On December 14, 2016, the US Federal Reserve Bank pushed up its policy target interest rate from 0.5 per cent to 0.75 per cent. In its – Press Release – it said that the “labor market has continued to strengthen and that economic activity has been expanding at a moderate pace since mid-year”. It acknowledged that “business investment has remained soft”. But it believes that even though it has increased the rate by 25 basis points, there is still room for “some further strengthening in labor market conditions and a return to 2 percent inflation”. The logic is very confused in my view. First, the US labour market is weak (in inflation pressure terms) notwithstanding the reduced official unemployment rate. Real wages growth has been effectively zero and the broad measure of labour underutilisation (U6) remains at 9.3 per cent (as at November). Second, the emphasis on central bank policy shifts is based on a view that elements of total spending are sensitive to interest rate changes and by increasing rates, price pressures will attenuated. The only problem with that logic is that all the elements of spending in the US (private investment, household durable goods) are hardly setting the world on fire. Private investment, in particular, is in poor shape. So by the US Federal Reserve bank’s own logic (which I do not share) it should be expecting on-going further poor investment growth, which will further undermine potential productive capacity. Not a sound strategy at all.
On Friday (January 29, 2016), the Bank of Japan issued a seven-page document – Introduction of “Quantitative and Qualitative Monetary Easing with a Negative Interest Rate” – which left me confounded. Do they actually know what they are doing or not? For years, the liquidity management conducted by the operations desk at the Bank has been impeccable, in the sense that they have maintained near zero interest rates in the face of growing fiscal deficits. There was always some doubt when they were the early users of quantitative easing which many claimed was to provide the banks with more reserves so that they would increase their lending to the private domestic sector in order to stimulate growth, after many years of rather moderate real performance to say the least. Of course, banks are not reserve constrained in their lending so the the only way that this aspect of ‘non-conventional’ monetary policy would be stimulatory would be if investment and purchasers of consumer durable were motivated to borrow at the lower interest rates that the asset swap (bonds for reserves) generated. The evidence is that the stimulus impact has been low and that there are many other factors other than falling interest rates governing whether borrowers will approach their banks for loans. In their latest announcement, the logic appears to be that by reducing reserves they will induce banks to lend more. Go figure that one out!
I have noted in recent weeks a periodic reference to long-run neutrality of money. Several readers have written to me to explain this evidently jargon-laden concept that has pervaded mainstream economics for two centuries and has been used throughout that history, in different ways, to justify the case against policy-activism by government in the face of mass unemployment. It is once again being invoked by the deficit terrorists to justify fiscal austerity despite the millions of productive workers who remain unemployed. I have been working on a new book over the last few days which includes some of the theoretical debates that accompany the notion of neutrality. There will also be a chapter in the macroeconomics text book that Randy Wray and I are working on at present on this topic. Essentially, it involves an understanding of what has been called the “classical dichotomy”. It is a highly technical literature and that makes it easy to follow if you are good at mathematical reasoning. It is harder to explain it in words but here goes. I have tried to write this as technically low-brow as I can. The bottom line takeaway – the assertion that money is neutral in the long-run is a nonsensical contrivance that the mainstream invoke to advance their ideological agenda against government intervention. It is theoretically bereft and empirical irrelevant. That conclusion should interest you! But be warned – this is just an introduction to a very complex literature that spans 200 years or so.
This time last month I was trying out the mobile office concept up the coast (see blog). The experiment was a success but the blog I wrote that day coincided with the decision of the Reserve Bank (RBA) to hike short-term interest rates again, which I considered to be a mistake. Exactly, one month later, the RBA is at it again however I am in Newcastle and there is no surf! The RBA announced today, quite predictably, that the policy rate will rise by 0.25 per cent which will push mortgage rates above 7 per cent. Our greedy private banks get another free ride out of this and the decision confirms that the crisis has not really changed the neo-liberal economic policy dominance. Inflation targeting which uses labour underutilisation as a policy weapon and fiscal surpluses which further drag the economy down – are well and truly entrenched. Spare the thought.
Today’s blog comes to you from beautiful Boomerang Beach, on the mid-North Coast of NSW and within the Booti Booti National Park. I am experimenting with the concept of a mobile office – well a cabin by the beach. Armed with my USB turbo mobile broadband and my portable computer, some files and books (not to mention a guitar and a couple of surfboards) I decided I can work nearly anywhere these days. Connectivity is no longer a problem. So I decided to head north for a couple of days to see how the concept works. Maybe it will begin a gypsy research life although I know one person who won’t allow that to happen! Anyway, it is a lovely setting and I can walk about 200 metres to the surf through the sand dunes. The perfect antidote to the sort of hysteria I covered in yesterday’s blog. Today I am considering corporate welfare among other topics and you definitely need a peaceful and soothing location to delve into that topic in any depth.
The media is increasingly reporting that the RBA will hike interest rates by the end of 2009. I consider this to be a nonsensical suggestion given that unemployment and underemployment will still be rising and it is unclear whether employment growth will be anything than near zero at that time. From a theoretical perspective, at the root of all the conjecture, whether the journalists actually realise it or not, is a concept called the “neutral rate of interest”, which is just another neo-liberal smokescreen. That is what this blog is about.
Today’s Australian newspaper, sadly our national daily carries a story – Stimulating our way into trouble – by Griffith University professor (and ex-federal treasury official) Tony Makin. I pity the students who have to study with him. The article continues the News Limited campaign against the government stimulus package and demonstrates the extent that is prepared to use the services of so-called experts (that is, titled mainstream economists) who seem prepared to grossly mislead the readership to advance their ideological strategy. Whatever it takes seems to be the strategy. Anyway, once again the mainstream macroeconomics textbook is called upon to make policy statements.
I haven’t had time yet to fully work through the decision by the European Commission yesterday to provide grants and loans to struggling Eurozone countries. I will comment on that when I have had time to understand the implications and be in a position to provide fair comment. It seems to be a vastly inadequately response in quantum, on top of an existing lack of fiscal support. But more on that another day. Today, I am investigating the latest data from the ECB. On May 26, 2020, the ECB released its bi-annual – Financial Stability Review, May 2020 – which seemed to excite some journalists to advance narratives that ‘sovereign debt’ investors (although none of the Eurozone nations are sovereign) will soon become spooked by the sharp rise in public debt levels in Europe, which will “threaten to undermine private-sector spending” and stall any growth prospects. The quote is from a Financial Times article (May 26, 2020) – ECB warns of challenge for eurozone from soaring public debt – which followed the release of the ECB’s Review. The elephant is, of course, the ECB assets and its ability to control all yields on public debt at will.
It is quite amusing really watching the way orthodox economists who know the game is up work like gymnasts to avoid actually spelling out directly what the facts are but spill the beans anyway. Last week (April 23, 2020), an ‘external member’ of the Bank of England’s Monetary Policy Committee, one – Gertjan Vlieghe – gave a speech – Monetary policy and the Bank of England’s balance sheet. If the message was taken seriously, then the way monetary economics and macroeconomics is taught in our universities should change dramatically. At present, there is only one textbook that seriously caters for the message that is inherent in the speech – Macroeconomics (Mitchell, Wray and Watts). The speech leaves out important insights but essentially allows the reader to appreciate what Modern Monetary Theory (MMT) has been on about, in part, for 25 years.
One of the enduring myths that mainstream macroeconomists and the politicians that rely on their lies to depoliticise their own unpopular actions continue to propagate is that of ‘central bank independence’. This is the claim that macroeconomic policy making improved in the ‘neoliberal’ era following the emergence of Monetarism because monetary policy was firmly in the hands of technocratic bankers who were not part of the political cycle. As such, they could make decisions based on fundamentals rather than the requirements of the political cycle. The corollary was that vote-greedy politicians, who operate on short-term political cycles, would be willing to compromise the ‘longer-term’ health of the economy to splurge on populist programs that might increase their chances of re-election. As a result of the mismatch between the political cycle and the, longer, economic cycle, the neoliberal solution was to make monetary policy independent of the political cycle. Except, of course, it didn’t and cannot. The latest scaremongering about the ‘loss’ of central bank independence was published in the UK Guardian last week (February 28, 2020) – From the Fed to Bank of England, central banks must up their game. The author is a former deputy governor of the Bank of England Board and former director general of the CBI. The interesting point about the article was not the further elaboration of the myth, but, rather, his assessment that the chances of reforming the European Union treaties in any direction “are vanishingly small”. Read: zero. From the mouth of the elites. I hope our Europhile Left colleagues absorbed that bit, at least.
This is the first part of a four-part series this week, where I provide some guidance on some key questions about Modern Monetary Theory (MMT) that various parties in Japan have raised with me. The public discussion about MMT in Japan is relatively advanced (compared to elsewhere). Questions are asked about it and answered in the Japanese Diet (Parliament) and senior economics officials in the central bank and government make comments about it. And political activists across the political spectrum are discussing and promoting MMT as a major way of expressing their opposition to fiscal austerity in Japan. The basics of MMT are now as well understood in Japan as anywhere and so the debate has moved onto more detailed queries, particularly with regard to policy applications. So as part of my current visit to Japan, I was asked to provide some guidance on a range of issues. In my presentations I will be addressing these matters. But I thought it would be productive to provide some written analysis so that everyone can advance their MMT understanding. These responses should not be considered definitive and more detail is available via the referenced blog posts that I provide links to.
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.
Wednesday today and a short blog. I also have to travel a lot today. But some brief comments on an interesting article from French commentator Michel Lepetit – Nourrir le débat sur une annulation partielle (370 mds€) de la dette publique (April 15, 2019) – which means more or less “Promoting the debate on a partial cancellation (€370 billion) of public debt”. The article proposes that the Banque de France cancels its holding of French government debt (the €370 billion), which could also lead other national central banks in the Eurosystem following suit with respect to their own government debt holdings. He argues that the cancellation (write off) would have no negative social impacts and could help Eurozone governments fund the transition to a low-carbon future. Above all, it reflects an understanding of Modern Monetary Theory (MMT). Michel Lepetit argues that the QE implemented by central banks, especially since the GFC demonstrates the patent failure of the foundations of monetarist dogma (“l’échec patent des fondements du dogme monétariste”).
There is a campaign on the Internet calling itself CANOO (the Campaign against nonsense output gaps) which one Robin Brooks, economist at the Institute of International Finance and former Goldman Sachs and IMF employee, is pursuing. You cannot easily access his written memos on this because the IIF forces you to pay for them. However, there is nothing novel about his claims and the points he is making are well-known. However, they are points that are worthwhile repeating at loud volume because the implications of the ‘nonsense’ are devastating to the well-being of workers, particularly those most vulnerable to precarious work and unemployment. So while the CANOO is just dredging up old issues I am very glad that it is. The concept of biased estimates of output gaps and so-called ‘full employment unemployment rates’ goes to the heart of the way the neoliberal economists, who dominate policy making units in government and places like the IMF, the OECD and the European Commission, create technical smokescreens to justify their dirty work. The more people find out about the basis of the scam the better. I have been working on this issue (estimating, writing and publishing) since the late 1970s as a graduate student. So welcome Robin Brooks, and make a lot of noise.
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.
It is Wednesday and so a short blog. I am working on a number of things at present but getting the material sorted for my next book with Thomas Fazi is a priority at the moment. My snippet today though is about a study that has just come out in the American Political Science Review – Bias in Perceptions of Public Opinion among Political Elites – by two US academics. The title is indicative. They explore what they argue is a disjuncture between what the politicians think voters want and what the voters actually want. This lack of congruence is also biased towards right-wing views. So, the politicians “believed that much more of the public in their constituencies preferred conservative policies than actually did”. They trace this bias to biases in the way the politicians get their information. The takeaway is that the progressive side of the debate has to be more active in framing distinctive messages and using multiple ways and avenues to communicate those messages to the candidates seeking election and the politicians that have been elected. And it must refrain from using conservative frames which advisors think neutralise difficult concepts etc. I think this sort of research provides some hope. I will be writing more about this in the weeks to come. And after that listen to some really classic minimalism from the C19th, which you might suspect on listening is very contemporary such was the genius of the composer.
My home town (where I was born and still spend a lot of time) is Melbourne, Victoria. It is a glorious place, at least the inner suburbs within about 3-4 kms of the city centre where I hang out mostly. It recently ‘lost’ its top place in the Economist Intelligence Unit’s Global Liveability Index (most pleasant place to live) to Vienna (Source). One wag thought it might have been because the Economist got confused between Australia and Austria. Economists are easily confused! But the reason I mentioned this is because it is symptomatic of how neoliberalism has reconstructed our realities and degraded our sense of community. The ‘competitive’ narrative, even though firms go all out to use power and deception to fix and rig markets in their favour, now dominates our perception. While I identify with Melbourne and would think a significant part of my identity is linked to that identification, the neoliberal narrative with its distinctive language, aims to reconstruct the community and communities of Melbourne, not as social and cultural artifacts, but as ‘products’ competing with other cities of the world for supremacy. I was thinking about this as I scope out the structure of the next book that Thomas Fazi and I will publish next year as a follow-up to our current book – Reclaiming the State: A Progressive Vision of Sovereignty for a Post-Neoliberal World (Pluto Books, 2017). Thomas and I have advanced our ideas and we will, in part, be focusing on how communities and the nation state work together to advance progressive outcomes. In our first book together, we set out how nation states can operate from a technical perspective and what they should do to provide for a progressive future. In the next book, we will dig deeper into the ways people and their communities have to re-empower themselves. Language, construction, vocabulary, and framing are all significant in this regard.
I am surprised at the hostility that Part 1 in this series created. I have received a lot of E-mails about it, many of which contained just a few words, the most recurring being Turkey! One character obviously needed to improve his/her spelling given that they thought it was appropriate to write along the lines that I should just ‘F*ck off to Terkey’. Apparently Turkey has become the new poster child to ‘prove’ Modern Monetary Theory (MMT) wrong. Good try! I also note the Twitterverse has been alight with attention seekers berating me for daring to comment on the sort of advice British Labour is receiving. Well here is Part 2. And because you all liked it so much, the series has been extended into a three-part series because there is a lot of detail to work through. Today, I revisit the fiscal rule issue, which is a necessary step in refuting the claim that MMT policy prescriptions (whatever they might be) will drive the British pound into worthless oblivion. And, you know what? If you don’t like what I write and make available publicly without charge, then you have an easy option – don’t read it. How easy is that? Today, I confirm that despite attempts by some to reconstruct Labour’s Fiscal Rule as being the exemplar of progressive policy making, its roots are core neoclassical economics (which in popular parlance makes it neoliberal) and it creates a dependence on an ever increasing accumulation of private debt to sustain growth. Far from solving a non-existent ‘deficit-bias’ it creates a private debt bias. Not something a Labour government or any progressive government should aspire to.
The Europhiles have been tweeting their heads off in the last week or so thinking that the corner has been turned – by which they mean that Germany is about to get all cuddly with France and agree to fundamental shifts in thinking which will make the dysfunctional Economic and Monetary Union (EMU) finally workable, without the need for the ECB to break Treaty law by propping up the private bond markets. The most recent incarnation of the ‘saviour’ is a few words that the new German Finance Minister, Olaf ‘Wolfgang Schäuble’” Scholz said during an interview with Der Spiegel (June 8, 2018) – ‘Germany Has a Special Responsibility’ – about his support for a new unemployment insurance scheme for the Eurozone. It seems even the smallest things excite those who remain in denial about the long-term viability of the common currency. The proposal that Scholz was advancing has been out in the public debate for some years and is nothing like an effective solution to the terminal design flaws in the EMU. It is just an application of the same thinking that led to the creation of that flawed architecture in the first place and reinforces the conclusion that the main players in Eurozone policy setting have no intention of creating an effective federated monetary system. Just more of the same. Tomorrow, the tweets will be extolling the virtues of some other erroneous plan that some Europhile has come up with to save the system. And so it goes.
I decided to write an extended blog post today (Wednesday) because events in Italy are so interesting. My usual short post on a Wednesday will resume next week. George Soros is now saying that “everything that could go wrong has gone wrong” in Europe and a financial collapse is in the wind (Source). I doubt the latter but agree with the former assessment. All the flaws in the original neoliberal design of the Eurozone have been revealed and all the reasons why those flaws were created in the first place remain in place. Nothing has changed since 1977 when the MacDougall Report concluded that the cultural and national differences between the (then) Member States of the European Communities were too great to allow an effective monetary union to be created. That assessment and the earlier work of Pierre Werner in his 1970 Report were ignored as the neoliberals in France and Germany rushed headlong to Maastricht. France thought it would have a chance to dominate and Germany was distracted by unification but still firmly in charge of what would be allowed in the new monetary system and what would not. Now, one of the biggest nations – Italy – is is turmoil as the damage of being part of the Eurozone slowly but surely erodes its capacity to deliver anything remotely like prosperity and its social and political system starts to collapse. Italy must leave the Eurozone – the sooner the better. And, that will bring a reality check for the whole disaster and encourage other nations to push for an orderly dissolution.