, with what other Federal Reserve officials have been saying, but the Fed chairman spoke more clearly and forcefully on fiscal policy than ever before — and what he said, translated from Fedspeak into plain English, was that the Beltway obsession with deficits is a terrible mistake. 

The Sequester's Impact on Recession and Recovery

The New Republic asked a range of economists whether the sequester will throw us back into recession. Here are some answers:

With $85 billion in budget cuts set to take effect Friday, when the sequester kicks in, there's been plenty of debate about whether the economy will spiral back into a recession. In search of some clarity, The New Republic asked economists from across the political spectrum a simple question, "Will the sequester start another recession?"...

It could. And either way, it's dumb policy.
"My reaction is possibly, but improbably. That said, it's pushing policy in exactly the wrong direction. At a time when the economy still needs a stimulus to promote recovery rather than restrictive policies to prevent overheating. I think job one economically today is to restore full employment, that is today's problem. Tomorrow's problem will be to deal with long term budget imbalances, but trying to curb long term budget imbalances now carries the high probability of delaying economic recovery and the possibility of turning recovery into decline and, were that to happen, it would be a major misfortune for the nation." — Henry Aaron, senior fellow of economic studies at the Brookings Institution

Probably not. But we'll notice a difference.
"In my view it will have a noticeable hit on the growth rate of between 0.5 and 0.9 percentage points. That won't put us in a recession but it will definitely slow improvements to unemployment and the job market." — Austan Goolsbee, professor of economics at the University of Chicago and former chairman of the Council of Economic Advisers

It's certainly not good for the economy.
"It's not helpful. However, trading the sequester for long-term Social Security and Medicaid/Medicare benefit cuts would be worse. Short-term cuts are fairly easy to reverse if it's done quickly." — James Galbraith, economist, University of Texas at Austin

The Racial Wealth Gap

Neil Shah @ Wall Street Journal:

White families build wealth faster than black households, a phenomenon economists call the “racial wealth gap.” What explains this growing divide?

The biggest drivers, new research shows, are home ownership and income levels. Tracking 1,700 working-age households from 1984 to 2009, researchers at Brandeis University’s Institute on Assets and Social Policy found that, among households whose wealth grew over the period, the number of years owning a home accounted for nearly 30% of the difference in the relative growth in wealth between white and black families.

Family income accounted for another 20% of the widening gulf in wealth. Other factors include college education, inheritances and unemployment. All told, these five factors accounted for 65% of the increasing wealth gap, researchers said.

The findings are the latest evidence that barriers in workplaces, schools and communities — rather than personal attributes and cultural factors — may be making it harder for blacks to accumulate wealth than whites over time. Wealth, the sum of assets like homes, cars, stocks and bank and retirement accounts, minus debt, is a key gauge of economic well being — and can be passed on to future generations.

Bernanke: Conservative Voice of Reason to Crazy Fellow Republicans

John Cassidy at The New Yorker:

With about eighty-five billion dollars of across the board spending cuts due to take affect in a few days, Fed chairman and former Princeton prof Ben Bernanke was up on Capitol Hill this morning giving his fellow Republicans a much-needed lesson in austerity economics. Departing from his statutory duty of reporting to the Senate Banking Committee on the Fed’s monetary policy, Bernanke devoted much of his testimony to fiscal policy, warning his congressional class that letting the sequester go ahead would endanger the economic recovery and do little or nothing to reduce the country’s debt burden.

“Given the still-moderate underlying pace of economic growth, this additional near-term burden on the recovery is significant,” Bernanke told his students, who included a number of right-wing Republican diehards, such as Senator Bob Corker, of Tennessee, and Patrick Toomey, of Pennsylvania. “Moreover, besides having adverse effects on jobs and incomes, a slower recovery would lead to less actual deficit reduction in the short run.”

Translated from Fed-speak, that meant that congressional Republicans have got things upside down. Bernanke has warned before about the dangers of excessive short-term spending cuts. But this was his most blunt assertion yet that Mitch McConnell, John Boehner, et al. should change course. “To address both the near- and longer-term issues, the Congress and the Administration should consider replacing the sharp, frontloaded spending cuts required by the sequestration with policies that reduce the federal deficit more gradually in the near term but more substantially in the longer run,” Bernanke said. “Such an approach could lessen the near-term fiscal headwinds facing the recovery while more effectively addressing the longer-term imbalances in the federal budget.”

Ideology over Empiricism among "conservatives", aka "The Crazy"

Steve Benen @ Maddow Blog on the GOP's reality issue:

For the Republican Party establishment, the only meaningful lesson to be learned from 2012 is rhetorical. Sure, polls show Americans rejecting the GOP line on every major issue, but, the argument goes, that's only because the party has failed to come up with persuasive sales pitches. Republicans believe they have a rhetorical problem, not a policy problem.

But just outside the establishment, there's a fair amount of discussion among Republican pundits, strategists, and thinkers about their party's systemic challenges and what the GOP should do about them. It's led to some thoughtful critiques from the likes of Ramesh Ponnuru, Kathleen Parker, Michael Gerson and Peter Wehner about how to "save" the Republican Party.

But it was this item from Bloomberg's Josh Barro, a self-identified "reluctant" Republican, that really got me thinking.

I don't want a Republican Party that's just like the Democratic Party, even though some people on both the right and the left see that as the upshot of Republican critiques like mine.

Political parties should differ on normative questions. They ought to strive for agreement on positive questions -- questions such as, what policies cause gross domestic product and median incomes to rise, how unemployment insurance affects the unemployment rate, or how global temperatures are changing. Currently, Republicans make a lot more errors on these kinds of questions than Democrats.

Correcting errors on positive questions should cause conservatives to revisit some of their top policies....  Conservatives say tight money and lower top tax rates would enrich middle-class families. But that's wrong, and if they figured that out, they might stop supporting tight money and lower top tax rates.

And that, right there, that very last sentence, helps shine a light on what I believe plagues the Republican Party more than anything else: they've abandoned empiricism, leading to a governing philosophy that puts ideological goals over pragmatic ones.

St, Reagan's grand fail

In the context of a response to column by conservative commentator Ramesh Ponnouru, Paul Krugman @ NYTs makes a compelling case with...uh...data:

Reaganomics was not a success!

Look at median family income. The basic story of postwar America is one of big gains in the first generation, near-stagnation in the second and after, with fluctuation due to the business cycle. And Reagan did not break that pattern:

If you want a better assessment, you can look at growth between business cycle peaks. (Peaks are much more similar than troughs; all happy economies are alike, each unhappy economy is unhappy in its own way.) Here’s what you get (treating the 1979-82 double dip as a single recession):

These periods don’t match up neatly with presidential terms. Still, if Reaganomics had been such a spectacular success, you would have expected the results by 1990 to have been families doing better than in the horrible 1970s; actually, not. The only clear things we see here are that the Clinton era was pretty good, while the Bush era was lousy even before the crisis.

The Walmart World

George Packer @ The New Yorker  takes a look at the fragility of the Walmart consumer economy after decades of increasing income inequality and years of Great Recession:

If you were to write a social history of America through the story of business, what would be the most significant companies in the years since the Second World War? I’d divide the period into two: from 1945 to the mid-seventies, I might name General Motors and Woolworth’s. They set the standard for corporate success and behavior during a period that could be called the Roosevelt Republic, when a social contract underwrote American life. It included an expanding middle class, a strong safety net, high marginal tax rates, a white male establishment that grudgingly made way for other groups, a bipartisan approach to legislation in Washington, and a business culture that was cautious, loyal, hierarchical, and unimaginative.

In the decades since the mid-seventies—you could call it the Reagan Republic, but I prefer the “Unwinding”—the social contract has frayed to the point of disintegration. The middle class has shrunk; tax rates (especially on upper brackets) have plunged; inequality has exploded; the safety net (especially for the poor) has weakened; the old power structure has given way to a more diverse and broad-based upper class based on education; bipartisanship—well, you know; and business culture has become entrepreneurial, fast, risk-taking, and harsh. The trade-off: more freedom, less security.

Two companies have defined the years of the Unwinding: one is Apple, the other, Walmart. Steve Jobs’s genius for design and marketing helped create the consumer taste of that educated upper class—the spare, sleek, Bauhaus-inspired devices; the turtlenecks and jeans; the self-congratulatory language of revolution and inspiration; the Einstein fetish—with the Apple Store a kind of secular temple for devotees in prosperous cities and suburbs, mostly along the two coasts.

Jobs’s stylistic and philosophical opposite was Sam Walton. He came out of the heartland, where he saw the potential for a strategy of low cost and high volume in overlooked backwaters like Siloam Springs, Arkansas, and Coffeyville, Kansas. Walmart’s period of explosive growth coincided with decades of wage stagnation and deindustrialization. By applying relentless downward pressure on prices and wages, the company came to dominte both consumer spending and employment in small towns and rural areas across the middle of the country. The hollowing out of the heartland was good for Walmart’s bottom line: its slogan might have been an amoral maxim attributed to Lenin—“The worse, the better.”

Joe Scarborough is an idiot

 Jon Chait @ New York magazine makes the case:

The deficit scold cause has suffered significant intellectual erosion over the last year or so. In the short run, the interest rate spike they keep insisting will happen keeps not happening. In the long run, the health-care-cost inflation that is at the root of the long-term fiscal predicament is growing markedly less dire. The case for prudent fiscal adjustment remains strong, but the case for  bug-eyed, table-pounding terror is growing increasingly ridiculous.

But bug-eyed, table-pounding terror is the stock-in-trade of the fiscal scold movement. And so they are striking back by labeling anybody with a calmer view of the deficit as a “debt denier.” Joe Scarborough, who may have launched the new catchphrase on Twitter, has a new op-ed in Politico brandishing the epithet. Meanwhile, the anti-deficit lobby “Fix the Debt” — for whom Scarborough has served as one of many media spokespersons — has taken up Scarborough’s favorite label with a new campaign, debtdeiners.com, which, alongside its latest attempt to generate a viral dance video, amounts to a concerted counteroffensive against Paul Krugman and others who have ever so slightly mitigated the tone of apocalyptic hysteria surrounding the fiscal debate. They even have their own debt deniers hashtag. They are trying very hard to make “debt deniers” happen.

Let’s examine their case on the merits, not merely as an attempt to create a viral meme.

Analyzing the argument in a Joe Scarborough–authored op-ed is inherently challenging. (The written word in general is just a terrible medium for Scarborough, hiding his winning personality while exposing his inaptitude for analysis.) It mainly consists of using variations of “debt denier” repeatedly to describe his opponents. To his credit, Scarborough finally cites one actual economist who shares his view, a welcome departure from his usual method of answering charges that he is in the grips of an incestuous groupthink driven by non-economist elites by citing the agreement of his non-economist elite friends.

Dr. Krugman v. GOP Starlet Rubio

The Professor @ New York Times:

"Marco Rubio Has Learned Nothing"

Because his party has learned nothing.

Kool-Aid?

OK, back up: this morning the papers and the web are full of nuance-sniffing, as people try to find omens in the SOTU and the GOP response. I don’t think I can add anything useful to all that. But there was one important point in Marco Rubio’s remarks that I don’t think has been highlighted. It’s true, as Andy Rosenthal says, that Rubio mainly reminded us that Republicans don’t like government or taxes; surprise! But he also reminded us that Republicans don’t like reality.

Here’s the passage:

This idea – that our problems were caused by a government that was too small – it’s just not true. In fact, a major cause of our recent downturn was a housing crisis created by reckless government policies.

OK, leave on one side the caricature of Obama, with the usual mirror-image fallacy (we want smaller government, therefore liberals just want bigger government, never mind what it does); there we go with the “Barney Frank did it” story. Deregulation, the explosive growth of virtually unregulated shadow banking, lax lending standards by loan originators who sold their loans off as soon as they were made, had nothing to do with it — it was all the Community Reinvestment Act, Fannie, and Freddie.

Look, this is one of the most thoroughly researched topics out there, and every piece of the government-did-it thesis has been refuted; see Mike Konczal for a summary. No, the CRA wasn’t responsible for the epidemic of bad lending; no, Fannie and Freddie didn’t cause the housing bubble; no, the “high-risk” loans of the GSEs weren’t remotely as risky as subprime.

"The case for helicopter money"

Martin Wolf @ Financial Times:

“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.” This comment of Mark Twain applies with great force to policy on money and banking. Some are sure that the troubled western economies suffer from a surfeit of money. Meanwhile, orthodox policy makers believe that the right way to revive economies is by forcing private spending back up. Almost everybody agrees that monetary financing of governments is lethal. These beliefs are all false.

As Claudio Borio of the Bank for International Settlements puts it in a recent paper, “The financial cycle and macroeconomics: what have we learnt?”, “deposits are not endowments that precede loan formation; it is loans that create deposits”. Thus, when banks cease to lend, deposits stagnate. In the UK, the lending counterpart of M4 was 17 per cent lower at the end of 2012 than in March 2009. (See charts.)

When arguing that monetary policy is already too loose, critics point to exceptionally low interest rates and the expansion of central bank balance sheets. Yet Milton Friedman himself, doyen of postwar monetary economists, argued that the quantity of money alone matters.