Monetary policy in the hands of the central banker sociopaths is advancing the class interests of the elites

Recently, I wrote about the conditions that dictate what impacts interest rate changes will have on aggregate spending and demand-driven inflation in direction, magnitude and temporality – see RBA governor’s ‘Qu’ils mangent de la brioche’ moments of disdain (June 8, 2023). It is highly likely in many cases, the decisions by central banks to increase interest rates, ostensibly to ‘fight inflation’ actually make inflation worse. More people are starting to understand that point even though central bankers appear to be still talking big about further interest rate rises. But the evidence is mounting against their position and ultimately that evidence is exposing the deep flaws in mainstream macroeconomics. I argue today that the problem is not only that the interest rate hikes can be inflationary but they are also facilitating a major reinforcement of the class divisions in our societies whereby the low income cohorts are transferring massive income benefits to the higher deciles. I also discuss cricket which recently has provided a demonstration of how the class divisions work. Then some music, given it is a Wednesday.

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A large government presence required for energy transition does not mean massive deficits are required

There appears to be confusion among those interested in Modern Monetary Theory (MMT) as to what the implications for a green transition that will fasttrack the transition to renewable energy will require by way of government. I regularly see statements that government deficits will have to be ‘massive’ for extended periods because the private (for profit) market entities will not move fast enough to deal with the climate emergency in any effective way. The confusion inherent in these claims is that they fail to separate the ‘size’ of government from any particular ‘net spending’ (deficit) recorded by government. The two outcomes are quite separable and have to be if government action is to achieve sustainable outcomes, not only in terms of environmental goals but also price stability goals. So let’s work all that out. Failing to do so, leads MMT activists to make claims that open them up to criticism from those who understand the point I am making but have different ideological agendas. So they make erroneous claims such that ‘MMT just advocates big deficits’, or that ‘MMT thinks that deficits do not matter’. But they have been lured into that position, in part, by the social media behaviour of some MMT activists.

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Why are the unions accepting massive real wage cuts?

In the 1890s, industrial capitalism had reached the point where the pain inflicted on workers in search of private profits by the industrialists reached a point where the workers could no longer tolerate it and they started to realise that in unity they had strength. This was a period of major industrial disputes and a burgeoning of trade union growth beyond the previously restrictive craft union base. The development of broad-based unions and their move into the political domain to give further voice to the concerns of workers marked a turning point and fostered social democratic political movements and the spread of welfare state capitalism, which lasted until the 1970s. The neoliberal period has seen many of the gains made by workers during that period wound back and now we are witnessing the consequences of that retrenchment – massive real wage cuts, profit gouging and central banks determined to further undermine the well-being of workers as they attempt to push up unemployment, in the name of fighting inflation. An inflation that is persistent only because corporations are using this period to solidify the shift in income distribution towards profits at the expense of wages. It is also apparent that the trade union movement has become co-opted and now collaborate with government and corporate bosses to oversee the deliberate cuts in real wages of their members. This is another turning point in history, where the workers’ own representatives give their support to policies that support those cuts, under the pretense that they have to be responsible. Responsible to whom? We are in a defining period at present in the class struggle and it seems that the labour side has swapped teams.

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Australia – inflation declines sharply

Today (June 28, 2023), the Australian Bureau of Statistics released the latest – Monthly Consumer Price Indicator – which covers the period to May 2023. On an annual basis, the monthly All Items CPI rate of increase was 5.6 per cent down from 6.8 per cent. There is some stickiness in some of the components in the CPI but overall inflation peaked last year and is now declining fairly quickly as the factors that caused the pressures in the first place are abating. I doubt that any of this decline is due to the obsessive interest rate hikes by the Reserve Bank of Australia. Anyway, a quick analysis of the data then some discussion of the British teachers’ pay dispute, the latest Australian Covid numbers (worrying) and some music to cheer us all up after the economics. The overwhelming point of today’s data is that this period of inflation is proving to be transitory and did not justify the rate increases. It was a supply-side event and trying to increase unemployment to kill off spending (demand) will just leave an ugly legacy once those supply-side factors abate (which they are and were always going to).

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Japan’s monetary policy experiment is working

Last week – RBA wants to destroy the livelihoods of 140,000 Australian workers – a shocking indictment of a failed state (June 22, 2023) – I wrote about the sense of being in a parallel universe when one reads official statements from the Bank of Japan and juxtaposes them against the stream of statements coming out of other central banks. The day after I wrote that post (June 23 2026), the Japanese e-Stat service (the portal for Japanese government statistics) released the latest – Monthly CPI data – which showed that the annual inflation rate fell by 0.2 points to 3.2 per cent in May, on the back of significant easing in electricity and gas prices, in part the result of government policy aimed at reducing energy prices rises in the domestic economy. Here is some more about the parallel universe. I conclude that the experiment underway between central banks is indicating that Japan’s zero interest rate regime (with fiscal expansion) is not an inflationary factor. It has not driven dangerous shifts in inflationary expectations for businesses or households. Further, the decision by the Bank of Japan not to hike rates has reduced the cost-of-living squeeze on mortgaged households that is being imposed by the (transitory) inflationary pressures. By way of contrast, other central banks have imposed extra burdens on those with debt and are engineering a massive redistribution of income from poor to rich into the bargain. As they continue with their blindness, they are risking recession and a major rise in unemployment, which will add to the pain the citizens are enduring.

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RBA wants to destroy the livelihoods of 140,000 Australian workers – a shocking indictment of a failed state

My early academic work was on the Phillips curve and the precision in estimating the concept of a natural rate of unemployment, or the rate of unemployment where inflation stabilises at some level. This rate is now commonly referred to as the Non-Accelerating-Rate-of-Unemployment (NAIRU) and my contribution was one of the first studies to show that the rate was variable and went up and down with the economic cycle, rendering it a meaningless concept for discretionary policy interventions. I extended that work into my PhD and built on much earlier work as a undergraduate to articulate the Job Guarantee idea. The NAIRU is unobservable and there have been various ways to estimate it from actual data. The problem is that these estimates are highly sensitive to the approach – so two researchers can get quite different estimates using the same data. Further, the estimates themselves are subject to large statistical errors meaning that we cannot be sure whether the NAIRU is say 4.5 per cent or 3.5 per cent or 5.5 per cent, say. Such imprecision makes it impossible to use the concept as a guide for monetary policy because if the NAIRU actually existed then ‘full employment’ might be at 3.5 or 5.5 per cent today but next week the estimates might be even wider. When would one want to start changing interest rates in pursuit of inflation stability – when the actual unemployment rate was down to 3.5 per cent or at 5.5 per cent or somewhere in between or at higher or lower unemployment rates, depending on what the models pumped out? You can see the problem. For some years, central bankers went quiet on the use of the NAIRU and stopped publishing their estimates exactly because they knew full well about the imprecision and that policy based on such a vague, difficult to estimate, unobservable would be discredited. That is until now. The RBA is now clearly admitting that their damaging and unnecessary interest rate hikes over the last year and a bit have been driven by the NAIRU. A sham. But a tragedy as well given the RBA’s almost obsession with pushing unemployment up by around 140,000. A shocking indictment of where we have reached as a civilisation.

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The New Global Financing Pact equals the old failed global financial arrangements

It’s Wednesday and I cover a few topics usually in less depth than usual and provide a musical entree. From tomorrow (June 22 to 23), the so-called world leaders are meeting in Paris for the – Summit for a New Global Financing Pact – which is being hosted by the French president. The aim, apparently, is to build a new global architecture to replace the Bretton Woods system (they left it a while!) to ‘address climate change, biodiversity crisis and development challenges’. The solution that is being proposed is to allow the financial markets to create debt and speculative derivative products to fund the new architecture because, apparently, governments do not have the financial capacity. The whole initiative is about replacing defunct financial architecture but it still proposes to rely on the same (defunct) approach to public infrastructure development and the like that has failed dramatically to reduce inequality and poverty. It has certainly massively enriched the top-end-of-town and the same result will come out of this Pact. I also comment on the latest Brexit claims and provide a brief entree into some Covid research that I found interesting. Then some music.

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Beware: pension systems about to collapse. Not! More mainstream fiction

Sometimes, one thinks that the intellectual world should evolve as intelligent people take account of the dissonance between their ideas and the facts before them and adapt their views. I know that doesn’t happen much but it should. I have studied the philosophy of science deeply enough over my student and postgrad days and beyond into my career to know that intelligent people have the capacity to completely fool themselves and hang onto defunct ideas as part of a paradigm-resistance to change. We know why that happens: senior professors have their reputations and legacy at stake, they control appointments, promotions, access to research grants, publication success for junior academics, and continuity of lucrative consulting empires. But sometimes I still am amazed when I read some research paper that I know has taken months to research and write up and which has been presented and talked about in seminars and conferences, and after dinner drinks and all the rest of it, but which bears no correspondence with the underlying reality. That was the situation when I read a research paper from three economists who were claiming that taxes have to rise and pensions cut if governments are to escape insolvency in the face of ageing societies. This continues, obviously, to be a powerful framework for proselyting the neoliberal mantra and a narrative that most people cannot see their way through to a conclusion that is all a fiction.

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