Posts about monetary policy

As the mainstream paradigm breaks down

On September 2, 2021, the Head of the BIS Monetary and Economic Department, Claudio Borio gave an address – Back to the future: intellectual challenges for monetary policy = at the University of Melbourne. The Bank of International Settlements is owned by 63 central banks and provides various functions “to support central banks’ pursuit of monetary and financial stability through international cooperation”. His speech covers a range of topics in relation to the conduct of monetary policy but its importance is that it marks a clear line between the way the mainstream conceive of the role and effectiveness of the central bank and the view taken by Modern Monetary Theory (MMT) economists. I discuss those issues in this blog post.

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The Bank of Goldman Sachs at Threadneedle Street

As I provided a detailed analysis of the National Accounts release yesterday, today, I am writing less via the blog and am shifting the Wednesday music feature to Thursday. That makes sense. Today, I am bemoaning the creation of the Bank of Goldman Sachs, formerly known as the Bank of England. Groupthink seems to plague this institution. And then, to restore equanimity, we have a music tribute to Lee ‘Scratch’ Perry who died in Jamaica this week.

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The dying embers of New Keynesian reasoning

Lawrence Summers is a New Keynesian economist. That means something. While there are nuances that exist between members of that school of thought, mostly to do with policy sensitivities and speeds of adjustment, the New Keynesian paradigm has demonstrated clearly that it is incapable of capturing the macroeconomic dynamics in any consistent manner, despite it being the dominant approach in the profession. So, it is no wonder when Summers provides opinions the underlying logic he demonstrates is similarly flawed. Unfortunately, he keeps getting important platforms to express these opinions, which continues to blight the public policy debate. He was at it again when he started lecturing the US Federal Reserve Bank on the conduct of its asset-purchasing program.

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ECB nearly comes clean – higher fiscal deficits, higher QE

Last year, the US Federal Reserve dropped a bombshell on mainstream macroeconomics by abandoning the consensus approach to monetary policy, which prioritised fighting inflation over maintaining low levels of unemployment, and, increasing interest rates well before any defined inflationary pressures were realised – the so-called forward guidance approach. It has also been buying massive quantities of US government debt and controlling bond yields in the markets as a result. Attention has been on the ECB to see where it would pivot too and whether it was going to abandon its own massive government bond buying program any time soon, which has been effectively funding the fiscal deficits of the 19 Member-States of the Eurozone. Recent statements have indicated the QE programs in Europe will not be ending any time soon. And an ECB Board member all but tied the scale of the purchasing programs to the size of the fiscal deficits as a guide to how long and how large the QE interventions would be.

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The ideology that the RBA operates within needs a review not it legislative charter

There are calls for the Reserve Bank of Australia to be forced to undergo a major review of its operations, given that it has failed to achieve its own stated inflation targets for many years now. The RBA is resisting that call. The Australian Labor Party, which is in opposition at present, is trying to politicise the issue by claiming it will review the RBA once it becomes government. The problem is that the call to review the RBA is being made by those who would make the worst aspects of the central bank worse. Further, the legislative structure that defines the RBA and its charter already allows the RBA to pursue employment as a goal with equal priority to inflation. The fact that it hasn’t done that is because it adopted the NAIRU myth and used the unemployed as a tool to discipline inflation rather than a policy target to be maximised. That occurred in the 1980s and beyond as neoliberalism became dominant. The problem is not the legislative structure that the RBA operates within. The problem is that it is part of a broader ideology that has demonised discretionary use of fiscal policy and prioritised interest rate changes, which has reduced our growth rates, undermined employment, suppressed wages and more. The Labor Party has echoed that same ideology and is just being hypocritical now. That ideology is what needs a ‘review’. And urgently.

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Inflation is coming, well, it could be, or, it might happen, gosh …

One could make a pastime observing the way that so-called ‘expert’ commentators change their commentary as the data unfolds. As one rather lurid prediction fails, their narrative shifts to the next. We have seen this tendency for decades when we consider the way mainstream economists have dealt with Japan. The words shift from those implying immediacy (for example, of insolvency), to those such as ‘could’, ‘might’, ‘perhaps’, ‘under certain conditions’ and more. The topics shift. The commentariat were obsessed with ‘this time is different’ during the GFC and the ‘debt insolvency threshold’ rubbish that the likes of Reinhardt and Rogoff propagated. That is, until they were sprung for spreadsheet incompetence. More recently, we have apparently forgotten how many governments were about to go broke and the mania has shifted to inflation. The data shows some price spikes earlier in the year which set of the dogs. Now, things might be shifting again. It is a pastime following all this. Short memories, no shame is the only requirement that is required to be a mainstream economics commentator. Prescient knowledge is not included in that skill set.

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Calling the British PAC, IFS – it is time we all moved on from the debt and deficit hysteria

The BBC in Britain carried a story yesterday (July 25, 2021) – UK will be paying for Covid for decades, say MPs – that began with the assertion that “Taxpayers will bear the costs of Covid ‘for decades'”. I guess there is some truth in that statement – families will remember their loved ones that died from the virus and those who are stricken with Long COVID will probably endure the negative effects for the rest of their lives. In that sense, if they are also ‘taxpayers’ they will be ‘paying’ the ‘costs’ of the pandemic. But, of course, that is not what the BBC article was wanting its readers to absorb. The intent was to lie to British citizens that somehow their tax burdens would have to rise to offset the deficits that the British government has run dealing with the collapsing economy. I know the BBC was just reporting on a document released by the House of Commons Committee of Public Accounts – COVID 19: Cost Tracker Update (released July 25, 2021). But the role of the public broadcaster is not to act as a press releasing agency for such politicised organisations, which, given the absence of any alternative voice in the article, is exactly what it did. The demise of critical scrutiny in economics commentary by national broadcasters everywhere is a major problem and makes them indistinguishable from scandalous media organisations run by private sector owners.

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British House of Lords having conniptions about QE – a sedative and a lie down is indicated

When I studied British politics (as one unit in a politics minor) at university, I was bemused by the role of the House of Lords. I know it is a curiously British institution that would be hardly tolerated anywhere else. But the fact that it serves as a part of the British democratic system continues to amaze me. Recently, the Economic Affairs Committee has been investigating (if that is what they get up to) Quantitative Easing because, apparently, some of the peers were worried about the “operational independence” of the Bank of England and the “economic effects” (read: inflation fears) among other concerns. They published their first report last week (July 16, 2021) – 1st Report – Quantitative easing: a dangerous addiction? – and it is littered with errors. The government has until September 16, 2021. The reply does not have to be long – they could just submit this blog post and get on doing things that matter, although the Tories are currently finding it hard to get their head around that essential task at the moment.

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Reading Beardsley Ruml carefully

Many social media commentators that have become interested in Modern Monetary Theory (MMT) regularly cite sections of the article written by businessman and former Chairman of the Federal Reserve Bank of New York Beardsley Ruml – Taxes for Revenue Are Obsolete – which appeared in the January 1946 edition of the American Affairs journal. The article was actually a speech that he made “before the American Bar Association during the last year of the war”. Some claim that the content provides an early underpinning for Chartalism, upon with MMT is, in part, derived. I disagree. If you read his work carefully, rather than selectively quoting convenient sentences, and, that work includes his more substantial book that was published in 1945 and from which the article cited above was derived, you would get no MMT succour. He was basically lobbying for zero corporate taxation and he expressed rather orthodox views about fiscal policy at the time, which are very non-MMT in substance.

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The central banks don’t seem to be worrying about inflation

It’s Wednesday and I have been tied up most of the day with commitments. So we will have to be content today with a couple of snippets. The first about the on-going inflation mania and the way in which the ECB seems oblivious to it. The second about the gross incompetence of the Australia government, who has put the health of the nation at risk and forced state governments to invoke rolling lockdowns as only a small number of us are vaccinated and cases keep seeping out of a flawed quarantine system (the latter being the federal responsibility). And once the anger subsides from that little discussion, we have the usual Wednesday music offering to restore peace.

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