Economics Questions

Re: Friedman on interest rates

resist272727 — Sat, 04 Dec 2010 03:46:00 GMT

I love Friedman but it's necessary to point out that real interest rates are the key. In the 1970s the Fed Funds rate was high in nominal terms but very low in real terms. The real rate was negative from the 1974-IV to 1977-IV and dipped as low as -4.8%, the Fed Funds rate being 6.3% while price inflation was at 11.1%. In 1978 and 1979 the real interest rate was never greater than 1%, so it was still very low. Compare this to the 1960s when the real interest rate was below 1% in only 5 out of 40 quarters. It was almost always 1%-3%.

In the fourth quarter of 1980 the Fed Funds rate soared above inflation and was anywhere from 3%-8% until 1987 and business flourished.

So yes, Friedman talks of interest rates and inflation but he fails to combine them and therefore fails to see the truth.

Re: Friedman on interest rates

nirgrahamUK — Sat, 04 Dec 2010 02:29:03 GMT

ok this is on its way. but I'm signing off for the night, see you tomorrow.

Re: Friedman on interest rates

Despicable — Sat, 04 Dec 2010 02:22:52 GMT

By "low" I mean artificially under the market's rate. And by "easy" I mean that banks do not have a difficult time obtaining cash from the central bank.

Re: Friedman on interest rates

nirgrahamUK — Sat, 04 Dec 2010 02:03:50 GMT

what do you mean by 'low' and 'easy' ?

Re: Friedman on interest rates

Despicable — Sat, 04 Dec 2010 02:02:53 GMT

What is the relationship between low interest rates and easy money in today's economy?

Re: Friedman on interest rates

nirgrahamUK — Sat, 04 Dec 2010 01:28:05 GMT

well we first need to understand what is Milton referring to by 'high' and 'low' and 'tight' and 'easy', best get that out of the way first.

Friedman on interest rates

pentahedron — Sat, 04 Dec 2010 01:09:39 GMT

After the U.S. experience during the Great Depression, and after inflation and rising interest rates in the 1970s and disinflation and falling interest rates in the 1980s, I thought the fallacy of identifying tight money with high interest rates and easy money with low interest rates was dead. Apparently, old fallacies never die.

Milton Friedman,1997

What do you guys think of his comment and do you agree/disagree?