Federal Reserve research paper kills another core New Keynesian idea about inflation expectations

The New York Times article (October 1, 2021, updated October 15, 2021) – Nobody Really Knows How the Economy Works. A Fed Paper Is the Latest Sign – reported on a paper by one Jeremy B. Rudd, who is a senior advisor in the Research and Statistics division at the Federal Reserve Bank in the US. The paper – Why Do We Think That Inflation Expectations Matter for Inflation? (And Should We?) – published as Finance and Economics Discussion Series 2021-062, by the Board of Governors of the Federal Reserve System, argues that a core aspect of New Keynesian macroeconomic orthodoxy “rests on extremely shaky foundations … and adhering to it uncritically could easily lead to serious policy errors.” The paper rejects the central notion in mainstream macro that the trajectory of inflation is driven by expectations. The idea that expectations are the key force has led central banks deliberately using the unemployed to fight an (imaginary) inflation threat. It has led fiscal authorities to pursue contractionary policies that have forced millions into unemployment. The Rudd paper is important because it shows the mainstream edifice is collapsing – it jettisons an other core concept. There is not much left in mainstream economics that hasn’t been rejected by evidence or exposed as being theoretically inconsistent.

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When ‘new’ is really old and doesn’t get us very far – latest BIS paper

It takes a while for the mainstream organisations in economics, banking and finance to start to realise that the framework they use cannot explain the actual events in the real world, without serious revision. The problem though, is that the overall framework is flawed and the typical ‘response to anomaly’ approach, which changes a few assumptions to get ‘novel results’ is inadequate because it leaves one blind to all the possible policy solutions. The latest example is the Bank of International Settlements paper – Indebted Demand (released October 19, 2021) – which was written by three economists from Princeton, Harvard and Chicago Booth, respectively. They now recognise that rising inequality and massive household debt is a major problem for economic growth and macroeconomic stability. But, in maintaining ‘conventional’ assumptions about the government sector, they miss the vital linkages in the story, that Modern Monetary Theory (MMT) economists have been providing for the last 25 or so years. Whether these responses to anomaly represent progress or different variations in a flawed ‘chess’ strategy is a matter of opinion. My thought is they are a largely a waste of time, although marginally, they demonstrate that elements of mainstream macro theory that were considered core elements a decade ago are no longer sustainable.

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The Weekend Quiz – October 23-24, 2021 – answers and discussion

Here are the answers with discussion for this Weekend’s Quiz. The information provided should help you work out why you missed a question or three! If you haven’t already done the Quiz from yesterday then have a go at it before you read the answers. I hope this helps you develop an understanding of Modern Monetary Theory (MMT) and its application to macroeconomic thinking. Comments as usual welcome, especially if I have made an error.

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Video of presentation for Wattle Partners – October 15, 2021

Last week, I did a seminar with a Melbourne financial market group (Wattle Partners), who I regularly help in their education programs. It took the form of an informal (somewhat structured) conversation about Modern Monetary Theory (MMT) and more practical applications of the MMT understanding. There were several questions from the audience that we didn’t get time to answer in the allotted time so today I am honouring my agreement to provide answers, which might be of interest to the broader readership, if only to reinforce knowledge. The video of the interaction is also available now and you can watch it here.

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Vaccine study suggests boosters will be required sooner rather than later

It is Wednesday and so just a few points today. I obviously like data as it tells me a lot about the world and often forces me to alter my views on things. While I mostly analyse economic and financial data, which is my professional skill, I also like to investigate other data sets on things that interest me. Today, I am looking into the vaccine question, which has been playing on my mind lately as the Australian political class, under pressure from all sorts of business lobby groups who fund their election campaigns, have been ‘opening up’ the economy (states and territories) despite high case numbers in some jurisdictions and despite relatively low vaccination rates. They have come up with a ‘Roadmap’ to ‘living with Covid’ (which will see many people die from Covid) and defined key thresholds in terms of average vaccination rates. The problem is the these thresholds are not very scientific at all and their semblance of ‘safety’ points is an illusion. In effect, the political class has abandoned their pretence to following health advice and are just going for it. It is a difficult period in our history.

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Marx’s dream does not justify ignoring day-to-day human suffering

One of the recurring criticisms I face when presenting at events comes from those who say they are ‘socialists’ or ‘Marxists’. They accuse me in various ways of being an apologist for capitalism, for offering palliative solutions to workers, which will delay the break down of the system and the revolution to socialism and communism. These critics proudly announce they follow Marx’s solutions and that they reject Modern Monetary Theory (MMT) because it is just a stooge for capitalism. The problem is that Marx had no real vision of how we would transit to Communism. A recent book referred to Marx’s philosophical position on this as a ‘dream’ (more later). And MMT is not specific to any mode of production, by which I mean, who owns the material means of production. It is applicable to any monetary system, and I cannot imagine any modern, technologically-based society functioning outside of that reality – socialist, capitalist or otherwise. But, moreover, the critics seem to be displaying a lack of basic humanity where they exercise reasoning that Noam Chomsky regularly refers to as belonging in a philosophy seminar. Even progressives (and socialists) have to be aware of humanity – as they plot and scheme for the revolution.

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Latest US quits behaviour signals possible shift in power to workers

The US Bureau of Labor Statistics published the latest JOLTs data last week (October 12, 2021) – Job Openings and Labor Turnover Summary – August 2021 – which has raised a possible shift in bargaining power in the US labour market towards workers. The most obvious sign of that is the rising quit rates, which are most prevalent in the low-wage sectors. While there is still some slack in the US labour market, the evidence suggests that workers are taking advantage of the improved job opportunities to pursue better wages and conditions. We will have to wait and see whether there are any significant wage outcomes arising from this behaviour or whether workers are just jumping from very bad to bad jobs. Time will tell.

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The Weekend Quiz – October 16-17, 2021 – answers and discussion

Here are the answers with discussion for this Weekend’s Quiz. The information provided should help you work out why you missed a question or three! If you haven’t already done the Quiz from yesterday then have a go at it before you read the answers. I hope this helps you develop an understanding of Modern Monetary Theory (MMT) and its application to macroeconomic thinking. Comments as usual welcome, especially if I have made an error.

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