Famed libertarian economist Milton Friedman blamed the depth and duration of the Great Depression on overly restrictive monetary policy. The Fed raised interest rates and choked off economic growth, putting the country and the world into a deflationary spiral that did not end until WWII.
We currently have interest rates near zero. The American dollar is hitting all-time lows. Despite this, economic growth is weak and demand for mortgages is low.
We don’t have loose money, and we haven’t during our entire economic slump. A big reason that slump has been so deep and long is that the Fed is keeping money tight: It’s not letting the money supply increase enough to keep current-dollar spending growing at its historical rate.
That view sounds crazy to a lot of people. They look at low interest rates, soaring commodities prices and an expanded money supply, and assume that these are clear indications of easy money. And sometimes these conditions do reflect monetary ease.
But not always. The late great Milton Friedman looked at Japan’s lost decade and grasped that its low interest rates were, counterintuitively, a sign of tight money: The Bank of Japan had choked the life out of the economy by keeping the money supply too low, and that’s what kept interest rates down.