Liberal voices: monetarism, monetary policy and the causes of inflation
Daniel Lacalle and Juan Castañeda
On 16 September 2024, the Rafael del Pino Foundation organised the dialogue "Liberal voices: monetarism, monetary policy and the causes of inflation" with the participation of Daniel Lacalle and Juan Castañeda.
Juan Castañeda is Director of the Vinson Centre for the Public Understanding of Economics and Entrepreneurship and Professor of Economics at the University of Buckingham since 2012. D. in Economics since 2003 (UAM), Juan Castañeda has focused his academic and research activity on monetary policy and central banking. Juan was Director of the Institute of International Monetary Research from 2016 to 2023. He has collaborated with the Bank of Spain, the Committee on Economic and Monetary Affairs of the European Parliament and the British Parliament. He has been Honorary Senior Visiting Fellow at Cass Business School (London) and visiting fellow at the Centre for Monetary and Financial Alternatives of the Cato Institute (Washington DC), and at the Universidad Francisco Marroquín in Guatemala. Before moving to the UK, he was a lecturer at UNED. He is the associate editor of the journal 'Economic Affairs' and author of academic books and research articles on money, monetary policy and central banking in historical perspective. He is a member of the Academic Advisory Committee and the Shadow Monetary Policy Committee of the Institute of Economic Affairs (London).
Daniel Lacalle D. in Economics, Chief Economist at Tressis S.V., professor of Global Economics at IE and IEB and investment fund manager. He holds a degree in Business Administration from the Universidad Autónoma de Madrid and a PhD Cum Laude from the Universidad Católica de Valencia. He holds a CIIA international financial analyst degree and a postgraduate degree from IESE, University of Navarra. He is President of the Instituto Mises Hispano, member of the Advisory Board of the Rafael del Pino Foundation and of ORFIN. He is also a member of the Academic Council of the International Freedom Foundation (FIL). His career in portfolio management and investment began at the hedge fund Citadel and continued at Ecofin Ltd. and PIMCO in the US and London. He is ranked number 5 in the Richtopia 2020 ranking of the world's most influential economists. He has been voted for five consecutive years among the top three managers in the Extel Survey, the Thompson Reuters ranking in the general strategy, oil and power categories. He writes a weekly column in El Español, and contributes monthly to CNBC and Bloomberg TV, as well as Antena 3, Cuatro, Telecinco, BBN Times, World Economic Forum, Hedge Eye, Epoch Times and Mises Wire, among others. Daniel Lacalle is the author of books on economics translated into several languages, including: "Nosotros los mercados", "Viaje a la libertad económica", "La gran trampa", "Libertad o Igualdad", and the latest, "Haz crecer tu dinero" (Deusto, 2022).
Summary:
Liberal voices: monetarism, monetary policy and the causes of inflation
On 16 September 2024, the Rafael del Pino Foundation organised an interesting dialogue entitled "Liberal voices: monetarism, monetary policy and the causes of inflation".with the participation of Daniel Lacalle y Juan Castañedatwo renowned economists in the field of liberal thought. The talk focused on the roots of inflation and how central banks and governments have managed the money supply in recent years, in particular during and after the COVID-19 pandemic.
The relationship between money supply and inflation
The debate started with a clear presentation on the monetarismThe "inflationary pressures", an economic current that argues that inflation is mainly the result of an excess of money in circulation. Juan Castañeda, director of the Vinson Centre for the Public Understanding of Economics and Entrepreneurship and professor at the University of Buckingham, began by explaining the essence of monetarism: "Monetarism tells us that there is a relationship between two major variables in the economy: the quantity of money in circulation and the nominal expenditure of the economy". This perspective, which follows the teachings of Milton Friedman, was a central point throughout the talk.
According to both speakers, the increase in money supply is the main cause of inflation. Although the media and many analysts have pointed to other factors, such as supply chain disruptions and higher commodity prices, both Castañeda and Lacalle emphasised that these are the main causes of inflation. consequences and not causes of inflation. "If inflation were a consequence of commodities, we would be seeing deflation today, as many of these prices are well below 2019 levels," said Lacalle.
Central banks and the pandemic
One of the key points of the debate was the analysis of the monetary policies adopted during the COVID-19 crisis. During the worst moments of the pandemic, central banks and governments injected massive amounts of liquidity into the economy to prevent a collapse. However, according to the panellists, this expansion of the money supply was disproportionate and unnecessary.
Daniel Lacalle was blunt about this: "The five-fold increase in the amount of money created in 2020 happened with the economy closed. It is not that there was insatiable demand, but that we were literally locked in the house. This massive intervention, Lacalle continued, was meant to cushion the crisis, but ended up generating an inflationary problem that was not seen until the economy began to reopen.
Castañeda added that as early as 2020, together with his colleague Tim CongdonIn the spring of 2020 we published a study warning about the inflationary risk of disproportionate central bank money creation. And, of course, we now see that this risk is already a reality. The problem, according to both economists, is that the central banks did not pay enough attention to the monetary aggregates (the total amount of money in circulation), resulting in an irresponsible policy.
Responsibility of central banks
One of the major points of criticism was the lack of accountability of central banks. According to Castañeda, "central banks have been failing to fulfil their price stability mandate for four years". The economist explained that these bodies, which should focus exclusively on keeping inflation under control, have diverted their attention to other issues, such as climate change or social inequality, something that, from his perspective, should not be their concern. "Central banks do not have to worry about climate change, inequality or social policies, they have to worry about price stability," Lacalle stressed.
The main criticism is that central banks have ignored the lessons of the past. Castañeda offered a historical example, showing how the Bank of England during the 19th century maintained inflation close to 0% for almost a century, thanks to the strict relationship between money issuance and the gold standard. "In 1813, an English family could buy the same as in 1913. That is price stability," Castañeda said, alluding to the importance of having clear rules that limit the ability of governments to over-issue money.
The role of the state and the manipulation of monetary policy
Daniel Lacalle took the debate into the political realm, emphasising how the governments use monetary policies to finance themselves at the expense of citizens. In his words, "governments are the main beneficiaries of the increase in the quantity of money, as it allows them to finance themselves at a lower cost, while shifting the burden of inflation onto households and businesses".
For Lacalle, the problem lies in the fact that states see crises as an "exceptional excuse" to increase spending and public debt, which in turn generates more inflationary pressure. "Since 1998 we have experienced exceptional crises in 2001, 2008, 2011, 2020... and the central bank has always been used to issue more money. This cannot continue," he said.
Where are we going? What solutions do they propose?
Both speakers agreed that the solution lies in limiting discretion and to establish stricter monetary rules. Castañeda mentioned the Taylor rule as an example of how the quantity of money could be managed in a more stable way. This rule, which links the quantity of money to inflation and economic growth, is one of the proposals most advocated by monetarist economists.
Lacalle, for his part, emphasised the need to also limit the public spending. In his view, it is not enough to tie the hands of the central banks if the deficits of the states are not controlled. "We cannot ask the central bank to act responsibly if the government continues to accumulate a deficit of 8% of GDP," he warned.
What about Bitcoin?
During the question and answer session, the issue of the Bitcoin and its possible role as a form of monetary competition against currencies issued by central banks. Castañeda recognised it as a possible tool to discipline states and central banks, forcing them to be more responsible with the issuance of money. However, he clarified that Bitcoin is not a currency in the strict sense, but an asset: "It is not a universally accepted means of payment, and therefore it is not money, but its existence may force governments to be more careful".
Conclusion
The dialogue between Daniel Lacalle and Juan Castañeda made it clear that, in their view, the inflation we are experiencing today is the direct result of poorly managed monetary and fiscal policies. Both economists agree on the need for stricter rules that limit the power of central banks and governments to create money and generate inflation. "It is time to put the focus back on the fundamentals: price stability," concluded Lacalle. And for Castañeda, the key is to understand the fundamental relationship between money and the real economy: "If we continue to ignore the quantity of money in circulation, we will continue to pay the price in the form of inflation.
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The Rafael del Pino Foundation is not responsible for any comments, opinions or statements made by third parties. In this respect, the FRP is not obliged to monitor the views expressed by such third parties who participate in its activities and which are expressed as a result of their inalienable right to freedom of expression and under their own responsibility. The contents included in the summary of this conference are the result of the discussions that took place during the conference organised for this purpose at the Foundation and are the sole responsibility of its authors.
