I am covering a few topics today, given that I used yesterday's post space to…
It’s Wednesday and overnight there has been a Twitter storm, which like most of these Tweet Crazes, is about nothing at all and only serves to embarrass the Tweeters, not that they are aware of the humiliation. I refer to the statements made overnight by the Bank of England boss who reiterated press releases the day before in saying the Bank would not continue to prop up pension funds who had mismanaged their assets. The Twitterati seemingly didn’t really get the point. And while we are on central banking, the former IMF chief economist Olivier Blanchard was interviewed in the last few days (I won’t link to it) claiming in relation to the US economy that “the path to avoiding a recession is narrow because the economy is still overheating”. He then concluded that the Federal Reserve Bank “is no longer behind the curve but still has work to do to deal with stubborn underlying inflation pressures”. He thought the Federal Reserve’s funds rate (its policy rate) would go higher than 5 per cent. Planet Not Earth. To keep us on the straight and narrow after those contributions to public discourse, we end today with some piano music. Always a good idea to stay calm and reflective.
The Bank of England in charge – and don’t doubt it
I wrote about the recent gyrations in Britain with the pension funds and the Bank of England in this blog post – The last week in Britain demonstrates key MMT propositions (September 29, 2022).
Twitter had gone berserk predicting the sterling was about to be destroyed and all sorts of commentators were out in force claiming fiscal deficits were causing the currency to collapse.
Some standard intervention from the Bank of England (buying up some bonds) saw the currency value return quickly to the level before the hoo-ha and peace resumed.
That intervention from the Bank proved that the central bank can always stabilise bond yields at whatever level it chooses and the ‘bond investors’ can do little to change that.
But the intervention didn’t fix the underlying problems facing the pension funds who had pursued greed over their main business – to provide stable flows of payments to retirees etc in a rather predictable manner.
That task is not that hard, as I explained in the blog post above.
The pension fund managers made it hard because they went off script and started to use various dubious methods to increase returns and putting their assets where they should not be put – presumably also to ensure they get massive management bonuses at the end of the year.
As one would reasonably expect, the greed got ahead of itself and the pension funds were forced into an unpalatable bond sell off which in a market where there was too much ‘supply’ and their solvency was threatened.
The Bank of England’s actions in bolstering the demand side of the bond market quote substantially the week before last temporarily provided the liquidity that the pension funds required, but did not solve the structural mismatch in assets and liabilities for the pension funds.
Then came yesterday in Britain.
Twitter went feral overnight, as it does regularly on most issues, after the governor Andrew Bailey told the BBC that (Source):
… a bond-buying scheme to stabilise pension funds must end on Friday … managers have got to make sure that their funds are resilient … You’ve got three days left now. You’ve got to get this done.
Predictably, the sterling fell in value (it will return don’t worry).
The pensions industry peak body, feeling like even more corporate welfare from the government (central bank division) was their due, pleaded with the Bank to continue buying up bonds.
Twitter went feral suggesting the Bank didn’t know what is was doing and that the governor was just a loose cannon mouthing off at will.
The day before (October 11, 2022), the Bank had issued a two press releases:
I wonder how many of the Twitter catastrophe army had read them. Not many I posit to guess.
Bailey was just telling the BBC what these press releases outlined in great detail.
Whether you agree with the decision or not the discussion with the BBC was no idle piece of tongue slipping.
The reality is that the pension funds need to be reined in and forced to withdraw from their ‘greed’ positions and to get back to ensuring they have sufficient assets and commensurate returns to cover their liabilities.
If the Bank of England maintained what was effectively a bailout for these funds then you can guess what the funds would continue to do.
Yes – pursue greed and management excesses.
The Bank is also pushing the pension problem back on to the funds and also the political arm of government.
If they cannot retreat back into safe territory, then the funds will be on the brink.
No government is going to allow the pension system to collapse.
So whether it is Treasury action – nationalisation would be a good start after sacking the managers – or more central bank action under a different guise – just maintaining indefinite support to the pension funds was not sustainable.
My preference is for them to be nationalised and for them, under public ownership, to go back to core business.
US inflation trends
From the comments made by Olivier Blanchard one would think that inflation is accelerating.
We use the term ‘overheating’ to describe an economy where nominal demand pressures are outstripping supply, but with the inference that it is demand that is accelerating rather than supply contracting due to temporary constraints arising from Covid or War or cost pressures arising from OPEC decisions on oil prices.
The first graph shows the monthly movements in the various versions of the US CPI from January 2015 to August 2022 (latest data).
It is obvious that it is energy prices that are driving the continued inflation.
The All Items CPI rose by 0.1 per cent in August 2022 after recording a zero rise in July 2022.
The ‘All items less food and shelter’ has fallen for two consecutive months.
The following graph shows the ‘Net per cent (higher minus lower) during next three month of small business pricing plans.
The data is published by NFIB research which does extensive surveying of small businesses in the US.
If the ‘net per cent’ line is falling it means that less businesses are planning to raise prices in the next three months relative to those who are going to reduce them.
What the graph tells us is that the inflationary peak has probably passed and was due to transient factors, some of which are abating.
The NFIB research also shows that expected sales have been declining rather sharply, hardly a sign of an overheating economy.
Which challenges the credibility of commentators like Blanchard, who along with several of his cronies have created a renewed hysteria about inflation and pressured the Federal Reserve Bank to go feral.
Don’t be under any apprehension that this isn’t another play in the class struggle.
The rising interest rates, as I have explained previously, aid the big banks and the wealthy, which is one reason they are not a very efficient tool for bringing down aggregate spending anyway,
But at the same time, they hurt the lower-income workers who are trying to accumulate a modicum of wealth in the form of owner-occupied housing.
And if the Federal Reserve pushes rates up far enough, eventually, the economy will tank and unemployment will rise, further endangering the prosperity of the weak.
This data also tells me, again a point I have been making for the last year or so, that the central banks do not have the tools to deal with the specific pressures that are causing the inflation.
Their only avenue is rising interest rates, which they hope will kill of spending, destroy sales and jobs and force workers into penury and firms into conservative pricing policies.
In the short-term, this very blunt approach is not even very effective at dealing with spending because even the Federal Reserve is uncertain that the rising borrowing costs to firms from the rising rates are not passed on as even higher prices.
But it becomes even more ridiculous when we understand that the inflation sources are, in the main, not sensitive to rising interest rates anyway.
On May 12, 2022, just after the central bank increased rates by the largest amount in 22 years, the Federal Reserve boss spoke to the American Public Media program, Marketplace – Fed Chair Jerome Powell: “Whether we can execute a soft landing or not, it may actually depend on factors that we don’t control.
The title of the Interview tells all really.
What we can control is demand, we can’t really affect supply with our policies … And supply is a big part of the story here. But more than that, there are huge events, geopolitical events going on around the world, that are going to play a very important role in the economy in the next year or so. So the question whether we can execute a soft landing or not, it may actually depend on factors that we don’t control.
In other words, WTF!
As noted above, they cannot even control demand very closely.
He also claimed when asked about the prospects of recession and rising unemployment, that the “the one thing we really cannot do is to fail to restore price stability”.
So that comes ahead of peoples’ jobs.
So you can conclude that the US Federal Reserve is acting more like an agent for capital than being a responsible and accountable economic policy maker, the image that is portrayed by the likes of Blanchard.
Music – staying calm
This is what I have been listening to while working this morning.
I saw a movie last night – Man on Wire – which told the story of the French wire walker who walked between the twin towers of the World Trade centre while they were still erect.
It wasn’t much of a movie, the walker basically burned his friends who seemed devoted to his obsessive compulsion to show off at great heights.
But at one point, the background music was that of French composer and pianist – Erik Satie – who is a particular favourite of mine.
While the movie use the – Gymnopédies – written by from Erik Satie in 1888.
While appearing to be deceptively simple, are actually very complex pieces – getting the tempo correct and keeping it even – has teased me for some time. It is a very hard exercise.
It is very difficult to get the clear separation between the melody and the chordal accompaniment including getting the right pedal exactly coordinated with the bass notes.
That juxtaposition between sonic simplicity and technical complexity is why Erik Satie was a genius.
Here is the late Dutch pianist – Reinbert de Leeuw – who has made something of a career interpreting the work of Erik Satie, playing Gymnopédies 1 and 3.
Gymnopédies 1 shifts from D major to D minor, while Gymnopédies 3 is in A minor. Both are in 3/4 time.
Erik Satie also can be accorded the status of a post minimalist 100 years before its time. That is the way I see his compositions.
As an additional treat – here is the version by – Blood, Sweat and Tears – from their – Variations on a Theme by Erik Satie (1st and 2nd Movements) – which appeared on their second album from 1968.
Quite a contrast to the rest of that album.
That is enough for today!
(c) Copyright 2022 William Mitchell. All Rights Reserved.