EconomicReason

Monetary policy is sometimes said to be “pushing on a string” if one wants to emphasize the ineffectiveness of expansionary monetary policy. However, I think that this expression is misleading - in the long run, monetary policy is quite powerful. In the long run, monetary policy is therefore rather pulling on that string. And because the economy is a complex system, there is more than one string involved. In fact, one can compare setting monetary policy with playing a violin - both involves pushing, pulling and plucking strings in order to create a harmonic tune.

The strings of the Fed’s violin represent the different transmission channels of monetary policy. Due to the steady increase in wealth, asset markets have become a major string of the Fed violin in recent years. In the 1990s, the music played mainly in the stock markets, until that string broke in a crescendo in 2000. In its efforts to keep up the tune, the Fed then turned to the real estate string, which proved to be very effective, until it, too, broke under the heavy hand of the Maestro.

Unfortunately, the Fed does not know that it is playing a violin, let alone that two main strings of the violin are broken. In order to keep up the volume, the Fed now fiddles all the harder, which will eventually ruin even more strings. The brunt of the Fed’s musical ambitions is now on the commodity string. In time, it will break as well, but not after having wrought havoc on consumer price inflation around the world.

It is rightly said that monetary policy is more of an art than a science. Engineers have no business in the orchestra pit - neither have today’s typical economists, having gone through several years of brainwashing by would-be mathematicians.