William Mitchell – Modern Monetary Theory – Page 15 – Macroeconomic research, teaching and advocacy

US labour market – ‘steady as she goes’

Last Friday (August 4, 2023), the US Bureau of Labor Statistics (BLS) released their latest labour market data – Employment Situation Summary – July 2023 – indicated a rather ‘steady as she goes’ outcome. A slightly weaker employment outlook compared to the beginning of 2023 but overall a very stable situation. There is no sign of recession and no sign that the misguided Federal Reserve interest rate rises are causing rises in unemployment. More evidence that monetary policy is not an effective tool.

No change in monetary easing from Bank of Japan until wages growth increases

The media and the phalanx of mainstream economists from banks etc, the latter of which have a vested interest in interest rates rising in Japan for various reasons, are constantly predicting that the Bank of Japan will relent to the ‘market pressure’ and reverse its current monetary policy stance and fall in line with the majority of central banks. While the concept of ‘market pressure’ is held out as some economic process – something inevitable to do with basic fundamentals governing resource supply and demand – it is really, in this context, just gambling positions that speculators have taken in the hope that the Bank will relent and reward their bets with stupendous profits. So last week, the Bank of Japan announced that it was changing its policy towards Yield Curve Control (YCC), which set the cat among the pigeons again. This is what it was all about.

Ratings downgrade on US government debt is as ridiculous as it is meaningless

It’s Wednesday and there are a few topics that warrant some comment. But at the top of the topics were headlines this morning shouting out that the US treasury bonds had been downgraded by one of those self-serving credit rating agencies, as if it was an event worthy of some import. The journalists obviously do not understand anything if they think that decision was important. The ratings downgrade on US government debt is meaningless and the rating agency involved just wants to boost its revenue by sounding important. After I explain all that we will have a quiet musical reflection to finish the day.

July 31, 2023
bill
Inflation
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On Friday (July 29, 2023), the Australian Bureau of Statistics released the latest – Retail Trade, Australia – data, which showed that total retail turnover fell by 0.8 per cent in June 2023 and was up 2.3 per cent on June 2022. In May 2023, it was up 4.1 per cent. So things have slowed. Almost all the components (Household goods, Clothing etc, Department stores, Cafes etc) were down on the month. The ABS noted that despite the massive EOFY sales, “retail turnover fell sharply … as cost-of-living pressures continued to weight on consumer spending”. By way of contrast, in the US the June data from the US Census Bureau – Advance Monthly Sales for Retail and Food Services (released July 18, 2023) – shows up 0.2 per cent in June. Moroever, the latest University of Michigan Survey of Consumer Sentiment results – Improving personal finances, business conditions lift consumer sentiment (released July 28, 2023) – reveal a sharp increase in consumer sentiment in the US. But there was a twist, which is the point of this post. The Survey reported “the material improvement in the economic experiences of consumers relative to the peak of high inflation last year … with the notable exception of lower-income consumers, who anticipate continued challenges from inflation and a potential weakening in labor market prospects.” What we will discuss today is that central bankers are effectively intent on increasing poverty in their societies. And, whichever way one looks at it, relying on such a pernicious policy tool – one that deliberately seeks to increase poverty – is not a sound basis for achieving social stability. And, and as inflation has been falling anyway, despite the hikes, the negative distributional impacts should militate against using such a nasty and inefficient instrument.

July 28, 2023
bill
Podcast
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Episode 12 of my – Podcast – Letter from The Cape – is now available.

The Bank of England ‘losses’ are meaningless and should never be used to justify fiscal austerity

We really get to see how absurd humanity can be when put in a neoliberal ideological straitjacket when we see serious discussion by serious and educated people about the government paying itself back for losses it makes by loaning itself currency that it issues as a monopolist. They conduct these conversations through the lens of complicated accounting structures that try to obscure what is actually going on and then invite political commentary from others that have no real idea of what is going on yet feel empowered or arrogant enough to offer all sorts of catastrophic scenarios about the consequences of what is essentially nothing at all. Once one sees through the nonsense it becomes clear that these ruses are just smokescreens for conservatives trying to cut fiscal spending and damage the prospects for those most in need of government support.

Australia’s inflation rate continues to fall despite RBA inflationary rate hikes

Today (July 26, 2023), the Australian Bureau of Statistics released the latest – Consumer Price Index, Australia – for the June-quarter 2023. It showed that the CPI rose 0.8 per cent in the quarter (down 0.6 points) and over the 12 months by 6.1 per cent (down 0.9 points). The annual inflation rate in Australia was significantly lower again in the June-quarter as the supply-side drivers abate. This was always going to be a transitory adjustment phase after the massive disruption from Covid and the exacerbating factors associated with the Ukraine situation and the OPEC price gouge. There was never any justification for the RBA pushing up interest rates. The correct policy response should have been to provide fiscal support for lower-income households to help them cope with the cost of living rises and wait for the adjustment after the disruption to come. The approach taken by the Bank of Japan and the Japanese government was the correct one and that is now clear even though the mainstream economists still cannot see past their textbooks.

Mainstream logic should conclude the Australian unemployment rate is above the NAIRU not below it as the RBA claims

Let’s put ourselves in the shoes of a mainstream New Keynesian economist for a moment. We would never want to walk in them for long because our self esteem would plummet as we realised what frauds we were. But suspend judgement for a while because to understand what is wrong with the current domination of macroeconomic policy by interest rate adjustments one has to appreciate the underlying theory that is guiding the central bank policy shifts. The New Keynesian NAIRU concept, which stems from work published in 1975 by Franco Modigliani and Lucas Papademos is pretty straightforward. Accordingly, they define an unemployment rate, above which inflation falls and below which inflation rises. So that unique rate (or range of rates to cater for uncertainty of measurement) is the stable inflation rate – where inflation neither falls or rises. They called it the NIRU (“the noninflationary rate of unemployment”). So if the unemployment rate had been stable for some period, yet inflation was continuously declining, then they would conclude that the stable unemployment rate must be ABOVE the NIRU and vice versa. Apply that logic to Australia at present and you will see why the RBA’s claim that the NAIRU (the modern term for the NIRU) is around 4.5 per cent and this is why they are hiking rates in order to stabilise inflation at the higher unemployment rate. They are frauds.

July 20, 2023
bill
Labour Force
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The Australian Bureau of Statistics (ABS) released of the latest labour force data today (June 15, 2023) – Labour Force, Australia – for June 2023. The June result presents a relatively stable picture with moderate employment growth keeping pace with the underlying population growth and the unemployment rate being largely unchanged (a slight drop in rounding). The only negative is that participation fell by 0.1 point but that may just be monthly variance. We should realise though that there are still 9.9 per cent of the available and willing working age population who are being wasted in one way or another – either unemployed or underemployed. That extent of idle labour means Australia is not really close to full employment despite the claims by the mainstream commentators. As I note below, the stability of the unemployment rate at around 3.5 per cent coupled with the rather sharp declines in the inflation rate indicate that the RBA claims that unemployment must rise to bring inflation down is spurious. Their so-called estimate of the NAIRU at 4.5 per cent should mean that inflation is still accelerating given the actual unemployment rate of 3.5 per cent. Exactly the opposite is occurring.

RBA interest rate rises are inflationary and neoliberal privatisations have reinforced that

Modern Monetary Theory (MMT) economists have argued from the outset that using interest rate rises to subdue inflationary pressures may in fact add to those pressures through their impact on business costs. Businesses with outstanding trade credit or overdrafts will use their market power to pass the higher borrowing costs on to consumers. In more recent times, we have seen other mechanisms through which central bank rate hikes actually add to inflation. Regular readers will know that I have been discussing how landlords have been passing on higher mortgage costs in tight rental markets, which then creates a vicious cycle – interest rates up, rental costs up, CPI up because rents are a significant component, inflation rises, interest rates rise. Repeat. The tight rental markets are in part, a consequence of the neoliberal austerity bias, which has seen governments seriously underinvest in social (low income) housing. In recent days, we have witnessed another conflation of neoliberalism and destructive policy insanity. Earlier this month, Australians received messages from the companies that provide them with electricity announcing that the Australian Energy Regulator (AER) had approved price rises of between 19.6 per cent and 24.9 per cent in various East coast states. How did that happen, especially as world coal prices are dropping rapidly and are now below the pre-pandemic levels? And how does the bias towards monetary policy exacerbate this situation?