In the battle between government and the hedge fund gamblers – the government has all the cards

Given my inflation report yesterday, I have shifted my usual Wednesday light blog post day and music feature to today. The economic debate has moved in recent years from ‘when is the government going broke’ to ‘hyperinflation is approaching’. It amazes me how puerile the economic commentary is as journalists and economists seeking headlines trot out headlines about how bad something (insert: insolvency, inflation, whatever is the latest craze) is going to be and what needs to be done about it. Nothing much happens in the real world and they keep their jobs and begin the next mania. Replay. And so it goes. It seems though that within this fictional world, that masquerades as informed economic commentary, subtle changes are underway. Governments worked out that during the GFC, the only weapon they had that would save the system was fiscal policy. They also worked out that large-scale bond buying by their central banks complemented the effective use of fiscal policy and didn’t deliver all the maelstrom that the mainstream New Keynesian textbooks predicted. The pandemic has accentuated that. And now there is this sort of stand-off between the ‘markets’ that were given too much latitude in the pre-GFC period and governments. The market players, who have become accustomed to manipulating government policy to ratify their speculative bets, which delivered massive profits to the hedge funds and the like, are now confronting central banks and treasuries that actually have power and cannot be bullied into delivering such policy ratification. That is progress and interesting to observe.

Monetary policy developments

With all the inflation hysteria about at present, I guess it is a relief from the ‘government is going broke’ narrative that we have morphed out of since the pandemic began.

It was only a matter of time I guess.

And when the latest anxieties provide no data to perpetuate the fear, then I guess we will switch back to the insolvency stuff for a while.

It comes in cycles, that is what I have observed over the course of my career.

There was a Financial Times article (October 26, 2021) – Lagarde set to push back on market bets of eurozone rate rise – which is relevant to what I have been writing about in recent weeks about the way the financial markets try to bully policy makers into pushing up rates and the profits of the gamblers (banks etc) in those markets by invoking inflation fears.

When you examine the voices in this debate – the interest rates must rise lobby – are dominated by the big investment banks who get platforms in the mainstream media (or whose opinions are propagated to the public by compliant journalists).

They tell the public that inflation is already ‘priced in’, which gives the impression that rising interest rates are somehow a fait accompli.

It is one of the biggest cons around and even the public broadcaster falls into the con by regularly having these ‘experts’ on TV and radio to give commentary without disclosing whether their companies (banks etc) would have portfolio positions that would benefit if policy makers followed the advice given by the ‘expert’.

The FT article notes that:

Investors, however, are betting the ECB could begin raising its deposit rate as soon as late 2022. These expectations helped lift Germany’s two-year bond yield from minus 0.78 per cent in August to minus 0.66 per cent on Monday.

Investors is code for speculative gamblers.

The article though discloses that the ECB really is in charge here.

It reports that an ECB official noted that “he did not think the market had “fully absorbed” the central bank’s new guidance on when it will raise rates.”

Which means the ECB is staring down the gambling bullies who will lose significant amounts if the ECB holds its line.

The ECB has made it clear that reates will not increase rates any time soon – before 2024 is not likely.

And the battle between the hype and the reality is, in my opinion, in favour of reality.

As I have noted many times, inflation has to have distributional propagation – the wage-price spiral – for it to become sustained rather than just reflect ephemeral supply constraints.

The FT article reported the comment of one economist – “One of the reasons we are less worried about a tightening of monetary policy in the eurozone . . . is what is happening with wages.”

Wages growth is flat.

And will not accelerate any time soon.

There was also an interesting input this week in the form of the latest Discussion Paper (No 40/2021) from the Deutsche Bundesbank (released October 26, 2021) –
Hitting the elusive inflation target.

Interesting doesn’t mean that it is correct.

It means, rather that the questions posed by the researchers are interesting and suggest paradigmic tension.

The Discussion Paper’s motivation is based on the observation that:

Since the 2001 recession, core inflation has been on average below the Federal Reserve’s implicit 2% target … This phenomenon has become even more severe in the aftermath of the 2008 recession. In other words, the “conquest of US inflation” that started with the Volcker disinflation seems to have gone too far …

In a low nominal interest rate environment, this deflationary bias is a predictable consequence of a symmetric strategy to stabilize inflation, like the one followed by the Federal Reserve until the revision of its framework announced in August 2020 …

We argue that in the current low interest rate environment, it is advantageous for a central bank to be more concerned about inflation running below target than about inflation going above target. A low inflation target should be combined with an asymmetric monetary policy strategy calling for more aggressive actions when inflation is below target than when inflation is above target.

So this is a little step away from the hardline New Keynesian view that monetary policy should be conducted in a symmetric fashion.

I say ‘little step’ because the same sort of New Keynesian nonsense is rehearsed in the paper – which I do not recommend anyone read. I have done the hard yards to filter it.

The point is that while the authors still believe that monetary policy adjustments are an effective way to discipline the economic cycle, they now recognise that the, previously dominant, ‘forward-looking’ approach, where central banks have tightened monetary policy prematurely because they ‘fear’ future inflation, is a costly approach.

Even within the New Keynesian mindset they are manipulating equations to show that it is better to allow inflation to reveal itself as being well above the target before policy should tighten.

Of course, the absence of any discussion of the role the bias in fiscal policy towards surplus generation (fiscal drag) has played in the persistently low inflation environment is telling.

MMTed update

We are close to completing a short new course which we hope to offer in early December, depending on how time plays out.

We are highly resource constrained because we are financially constrained, unlike a currency-issuing government, so things take time to develop.

We also hope to offer the MOOC, which we ran earlier this year again in the not too distant future.

We are also looking for an app developer who is interested in helping us. If you are interested and skilful, please contact me on my usual E-mail or phone addresses and I will fill you in with the details.

We cannot pay any large cheques though!

Music – a (pre)-funky morning

This is what I have been listening to while working this morning.

One of my favourite bands was (is) – Sly & The Family Stone – who defined, in my view, the late 1960s West Coast US sound combining soul, funk and pyschedelic instrumentation.

It was led by the brilliant – Sylvestor Stewart (aka Sly Stone) who many attribute being one of the pioneers of what became funk music in the 1970s.

This single – Everybody Is A Star – was released in December 1969 and I recall as a teenager that it was one of the best things I had ever heard.

It was the b-side to their song – Thank You (Falettinme Be Mice Elf Agin.

The a- and b- side reached number 1 in the Billboard charts in February 1970.

It was compiled on their 1970 – Great Hits – album, which was among my favourites of all time.

The single was classified as – Psychedelic Soul – and was the last release the band made before turning very funky.

That is enough for today!

(c) Copyright 2021 William Mitchell. All Rights Reserved.

This Post Has 12 Comments

  1. ” I have done the hard yards to filter it.”

    Greatly appreciated as well.

    The copious amount of ill-informed comment and “think tank” output today about yesterday’s UK autumn budget is just too much to bear. It would take weeks to debunk it all, working full-time.

  2. We’ve been witnessing a mega tsunami of lies.
    As Adam Tooze put it recently, we have to consider the “manipulative politics of confidence discourse (…) Crisis talk is often the flip side of “confidence” talk. (…) talk of inflation linked to talk of an energy crisis is being wielded against at least two progressive agendas: the Biden infrastructure push and the global push for net zero. It will no doubt soon rear its head in Eurozone fiscal policy debate as well” (Chartbook # 47).
    Indeed, it looks like there are price hikes artificially inducted into markets, as to rise inflation, with the purpose of scaremongering, or a last attempt to keep alive the mainstream lies and getting some good profits along the way.
    I too believe that’s the cue to call for the heavy hand of governments.

  3. @Neil Wilson: The whole song and dance about the budget is so tiresome.

    Looks like the Bank of Canada will be moving their rate rise to April 2022 so not sure politicians can so easily resist the HFs. Then again Canada tends to go against the grain of what the others do.

  4. So how did the mainstream media report the budget ?

    What narrative did they create and how did they frame it. That was then repeated 100 times Joseph Goebbels style.

    They took back control ! Put the sheep back in their sheep pens ready for the one man and his dog show. Just like they did after 2008 when they blamed the government budget deficit for the world financial crash.

    How they got away with it is incredible. Osborne, Cameron and Clegg sold it to the sheep like second hand car salesmen.

    Here’s the mainstream media official narrative and framing before the pandemic…….

    “The Tories can’t offer tax cuts – there will be no money left after Brexit”

    Please read that over and over and over again. This the standard mainstream media framing and narratives of how the UK monetary system works. In short the UK uses the Euro.

    Yesterday the mainstream media took back control of that narrative and framing and repeated it relentlessly. Just like 2008. It was a textbook case how the mainstream media support the bank lobby.

    Now after you’ve read that link a few times just think about what actually happened over the last 18 months.

    What did you witness before your own eyes ?

    1. Was there no money left ?

    2. Was there a shortage of money ?

    3. Was there this field on the Isle of Wight that has a heap of £’s sitting in the corner of it. Once they run out The MONOPOLY issuer of the £ is out of £’s ?

    The mainstream media took back control. Told you to completely forget what you witnessed with your own eyes over the last 18 months while the green curtain was getting pulled back.

    Getting the sheep ready for the dip. Move along now nothing more to see. Back to the MONOPOLY issuer of the £ has no £’s narrative and framing.

    Will the country fall for it ?

    You can bet your last £ on it. Brainwashed by that box hanging on their walls in their living rooms.

    The real question is why do the establishment owned media support the bank lobby view ? The answer to that question is very simple indeed. The UK is a US colony and it’s all geopolitics and the banks are the tools that further neoliberalism. Rape and pillage everything before them without sending in the army.

    Yesterday the bank lobby took back control of the framing and narrative.

  5. If the virus didn’t happen and for the past 18 months we lived a normal life.

    And Bob came along and said you know what pop pickers why don’t we ask workers to stay at home and the Government can pay them furlough payments. Just credit their bank accounts while they are sitting at home ?

    What would the response have been ? How would the world responded to Bob ?

    “Bob you are out of your tiny little mind the Government has no money. They are skint – inflation would be 20% ,interest rates would go through the roof and the £ would collapse. The yields on the 10 year bonds would be out of control because of bond vigilantes and Nobody would buy them.”

    And all the other nonsense the mainstream media present as facts.

    Poor Bob would be standing in his own saying

    ” But guys we left the Gold standard and fixed exchange rates years ago “

  6. “They also worked out that large-scale bond buying by their central banks complemented the effective use of fiscal policy….” Only when the ruse of bond buying is ended, and fiat money is directly created and invested to serve the needs of current-sovereign societies, will the obvious, elemental truth of MMT be impossible obfuscate. But it’s a chicken and egg problem, isn’t it?

  7. Bill,

    What do you make of this by the New economic foundation – Fiscal referees ?

    Now the liberals are in charge of the Labour party again. Rachel Reeves mentioned a ” value for money ” group to monitor fiscal policy.

    Is this not just Simon Wren Lewis and Jonathan Portes idea of fiscal councils being introduced ? After all these guys have so much more power over the left’s economic policies now the liberals are back in charge.

    Fiscal referees, value for money group is creeping into the narrative a lot more nowadays. Surely those associated with Wren Lewis and Portes are pushing this ? Just with a different name.

    What do you make of it ?

    The same or something different ?

  8. Derek Henry @ 23:31,
    Derek , I ‘m not sure what ‘pop pickers’ means and I also don’t know what ‘skint’ means. But I do know that there are lot of jobs that were very necessary to be done even during the pandemic. So if ‘Bob’ just said pay every worker to stay home- well that just wouldn’t work no matter about interest rates or government money or whatever.

    It is a shame that very many of these most necessary jobs are also lower paying jobs and we should try to do something about that. But it doesn’t look like we will at least here in the US. Christ- it’s like pulling teeth to get Senators here to support even making sure these workers are able to have their children looked after while they are doing their ‘essential’ jobs. More than a few of these Senators deserve to have their teeth re-arranged by some more essential workers.

  9. What we’re seeing here, Derek, is the ancient battle between the Church and the King playing out for a new generation.

    The elected government is still “The Crown” and has the powers of the King.

    The new technocratic elite have adopted the manners of “The Church”, including high priests of doom, all speaking from sacred texts and censoring anybody who dares cross them. It’s the new Holy Roman Empire.

    Labour have decided to back the Church.

  10. ” Of course, the absence of any discussion of the role the bias in fiscal policy towards surplus generation (fiscal drag) has played in the persistently low inflation environment is telling. ”

    They won’t discuss it because when business as usual returns to the EU. The fiscal rules will be put back in place. The everyone export their way to growth model while trying to achieve a Fiscal surplus will be the front and centre framing and narrative again.

    Fiscal policy is the devil – Walk this way and I will provide you with a loan instead.

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