It’s Wednesday and I am still not up to full blog speed after a week doing other things. But I am getting there. Today we consider the latest inflation data from Australia, some fun in the Guardian newspaper and some nonsense about debt ceilings in the US. Then a visit to Paris.
Today, I make available a video session that I recorded in Japan while I was working there in the latter part of this year. It sets out a range of interesting topics that form, in part, the research program that my colleagues and I at Kyoto University have mapped out to work on in the coming year. I hope that by the end of 2023 we will have advanced this program and perhaps will be able to stage some sort of event (Covid permitting) in Japan later next year to spread the knowledge.
In discussions about the significant differences that we have observed over the last 30 odd years between the conduct of economic policy in Japan and elsewhere, the usual response from mainstream economists, when challenged to explain the outcomes in the former nation, is that it is ‘cultural’ and cannot be applied elsewhere. I always found that rather compromising because mainstream economics attempts to be a one-size-fits-all approach based on universal principles of maximising human behaviour. So, by admitting ‘cultural’ aspects to the discussion, this is tantamount to admitting that the ‘market-based’ micro founded approach to macroeconomics is incapable of explaining situations. That is the first black mark against the veracity of mainstream theory. But when one prods further, it becomes clear that the term ‘culture’ is fairly vacuous and blurred in this defense of the mainstream framework. I respond by pointing out that essentially the monetary system dynamics in Japan are identical to the way the system works elsewhere. The institutions might have subtle variations but essentially the operations are so similar that the ‘culture’ bailout doesn’t help resurrect the appalling lack of predictive accuracy when it comes to examining the macroeconomics of Japan. Cultural aspects, however, are crucial to understanding the differences. The trick is understanding how these monetary and fiscal institutions are managed. This is where the cultural aspects impact. And, while I have learned a lot about Japanese cultural nuances, some of the more important ‘cultural’ drivers are transportable to any nation – if only we cared enough and valued people in the same way.
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.
Today we consider how asinine Australian’s monetary policy makers are now sounding. Yesterday, I reported the massive income redistribution that is going on at present as a consequence of central banks now hiking interest rates. This not only favours those with interest rate sensitive assets and punishes borrowers, but also necessitates, under current policy settings that central banks pay millions to trillions of cash to the banks that hold excess reserves. The excess reserves are the consequence of quantitative easing programs. Some might say this is the fault of the QE programs. But an Modern Monetary Theory (MMT) interpretation is that under optimal policy where no public debt is issued at all, the bank reserves would still accumulate. The MMT position would see no support rate paid and a Japan-style zero interest rate regime maintained at the short-end of the yield curve. In that case, there would be no transfers of cash to the banks as a result of their excess reserve holdings. Today, there is more though. On Tuesday (November 22, 2022), the Reserve Bank of Australia governor gave an address (November 22, 2022) – Price Stability, the Supply Side and Prosperity – to the Annual CEDA dinner in Melbourne. He told the audience that we are entering a period of global uncertainty which will require more rapid adjustments in interest rate settings, up and down, to deal with the growing threat of inflation. It was an appalling display of hubris and September cannot come quick enough – when his contract as governor expires.
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.
Today, we have a guest blogger in the guise of Professor Scott Baum from Griffith University who has been one of my regular research colleagues over a long period. He indicated that he would like to contribute occasionally and that provides some diversity of voice although the focus remains on advancing our understanding of Modern Monetary Theory (MMT) and its applications. Today he is going to talk about the current concerns about the cost-of-living crisis in Australia. Anyway, over to Scott …
There is no doubt that the on-going pandemic has left a trail of economic problems including major supply constraints, the growing problem of long Covid and other issues that are challenging policy makers. They have been exacerbated by the behaviour of OPEC+ and the Ukraine situation. We now have a period of inflation, real wage cuts and most central banks doing their best to make matters worse. However, we now have a phenomenon that goes like this. In the UK, everything ‘bad’ that arises is apparently because of Brexit even if the trends were there before the move or the problems are being shared across all countries. I imagine even if the English cricket team loses it is because of Brexit. This phenomenon has generalised however. Now, we have the claim that all bad economic news is because governments ‘followed’ MMT or something akin to it. Those who are insecure about MMT because it does better at explaining the real world than the mainstream theories are the same as the Remainers who predicted that the British economy would crash badly in 2017 and then every year after that. To soothe their worried souls they consider any ‘bad’ news to be because of ‘MMT’ or in the case of Britain because of Brexit. Neither proposition has any foundation.
I don’t really want to write this post today given the hysteria that has appeared in the media over the last week. But it is an important event so I better. Working in Kyoto for the last month has given me a sort of sense of dislocation from the day to day macroeconomic debate in Australia. I still read all the information and study the data but being somewhat distant from it – and not watching any current affairs or listening to the radio – provides for calm. Anyway, last night (October 25, 2022), the new Federal Treasurer released the annual ‘fiscal statement’ (aka ‘The Budget’), after telling the nation since he was elected that the sky was about to fall in because the previous government had left a ‘trillion dollars worth of debt’. The new Labor government is so intent on looking ‘responsible’ and the exemplars of ‘sound finance’ that the population has been subjected to a daily briefing from the Treasurer and the Finance Minister that amounts to little more than nauseating lies. And last night’s fiscal statement? A joke really. It neither does what the Treasurer claims nor does it deal with the numerous policy challenges that face the nation in any significant way. The fiscal statement essentially fails to meet the challenges that are before us and will worsen over the next few years. A gutless document really.