It’s Wednesday and I have a few items of interest (to me at least) to warm us up for the music feature, which is beautiful though sad. First up we learn how a senior Tory MP has made admissions to the media that completely contradict mainstream macroeconomics and validate what Modern Monetary Theory (MMT) tells us. Second, we learn from the latest ECB data just how ‘flexible’ (read: anything goes) it can be in its government funding. Italy and Spain are being rescued at present. As I said anything goes. And third, the vandalism of the Reserve Bank of Australia continues. Then we can rest and listen to some glorious singing.
There is hysteria in the air today after the Australian Bureau of Statistics released the June-quarter – Consumer Price Index, Australia (July 27, 2022). Journalists are jumping over their keyboards to see who can come up with the most alarming headline and narrative. Me? I am calm. The price pressures will soon enough evaporate given their source. Inflation in the June-quarter 2022 rose to 1.7 per cent, down from 2.1 per cent in the March-quarter. The annualised rate of CPI inflation was 6.1 per cent. The most significant contributors over the year were owner-occupied housing, food, automotive fuel and furniture (the latter being largely due to transport costs). But looking at just the quarter results, we can see that housing is now a negative contributor as major government programs which pushed the boom are gone and interest rates are higher. We can do little to alleviate the rising fuel costs (except make public transport free and work from home) and the food inflation is down to the recent massive floods wiping out crops. That will be a temporary influence. So some of the factors driving the inflation are short-term and the others will be resolved by factors outside our control. But with wage pressures absent and the most reliable indicator of medium- to long-term inflation now falling, it is hard to make a case that the rising inflation is now entrenched. The hysteria is unjustified.
So last week, the Bank of Japan remained the last bank standing, the rest in the advanced world have largely lost the plot by thinking that raising interest rates significantly will reduce the global inflationary pressures that are being driven by on-going supply disruptions arising from the pandemic, the noncompetitive behaviour of the OPEC oil cartel and the Russian assault on Ukraine. The most recent central bank to buckle is the ECB, which last week raised interest rates by 50 basis point, apparently to fight inflation. But the ECB did it with a twist. On the one hand, the rate hike was very mainstream and based on the same defective reasoning that engulfs mainstream macroeconomics. But on the other hand, they introduced a new version of their government bond-buying programs, which the mainstream would call ‘money printing’ and inflationary. So, contradiction reigns supreme in the Eurozone and that is because of the dysfunctional monetary architecture that the neoliberals put in place in the 1990s. The only way the common currency can survive is if the ECB continues to fund Member State deficits, even if they play the charade that they are doing something different. Hilarious.
We are used to segmenting destructive episodes as crises – the Mexican debt crisis in 1982, which gave way to the Latin American debt crisis in the 1980s, the East Asian financial crisis of 1997-98, then the Global Financial Crisis in 2008 and beyond, then the pandemic crisis since 2020. Meanwhile, firefighters are dealing with major fires from Portugal, France to Crete; Britain is about to experience 40 degrees Centigrade; Australia is dealing with a sequence of massive floods; corporations are gouging profits and pushing inflation, which is provoking policy makers to take it out on the most disadvantaged in our societies, with no logical link between the policy and the perceived problem, other than deep recessions stop the gouging; nations considered to be ‘middle income and rising’ are now lining up behind Sri Lanka to see who will be the next to basically collapse into anarchy, unable to feed its population; housing shortages are causing havoc almost everywhere; the quality of employment has declined dramatically (job security, worker agency, etc) and the trade unions are a pale imitation of what they used to be; politicians are more self-serving than ever; and people are still dying in the thousands everyday from the pandemic but our leaders insist we are now ‘living’ with Covid (more like dying with it). The reality is that all these events are linked and part of what some might call a poly crisis. Capitalism has failed and the institutions we created to tame the raw-profit greed of capital – the state, trade unions, etc – have also been compromised to such a degree that they, either are no longer effective or work as agents of capital rather than mediating the labour-capital conflict. A poly crisis requires fundamental change. But, such is the dominance of the mainstream, which has created this crisis, that all we get is more of the same. That means the ultimate solutions will be more painful and destructive and lead to conflagration as this period of human civilisation collapses.
It’s Wednesday, and so I have some shorter analysis on a range of matters today. First, some discussion of a technical paper from the US Federal Reserve researchers, which makes it clear they think that the interest rate hikes have a high probability of causing a recession. Second, we analyse some Russian data which suggests the sanctions are having the opposite effect to that intended. Third, I consider the stupidity of the new Australian government which is now falling into the ‘we have too much debt’ to even provide basic health care trap. And, I comment on a State Government that is now openly ignoring its professional health advice because the corporate sector told them to. And if all that wasn’t depressing enough, some music that focuses our attention of the vicissitudes of colonial might. All in a day.
A few years ago, various policy makers, but mostly central bankers were keen to disabuse anyone of the notion that they were ‘doing’ Modern Monetary Theory (MMT). Some were aggressive in denial, such as US Federal Reserve boss Jerome Powell, who on February 26, 2019 announced to the US Senate Banking Committee that MMT was ‘just wrong’. There was a general pile on from other central bankers and commentators. No way, they were doing MMT. Okay, they were right, one doesn’t ‘do’ MMT, given it is an analytical framework (see below). But, curiously, now, the commentators are falling over themselves claiming that MMT is dead in the water given that it has been tried over the course of the pandemic to date and failed because inflation is out of control. Hilarious really. But what is interesting is Japan (as always). And I wonder whether any of these MMT critics now have considered why the Bank of Japan has not followed the lead of the other central banks that are rushing to exacerbate the temporary inflation spike by deliberately creating unemployment. It seems that there are different paths that policy makers can take within a capitalist monetary economy. They can allow corporations to profit gouge at the expense of the workers and then turn on the workers (creating unemployment) or they oversee a system where all parties (workers and corporations) take real income hits as a result of imported price pressures and wait it out. Japan is in the second category to its credit.
On August 27, 2020, the US Federal Reserve Chairman, Jerome Powell made a path breaking speech – New Economic Challenges and the Fed’s Monetary Policy Review. On the same day, the Federal Reserve Bank released a statement – Federal Open Market Committee announces approval of updates to its Statement on Longer-Run Goals and Monetary Policy Strategy. I analysed that shift in this blog post – US Federal Reserve statement signals a new phase in the paradigm shift in macroeconomics (August 31, 2020). It appeared at the time, that a major shift in the way central banking policy was to be conducted in the future was underway. A Reuters’ report (August 28, 2020) – With new monetary policy approach, Fed lays Phillips curve to rest – reported that “One of the fundamental theories of modern economics may have finally been put to rest”. At the time, I didn’t place enough emphasis on the ‘may’ and now realise that nothing really has changed after a few years of teetering on the precipice of change. The old guard is back and threatening the livelihoods of workers in their usual way.
It’s Wednesday – a day for a few short comments and then relaxing to music. Today I consider some statements from the Bank of International Settlements, which suggest that the mainstream inflation approach, based on the New Keynesian Phillips curve is subjected to “serious practical shortcomings”. In other words, it is unfit for purpose, which means you should not be surprised that central banks are hiking rates to stifle a transient supply-side inflation burst. Quackery leads to quackery. I also consider some recent evidence that supply disruptions are easing. And, then, we learn that that the British Labour Party no longer things workers should strike. And if that has driven you mad, then we restore calm with some great music from Jiro Inagaki.
There was an unedifying and fairly undignified war on Twitter recently about whether Modern Monetary Theory (MMT) economics advocate using taxes to deal with inflation. Like all these Twitter ‘debates’, the opening proposition was a ‘gotcha’ attempt that was correct from one angle but then missed the point when it was applied to whether MMT is a valid framework or not. The responses from the MMT ‘activists’ were also overly defensive and reflected the fact that they had fallen for the framing trap presented by the antagonist. In this blog post, I want to clarify the MMT position on the use of taxes and inflation policy. What you will learn is that both positions presented in that Twitter war were largely erroneous, and, conflated concepts, either knowingly (probably not) or unknowingly, to leave a muddy mess. As the cloud became thicker, the ‘debate’ descended, as all these Twitter exchanges seem to, into unhelpful accusations of racial insult, claims of ignorance and stupidity, and worse. Not very helpful.
It’s Wednesday and I am pushed for time today. My local community is in the last stages of trying to stop a massive overdevelopment in our midst, which will damage the social cohesion and environmental amenity in our neighbourhood, while delivering massive profits to a greedy property developer. I have to appear before a tribunal today to document the impacts of the development on these things. Property developers are the scourge. So are mainstream economists like Larry Summers who is proposing that unemployment be deliberately increased by more than 2.3 million and held at that level or higher for years in order to reduce the current (transitory) inflation. Who would be so stupid? And after getting really mad about that and Keir Starmer’s abandonment of working class representation, we can soothe our souls with some Roy Elridge.