Posts about monetary policy

Why has Japan avoided the rising inflation – a more solidaristic approach helps

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.

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Unaccountable central bankers once again out of controls

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.

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New Keynesian inflation model is unfit for purpose

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.

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Eurozone anti-fragmentation confusion – its really simple – the ECB has to continue to fund deficits or kaput!

The French National Assembly results from the weekend are a good outcome. Not the best, but good, although the continued presence of the Right is disturbing. At least Macron’s group of Europhiles has lost its absolute majority with the new Left alliance becoming a viable opposition. The polarisation – with a surge from the Right and the strong performance of the real Left rather than the lite Socialist Party version – is indicative of what Europe has become – a fractured, divided, divergent set of nations and regions. If the Left had have seen the value in this unity ticket during the Presidential election things might have been different. But better late than ever. France will now find it hard pushing further neoliberal policies and there will be pressures on the government to defy the fiscal rules and redress some of the shocking deficiencies that the neoliberal period has created. But, those pressures are coming squarely up against the impending crisis facin gthe monetary union. All the economics talk in Europe at the moment is indicative of the plight that monetary union faces after papering over the cracks during the first two-and-a-half years of the pandemic. After years of holding the bond spreads down, with their asset purchasing programs, things are changing as the ECB is pressured to follow suit and hike interest rates and abandon their bond buying. If they do both things, then there will be a crisis quick smart because nations like Italy will face increasing yields on their borrowing which will run out of control. So, the solution – another ad hoc response – an “anti-fragmentation” tool. If it sounds like a joke that keeps on rolling, you would not be wrong. More paper, same cracks.

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The class war is over, viva the class war – inflation and all that

Political leaders have been keen to promote individualism over the last several decades because it suits the class interests they serve. Margaret Thatcher denied the existence of society. John Major, who shafted her to take over the Tories in 1990 and pressured the UK to join the EU, claimed there was a society but that he would render it “classless” so that everyone has the opportunity to shine according to their talents. Within the Tory tradition, David Cameron, who effectively through bungling paved the way for the UK to leave the EU (finally) told the people “There is such a thing as society; it’s just not the same thing as the state” and promised to create a “Big Society” where we all worked together to volunteer and provide public services as charitable endeavours. On the Labour side, in 1999, Tony Blair clarified all these claims to classlessness by declaring that “the class war is over”. Class struggle is dead. We are all on the same side now. All sharing in a commonwealth that we create together. I recall a BBC program I saw around the turn of this century that declared the ‘class system’ was dead and that we had all become elevated, together, in the middle class.

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RBA aims to cut policy stimulation by adding to it

It’s Wednesday, and we have some analysis and news and then my music segment for the week. Yesterday, the Reserve Bank of Australia (RBA) stunned the nation by pushing up interest rates by 0.5 points, claiming it was the responsible thing to do given that inflation was higher than expected. They then outlined all the factors driving inflation – none of which are going to be responsive to interest rate rises. Further, when one dissects the way in which interest rate rises work through distributional effects and effects on business costs, it is not clear that increasing rates will not just add to the stimulation rather than reduce it as the RBA claims. Next, we Fact Check the Fact Checkers and after all of that we have some Tupelo Blues, to restore some sense of decorum.

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US Federal Reserve Bank economists going Marxist on us

It only took about 6 decades or so. And, in between, there has been denial, fiction, and diversions. But here we are 2022 and work that was explicit in the 1960s is now being recognised by the central bank of the largest economy. In fact, the foundations of this new acceptance goes back to the C19th and was developed by you know who – K. Marx. Then a socialist in the 1940s wrote a path breaking article further building the foundations. And then a group of Marxist economists brought the ideas together as a coherent theory of inflation early 1970s as a counter to the growing Monetarist fiction that inflationary pressures were ultimately the product of irresponsible government policy designed to reduce unemployment below some ‘natural rate’. I am referring here to a Finance and Economics Discussion Series (FEDS) working paper – Who Killed the Phillips Curve? A Murder Mystery – published on May 20, 2022 by the Board of Governors of the US Federal Reserve System. I suppose it is progress but along the way – over those 6 decades – there have been a lot of casualties of the fiction central banks created in denial of these findings.

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US inflation is moderating while a massive fiscal contraction is underway – recession looming

Yesterday (May 11, 2022), the US Bureau of Labor Statistics released the latest – Consumer Price Index Summary – April 2022 – which showed the monthly increase in the CPI to be 0.3 per cent, the lowest monthly increase since August 2021 and, as it happens, just about right on the average monthly growth rate from January 1947 and April 2022. The result suggests a tapering of price pressures. The Energy component fell by 2.7 per cent in April after spiking at 11 per cent in March. Further, the growth in food prices fell for the third consecutive month. All of this has nothing to do with the recent interest rises imposed on the economy by the US Federal Reserve. They were already in train and confirm the transitory nature of this period of price instability. The US Treasury Department also published its most recent fiscal statistics yesterday – Monthly Treasury Statement – for April 2022, which reports a staggering $US533,794 fiscal shift between April 2021 and April 2022 – the fiscal drag embodied in that shift is massive and calls into question the conduct of the US Federal Reserve – why did they think they needed to push the economy towards recession? Fiscal policy is already working in that direction!

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With corporate profits booming, business can afford to pay higher wages

Last week, I provided a graph in this blog post – The Left/Right distinction is as relevant as ever as corporations gouge profits out of pushing inflation (May 2, 2022) – which showed negotiated wages growth in Europe was declining and real negotiated wages had fallen sharply over the last several months. I am continually on the lookout for evidence that the current inflationary episode, no matter how alarming, is not being driven by structural forces in the labour market even though unemployment rates have fallen somewhat. A music segment follows.

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Fiscal policy shifts, not rising interest rates are required at present

Yesterday, I commented on Tuesday’s RBA interest rate rise. I wasn’t complementary. In the last two days, more data has been released since the decision, which further suggests that the RBA erred. It also suggests that part of the housing problem everyone is focused on is not due to lax monetary policy, which is the mainstream mantra, but is, rather, due to flawed tax policy. So, we have seen housing loan demand in decline and building approvals plummetting in the last month, a sign that the housing market, especially for owner-occupiers is in decline. Further, the growth in retail sales was only 1.6 per cent, and while mainstream economists are pointing to the rapid growth over the 12-month period (9.4 per cent March to March), they ignore the fact that the the March 2022 observation shows a decline on the previous month. The RBA statement yesterday did not mention housing at all, even though its decision has already pushed up mortgage rates in an already declining market. All they seem to want to do is cause massive damage to low income workers through even lower real incomes and rising unemployment and underemployment. There are fiscal options that should be pursued right now but the policy makers appear blind to them.

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