Morningstar Magazine - October/November 2016 - 49

1.44 1.44 1960 1960 1970 1970 1980 1980 1990 1990 2000 2000 2010 2010 1.50 1.50 1.30 1.30 EXHIBIT 2 We believe that Monetary Keynesianism is somewhat to blame.¹² Monetary Keynesianism is the use of monetary techniques, such as low interest rating and quantitative easing, to achieve the Keynesian goals of full employment of labor and capital. Central bankers try to stimulate economic growth by attempting to increase M, but all they accomplish is to raise P and/or lower V. If they raise P, they hope they will increase Q through the agency of a Phillips curve (which says that more inflation means less unemployment and consequently more output). However, as we noted earlier, Edmund Phelps, back in the day of Friedman's presidential address, showed that the Phillips curve is highly unstable and essentially unusable for policy. In the postcrisis period, attempts to increase M have raised neither P nor Q ; they have lowered V. Nevertheless, Monetary Keynesianism has become gospel among central bankers almost everywhere. But it is not effective. Also, it is not monetarism. It is not even Keynesianism. It is bad monetary economics. Monetary Policy During and After the Crisis While monetary easing is not effective at boosting real output in normal times, it does seem to be effective in emergencies. At the worst point of the global financial crisis, in September and October 2008, the money supply was contracting rapidly and the soundness of the global financial system, including the payments system that allows checks and other routine financial transactions to clear, was in question. A massive injection of liquidity by central banks was needed and achieved. This emergency monetary policy measure was successful because the money supply had shrunk to a level that was suboptimal and was likely to shrink further in the absence of intervention. After the worst of the crisis was over, however, central banks continued to pursue radically accommodative monetary policies-one quantitative easing after another-in the pursuit of economic growth. Increasing a nominal Growth of the Monetary Base, the Money Supply, the Real Economy, and Consumer Prices Since 2005 St. M2 St. Louis Louis Adjusted Adjusted Monetary Monetary Base Base M2 Money Money Stock Stock Consumer Consumer Price Price Index Index for for All All Urban Urban Consumers, Consumers, All All Items Items Real Real Gross Gross Domestic Domestic Product Product Growth Growth 1,000 1,000 900 900 800 800 700 700 600 600 500 500 400 400 300 300 Recession Recession 200 200 Logarithmic Logarithmic scale scale 2005 2005 2006 2006 2007 2007 2008 2008 2009 2009 2010 2010 2011 2011 2012 2012 2013 2013 2014 2014 2015 2015 100 100 Source: FRED, Federal Reserve Bank of St. Louis. EXHIBIT 3 U.S. Real GDP and Real GDP Change, Q1 1960-Q2 2016 Quarterly Real GDPChange ($ Bil) in Real GDP (Stated as a Annual Rate) 17,000 17,000 Growth (%) Quarterly Change in RealReal GDPGDP (Stated as anAnnualized Annual Rate) + +10 10 In Billions In 2009 2009 USD U.S. Dollars 16,000 16,000 + +55 15,000 15,000 00 14,000 14,000 -5 -5 Recession Recession 13,000 13,000 2005 2005 2006 2006 2007 2007 2008 2008 2009 2009 2010 2010 2011 2011 2012 2012 2013 2013 2014 2014 2015 2015 -10 -10 Source: FRED, Federal Reserve Bank of St. Louis. 12 To the best of our knowledge, "Monetary Keynesianism" in this sense was first used by Laurence B. Siegel and Stephen C. Sexauer, "Five Mysteries Surrounding Low and Negative Interest Rates," forthcoming, Journal of Portfolio Management, Winter 2017. Monetary Keynesianism has a slightly different meaning in academic economics. global.morningstar.com/Morningstarmagazine 49 http://global.morningstar.com/Morningstarmagazine

Table of Contents for the Digital Edition of Morningstar Magazine - October/November 2016