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The Weekend Quiz – August 10-11, 2019

Welcome to The Weekend Quiz. The quiz tests whether you have been paying attention or not to the blog posts that I post. See how you go with the following questions. Your results are only known to you and no records are retained.

1. The IMF and the OECD and a range of central banks equate the Non-Accelerating Inflation Rate of Unemployment (NAIRU) with their concept of full employment and they use the NAIRU estimates to calibrate their structural deficit estimates. Accordingly, the structural deficits will typically be:

2. When a sovereign government issues debt it logically:

3. Only one of the following statements can be true when you observe rising government bond yields for new issues:

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    This Post Has 20 Comments
    1. 3 out of 3, though it’s been a while, TBH!

      (A little hesitation on No1, because sometimes our host can throw in the odd trick question!)

    2. Bill there is a Mark Blyth critique of MMT on youtube entitled “So can we have it all” which is positive about MMTs insights on how the economy will work but doubts if the freedom to spend when resources are underemployed can work.

      He uses the example of Britain and says “imagine Boris cuts taxes to win the next general election.”. Well the British economy imports 40% of its food and the pound is not an international reserve currency, so consumption goes up whilst foreign food exporters dump their pounds on the exchanges, which devalues the currency, which causes inflation and so Boris now has to cut spending to tackle the inflation long before the economy is at full employment.

      I think that’s the argument anyway.

      Can you respond?

    3. I’m sure Bill would answer far more scientifically and authoritatively then me, but I had some thoughts on this:

      Firstly, would a tax cut seriously result in an increase in foreign food imports?!? Is there any evidence that brits are currently curtailing their consumption of imported food due to the current rate of taxation? I doubt it.

      Secondly, pass-through inflation due to exchange rate falls is not guaranteed to occur for a variety of reasons.

      Thirdly, foreign exporters could be better off investing their Sterling earnings in (cheaper) UK assets than exchanging them for fewer Euros, Dollars, Yuan etc,

      Fourthly, exchanging Sterling would in aggregate increase their currencies, making them less competitive, and encouraging import substitution in the UK (we have some nice home-grown wine these days!)

      Fifthly, Sterling has indeed declined significantly in the last three years, but where’s the inflation?

      Sixthly, in spite of these points, were inflation to occur, PM de Pfeffel could simply revoke his tax cuts.

      I’d be very interested in Bill’s take though.

    4. @PhilipR

      1. All food-import is not in Pound Sterling I presume!
      2. The Pound-value has been in a long term debasement (against i.e dollar) and inflation is low and falling globally (oecd) since the 80s
      3. Even if food-imports are in pounds Great Britain is still a large exporter (net EU-importer though), in pounds, which could balance the flow. Otherwise BoE could, if they want, intervene.
      4. Do not forget the foreign exporter almost always exchange their foreign export-currency (pounds i.e) to their domestic currency because it us mostly working capital needed in their local business. What is done with the new foreign exchange-reserves in Pounds is normally up to their central bank-policy.

      If there is a new foodcrises due to i.e climate change that is another situation which also will be global.

    5. @ Thorlief,

      “1. All food-import is not in Pound Sterling I presume!”

      Hmmm… we don’t use anything else but sterling here in the UK, so I ‘d imagine that’s what we would normally use to pay for imports. (Banks can act as intermediaries, but the initial transaction in the chain would be a sterling spend.)

      I suppose some UK supermarkets could have foreign currency reserves, perhaps the German ones like Aldi and Lidl, or Asda (Walmart, USA) and Tesco, which has a presence in European countries – and I’ve also seen its concessions in e.g. HK.

      I presume, like airlines, they could also hedge for future FX rates, but I’m not sure if this is widely the case in food retailing?

      The more I try to think about this, the more out of my depth I think I’m getting… : (

    6. It doesn’t matter what currency the food imports are denominated in (pounds, euros OR US dollars) someone in the supply chain has to sell pounds eventually.

      The point about “where is the inflation” is well made though.

      My point is I respect Mark Blyth and he made the comment at an event where he shared the stage with Stephanie Kelton.

      If he’s wrong, it’s important to explain why.

    7. Mr. Shigemitsu

      The main question was about exporters eventually dumping Sterling and how that could increase inflation in the UK!

      Sellers normally prefer their own currency to avoid uncertaincy. UK–buyers would then have to buy foreign currency to settle their imports.

      Foreign (food-)firms operating in the UK is another question. Local revenues in Sterling usually means costs incl. imports in the same currency (matching).

      Input food for processing is often priced/listed in i.e us dollars on the open market. This could mean at least three different currencies in one deal.

      Sterling is of course an international reserve currency but a minor one compared to us dollar and second one the euro. The London financial market is still one of the biggest.

    8. Recently, I saw a youtube video [maybe by Mark Blyth] were it was said that the euro took a huge hit when the ECB took a chunk out of every account in all the banks in Cyprus.

      It seems like all people with a choice don’t want to leave any money in a bank that might just take 10% to 20% of the balance at any time [to pay some higher authority].

      So, why is the euro still an international reserve currency?

    9. “where is the inflation”

      Headline inflation might be reasonably constant but that only works as an average. These days I am an OAP and continue to use my accountancy software to manage my own domestic finances. In the last three years it shows that inflation has been around 16% for the sorts of things you have to buy all the time like food and consumables. It may be worse than that because of “shrinkflation” where manufacturers put less in packages but charge the same. Meanwhile plenty of consumer goods like electronics have fallen. After Brexit I am sure there will be accelerating inflation for the likes of me but probably not for everyone else. There will also be the excuse for manufacturers and suppliers to put prices up “because of Brexit” like they did after decimalisation and, in the Eurozone, on the introduction of the new currency.

    10. Philippe,

      You wrote “……someone in the supply chain has to sell pounds eventually”

      Would it not be interesting to know how trade and settlement is done? Do people in general understand the monetary system? Probably not because it is in the details you will find the answers. And I am not certainly an expert myself. Still…….

      Most countries have their own currency so when you want something from abroad you have to get that currency BEFORE you get your hands of the desired goods or services. You have to exchange your currency for the needed one. Hopefully your own currency has some value in the country from where you want to make a purchase. Otherwise your central bank need some of that currency (foreign exchange reserves) to sell to you! China is a good example because their currency has not been of any value before we started to export there. But even with exports to China their currency is not of high interest. Well there are several reasons for that but (even) with a managed pegged rate to i.e the us dollar we know that the chinese central bank has “earned” a few trillions of us dollar reserves (us federal bonds) during its now 20 years of net export success. China is not part of our western (incl Japan) banking- and defence-community and the reason is if cource political. So China like many other countries have to save their foreign reserves some way or another. Selling natural resources or taking up big foreign loans are other typical ways of financing their investments.

      Getting back to the UK importing food from i.e. Germany means the importer in this case deliver pounds to the exporters bank. Lets say we use cash-bills and the purchase is done without credit (which is a normal routine for large shipments). Then the exporter exchange his pound-note for euro through his german bank. The bank then have a negative balance in euros (newly emitted money). The german bank can then settle their euro-account by selling back the pound-note to a UK bank (i.e) against euros OR they can choose to sell the pound-note to their own central bank, the ECB. Their central bank, the ECB, then make the final net issue of newly created euros in Germany and for that they instead have a pound-note in foreign reserves. The sold food are exchanged for money and your call that the pounds eventually has to be sold is not really true in every aspects. There is no change of outstanding pound-notes in the BoE’s balance-sheet. The owner of pounds have only shifted abroad to ECB in the latter example. In the former case when the british bank buy back the pound-note for euros BoE has to settle the british bank’s euro-account. As we know all trades of foreign exchange currencies are cleared between countries by their respective central banks.

      Conclusion: When we say that importing makes a currency weaker and thus generate inflation we have to be vary careful about what we speak. Personally I like Mr Blyth and have great respect for him. Maybe I should listen to the youtube-video and try to understand what he means when sign PhilipR above makes claims about inflation from currency-debasement from trade-imports.

      Best regards

    11. Steve…. But there are bigger trades and assets denominated in us dollars and that is why the Dollar is the main reserve currency in payment system of the world.

    12. @Nigel Hargreaves,

      That doesn’t surprise me – and I have noticed increases in food and consumables, although it’s not clear whether your 16% inflation rate is annual, or over three years. (I presume the latter?)

      So other costs in the RPI/CPI basket must have decreased (Air fares? White goods?) which a pensioner is less likely to consume.

      Tullet Prebon produced a one-off inflation rate calculation some years ago for the particular kind of spending that you describe, and the rate was indeed higher than the headline rate, IIRC.

      But short of offering custom or personalised inflation tables, how else can headline inflation rates be calculated, other than as a broad basket of expenses? And if you change the overall system of measurement, relative movements become difficult to measure consistently over time. The Tories always did this with unemployment statistics, changing the rules to massage down the figures at each point.

      However, it’s theoretically possible that imports could be cheaper post Brexit, especially from food producers outside the EU; this is one of the arguments in favour of leaving the EU, but who knows if it’s going to prove the case.

      I certainly recall my parents complaining that food prices, esp meat and dairy, did increase considerably after the UK joined the Common Market in 1973, as I think there may have been tariffs imposed (?) on food imports from the Commonwealth – NZ and Aus in particular??

      So perhaps the reverse is possible. There is also be the ability to reduce (or even abolish) VAT, ex-EU, which would reduce the costs of certain (hot, confectionary..etc) foods, as well as household and personal consumables – but sadly, I wouldn’t hold your breath!

      Shrinkflation is most definitely a thing, but it can’t go on indefinitely – once a Wagon Wheel shrinks to the size of a Mini Egg, how much more (or rather, less!) can they get away with?

      You probably already do so, but if not, I would advise doing most of your food shopping at Aldi or Lidl instead of Sainsbury’s or M&S – that will bring about a significant one-off drop in your personal inflation rate, as I discovered when moving to my current home town a few years ago.

      Best, Mr S

    13. MrShigemitsu
      Monday, August 12, 2019 at 20:13

      Yes it’s over the three years.

      The Daily Telegraph used to do a “Real Inflation” calculation based on a basket of what people had to buy every day, but it was dropped after the GFC when deflation set in and it became meaningless.

      Lowering VAT won’t help with most foods because they are already zero rated or exempt. That said, I used to do the accounts for a fast food outlet and it was astonishing how many foods do have VAT. Then there’s the ridiculous thing about eat-in or eat-out. HMRC did a series of mystery shops and found our staff were not always asking and my client was told to pay an estimated £60,000 going back 5 years. At least I got it down to £30,000 after interrogating the POS till and constructing a spreadsheet which the inspector (an actually very pleasant and helpful Nigerian woman) accepted.

      I’m not so broke I need to shop in Lidl and Aldi, but I do from time to time. Having plenty of time I can shop around. I also buy as much as possible UK-sourced and that in itself accounts for most of my inflation. The trouble is my pension only increases by CPI which does not reflect my own costs.

    14. @Nigel and mrShigemitsu

      In our country we say “High inflation in things you can not be without and disinflation in things you do not need”. So I guess 16% is not an impossible figure concerning certain needed goods and services.

      Beeing poor or just an ordinary pensioneer is not easy living even if official headnumber inflation is low.
      I think politicians of today really have no idea how real life is today for many groups of their society.

      Best regards

    15. The Marc Blyth-example by PhilipR

      I have now seen the youtube-video by Blyth and I can not find the food-reference regarding inflation. Looks that that is your own interpretation of a weakening pound. Now mr Blyth is not explaining his view on inflation-pressure because of the boom Boris tax-cuts will cause. He is just implying the pound will weaken when Boris tax-cut boom ends (as booms normally does…..with recession and capitalflight……and, I guess, some inflation-pressure during the boom itself). We still live in disinflation-times regarding cpi. Deflation will probably follow such a boom-bust scenario. But I guess, sooner or later, the corporate market is ready for a cyclical upturn in (cost-)inflation

      I find it a bit odd that his example of MMT practice use tax-cuts instead of fiscal spending. Maybe that is what conservatives wants the most

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