Posts about monetary policy

The ‘MMT is dead’ crowd are silent now the yen is appreciating

It’s Wednesday and I am mostly thinking about Japan today. In just over a week’s time, I will once again head to Japan to work at Kyoto University. I will be there for several weeks and will provide regular reports as I have in previous years of what is happening there. The LDP leadership struggle is certainly proving to be interesting and there is now a view emerging that the hoped for break out from the deflationary period has not happened and further fiscal expansion is necessary. This is at a time when the yen is appreciating and the authorities are worried it is making the external sector noncompetitive. That is, light years away from the predictions made by the ‘MMT is dead’ crowd when they saw the depreciating yen during 2022 and beyond. It just goes to show that trying to interpret the world from the ‘sound finance’ lens will generally lead to erroneous conclusions.

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The 20 EMU Member States are not currency issuers in the MMT sense

For some years now (since the pandemic), I have been receiving E-mails from those interested in the Eurozone telling me that the analysis I presented in my 2015 book – Eurozone Dystopia: Groupthink and Denial on a Grand Scale (published May 2015) – was redundant because the European Commission and the ECB had embraced and was committed to Modern Monetary Theory (MMT) so there was no longer a basis for a critique along the lines I presented. I keep seeing that claim repeated and apparently it is being championed by MMT economists. While there are some MMTers who seem to think the original architecture of the Economic and Monetary Union has been ‘changed’ in such a way that the original constraints on Member States no longer apply, I think they have missed the point. They point to the fact that the ECB continues to control bond yield spreads across the EU through its bond-buying programs (yes) and that the Commission/Council relaxed the fiscal rules during the Pandemic (yes). But the bond-buying programs come with conditionality and the authorities have now ended the ‘general escape clause’ of the Stability and Growth Pact and are once again enforcing the Excessive Deficit procedure and imposing austerity on several Member States. The temporary relaxation of the SGP rules (via the general emergency clause) did not amount to a ‘change’ in the fiscal rules. Indeed, the EDP has been strengthened this year. The Member States still face credit risk on their debt, still use a foreign currency that is issued by the ECB and is beyond their legislative remit, and are still vulnerable to austerity impositions from the Commission and their technocrats. To compare that situation with a currency-issuing government such as the US or Japan or Australia, etc is to, in my view, commit the same sort of error that mainstream economists make when they say that ‘the UK is at risk of becoming like Greece’ or similar ridiculous threats to discipline fiscal authorities in currency-issuing nations.

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British House of Lords Debt Report starts with false premises and then just repeats conventional fictions

On Tuesday (September 10, 2024), the UK House of Lords Economic Affairs Committee released their first report for the Session 2024-25 (HL Paper 5) – National debt: it’s time for tough decisions – which was the result of their decision to hold an inquiry – How sustainable is our national debt? – into whether “UK’s national debt is on a sustainable path” and whether “the Government’s fiscal rule regarding the national debt is meaningful”. They didn’t need a large-scale investigation to come up with answers to those questions: Yes and Not meaningful- are my answers based on the reality of the currency status of the British government.

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Treasurer-central bank stoush – a case of the pot calling the kettle black

The Reserve Bank of Australia has certainly attracted headlines this last week or so starting with the claim by the Federal Treasurer that the monetary policy stance is “smashing the economy” (Source), while a past Labor Treasurer and now Labour Party National President (Wayne Swan) was much more openly critical of the RBA conduct over the last few years. Things then came to a point when the new RBA governor gave a speech the day (September 5, 2024), the day after the National Accounts came out with the news that the GDP growth rate had slumped to 0.2 per cent for the June-quarter (well below trend), and told her audience (a Foundation that “supports research into adolescent depression and suicide”) that around 5 per cent of mortgage holders were falling behind payments and many would “ultimately make the difficult decision to sell their homes” (Source) as they would be forced into default. Meanwhile, the conservatives (and economists) have claimed the Government is impugning the ‘independence’ of the RBA. It is a case of – The pot calling the kettle black – and demonstrates how ridiculous the policy debate has become in this latter years of the neoliberal era.

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Major macroeconomic policy reform is needed to reduce the reliance on monetary policy

There is some commentary emerging that is finally starting to question the reliance on monetary policy (setting interest rates) as the primary macroeconomic policy tool with fiscal policy forced into a passive role. In Australia, this debate has intensified in the last week following the hubris from the new Reserve Bank governor, who thinks her role is to sound like a ‘tough guy’ dishing out threats of ever increasing interest rate rises even as inflation falls. There was an Op Ed in the Sydney Morning Herald today (August 12, 2024) – Maybe only a recession will fix macroeconomic management – by the Economics Editor Ross Gittins, which challenges the current macroeconomic consensus. Some of this argument is acceptable. But when he advances his alternative proposal of “a new independent authority” to set monetary and fiscal policy, the reality is that this would be as bad as we have now. More on that later.

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Australia – inflation rate slightly up but stripping out volatility shows significant declines

Today (July 31, 2024), the Australian Bureau of Statistics (ABS) released the latest – Consumer Price Index, Australia – for the June-quarter 2024. The data showed that the annual inflation rate continues rose by 0.2 points to 3.8 per cent but was steady over the quarter. The major factors driving the inflation at present are housing (rents) and food prices, the latter due to abnormal weather events. The major expectations series all show expected inflation to be in decline and well within the RBA’s target zone. Further, when we strip out the volatile components (like weather) the preferred series (Trimmed Mean and Median) are all declining. There is now no case at all for further rate hikes.

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Special pleading from Japan’s fossil fuel financing megabanks reaches new heights

In our new book – Modern Monetary Theory: Bill and Warren’s Excellent Adventure – which will be launched in the UK next Wednesday, we devote a chapter to what we refer to as the Japanese irony. This relates to the fact that while the conduct of policy in Japan is justified in mainstream terms, the more extreme policy settings that emerge produce outcomes that expose the deficiencies of the mainstream theories. At present, we are observing more examples of this. The latest matter of interest in Japan (from my watch) is the pressure the three megabanks are putting on the Bank of Japan policy makers to push up bond yields and interest rates. There is no reason based in financial stability concerns or community well-being for the Bank of Japan to agree to their demands. They just amount to special pleading from Japan’s fossil fuel financing megabanks for more corporate welfare to boost their profits.

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Central bankers live in a parallel universe

It’s Wednesday, which means a few (sometimes unrelated) items are discussed or analysed. Today, we see that real wages in 16 of the 35 OECD countries are still below the pre-pandemic levels, which tells us among other things that the inflationary pressures were not wage induced. Further, a speech yesterday by the Federal Reserve boss demonstrated quite clearly how central bankers fudged the whole rate hike narrative. And after all that, some music from the 1960s.

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Bank of Japan is making losses on its balance sheet – so what?

Sometimes when I am reading some story or analysis about the economy I sense a sort of glazing over effect – I just read the words as they appear on the paper and it is not until after I have read the entirety that I sort of have to pinch myself and realise that this is an attempt at serious journalism. The realisation that I have just read the most extraordinary nonsense that one could devise to present to readers then sinks in. I then wonder how a journalist could be so stupid as to actually construct and article in that way and seek so-called ‘expert’ commentary from an array of highly paid economists and bankers to support the nonsense. Who are they trying to fool? Well almost everyone is the answer. Why does this sort of journalism continue other than the lurid headlines sell products and that is what journalism has really become? I don’t accept that all these characters are part of a massive conspiracy to deceive the rest of us. Obviously, some of the players know clearly that they are manipulating the truth to advance their own agendas – like when bank economists continually claim interest rates have to rise (which they know will just boost the profits of the companies they work for). But the better way of thinking about this mass deception is that we have all been captured by the fictional world created by economists, who themselves are mostly trapped by the Groupthink that is impressed on them during their university days. Whatever the explanation, it still amazes me how stupid we all are for accepting this nonsense as serious commentary.

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The European Union has been designed and run to maintain the corporate interests of the elites – no surprises there

After the Far Right National Rally (RN) took the prizes in the recent European Parliament elections and seriously dented the electoral appeal of Emmanual Macron’s grouping, the French President decided to follow the British script and dissolved the French Parliament and called a snap election, the first round of which will take place on June 30, 2024 and the second round a week later. Far right parties also did well in Germany, Italy and Austria, but all the talk of a sharp swing to the right in Europe was overstated, given that in other nations, the Right vote was not as strong. The deals to give the European Commission presidency to VDL for another term were then in full sway. And within days we started to observe some strange behaviour in the bond markets with the 10-year bond spreads against the German bund rising sharply with accompanying warning bells from the mainstream politicians – some even venturing to claim in France’s case that it would experience a ‘Truss moment’ if Macron was not returned to office, despite his government floundering due to its poor policy making. None of this should come as a surprise. The European Union is the most advanced example of neoliberalism, given that the ideology is built into its legal structures and the institutions are required to enforce it. There are countless examples, of the main institutions – the Commission and the ECB – acting individually and together to drive political outcomes that they deem to be desirable from the perspective of maintaining the status quo. All the angst in the last few weeks about interference in the upcoming French election is really surprising given the track record of these bodies. The whole system has been designed and run to maintain the corporate interests of the elites. Pure and simple. The current situation is no exception.

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