As the inflation episode starts to abate, central bank governors have been keen to advance…
Corporate welfare abounds
It’s Wednesday, so just a few snippets before some great music from the early 1960s. Over the last few weeks, the commentary in the financial and economic press has been that the ‘market’ has priced in higher inflation and the central banks will have to concede to the market prerogative. Even people I personally like in the media have been running this line and headlines last week included statements like the RBA has run the white flag up. All of this is a self-fulfilling outcome, if every one acts as if there is an imperative to give the ‘markets’ the running, then it will happen. And we should all be clear on what that means. Corporate welfare abounds. And it is not the only example in the last week.
Corporate welfare #1
How is that the Biden administration is struggling to honour almost any of its promises leading into last year’s Presidential election yet it can hand out billions to private companies that sends their share values through the roof?
Last week, we read that the Hertz rental car has purchased 100,000 Tesla Model 3 cars from Elon Musk’s company.
The contract was reported to be worth around $US4.2 billion in revenue to Tesla and the value of its share capital passed 1 trillion $US.
So a massive increase in wealth for the owners of the company.
The purchase order is equivalent to around 10 per cent of the company’s annual production.
We also learned that under the auspices of the House reconciliation spending bill, specifically, the section on decarbonising the US motor vehicle stock, that while consumer subsidies (tax credits) being offered would exclude Tesla because it is an anti-union workplace, the provisions relating to commercial vehicles would give up to a 30 per cent tax credit.
That means the subsidy would save Hertz around $US1.26 billion, which means that Tesla’s competitor becomes a pretty standard Toyota.
They will also receive subsidies for the EV-charging infrastructure they are going to build.
Several things struck me when I read about this.
1. I applaud the shift to EVs.
2. Tesla has long supply-side delays on delivering cars to consumer, which means there is already excess demand.
3. Hertz spun the decision as a “strategic decision” to reduce unit costs and boost profits.
4. If (2) and (3), then why is the US government providing profit-seeking firms with a massive public subsidy, at the same time, the politicians are reneging on their promises to do other worthwhile things because they ‘don’t have enough money’?
Answer: Corporate welfare as per normal.
Corporate welfare #2
Back to the central banks.
When we hear that the ‘market’ has ‘priced in’ higher interest rates, what that means is that a host of gamblers in the financial markets have taken bets on interest rates rising and stand to gain massive profits if that outcome occurs.
These gamblers manipulate the media to put pressure on authorities to fulfill their wishes by suggesting that rate rises are inevitable to deal with an apparent outbreak of inflation that threatens to escalate into hyperinflation.
Every day, during this phase of manipulation, some financial market ‘economist’ will be wheeled out in the media saying central banks have to act to safeguard us from higher inflation.
Which is code for saying that they want the central bank to validate their bets and deliver the massive returns to their companies, including their own bonuses.
The unsuspecting public think that these investment bank commentators on TV, who appear daily, are ‘experts’ providing informed commentary to help us all understand what is going on in the economy, which, in turn, we think helps us make better decisions about our borrowing and spending decisions.
The media companies, including the public broadcasters (such as the ABC, BBC, etc) never indicate that their ‘experts’ actually have a massive conflict of interest in that the companies they work for stand to gain massively if the advice or commentary (like, interest rates will have to rise, etc) transpires into reality.
Stupid us, for being so gullible.
The ‘markets have priced it in’ con also reinforces the idea that is constantly implanted into the public psyche that these amorphous ‘markets’ are actually more powerful than the treasury and central bank together (that is, the government).
Which then leads to all to narratives that we are confronted with about ‘inevitabilities’, ‘TINA’, ‘nothing the government can do about it’, ‘markets rule and deliver efficiency which government interference undermines’, and all the rest of it.
Which then leads to all the other spin-offs that fiscal deficits are bad and the financial markets will kill currencies of nations that run them. And all of that.
Which then infests social democratic political parties, like the British Labour Party in 1976, who lied to the people about having run out of money with only recourse to the IMF loan facility as the option left.
And all of that.
All the while, the billionaires in the markets are laughing at our stupidity and ordering the next luxury yacht or buzzing off to a climate change conference in Glasgow in their private jets and given platforms to lecture us on climate change.
And, in some cases, after blasting themselves into space and who knows what costs to the environment just to confirm that the atmosphere is ‘thin’.
Stupid us, for being so gullible and tolerating all of this.
Last week, the RBA caved in to the ‘interest rates will have to rise’ ruse by abandoning their targetting of the 3-year Australian government bond yield, which they had held close to 0.1 per cent since March 2020, as part of their pandemic response.
They demonstrated their power against the markets since March 2020 through their bond-buying capacity.
In the last few weeks, the ‘markets’ – the gamblers – have been selling bonds in the maturity range of April 2024, which in fixed income markets has the consequence of pushing up yields.
The flow-on then is to interest rates on other assets and if that occurs, then the speculative trades (short selling etc) become profitable.
The central bank has two options: (a) kill the speculation by maintaining strong demand for those bonds in the secondary market; or (b) stop controlling the yield and allow the profits to be made
Last week, the RBA chose Option (b) and delivered massive corporate welfare benefits to the gamblers.
Last Friday, the RBA could have choked off the speculation by buying up a tranche of April 2024 maturing bonds.
There was no bid from the RBA, which meant that gamblers won.
In its statement yesterday (November 2, 2021) – Today’s Monetary Policy Decision – the RBA governor confirmed that the policy interest rate would remain unchanged at 0.10 per cent.
He also said that the RBA would “continue to purchase government bonds at the rate of $4 billion per week until mid February 2022, with a further review to be undertaken then” but that it would “discontinue the target for the yield on the April 2024 bond”.
The RBA claimed that the yield targetting had been introduced to keep rates low while the economy was enduring the worst of the pandemic.
The statement then said that:
But its effectiveness as a monetary policy tool declined as expectations about future interest rates shifted due to the run of data and the forecast progress towards our goals.
Which makes it look as though the gamblers have the power.
But, of course, the RBA could have held the yield at whatever level it chose, irrespective of what the gamblers claimed was the inevitable future.
The RBA effectively abandoned their ‘promise’ to keep short-term rates unchanged until 2024, which is why the three-year yield was targetted.
Now they are admitting that they will probably increase rates before that because inflation might be higher than previously thought.
However, they sent mixed signals because the statement also claimed that:
I want to make it clear that this decision does not reflect a view that the cash rate will be increased before 2024.
The other issue relates to the claim that interest rates have to rise to deal with the ‘alleged’ inflationary problem.
Certainly prices have risen in some products, transport costs are up due to misallocation of boats and containers, and so on.
But wages haven’t budged.
And during a pandemic where consumption expenditure patterns have changed due to lockdowns and constraints on travel and factories and wholesalers have experienced massive disruptions, it was always going to be the case that there would be some inflationary pressures.
But how will higher interest rates work to ease these temporary supply chain blockages?
They won’t – so we are once again locked into the destructive New Keynesian mantra about the primacy of monetary policy and its corollary – the need to run fiscal surpluses as soon as possible.
If we return to that nonsense the damage will be massive.
Music – Scrapper Blackwell
This is what I have been listening to while working this morning.
I hadn’t listened to the album – Mr. Scrapper’s Blues (released 1962 on the Prestige Bluesville label) – which was one of three studio albums recorded by – Francis Hillman ‘Scrapper’ Blackwell.
The tracks were recorded by – Art Rosenbaum – as part of his archival work preserving the folk music traditions of the US.
You can now get that album on CD and it is a fantastic.
Here is Scrapper Blackwell playing the famous song – Nobody Knows You When You’re Down And Out – written by – Jimmie Cox – in 1923.
It demonstrates the – Piedmont Style – of guitar playing which grew out of the ragtime playing styles.
Scrapper Blackwell didn’t sing much in his early days – particularly in his partnership with pianist Leroy Carr, but when that relationship ended, and after a long hiatus when Blackwell was not active in the scene, he did start singing and we are thankful he did.
Great playing and beautifully empathic vocals.
That is enough for today!
(c) Copyright 2021 William Mitchell. All Rights Reserved.
This Post Has 7 Comments
“The central bank has two options: (a) kill the speculation by maintaining strong demand for those bonds in the secondary market; or (b) stop controlling the yield and allow the profits to be made”
It’s not that simple, is it?
With interest rates so low (until recently) fixed interest speculators know that the prices of fixed interest assets have topped out. So they have been in selling mode and they know there is a ready buyer, the RBA. The inflation story is a catalyst for them to accelerate the selling, because with the inflation story gaining traction the chances of the RBA allowing interest rates to rise is increasing. The fact that the RBA has backed off suggests it knows the game is up and it indicates the RBA itself believes interest rates will have to rise. Why would it continue to buy fixed interest assets if it thought their prices were probably vulnerable? They would look like even bigger fools. The best option is to back off lest they end up buying more assets which now have a chance of losing value at a quickening rate. Over the last year they essentially have backed themselves into a corner as any central bank would have done in the circumstances. It is now holding a mountain of fixed interest assets which are about to drop in value.
The market has slumped. But in the last few days some recovery has taken place. Perhaps the RBA is mopping up selling and averaging down?
OMG, thanks for that fabulous music, Bill!
Santa might have to get me that album for Christmas.
Whenever there is a shock first 2 things they do is drop rates to zero and QE and strip interest income out of the economy. That tells me they only pretend to have the interest rate thing backwards. When they are really scared of inflation that’s what they do.
If they actually did what they say then whenever there is a shock and are scared of inflation then like Geoffrey Howe and Volker interest rates would be in double figures.
That tells me they know how interest rates work. But they have the voters and investors on a bit of string and have spent decades brainwashing via their media. That the opposite is true on just about everything they do.
1. To offset what they are going to do.
If everyone knew increasing interest rates causes inflation at the margins what would nation state currencies look like ? That would be a problem when they want to increase rates. So by convincing investors that the opposite is true. That helps to weaken how the markets react when they do things. Forward guidance helps with that. Forward guidance starts that offsetting process.
Draghi’s whole central bank stint was a master class in doing exactly that. He convinced the world’s portfolio managers into selling euro by doing things that they think are inflationary, but they weren’t inflationary at all. If the portfolio managers knew the truth the Euro would have got stronger which is not a good thing when the continent has chosen an export your way to growth model.
2. It is how they hijacked the state in the first place.
You have to ask yourself why Howe, Volker did what they did. Why Norman Lamont accommodated George Soros when George Soros shorted the £. Their actions of pegging the £ and throwing liquidity into the market helped Soros as they tried to defend the £.
For me they were all in it together working hand in glove to create a crises in order not only to hijack the state but it also allowed them to drive through their neoliberal ideology afterwards. To install in voters and investors minds that the markets are in charge for decades to come.
Then this doctrine was introduced into business schools and University economic textbooks. Why we are where we are today.
I also believe the Chicago School already had this worked out years before and had figured out exactly what needs to be done. After the wall fell down when Wall Street, the city of London manage to get into a country this is the model they all used. Exactly What they did in Russia and South American countries.
Still use it today in Argentina, Turkey, the Eurozone. Only this time the key is to get them to borrow in a foreign currency. Then you own them. Why they do everything they can to get their man in charge. The first thing they do is borrow in $’s.
As Lord Acton warned everybody in the 1800’s. “The day will come when the people have to take on the banks.”
I think there is another side to this story. Low interest rates penalize savers and favor borrowers. When the Fed took money market rates etc. down close to zero from the 5% level back in 2007, investors found a 90% drop in their income especially those who relied on safe investments for their retirement. In other words, the Fed imposed a 90% tax on the income from those investments before taxes! Meanwhile the borrowers are rolling in dollars. I would prefer to see an increase in interest rates that benefit these savers since most of the borrowers seem to be doing quite well.
Could there be an element of trying to cool the asset price inflation (Ponzi) side of the economy in the confused messaging from the RBA with a sort of hat tip toward increasing rates? Clearly, our abominably anti-intellectual government operating as a peculating kakistocracy is showing no inclination to do anything about our runaway real estate market. Macroeconomic ignorance as to the realities of money and banking and what is possible continues as a huge problem which keeps capital maintaining control of the masses.
We must all become educated in economics so as to resist the bullshit.
Thanks for the great track.
All the statements about corporate welfare are true and have been so for a long time, the whole neoliberal era at least but probably going much further back in capitalism. However, these statements are now becoming “more and more true” as it were in heightened, late stage capitalism. The corporate welfare swindle is getting worse and worse. This is ultimately unsustainable in financial economy / real economy terms. The financial economy will keep delivering massive gains to the super rich and keep moving more and more income producing assets (which are not necessarily productive assets in real terms) to the super rich. The real productivity of the real economy will stagnate, even be selectively sabotaged in the Veblenian sense.
Inflation is very likely to remain damped if all the income and wealth gains go to the super rich. They have a low marginal propensity to spend and consume, relative to their massively high incomes. Their increasing wealth is used to purchase assets and push more asset inflation. This is the mechanism by which they will end up owning all the wealth whilst the great majority of the population will own nothing. At this rate, 90% of the population will own nothing, have no savings and depend on a weekly income to survive, quite literally. Goodbye, middle class. Welcome a massive precariat. Such a society has no prospect of being for the greater good or stable or sustainable. Such a society has no prospects at all.
Only two things apart from revolution can stop this process. Total environmental collapse and/or total societal collapse. Indeed, it is highly likely both will proceed in tandem. Structured and maintainable revolutions, as opposed to mere anarchic collapses, can came in various forms. But every form depends on theorizing the revolution first and basing the theory supportably on empirical foundations. Peoples’ minds must be changed by empirically demonstrable truths. Their false beliefs and faith in the ideological and non-empirical nonsense of neoliberal capitalist myths and obfuscation hereof must be replaced by an empirical and de-mystified reappraisal of economics. MMT theorizing has a role to play in this.
I happen to hold to a synthesis view that Marxism, Veblenianism, Keynesianism, Functional Finance/MMT and Capital as Power (CasP) analyses when synthesized with (of course) the touchstones of general empiricism, science and ecological sustainability, could deliver the comprehensive answers required. This grand synthesis view would have to combine the insights of all of the above, lay out where they agree and re-appraise where they disagree in order to expunge the historically, contemporaneously and/or empirically unsupportable aspects of each theory.
One can imagine a Venn diagram of the theses put forward by each of these systems of thought. Only where the theses of all five systems concur and also are empirically supportable could a specific thesis be regarded as fully supportable. Where they disagree (do not mutually concur) there would most likely be a contestable issue. Then the synthesis of, or search for, the empirically, “synthesizeably” supportable given thesis would be required. It would be, if you like, an exercise in comparative political economy theory with the goal of a grand synthesis. It’s an outline of a giant project of course: not one I could undertake and not one perhaps that any single thinker could undertake. I don’t even qualify as “a thinker” in this context. I have neither the IQ nor the erudition for such an ambitious project. All I can envision is the necessity to seek the possibility.
I’ll leave the suggestion pretty much floating here. One important point is that terminology changes over time, even when thinkers in different eras are really talking of substantially the same concept. The theories would have to be terminologically and conceptually standardized first in an acceptable common technical language. For example, I would argue that “dialectical materialism” (not a term coined by Marx but now generally accepted in Marxism) means substantially the same as “a consideration of complex material system feed-backs and their inter-relation”. That could be a high pre-synthesis hurdle of course and many might baulk at it. But if such issues could not be resolved then a grand synthesis of economics would remain a pipe dream. We must then remain fated to be unable to synthesize our greatest thinkers who separately and somewhat idiosyncratically gave us our greatest insights. To me that would be a like sad admission of ultimate defeat in reaching for a much needed empirically grounded grand theory of political economy.
I’ve just sent this letter to the FT – doubt they’ll publish but been wanting to do so for some time:
I waited for the news before responding to your article ‘Markets confident BoE will raise rates’, although confident that I would be proved right. ‘The markets’ were, of course, hoping that this would be a self-fulfilling prophecy on the backs of their bets.
It is pleasing that the finance sector hasn’t managed to squeeze a little extra rent out of the system, but more that this proves the superior power of a monetarily sovereign state like ours and shatters the illusion of the independence of the Bank of England Monetary Committee.
Mortgage lenders have already raised their rates. A rise in the BoE rate, no matter how small, along with all the other cost increases coming down the line, will not wear well for next year’s general election.