A quick post as I’m just back from holiday; a couple of things I haven’t seen discussed elsewhere.
Candidate for next Bank of England governor, Adair Turner, gave a speech which I found disappointing compared to his previous speech on monetary policy. It indicated he was fully signed up to “creditism”, considering bank lending as the only monetary policy transmission mechanism. He does at least still see the importance of nominal income growth.
In the UK, as the Monetary Policy Committee (MPC) noted on 20 June, GDP is 0.4% lower than 18 months ago, and as the one-off effects of sterling depreciation, VAT increases and commodity price increases recede, inflation is now falling rapidly. In the US, the pace of recovery is slowing; in Japan, the nominal value of national income is static and still 7.7% below pre-crisis levels; the Eurozone is facing strong recessionary headwinds. Across all four advanced economies, there is a danger that if policy is not appropriate, we could fall into the debt and deflation traps from which Japan has suffered since the mid 1990s. As the Chief Economist of the International Monetary Fund (IMF) Olivier Blanchard, said last week, even more worrying than falling base case forecasts for global growth is the increase in downside risks.
Next up, Martin Wolf finally took the time to consider monetary policy on his FT blog, discussing explicit currency devaluation and also nominal GDP targeting:
- First, if an economy is to escape from the legacy of excessive accumulations of private debt without a prolonged depression and permanent damage to productive capacity, it is vital that policymakers sustain the growth of nominal GDP. Macroeconomic policy should be devoted to that end, provided the country retains the necessary policy freedom, as the US does.
- Second, an active fiscal policy will help by offsetting the long-lasting surpluses generated in a private sector hit by a balance-sheet contraction. Monetary policy, either on its own, or in conjunction with other policies, should aim at steady growth of nominal GDP. The most effective ways of achieving this are likely to be highly unorthodox. This may well require close co-operation between the fiscal and monetary authorities, if possible. In the US, alas, it now seems impossible.
A candidate for the long list of things which would be funny if they weren’t so serious: the volume of macro analysis done on the basis of a post hoc ergo propter hoc fallacy – there was debt, then there was a crisis, therefore debt caused the crisis.