Home > History, Monetary Policy > Liquidate the Rentiers… on a Cross of Low Inflation?

Liquidate the Rentiers… on a Cross of Low Inflation?

State-of-the-art monetary theory in 1968 from Milton Friedman:

Paradoxically, the monetary authority could assure low nominal rates of interest-but to do so it would have to start out in what seems like the opposite direction, by engaging in a deflationary monetary policy. Similarly, it could assure high nominal interest rates by engaging in an inflationary policy and accepting a temporary movement in interest rates in the opposite direction.

State-of-the art monetary nonsense in 2014 from Martin Wolf:

High-income economies have had ultra-cheap money for more than five years. Japan has lived with it for almost 20.

From this weak start Mr. Wolf goes on to conclude that it is necessary either to have “big government” or to “wipe out the rentiers”:

Low interest rates are certainly unpopular, particularly with cautious rentiers. But cautious rentiers no longer serve a useful economic purpose. What is needed instead are genuinely risk-taking investors. In their absence, governments need to use their balance sheets to build productive assets. There is little sign that they will. If so, central banks will be driven towards cheap money. Get used to it: this will endure.

Cheap money?  If only.  Meanwhile, Gavyn Davies is worried about those naughty capitalists taking, erm, excessive risks:

The case for macro prudential controls is straightforward [1]. During economic upswings, the behaviour of the financial system can become destabilising. Banks’ balance sheets are flattered by the expanding economy and low interest rates, so credit supply expands aggressively. This fuels the boom until risk taking becomes excessive, and even a moderate rise in interest rates produces a financial crash. Direct intervention in the financial system to head off these problems early, through increased capital and liquidity standards, seems to be justified.

So concerned is Mr. Davies that we might have a recession…

While an interest rate rise might be compared to firing a shotgun, macro prudential measures might be closer to a rifle shot. However, the separability of the two weapons raises many issues and difficulties. Both may need to be fired simultaneously in order to get the job done.

… that we might need a little bit of a recession to keep those risk-takers under control.  What a fine mess this is.

HT: Marcus Nunes

Categories: History, Monetary Policy
  1. ChrisA
    May 16, 2014 at 07:32

    The establishment view is that the economy needs to be “managed”, otherwise a lot of people’s power would be reduced. This is true of journalists, like Wolf, whose USP includes access to “decision makers”. You can hardly ask turkeys to vote for Christmas, so we should continue to expect articles calling for intervention as a way of demonstrating the need for the managers to intervene.

    So the really interesting question is, how can we get the turkeys to agree to Christmas and introduce a rule based monetary policy that is not abandoned the first time that house prices fall or rise more than the Guardian or FT thinks is wise? Ed Balls and Gordon Brown actually did introduce the inflation target for the BoE, so radical changes can be done. Of course this was actually pioneered by others countries before the UK (like New Zealand) and was forshadowed by the Conservatives in the Baker era after the exit from ERM.

    So, with that parallel, which country is actually closest to NGDP LT do you think?

    • May 16, 2014 at 09:04

      Good points. On the history: it was a different Kenneth, Clarke not Baker who was a Tory Chancellor! But Lamont first introduced inflation targeting in 1992.

      Lars and Marcus have done a number of posts on the last question: Australia, Israel and Switzerland are examples of countries which have come close to emulating NGDPLT. But there is a big issue here: in absence of significant supply shocks flexible IT *should* have outcomes very similar to NGDPLT. I am not sure if there are any examples of countries which have done NGDPLT well in the face of supply shocks, which is the really interesting case.

  2. ChrisA
    May 17, 2014 at 02:48

    My bad – yes it was Clarke not Baker, old age telling perhaps.
    Thinking about your last point – usually regime changes come about due to crisis. So countries, like Australia, Israel and Switzerland, which are doing OK under an IT regime, I don’t see as first movers to NGDLT. Why rock a boat that is floating fine.

    I wonder if Labour might actually be the first to do this in the UK, if they actually got into power next time. Balls and Brown introduced IT in 1997 as they realized that most previous Labour governments had fallen due to economic crisis, and they wanted to have a more stable economy to allow them to introduce their social programmes. IT worked very well compared with previous Labour government administrations, they managed to get three terms. Ironically the economic crisis that did eventually bring them down was exacerbated by the very IT regime that they had brought in. Balls as a politician could never admit this, but Balls as a Labour party tactician might be thinking that if the inflation target had been waived or relaxed in 2008 he might be chancellor today.

    • May 17, 2014 at 09:06

      Yes very nice points. Labour doing NGDPLT it is an intriguing idea.

      A couple of years of 6-8% NGDP growth plus a tight grip on government spending is the perfect way to show “fiscal discipline”. If Labour win 2015 and they *don’t* do that, they are idiots. But it is possible we’d reasonably “high” CPI rate with such a policy. I don’t know how tied a Labour government would be to the “cost of living” slash “low inflation” narrative. That is always going to be the key on macro policy.

      We did get one glimpse from Labour “voices” on this topic:


      and Balls did praise the “monetary activism” and “fiscal growth plan” seen under Obama, basically a complete rejection of the “fiscalist” logic.

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