Posts about monetary policy

Inflation has peaked, the supply side is recovering, and the interest rate rises were for what?

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?

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Military spending binge is working to keep economies growing

Its been around 9 months since the central banks of the world (bar Japan) started to push up interest rates. And still there are no firms signs that a recession is impending. There are some signs of a growth slowdown but that is not uniform across the globe. The US seems to be continuing to grow. While that suggests that monetary policy is less effective than the mainstream economists claim – which is no surprise to non-mainstream economists who have long understood that fiscal policy is the tool of choice for counter-stabilisation, there are other offsetting factors that are at play here. Governments around the world have seriously ramped up their fiscal outlays over 2022 on military procurements as the perceived threat from Russia and China has been magnified by military generals and their mates in the big US weapons corporations, who have taken the opportunity to get make massive extra profits. The power of the military-industrial complex (MIC) is long-standing and well understood. It explains why all the usual disaster scenarios that accompany increasing fiscal outlays by governments haven’t attracted much criticism. Too many elites benefit from the military binge. But the fiscal expenditure also helps to counteract any spending contraction by households who are negatively impacted by interest rate increases.

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The Eurozone fictions continue to propagate

There was a Financial Times article recently (January 8, 2023) – Monetary independence is overrated, and the euro is riding high – from Martin Sandbu which strained credibility and continues the long tradition of pro-Euro economists attempting to defend the indefensible – fixed exchange rate, common currency regimes. He claims that the Euro is a better system in the modern era for dealing with calamity than currency independence. However, as I explain below, none of his arguments provide the case for the superiority of the Eurozone against currency-issuing independence. Currency-issuing government can certainly introduce poor policy – often because the policy makers refuse to acknowledge their own capacity and think they have to act as if the nation doesn’t have its own currency. But the negative consequences that flow from testify to the poor quality of the polity rather than any disadvantages of the currency independence. The Euro Member States are being bailed out by the central bank and if that stopped the system would demonstrate the inherent dysfunction of its monetary architecture and nations would fail.

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Japan and the World Economy through the lens of MMT – video presentation

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.

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Central bankers have created excessive unemployment for decades because they use the wrong theory

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.

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Bank of Japan has not shifted direction on monetary policy

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.

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US inflation has peaked and monetary policy had nothing much to do with it

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.

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The monetary institutions are the same – but culture dictates the choices we make

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.

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The transitory inflation conjecture gains even more data credence

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.

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