As great as Friedman was, Rothbard jokingly referred to him as a “road socialist”, because Friedman was incapable of making the leap to AnCapistan (full separation of Economy and State). More recently, economist Richard Koo has pointed out significant breakdowns with Friedman’s Monetary Theory around recessions: according to Friedman, the Great Depression was caused by the Fed’s failure to properly maintain the money supply in the midst of a rapidly deflating economy. Koo coined the term “Balance Sheet Recession” to identify the regime switching behavior of individuals and firms who, in the aftermath of an asset bubble burst, switch from profit maximization to debt minimization. This debt minimization behavior occurred again after the real estate bubble collapse in Japan in the ‘90s and to the rest of the world following our Housing Bubble of ‘08. Firms and individuals devoting spare cash flow to repairing their balance sheets are completely unresponsive to the standard central bank tools of lowering interest rates or even Quantitative Easing. Koo instead proposes to soak up excess private sector savings with fiscal spending on self financing infrastructure projects, thus maintaining the general income level to avoid the “paradox of thrift” in which private sector debt minimization by all sharply reduces incomes, leading to recession.
Milton Friedman nailed it every time.
As great as Friedman was, Rothbard jokingly referred to him as a “road socialist”, because Friedman was incapable of making the leap to AnCapistan (full separation of Economy and State). More recently, economist Richard Koo has pointed out significant breakdowns with Friedman’s Monetary Theory around recessions: according to Friedman, the Great Depression was caused by the Fed’s failure to properly maintain the money supply in the midst of a rapidly deflating economy. Koo coined the term “Balance Sheet Recession” to identify the regime switching behavior of individuals and firms who, in the aftermath of an asset bubble burst, switch from profit maximization to debt minimization. This debt minimization behavior occurred again after the real estate bubble collapse in Japan in the ‘90s and to the rest of the world following our Housing Bubble of ‘08. Firms and individuals devoting spare cash flow to repairing their balance sheets are completely unresponsive to the standard central bank tools of lowering interest rates or even Quantitative Easing. Koo instead proposes to soak up excess private sector savings with fiscal spending on self financing infrastructure projects, thus maintaining the general income level to avoid the “paradox of thrift” in which private sector debt minimization by all sharply reduces incomes, leading to recession.
I have many friends who agree with Rothbard.
Very relevant to Libertarian parties. Brilliant.