Senior mainstream economist now admits central banks are not as independent as many believe

The UK Guardian published quite an odd article the other day (May 30, 2024) by Mr GFC Spreadsheet Fudge Man Kenneth Rogoff – Why policymakers are more likely to risk high inflation during periods of economic uncertainty – which essentially claims that economic policy has been conducted for several years by institutions that do not meet the essential requirements that are specified by the mainstream New Keynesian macroeconomic approach, upon which the institutions have claimed justification. If that makes sense. He now claims that the eulogised principle of ‘central bank independence’, which is a mainstay of the New Keynesian justification that macroeconomic counter stabilisation policy should be left to monetary authorities and that fiscal policy should play a supporting but passive role, no longer exists as policy makers have had to come to terms with multiple crises. Of course from an Modern Monetary Theory (MMT) perspective such independence never existed and was just a ploy to allow the governments to depoliticise economic policy making and thus distance themselves, politically, from the fall out of unpopular policy interventions. If it wasn’t the IMF to blame, then it was the ‘independent’ central bank for austerity and interest rate hikes and all the rest of it. Now we have a senior Harvard professor admitting it was a ruse and bemoaning the fact.

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The fiscal lunancy reaches peak levels this time of year

In the last week, as the Federal government comes towards next Tuesday’s annual fiscal statement (aka ‘The Budget’ although we don’t use that terminology around here, do we?) and the State Government’s are progressively delivering their own Budget Statements (they being financially constrained) we have witnessed the absurdity of the system of public finances that pretends the Federal government is a big household and that somehow monetary policy is the most effective way to deal with an inflation that is sourced in supply side constraints. Earlier this week, the Victorian government released a fairly shocking fiscal statement, which cut expenditure programs in many key areas such as health care (while the pandemic is still killing many people), public education, essential public infrastructure maintenance and upgrades, and more. Why? Because it built up a rather large stock of debt during the early years of the pandemic and is now in political jeopardy because the state debt is being weaponised by the conservatives who claim the government is going broke. Similar austerity agendas are being pursued by other state and territory governments although Victoria leads the way because it provided more pandemic support to offset the damage that the extensive restrictions caused. Meanwhile, the federal government is boasting that it is heading towards its second consecutive surplus, as unemployment rises, hours of work fall, and the planet requires massive investment to attenuate climate change. The madness compounds when we realise that around 85 per cent of all state and federal debt that was issued between March 2020 and July 2022 was purchased by the Reserve Bank of Australia – that is, effectively, by the federal government itself. If citizens really understood the implications of that they would never agree to the swingeing cutbacks in public expenditure and the user pays tax hikes etc, that have been justified by an appeal to the debt build up. Its just madness.

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Australia’s inflation rate continues to fall yet some bank economists think further interest rate rises are possible

Yesterday (April 24, 2024), the Australian Bureau of Statistics (ABS) released the latest – Consumer Price Index, Australia – for the March-quarter 2024. The data showed that the inflation rate continues to fall – down to 3.6 per cent from 4 per cent in line with global supply trends. There is nothing in this quarterly release that would justify further interest rate rises. Despite that reality the national broadcaster has wheeled out a few bank and/or financial market economists who claim we cannot rule out further interest rate rises. That is their wish because it improves the bottom line of their companies. But it is arrant nonsense based on the reality and it is a pity that the national broadcaster cannot present a more balanced view on this.

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The IMF has outlived its usefulness – by about 50 years

The IMF and the World Bank are in Washington this week for their 6 monthly meetings and the IMF are already bullying policy makers around the world with their rhetoric that continues the scaremongering about inflation. The IMF boss has told central bankers to resist pressure to drop interest rates, even though it is clear the world economy (minus the US) is slowing quickly. It is a case of the IMF repeating the errors it has made in the past. There is a plethora of evidence that shows the IMF forecasts are systematically biased – which means they keep making the same mistakes – and those mistakes are traced to the underlying deficiencies of the mainstream macroeconomic framework that they deploy. For example, when estimating the impacts of fiscal austerity they always underestimate the negative output and unemployment effects, because that framework typically claims fiscal policy is ineffective and its impacts will be offset by shifts in private sector behaviour (so-called Ricardian effects). That structure reflects the ‘free market’ ideology of the organisation and the mainstream economic theory. The problem is if the theory fails to explain reality then it is likely that the predictions will be systematically biased and poor. The problem is that the forecasts lead to policy shifts (for example, the austerity imposed on Greece) which damage human well-being when they turn out to be wrong.

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Rinse and repeat – Truss chaos – the new benchmark

For years, those who want selective access to government spending benefits (like the military-industrial complex and other parasitic sectors), while claiming the government cannot afford to provide adequate income support to the most disadvantaged citizens have used various ruses to give an air of authority or legitimacy to their claims. So in the UK, the lie in 1976 by the then Labour government that it was going to have to borrow from the IMF to stay solvent has been regularly wheeled out. In Europe, it was the ‘tournant de la rigueur’ (austerity turn) introduced by the French government of François Mitterrand in 1983 that effectively cancelled the commitment to the progressive – Programme commun – that is often cited as a demonstration of the limited capacity of governments to resist the global power of the financial markets. The fact that it was progressive governments that instigated these events made it more emphatic – the Left essentially swallowed the fictions introduced by the Right and the corporate elites that governments were now powerless against the power of the financial markets. The macroeconomic contest was essentially ceded to the conservatives and it has been that way since. There is now a new ruse that the elites are using that the progressives are also spreading – the Liz Truss Ruse. This apparently tells us that governments must appease the financial markets or face currency destruction and rising bond yields. Like its predecessors, there is no validity to the claims. But the Left is so bereft that it cannot see through the smoke and mirrors. And that is why the world is in the parlous state that it is – the contest of ideas is non-existent. It is a case of rinse and repeat – except all is happening is lies and posturing is being recycled.

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Bank of Japan’s rate rise is not a sign of a radical policy shift

Yesterday, the Bank of Japan increased its policy target rate for the first time in 17 odd years and it set the noise level among the commentariat off the charts – ‘finally, they have bowed to the pressure from the financial markets’, ‘major tightening’, ‘scraps radical policy’, etc – all the hysteria. The reality is quite different as they moved the target from -0.1 per cent to 0 per cent – no major shift, just a modest variation after better than expected – Shuntō outcomes for workers, which may finally signal that the deflationary mindset among workers and firms is coming to an end. However, to think that the Bank of Japan has just radically changed its tune is naive and not consistent with the facts. After analysing the Japanese situation we have some nice music today – given it is Wednesday.

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British government designs fiscal policy within a flawed framework – result = poor policy

This week, the UK Chancellor releases the latest fiscal statement (aka ‘the budget’) and will also have a eye to the general election which must be held before January 28, 2025. One would expect the government would stall the announcement and delay the election for as long as is possible, given the current situation and the cumulative impacts of 12 years of Tory rule, which are plain to see at all levels of British society. All the talk is of tax cuts, that typical ‘sugar hit’ approach to winning votes that soon works it way out of the system. The debate as to what the British government should now be doing is clouded, as these debates are always clouded, by the input of organisations such as the Office of Budget Responsibility, which claims its charter is to “to examine and report on the sustainability of the public finances”, yet consistently provides input which is irrelevant to the substance of the issue and just feeds the flawed political scrum. In the end, the policy choices are not based on the actual opportunities and threats that are available to and confront the currency-issuing government but rather a fictional mindset that all the players are trapped within.

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Apparently the bond vigilantes are saddling up – on their ride to oblivion

When I was in London recently, I was repeatedly assailed with the idea that the Liz Truss debacle proves that the financial markets in Britain are more powerful than the government and can force the latter to comply with lower spending and lower taxes. It seems the progressives have a new historical marker which they can use to walk the plank into conservative, sound finance mediocrity. For decades it was the alleged ‘IMF bailout of the Callaghan government in 1976’ when Chancellor Dennis Healey lied to the British people about running out of money and needing IMF loans to stay afloat. They, of course, never needed any loans but Healey and Callaghan knew the people wouldn’t know that and they used the fiction as a vehicle to keep the trade unions in a subjugated position. That lie has resonated for years and has been a principle vehicle for those advocating smaller government, more privatisation, and more handouts to the top-end-of-town while at the same time cutting welfare payments to the poor, killing the national health system, degrading public utilities, transport and education and all the rest of it. Well now that gang, which now rules the Labour Party in Britain has a new fiction – the ‘Truss surrender to the markets’. And the logic is spreading elsewhere with lurid claims emerging that the so-called bond vigilantes are saddling up to force the US government broke.

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Australian inflation rate remains on a downward trajectory

Today (February 28, 2024), the Australian Bureau of Statistics (ABS) released the latest – Monthly Consumer Price Index Indicator – for January 2024, which showed that the inflation rate steadied at 3.4 per cent but remains in a downward trajectory in Australia as it is elsewhere in the world. Today’s figures are the closest we have to what is actually going on at the moment and show that the inflation was 3.4 per cent in January 2024 but many of the key driving components are now firmly declining. The trajectory is firmly downwards. As I show below, the only components of the CPI that are rising are either due to external factors that the RBA has no control over and are ephemeral, or, are being caused by the RBA rate rises themselves. All the rate hikes have done is engineer a massive shift in income distribution towards the rich away from the poor. The slowdown the Australian economy is experiencing is largely due to fiscal drag not higher interest rates.

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US inflation rate is declining – no case for further rate rises

It’s Wednesday and I have comments on a few items today. I haven’t been able to write much today because the power has been down after the dramatic storms yesterday in Victoria damaged the network and caused absolute chaos (see below). Power is mostly back on now (which is why this post is later than usual). The US CPI data released yesterday showed that inflation continues to decline and the so-called ‘surprise’ that seems to have shocked the ‘markets’ are mostly down to the eccentric way the US Bureau of Labor Statistics calculates housing costs. The data provides no justification for further rate hikes in the US or anywhere else for that matter. I also report on an interesting survey from Japan regarding local attitudes to foreigners. I don’t think it reflects Japanese insularity although many will conclude otherwise. Then some Wayne Shorter.

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