Archive for June, 2012

Headlines You Didn’t Read Today, Inflation Edition

June 19, 2012 2 comments

Here’s what the Guardian didn’t write about the inflation numbers today, though I’m not sure why:

Inflation drops to 2.8% as aggregate demand falls

Inflation has slipped to its lowest level in two and a half years, in another piece of bad news for Britain’s recession-hit households.

Though inflation is still well above the government’s target of 2%, the fall should help to reassure policymakers that they can take more action to borrow and spend without sparking a renewed surge in prices.

Some members of the Coalition Government have previously expressed caution about deficit spending, warning that it could push up inflation, but world commodity prices have been falling in recent weeks amid fears about a slowdown in the world economy. Wednesday’s minutes from the Government’s Aggregate Demand Management Committee June meeting will show whether any members were calling for more deficit spending.



Vince Cable, Market Monetarist

June 18, 2012 4 comments

No need for a question mark on that post title, no need at all.

Lars got the scoop, a simply brilliant speech from Vince Cable.

In the 1930s, the abrupt departure from Gold – so much condemned by the City – had the strongest possible effect on expectations of rising money GDP.

Quantitative Easing can sound like a powerful instrument – but if it does not succeed in making people expect rising money spending in the economy, it is likely to be far less effective than leaving gold proved in the 1930s.

Bravo Mr Cable, bravo!  Read Lars for more.

Categories: Monetary Policy

2008 All Over Again

June 15, 2012 Leave a comment

It’s becoming a media cliché to compare the status quo to 2008, but it is a hard one to avoid.

  1. UK nominal demand growth has started falling off.
  2. MPC hawks have been proudly strutting around the media showing off their brave inflation-fighting credentials, as the CPI rate sits above target.
  3. Mervyn King decides – as Ben Chu writes – that the banking system again has a capital shortfall not a liquidity problem, and reluctantly opens up “liquidity schemes”, probably under pressure from the Chancellor – rather than simply easing the monetary policy stance.
  4. HM Treasury goes into something close to a blind panic, reverting to “creditism” – that nominal spending is determined by bank lending – and concentrates its efforts on schemes which might “fix” the banking system, and encourage new lending.

It would be funny if it weren’t so serious. Today’s Guardian:

“Throwing money at banks won’t solve economic crisis, Ed Balls says”

Ed Balls has warned that an emergency multibillion-pound package to inject
lending into the British economy still fails to address the lack of economic
confidence and demand.

Bravo, Ed!  I take back anything I ever said about Mr Balls which was less than complimentary.  But wait a second… wasn’t this exactly the Labour government’s prescription for a demand shortfall in 2008?  “Fix” the banks using fiscal policy to encourage lending, loosen the fiscal stance with some “high-multiplier” investment spending, mostly ignore the monetary policy stance, and well, hope for the best?

It’s only a shame that this policy combination resulted in the worst collapse in nominal demand on record.  Good luck everybody.

Update: Scott is not impressed either.

Uncertainty Rules UK

June 15, 2012 5 comments

What Mervyn King could have said yesterday:

Good people of the United Kingdom,

The Bank of England will do whatever is necessary to keep nominal demand growing along a path consistent with hitting our 2% inflation target over the medium term.  We stand ready to extend the Bank’s balance sheet by an unlimited amount, buying whatever assets are necessary to keep nominal demand growing along a stable 5% path starting from the first quarter of 2012.

Thanks, and goodbye.

What Mervyn King actually said yesterday:

… a large black cloud of uncertainty hanging over not only the euro area but our economy too …
… Complete uncertainty means that the risks to prospective investments … are simply impossible to quantify …
… the black cloud of uncertainty and higher bank funding costs …
… The paralysing effect of uncertainty, with consumers and businesses holding back from commitments to spending …
… the black cloud of uncertainty has created extreme private sector risk aversion …
… private sector spending is depressed by extreme uncertainty
… during the present period of heightened uncertainty

Well, thanks so much for that, Mervyn.

Your job, Sir Merv, is to provide certainty.  Nominal certainty.  That is what we pay you for.  That is what monetary policy is for, and why we have delegated it to your “independent” central bank.  We want you to provide nominal certainty, nominal stability.  Certainty over the future path of the price level, if you like.  Better yet – certainty over the future path of nominal incomes, nominal spending.

So please just shut the hell up about uncertainty.  Please.

How Much Worse Things Could Be

June 15, 2012 3 comments

There’s a lot to digest from last night’s Mansion House speeches.  But I’ve been waiting for an excuse to use this Friedman quote, and now seems like as good a time as any.

Milton Friedman, 1978:

In a good year, when things are good, when the economy is booming, you will read that the Federal Reserve by its wise policy – by its efficacious management of money – has produced this fine situation.  However, let things get bad, and all of a sudden the tone of the annual report is different.  Then you discover that despite the best efforts of the Federal Reserve outside forces combined to produce difficulties.

Even at the depths of the depression in 1933 – when – in the Spring of that year – the Federal Reserve system which had been established in order to prevent banking panics and keep banks from closing when the Federal Reserve itself closed its doors, and you had a banking holiday for 7 days – and when, over the previous three years a third of the banks in this country closed their doors and went broke – because, in my opinion, of the poor policy followed by the Federal Reserve system.  Even in 1933 if you read the annual report you will discover how much worse things could be if the Federal Reserve hadn’t behaved so well.

Mervyn King, 2012:

Let me start with monetary easing, before turning to the banking sector. The view that further monetary stimulus is, in present conditions, simply “pushing on a string” is, in my view, too pessimistic. The creation of money by the Bank of England has helped offset what would otherwise have been an extremely damaging contraction of the money supply. In the Great Depression, the money supply in the United States fell by around one-third. In Greece, broad money has fallen by over 25% since the end of 2009. The consequences are self-evident. Here at home, thanks to asset purchases by the Bank, broad money has continued to expand, albeit slowly.

Let’s all take a moment to give thanks that the Bank of England has “behaved so well“.

George Osborne, Market Monetarist?

June 14, 2012 2 comments

George Osborne continues down the path which can only be concluded by getting the phrase “I ♥ Scott Sumner” tattooed onto his forehead (or maybe somewhere more private?):

Theory and evidence suggest that tight fiscal policy and loose monetary policy is the right macroeconomic mix to help rebalance an economy in the state I’ve just described.

Of course, there are those who argue we should not be reducing the deficit – we should be spending and borrowing even more.

But that argument ignores a crucial fact: inflation in the UK has been significantly above the Bank of England’s 2% target since the end of 2009.

That is due to a combination of commodity price shocks, the lagged effects of a lower exchange rate and a worsening underlying productivity performance, and it has very important implications for fiscal policy.

Looking backwards it means that over this period looser fiscal policy would almost certainly have been offset by tighter, or less loose, monetary policy.

The fiscal multiplier is already likely to be low in an economy as open as the UK; an offsetting impact from tighter monetary policy would make it lower still.

In other words, much if not all of any gain from more deficit-financed spending would have been lost through higher imports and tighter monetary conditions.

Looking forwards, it is very hard to argue that monetary policy – in all its forms – has run out of road.

My emphasis.  Now change the target, George.

Ditch The Output Gap

June 14, 2012 Leave a comment

Chris Giles has an excellent piece on ditching the output gap which I won’t quote fully to avoid the wrath of the crack team of copyright enforcement lawyers at the FT:

Ditching the output gap concept would not resolve the big economic debates of the day but it would at least free them from some unnecessary constraints. Monetary policy makers would no longer have to act so surprised that inflation has remained stubbornly high alongside economic weakness. In fiscal policy, the authorities would have to accept that they do not know how much of the deficit is structural and needs action, and how much will go away as the economy recovers.

The rest is just as good.