This category provides commentary on the release of inflation data by national statistical agencies and discussions about hyperinflation
It’s Wednesday and also a holiday period, so just a few things today. First, I discuss a research paper that has concluded that central bankers have been using the wrong model for years which has resulted in flawed estimates of the state of capacity utilisation, and, in turn, created excessive unemployment. Second, we have a little Modern Monetary Theory (MMT) primer before going to the beach.
The hysteria surrounding the decision by the Bank of Japan (released December 19, 2022) to make a minor adjustment to its yield curve control ceiling on Japanese government 10-year bonds has been predictable but uninformed and full of vested interest agendas. You know the type of agenda that investment bankers engage in where they consistently pump out their media statements, which are soaked up by the financial media as if they are knowledge that needs repeating, that claim interest rates have to rise to deal with some inflation emergency or something. The media doesn’t tell the public who absorb this stuff that the actual agenda is that bankers want higher interest rates because they make more profit and that the reason the media statements give is largely fiction. So we are seeing more of that in the last few days. My understanding of the decision is that it does not signal a fundamental change in monetary policy in Japan. It is a minor shift to tweak the interface between the government bond market and the corporate bond market in order to maintain financial stability – the most important role of a central bank. All those characters that are claiming the hedge funds have won and the Bank of Japan is now conceding power to them with interest rate hikes to come are not reading the room. They are just pushing their self-interest in vain. No interest rates went up and my reading of the statement and what I know informally via contacts is that the Bank is committed to its current policy position because it considers, as I do, the inflationary pressures to be transitory and doesn’t want to respond to an ephemeral problem by creating a more entrenched problem of real economy recession and rising unemployment.
It’s Wednesday, and I have two things to write about briefly before exposing readers to some more music. First, the evidential base for my ‘this inflationary period is transitory’ narrative gains more weight. The latest CPI data from the US Bureau of Labor Statistics shows that inflation has peaked in the US and falling rapidly in the goods sector, which started this episode off. The second topic relates to measuring progress in the development and spread of new ideas. It is often difficult to know how far a new framework has penetrated the broader debate. But sometimes things happen that remind me of how far we have to go in changing the framing and language surrounding fiscal capacity and the related topics, that Modern Monetary Theory (MMT) has brought to the fore. We finish with some calming guitar playing.
Yesterday (November 30, 2022), the Australian Bureau of Statistics released the latest – Monthly Consumer Price Index Indicator – which is a new data series that the ABS has introduced to augment the quarterly CPI index release. Regular readers will know that I have considered this period of inflation to be transitory, which means that it is likely to dissipate rather quickly once the driving factors abate. It doesn’t mean that those driving factors are necessarily short-term in horizon. They might persist. But the important point is that second-round propagating mechanisms such as the wage-price distributional battle over markups are not present as they were in the 1970s, which is why that episode had a life of its own once the initial oil price supply shock adjustment was made. The other significant aspect of my assessment is that this current inflationary period does not indicate excessive fiscal support nor does it justify central banks hiking interest rates. The drivers at present are originating from the supply-side (pandemic, long Covid, OPEC+ and the Ukraine situation) and are not sensitive to any degree to interest rate changes. I have received a lot of criticism for holding this view. The Modern Monetary Theory (MMT) is dead crowd constantly E-mail me or try to push acrid comments on this blog telling me to get another life or end my existing one. The problem for them is that the latest data from around the world is telling me that this period of inflation is peaking as the supply drivers start to wane.
The IMF published a new blog the other day (November 21, 2022) – How Fiscal Restraint Can Help Fight Inflation – which demonstrates that the organisation is still stuck in a New Keynesian world and despite all the empirical dissonance that has been building over the last decades to militate against that economic approach, little evolution in thinking is apparent. The battle to dispense with the mainstream approach is going to be harder and longer than many thought.
It’s Wednesday, and before we get to the music segment, I document some developments in the banking system which are not receiving much press at the moment. I refer to the fact that the rate hikes now being implemented by most central banks are not just allowing the commercial banks to widen spreads between deposit and lending rates which will generate significant windfall profits for the banks and their shareholders. The increasing interest rates are also delivering massive cash injections to the banks who hold reserve accounts at the central banks. Why? Because the quantitative easing programs from the past have resulted in a massive buildup of excess reserves which are liabilities for the central banks. They are paying support returns on those reserve, which are scaled against the rising policy target rates. So the payments have escalated significantly and delivering a massive corporate welfare boost to the banks while the same interest rate rises are causing hardship to borrowers, especially those on low incomes. And amazing redistribution of income towards the ‘champagne socialists’ all via our central banks.
First, the Bank of England seems to have abandoned credibility. Not to be outdone, the fiscal policy makers in government have now joined in the absurdity of mainstream policy thinking by reimposing austerity at the same time as the economy heads into recession. Milton Friedman and his gang used to claim the problem of fiscal policy was that it was practiced in a ‘pro-cyclical’ manner, by which they meant that because of time lags involved in implementation, by the time a stimulus to deal with a recession was in place and impacting, the private economy was already on the upturn – so that fiscal policy was working to push the cycle harder in the same direction. They claimed that was inherent to the use of fiscal policy, which rendered it unsuitable for use as a counter-stabilising (-cyclical) measure. The fact that that claim (which is contestable) won the debate in the 1970s is why all the central bank independence nonsense entered the scene and why New Keynesians claim that monetary policy should be the tool of choice to stabilise spending fluctuations. Now, the Tories in Britain are deliberately using fiscal policy in a pro-cyclical way – pushing the already recessionary forces further into the morass. A totally unnecessary and patently dangerous action. It almost beggars belief that they are getting away with this and the Labour Party essentially just offers to tune up the governments ‘violin strings’ a bit.
Today (September 16, 2022), the Australian Bureau of Statistics released the latest – Wage Price Index, Australia – for the September-quarter, which shows that the aggregate wage index rose by 1 per cent over the quarter and 3.1 per cent over the 12 months. There was a major discrepancy between the private sector (1.2 per cent for the quarter) and the public sector (just 0.6 per cent), which reflects the harsh wage caps that the federal and state governments have in place that are undermining the well-being of public employees. While there has been some pickup in the pace of nominal wages growth, the fact remains that workers have endured another quarter of real cuts to the purchasing power of their wage. This is the sixth consecutive quarter that real wages have fallen. There can be no sustained acceleration in the inflation rate arising from wages growth under these circumstances. Further with the gap between productivity growth and the declining real wages increasing, the massive redistribution of national income away from wages to profits continues. The business sector, as a whole, thinks it is clever to always oppose wages growth and the banks love that because they can foist more debt onto households to maintain their consumption expenditure. None of this offers workers a better future.
Yesterday (October 26, 2022), the Australian Bureau of Statistics released the September-quarter – Consumer Price Index, Australia – which revealed that the quarterly CPI rose by 1.8 per cent (relatively large increase) and rose over the 12 months by 7.3 per cent, the highest annual inflation rate since 1990. The most significant contributors over the year were owner-occupied housing (bushfires wiping out materials), food (floods destroying crops), and gas supplies (cartel profit gouging). 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 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.
It’s Wednesday and overnight there has been a Twitter storm, which like most of these Tweet Crazes, is about nothing at all and only serves to embarrass the Tweeters, not that they are aware of the humiliation. I refer to the statements made overnight by the Bank of England boss who reiterated press releases the day before in saying the Bank would not continue to prop up pension funds who had mismanaged their assets. The Twitterati seemingly didn’t really get the point. And while we are on central banking, the former IMF chief economist Olivier Blanchard was interviewed in the last few days (I won’t link to it) claiming in relation to the US economy that “the path to avoiding a recession is narrow because the economy is still overheating”. He then concluded that the Federal Reserve Bank “is no longer behind the curve but still has work to do to deal with stubborn underlying inflation pressures”. He thought the Federal Reserve’s funds rate (its policy rate) would go higher than 5 per cent. Planet Not Earth. To keep us on the straight and narrow after those contributions to public discourse, we end today with some piano music. Always a good idea to stay calm and reflective.