Posts about monetary policy

The inflation mania is growing – but manias are manias

The other day I gave a talk to the ‘investment’ community in Melbourne and they wanted to talk a lot about inflation, which seems to be their foremost concern at the moment. Tomorrow, I am giving a similar presentation in Sydney and I expect a similar line of questioning. Think about it. Wages growth is projected to be so low over the next several years that real wages will decline for at least 3 to 4 years. The Output gaps are still significant and were significant even before the pandemic. Households were already cutting back consumption spending growth, given record levels of indebtedness and no prospect of wages growth. Where pray tell are the inflationary pressures going to come from? I also keep reading of similar fears from economists and central bankers. The latest I saw came from Britain, where the outgoing chief economist from the Bank of England started beating on the inflation drum. There are some areas of our economies that will experience price pressures in the coming period given the disruptions in supply and various administrative pricing decisions by governments (reversing pandemic assistance in areas like rents, energy, child care etc). But these pressures in some segments of the economy are unlikely to instigate a major shift to high generalised inflation rates because the capacity of workers to defend their real wages is diminished now. Fiscal policy has a long way to go yet in reducing unemployment and underemployment from their elevated levels before that capacity becomes functional again.

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Central bank writes off government currency transfer

Today, I am treating as Wednesday, given I wrote an extended treatment of the Australian government’s fiscal statement yesterday and I reserve Wednesday’s for other writing commitments. So just a few things today but including a really interesting piece of news. Some music to follow for those who seem to like what I come up with on Wednesdays. But the interesting snippet is from a tiny island in the middle of the Indian Ocean that might just be showing the world how central banks and treasuries should interact.

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The macroeconomic narrative continues to (MMT) evolve but the games not over yet

I think the general population are starting to get the message that my profession and the political class that uses it as an authority has been leading them down the garden path for decades now to cover up policies that have deliberately undermined our socio-economic prospects and allows a massive transfer of national income to the top-end-of-town. I am also watching, on a daily basis, the almost ludicrous way the mainstream economists and the politicians weave and duck as they change their story about fiscal deficits, public debt and unemployment. The paradigm shift that has been in play for a while now has accelerated in recent weeks, from a ‘6 in front of it’, to a ‘5 in front of it’, then last week a ‘4’ with some players urging a 3. That fancy talk the policy class use to talk about when the fiscal stimulus that has had capitalism on life support will start to be withdrawn and the numbers refer to the official unemployment rate that will tell the politicians the economy has recovered. Yes, I jest. And I shouldn’t because human tragedy is involved. But after years of being told I was crazy, it makes me laugh to watch the machinations unfold as the uncomfortable truth sets in that this lot had no authoritative model – it was hocus pocus all along designed to make us think they were on top of it and that TINA (prevails).

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No inflationary trends evident in Australia – latest data

I have been seeing a lot of crazy predictions that inflation is about to accelerate because of the elevated levels of government spending, record low interest rates and substantial government bond purchases by the Reserve Bank of Australia. It is almost as if the conservative, deficit-haters want that to happen so they can say “We told you so” as they cling on to their flawed macroeconomic theories. Well sorry to disappoint. Today (April 27, 2021), the Australian Bureau of Statistics released the latest – Consumer Price Index, Australia – for the March-quarter 2021, which hoses down the inflation fears. The Consumer Price Index rose by just 0.6 per cent in the quarter (mostly petrol prices) and over the 12-months to March 2021 it rose 1.1 per cent. The less volatile series, Trimmed Mean rose just 0.3 per cent and the Weighted Median rose 0.4 per cent. So nothing to see here. The RBA keeps buying government debt and effectively funding substantial proportions of the fiscal interventions since the pandemic, interest rates remain low and yet inflation is still well below the lower bound of the RBA’s inflation targetting range. The most reliable measure of inflationary expectations are flat and below the RBA’s target policy range.

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The IMF is all at sea, stuck in its ways, and sending conflicting signals

Last week, I wrote about how the IMF is presenting a somewhat nuanced view these days. See – IMF now claiming continued inequality risks opening a “social and political seismic crack” (April 21, 2021). But, there was a warning for those who might think this suggests the institution is leaving its mainstream macroeconomics past behind them though. Rather, I think what is going on is a series of ad hoc responses to the growing anomalies that the institution faces between the observed reality and the sort of predictions it has been making based on its core paradigmatic approach. We are observing a specific form of dissonance in many of the current contributions coming out of mainstream economics. This takes two forms: (a) an incomplete response to the current situation (pandemic, GFC aftermath, climate change) where there are conflicting signals being sent; and (b) a tortured attempt to absorb pragmatic narratives within a theoretical structure that cannot consistently accept that absorption. The IMF’s latest blog post (April 20, 2021) – A Future with High Public Debt: Low-for-Long Is Not Low Forever – is a good example of both forms of this dissonance.

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The cat is progressively getting out of the bag – Part 2

This is the second and final part of my discussion of the – Economic Affairs Commitee (House of Lords) – hearings into – Quantitative Easing: Committee to examine whether inflationary fears justified, the future of QE, and the merits of ‘helicopter money’ approaches. In Part 1 we learned that statements made by notable central bank governors (or equivalent) to the public about what they are doing are highly questionable given the evidence given by two prominent witnesses to the House of Lords enquiry. The evidence doesn’t just refer to matters pertaining to the UK. We learned that it is obvious that large-scale government bond buying programs by central banks are funding fiscal deficits despite the denial from the central bank officials. In this Part, we find more revealing statements by the witnesses further suggest that the central bank officials, including those from the Reserve Bank of Australia governor, are, at best misleading. At worst – use your own words.

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The cat is progressively getting out of the bag – Part 1

Remember on February 3, 2021, when the RBA governor Philip Lowe spoke at the National Press Club in Australia and told the audience that the Reserve Bank of Australia is not funding the federal government deficit, either in part, or, in full. This was in response to being asked whether the current situation that sees the RBA buying large swathes of government bonds are in any way consistent with Modern Monetary Theory (MMT). Well, since he gave that speech and answered questions from Australia’s journalists, a very interesting session was held by the – Economic Affairs Committee (House of Lords) – in London as part of the Committee’s investigation into the ins-and-outs of Quantitative Easing (QE). And some very revealing statements were made in those hearings which the RBA governor might reflect on. They rather directly challenge the veracity of his public statements about MMT in recent years. They also expose the way in which public officials tell the public they are not doing A but B, while doing exactly A. The cat is progressively getting out of the bag.! This is Part 1 of a two-part series explaining how the cat is escaping.

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US Congress to consider a vote on condemning MMT – signals progress

On March 25, 2021, a member of the US House of Represenatives “introduced a resolution in the House of Representatives this week condemning Modern Monetary Theory, recognizing that its implementation would lead to higher deficits and inflation”, while a “companion bill” was introduced into the US Senate (Source). The full text of the proposed legislation is available – HERE. The Bill is full of factual errors. But I thought the most significant aspect is the ‘authorities’ they call upon for justification. A parade of mainstream economists and progressive economists are quoted to give support for the Bill. And I haven’t seen one disclaimer from those mentioned disassociating themselves from some of the wild inferences that the Bill makes. They have allowed themselves to be co-opted by their silence in this rather tawdry and dishonest exercise. That is not surprising at all.

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Corporate welfare booming in Europe despite the deep crisis being endured by the citizens

The European Union officials seem to be ‘playing violins while the nations burn’, given Covid-19 is running out of control still (another wave coming) and new variants are outpacing the vaccine rollout (which wouldn’t be hard given how slow it has been). New extended lockdowns are coming, mass insolvencies are coming (once the relaxation of rules occurs), unemployment remains at obscene levels, and the whole show is lurching into stagnation, of the type only the EU elites can create. But what isn’t going wrong is the welfare system for the financial elites. They are rushing to purchase government bonds as if there is no tomorrow despite the deep crisis that the Member States are mired in. The bond investors are warmed by the knowledge that the ECB will do whatever it takes to keep bond yields low for fear that one or more Eurozone nations will become insolvent. The dysfunctional architecture of the common currency has ensured that the ECB has to keep buying government debt in large volumes to fund the growing fiscal deficits (despite their denial). The consequential outcome of this is that bond investors make tidy capital gains and the whole risk structure of investment in the EMU is corrupted.

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RBA shows who is in charge as the speculators are outwitted

While progressive-sort-of politicians, at least they say they are progressive, work out all the ways they can parrot mainstream macroeconomics textbooks about fiscal deficits and public debt to make themselves appear ‘credible’, even using credibility in the title of key fiscal rules they advocate, the world passes them by rather quickly. British Labour is crippled by, among other things like Europe, their belief that the City (finance) is powerful and the state has to appease the interests of the speculators. The Australian Labor Party is no different and so it goes everywhere. Give a traditional social democratic politician any latitude and they privatise, cut welfare spending, deregulate, give handouts to the top-end-of-town and more. We have four decades of this behaviour to back that accusation up. Well one of the more conservative central banks in the world – the Reserve Bank of Australia – is currently demonstrating what Modern Monetary Theory (MMT) economists have said all along – the financial markets can always be subjugated by the power of government, any time policy makers choose to exercise their capacity. It is time that these progressive types realised that and became much more ambitious and, yes, progressive, really progressive rather than adopting the sycophantic stance that the ‘financial markets will destroy our currency’, which has undermined traditional social democratic politics.

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