bored-bernankeIf there’s one thing we can be sure of ever since this Great Recession hit four years ago, shortly after we got sated on the Beijing Olympics in late summer 2008, one verity, it is that the money supply has gone up ever since. Way up.

Federal Reserve Chairman Ben Bernanke is known far and wide for having “printed money” like never before—through the various quantitative easings, operation twists, and putting ceilings on interest rates south of 0.5%. You can look it up. All the old “monetary aggregate” statistics the Fed uses to measure the money supply—“M1” and all that—are up three-fold or more since 2008, and interest rates are at all-time lows.

Yet do you know what certain insiders in the economics profession have been saying? Money has been tight the whole while. Steve Hanke of Johns Hopkins is one who’s been making this point. As has William A. Barnett of the University of Kansas, who late last year published a book called Getting it Wrong: How Faulty Monetary Statistics Undermine the Fed, the Financial System, and the Economy.

The point these rogue economists are driving at is that (as has long been conceded in economics) simply adding up currency and bank account numbers, as the Fed does as it counts money, will not give you a good picture of people’s liquidity. How much “money” people have is not wholly a function of cash stashed in currency or under an FDIC umbrella at the bank, but rather of how much financial power people are able to leverage at any moment by deploying cash, banked money, bonds, stocks, hard assets, what have you.

In 1980, Barnett wrote an eye-popping article in an academic journal showing that you could discount all non-cash assets according to their propensity to be used as cash and then include them in a new monetary aggregate. This would give you a true picture of the nation’s money supply. Barnett called it a “Divisia” index, after a classical French economist of that name.

Here’s what Divisia measures of money have been doing since 2008: going down. At one point during the Great Recession, as Barnett explains in his book, the year-over-year decline was 10%. There’s a simple lesson here. You’re going to have a recession if people’s ability to manifest money to buy things goes down at a double-digit rate.

All very recondite? Not really. What the likes of Barnett and Hanke have been telling us all these years is rather obvious. If the Fed is going to ram down interest rates, then all our current assets that are earning interest (or that could earn interest) are going to be worth less. If the Fed is going to print money such that the value of a narrow portfolio of hard assets like gold, copper, and oil are going to go up at the expense of all other assets, that greater share of assets can be monetized by their owners for less.

Today, maybe you can get a mortgage loan for less than ever (if you qualify!), but your house, car, deposits, stocks, bonds, you name it are all worth less. Our purchasing power is lower, hence the money supply is lower. Money has been tight all these years since 2008. The Divisia statistics bear it out uncannily.

The moral of the story is one that advocates of supply-side economics (the incomparable John Rutledge most of all) have been intoning since the 1970s. Monetary policy does not exist in a vacuum. It must be coordinated with fiscal and regulatory policy. All three of these blunderbusses have to get out of the way in tandem in order for any one to have positive effect on the economy.

What should have occurred under the current incumbent’s star-crossed presidency is that the government should have committed to less regulation and marginal taxation as the crisis came. This in turn would have raised the market value of all assets, by virtue of not putting encumbrances on them that made them hard to move around in the economy—in other words, to function as money.

Think Dodd-Frank. Without the new banking regulation of 2010, bank assets (especially small-bank assets) could have been put to use however their owners desired. Now they’re stuck doing nothing for the economy while all the new rules are hued to, and we have 1.5% growth to show for it.

Had a walkback of regulation occurred in tandem with tax reform in 2009-11, the Fed would have not been of a mind to plunge interest rates to historic lows and destroy the earning capability of banked money as a consequence. And absent the folly of quantitative easing care of the Fed, gold would not have marched up 3-fold as it did, as everything else sunk in value.

The monetary power of the range of assets that the Fed doesn’t ordinarily count as “money” would have been retained if government cooled it across-the-board as the recession hit. Economic growth would have ensued as the wealth generated in the long prosperous period before 2008 would still have been there to be deployed.

Supply-siders have long known that the Fed alone cannot cure recession. Buying up Treasury bonds en masse is going to be a net negative in the economy, ruining the value of savings and such, especially if done in the context of a greater general commitment on the part of government to displace the real economy. Because all our assets are in some form money, our progressive impoverishment these last years at the hands of government activism means that money has been tight.

Books on the topic discussed in this essay may be found in The Imaginative Conservative BookstoreOriginally published at Forbes.com the essay is reprinted here with gracious permission of Brian Domitrovic.

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