I read an article in the Financial Times earlier this week (September 23, 2023) -…
There is no doubt that the on-going pandemic has left a trail of economic problems including major supply constraints, the growing problem of long Covid and other issues that are challenging policy makers. They have been exacerbated by the behaviour of OPEC+ and the Ukraine situation. We now have a period of inflation, real wage cuts and most central banks doing their best to make matters worse. However, we now have a phenomenon that goes like this. In the UK, everything ‘bad’ that arises is apparently because of Brexit even if the trends were there before the move or the problems are being shared across all countries. I imagine even if the English cricket team loses it is because of Brexit. This phenomenon has generalised however. Now, we have the claim that all bad economic news is because governments ‘followed’ MMT or something akin to it. Those who are insecure about MMT because it does better at explaining the real world than the mainstream theories are the same as the Remainers who predicted that the British economy would crash badly in 2017 and then every year after that. To soothe their worried souls they consider any ‘bad’ news to be because of ‘MMT’ or in the case of Britain because of Brexit. Neither proposition has any foundation.
MMT hate hysteria – a sign of deep insecurity
There is this character Robin Brooks, who works for the important sounding Institute of International Finance, who cannot stop tweeting and writing about the ‘death of MMT’.
He is ex-IMF, Goldman Sachs etc.
The IIS is a peak body of the ‘financial industry’ and advocates to advance the interests of that lot, including financial market deregulation etc.
Basically, anything that makes more money for the hedge funds will fit into their remit.
The most ridiculous recent ‘contribution’ (used as a null) was published in the Financial Times article (November 4, 2022) – RIP MMT – IIF – complete with gravestone “Modern Monetary Theory 2013-2022 Rest in Peace”.
The author and commentators attributed in the article obviously haven’t read much because to them MMT was ‘born’ in 2013.
We started working on this project together in 1995!
The IIS meanwhile has announced the death of MMT after several years of carping about our work with little but more carping to back them up.
In other words, vacuous, self-aggrandising tweets that say things like ‘see Japan has seen a depreciating yen, MMT must be wrong’.
Any trend they interpret – rightly or wrongly – as a retrograde development – is tied in with the conclusion – MMT must be wrong!
Brooks carries on like relentlessly, and, in doing so, reveals how insecure he is about our work.
The FT article basically gives Brooks another platform to push his bile and supplements extensive quotes from him with the usual inflammatory language such as:
1. “government debt kept ballooning around the world” – what does ballooning actually mean – rose? Why not just say government debt has increased.
To which I would say, generally, so what?
2. “even as long-term interest rates kept sagging lower and lower and inflation remained comatose” – how is ‘sagging’ indicative of declining.
Then they started quoting Brooks who opined that:
The illusion of limitless fiscal space has ended abruptly in recent months …
And claiming that “the UK omnishambles as an example of how the market’s patience is not inexhaustible”.
And then realising that Japan has been much more capable of resisting the neoliberal pressure to increase rates and cut fiscal deficits (even though the two don’t seem to go together (much to the ‘surprise’ of the New Keynesian advocates of such a move), Brooks concludes that its currency has been “collapsing”.
‘Collapsing’ is a rather catastrophic state one would think – but these guys are not short on the hubris and linguistic overreach.
The US Federal Reserve started increasing interest rates on March 17, 2022 and 6 increments later has increased the rate from 0.25 per cent to 0.5 per cent up to 3.75 per cent to 4 per cent.
Over that time, most of the major currencies have depreciated significantly as the following Table shows:
|Currency||Depreciation (%)||Interest Rate Change (points)|
|Euro – USD||13.4||2.25|
|AUD – USD||13.42||2.25|
|£ – USD||12.1||2.9|
|Yen – USD||24.7||0.0|
So the depreciation against the US dollar is of a similar magnitude for advanced countries with similar rate hikes relative to the US Federal Reserve hikes.
Japan has experienced a larger depreciation but has held the same policy interest rate throughout.
I ran a rather simple statistical routine to predict what would be the depreciation expected for Japan (with the largest interest rate differential against the US) based on the scale of depreciation and interest rate differentials against the US rate for various other nations. I controlled for energy export status.
The answer: about the scale of the depreciation that Japan has experienced!
So nothing to see really.
Is that a sign Japan’s currency has collapsed?
The Bank of Japan and the Cabinet Office certainly don’t think so.
They understand that the depreciation has been relatively controlled and consistent with the experience of all oil importing nations as the US interest rates have moved up.
And when comparing these nations it would be hard to find a simple story that satisfies Brooks’ penchant for blaming MMT thinking.
If anything the depreciating currencies are a result of the dependency on imported oil, scaled by how far the respective central banks have reduced the scope for investors to shift to the higher returns in the USD.
You can also see how mindless the Brooks-association of the exchange rate depreciation in Japan with the end of MMT is when you examine this analysis from the ECB – Mind the step: calibrating monetary policy in a volatile environment – (which provides graphs from a speech made by Fabio Panetta, a Member of the ECB Board on November 3, 2022).
The following graph appears as “Chart 3 Drivers of the euro-US dollar exchange rate” in the slides that Panetta spoke to.
The overwhelming driver of the euro-USD depreciation has been the US Federal Reserve’s rather manic interest rate hikes on top of the deteriorating commodity terms of trade arising from a shift to higher priced energy exports at the expense of energy importers such as the European nations.
You will die trying to find anything in the MMT literature that claims these trends will not impact on exchange rates.
Of course, these shifts in interest rates and terms of trade will work against some currencies in favour of others.
The Bank of Japan has been intervening in the foreign exchange market recently but only to smooth the volatility in the currency rather than worry about the level.
The Japanese government knows that its Real Effective Exchange Rate (REER) – which measures how internationally competitive a country is has fallen and given a massive boost to its export strength.
It has declined by 11.2 per cent since March 2022.
For an exporting nation, that is highly significant.
Brooks was quoted as saying:
… the fact that YCC has pegged Japan’s yields at low levels has meant that rate differentials moved sharply against Japan, sending the Yen into an unprecedented devaluation spiral. This illustrates that a central bank can suppress the fiscal risk premium in the bond market, but – if it does that – the risk premium just shows up in currency devaluation.
It just says that sometimes exchange rates will depreciate if there are no capital controls and funds shift to higher interest rate assets in other countries.
What that tell us about Modern Monetary Theory (MMT) and fiscal space?
Nothing at all.
There is nothing that anyone could ever find in our writing that says that currencies will not depreciate.
There is nothing that says that there will not be currency flows shifting when interest rate differentials shift.
Does it mean that the Japanese government has run out of the capacity to use fiscal policy to maintain low unemployment?
And the Japanese government has just announced another major stimulus and will ride on the back of the boost to exports as a result of the decline in the REER.
Brooks is wrong if he thinks the Japanese government have suddenly been forced to shift to a position of fiscal rectitude and will suddenly impose austerity.
They understand their fiscal space has nothing to do with their public debt levels or other financial aggregates.
They know if they harness productive resources with net spending then there is fiscal space, quite independent of what the bond investors think.
If Brooks wwas right there should be raging inflation in Japan and rising unemployment.
Quite the opposite is the case.
The day before the FT article was published, the Australian Financial Review published an article that claimed that Modern Monetary Theory (MMT) was effectively dead as well.
The article – To advance Australia, ignore Rod Sims (behind a pay wall and not worth paying a cent to read) -is one of the most preposterous representations of our work.
We get gems such as:
1. “Voters should elect politicians prepared to make tough decisions, and ignore experts offering easy solutions” – so he cannot be talking about my work (that is, MMT) because there is nothing easy about the solutions I propose based on my MMT understanding.
2. “A couple of years ago, an economic approach called modern monetary theory got some traction in the Australian media … MMT offered the easiest of solutions to the hardest of problems. Money could be created, almost at will, to fund government spending, without stimulating inflation”.
This is the problem of providing a public platform to someone with limited knowledge and an inability to know they have limited knowledge.
MMT is founded on the notion that all nominal spending carries an inflation risk and effectively the inflation ceiling represents the limit on government net spending because in most situations – that is, where tight supply constraints are not binding as they are now – without exhausting the productive capacity of the economy to response with extra production rather than by raising prices.
To suggest otherwise renders the author (some character named Aaron Patrick) either dishonest, stupid or asleep.
3. Apparently “both sides of politics dismissed the theory as a dangerous fantasy. It quickly departed the public debate”.
Well I am still around as are other MMT colleagues – debating just as hard as we have for the last 25 years.
And after an extended diatribe about the virtues of unfettered competition, the author decides that:
Modern monetary theory, in different forms, is everywhere.
Which seemed curious given that a few hundred words previously he had dismissed MMT and concluded it had “quickly departed the public debate”.
Consistency and continuity of thought is apparently a bit difficult for these characters.
And I would love to know what all the “different forms” of MMT are.
I am aware of just one body of thought – that which Warren Mosler, Randy Wray and yours truly set about creating 25 years ago and remains coherent and consistent.
It also remains very congruent with the current data movements.
All of this stuff is like the Brexit story in the UK.
Those who are insecure about MMT because it does better at explaining the real world than the mainstream theories are the same as the Remainers who predicted that the British economy would crash badly in 2017 and then every year after that.
To soothe their worried souls they consider any ‘bad’ news to be because of ‘MMT’ or in the case of Britain because of Brexit.
Neither proposition has any foundation.
And let me assure you, MMT is not going anywhere.
We are still researching, refining, educating.
Paradigm shift is slow.
I am patient by nature.
Skills shortages update
On October 6, 2022, the National Skills Commission published the – 2022 Skills Priority List – Key Findings Report.
“The National Skills Commission (NSC) provides expert advice and national leadership on Australia’s labour market and current, emerging and future workforce skills needs.”
Section 1.2 is entitled “A tight labour market has implications for skill shortages”.
An important conclusion is that a tightening labour market will generally indicate that employers will increasingly compete for workers, resulting in a greater number of occupations in shortage as employers are unable to fill advertised vacancies.
Okay, they got that out of a Microeconomics 101 textbook.
And if they had have then read the next paragraph in the same text, they might have reported something along the lines of ’employers will start to offer higher wage bids in the labour market in order to attract labour resources into their workplaces’.
The Report goes on to detail what they claim are skill shortages although vacancy to unemployed ratio is still above 1 – which means there are more workers unemployed than unfilled vacancies.
But apparently surveys find employers saying they cannot fill their vacancies with suitable workers.
One problem, which I have written about previously, is that the employers’ definition of suitability includes their own prejudices – which might be racially, gender, age, or other related.
The second issue is whether they have actually tried to find suitable workers.
In a tight labour market, an important signal to attract workers is the wages offered.
What does the NSC research reveal about that?
As well as publishing a long list of occupations allegedly in short labour supply, they produced this graphic (Figure 5).
In common language the right expression is – go figure!
Of the employers claiming that they cannot attract labour only 0.4 per cent of them had offered a “Change remuneration”.
They are big on rhetoric when the media has a microphone or camera in their faces but when it comes to the most obvious strategy when the usually recruitment methods fail (like advertising), the most obvious thing is to offer higher wages.
The fact they are not prepared to do that tell us a lot about the veracity of their narratives and their claims they want to support a higher wage economy.
Yeh, all the way to bank their profits!
That is enough for today!
(c) Copyright 2022 William Mitchell. All Rights Reserved.