Neglecting Money: The new monetary theorists are making a huge blunder.

• Author: Congdon, Tim

Rarely have top economic policymakers been more united than they were in their response to the coronavirus pandemic. In the leading advanced nations, governments widened budget deficits and financed the enlarged deficits mostly from banking systems, while central banks carried out extensive asset purchases in programs of so-called "quantitative easing." Writing in the Financial Times June 22, 2020, Gavyn Davies, former chief international economist for Goldman Sachs, opined that these highly stimulatory measures had received "a chorus of approval from the [economics] profession."

Stimulus was needed--according to the many members of the chorus--because Covid-19 was expected to lead to bankruptcies and job losses on a vast scale. Thinking in New Keynesian terms, they believed that the resulting unemployment would constrain wage and price increases over the medium term. Olivier Blanchard--chief economist at the International Monetary Fund from 2007 to 2015--judged in a May 24, 2020, blog for the Vox CEPR Policy Portal that it was hard "to see strong demand leading to inflation."

A few days earlier, Richard Clarida, vice chair of the Federal Reserve, had told the New York Association for Business Economics that, "My projection is for the Covid-19 contagion shock to be disinflationary, not inflationary." Clarida must have been an important voice on the Federal Open Market Committee, since the minutes of its June 2020 meeting affirmed that "highly accommodative financial conditions" would have to be maintained "for many years" in order "to quicken meaningfully the recovery from the current severe downturn." Notice the phrase "for many years."

The unanimity of policy response and commentariat endorsement in spring 2020 was exceptional, perhaps unprecedented. But so too have been the speed and completeness of the refutation by events of the professional consensus. The first surprise was not just the resilience of asset markets, but the vigor with which stock markets and real estate values rebounded from March 2020 lows. At its highs in January 2021, the S&P 500 index was 75 percent higher than it had been less than ten months earlier. While U.S. equities led the pack, stock markets around the world also registered massive gains. Moreover, fears of tumbling real asset markets were dumbfounded. To focus on the United States again, in the six months to November 2020, the Federal Housing Finance Agency's index of house prices climbed by 8.2 percent (that is, at an annualized rate of almost 17.2 percent).

Plainly, the...