Quantitative easing 101

Some readers have written to me asking to explain what quantitative easing is. Some of them had heard an ABC 7.30 Report segment the other night which interviewed the Bank of England Governor who outlined the BOE’s plan to “print billions of pounds” as its latest strategy to stimulate lending and hence economic activity in the very dismally performing UK economy. Once again we need to de-brief and learn what quantititative easing actually is. We need to understand that it is not a very good strategy for a sovereign government to follow in times of depressed demand and rising unemployment. We also need to get this “printing money” mantra out of our heads.

Read more

No change in monetary easing from Bank of Japan until wages growth increases

The media and the phalanx of mainstream economists from banks etc, the latter of which have a vested interest in interest rates rising in Japan for various reasons, are constantly predicting that the Bank of Japan will relent to the ‘market pressure’ and reverse its current monetary policy stance and fall in line with the majority of central banks. While the concept of ‘market pressure’ is held out as some economic process – something inevitable to do with basic fundamentals governing resource supply and demand – it is really, in this context, just gambling positions that speculators have taken in the hope that the Bank will relent and reward their bets with stupendous profits. So last week, the Bank of Japan announced that it was changing its policy towards Yield Curve Control (YCC), which set the cat among the pigeons again. This is what it was all about.

Read more

US labour market weakens a little – it is madness to be increasing interest rates in this environment

Last Friday (June 3, 2022), the US Bureau of Labor Statistics (BLS) released their latest labour market data – Employment Situation Summary – May 2022 – which reported a total payroll employment rise of only 390,000 jobs and an official unemployment rate of 3.6 per cent. The US labour market is still 822 thousand payroll jobs short from where it was at the end of May 2020, which helps to explain why there are no wage pressures emerging. Real wages continued to decline as the supply disruptions and the greed of increased corporate profit margin push sustain the inflationary pressures. Any analyst who is claiming the US economy is close to full employment hasn’t looked at the data. It is madness to be increasing interest rates in this environment.

Read more

Claims that mainstream economics is changing radically are far-fetched

I have received several E-mails over the last few weeks that suggest that the economics discipline is finally changing course to redress the major flaws in the curricula that is taught around the world and that perhaps Modern Monetary Theory (MMT) can take some credit for some of that. There has been a tendency for some time for those who are attracted to MMT to become somewhat celebratory, even to the point of declaring ‘victory’. This tendency is not limited to the MMT public who comment on social media and the like. My response is that we are probably further away from seeing fundamental change in the economics profession than perhaps where we were some years ago – after the GFC and in the early years of the pandemic (which continues). My answer reflects the incontestable fact that the make up of faculties within our higher education systems has not changed much, if at all, and the dominant publishing and grant awarding bodies still reflect that mainstream dominance. There is still a lot of work to be done and a lot of ‘funerals’ to attend (à la Max Planck).

Read more

The absurdity of the current monetary policy dominance exposed

We start to see the absurdity of the current reliance on monetary policy as a counter-stabilisation tool, when you read the calls from the Bank of England Monetary Policy Committee member talking about the risk of a ‘significant inflation undershoot’. In a detailed analysis of the current situation, the external MPC member noted that inflation was falling faster than expected because the supply constraints were reversing quickly. She also noted that the interest rate hikes had now reached a point where unemployment was certain to rise and lead to, in the face of the supply reversals, to deflation. And that would require faster and larger interest rate cuts. Here is an insider admitting that the Bank of England is more or less gone rogue and out-of-step with reality. Overshoot at the top of the hiking cycle, swinging to a massive undershoot at the bottom. Absurd.

Read more

When mainstream economists arrive at ideas 50 or so years late and pretend to be contributing to knowledge

I regularly encounter mainstream economists who are confounded by the dissonance that the body of theory they have been working in introduces and then seem to think they have come up with new ideas that restores their credibility. The more extreme version of this tendency is called plagiarism in academic circles. But the less extreme version is to produce some work in which you conveniently ignore the main contributors in history but hold out implicitly that the ideas are somehow your own. As mainstream economics fumbles through this period where the fictional world they operate in and push onto students is increasingly being revealed as a fraud, several economists are trying to distance themselves from the train wreck by resorting to restating ideas that in a period past they would have criticised a ‘pop science’. This syndrome is an accompaniment to the well established ‘we knew it all along’ or ‘there is nothing new here’ defenses that are often used when new ideas make the mainstream uncomfortable. I saw this again in a recent article from the British-based Centre for Economic Policy Research (CEPR) which discusses the way modern banks work – How monetary policy affects bank lending and financial stability: A ‘credit creation theory of banking’ explanation (March 20, 2023). The problem is that heterodox economists knew this from years ago including with the seminal work in the early 1970s of Canadian economist – Basil Moore. The other problem is that the CEPR authors choose not to credit the seminal authors in the reference list, which I think is poor form.

Read more

The inflationary episode is being driven by profit gouging and interest rate hikes won’t help much

I have read an interesting reports in the last months that demonstrate there is a shift in thinking about inflation – away from the tired narratives that attempt to implicate excessive government spending, poorly contrived monetary policies (particularly quantitative easing) or drag in the usual suspect – excessive wage demands from workers. All of the usual narratives are very convenient frames in which those with economic power can extract more real income at the expense of the rest of us, who have little economic power. At least, we have been indocrinated to think we have no power. But, of course, if we could overthrow the whole system of capital domination if we were organised enough but that is another story again. Back to the inflation framing. While it was possible to argue that distributional struggle between workers (organised into powerful unions) and corporations (with obvious price setting power in less than competitive industries) was instrumental in propagating the original OPEC oil shock in 1973 into a drawn out inflationary episode, such a narrative falls short in 2022-23. The workers are largely disorganised and compliant now. The new thinking is starting to focus on the role of corporations – one term that is now being used is ‘greedflation’ – to describe this new era of profit gouging and its impact on the inflation trajectory. That shift in focus is warranted and welcome because it highlights the imbalances in the capitalist system and just another way in which it is prone to crises.

Read more

Central banks accounting losses are rising but are of no importance to anything important

There are regular interventions from commentators over time who repeat the same thing over and over – usually some prophesy that a currency (for example, the Yen or the USD) will collapse soon, and life goes on until they come out with the same predictions, which never turn out. The mainstream media loves to give these characters a platform because the headlines are sensational and I guess that sells ‘units’ for the companies. The latest I saw was from Mr. Roubini in the Financial Times, who has been predicting the collapse of the USD regularly. Time to give him a miss I think. A related topic of hysteria that ordinary folks seem to get agitated about but clearly don’t understand even the first principles involved is the old canard – central bank losses. This gets a little more abstract for most relative to the Roubini-type currency collapse headlines but the mainstream press still manage to whip up a doom scenario that somehow the central bank is about to go broke and governments will have to bail them out and taxes and debt will rise, and, somehow, ultimately, our grandchildren will find themselves in penury trying to pay back the debts our current governments ran up. A recent Bank of International Settlements Bulletin article (No. 68)- Why are central banks reporting losses? Does it matter? (released February 7, 2023) – bears on this issue. Conclusion: nothing to see here.

Read more

Bank of Japan has not shifted direction on monetary policy

The hysteria surrounding the decision by the Bank of Japan (released December 19, 2022) to make a minor adjustment to its yield curve control ceiling on Japanese government 10-year bonds has been predictable but uninformed and full of vested interest agendas. You know the type of agenda that investment bankers engage in where they consistently pump out their media statements, which are soaked up by the financial media as if they are knowledge that needs repeating, that claim interest rates have to rise to deal with some inflation emergency or something. The media doesn’t tell the public who absorb this stuff that the actual agenda is that bankers want higher interest rates because they make more profit and that the reason the media statements give is largely fiction. So we are seeing more of that in the last few days. My understanding of the decision is that it does not signal a fundamental change in monetary policy in Japan. It is a minor shift to tweak the interface between the government bond market and the corporate bond market in order to maintain financial stability – the most important role of a central bank. All those characters that are claiming the hedge funds have won and the Bank of Japan is now conceding power to them with interest rate hikes to come are not reading the room. They are just pushing their self-interest in vain. No interest rates went up and my reading of the statement and what I know informally via contacts is that the Bank is committed to its current policy position because it considers, as I do, the inflationary pressures to be transitory and doesn’t want to respond to an ephemeral problem by creating a more entrenched problem of real economy recession and rising unemployment.

Read more

The RBA governor jumps the shark

Today we consider how asinine Australian’s monetary policy makers are now sounding. Yesterday, I reported the massive income redistribution that is going on at present as a consequence of central banks now hiking interest rates. This not only favours those with interest rate sensitive assets and punishes borrowers, but also necessitates, under current policy settings that central banks pay millions to trillions of cash to the banks that hold excess reserves. The excess reserves are the consequence of quantitative easing programs. Some might say this is the fault of the QE programs. But an Modern Monetary Theory (MMT) interpretation is that under optimal policy where no public debt is issued at all, the bank reserves would still accumulate. The MMT position would see no support rate paid and a Japan-style zero interest rate regime maintained at the short-end of the yield curve. In that case, there would be no transfers of cash to the banks as a result of their excess reserve holdings. Today, there is more though. On Tuesday (November 22, 2022), the Reserve Bank of Australia governor gave an address (November 22, 2022) – Price Stability, the Supply Side and Prosperity – to the Annual CEDA dinner in Melbourne. He told the audience that we are entering a period of global uncertainty which will require more rapid adjustments in interest rate settings, up and down, to deal with the growing threat of inflation. It was an appalling display of hubris and September cannot come quick enough – when his contract as governor expires.

Read more

Champagne socialists in the banking sector reaping millions from public money

It’s Wednesday, and before we get to the music segment, I document some developments in the banking system which are not receiving much press at the moment. I refer to the fact that the rate hikes now being implemented by most central banks are not just allowing the commercial banks to widen spreads between deposit and lending rates which will generate significant windfall profits for the banks and their shareholders. The increasing interest rates are also delivering massive cash injections to the banks who hold reserve accounts at the central banks. Why? Because the quantitative easing programs from the past have resulted in a massive buildup of excess reserves which are liabilities for the central banks. They are paying support returns on those reserve, which are scaled against the rising policy target rates. So the payments have escalated significantly and delivering a massive corporate welfare boost to the banks while the same interest rate rises are causing hardship to borrowers, especially those on low incomes. And amazing redistribution of income towards the ‘champagne socialists’ all via our central banks.

Read more

The Weekend Quiz – October 1-2, 2022 – answers and discussion

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.

Read more

Central banks can operate with negative equity forever

The global press is full of stories lately about how central banks are taking big losses and risking solvency and then analysing the dire consequences of government bailouts of the said banks. All preposterous nonsense of course. It would be like daily news stories about the threat of ships falling off the edge of the earth. But then we know better than that. But in the economic commentariat there are plenty of flat earthers for sure. Some day, humanity (if it survives) will look back on this period and wonder how their predecessors could have been so ignorant of basic logic and facts. What a stupid bunch those 2022 humans really were.

Read more

Central bank priorities are not the priorities of working people

I remember a conversation I had when I was picked up hitch hiking to Melbourne from where I was living down the coast. It was during the 1970s inflationary period, which had morphed into stagflation as a result of deliberate government policy to create unemployment and discipline the wage-price spiral. The driver was a manual worker and during a conversation about the state of the economy (I was studying economics at the time) he said “the government should care about employment because at least then everyone has a job even if prices are rising”. That conversation stuck with me because it summed up what research shows in more sophisticated ways – the costs of inflation are minimal when compared to the devastating costs of unemployment. At present, our policy makers are unwilling to recognise that reality because it is not them that bear the costs.

Read more

The Weekend Quiz – September 3-4, 2022 – answers and discussion

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.

Read more

The Weekend Quiz – August 20-21, 2022 – answers and discussion

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.

Read more

The Weekend Quiz – August 6-7, 2022 – answers and discussion

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.

Read more

British Tory MP spills the beans on government debt

It’s Wednesday and I have a few items of interest (to me at least) to warm us up for the music feature, which is beautiful though sad. First up we learn how a senior Tory MP has made admissions to the media that completely contradict mainstream macroeconomics and validate what Modern Monetary Theory (MMT) tells us. Second, we learn from the latest ECB data just how ‘flexible’ (read: anything goes) it can be in its government funding. Italy and Spain are being rescued at present. As I said anything goes. And third, the vandalism of the Reserve Bank of Australia continues. Then we can rest and listen to some glorious singing.

Read more

The Weekend Quiz – July 30-31, 2022 – answers and discussion

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.

Read more

The Weekend Quiz – July 16-17, 2022 – answers and discussion

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.

Read more
Back To Top