skip to Main Content

Is exchange rate depreciation inflationary?

One of the first things that conservatives (and most economists which is typically a highly overlapping set) raise when Modern Monetary Theory (MMT) proponents suggest that increased deficits are essential to reduce mass unemployment is the so-called balance of payments constraint. Accordingly, we are told that the capacity of a nation to increase domestic employment is limited by the external sector. And these constraints have become more severe in this age of multinational firms with their global supply chains and the increased volume of global capital flows. I will address the specific issue of a balance of payments constraint on real GDP growth (that is, the limits of fiscal stimulus) in a future blog. But today I want to consider the so-called Exchange Rate Pass-Through (ERPT) effects of that are part of the balance of payments constraint story. The mainstream narrative goes like this. Higher wage demands associated with full employment and/or stronger imports associated with higher fiscal deficits lead to external imbalances due to rising imports and loss of competitiveness in international markets (eroding export potential). In a system of flexible exchange rates, the currency begins to lose value relative to all other currencies and the rising import prices (in terms of the local currency) are passed-through to the domestic price level – with accelerating inflation being the result. If governments persist in pursuing domestic full employment policies the domestic inflation worsens and the hyperinflation is the result, with a chronically depreciated currency. Real standards of living fall and a general malaise overwhelms the nation and its citizens. I am sure you have heard that narrative before – it is almost a constant noise coming from the deficit phobes. Like most of the conservative economic claims and I include the austerity-lite Leftist parties in this group, it turns out that reality is a bit different. Here is some discussion on that issue.

Read More

Overt Monetary Financing – again

Adair Turner has just released a new paper – The Case for Monetary Finance – An Essentially Political Issue – which he presented at the 16th Jacques Polak Annual Research Conference, hosted by the IMF in Washington on November 5-6, 2015. The New Yorker columnist John Cassidy decided to weigh into this topic in his recent article (November 23, 2015) – Printing Money. The topic is, of course, what we now call Overt Monetary Financing (OMF), which simply means that all of the unnecessary hoopla of governments matching their deficit spending with bond-issuance to the private bond markets, as if the latter are funding the former, is dispensed with. That artefact from the fixed exchange rate Bretton Woods system is maintained as a voluntary procedure by fiat-currency issuing governments but only provides financial assets to the non-government sector in the form of ‘corporate welfare’. The debt issuance of debt has nothing to do with funding the spending and is used by all and sundry to attack such spending for creating so-called ‘debt mountains’. OMF brings together the central bank and the treasury functions of government into a coherent framework whereby the central bank merely credits private bank accounts on behalf of the government to indicate the spending initiatives implemented by the Treasury.

Read More

Australian inflation trending down – where are all the gold bugs?

There was a time, in better days, that the evening news had news, sport and weather. Then, at some point, around the 1980s the national news started to host a Finance segment. Sometimes these segments are meagre reporting of what happened in the share markets. Even that benign news is symptomatic of the way neo-liberalism has infested our daily thinking and made the common folk feel part of the game that they are really can never be part of – wealth creation. At other times, the finance segments introduce economic theory and analysis as if it is news. Then the insidious nature of the neo-liberal propaganda machine becomes stark. But the starkness is lost on most because they think it is news and we have been led to believe that what gets pumped out at 19:00 on the national broadcaster (and other times by other broadcasters) are facts. Facts don’t lie do they? Well, when it comes to finance segments they are mostly lies.

Read More

Inflation benign in Australia with plenty of scope for fiscal expansion

A few weeks ago (April 8, 2015), I wrote a blog – Monetary policy is largely ineffective – which detailed why fiscal policy is a superior set of spending and taxation tools through which a national government can influence variations in activity in the real economy. In today’s blog I will consider two recent bits of evidence that reinforce that viewpoint. Today’s inflation data issued by the Australian Bureau of Statistics clearly indicates that there is plenty of scope for further interest rate cuts within the logic of the central bank’s inflation targetting strategy. But monetary policy is trapped in Australia at present between the need to expand the economy (for which it is largely ineffective) and the worry that further interest rates cuts will push housing prices up further. Second, economic activity is faltering and unemployment has risen because the Government refuses to take discretionary action to increase the fiscal deficit to support higher spending levels. They are firmly caught up in the neo-liberal obsession about the need for surpluses and where they are likely to make concessions is in tax cuts for high income earners – based on the so-called trickle down hypothesis. Some recent research from the US, however, demonstrates fairly categorically that tax changes at the top end of the income distribution have negligible effects on economic activity. This is in contradistinction to changes in disposable income at the bottom end. They are very powerful in terms of stimulating or undermining employment and output.

Read More

Australian inflation trending down – lower oil prices and subdued economy

Despite missing out on the recession associated with the GFC, Australia is now following the rest of the world down the decelerating inflation route. Yesterday, the Australian Bureau of Statistics released the Consumer Price Index, Australia – data for the December-quarter 2014 yesterday. The December-quarter inflation rate was 0.2 per cent which translated into an annual inflation rate of 1.7 per cent. Recall that the September-quarter inflation rate was 0.5 per cent and the annual rate was 2.3 per cent. The Reserve Bank of Australia’s preferred core inflation measures – the Weighted Median and Trimmed Mean – are now at the bottom end of their inflation targetting range (2 to 3 per cent) and are trending down. Various measures of inflationary expectations are also flat or falling, including the longer-term, market-based forecasts. This suggests that the RBA may consider that the major problem in the economy is declining growth and rising unemployment, especially in the context of China’s deliberate slowdown. The benign inflation outlook provides plenty of room for further fiscal stimulus.

Read More

Japan demonstrates the real limits on government spending

Last week, Reuters put out a story (October 30, 2014) – Special Report: Tsunami evacuees caught in $30 billion Japan money trap (thanks Scott Mc for the link) – which provides an excellent demonstration of the true limits of government spending in a currency-issuing nation. The underlying principles should be understood by all as part of their personal mission to expel all neo-liberal myths from their thinking and to help them see the nature of issues more clearly. Unfortunately, the application we will talk about is sad and has tragic human and environmental consequences, but that doesn’t reduce the relevance of the example for conceptual thinking. In a nutshell, the central Japanese government has transferred some $US50 billion worth of yen to the local government to combat the destruction caused by the tsunami in March 2011. Thirty billion is unspent despite people still living in temporary housing and suffering dramatic psychological trauma as a result. Why is this happening? Doesn’t Modern Monetary Theory (MMT) tell us that a currency-issuing government can spend what it likes? Well, not exactly. What MMT tells us is that a currency-issuing government can purchase whatever is for sale in its own currency and that propensity is limited by the availability of real resources. Here is a classic demonstration of the limits of government nominal spending.

Read More

Australia’s inflation rate falling on back of weak spending

The Australian Bureau of Statistics released the Consumer Price Index, Australia data for the September-quarter 2014 today. The quarterly inflation rate was 0.5 per cent (down from 0.6 per cent last quarter) and this translated into an annual rate of 2.3 per cent, down on the 3.0 per cent in the June-quarter 2014. The Reserve Bank of Australia’s preferred core inflation measures – the Weighted Median and Trimmed Mean – are still well within the inflation targetting range and are not trending up. Various measures of inflationary expectations are also flat, including the longer-term, market-based forecasts. This suggests that the RBA may consider that the major problem in the economy is declining growth and rising unemployment, especially in the context of China’s surprise slowdown announced yesterday, and may even cut rates before the year’s end. The evidence is suggesting that the economy is still very sluggish. The benign inflation outlook provides plenty of room for further fiscal stimulus.

Read More

Inflation rises on back of health fund price hikes – generally benign

The Australian Bureau of Statistics released the Consumer Price Index, Australia data for the June-2014 quarter today. The quarterly inflation rate was 0.6 per cent and this translated into an annual rate of 3 per cent, up on 2.9 per cent in the March-quarter 2014. The Reserve Bank of Australia’s preferred core inflation measures – the Weighted Median and Trimmed Mean – are still well within the inflation targetting range and are not trending up. Various measures of inflationary expectations is also flat, including the longer-term, market-based forecasts. This suggests that the RBA will probably consider the inflation outlook to be benign and they will probably hold interest rates at their current low level. The evidence is suggesting that the economy is still very sluggish. The benign inflation outlook provides plenty of room for further fiscal stimulus.

Read More

Australian inflation outlook – spikey but benign

The Australian Bureau of Statistics released the Consumer Price Index, Australia data for the September-2013 quarter today. The quarterly inflation rate was 1.2 per cent and this translated into an annual rate of 2.2 per cent, down on 2.4 per cent in the June-quarter 2013. The Reserve Bank of Australia’s preferred core inflation measures – the Weighted Median and Trimmed Mean – are now well within the inflation targetting range and are probably trending down. The RBA measure of inflationary expectations is also falling. This suggests that the RBA will probably consider the inflation outlook to be benign or “too low” and if the labour market continues to deteriorate (data for October out early November) then they will probably cut interest rates once before the holiday period. The evidence is suggesting that the economy is slowing under the weight of the previous federal government’s obsessive pursuit of a budget surplus and subdued private spending (particularly non-mining investment). The benign inflation outlook provides plenty of room for further fiscal stimulus.

Read More

Australian inflation outlook – plenty of scope for a needed fiscal boost

The Australian Bureau of Statistics released the Consumer Price Index, Australia data for the June-2013 quarter today. The quarterly inflation rate was 0.4 per cent and this translated into an annual rate of 2.4 per cent, down on 2.5 per cent in the March-quarter 2013. However, if we acknowledge the inflation spike in the September-quarter 2012, and consider the annual trend, the annual inflation rate is more like 1.6 per cent, which puts it well below the lower-bound of the RBA’s inflation targetting range (2 to 3 per cent). The Reserve Bank of Australia’s preferred core inflation measures – the Weighted Median and Trimmed Mean – are now well within the inflation targetting range and are probably trending down. This suggests that the RBA will probably consider the inflation outlook to be benign or “too low” and will instead have to shift their focus to the failing labour market, which in the last month showed signs of considerable deterioration after a flat 18months.The evidence is suggesting that the economy is slowing under the weight of the federal government’s obsessive pursuit of a budget surplus. The benign inflation outlook provides plenty of room for further fiscal stimulus.

Read More
Back To Top