Bill Mitchell-en Dr Die Schwarze Null still not thinking beyond more austerity
(http://bilbo.economicoutlook.net/blog/?p=47295)
(i) Sarrera gisa
Project-Syndicate recently published the latest Op Ed (April 16, 2021) from former German finance minister and current President of the German Bundestag, Wolfgang Schäuble – Are We Risking a Debt Pandemic?. He is the person who personified the so-called ‘die schwarze null’ (Black Zero) while finance Minister. His conduct as finance minister was an instrumental element in extending the GFC across the Eurozone. He is still influential in European politics and his latest Op Ed makes it clear that the austerity mindset is still alive and well despite the current relaxation of the Stability and Growth Pact rules during the pandemic. The problem is that if Europe reverts back to that mindset, the essential changes to the monetary union that are necessary to make it viable will never be discussed. It will be just more of the same. And that same is pretty ordinary for the common folk across the EMU.
(ii) Aspaldiko Wolfgang Schäuble
These blog posts give some background on the way that, the German obsession with the ‘Black Zero’ (managed and propagated by Wolfgang Schäuble) has been a black cloud over Europe for the last decade or more.
1. Die schwarze Null continues to haunt Europe (May 21, 2018).
2. Germany should look at itself in the mirror (June 17, 2015).
Consider the following graph, which shows real GDP indexed to 100 at the March-quarter 2008 for the Eurozone, the US and Australia.
In the 12 years from the March-quarter 2008 to the December-quarter 2020, the Eurozone grew by 3.5 per cent, the US economy grew by 19.9 per cent and the Australian economy grew by 31.8 per cent.
And, to put that into perspective, the Australian economy has been constrained in growth by excessively tight fiscal policy.
There is more to life than economic growth clearly, but it does tell you something about the relative material prosperity of a nation.
The Eurozone is effectively a failed experiment and the likes of Wolfgang Schäuble has been an instrumental part in that failure given the position he held in the policy making hierarchy over the course.
As an aside, the French weekly current affairs magazine – Marianne – published an article last week “Comment l’Allemagne tond la France… et l’Europe” (‘How Germany has fleeced France’), which argued that Germany has ridden roughshod of the nation in many ways in pursuit of Germany’s self-interest.
The author of the article commented in this – Interview (April 1, 2021) – with Sud Radio, that “We have an elite who are so in thrall to our German neighbours that the moment anyone legitimately defends our national interests, the elite cry ‘Germanophobia’”.
I will comment on that article in more detail in another blog post.
(iii) Alemania eta Euroguneko Distopia
I have long argued that Germany has effectively ‘played’ the other partners in the common currency for their own ends and left the bloc in a dreadful state.
In my book – Eurozone Dystopia: Groupthink and Denial on a Grand Scale (published May 2015) – I showed how the growing obsession within the French elite at being ‘like Germany’ – for example, the ‘franc fort’ approach pursued by Jacques Delors, effectively allowed him, a bit later, to push through his dysfunctional design for the monetary union into the Maastricht process.
At that stage, Europe was doomed to sub-standard economic outcomes.
At least, there is a growing voice in France now coming to realise what has been going on for the last few decades.
In his Op Ed, Wolfgang Schäuble remains on form.
His basic point is that while the pandemic has temporarily given the 19 Member States a reprieve from the Stability and Growth Pact restrictions and the enforcement of the Excessive Deficit, a renewed bout of austerity must be introduced “to maintain budgetary discipline.”
He correctly notes that government deficits have risen sharply to combat the crisis but incorrectly says that this meant that:
… a huge volume of net borrowing was needed. This headlong acceleration of debt, in Germany and in countries around the world, is the price being paid to stave off the economic consequences of COVID-19.
For Germany, the debt issuance was necessary to fund the deficits because that nation does not issue its own currency.
But for most other countries, the rise in debt that matched the rise in deficits was purely a political choice. There was no necessity for their debt levels to rise at all.
For those nations “the price being paid to stave off the economic consequences of COVID-19” is not the monetary amounts associated with the rising deficits (or for that matter the associated matching debt increases).
For a currency-issuing nation, these numbers on bits of paper are not a cost.
The cost is the extra resources that are necessary to implement the program in question.
Given that a significant proportion of the fiscal outlays were targetted at maintaining existing resource usage, then the actual ‘cost’ of the programs, in real resource terms, was very small.
They just look large because of the skewed way we seek to understand the concept of an economic cost.
By focusing solely on monetary numbers we will typically never appreciate what is going on.
The Eurozone is another matter given that the nominal amounts take on an extra signficance.
Wolfgang Schäuble thinks the rising “debt burden” in Germany is becoming a significant issue now.
He says that Germany has been:
… adhering to the rules of the Stability and Growth Pact of the Maastricht Treaty and reducing our debt to less than 60% of GDP before the COVID-19 pandemic hit.
One could contest that assessment given that the way in which a Member State in the Eurozone is appraised is, in fact, – multi-dimensional – and, in addition to the Stability and Growth Pact rules, a nation must satisfy the conditions pertaining to – The Macroeconomic Imbalances Procedure (MIP).
(iv) Alemaniak neurriak hautsiz
One of the required outcomes is the “3-year backward moving average of the current account balance as percent of GDP, with thresholds of +6% and -4%”.
As the next graph reveals, Germany has violated that requirement for the last 10 years and 11 of the 20 years of EMU existence. It is a serial offender.
And in doing so, it has gamed the other states given that a high proportion of Germany’s trade is Intra Europe. The obvious point is that the mirror of these persistent violations are on-going external deficits and external indebtedness across many other Member States.
So while Wolfgang Schäuble thinks Germany has been a model citizen his assessment is blinkered.
The reason this is important relates to his next statement:
These consolidation measures over the past 12 years have given Germany some financial leeway that can now be used in the crisis. The Harvard University economist Kenneth Rogoff, a former chief economist of the International Monetary Fund, has long argued that Germany’s strong balance sheet gives it the capacity to react forcefully in a deep crisis. In other countries this is not true, at least not to the same extent.
What Kenneth Rogoff thinks is irrelevant. He of the ‘spreadsheet’.
But the point is that Germany’s persistent violation of EU fiscal rules as above has meant it has been able to continue running large external surpluses, which have:
(a) covered them while they have inflicted damage to their domestic economy (real GDP per capita has only risen by 4.6 per cent in the 12 years since 2008), which is good relative to other EMU nations (Belgium declined by 2.5 per cent; Greece declined by 27.3 per cent; Spain declined by 8.6 per cent; France declined by 4 per cent; Italy declined by 14 per cent; Portugal declined by 2.2 per cent; and Finland declined by 4.5 per cent).
The peoples in these nations, on average are poorer in material terms. That is what the Eurozone has done to them.
So while Germany looks a little better than its large ‘partners’, its own performance is pathetic.
Australia’s per capita real GDP growth since 2008 has been of the order of 11.7 per cent. The US 19.9 per cent. Even tiny Iceland, which had a massive banking collapse during the GFC, has seen its per capita real GDP grow by 10.4 per cent since 2008.
(b) allowed their revenue to grow strongly via the export income and that has been a major reason they have been able to stick within the SGP fiscal rules.
But that has been at the expense of suppressed growth and slower growth in tax revenue in its EMU partner states.
Rob Peter to pay Paul.
Wolfgang Schäuble doesn’t really provide any answer to the problem he sets.
He acknowledges that “an exogenous shock like the COVID-19 pandemic justifies a rise in public spending, as well as reinforced financial solidarity across borders”.
But then says that “money is not a panacea, and borrowing makes sense only if it is carried out prudently and reasonably”.
Which are just – weasel words.
(Note: A weasel word, or anonymous authority, is an informal term for words and phrases aimed at creating an impression that something specific and meaningful has been said, when in fact only a vague or ambiguous claim has been communicated. Examples include the phrases “some people say”, “most people think”, and “researchers believe.” Using weasel words may allow one to later deny any specific meaning if the statement is challenged, because the statement was never specific in the first place. Weasel words can be a form of tergiversation and may be used in advertising, conspiracy theories and political statements to mislead or disguise a biased view.)
Increased monetary outlays were the only way that incomes could be protected during the pandemic, for example.
And the fact that economic outcomes have been poor in the Eurozone is a sign that the Member States didn’t take advantage of the relaxed fiscal rules to spend more.
What exactly does Wolfgang Schäuble classify as spending “prudently and reasonably” in this context.
Weasel words.
(v) EBZ
And, of course, all of this has been in the context of the massive ECB government bond-buying program.
The total Eurozone government debt was 10,027,291.4 million euros in the December-quarter 2019.
By the third-quarter 2020, it has risen to 11,112,101.5 million euros a 10.8 per cent increase.
That is the latest data available.
Over that period, the ECB has increased its holdings of EMU government debt via the Public Sector Purchasing Program (PSPP) from 12,515 million euros to 23,102 million euros.
Further, between March 2020 and September 2020\1, the ECB’s other government bond purchasing program, the Pandemic Emergency Purchasing Program (PEPP) – had accumulated 629,169 million euros worth of government debt on top of its PSPP purchases.
Taken together that is about 58.9 per cent of the total debt issued during the pandemic up until the third-quarter 2020 has been purchased by the ECB.
The proportion has increased over the last 6 months, but we do not yet have total EMU government debt outstanding for that period.
For example, between March 2020 and March 2021, the PEPP has accumulated 943,647 million euros worth of government debt – a massive ramping up over the last 6 months.
Of course Wolfgang Schäuble thinks this is:
… swelling the money supply and increasing the risk of inflation.
But he doesn’t bother to explain how, given that the ECB has been trying for years to push up the inflation rate with no success.
And why hasn’t Japan got runaway inflation given the Bank of Japan has been doing the government bond-buying thing for a lot longer than the ECB.
And his use of Larry Summers and Olivier Blanchard as authorities on the inflation risk argument is about as bad as using Kenneth Rogoff to talk about government debt thresholds.
The only difference is the former two haven’t been sprung with dodgy spreadsheets.
Apparently, inflationary expectations are going to rise with “the European Central Bank running the printing press overtime”.
The most recent edition of the ECBs – The ECB Survey of Professional Forecasters – the first quarter 2021 tells us that:
Shorter-term inflation expectations were largely unchanged at 0.9%, 1.3% and 1.5% for 2021, 2022 and 2023 respectively. Longer-term inflation expectations (for 2025) averaged 1.7%, confirming the signs of stabilisation reported in the previous round and possibly indications of a slight uptick …
The outcome implied a small upward revision beyond the first decimal. Taking a slightly longer perspective, following four rounds of downward revisions during 2019 by a cumulative 0.2 percentage points and having remained at historical low levels in a narrow range (1.64-1.67%) during 2020 …
I liked the “beyond the first decimal”.
Yeh, out of control man. Time to head to the bunkers!
(vi) Wolfgang Schäuble-k ahantzitakoaz
Of course, what Wolfgang Schäuble forgot to mention in his Op Ed was that if the ECB wasn’t buying up all this government debt, then, given the size of the fiscal deficits (even though they are well below what is necessary), the yields on some government bonds would be rising sharply and those nations (Italy, Spain, even France) would be facing insolvency.
The ECB government bond buying programs, which began in May 2010 with the introduction of the Securities Markets Program, has saved the monetary union from breakup, given that Italy would have been insolvent in mid-2012 (at least) if the ECB hadn’t bought up its debt and suppressed the bond spreads with the bund.
That is the story.
The inflation threats are just an application of mainstream macroeconomics, which has been proven to be consistently wrong it is predictions.
The story is that the ECB interventions, that have run against the advice of mainstream economists, have rescued (in a sort of blighted form) the EMU from its dysfunctional architechure, which, itself, was the product of an application of mainstream economics.
On concrete plans, Wolfgang Schäuble is unable to go beyond generalities other than to invoke the applicability of an initiative in the US in 1792 to deal with a crisis (The Hamilton sinking fund plan).
1. “a firm vision of how the burden of public debt can be reduced once the coronavirus has been vanquished.” Nothing proposed.
2. Apparently, government debt is widening the “competitive disadvantage” between the EU and China and the US. How? Not specified.
3. No “community” debt can be envisaged. Each country has to “strive to maintain budgetary discipline”. That is, austerity.
4. “maintaining competitiveness and a sustainable fiscal policy are the responsibility of member states.” That is, pay cuts, more precarious work, and austerity.
5. Unless Draghi scorches the earth in Italy, “we will need a European institution that not only monitors compliance with the Union’s jointly agreed budgetary rules, but has the power to enforce them.”
More anti-democratic interventions from Brussels.
6. The 1792 Panic was about a financial asset bubble – not the main problem facing the Eurozone.
When Hamilton took over after the War of Independence, he wanted to device a fund for paying off the US government’s debts (both domestically and to foreign nations (mostly France), which had been used to prosecute the War against the British.
He proposed restructures which forced losses on creditors and established a sinking fund in 1790, which was a political stunt to restore confidence in debt markets.
He basically paid US Postal Service profits into the fund which would then pay back government debt.
The Sinking Fund also bought up the degraded public debt via ‘open market operations’.
In 1790, the Treasury Secretary Alexander Hamilton also created the Bank of the United States (a central bank) by injecting 20 per cent of the capital and then issuing shares for the rest to the private sector.
A major speculative boom then followed and the credit bubble was curtailed sharply by a banking credit crisis in 1792.
Hamilton’s bank became a ‘lender of last resort’ to offset the growing insolvencies, which has become an essential feature of modern central banking.
The Sinking Fund also bought up government debt to stabilise the markets.
But what this has to do with the European crisis is another issue. There will be no public debt crisis in the Europe as long as the ECB keeps purchasing it. That is the upshot of the dysfunctional architecture of the EMU.
Effectively, Schäuble’s advocacy of a sinking fund, is just another version of the crippling austerity that Member States are exposed to in a system where there is no federal government and no willingness to have community assets.
Ondorioak
(1) The real issue is the dysfunctional architecture of the EMU.
(2) As long as they persist with the system they created there will be a propensity to crisis.
(3) The patch ups to deal with the crisis are always biased to austerity. That is the consequence of having 19 Member States which retained the primary responsibility for fiscal policy but surrendered their currency sovereignty.
joseba says:
Wolfgang Schäuble
QE, Europar Batasuna, inflazioa eta deflazioa…, Schäuble, progreak eta abar
(https://www.unibertsitatea.net/blogak/heterodoxia/2015/10/22/qe-europar-batasuna-inflazioa-eta-deflazioa-schauble-progreak-eta-abar/)
Schäuble jauna: zuzena al da hori?
(https://www.unibertsitatea.net/blogak/heterodoxia/2016/03/04/schauble-jauna-zuzena-al-da-hori/)
Brexit eta W. Schäuble
(https://www.unibertsitatea.net/blogak/heterodoxia/2016/06/11/brexit-eta-w-schauble/)
joseba says:
Inflazio maniaz
Bill Mitchell-en The inflation mania is growing – but manias are manias
(http://bilbo.economicoutlook.net/blog/?p=47492)
The other day I gave a talk to the ‘investment’ community in Melbourne and they wanted to talk a lot about inflation, which seems to be their foremost concern at the moment. Tomorrow, I am giving a similar presentation in Sydney and I expect a similar line of questioning. Think about it. Wages growth is projected to be so low over the next several years that real wages will decline for at least 3 to 4 years. The Output gaps are still significant and were significant even before the pandemic. Households were already cutting back consumption spending growth, given record levels of indebtedness and no prospect of wages growth. Where pray tell are the inflationary pressures going to come from? I also keep reading of similar fears from economists and central bankers. The latest I saw came from Britain, where the outgoing chief economist from the Bank of England started beating on the inflation drum. There are some areas of our economies that will experience price pressures in the coming period given the disruptions in supply and various administrative pricing decisions by governments (reversing pandemic assistance in areas like rents, energy, child care etc). But these pressures in some segments of the economy are unlikely to instigate a major shift to high generalised inflation rates because the capacity of workers to defend their real wages is diminished now. Fiscal policy has a long way to go yet in reducing unemployment and underemployment from their elevated levels before that capacity becomes functional again.
Last week, the outgoing Bank of England chief economist (Andy Haldane) claimed that accelerating inflation was now a real prospect and fiscal and monetary policy would need to be tightened.
I note that this is not the scenario that the Bank of England predicted in 2016 in the lead up and aftermath of the Brexit referendum.
Then the Bank predicted very bad outcomes that were consistent with the doom predicted by the Treasury and a raft of New Keynesian economists – all part of the same crop.
On January 9, 2017, British economist Paul Ormerod wrote a piece in the Prospect Magazine – Why are so few economists Brexiteers? – where he cited Haldane (then chief economist at the Bank of England) as saying that the Project Fear that the mainstream economists in Britain ran during the Brexit referendum and afterwards during the exit negotiations was an example of:
Groupthink culture in the economics profession … The notorious projections by ‘Project Fear’ of the immediate impact of a Brexit vote have been shown to be completely wrong. But, as the Treasury document which produced the forecasts states, they were based on a ‘widely accepted modelling approach’
Haldane, of course, was part of the Project Fear debacle given the Bank, itself immediately claimed that the GDP loss would be a cumulative 2.5 per cent, which at the time was the largest ever downgrade in two consecutive quarterly inflation reports since they were first published in February 1993.
In the – Inflation Report, August 2016 – the Bank of England claimed that:
Following the United Kingdom’s vote to leave the European Union … the outlook for growth in the short to medium term has weakened markedly … likely to push up on CPI inflation … Domestic demand growth is, therefore, projected to slow materially over the near term …
The Bank’s governor at the time, Mark Carney promoted fear when he claimed there would be a “technical recession” if the Leave vote was successful.
In the – Monetary Policy Summary and minutes of the Monetary Policy Committee meeting ending on 11 May 2016 (published May 12, 2016) – a month before the vote, the Bank predicted the worst if the Leave vote was to win – “a materially lower path for growth and a notably higher path for inflation”.
They predicted that GDP growth would fall, the exchange rate would depreciate sharply causing inflation and unemployment would rise.
They predicted that by the end of 2016, the growth would stagnate.
When none of their predictions materialised in any significant way (or at all), Haldane told the Institute for Government (January 5, 2017 – (Source), that the economics profession was in “crisis
” over its embarassing forecasting failures.
He compared the Brexit forecasting disaster with the so-called – Michael Fish Moment controversy – which saw the British BBC weather man (Fish) fail to predict a massive 300-year storm in the SE England in October 15 and go on air and deny that such an event was likely.
Now, as a parting gesture, Haldane gave an interview last week ((Source) where he predicted that there would be a strong recovery from the pandemic and private domestic spending (households and firms) would “maintain the momentum in demand”.
He claimed that “A year from now, it is realistic to expect UK growth to be in double digits”.
But this would likely push up inflation as the economy ‘overheated’ and that would introduce “collateral damage on our finances, squeezing the purchasing power of our pay and causing rises in the cost of borrowing”.
He wrote in the article:
This momentum in the economy, if sustained, will put persistent upward pressure on prices, risking a more protracted – and damaging – period of above-target inflation. This is not a risk that can be left to linger if the inflation genie is not, once again, to escape us
Usual stuff.
Brexit is was real output collapsing and inflation.
Fiscal stimulus in pandemic – output will boom and inflation.
He claims that the stimulus has to be withdrawn and the Bank of England had to cut its bond-buying program substantially as part of a weaning process.
The same inflation fear mongering is coming out of the US with the Treasury secretary and other senior Democrats singing the same song.
The UK Guardian is pushing the line too.
In the article (May 15, 2021) – The fear that haunts markets – is inflation coming back? – the “spectre of inflation” allegedly “had investors on the run last week”.
I told the audience in Melbourne the other day that if they keep listening to the advice from mainstream economists and follow their predictions they will continue to lose investment opportunities.
Many investors have lost billions trying to short sell Japanese government 10-year bonds after being told by economists that yields would rise and bond prices would fall.
That sort of losing trade has been going on for 20 or more years.
More recently during the GFC, mainstream economists predicted bond yields and interest rates would rise and inflation would accelerate and the investment firms shifted positions accordingly and lost a bundle when none of the predictions materialised.
But once again, the inflation fear is out there and spreading because economists are using their failed models and predicting the rising deficits and bond-buying programs will pump too much demand into the economy just as households go on a spending spree after increasing savings over the course of the pandemic.
Remember a once-off price spike in one or more markets is not an inflationary event. It is possible that some commodity markets will see such spikes (like iron ore at present).
Oil prices might rise.
But there has to be a more connected response from workers and firms for those raw material price rises to trigger a generalised inflation.
And, given that inflation rates fell during the worst of the pandemic slowdowns, the fact that they return to pre-pandemic levels is not a signal that they are about to burst.
Some economists are predicting a wages boom as a result of shortages of skills.
As an aside, in Australia, the business bosses are all screaming that the borders have to reopen because there is a skill shortage emerging and they cannot get enough workers.
What they are really saying but won’t is that for too long they have been exploiting cheap, non-unionised labour – short-term foreign (guest worker type) visas or backpackers on holiday – to get labour and avoid paying the statutory wages and providing legal minimum conditions.
So, of course, with the borders shut at present, that source of labour has gone.
But there is still 13.5 per cent of workers not working in one way or another (unemployment or underemployment) and all these bosses need to do is pay the legal wages and they will be able to attract those workers back into employment.
When they scream skill shortage, they are really saying they are not prepared to pay the going wage for workers who are currently available and seeking work.
Scum.
But back to the Bank of England.
It seems that the most recent governor (Andrew Bailey) doesn’t agree with Haldane on the inflation threat.
He predicts some “temporary” price pressures and that:
… the really big question is, is … [whether rising inflation is] … going to persist or not? Our view is that on the basis of what we’re seeing so far, we don’t think it is.
I share that view.
If you look at the underlying data an large scale inflationary event can really only occur if output gaps are eliminated and the economy is maintained at very high pressure for an extended period and/or if raw material prices rise and firms and workers have the capacity to defend their real margins/wages in a time of low relative productivity growth.
At present those sorts of conditions do not appear to be present.
I am yet to see unemployment reach the low levels that would be consistent with a massive wages push from workers.
And what we learned in the period since the 1991 recession is that while unemployment eventually fell to lower levels (never reaching full employment), the labour market slack was maintained by rising underemployment.
The rise of underemployment accompanying the casualisation of the labour market in the neo-liberal era, means that ‘within-firm’ measures of labour slack were now an additional way in which wages growth is suppressed.
I wrote about that in this blog post among others – Not only smokeless, but looking rusty and unusable (October 28, 2010).
The British Office of Budget Responsibility clearly doesn’t think that GDP growth is about to bounce back into double digits.
In its – Economic and fiscal outlook – March 2021 – it predicted that by first-quarter 2026, GDP would only be 6.5 per cent above its March 2020 level.
That is well below the level that would have been achieved if the pandemic had not occurred and GDP had have grown on its pre-pandemic trend.
In that case, GDP would be 10.2 per cent above its March 2020 level by March 2026.
Hardly the stuff that ignites a spending led inflationary spiral.
I produced this graph from their supplementary data set.
But what about potential GDP?
The following graph shows the IMF’s WEO measures of the British output gap (as a percentage of potential output) and the annual inflation rate from 1980 to the IMF’s current forecast horizon of 2026.
The output gap measures how far actual real GDP deviates from potential GDP.
Regular readers will know that I consider the output gap measures produced by organisations such as the IMF (and OBR, for that matter) are biased downwards – that is, they estimate smaller output gaps than exist in reality.
Please read the following blog post for more information on that – The NAIRU/Output gap scam (February 26, 2019).
So, if anything the IMF measure, that is used by many to assess how strong demand is relative to supply potential, will be biased towards the inflation mania narrative.
But examining the data suggests a different story.
First, the output gap remains open throughout the period of the forecast.
Second, if you try to tell an inflation narrative based on ‘too much money chasing too few goods’ (that is, using the output gap measure to indicate spending pressure), then you won’t get very far.
And note that in 1999 and 2008, the IMF was estimating the output gap to be positive. The gap in 2005 was estimated to be 1.784 per cent, then 2.687 per cent, then 3.612 per cent, then in 2008 2.164 percent.
The meaning of a positive output gap is that actual output is outstripping productive capacity, which if true would definitely mean an overheating economy – especially when the state was being maintained for 8 years or so.
During the latter part of that period, the unemployment rate was 4.825 per cent (2005), 5.425 per cent (2006), 5.35 per cent (2007) and 5.725 per cent (2008) – hardly a signal that the economy was overheating.
And between 1999 and 2007, the inflation rate rose from 1.3 per cent to 2.3 per cent, hardly an acceleration.
And to see the sort of bias in reporting consider these two headlines which were published about the same data release.
Bloomberg beating up the inflation mania.
Reuters reporting it as it is.
And when the ONS released the latest data – Consumer price inflation, UK: March 2021 – we learned that:
1. The March 2021 CPI index rose to 109.7 from 109.4 in February 2021.
2. The 12-month inflation rate was 1 per cent to March 2021 and the one-month shift in March was 0.2 per cent.
3. You will be disappointed by the data if you have bought into the inflation mania stuff.
Conclusion
Clearly, some areas of our economies will experience price pressures in the coming period given the disruptions in supply and various administrative pricing decisions by governments (reversing pandemic assistance in areas like rents, energy, child care etc).
But these pressures in some segments of the economy are unlikely to instigate a major shift to high generalised inflation rates because the capacity of workers to defend their real wages is diminished now.
Fiscal policy has a long way to go yet in reducing unemployment and underemployment from their elevated levels before that capacity becomes functional again.
joseba says:
The central banks don’t seem to be worrying about inflation
(http://bilbo.economicoutlook.net/blog/?p=47792)
… The first about the on-going inflation mania and the way in which the ECB seems oblivious to it. (…)
Inflation mania continues
The Bank of International Settlements is now whipping up the inflation narrative.
On June 29, 2021, the BIS released its – Annual Economic Report 2021 – and claimed that:
… the outlook for inflation is one of the big questions keeping financial markets on tenterhooks. Inflation has already increased in a number of EMEs: higher commodity and food prices alongside currency depreciations have given it a push. Moreover, the supply of many intermediate goods is failing to keep up with demand, generating bottlenecks. But the real question is whether the significant rise in inflation already seen in the United States – where it has recently substantially exceeded the target – will be temporary or longer-lasting.
The answer is that the recent rise in prices in the US will be temporary but the BIS thinks that the “plausible scenario” is that:
… inflation proves stronger than expected and financial market conditions tighten, and one in which the global recovery falters and the economy fails to recover.
So they are predicting that central banks will have to increase interest rates because household spending will suddenly go into reverse (saving rates will fall) and fiscal policy will push aggregate spending beyond sustainable rates of growth.
They admit that all the forces that bear on inflation at present are really in favour of “holding inflation down” but then they have to keep their faith by claiming that “non-linearities cannot be ruled out.”
That last claim is just a fancy way of saying they haven’t any reason to believe there will be a sustained outbreak of inflation but something might happen to generate it.
They also think that “even if any increase in inflation ultimately proves temporary, financial market participants could overreact, anticipating more sustained inflation.”
What might such an overreaction do?
Not much in fact.
The BIS think that it will push up government bond yields and make it more expensive for governments to fund spending (in their terms).
Of course, the financial markets can do what they want but the central banks are always able to thwart any negative consequences of these shifts in sentiment.
And the ECB, for example, clearly doesn’t seem to have bought the inflation danger narrative.
Despite all the inflation hawks claiming that the ECB will have to dramatically scale back its – Pandemic emergency purchase programme (PEPP) – and – its other – Asset purchases programmes – the latest data shows the ECB has actually started to ramp up its government bond purchases in recent months.
Here is the history of the PEPP which began in March 2020.
The ECB now holds 1,104,465 million euro worth of assets as a result of this program alone. Most of them are public sector securities.
So far from worrying about all the inflation mania, the ECB is steaming full speed ahead funding the 19 Member State deficits and keeping them solvent.
The objective – to ensure the eurozone doesn’t break up.
Reality: breaking the Treaty but then without this massive bond-buying program the common currency would be dead.
I think the lesson is not to listen to the political statements from peak bodies (such as the BIS) but to watch what the practitioners are doing.