During the GFC, a new phenomenon emerged – the ‘We knew it all along’ syndrome, which was characterised my several mainstream New Keynesian macroeconomists coming out and claiming that some of the insights provided by Modern Monetary Theory (MMT) economists were banal and that their own theoretical framework already accommodates them. The pandemic has brought a further rush of the ‘We knew it all along’ syndrome. Apparently, mainstream macroeconomics is perfectly capable of explaining the fiscal reality the world has found itself in and there is no need to MMT, which, by assertion, is saying nothing new. These sorts of statements are not coming from Facebook or Twitter heroes who might have done a few units in economics or even acquired a degree in the discipline. They are coming from senior professors in the academy. The curious thing, which really lifts their cover, is that if you examine the academic literature you won’t find much reference to these sorts of ‘insights’ at all. What you find, and what students are taught, are a completely different set of propositions with respect to fiscal policy. So if they ‘knew it all along’ why didn’t they ever write about it? Why is their published academic work replete with conclusions that run contrary to the conclusions MMT economists make? You know the answer. These ‘knew it all along’ characters have just been caught out by the poor empirical performance of their paradigm and now they are trying to salvage their reputations and position by trying to blur history. They really should be sacked.
Last year, the US Federal Reserve dropped a bombshell on mainstream macroeconomics by abandoning the consensus approach to monetary policy, which prioritised fighting inflation over maintaining low levels of unemployment, and, increasing interest rates well before any defined inflationary pressures were realised – the so-called forward guidance approach. It has also been buying massive quantities of US government debt and controlling bond yields in the markets as a result. Attention has been on the ECB to see where it would pivot too and whether it was going to abandon its own massive government bond buying program any time soon, which has been effectively funding the fiscal deficits of the 19 Member-States of the Eurozone. Recent statements have indicated the QE programs in Europe will not be ending any time soon. And an ECB Board member all but tied the scale of the purchasing programs to the size of the fiscal deficits as a guide to how long and how large the QE interventions would be.
One could make a pastime observing the way that so-called ‘expert’ commentators change their commentary as the data unfolds. As one rather lurid prediction fails, their narrative shifts to the next. We have seen this tendency for decades when we consider the way mainstream economists have dealt with Japan. The words shift from those implying immediacy (for example, of insolvency), to those such as ‘could’, ‘might’, ‘perhaps’, ‘under certain conditions’ and more. The topics shift. The commentariat were obsessed with ‘this time is different’ during the GFC and the ‘debt insolvency threshold’ rubbish that the likes of Reinhardt and Rogoff propagated. That is, until they were sprung for spreadsheet incompetence. More recently, we have apparently forgotten how many governments were about to go broke and the mania has shifted to inflation. The data shows some price spikes earlier in the year which set of the dogs. Now, things might be shifting again. It is a pastime following all this. Short memories, no shame is the only requirement that is required to be a mainstream economics commentator. Prescient knowledge is not included in that skill set.
Today, my on-going inflation watch turns to Australia, given the release today (July 28, 2021) of the latest – Consumer Price Index, Australia – for the June-quarter 2021. The data is consistent with what we are seeing across many nations as supply chains are disrupted by the pandemic. Energy prices are adjusting back upwards and because the base from which we are judging these quarterly rises was lower as a result of price suppression during the downturn, the recovery in the pre-pandemic price levels deliver larger than usual price increases (when the base is higher). In Australia’s case, a major recent flood and a long drought before that have also complicated matters by driving up food prices. All these impacts are transitory. The CPI rose by 0.8 per cent in the June-quarter 2021 and over the 12-months to June 2021 it rose 3.8 per cent. But the key to understanding the trends in the data is to appreciate that the less volatile series were still rising at rates below the RBAs inflation targetting range – the Trimmed Mean rose just 0.5 per cent and the Weighted Median rose 0.5 per cent. So nothing to see here. The most reliable measure of inflationary expectations are flat and below the RBA’s target policy range.
It’s Wednesday and I have been tied up most of the day with commitments. So we will have to be content today with a couple of snippets. The first about the on-going inflation mania and the way in which the ECB seems oblivious to it. The second about the gross incompetence of the Australia government, who has put the health of the nation at risk and forced state governments to invoke rolling lockdowns as only a small number of us are vaccinated and cases keep seeping out of a flawed quarantine system (the latter being the federal responsibility). And once the anger subsides from that little discussion, we have the usual Wednesday music offering to restore peace.
On November 11, 2020, the Australian Bureau of Statistics published a very interesting new experimental dataset – Non-Discretionary and Discretionary Inflation – which was derived from the standard Consumer Price Index data. It provided us with new insights and a richer knowledge of the impacts of inflation, particularly in distributional terms. Last month (May 25, 2021), the ABS published a followup article – Measuring Non-discretionary and Discretionary Inflation – which summarised some of the key findings. After receiving feedback, the ABS has refined the data series and will publish them on an on-going basis from the September-quarter 2021 as part of the “regular quarterly CPI release”. This new approach to measuring inflation will help us considerably assess the implication of wage movements on the real living standards of Australian workers.
In my daily data life, I check out movements in commodity prices just to see what is going on. As I wrote recently in my UK Guardian article (June 7, 2021) – Price rises should be short-lived – so let’s not resurrect inflation as a bogeyman – the inflation hysteria has really set in. I provided more detail in this blog post – Price rises should be short-lived – so let’s not resurrect inflation as a bogeyman (June 9, 2021). Yes, I stole the title of my article for the blog post if you are confused. The inflation hysteria really reflects the fact that mainstream economists are ‘lost at sea’ at present given the dissonance between the real world data and the errant predictions from their economic framework. They cannot really understand what is happening so when they see a graph rising it must be inflation and that soothes them because rising deficits and central bank bond purchases have to be inflationary according to their perverted theoretical logic. The financial market press then just repeats the nonsense with very little scrutiny. But given many graphs are falling again, this Pavlovian-type response behaviour must be really doing their heads in. I have no sympathy.
It’s Wednesday and I am somewhat besieged. So just a few reflections today before we delve into our latest music offering. I had an Op Ed published in the UK Guardian today (my time) which analysed the latest inflation scares that have been dominating the popular media. More and more mainstream macroeconomists are coming out and asserting that economies will overheat. The usual gold bugs have been delighted by this shift in the narrative back to the obsessions and manias that keep them occupied on a daily basis. What was interesting to me was the responses of the commentators to the Guardian Op Ed. If the sentiments expressed represent the state of macroeconomic knowledge (presumably mostly in the UK) then we have a long way to go before Modern Monetary Theory (MMT) and the sensible policies that it might inform gain any serious traction. Given the GFC, the stagnation in the aftermath, 30 years of Japanese history, the pandemic, which have all combined to demonstrate why the mainstream approach is dysfunctional and provides no guidance to what might happen in the real world, the commentators continued to rehearse these failed ideas about inflation, interest rates, bond markets etc. Quite dispiriting.
Everybody is concerned with ‘herd immunity’ at present as the pandemic continues on ravaging our social and economic lives. But I have been studying the concept of ‘herd mentality’ for some years, aka – Groupthink. Mainstream macroeconomics is sustained, not by any internal logical consistency (on which it fails), by close congruency with the empirical data (on which it fails), which are the usual qualities of a dominant system of ideas, but, rather, by (using modern terminology) its long-standing and on-going cancel culture. So it is rather amusing to read one of the leading voices in that paradigm, Kenneth ‘Spreadsheet’ Rogoff, whinging on the Internet that ‘cancel culture’ is being used to undermine the reputations of one of his mates (Larry Summers). Both continue to get platforms in the world media without trouble to push their vapid ideas into the narrative. The antithesis of cancel culture it would seem. What is going on is that more people are realising that the prognostications of mainstream macroeconomics are deeply flawed, and, while many may not know the technicalities and the theoretical complexities, they can see the empirical dissonance, and that means they know a – lemon – when they see one. And social media has given more people a voice and they are using that to call these characters out for what they are. And the sense of invulnerability that pervades all disciplines riddled with Groupthink is being questioned.
The other day I gave a talk to the ‘investment’ community in Melbourne and they wanted to talk a lot about inflation, which seems to be their foremost concern at the moment. Tomorrow, I am giving a similar presentation in Sydney and I expect a similar line of questioning. Think about it. Wages growth is projected to be so low over the next several years that real wages will decline for at least 3 to 4 years. The Output gaps are still significant and were significant even before the pandemic. Households were already cutting back consumption spending growth, given record levels of indebtedness and no prospect of wages growth. Where pray tell are the inflationary pressures going to come from? I also keep reading of similar fears from economists and central bankers. The latest I saw came from Britain, where the outgoing chief economist from the Bank of England started beating on the inflation drum. There are some areas of our economies that will experience price pressures in the coming period given the disruptions in supply and various administrative pricing decisions by governments (reversing pandemic assistance in areas like rents, energy, child care etc). But these pressures in some segments of the economy are unlikely to instigate a major shift to high generalised inflation rates because the capacity of workers to defend their real wages is diminished now. Fiscal policy has a long way to go yet in reducing unemployment and underemployment from their elevated levels before that capacity becomes functional again.