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More evidence that the current inflation is ephemeral

When I am asked whether I still consider the recent bout of inflation to be transitory, I say that transitory means as long as the pandemic disrupts the balance between supply and demand. Note: demand. I have been getting lots of E-mails telling me that Modern Monetary Theory (MMT) is a fraud because of the inflation spike and our denial of the demand (spending) involvement. Apparently, the data shows that large fiscal deficits and central bank bond-buying programs are always inflationary. Good try. I last provided data and analysis of this issue in this blog post – Central banks are resisting the inflation panic hype from the financial markets – and we are better off as a result (December 13, 2021) – where I made it clear that the spikes are a unique coincidence between abnormal, pandemic-related demand and supply patterns. That couldn’t be clearer. And when that sort of imbalance occurs, with the addition of cartel-type price gouging (which has nothing to do with fiscal or monetary policy settings) then MMT predicts a nation will encounter inflationary pressures. The idea that the economy is defined by periods below full capacity when there will be no inflation and beyond full capacity when there will be inflation is not part of the MMT body of knowledge. It is more complicated than that dichotomy which we address in our textbook – Macroeconomics. Supporting this view, is a recent ECB research paper, which uses fairly advanced econometric techniques to decompose one measure of inflationary expectations in a component that reflects short-term risk and another that reflects longer term inflationary expectations. They find the former is driving the current inflation trajectory while the latter is largely stable. That means, in English, that the current inflation is likely to be of an ephemeral nature driven by how long the pandemic interrupts supply chains.

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When ABC journalists mislead the public and spread fiction

There is a difference between a journalist reporting news about economics and money and a journalist writing an opinion piece. In the first instance, the responsibility of the journalist is to ensure they cover the topic in a balanced way, seeking input from all viewpoints if the topic is controversial, as most topics in economics are. Too often journalists in this situation allow themselves to be used as mouthpieces for specific viewpoints, sometimes because they are coerced by editorial deadlines. Often they just uncritically summarise press releases put out by some group or another and represent the material as fact. In the second case, when a journalist is writing an analytical piece they are holding themselves out as experts. Then they better get it right. Usually, when they are writing about macroeconomics they do not get it right because they merely rehearse mainstream thinking, which most people by now should realise is off the mark. A case in point was a recent Op Ed (represented as analysis) published by the economics reporter at the ABC (January 10, 2022) – How the banks may profit from the taxpayer as COVID quantitative easing winds down. It is full of errors that journalists make when they don’t exactly understand the material they are dealing with. This should have been worked out during the GFC, when these issues arose in the general media. The fact that the same errors are being made more than a decade later doesn’t suggest any learning has taken place.

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German threats of exit rely on the ignorance of others reinforced by Europhile progressives

I read a story in the German press – Der Euro auf dem Prüfstand (‘The euro on the test bench’, published January 7, 2022) – which reinforced my view that progressives who think the harsh austerity-bias of the Economic and Monetary Union (EMU) have vanished with the invocation of the ‘general escape clause’ within Article 126 of the Treaty of the Functioning of the European Union when the pandemic arrived are off the mark. And when the same commentators/thinkers welcomed the end of the Merkel era and the dawning of the new German government, their assessment reflected that they are trapped within the TINA to the euro thought process. Well, economists with influence in Germany certainly don’t think that and one of the bosses of the Kiel Instituts für Weltwirtschaft (IfW) (Kiel Institute for the World Economy), which is a German research institute, has called for the topic of German exit from the EMU to be debated. He believes that this will put pressure on the other Member States (particularly the so-called “Achse Paris-Rom” (Paris-Rome axis) to abandon any thought of relaxing the economic and monetary rules and force the ECB to tighten monetary policy again. The iron gauntlet of ‘schwarze Null’ is still firmly gripping the European debate.

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Australia is becoming an Orwellian dystopia

It’s Wednesday and I am retaining my practice into 2022 of only offering a sort of short commentary or news with music service on this day, unless a major data release (like the national accounts) comes out. The title of this blog post was inspired by an interview I listened to on the radio the other day with a leading epidemiologist who noted Australia was becoming like some Orwellian dystopia as the national government elevates spin to new levels and effectively jettisons any semblance of leadership. We are now being treated as fools by our national and state governments on a daily basis and it is now approaching dangerous levels.

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The Japanese denial story – Part 2

Here is Part 2 of my analysis of the claim that Japan is not a good demonstration of what happens when macroeconomic policies are pushed beyond their usual limits. I have long argued that trying to apply a mainstream macroeconomics (New Keynesian) framework to the Japanese situation yields nonsensical predictions about rising interest rates, accelerating inflation, rising bond yields and government insolvency. Nothing like that scenario has emerged since Japan has introduced economic policies that ran counter to the mainstream consensus since the 1990s. Japan demonstrates key Modern Monetary Theory (MMT) principles and those that seek to deny that are really forced to invent a parallel-universe version of MMT to make their case. That version is meaningless. In Part 2, we extend that analysis to consider trade transactions, the fear of inflation, and the argument that the current generation are selfishly leaving their children higher tax burdens while we party on.

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The Japanese denial story – Part 1

Well, it’s 2022 already and we enter the 18th year of this blog. Regular readers will know that I have studied the Japanese economy in considerable detail over the course of my career and when it experienced one of the largest commercial asset price bubble busts in history in early 1992, the questions I was asking and the data I was looking out were important in framing the way I have done macroeconomics since. I consider Japan to be one of the nations that was early to embrace the madness of neoliberalism – credit binge, wild property speculation then crash – and the first nation to abandon it in favour of more responsible fiscal policy – which given the circumstances required on-going fiscal deficits exceeding 10 per cent of GDP at times. Its policy approach – including the relatively high deficits, the zero interest rate policy of the Bank of Japan, and then the massive bond-buying program by the same, became the target for various New Keynesian macroeconomists (including Krugman) to prophesise doom. Their textbook models predicted the worst – rising interest rates, accelerating inflation, rising bond yields and then government insolvency as bond markets bailed out and the currency plummetted. Nothing like that scenario emerged. Japan was playing out policies that ran counter to the mainstream consensus in the 1990s and beyond and I learned so much from understanding why things happened there as a consequence. This is Part 1 of a two-part discussion about why Japan demonstrates key MMT principles and how those who wish to deny that reality have to invent a parallel-universe version of MMT to make their case.

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The ECB is facing a crisis – rising inflation and risk of Member State insolvency – how to make a problem

The Eurozone continues to stumble on, held together by the vast bond-buying program of the ECB, which has saved several Member States from insolvency over the last several years. While all the talk at present has been about what to do about the punitive and unworkable fiscal rules in a post-pandemic (when will that be?) period, when the emergency waivers of the Excessive Deficit Mechanism procedures are withdrawn, the reality is that under the current architecture, the only thing that keeps the currency union intact is the ECB acting outside of the legal structures set down by the treaties. Yes, I know full well that the elites have massaged the public into believing that there is no breach of the no bailout clauses, but the reality is different. The ECB is (indirectly) funding Member State fiscal deficits through its massive asset purchasing programs, the two relevant ones being the PSPP and the PEPP. And ever since they introduced the Securities Market Program (SMP) in May 2010 they have been providing funding to Member States to allow them to run fiscal deficits while maintaining low bond yields. With the Pandemic Emergency Purchase Programme (PEPP) scheduled to end in March 2022, the fears are growing that Italy will be the first Member State to succumb to the bond markets – the yields on debt will rise because the investors appreciate the credit risk and will know they cannot offload as much debt onto the ECB in the secondary markets. The fact that these fears are becoming more widespread should tell you that the role of the ECB is exactly what I say it is rather than the ‘maintaining order in investment markets’ spin that the ECB runs as the smokescreen.

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Turkey – who is squeezing who?

It’s Wednesday and a shorter blog post, which includes the latest from Turkey and some music. The mainstream narrative against Modern Monetary Theory (MMT) has been ramped up significantly in recent weeks as a result of events in Turkey, where, up until yesterday, the currency had depreciated significantly. The screams for interest rate rises from bankers etc (of course! they profit or protect foreign debt exposure) have been deafening. But the most recent monetary policy decision was on December 16, 2021, when the CBRT reduced its policy rate (the one-week repo auction rate) from 15 per cent to 14 per cent. The ‘markets’ can’t really get a handle on the current government’s thinking because it is running against the mainstream in several ways, including cutting rates to reduce inflationary pressures (see Press release on Interest Rates – from the CBRT). Overnight a big swing happened after the government made a significant fiscal policy announcement. That will further confound the markets who were forced to scramble to close out short-selling positions as the lira appreciated by around 25 per cent in one day. The fiscal squeeze worked. You couldn’t make this stuff up.

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Turkey tells us nothing about MMT – but MMT tells us a lot about why Turkey is in trouble

I have noticed a lot of Internet traffic about Modern Monetary Theory (MMT) and the situation in Turkey at present. Apparently, as the narrative goes, MMT is finally being revealed as a fraud because Turkey’s economy is going backwards and its currency is depreciating rapidly. The logic, it seems, is that if a nation enters rough economic waters and the financial markets sell its currency (although remember someone has to be buying it simultaneously) then that proves MMT is false. An extraordinarily naive viewpoint if you think about it. This viewpoint has somehow missed the train on understanding what MMT actually is and seems to think that MMT economists have seen Turkey as a policy model. In this blog post, I consider some aspects of this naivety. It won’t silence the critiques, but it, hopefully will educate those who are interested in the topic and are learning about MMT.

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Sunak – (bad) comedian of the year

It’s Wednesday and I load up other things to do on this day and thus write less here. I also am in the process of moving offices at the University – and after some 18 years in different locations, I am now returning to the Social Sciences Building where I first had an office when I came to the University from Adelaide. Which feels sort of okay, given by opposition to economics being treated as a business discipline. But thanks to a deal I made with the University in 2007, my research centre left the ‘business faculty’ and went out on our own. Hence, my office doesn’t have to be with the other economists, which I am happy about. This morning, I read the most stupid thing I think one could ever read about economics. It came from a UK Guardian article (December 14, 2021) – Sunak warns over multibillion cost of booster programme – where the Chancellor basically disqualified himself from office. Once we get through the trauma of that sort of news, I promise there is some great music to finish with.

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