Bill Mitchell-en The monetary and fiscal normality of Wolfgang Schäuble – stagnation and entrenched unemployment
(http://bilbo.economicoutlook.net/blog/?p=47642)
(i) Sarrera gisa
I have been working on an article that will come out in the press soon on inflationary pressures1. It is obvious that characters like Larry Summers and Olivia Blanchard are trying to stay at the centre of the debate by issuing various lurid threats about the likelihood of an inflation outbreak in the US and elsewhere. Last week, the Financial Times published an article (June 3, 2021) by the former German Finance Minister and now President of the Bundestag, Wolfgang Schäuble – Europe’s social peace requires a return to fiscal discipline. I was initially confronted with the juxtaposition of this author, who bullied all and sundry during to the GFC to ensure an austerity mindset was maintained at great cost to the millions who were deliberately forced to endure unemployment, with the photo of John Maynard Keynes under the title of the article. The title didn’t seem to match the picture. My first impressions were correct. Lessons have not been learned.
(ii) BPG EBn, Australian eta AEBn
To refresh our memory, this graph shows the real GDP indexes for the Eurozone Member States (19), Australia and the US from the March-quarter 2005 to the March-quarter 2021.
It took until the June-quarter 2015, more than 7 years after the onset of the GFC, for the Eurozone as a whole to get back to the production size they achieved in the March-quarter 2008.
And, before the pandemic hit, the Eurozone economy was only 8.8 per cent bigger than it was in the March-quarter 2008. By comparison, Australia’s economy was 32.8 per cent larger and the US economy was 22.2 per cent larger.
These differences were mostly created by the different fiscal policy responses the respective governments took.
The austerity that the European Commission and its Troika mates imposed on the 19 Member States directly led to the massive waste of productive potential and income generation in that region.
For individual countries the situation is also rather diverse and provides an empirical refutation of the crazy political narratives that the creation of the common currency was all about convergence and shared prosperity.
The next graph shows the divergence. Ireland was excluded because of the way their treatment of foreign firm relocations in their national accounts has distorted their growth rates.
With the overall Eurozone exhibiting very little growth (Euro19), the Southern states have fared very badly since the March-quarter 2008.
Spain has contracted by 3.2 per cent overall.
Portugal by 4.3 per cent.
Italy by 11 per cent.
Greece by a staggering 29.5 per cent.
There is no prosperity in these nations when assessed overall.
(iii) John Maynard Keynes
That is background.
When Wolfgang Schäuble advocated a return to “monetary and fiscal normality”, it is a normality that delivered this mess.
Wolfgang Schäuble started his Op Ed with a quote from John Maynard Keynes:
In the long run we are all dead …
The segment from Keynes was published in his 1923 work – A Tract on Monetary Reform.
He was discussing the reliance by neoclassical economists on the Quantity Theory of Money to underpin their notion of inflation – that excessive monetary growth would feed into spending in a fully employed economy and the only adjustment that would then be possible was for prices to rise to ration the excessive nominal spending.
He vehemently disagreed with the notion that an increase in the volume of currency in circulation would not influence any real variables – like employment, output etc.
The neoclassical school embraced what was known as the classical dichotomy (the split between nominal and real) where monetary expansion would only influence nominal aggregates (prices) rather than have any real stimulative effects (reducing unemployment).
He considered that this might only be true “in the long run” to which he wrote:
But this long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again.
What he was railing against when he wrote that was the prevailing and dominant neoclassical view that the macroeconomy always tends to achieve ‘equilibrium’ (that is, full employment) if the ‘market’ to unfettered by government interference.
He considered that the capitalist monetary system was biased towards disequilibrium and entrenched unemployment, which would need an external prod to change from that state.
Later, in his 1936 General Theory, he obviously explained this view in more detail.
Keynes would never tolerate a situation where austerity was imposed by governments to reduce fiscal deficits at the same time private spending was weak and collapsing and unemployment was rising.
In other words, he would never have accepted the austerity that Wolfgang Schäuble and his cronies inflicted on the Member States after the GFC.
For Keynes, unemployment was not only a waste of resources but an evil.
In the 1923 Tract he wrote:
… it is worse, in an impoverished world, to provoke unemployment than to disappoint the rentier. But it is not necessary that we should weigh one evil against the other. It is easier to agree that both are evils to be shunned.
In his 1925 book – The Economic Consequences of Mr Churchill – Keynes wrote:
By what modus operandi does credit restriction attain this result? In no other way than by the deliberate intensification of unemployment.
(iv) Wolfgang Schäuble
It is obvious from his past record that Wolfgang Schäuble is prepared to tolerate mass unemployment, deliberately created by austerity, if his goal of “sustainability”, is achieved.
Sustainability is defined by Wolfgang Schäuble in terms of debt ratios and fiscal balances.
For him, the most important thing is that Member States repay their debts and maintain their spending within the limits set by the private bond investors, without central banks distorting the investment choice through asset purchasing programs.
This calculus is really independent of the state of the labour market, although the fiscal aggregates are clearly influenced by the health of the that market.
For Wolfgang Schäuble it is more important for a Eurozone nation to be able to issue debt to the private bond investors at stable yields than it is to ensure there is full employment.
It is clear that the aims of the bond investors are not necessarily aligned to the concept of generalised well-being. Their logic differs.
Wolfgang Schäuble also rehearses the standard inflation line by claiming that accelerating inflation will result from the European Central Bank’s public bond buying program, which has purchased most of the Eurozone government debt issued since the pandemic began.
He wrote:
This boosts the inflationary expectations of firms and private households. In this way, the eurozone risks a currency devaluation that could take on a virtually unstoppable dynamic.
There are misconceptions as to what inflation actually is.
Inflation is the continuous rise in the price level.
A one-off price rise does not constitute inflation. For example, after recessions, firms often withdraw discounts and return prices to pre-recession levels.
These adjustments do not constitute inflation.
Share market booms are also not akin to generalised inflation.
Inflation expectations data shows that they are largely stable at present.
The latest Eurostat data – Inflation in the euro area (June 1, 2021) – which considers data from May 2021, shows that Euro area inflation is currently around 2 per cent, a 0.4 points rise from April 2021.
Eurostat write:
Looking at the main components of euro area inflation, energy is expected to have the highest annual rate in May (13.1 %, compared with 10.4 % in April), followed by services (1.1 %, compared with 0.9 % in April), non-energy industrial goods (0.7 %, compared with 0.4 % in April) and food, alcohol & tobacco (0.6 %, stable compared with April).
Some price pressures have emerged as the pandemic eases.
Shifts in oil prices are driving higher price levels at present, which is no surprise.
Oil prices fell sharply as the lockdowns kept us off the road. This was despite the production cuts that OPEC imposed early on in the pandemic to try to prevent such a fall.
But, now, the increased demand for fuel, as cars have returned to the roads, is pushing up prices.
No surprise there.
With energy prices heavily weighted in national statistical agencies price index measures, it is no surprise that the rapid increase in oil prices is driving a rise in CPI outcomes.
But look at this graph, which shows the OPEC Basket Oil Price from January 2003 to June 1, 2021.
The OPEC Reference Basket (ORB) for global oil prices is still below pre-pandemic levels and well below the stable post GFC levels.
And the US Energy Information Administration forecasts oil prices will flatten out through 2022.
When these cyclical adjustments sort themselves out the CPI rises will disappear.
More importantly, these rises have nothing much to do with fiscal or monetary policy.
They just reflect the into-and-out of lockdown variations in overall fuel demand.
Fear mongers point to the OPEC hikes in October 1973, when global oil prices rose from an average 2.48 US dollars per barrel in 1972 to $11.58 in 1974.
However, there is little prospect of a 1970s-style inflation emerging.
Then, strong unions and firms with price setting power engaged in a donnybrook aimed at shifting the real income losses from the rising oil prices onto each other.
But the strength of the relationship between oil prices and inflation has waned since the 1990s.
The ability of workers to engage in this sort of distributional struggle has been constrained by the rise of precarious work, persistent elevated levels of unemployment and underemployment and pernicious legislation that has reduced union capacity to pursue wage demands.
Since 1995, average annual inflation across advanced nations has been just 1.87 per cent.
In Japan, the average inflation rate has been 0.2 per cent.
A 1970-style wages breakout will not happen.
He wants a return to austerity or “monetary and fiscal normality”, a normality that maintained elevated unemployment levels and stagnant growth.
Extraordinarily, Wolfgang Schäuble considers that a return to austerity or “monetary and fiscal normality”, is required to protect the “social fabric”.
Refresh your memory of the graphs above.
This is a normality that maintained elevated unemployment levels and stagnant growth.
But it gets worse.
He thinks that government deficits widen “the gulf between rich and poor”.
Inequality in Europe has increased sharply since the adoption of the common currency.
In this article (April 22, 2019) – Forty years of inequality in Europe: Evidence from distributional national accounts – we learn that:
Inequalities have risen in a majority of European countries since 1980 …
Rising inequalities in Europe appear to have been mainly driven by dynamics visible at the very top of the income distribution. In the past four decades, the poorest 80% Europeans’ average incomes grew by about 20% to 50% … As soon as one looks at richer income groups, however, growth rates are markedly higher, exceeding 100% for the top 1% and culminating at 200% for the top 0.001% of European citizens. Between 1980 and 2017, the top 1% alone captured 17% of European-wide growth, compared to 15% for the bottom 50%.
I guess he could argue this occurred as a result of the rising deficits in the GFC.
But that wouldn’t cut it at all.
There is a problem when fiscal policy expansion is poorly designed and shores up, for example, the pay and benefits of banksters and neglects proper unemployment benefit coverage.
But that is not an intrinsic problem with using expanding deficits to protect jobs.
It is just that neoliberal politicians do neoliberal things and misuse the policy tools at their disposal.
I will write more about that soon.
But what Wolfgang Schäuble has in mind when he talks about “monetary and fiscal normality” is:
1. Cutting fiscal deficits.
2. Running “balanced budgets”.
The result: further stagnation, entrenched unemployment, rising poverty, rising suicide rates, and further damage to the social fabric of Europe.
Ondorioa
Leopards don’t change their spots.
1 Ikus Price rises should be short-lived – so let’s not resurrect inflation as a bogeyman: https://www.theguardian.com/commentisfree/2021/jun/08/price-rises-inflation-full-employment-public-spending_
joseba says:
Prezio gehiketak epe laburrekoak izan beharko lirateke
Price rises should be short-lived – so let’s not resurrect inflation as a bogeyman
(https://www.theguardian.com/commentisfree/2021/jun/08/price-rises-inflation-full-employment-public-spending)
William Mitchell
Until full employment is reached, governments need not cut back on public spending
A decade ago the financial press, echoing predictions from mainstream macroeconomists, obsessed about whether governments would run out of money as deficits rose to combat the global financial crisis. Stark predictions of rising bond yields and inevitable debt defaults came to nought.
Now, with much larger deficits, the headlines are all about inflation. No one seems worried any longer about government insolvency as capitalism survives on fiscal life-support systems. The focus has shifted from meaningless financial ratios to substantive issues relating to real resource scarcity (that is, how close nations are to full employment). However, the inflation mania is as misconstrued as the earlier solvency fears.
Lurid statements, like this in the Wall Street Journal: “Anxiety about inflation is at a fever pitch, among economists and in markets” and this headline in the Dow Jones-owned Marketwatch: “The biggest ‘inflation scare’ in 40 years is coming”, feed the frenzy. Apparently, rising household saving during the lockdowns will become an expenditure binge as restrictions ease. Accordingly, the former US treasury secretary Larry Summers claimed that Biden’s fiscal injections would “overheat” the economy and cause accelerating inflation.
The former German finance minister Wolfgang Schäuble has also claimed that accelerating inflation will result from the European Central Bank’s public bond-buying programme, which has purchased most of the eurozone government debt issued since the pandemic began. He wants a return to austerity or “monetary and fiscal normality”, a normality that maintained elevated unemployment levels and stagnant growth.
Inflation hawks claim the large deficits and central bank bond buying programmes – quantitative easing, or QE, which is mischaracterised as “money printing” – will deliver Zimbabwe-like outcomes. However, they just misunderstand how governments spend and are ignorant of the history of hyperinflations.
All government spending is facilitated by central banks typing numbers into bank accounts. There is no spending out of taxes or bond sales or “printing” going on. All spending – public or non-government – carries inflation risk if nominal spending growth outstrips productive capacity. As full employment is reached, governments have to constrain spending growth and may have to increase taxes to curtail private purchasing power. But we are a long way from that point, with elevated levels of unemployment and largely flat wages growth.
Japan’s experience since the 1990s demonstrates the spurious nature of mainstream macroeconomics, which erroneously predicted bond market revolts and accelerating inflation in the face of its large deficits and QE programme, which most nations have now copied. Modern monetary theory (MMT) demonstrates that QE involves central banks buying government bonds by adding cash to bank reserves. Bank lending is not constrained by available reserves – they are never loaned out to consumers. Rather, lending is driven by demand from credit-worthy borrowers, who are thin on the ground in deep recessions. The only way that QE can stimulate total spending is via its capacity to lower interest rates. When the central bank buys bonds in the secondary markets, the increased demand reduces yields and this permeates into lower rates for relates financial assets. The lower bond yields may have stimulated increased demand for equities, but they have not pushed total spending beyond resource constrain.
Further, massive supply shocks explain the hyperinflation of 1920s Germany and modern-day Zimbabwe. The Zimbabwean government’s confiscation of highly productive white-run farms to reward soldiers who had no experience in farming, caused farm output to collapse, which then damaged manufacturing. Even with fiscal surpluses, hyperinflation would have occurred, such was the supply contraction. The current supply chain disruptions are temporary and relatively small by comparison.
There are misconceptions as to what inflation actually is. Inflation is the continuous rise in the price level. A one-off price rise does not constitute inflation. For example, after recessions, firms often withdraw discounts and return prices to pre-recession levels. These adjustments do not constitute inflation. Share market booms are also not akin to generalised inflation.
Some price pressures have emerged as the pandemic eases. Oil prices fell sharply as the lockdowns kept us off the road. The increased demand for fuel, as cars have returned to the roads, is pushing up prices. But the Opec Reference Basket (ORB) for global oil prices is still below pre-pandemic levels and well below the stable post-global financial crisis levels. The US Energy Information Administration forecasts oil prices will flatten out through 2022.
Fearmongers point to the Opec hikes in October 1973, when global oil prices rose from an average 2.48 US dollars per barrel in 1972 to $11.58 in 1974. However, there is little prospect of a 1970s-style inflation emerging. Then, strong unions and firms with price-setting power engaged in a dispute aimed at shifting the real income losses from the rising oil prices on to each other. But the strength of the relationship between oil prices and inflation has waned since the 1990s. The ability of workers to engage in this sort of distributional struggle has been constrained by the rise of precarious work, persistent elevated levels of unemployment and underemployment, and pernicious legislation that has reduced union capacity to pursue wage demands. Since 1995, the IMF’s World Economic Outlook data shows that average annual inflation across advanced nations has been just 1.87%. In Japan, the average inflation rate has been 0.2%. A 1970s-style wages breakout will not happen.
Modern monetery theory draws attention to inflationary triggers that are independent of aggregate spending pressures: for example, administrative pricing practices (for example, indexation agreements with privatised energy or mass transport companies to increase prices irrespective of current conditions) and abuse of market power (such as cartels). Further, one of the problems the global financial crisis exposed, which has not been adequately dealt with, is the speculative move by hedge funds into agricultural commodity markets, which triggered massive food price increases in 2008. These triggers do require legislative focus.
I believe that the current price spikes, though, are transient, and will be absorbed without any entrenched inflation emerging. Accordingly, they do not justify a return to austerity.
joseba says:
Letter: It’s time Europe stopped fetishising fiscal discipline
https://www.ft.com/content/a92a20e2-7efb-497c-bc13-0e002d4aca2e?shareType=nongift
joseba says:
Prezio igoerak eta inflazioa
Bill Mitchell-en Rising prices equal an inflation outbreak (apparently) but then the prices start falling again
(http://bilbo.economicoutlook.net/blog/?p=47715)
In my daily data life, I check out movements in commodity prices just to see what is going on. As I wrote recently in my UK Guardian article (June 7, 2021) – Price rises should be short-lived – so let’s not resurrect inflation as a bogeyman – the inflation hysteria has really set in. I provided more detail in this blog post – Price rises should be short-lived – so let’s not resurrect inflation as a bogeyman (June 9, 2021). Yes, I stole the title of my article for the blog post if you are confused. The inflation hysteria really reflects the fact that mainstream economists are ‘lost at sea’ at present given the dissonance between the real world data and the errant predictions from their economic framework. They cannot really understand what is happening so when they see a graph rising it must be inflation and that soothes them because rising deficits and central bank bond purchases have to be inflationary according to their perverted theoretical logic. The financial market press then just repeats the nonsense with very little scrutiny. But given many graphs are falling again, this Pavlovian-type response behaviour must be really doing their heads in. I have no sympathy.
The inflation scare rises on a number
The accelerating inflation narrative was given a boost last week when the US Bureau of Labour Statistics released the May 2021 their latest Consumer Price Index data.
In their ‘The Economics Daily’ article (June 16, 2021) – Consumer prices increase 5.0 percent for the year ended May 2021 – we learned that:
The Consumer Price Index for All Urban Consumers increased 5.0 percent from May 2020 to May 2021. Prices for food advanced 2.2 percent, while prices for energy increased 28.5 percent. Prices for all items less food and energy rose 3.8 percent for the year ended May 2021, the largest 12-month increase since the year ended June 1992.
This set off all the inflation scaremongers but they really should have been more circumspect.
At least the US Federal Reserve Monetary Committee didn’t really blink.
In their June 16, 2021 (released on the same data as the BLS data came out) – Federal Reserve issues FOMC statement – they maintained policy settings and repeated that it was “committed to … promoting its maximum employment and price stability goals.”
It announced that:
The Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time. In addition, the Federal Reserve will continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage‑backed securities by at least $40 billion per month until substantial further progress has been made toward the Committee’s maximum employment and price stability goals.
So no rush to an inflation is out of control narrative.
If inflation is accelerating why are long-term bond yields falling?
I gave an after-dinner address to a financial markets conference in Sydney last week and inflation was on everybody’s tongue during the dinner.
I was not surprised how quickly the narrative has turned in this way.
As I noted during the talk, the mainstream macroeconomics narrative is so far out of kilter with reality that proponents are just coping with the dissonance by going back to Pavlovian-type triggers.
See food, and eat it sort of stuff.
In their case, they have been seeing relatively large fiscal deficits and central bank asset purchasing programs and the only thing their defective model says about that sort of conjunction is rising interest rates and bond yields and inflation.
They cannot ‘understand’ the world in any other way.
So their only ‘contribution’ is to scream ‘rising inflation’.
Except that they have constant troubles dealing with the reality that confounds this response.
If the US economy was overheating and inflation was about to break out then why would long-term US bond yields be falling recently?
That is a question I posed to the dinner.
Have a look at the history of the US 10-year Treasury bond yields since the beginning of 2021.
You can get for all available maturities from the US Department of Treasury’s site – Daily Treasury Yield Curve Rates.
As the economy started to opened up a bit in February and sentiment improved, investors started to diversify their portfolios away from the risk-free Treasury bonds and yields rose a little.
Since mid-March, yields have flattened and now falling.
Why does this militate against the accelerating inflation narrative?
For those who are a little hazy about bond markets – or fixed income markets – a bond represents a future flow of cash returns which comprise regular ‘coupon’ (interest) payments that are fixed and the refund of the principal (face value) upon maturity.
Given there is no default or credit risk in holding a US government bond (or any bond issued by a currency-issuing nation) the only uncertainty that a investor faces is the path of inflation over the time that these cash payments are relevant.
I explained the relationship between movements in yields and prices of government bonds in this blog post – Whether there is a liquidity trap or not is irrelevant (July 6, 2011).
We also discuss the difference between primary and secondary markets in that post.
The simple rule is that when bond prices rises (fall) due to demand fluctuations, yields fall (rise).
Expectations of inflation become part of this dynamic because inflation reduces the real value of the these future cash flows.
So if investors expect that inflation is becoming an issue, then they will demand higher yields at the primary issue and will be prepared to pay less for outstanding bonds in the secondary market.
The higher the expected inflation, the higher the risk premium that will be built into required yields.
The bond investors closely watch the central bank’s monetary policy.
If they form the view that the policy interest rate that the central bank sets is too low, then they will up their inflation expectations (because they have been conditioned to believe this state will promote inflation), and demand higher yields at the investment maturities (long-term).
So the so-called yield curve, which depicts the current bond yields at all maturities will steepen.
Here are two visual depictions of the US Treasury yield curve.
The first surface graph shows the movements across the maturities between May 3, 2018 and June 18, 2021.
The second compares yield curves from the beginning of 2021 to June 18, 2021.
You can see in this graph (which is easier to see than in the previous surface graph) that over June (compare the thicker red and blue lines), the yield curve is flattening rather than steepening.
If inflation was about to runaway, then we should not expect to witness that sort of dynamic.
US real wages down 2.2 per cent
One day after the US Bureau of Labour Statistics released the US CPI data, they released (June 17, 2021) the published an article – Real average weekly earnings down 2.2 percent from May 2020 to May 2021 – in their excellent ‘The Economics Daily’ publication, which highlights the big data news of the day.
The BLS reported that:
Real (adjusted for inflation) average weekly earnings decreased 2.2 percent from May 2020 to May 2021. The change in real average weekly earnings resulted from real average hourly earnings decreasing 2.8 percent from May 2020 to May 2021. The change in real average hourly earnings, combined with an increase of 0.6 percent in the average workweek, resulted in the 2.2-percent decrease in real average weekly earnings over this period.
No wages explosion visible there.
Nominal wages grew by 2.6 per cent only.
In May 2020, average (nominal) hourly earnings were $US29.74 and a year later they had crept up to $US30.33 (Source).
Average weekly hours had risen from 34.7 to 34.9 hours.
Which brings me to the data again
Here at the latest FT Commodities graphs – for Metals and Agriculture and Lumber as at June 18, 2021.
Metals
Agriculture and Lumber
Here are two more detailed graphs – for Soybeans and Lumber – over 2021 to June 18, 2021.
Soybeans
Lumber
Where are the screams of deflation?
I could have shown the movements in energy prices, which have been used to give credence to the accelerating inflation narrative.
Here is the OPEC – Basket Oil Price – from 2003 to June 17, 2021.
Sure enough oil prices have risen in the last few months as more cars are returning to the roads.
This is just a reversal of the price falls that occurred when the cars left the roads during the lockdown.
Note that the current level did not yet reach the pre-pandemic level and in recent days has started to taper off (see the next graph).
This graph shows the data from April 2021 to June 18, 2021.
Conclusion
I realise that it is easy to just be trapped by the data of the day, which doesn’t disclose underlying pressures and just reinforce one’s views.
And, to understand the inflationary potential one has to appreciate the levers that can be stimulated by some cost or demand triggers to generate a new inflationary spiral.
The point is that there are price pressures at present but I consider them to be transient as our economies and markets adjust to the massive disruptions in the global supply chains that have arisen during the pandemic.
And while in another era, these might have triggered a real wage-profit margin struggle between labour and capital, I cannot see the institutional machinery in place now to facilitate such a ‘battle of the markups’.
Trade unions are too weak and pernicious legislation has made it very hard for workers to fight for higher real wages.
joseba says:
Bill Mitchell
Price rises should be short-lived – so let’s not resurrect inflation as a bogeyman
(http://bilbo.economicoutlook.net/blog/?p=47648)
… I had an Op Ed published in the UK Guardian today (my time) which analysed the latest inflation scares that have been dominating the popular media. More and more mainstream macroeconomists are coming out and asserting that economies will overheat. The usual gold bugs have been delighted by this shift in the narrative back to the obsessions and manias that keep them occupied on a daily basis. What was interesting to me was the responses of the commentators to the Guardian Op Ed. If the sentiments expressed represent the state of macroeconomic knowledge (presumably mostly in the UK) then we have a long way to go before Modern Monetary Theory (MMT) and the sensible policies that it might inform gain any serious traction. Given the GFC, the stagnation in the aftermath, 30 years of Japanese history, the pandemic, which have all combined to demonstrate why the mainstream approach is dysfunctional and provides no guidance to what might happen in the real world, the commentators continued to rehearse these failed ideas about inflation, interest rates, bond markets etc. Quite dispiriting.
UK Guardian article
The UK Guardian published an Op Ed from me late yesterday (June 7, 2021) – Price rises should be short-lived – so let’s not resurrect inflation as a bogeyman – which provides a different view to some of the inflation question that is occupying peoples’ attention at the moment.
There is an art in writing just 900 odd words and the author has to make every phrase count and become a container for implicit and sometimes very complex propositions.
One hopes that the curious reader will pursue some of these issues in more depth elsewhere if they are unclear what the emphatic point being made is.
The article attracted 451 comments before the moderator closed the commentary section off.
I read some of them and was astounded how many of them (probably the vast majority) had not taken time to read the words carefully.
There is scope for disagreement always.
But reconstructing what an author says to suit your own pre-conceived and factually incorrect version of reality is not particularly illuminating.
For example, I write:
Inflation ‘hawks’ claim that the large deficits and central bank bond buying (quantitative easing) programs – mischaracterised as ‘money printing’ – will deliver Zimbabwe-like outcomes. However, they just misunderstand how governments spend and are ignorant of the history of hyperinflations.
All government spending is facilitated by central banks typing numbers into bank accounts. There is no spending out of taxes or bond sales or ‘printing’ going on. All spending – public or non-government – carries inflation risk if nominal spending growth outstrips productive capacity. As full employment is reached, governments have to constrain spending growth and may have to increase taxes to curtail private purchasing power. But we are a long way from that point with elevated levels of unemployment and largely flat wages growth.
Many comments claimed that, of course, the central bank is printing money and that will devalue it because it will lead to an explosion in spending.
But the point I was making, which is intrinsic to some of the differentiating knowledge that Modern Monetary Theory (MMT) offers is that all government spending involves new currency entering the system.
There is no spending from taxes.
Or spending from bond sales.
Or spending from ‘printing money’.
These are the options that mainstream macroeconomics teach their students, which conveniently suit their framework, that is used to disabuse politicians and policy makers from running continuous deficits.
All government spending involves new currency entering the monetary system.
There is an inflation risk to that – but to gauge that risk we have to go beyond the monetary aggregates and explore the spending impact on real resource availability.
They also claimed that QE was printing money and would be inflationary.
I had written:
Mainstream economists claimed QE would result in an avalanche of bank lending and inflation. Modern Monetary Theory (MMT) demonstrates that QE involves central banks buying government bonds by adding cash to bank reserves. Bank lending is not constrained by available reserves – they are never loaned out to consumers. Rather, lending is driven by demand from credit-worthy borrowers, who are thin on the ground in deep recessions. QE reduces interest rates, by increasing the demand for bonds and driving down yields, which may have stimulated demand for equities, but have not pushed total spending beyond resource constraints.
But the commentators couldn’t get to parroting quantity theory of money quickly enough.
The QTM partners with the money multiplier to allow neoclassical/New Keynesian economists to claim that when bank reserves rise, broad money rises and inflation results from too much money chasing too few goods.
The causality is that broad money is driven via the money multiplier by the introduction of ‘high powered money’ or in this context bank reserves.
This is wrong on so many levels but the level of indoctrination that these comments reflected goes very deep.
First, when the central bank credits bank reserves in return for receiving bonds via the QE purchase, all that really happens is some numbers are shifted from one account at the central bank (public debt) to another (reserves).
The crediting of the reserve accounts do not involve any ‘money’ entering into the hands of the public (us).
It is fallacious to conclude that banks have greater capacity to make loans because their reserve accounts at the central bank have larger numbers in them.
Sure enough, greater reserve balances means the chances of being compromised on any particular day when the payments system resolves all the interbank transactions falls.
But that doesn’t increase the propensity or the capacity of banks to make loans.
That was the other point I was making.
Banks don’t loan out reserves.
They make loans when a credit worthy borrower seeks a loan. Loans create deposits and the liquidity is then available for spending.
Simple facts tell us that with the vast QE programs that the central banks have been running, broad money has not expanded anything like the expansion in reserves, and there is not a strong relationship between bank lending and reserve accumulation.
So the commentators can go on about ‘money printing’ for all they are worth, but they are just disclosing their own inadequate understanding of how the monetary system that they profess expertise in (which is why they make such assertive comments) actually works.
There was also commentary about housing price inflation.
I was writing about general inflation measures as captured by the standard CPI type measures published by the national statistician.
No-one is denying that in some nations housing has become unaffordable for many citizens because of the booms in prices.
That is definitely a problem but it is hard to directly relate this as a consequence for excessively expansionary monetary or fiscal policy.
More like the housing booms are being exacerbated by:
1. A lack of low income state housing being provided (definitely a problem in Australia) – this requires more public spending not less.
2. Tax structures that distort investment choices and bias savings allocations to speculative property market behaviour and away from productive asset accumulation.
3. Population pressures.
4. Poor urban planning frameworks adopted by nations, states and cities.
So the cure for an ‘inflated’ housing market is not to inflict austerity, which seems to be one of the suggestions that would satisfy the commentators, but to deal with the distortions and lack of public housing.
Anyway, there is a lot of work still to be done if the sentiments expressed by these commentators, who would seem to have a progressive bent (because they read the UK Guardian, notwithstanding the likely trolls), are expressive views and using analytical frameworks that are anything but progressive.