I have finally moved my blog and integrated in within my long-standing home page. The new blog address is – https://www.billmitchell.org/blog – although the old address will work forever. However, I do urge you to update your bookmarks to the new address.
There are regular interventions from commentators over time who repeat the same thing over and over – usually some prophesy that a currency (for example, the Yen or the USD) will collapse soon, and life goes on until they come out with the same predictions, which never turn out. The mainstream media loves to give these characters a platform because the headlines are sensational and I guess that sells ‘units’ for the companies. The latest I saw was from Mr. Roubini in the Financial Times, who has been predicting the collapse of the USD regularly. Time to give him a miss I think. A related topic of hysteria that ordinary folks seem to get agitated about but clearly don’t understand even the first principles involved is the old canard – central bank losses. This gets a little more abstract for most relative to the Roubini-type currency collapse headlines but the mainstream press still manage to whip up a doom scenario that somehow the central bank is about to go broke and governments will have to bail them out and taxes and debt will rise, and, somehow, ultimately, our grandchildren will find themselves in penury trying to pay back the debts our current governments ran up. A recent Bank of International Settlements Bulletin article (No. 68)- Why are central banks reporting losses? Does it matter? (released February 7, 2023) – bears on this issue. Conclusion: nothing to see here.
Yesterday, the Reserve Bank of Australia lifted the interest rate target for the ninth consecutive time (they didn’t meet in January) claiming that they had to do this to stop inflation accelerating and restoring price stability. Except inflation already peaked in the March-quarter 2022 as a result of the driving factors abating. Further, none of the major driving factors are remotely sensitive to domestic interest rate movements. The RBA’s excuse is that there are dangerous domestic demand pressures that need to be curtailed. Except the evidence for that claim is lacking. Most of the demand measures are in retreat. So what gives? Well there is a massive income redistributing being engineered by the RBA from poor to rich and if they keep going unemployment will certainly rise, in part, because the lame Australian government is claiming it has to engage in fiscal restraint to ensure the RBA doesn’t hike rates even more than they are. It would be comical if it wasn’t damaging the prosperity and solvency of tens of thousands of the most vulnerable Australians. Disgraceful.
Well, things are getting interesting in the US. The Federal Reserve started hiking interest rates in April 2022 and its decisions are underpinned by an theoretical framework that suggests the unemployment rate is above what it thinks is the natural rate (the rate where inflation is stable). So the rate hikes are meant to slow spending and increase the unemployment rate and cause price setters to stop accelerating prices up. Except the data isn’t obeying the theory and inflation is falling despite the rate hikes rather than because of them. This is another demonstration of how flawed the dominant mainstream economics has become. Last Friday (February 3, 2023), the US Bureau of Labor Statistics (BLS) released their latest labour market data – Employment Situation Summary – January 2023 – which revealed on-going and very robust employment growth, rising participation and falling unemployment. These are good signs for American workers. Further, as inflation is now in decline, most sectors recorded both modest nominal wages growth is some real wages growth – another virtuous sign. The latest data is certainly not consistent with the Federal Reserve type narratives. The point is that the labour market is not behaving at all like the assumed model deployed by the Federal Reserve.
This week, the British Broadcasting Corporation (BBC) released the results of an independent review into its coverage of economic matters – Review of the impartiality of BBC coverage of taxation, public spending, government borrowing and debt – which was completed in November 2022. The problem is that the Investigation conducted by this Review, while interesting and providing some good analysis, misses the overall source of the bias that our public broadcasters have fallen into. The problem is not that they might be favouring political positions of one party or another. Rather, the implicit framing and language they use to discuss economic matters is largely flawed itself. And the journalists who uncritically use these concepts and terms just perpetuate the fiction and mislead their audiences.
So the IMF has come late to the transitory inflation party. What was obvious months ago is now at the forefront of IMF forecasts. Better late than never I suppose. It is becoming clear that most indicators are still not predicting a major demand-side collapse in most nations. Growth has moderated slightly and the forward indicators are looking up. At the same time, the inflation data around the world is suggesting the price pressures have peaked and lower inflation rates are expected. Real wages continue to fall, which means that the inflationary pressures were not being driven by wages. So no wage-price spiral mechanism at play. And PMI data and related indicators (such as shipping costs, etc) suggest the supply constraints which drove the inflationary pressures are easing. So has all this been the work of the interest rate rises imposed on nations by central bankers (bar Japan)? Not likely. The rising interest rates and falling inflation are coincidental rather than causal. Which means the damage to low income debt holders and the bank profits boom from the higher rates was for what?
Britain is now in a very undesirable state. The governing Tories are bereft of any sensible ideas and likely to lose the next General election in 2024 to Labour, who are promising to be the party of ‘sound finance’, which means they will be incapable of dealing with the challenges that face the nation in a highly volatile world and will likely end up losing popularity and ceding government back to the Tories. And just as in 2010, the Labour reputation will tarnished and they will be lost again for another sequence of elections. That sort of future prospect is not inspiring is it. Caught between a rock and a hard place.
Its been around 9 months since the central banks of the world (bar Japan) started to push up interest rates. This reflected a return to the dominant mainstream view that fiscal policy should aim to support monetary policy in its fight against inflation and thus be biased towards surpluses, while central banks manipulated interest rates to deal with any inflationary pressures. The central banks would somehow form a ‘future-looking’ view that inflation was about to spring up and they would push rates up to curb the pressures. The corollary was that full employment would be achieved through price stability because the market would bring the unemployment rate to a level consistent with stable inflation. So full employment became defined in terms of inflation rather than sufficient jobs to meet the desires of the workforce. This is the so-called NAIRU consensus that has dominated the academy and policy makers since the 1970s. During the pandemic, it was abandoned and there was hope, particularly after statements made by the US Federal Reserve that this approach had unnecessarily resulted in elevated levels of unemployment for decades, that central bankers would target low unemployment as well as price stability. Progressive economists, of course, rejected the whole deal, noting that monetary policy shifts created uncertain distributional outcomes (creditors gain, debtors lose when rates rise) and also rising interest rates add to business costs which provoke further price rises. Anyway, after a short respite from this pernicious NAIRU logic, we are back to square one with central banks pushing up rates. The Bank of Japan is now standing, again, in the wilderness, resisting this logic and demonstrating how government should deal with the sort of pressures being felt around the globe. And who isn’t happy? The grandstanding financial markets who thought they could make a quick buck but have come up against an ideology that rejects their claim to dominance. That is a happy story.
Today (January 25, 2023), the Australian Bureau of Statistics released the latest – Consumer Price Index, Australia – for the December-quarter 2022. It showed that the CPI rose 1.8 per cent in the quarter (down 0.1 point) and over the 12 months by 7.8 per cent (up 0.5 points). So, the annual inflation rate in Australia was higher in the December-quarter, but, the quarterly rate was lower, suggesting that the current episode is losing steam. The major sources of price increases are temporary – overshoots on pre-pandemic travel and holidays, anti-competitive cartel behaviour and the War in Ukraine. These influences are supplemented by shortages of building materials due to bushfires and food price inflation due to the major floods. The correct policy response should be to provide fiscal support for lower-income households to help them cope with the cost of living rises at present. Increasing interest rates again will not solve the problem that is already abating.
Today, I have a few news and information items. First, I detail how to migrate to Mastodon so that you can continue to follow me as I escape Twitter. Second, I provide enrolment details for the next offering of our MMT edX MOOC. Third, I provide access details to my annual Helsinki public lecture which will take place tomorrow starting at 19:00 EAST.