Argentina – CPI 109% interest rates 97%

I blogged back in April about Argentina’s inflation rate and interest rates. Since then both inflation and interest rates have increased further – inflation 109 percent last month and this week the Argentine central bank increased interest rates to 97 percent. In this environment, paying for everyday needs becomes a constant worry and running a business especially challenging. Some good interviews with Argentinian business owners and the general population about the impact of inflation on their lives. Worth a look.


The 3 different waves of a business cycle.

According to Lacy Hunt, chief economist at Hoisington Investment Management the “business cycle” is actually three different waves occurring in a specific order. They peak and trough in that sequence

  1. Financial cycle – lose and tight monetary policy influence the movement
  2. GDP cycle – monetary policy then impact inflation and risk-taking
  3. Price/labour cycle – this later makes wages and prices rise

Source: Hoisington Investment Management

Can the US Fed stimulate growth?

Although central banks can control the money supply, the velocity that it moves in an economy is very important to the business cycle – creating more money has little effect if people don’t use it. Velocity in the US is now lower than it was in the great depression. This is a serious problem for the US Federal Reserve’s attempts to stimulate growth.

There is also the problem of Marginal revenue product of debt – this is the amount of GDP growth generated by each additional dollar of debt. That has been falling for years and is set to fall even more as higher rates divert a bigger part of the revenue from debt-funded projects to interest payments instead of more productive uses.

Source: Mauldin Economics: Thoughts from the front line – 6th May 2023

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New Zealand’s tight labour market but do all benefit?

Figures out yesterday show that unemployment in New Zealand remained at 3.4% which makes for a very tight labour market. One wonders if this figure is beyond the maximum sustainable levels with the RBNZ worried about the pressure on private sector wages feeding into inflation. The RBNZ would like labour market pressures to ease – i.e. they want unemployment – as this should bring down inflation. However on 18th May the government deliver the Budget and no doubt there will be some fiscal stimulus that the RBNZ will need to be aware of – Expansionary Fiscal Policy vs Contractionary Monetary Policy. It seems the Government want to put money into the circular flow especially as it is election year but the RBNZ want to keep inflation between 1-3%. Ultimately it is Politics vs Economics.

Full employment doesn’t mean all workers benefit
Full employment has normally been the concept that has been used to describe a situation where there is no cyclical or deficient-demand unemployment, but unemployment does exist as allowances must be made for frictional unemployment and seasonal factors – also referred to as the natural rate of unemployment or Non-Accelerating Inflation Rate of Unemployment (NAIRU). Full employment does suggest that the employee has a lot of bargaining power as the supply of labour is scarce relative to the demand. In theory a tight labour market should lead to higher wages and improved conditions of work as the employer has less labour to chose from. We have seen in the labour market incentives for employees in recommending potential candidates for vacancies in the company. Other incentives for potential employees include shorter working weeks, hiring bonuses and special leave days.

Michael Cameron’s article in The Conversation suggest that this doesn’t apply to all workers. A lot depends on the bargaining power of the worker and the elasticity of supply of labour. If the supply is very inelastic for a particular job (higher skilled) it is harder and most likely more expensive for the employer to find an alternative worker. This is evident when unemployment is low as the worker can easily look around at other job opportunities. On the contrary if the supply of labour is more elastic (lower skilled jobs) the worker has less bargaining power and the employer will have more potential workers to chose from. The graph below shows the elasticity of supply of labour – high skilled has a steeper curve (inelastic) whilst low skilled as a flatter curve (elastic)

Source: Economicshelp

ANZ New Zealand Labour Market Review | March 2023 Quarter
Michael Cameron writes in The Conversation

Profit-led inflation

Most textbooks cover cost-push and demand-pull inflation but I have yet to come across profit-led inflation. Paul Donovan, Chief Economist at UBS in London, wrote about the inflation in the last couple of years of which profit-led inflation has been prevalent.

There have been 3 upsurges in inflation of since the COVID-19 outbreak.

  1. There was transitory inflation as the fiscal stimulus led to people wanting to spend more as supply chains were struggled to keep a pace with this demand for durable goods.
  2. The war in Ukraine saw a spike in energy prices as economic growth recovered from the pandemic. This was independent of transitory inflation.
  3. Profit-led inflation – this is when companies tell consumers a convincing story that allows them to increase their price with out reducing demand for the product and therefore making it more inelastic. Consumers believe the price increase is ‘fair’ or ‘justified’.

Two types of companies.

  • Those that raise and lower profit margins and prices as demand fluctuates which means that inflation is demand driven.
    These are companies that have weaker pricing power but strong brand values and need repeat customers.
  • They convince customers that something has happened outside their control or the customer doesn’t hinder stand the companies’ true costs. Stories about agricultural prices increasing, climate change etc makes it seem fair but the majority of the cost is in labour and they haven’t been rising as much

To control profit-led inflation raising interest rates is one option in that it should reduce demand and squeeze prices. Convincing customers that they are being taken advantage of, is a faster and less damaging way of reducing inflation. Also social media has a role to play here by facilitating customer thoughts on the product.

Source: What profit-driven inflation might mean

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Argentina inflation 103% = Interest rates 78%

The Argentinian central bank has continued its tightening cycle with 300 (3%) basis point increase in interest rates to 78%. Even with such high interest rates inflation has accelerated as basic food items such as grains and meat have increased mainly due to the drought that is affecting the country – CPI 103%. But such high rates are necessary to avoid a big outflow of the currency (Peso) as Argentinians look to the safety of the US dollar and therefore exchange their Pesos for US dollars. This would lead to a collapse of the Peso and a loss of confidence in the Argentinian economy.

The major worry about the inflation is that it has been so prevalent over the last five years that there is strong inflationary expectations. This causes consumers to buy now, rather than later when goods and services are more expensive – AD shifts to the right causing further increases in prices. It is essential for central banks to maintain a stated target for inflation – RBNZ 1-3% – as this leads to greater confidence in the economy and especially in the banking sector. New Zealand was one of the first countries to adopt inflation targeting in1990.

Trust. Ultimately the trust in the central bank meeting their inflation target is important to businesses and households as they plan for future expenses etc. Expectations are anchored around these targets and essential for consumer and producer confidence and ultimately growth. It is imperative that central banks need to be able to build up trust and institutional creditability.

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Croatia tackle inflation with price caps

The Croatian government has introduced price caps on basic food items to tackle the cost of living crisis. The foodstuffs that have been capped are sunflower oil, milk, flour, white crystal sugar, whole chicken, pork and minced meat.

Croatia recently adopted the Euro and as with other countries when the transfer from local currency happens consumers argue that businesses use the move to the Euro as an excuse to increase prices. Inflation in the Eurozone is currently 6.9% and in Croatia 10.6% – March 2023. Croatia is one of the poorer members of the Eurozone therefore their population is more vulnerable to price rises.

Croatia – GDP per capita is US$17,685
Euro zone – GDP per capita is US$38,411

The concerns about prices caps is when you remove them and let the market dictate the price of goods. Price caps don’t tackle the fundamental reason for inflation and there can be a lack of incentive for firms to increase supply which can have a lasting impact the longer prices are capped. There is the risk that prices will accelerate with limited supply – it is like water building up on the wall of a dam as the longer you leave it the more damaging it will be when you open the dam wall. Price caps can also lead to an increase in the informal market.

Maximum price theory

If a government set a maximum price control of $350 (see graph) for the market of houses to rest this restricts the rent hat landlords are legally allowed to charge tenant. The maximum price of $350 will cause the price to fall from the market of $450 and an increase in quantity demanded of 3,500 to 4,000 and a decrease in quantity supplied from 3,500 to 2,500. There is now a shortage of 1,500 houses to rent and this could give rise to an informal market where some people are willing to pay a higher price than the legally set price by the government of $350 to rent a house. Elearneconomics

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New Zealand interest rate rises an over-correction?

On my way to work last week there was a very good interview on National Radio (NZ) with Robert MacCulloch an economics professor at the University of Auckland. This ended up to be my lesson plan with my A Level class for the last day of term. MacCulloch argued that the interest rate hike of 50 basis points was too great an increase and could lead to a hard landing and deeper recession that could be avoided. His main arguments were:

  • Inflation has stabilised as quarterly inflation had dropped from 2.2% to 1.4% therefore no need for a 50 basis point rise.
  • In other countries (USA) inflation is dropping and those central banks are holding off on interest rate increases.
  • Stated that the RBNZ wants a hard landing and therefore a recession which can be damaging with higher unemployment.
  • More gradualist approach should have been adopted.
  • RBNZ stated that the post-covid inflation was a temporary blip and that stagflation was back in the early 1980’s – we live in a different world today.
  • Would it be better to go hard early with higher increases and then be able to loosen monetary policy? This may mean recession where you hit mortgage holders and those that become unemployed.
  • A lot of other central banks adopting a wait and see approach – couldn’t the RBNZ do the same?
  • Okun’s Law – A slowdown in GDP growth typically coincides with rising unemployment. A hard landing will result in this.
  • In NZ GDP shrank 2% compared to the UK 11%. NZ grew in 2021 so was there a need to have close to 0% interest rates and print $50bn?

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Loose monetary policy not solely to blame for present economic conditions.

Martin Wolf in the FT wrote an interesting piece in the FT yesterday talking about loose monetary policy and not to wholly blame the central banks for the economic environment today. Below are some of the main points that he makes:

  • Deregulation of financial markets, free trade and China joining the WTO in 2001 lowered the global inflation rate.
  • Huge savings were prevalent in the global economy – especially in China and Germany
  • Balance global demand and supply = big investment in housing driven by financial liberalisation.
  • COVID – money growth exploded with expansionary monetary and fiscal policy.
  • Fiscal deficit of G7 countries jumped by 4.6%.
  • Monetary – quantitative easing and stimulatory level of interest rates
  • With supply chain issues, China’s lockdown and the Ukraine War, the dramatic increase in demand could not be met by a corresponding increase in supply. See graph
  • Inflation = higher interest rates = shock to banking system
  • Loose monetary not the blame for what has gone wrong in the global economy
  • Mistake to think that there is a simple solution to the failing of the banking systems

Things would not be wonderful if central banks had stood idly by. We cannot abolish democratic politics. Economic policy must be adapted to our world, not to the 19th century. Martin Wolf

Source: IMF

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How interest rates affect inflation – flow chart

Below is a useful flow chart for anyone studying monetary policy. Both the NCEA Level 3 and CIE A2 courses cover this topic.

Negative – lower interest rates might depress spending by some retirees who rely on interest income. But these counterproductive channels are small compared to the
Positive – lower interest rates = a lower propensity to save and a higher propensity to spend.

The side effects of monetary policy.
Falling interest rates = accelerating house prices = social problems and political anxiety.
If RBNZ kept interest rates at around 8% as in the 2000s to prevent the house price = New Zealand in deflationary spiral.

The economic and social consequences of deflation would be far worse than the (undeniable) problems with rising house prices. The low inflation / falling interest rate dynamic of the past two decades has been a global phenomenon, ultimately caused by a global change in the balance between savings and investment. The Reserve Bank of New Zealand could not have prevented this global trend from affecting New Zealand interest rates without causing severe damage to the economy. In New Zealand, the most important transmission channels are asset prices and the exchange rate. Falling interest rates tend to push asset prices up, which stimulates consumer spending. Falling interest rates also tend to reduce the exchange rate, which generates inflation via the prices of internationally-traded goods and services.

Source: Westpac Bank

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Can globalisation help tame inflation?

Supply chain disruptions and large fiscal deficits have been part of the cause of the inflationary problems that have been prevalent in the global economy. Increased aggregate demand from government spending accompanied by supply constraints have seen prices soar. The IMF blog looked at how we should go back on history and look at how globalisation in the past has offered an antidote to inflationary spirals.

In the 1970’s technology improved global supply chains with the introduction of the shipping container which reduced transport costs of goods. Policymakers like the former US Fed Chairman Alan Greenspan see the relationship between globalisation and innovation a transition to low inflation. This idea has been embraced by current Fed Chairman Jerome Powell who talks of not only technology but demographic factors that bring about sustained disinflation. Trade liberalisation had a part of play here with the role of the General Agreement on Tariffs and Trade (GATT) – now know as the World Trade Organisation (WTO) – providing the rules for much of world trade and presided over periods that saw some of the highest growth rates in international commerce – see graph.

Modern inflation targeting by central banks (1-3% in New Zealand) also brought inflation under control as countries established a process that would allow them to attract capital flows or to globalise further. New technologies will produce better growth and increase the potential capacity of the economy (Production Possibility Curve shifts to the right) but requires a lot of cross-border co-operation. Some countries pursue costly ‘friendshoring’ strategies of steering trade to friendly nations and regimes while attempting to hobble rivals. In particular big economies look to protect strategic vital and strategic resources thereby preventing global economic growth. All of this may seem an easy solution to tame inflation but the reality is there are many variables that influence the inflation figure within countries.

Source: IMF Blog: In defense of globalisation

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Causes of recessions and how do you manipulate the economy for a ‘soft landing’?

Below is a very good video from CNBC that covers the main causes of recessions – overheated economy, asset bubbles and black swan events. Good analysis of soft and hard landings as well as the wage price spiral effect.

“History teaches us that recessions are inevitable,” said David Wessel, a senior fellow in economic studies at The Brookings Institution. “I think there are things we can do with a policy that makes recessions less likely or when they occur, less severe. We’ve learned a lot, but we haven’t learned enough to say that we’re never going to have another recession.” As the nation’s authority on monetary policies, the Federal Reserve plays a critical role in managing recessions. The Fed is currently attempting to avoid a recession by engineering what’s known as a “soft landing,” in which incremental interest rate hikes are used to curb inflation without pushing the economy into recession.

RBNZ – Adrian Orr on supply and demand

Below is a link to an interview with RBNZ Governor Adrian Orr on National Radio’s Morning Report last week. For those new to economics he explains the concept of supply and demand in layman’s terms with regard to inflation. Notice that he doesn’t mention the word ‘recession’ although talks of a couple of quarters of negative activity. As was predicted the RBNZ increased the OCR by 50 basis points to 4.75%.

Remember in 2012 the focus for inflation was given to 2% which is the mid-point in the 1-3% band. Later in 2018 an additional policy objective was added to maintain a maximum sustained employment. Worth a listen. Also below is a mindmap on monetary policy which might be useful.

Morning Report interview with Adrian Orr

What will higher unemployment figures in NZ mean for monetary policy?

Although still low New Zealand’s unemployment figures today registered an increase of 0.1% to be at 3.4%. The labour market is still tight but there are signs that the reduction in job ads and monthly filled jobs are putting less pressure on the market. This may mean that the RBNZ, who sets monetary policy, sees that aggregate demand is starting to ease indicating a less aggressive stance with interest rates. With inflation at 7.2% and still well above the policy target agreement of 1-3%. the RBNZ might increase the OCR this February by 0.5% which is a reduction on the the previous increase of 0.75% on 23rd November. That would leave the OCR at a peak of 5.25% by May. However if high inflationary expectations become the norm the RBNZ might have to become more aggressive in its policy. Below is a mindmap on monetary policy which might be useful for revision purposes.

Source: ANZ Research 1st February 2023

Adapted from: A Level Economics Revision – Susan Grant.

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How well do we understand inflationary expectations?

In looking at the causes of inflation, textbooks will cover demand-pull and cost-push but not go into much detail about inflationary expectations. If the consumer believes that prices of goods are going to increase this will have an impact on future price levels and the wage demands – a self-fulfilling prophecy.

Higher wages = Higher labour costs = Higher prices

Jerome Powell, US Fed Chairman, has made four 0.75 percentage point hikes in a row is an aggressive monetary policy to reduce inflation. Yesterday’s increase of 0.5% takes the bank’s benchmark lending rate to 4.25% – 4.5%, a range that is the highest since January 2008. He also alluded to inflationary expectations:

“We can’t allow a wage-price spiral to happen,” he said. “And we can’t allow inflation expectations to become unanchored. It’s just something that we can’t allow to happen.”

So how do you measure inflationary expectations? Policymakers use surveys at different times to monitor households’ and firms’ beliefs about prices. Furthermore, in order to try and shape consumer expectations central banks are very transparent as to their forecast of inflation and future interest rate changes.

How well do we understand households’ expectations? An article in the IMF Finance & Development (September 2022) looked at a deeper understanding of how consumers think about inflation. There seems to be a disagreement between consumers and policy makers with the former relying on the price change in a few products like coffee and petrol as an overall indicator of a country’s inflation rate. Past experiences —such as living through events such as the 1970’s oil crisis, the stagflation years of the late 1970’s, the Global Financial Crisis 2008, stock market crash of 1987 (Black Monday) etc, can influence peoples understanding of inflation for years to come. For instance if you lived through the stagflation years you are you more likely to be less optimistic about controlling inflation?

Andre et al (2022) recent research set out to see if economic policy (fiscal and monetary) and economic events result in the same expectations by laypeople and experts. They focused on unemployment and inflation and distributed surveys to 6,500 households and 1,500 experts. The survey asked respondents to consider four hypothetical shocks to the US economy:

  • a sharp increase in crude oil prices
  • a rise in income taxes,
  • a federal government spending increase,
  • a rise in the Federal Reserve’s target interest rate.

All respondents were given the current figures for inflation and unemployment and were asked to give their forecast of their movement over the following year after being given news about one of the four shocks. Interestingly laypeople believed that an increase in interest rates and income taxes would increase inflation which is contrary to what economics textbook models show – see Chart 1. The difference of opinion seems to stem from the interpretations of demand versus supply models see Chart 2. The experts used theoretical models and economic toolkits whilst the laypeople were more likely to rely on personal experiences, political views and a different interpretation – i.e. they look at supply-side issues:

higher interest rates = higher costs for firms = increase in prices to maintain profit margins = inflation↑

Experts take the view that it is a demand-side issue:

higher interest rates – higher cost of borrowing for consumers = less borrowing = inflation↓

Central Banks look to make communication more accessible

Central banks are now trying to, not only make communication accessible, but also much easier to understand. For example the European Central Bank (ECB) has built a presence around social media platforms using simpler language to explain the impact of interest rates on inflation.

Economic models depend on ‘rational expectations’ according to which households base their individual decisions—on how much to save, consume, and work—on expectations about the uncertain future state of the economy.

Source: Hall of Mirrors: How Consumers Think about Inflation by Carlo Pizzinelli
IMF F&D September 2022

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Globalisation to regionalisation and its impact.

With the global economy experiencing supply chain pressures, inflationary problems, higher interest and geopolitical tensions are we seeing a move to more regionalisation rather than globalisation?

Part of this change has come about from the decoupling of the American, European and Japanese economies from China. This ultimately alters trade and investment flows around the global economy and will mean lower economic growth and less liquidity. For instance consider the restrictions on technology including complex microchips being placed by the US on China. Janet Yellen the US Treasury secretary referred to ‘friendshoring’ which means relocating production to countries that fall within the US economic sphere of influence. Apple’s recent announcement that it would begin sourcing sophisticated chips from North America is the signal that many global firms have been waiting for to begin reducing their exposure to China.

Furthermore as well as the impact of decoupling of trade with China, a shortage of labour will also add to production costs and will result in slower rates of growth. Labour force participation rates have dropped as there have been less migrant workers coming into countries. This scarcity of labour will put further pressure on wages and ultimately inflation. To counteract the latter interest rates will continue to climb and this will lead to further problems:

  • The cost of financing economic expansion will become more expensive.
  • Firms that have lived off 0% interest rates and negative real rates (nominal interest rate – inflation) will face increasing problems on their balance sheets

In the medium term interest rates are determined by inflationary expectations and rates tend to move lower in periods of disinflation and higher in periods of inflation. The risk for all central banks and policymakers is if the rate of inflation goes above that of expectations there can be a further tightening cycle.

Response to shocks – GFC and COVID-19

The GFC and COVID-19 saw the primary policy response of an expansionary monetary policy (near 0% interest) due to insufficient aggregate demand. The result of this policy has changed the economic landscape. Today things are quite different:

  • insufficient aggregate supply,
  • persistent supply shocks,
  • higher inflation,
  • higher interest rates
  • slow growth.

After years of loose fiscal, monetary, and credit policies and major negative supply shocks, stagflationary pressures are now putting the squeeze on a massive mountain of public- and private-sector debt. Recession (negative GDP for two consecutive quarters) seems on the cards.

Source: The Real Economy Blog

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US dollar strength a problem in fighting inflation

The US dollar hasn’t been stronger since 2000 – it has appreciated:

  • 22% – Yen,
  • 13% – Euro,
  • 6% – emerging market economies.

The dominance of the US$ has serious implications for the macroeconomy of almost all countries. Although US share of world trade has declined from 12% to 8% the US$ share of world exports has remained around 40%. Therefore imports denominated in US$ into countries have become more expensive and it is estimated that for every 10% US$ appreciation adds 1% to the country’s inflation figure. For developing countries with a high dependency on US$ denominated imports this is particularly worrisome.
Furthermore almost 50% of cross-border loans and international debt securities are in US$ and although emerging market governments have made progress in issuing debt in their own currency, their private corporate sectors have high levels of dollar-denominated debt. As the US Fed continue to raise interest rates with a fourth consecutive 75 basis points rise on 2nd November financial conditions have tightened and the strong US$ only compounds these pressures especially for many low income countries that are close to defaulting on their debt.

What should countries do?
Some countries and intervening in the foreign exchange buying their own currency with US$ reserves – foreign reserves fell by over 6% in the first half of this year to support their currency. Intervention should not be a permanent policy as it could mean a loss of foreign reserves as well as alerting markets to your intentions which could play into the hand of foreign exchange dealers. Monetary policy needs to keep inflation close to its target rate and the higher price of imports should reduce demand and therefore prices but a lot depends on the elasticity of demand for a country’s imports – if inelastic there is increasing pressure on inflation. Fiscal policy should provide some support to those that are most vulnerable without jeopardising the inflation target.

Source: IMF Blog – How Countries Should Respond to the Strong Dollar.

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New Zealand and Global Economy update.

New Zealand Economy

As we approach the external exam season it is important that you are aware of current issues to do with the New Zealand and the World Economy. Examiners always like students to relate current issues to the economic theory as it gives a good impression of being well read in the subject. Only use these indicators if it is applicable to the question. Indicators that you might want to mention are below.

  • New Zealand’s gross domestic product (GDP) expanded by 1.7 percent in the June 2022 quarter, above market expectations.
  • Coming from record low interest rates the RBNZ has recently increased the OCR by 50 basis points (0.5%). They did consider 75 basis points.
  • A current account deficit of $7.1 billion was recorded in the June 2022 quarter, compared with a deficit of $8.8 billion in the previous quarter (in seasonally adjusted terms)
  • Annual inflation remains high globally, with annual inflation within the OECD averaging 10.3 percent in August.

Global Economy – October 2022

Notice that global interest rates are on the rise as the countries tackle the current inflationary problem. Within OECD member countries, annual inflation ranged from 3% in Japan to 80.2% in Turkey. Global inflation is expected to moderate next year but likely to remain above inflation targets in many economies – RBNZ 1-3%. However with the tight monetary conditions expected to remain in place until mid 2023 GDP growth will be subdued.

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UK Pound slumps as IMF advises against tax cuts

Below is a very good video from Al Jazeera that explains the Bank of England’s emergency intervention to calm the market after the UK’s government’s tax cut plans. Once these plans were announced the GB Pound slumped to it lowest level $1.035 against the US Dollar since 1985. The BoE announced it is buying up long-dated UK government bonds to bring stability to financial markets but even higher interest rates are still likely and that is worrying news for the country’s property market. Good coverage of this below from Al Jazeera.

Modern Monetary Theory vs Mainstream Monetary Theory

Although not in the A2 syllabus we have had some great discussions in my A2 class on Modern Monetary Theory – MMT. It has its roots in the theory of John Maynard Keynes who during the Great Depression created the field of macroeconomics. He stated that the fact that income must always move to the level where the flows of saving and investment are equal leads to one of the most important paradoxes in economics – the paradox of thrift. Keynes explains how, under certain circumstances, an attempt to increase savings may lead to a fall in total savings. Any attempt to save more which is not matched by an equal willingness to invest more will create a deficiency in demand – leakages (savings) will exceed injections (investment) and income will fall to a new equilibrium. When you get this situation it is the government that can get the economy moving again by putting money in people’s pockets.

MMT states that a government that can create its own money therefore:

1. Cannot default on debt denominated in its own currency;
2. Can pay for goods, services, and financial assets without a need to collect money in the form of taxes or debt issuance in advance of such purchases;
3. Is limited in its money creation and purchases by inflation, which accelerates once the economic resources (i.e., labor and capital) of the economy are utilised at full employment;
4. Can control inflation by taxation and bond issuance, which remove excess money from circulation, although the political will to do so may not always exist;
5. Does not need to compete with the private sector for scarce savings by issuing bonds.

Within this model the only constraint on spending is inflation, which can break out if the public and private sectors spend too much at the same time. As long as there are enough workers and equipment to meet growing demand without igniting inflation, the government can spend what it needs to maintain employment and achieve goals such as halting climate change.

How does it differ from more mainstream monetary policy – see table below.

Those against MMT are dubious of the idea that the treasury and central bank should work together and also concerned about the jobs guarantee. They argue that if the government’s wage for guaranteed jobs is too low it won’t do much to help unemployed workers or the economy, while if it’s too high it will undermine private employment. They also say that trying to use fiscal policy to steer the economy is a proven failure because politicians rarely act quickly enough to respond to a downturn. They can’t be relied upon to impose pain on the public through higher taxes or lower spending to quell rising inflation.

Below is a video from Stephanie Kelton, an MMTer who was the economic adviser on Vermont Independent Senator Bernie Sanders’s presidential campaign in 2016.


The Economist – Free Exchange – March 16th 2019

Wikipedia – Modern Monetary Theory

Central Bank Interest Rates – more increases in the horizon

Jerome Powell US Fed Chair increased the Fed Funds Rate by 0.75% last week to 3.25% and has signalled that he will do what is required to get the inflation rate down to the 2% target. Policy rates are still negative almost everywhere, the main exceptions being China, Brazil, Hong Kong, and Saudi Arabia. Mexico and Indonesia are almost there, too.

Thoughts from the Frontline – Mauldin Economics.

If there is a negative real interest rate, it means that the inflation rate is greater than the nominal interest rate. If the interest rate is 2% and the inflation rate is 10%, then the borrower would gain 8% of every dollar borrowed per year. In the early 1970s, the US and UK both reduced their debt burden by about 30% to 40% of GDP by taking advantage of negative real interest rates.

It is possible to control inflation while keeping real rates well below zero but it is more likely that reducing demand will require raising real rates at least to 0%, and probably a bit higher. Higher interest rates globally are on the horizon as at present they aren’t high enough to significantly reduce inflation pressure in most countries. Central banks have work to do.

Source: Mauldin Economics