Author Archive

Depression is a Policy Choice, Riksbank Edition

February 21, 2014 1 comment

It is – or should be – astonishing that unelected technocrats get away with this madness without being immediately ejected from office.  From the Riksbank’s latest:

In the forecast, CPIF inflation reaches 2 per cent in 2015. An even more expansionary monetary policy could lead to inflation attaining the target somewhat sooner. But a lower repo rate could also lead to resource utilisation being higher than normal in the long run and to the risks linked to household debt increasing further. The current repo-rate path is expected to stimulate economic developments and contribute to inflation rising towards 2 per cent, at the same time as taking into account the risks linked to household indebtedness.

Low inflation, low output, low employment – it’s simply a policy choice.  They know it is a policy choice.  They think low inflation, output and employment are the right policy choice, because rising household debt leads to, well, um, maybe low inflation, output and employment.

Via Mr. Svensson, still methodically attacking the madness.

Categories: Monetary Policy, Sweden

That 2013 Q4 Productivity Recovery, One Graph Version

February 20, 2014 9 comments
UK Productivity, Deviation from Long-Run Trend

UK Productivity, Deviation from Long-Run Trend

This data is slightly better than was expected, output/hour rose in absolute terms.

Categories: Productivity

Holy Disinflation, Batman!

February 18, 2014 5 comments

I’m still trying to stay intensely relaxed about the falling UK CPI rate.  There is more than enough media coverage on that 1.9% number.  What has not been so widely advertised is that the ECFIN Economic Sentiment Indicator rose in January to the highest level since 1997.  The lesson of the last five years is that the CPI rate is not a good proxy for aggregate demand.  Let’s not forget it!

ECFIN Economic Sentiment Indicator

ECFIN Economic Sentiment Indicator. Source: Eurostat Eurostat ei_bssi_m_r2

For what it is worth, the Bank of England think monetary policy is a little too tight to hit their 2% inflation target on the two year horizon, where the median forecast is now 1.9%.  And that is the way we should judge the stance of monetary policy under inflation forecast-targeting.

Bank of England Inflation Forecasts

Bank of England Inflation Forecasts. Source: BoE

Giants and Titans

January 30, 2014 Leave a comment

A short note.  Faisal Islam got his hands – literally – on the giants and titans.  A fascinating quirk of British monetary history is the existence of £1m (“giants”) and £100m (“titans”) Bank of England notes, which are used as assets backing sterling banknotes issued privately by commercial banks in Scotland and Northern Ireland.

The video is here and is mostly about Carney’s speech on Scottish independence.  The Bank’s web site has more information about Scotland & NI currency and the “backing assets”.  George Selgin wrote a very good post on Scotland and the pound last year.

I am curious, how many objects are there in the world worth (nominally) £100m which you can hold in your hands?  Some artwork… jewellery?

Categories: Bank of England

Productivity Shocker

January 29, 2014 10 comments

It looks like 2013 Q4 is going to have very bad productivity numbers.

This post is a little premature, we need to wait for another month of labour market data, and the month 2 estimate of GDP.  But the data seems likely to show that the UK has had around six quarters of fairly steady, fairly strong demand growth, averaging at least 4% NGDP growth from 2012 Q3 to 2013 Q4.  Yet the level of market sector output per hour is likely to show almost no change at all over that period.  This is starting to look like a total disaster for those of us hoping for at least some validation of the “endogenous aggregate supply” theory.

Chris Giles comments, as does Duncan Weldon.  Duncan picks up a point which friend’o’the’blog James made in the comments here in a previous post: that average productivity is looking bad as low-productivity, low-waged workers regain employment, even if productivity might be rising for the rest of the workforce.  Karl Smith makes a similar point at FT Alphaville.  That’s all very reasonable, but this idea is giving in to supply-side pessimism.  Supply-side optimists need to argue we have high-skilled, highly productive workforce part of which is merely sitting idle waiting for demand to return and put them back into work.  But that does not appear to be happening.

It would be very interesting to see an update of the IFS analysis which showed where the loss of productivity has occurred in terms of movement of output/hour by sector and in the composition of hours between sectors.

I spent five minutes with the Labour Productivity data for 2013 Q3 and I get a feeling that I won’t like the answers.  Here is a (perhaps) startling statistic: in the finance sector total hours worked is already back around the same level as 2008.  Output per hour in that sector is down 12%.  That hurts so, so much.  Karl says, and he’s made the point before:

However, we should not forget that British productivity was supported by two very high margin wells which have begun to run dry, North Sea Oil and City of London Financial Services.

Replacing those sources of wealth will not be easy – but I add, it very likely will be done. Oil and Finance promoted a high priced pound and as a result made life difficult for other British exporters and life sweet for British importers. As that phenomenon turns around we should see a Britain that is increasingly self-sufficient and investing in technology and education to support the needs of its population rather than serving foreign demand for energy and complex derivatives.

It is an uncomfortable message to receive.  To end on a positive note, I heartily endorse Sam Bowman’s “Alternative Agenda for Hope“.

Categories: Productivity

Sticky Wages and “Living Standards”

January 24, 2014 5 comments

Why does employment fall when there is a negative shock to aggregate demand?  Because nominal wages are sticky.  Why does employment rise when there is a positive shock to aggregate demand?  Because nominal wages are sticky.

Labour and HM Treasury are arguing about whether British living standards are rising based on some measure of real wages, and I find this very annoying.

The phrase “cost of living crisis” is still stupid.  Labour spent most of the last three years arguing that the government should be doing more aggressive demand stimulus.  Well, guess what the effect of faster AD growth would be, Dear Eds?  That’s right, an even faster rise in the “cost of living”.  And because nominal wages are sticky that would mean even lower real wages… oh and hopefully, even higher employment.  That is the point in doing demand stimulus.

That’s what Abenomics is trying to achieve in Japan, following bog standard New Keynesian macro policy for the ZLB.  That’s what happened when FDR and Chamberlain left the gold standard in the 1930s, it raised “the cost of living.”  The reason “Old New Keynesians” argue we need fiscal stimulus at the ZLB is to “create inflationary pressure” because you think you monetary policy can’t “get traction”.  Yet the Two Eds are arguing UK has “too much inflationary pressure” even WITHOUT fiscal stimulus… so just what was the point of all those “too far, too fast” arguments?  Why does anybody still take this garbage seriously? 

And HM Treasury’s argument that we should look at real wages to see whether living standards are rising is just as stupid.  Almost any available measure of real wages rose in 2009… so was that good for “hardworking people” (™ The Tory Party)?  Only if you ignore the inconvenient fact that a million people discovered they were suddenly unable to work at all, whether “hard” or not.

This data is sufficient to demonstrate, in my view, that “living standards” are rising:

Month Unemployment
Rate (%)
2013 Jun 7.7 29.8
2013 Jul 7.7 29.9
2013 Aug 7.6 30.0
2013 Sep 7.4 30.1
2013 Oct 7.1 30.2

Now enough stupid arguments, and get people back to work.

Categories: Inflation

Two Point… Oh!

January 16, 2014 12 comments

The UK inflation rate fell to 2.0% in December 2013.  (!!!)  This cannot pass without comment.  What does this mean for UK macro policy?  I will try to be consistent here.  The two most important things about inflation are that:

a) Movement of inflation can represent supply-side or demand-side factors.

b) Macro policy is forward-looking; the inflation rate is backward-looking.

First, addressing (a).  UK inflation is much lower than recent BoE forecasts; the February 2013 forecast expected the CPI to rise 3.1% in the year to 2013 Q4, the outturn is 2.1%.  That’s a big miss!  But real GDP is also much stronger than expected, and stronger by around the same magnitude.  It’s likely we’ve seen at least 2%+ RGDP growth in the year to Q4, yet that February forecast was for 1.1% RGDP growth over the same period.

So this suggests either that the BoE is very bad at modelling the short run aggregate supply curve (which determines the split between inflation and output in the short run, given AD)… or that the curve shifted.  I would say that both of these are somewhat true.  The sharp rise in Sterling since mid-2013 is an obvious candidate for a supply shock, though it will have equal and opposite effects on different sectors.

(An obligatory dig at liquidity trappists on Sterling: nobody really believes that a central bank which is trying but failing to “create enough inflation” would stop printing money and then watch its currency appreciate by 10% over just nine months.  The UK’s “liquidity trap” is a Very Serious Theory, in the Krugmanite sense of “Very Serious”.)

Moving on to (b).  Does the current inflation rate tell us anything about whether monetary policy is too tight, looking forward?   No, no, no.  If you don’t answer “no, no, no” to that question, then you must also argue that the 5.2% inflation rate in September 2008 or September 2011 was telling us something useful about monetary policy at the time.

Relative to anything close to my ideal macro policy (say NGDPLT with a return to the 2009/10 trend), monetary policy is of course still much too tight.  Relative to the actual goals of UK monetary policy I would be fairly relaxed about the outlook. The domestic equity market (FTSE 250) is rising 25-30% y/y.   Inflation expectations are stable and consistent with hitting 2% inflation.  I’d guess this is consistent with a continuation of 4-5% y/y NGDP growth.  Those who thought running inflation 3.2% above target was not a sufficient reason for tightening monetary policy should also be relaxed about inflation going below target… or else admit that targeting inflation should not be a goal of macro policy in the first place.

No post is complete without a graph.  It is interesting that there has been something of a decoupling of UK and US inflation expectations; the decline in the TIPS spread since early 2013 has not been matched by a decline in gilt market implied RPI.  This stands in contrast to what happened to 2010 and 2011.

UK vs US Inflation Expectations

UK vs US Inflation Expectations. Source: FRED, BoE UK 5 Year Implied RPI

N.B. Yes, this graph compares apples (US expected CPI) with oranges (UK expected RPI), and the discontinuity in January 2013 caused by the RPI non-reform further distorts the validity of the UK data.  But both countries have a 2% inflation target.  Expected UK RPI of around 3-3.5% is consistent with expected UK CPI around 2%.  And where’s that NGDP futures market?

Categories: Inflation, Monetary Policy

UK 2013 Q3 Quarterly National Accounts

December 20, 2013 1 comment

The ONS delivered a variety of Christmas presents this week in the form of the labour market data (which is very good, per Lars), and the Q3 national accounts.  There is bad news and good news in the GDP revisions.

First the bad news: the impressive Q3 nominal GDP growth rate has been revised down from 6.9% (q/q annualized) to a still-respectable 5.7%.  The good news is that the level of nominal GDP has been revised up for recent quarters.  This moves the year-on-year growth rate up from 3.8% to 4.5% over the four quarters to 2013 Q3.

The “double-dip recession” has reappeared at the beginning of 2012, though the latter half now looks better.  The revisions make 2012 look even stranger; Q4 nominal GDP was revised up to a growth rate of +5.5% (annualized) and yet real GDP growth is still recorded as falling that quarter!

Here is the data, table at quarterly rates of GDP (annualized), and chart of annual GVA growth, as usual:

Year Nominal
Deflator Real
2012 Q3 4.3 1.2 3.2
2012 Q4 5.5 5.9 -0.5
2013 Q1 4.3 2.3 2.0
2013 Q2 2.6 -0.4 3.2
2013 Q3 5.7 2.3 3.1
UK Gross Value Added

UK Gross Value Added. Source: ONS ABML , CGBV , ABMM

Categories: Data, UK GDP

Productivity, Growth and The Deficit

December 12, 2013 11 comments

Keynesians love to say that the deficit will come down with growth.  This is 50% wrong, because when Keynesians talk about “growth” we know they mean real GDP growth 100% of the time.  But it is nominal GDP growth which determines the course of the public finances; tax revenue follows nominal GDP and NGDP is the denominator in debt/GDP.  (When we talk about “debt/GDP” it is the only time that “nominal” is implicit!)

Japan had positive real GDP growth for some of its “lost decade”; but it never had any nominal GDP growth.  That is why Japan’s public sector debt/GDP went off the charts; not merely because Japan had insufficient real growth (though that is probably also true).

Keynesians are also 50% right, because under inflation targeting real GDP growth “determines” nominal GDP growth.  This assumption is embedded in many macro models; we read that improving productivity will improve the public finances, which is true because higher productivity ⇒ higher real GDP growth ⇒ higher nominal GDP growth – if inflation is always held constant.

Maybe I’m beating a dead horse here, but Keynesians should be more open about the insane implications of macro models which embed the assumption of price stability.  For example, such models tell us that it is roughly true that the collapse in productivity since 2007 has caused the collapse in the public finances.

Deviation from 1993-2007 Trend of Price Level, Tax receipts and Productivity

Deviation from 1993-2007 Trend of Price Level, Tax receipts and Productivity. Source: ONS CGBV, ANBV, ABMI/YBUS

Categories: Data, Fiscal Policy, Inflation

Follow the (Divisia) Money

December 7, 2013 6 comments

It was very good to see some monetarist analysis in the UK media this week – Ed Conway reported that “Households Raid Savings At Record Rate” for Sky News, and followed this with a blog post.  The “raid” is actually a switch from long to short-term deposit accounts, which started mid-2012, as Ed’s graph shows.

Though the traditional broad money aggregates are growing steadily and at “decent” rates (M4ex at 4-5% this year), this shift towards liquidity naturally has a more profound impact on the Divisia indices.  I would treat this more as an indicator of current monetary conditions; Duncan Brown has a very nice post earlier this year exploring the relation between UK monetary aggregates and nominal spending in great detail.

Here, anyway, is the current state of the data, showing M4ex, household divisia and nominal spending:

UK Money and Nominal Spending

UK Money and Nominal Spending. Source: BoE M4ex, Household divisia, ONS YBHA

Categories: Data, Monetary Policy

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