I am grateful to Frances Coppola for drawing my attention to a paper by Hiroshi Yoshikawa, Hideaki Aoyama, Yoshi Fujiwara and Hiroshi Iyetomi entitled Deflation and Money
Their conclusion, based on research in Japan, is pretty clear and so worth reproducing in full:
Deflation and inflation are macroeconomic phenomena. However, we cannot fully understand them by only exploring macro data because the behavior of aggregate prices such as the Consumer Price Index depends crucially on the interactions of micro prices. On the other hand, all in all, the results we obtained have confirmed that aggregate prices significantly change, either upward or downward, as the level of real output changes. The correlation between aggregate prices and money, on the other hand, is not significant. The major factors affecting aggregate prices other than the level of real economic activity are the exchange rate and the prices of raw materials represented by the price of oil. Japan suffered from deflation for more than a decade beginning at the end of the last century. More recently, Europe faces a threat of deflation. Our analysis suggests that it is difficult to combat deflation only by expanding the money supply.
I have written on inflation recently and suggested, simply based on my own reasoning, that this is likely to be the case. The fact that $6.5 or so trillion of QE has not delivered inflation whilst real wages have been static very strongly supports this idea.
I am quite sure it is true: and what it implies is that monetary policy is, as I have also recently suggested, dead for all practical purposes and that it is fiscal policy that delivers real growth in the actual economy that is needed if inflation is to be created and deflation is to be prevented.
What has this to do with People's Quantitative Easing? Three things.
First, the PQE financing mechanism cannot be inflationary. All the financing mechanism does is buy bonds issued by a National Investment Bank. In effect this is little different from QE: it would be splitting hairs to pretend otherwise. And as the authors noted say, this does not cause inflation. But since PQE is cheaper than bonds ti remains worthwhile.
So, secondly, it is instead the fiscal impact of the PQE that matters i.e. the fact that it will be used to fund real investment in real assets creating real jobs for real people in every constituency in the UK that is its significance and which makes it different from QE, which simply creates financial asset bubbles.
And, thirdly, as the authors say, this investment in real activity could be inflationary if it sought to over-expand the economy (i.e. push it beyond full employment, which does take into account all the available pools of labour). But, until such time is reached PQE has massively beneficial impact. It delivers real growth, not bubbles. It creates employment (and so delivers a more balanced economy). It delivers long term gain in the form of the assets created. And it may deliver some inflation, which I would remind anyone, has been official policy for the Bank of England since 1998 when it became independent and which we do not have at present.
As I keep arguing, PQE is the policy we need to control the economy, deliverable at the lowest possible cost. And in, and of, itself the funding is not inflationary.
Might we lay that to rest now?
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“And, thirdly, as the authors say, this investment in real activity could be inflationary if it sought to over-expand the economy”
It can only do that if you are competing for resources in a time sensitive manner.
If you set a lowish price for a project, and there are no bids, then the project stays on the shelf and doesn’t get done. If you get bids, then there is spare capacity in the economy and the project gets done.
For there to be inflation, there has to be time sensitivity. Remove that and there can’t be any.
The ability to delay and wait another day is the best tool for fighting inflation. And that is why equity is far more useful to businesses than debt. It reduces the time sensitivity of the business.
Fair comment
But timing is key to PQE, I have always said
This is my go to piece on debunking money growth is inflationary by the excellent Professor John T Harvey (in Forbes of all places) http://www.forbes.com/sites/johntharvey/2011/05/14/money-growth-does-not-cause-inflation/
Good that it takes on MV=Py
Richard, thank you. I agree: if PQE proves more inflationary than standard QE then it will because it stimulates demand for resources rather than through money creation.
But there are still risks. One reason standard QE has had very limited inflationary effects is precisely because its benefits have been confined to a very narrow class. We can see an impact at the top end of the London property market but little elsewhere. PQE will have much broader impact and benefits and hence its inflationary impact is also likely to be broader. At present that’s not a concern but by 2020 it might be and if so we shall have to manage it.
PQE has to be seen as an option within a broader package of measures. Taxation has a role here, not because it ‘provides money’ for government but because it reduces competition for resources, both generally and specifically, e.g. increasing top-end property taxes would reduce demand for the land and skills needed to build homes and infrastructure.
We will also have to manage the supply side. Even with continuing mass unemployment, the supply curve is not infinitely elastic and sectoral pressures can build even where there is aggregate excess supply. Identifying and addressing these will push back the point at which the investment aided by PQE becomes inflationary and hence extend its benefits more widely and deeply.
I accept the risks
And the need for them to be managed
It will be good to have the problem of doing so
The problems brought on by success are always easier to deal with than those brought on by failure.
If you have supply side issues within the UK, my first port of call would be the competition commission (or the CMA as it is now known).
We saw during the crash with a 25% reduction in the value of Sterling that business reorganised to accommodate the change with very little consumer inflation. And that is because they were competing desperately for demand.
The fight against oligopoly, cartels and stitch-ups needs as much attention and resources as the battle against tax evasion.
Good point
Richard Murphy: “As I keep arguing, PQE is the policy we need to control the economy, deliverable at the lowest possible cost. ”
The cost element is never addressed, however, here my challenge to the 55 economists who criticise Corbynomics:
https://radicaleconomicthought.wordpress.com/2015/09/05/the-mosler-challenge-to-55-economists/
So if PQE is spent on non idle resources will it be inflationery? Or does the existence of idle resources anywhere in the econony automatically prevent price increases?
This is important as it will determine whether PQE can be spent on anything, or should aim to only employ idle resources.
It can be spent so long as there is capacity
We have considerable capacity
“We have considerable capacity” Hilarious. There’s a serious shortage of skills in exactly the area where you want to spend billions: the construction / infrastructure sector.
Did you notice I suggested a very broad spread of work? Partly for this reason?
Or do you always ignore what others write?
If so your time here may be limited
Sanjay, As Richard has pointed out there are many options for ramping up public investment. So we will start with those which are easiest to get started quickly while we extend our capacity in other areas.
And as I have observed before, one of our early priorities should be to train up people in the skills we need for that extended capacity. To repeat: PQE is not just about building things. Check out Jeremy Corbyn on a National Education Service.
Skills gaps are a real issue so we will address them. You just seem to want to hide behind them.
Sorry, but the last comment failed the credibility test
Sanjay,
It might be an idea to drop that “hilarious” adjective that you seem to be so fond of. Its disingenuous and irritating, like a fake LOL, and it only serves to undermine the points you are making.
“Japan suffered from deflation for more than a decade beginning at the end of the last century.”
This deflation is something of a myth. Japan had to all intents and purposes price stability over the 20 year lost ‘decade’. Just check out the price index. It’s flat.
It would have had deflation but for…is then the right answer
It is nonsense to suggest, as the above article does, that because a money supply increase brought about by conventional QE produces no inflation, that therefor money supply increases in general do not generate inflation. Reason is that conventional QE simply involves the swapping of two very similar assets, namely base money and government debt. Martin Wolf pointed out that those two assets are near identical. In short, conventional QE has no effect on what MMTers call “private sector net financial assets”.
In contrast, increasing the money supply via PQE is a totally different matter. That does involve an increase in PSNFA. The two are chalk and cheese.
I have not denied it
BUT it is not PQE pe se that does that – as Yvette Cooper claims
It is investment that does that
And right across the board all economists say we want investment right now
So PQE is fine as a financing mechanism: the issue is how much investment do we need
You are also not asking the right question
Richard,
In response to my 2.42pm comment you are now talking about a “very broad spread of work”. Well that’s better. PQE has always been advertised from the start, both by you and others as being almost exclusively confined to infrastructure. If you are now saying that the new money created by PQE should only go to government departments which are not short of skills, that’s fine by me. That’s getting very near to what I’ve said all along, namely that stimulus (whether in the form of new money or not) should be fairly widely dispersed. Moreover, and to repeat, if stimulus is concentrated on just one or a few areas, then there’ll be a dramatic fall in money spent on that area in years when no stimulus is needed, and that does not make much sense.
That claim has been wrong since 2010
The work proposed has always been broadly based
Lyn Eynon,
Re your 3.58 comment, you advocate more training in areas where there are skill shortages. Now there’s a problem there as follows.
Engineers, bricklyers etc take anything between two and five years to train.Plus every industry needs people with ten or more years experience: they’re much more productive than the recently qualified. But Richard Murphy said that PQE is only suitable for when stimulus needed, and quite right: printing and spending money is stimulatory and in some years no stimulus or very little is needed.
So you start training your engineers and bricklayers and then let’s say all of sudden in two, three, five years time employers and households get all confident and demand rises. So… there’s no call for stimulus and no call for those newly trained or half trained construction staff. In short, a shambles.
Now there’s a simple solution to that potential mess, as follows. Assuming we need to spend more on infrastructure, then increase infra spending GRADUALLY over the next five or ten years. Second, don’t concentrate stimulus spending in just one or a few areas. That means that if there’s a boom in a few years, all forms of spending can be cut, thus the amount of reduced spending in any one area won’t be too dramatic, thus most of those newly qualified people will stay in their jobs.
To summarise, if there’s going to be increased spending in one particular area, it should be funded mainly in the usual way: tax and/or government borrowing (with a bit of stimulus money thrown in as necessary). As to stimulus, that should be spread fairly widely.
Sanjay
Excuse me if I am cynical, but you should have noticed that I, many others and Jeremy Corbyn have been arguing against cuts and austerity for years because of the long-term harm it causes and yet you are now claiming it as a revelation that has dawned on you alone
Get up to speed, please
Richard
Excuse me if I am cynical and all that, but your comment far as I can see has nothing to do with my 8.40 comment just above. Your comment seems to be a second response to my 6.49 comment. Anyway, on that assumption….
Your point about you and Corbyn being opposed to austerity (by which I assume you mean inadequate aggregate demand) has precisly nothing to do with my 6.49 comment. My basic point there was that stimulus (regardless of whether more stimulus has actually been needed recently) should as a general principle be widely dispersed.
As to whether more stimulus should have been applied in recent years, as it happens I fully agree with you and Corbyn: i.e. we should indeed have had more stimulus. But to repeat, that point is irrelevant.
This engagement is taking us precisely nowhere and it is clear I am not the only one to think so
In that case I am calling your time here to a halt
Sanjay, in your 8:40 response to me you confuse the arguments for short-term stimulus and long-term investment. The case for BoE puchases of NIB does not depend on short-term monetary conditions but on the cheaper financing that can be obtained if we stop subsiding the banks with public money. As I have explained previously, if at any point NIB bond purchases would create more money than warranted this could be offset by selling back to the market assets from the very large stock the BoE now possesses. Today of course the economy would benefit from both more investment and more money.
Everyone agrees that any stimulus should be broad based. On major infrastructure, we will be able to reach desired spending levels immediately? Of course not. It will probably take a whole 5-year parliament to ramp up. Does that mean we shall be training people in skills they will then not use? Not if we plan it well. On housing, most experts believe the UK will need to build an extra 100,000 homes a year for many years to come. And let’s remember that many of our skills gaps relate to new and emerging technologies. The private sector will also benefit if we tackle those.
Sanjay said “households get all confident and demand rises. So… there’s no call […] for those newly trained or half trained construction staff”
You may want to re-think that, Sanjay. If demand is rising, there should be plenty of call for all those staff. It’s only the need for stimulus which will go.
Whether he is asking the right question or not, Sanjay’s last point will be one of the responses that some will invoke in reply to the Japanese authors.
They may not use his exact terms but they may bring it up and they might also raise the related issue of “sterilisation” particularly so in the case of US QE. In which case, the argument will be that the increase in the monetary base resulting from QE, has been kept out of circulation as most of that increase takes the form of private banks’ excess reserves, which are parked at the Fed ‘earning interest’.
Put another way: One can’t necessarily draw conclusions about the impact of increased money supply on inflation by observing the effects of sterilised, conventional QE – because its effect on the money supply has been deliberately neutered.
As for the Japanese insights about output and inflation, ideally, we can say that inflation should not occur at any point below full capacity. In which case Neil Wilson makes a good point in relation to “The fight against oligopoly, cartels and stitch-ups”. Those guys know how to spoil the picture before it has the chance to take form.
If not sure if Neil is addressing ‘the right question’ that you had in mind, but he’s certainly addressing one of them.
P.S. My reference Sanjay’s “last point” was his 2.45 comment about the neutrality of conventional QE (not the other one).
Maybe QE has been inflationary, but just to the extent it has offset deflation pressures? Similarly inflation from pqe might not be such an issue given the deflationary pressure on resources at the moment?
PiNT, its good to see that someone has raised the obvious counterfactual. The counterfactual that you’ve raised, however is one that is difficult to test.
It would be tested, perhaps, if someone suddenly stopped their QE program. The US has allegedly stopped theirs by easing it off gradually. That process officially ended in Oct. 2014.
The CHARTS in the following 3 articles tell 3 different stories. One about oil another about the Fed’s preferred inflation index (the PCE) and the third one is.. interesting. Between them there is no conclusive answer as to the effect of QE on inflation except that it doesn’t have a strong and decisive effect on anything except asset prices, banks & financial markets – for that see the CHART in the 4th article (where the link is headed;’check this one’).
One conclusion we might draw is that a level of conventional QE that was big enough to have a really strong effect on inflation in the real economy would have to be so big that it would drive financial markets over the cliff.
http://marketrealist.com/2015/08/us-consumer-price-index-inflation-rose-0-2-july/
http://marketrealist.com/2015/05/us-pce-inflation-didnt-change-much-march/2
http://www.businessinsider.com.au/us-inflation-looks-like-europe-deflation-2015-2
Check this one:
http://www.taxresearch.org.uk/Blog/2015/08/28/qe-was-life-support-for-financial-markets-pqe-is-life-support-for-real-people/
Do you know what “Ceteris paribus” means?
Yes
Good, that should resolve your confusion in this instance.
Not at all
Ceterus paribus is concept used by economists who presume the world is a mathematical model wholly unrelated to reality
It has no practical application
Richard,
Is this a complete refutation of the old-fashioned “monetarists” of the Thatcher years, and the MV = PT nonsense?
Where does PQE sit with Marxist theory (which I admit I find difficult to follow)?
I leave it to others to deal with the Marxist theory
I deal with current reality
Franklin – no, it isn’t. It’s quite possible that an increase in the money supply fails to lead to an increase in prices. Hence the “V” and “T” variables in the equation of exchange. Richard seems to be implying that monetarists believe M=P, but this is clearly a strawman.
Fwiw I don’t think that MV=PT is nonsense. It doesn’t imply that an increase in a particular measure of the money supply will always lead to an increase in a particular measure of inflation (such as CPI). It’s more general than that. It does imply that if you have a large and sustained increase in the money supply, one should expect to see rising prices. This is perhaps the only empirical generalisation that macroeconomists of all schools agree on!
Increasing the money supply doesn’t *always* increase inflation, but ceteris paribus, it will.
And $6.5 trillion has proved you wrong
But please do not let the facts get in your way
Has the money supply increased? It depends on what we are measuring.
From the FRED money aggregate statistics, narrow money (note/coins and reserves) has certainly increased rapidly (UK M1 rose by a third from Q4 2011 to Q4 2014) but broad money (adding various types of deposits depending on the definition) has not (UK M3 was no higher in Q1 2015 than 5 years earlier). The difference is that ‘loans create deposits’ and lending has declined in the aftermath of the financial crisis as banks rebuild capital ratios under tighter regulation.
Broad money measures are the more useful for looking at the impact on prices and transactions and from that perspective, for the UK at least, it would be more accurate to say that QE has so far stabilised rather than increased the money supply.
In your recent debate with Bill Mitchell an audience member lamented the difficulty of explaining Modern Monetary Theory (MMT) to the general public (minute 37 in the following link):
https://www.youtube.com/watch?v=5TP9X6UqlDc
Beyond the need to better ‘frame’ MMT arguments using positive language as Bill discussed (see preceding video : https://www.youtube.com/watch?v=4OVAROe3gW4 ) , I think there is a need to tell compelling stories about political and economic changes in recent history. Maybe I’ve missed some sources, but the Neoliberal ‘devil’ seems to tell the better tales for the moment.
Previously I tried to track down alternative narratives for a the modern fable in which the austere Irish / Latvians recover while the tragic Greeks continue with their profligacy. Although I eventually found one or two sources, they were difficult to locate and I have now lost them. I had more luck tracking down an MMT defence of the standard Weimar Republic / Zimbabwe republic hyperinflation criticism. However, I struggled to find an MMT account of 1970s style UK inflation which has again been equated with a failing UK economy in a recent anti-Corbyn Telegraph article:
http://www.telegraph.co.uk/finance/economics/11847228/Corbyns-attack-on-rich-fails-to-stand-up-to-proper-debate.html
The challenge that the anti-austerity community faces is to pull together MMT-style narratives of recent history. A short list of common examples that are always raised in conversation include:
1. Why did the Soviet Union fall and why didn’t communism survive?
2. Why did we have high inflation in the 1970s in the UK and how do we avoid returning to the poor industrial relationships of the period?
3. Is Francois Hollande unpopular because of his high top rate tax?
4. Global poverty has fallen under modern Capitalism. Isn’t this a great example of Neoliberal success?
It would be useful if ‘FAQ-style’ lists telling compelling economic histories could be collected in one place. This would allow them to be updated as the debate moves forward and counter-attacks need repelling. For me, the most compelling stories for voters will be those that force the listener to consider the same event through a different lens; MMT has great potential for this.
It would be good to know if any of your commentators have other common Neoliberal histories that need challenging and/ or alternative explanations that are set a the level of that of an engaged lay campaigner.
Incredibly good idea
You might begin with the here and now and emphasise the fact that austerity policies do not prevail anywhere else in the English-speaking world or anywhere outside of the UK and Europe.
You could emphasise the point that geographical proximity provides no excuse for Osborne to be taking his lead from of the industrial world’s greatest economic failure – the Eurozone.
You could remind UK Labour that, to most outsiders, the social-democrat parties of the UK and Europe look like pathetic little Bundesbank-whipped patsies. See point #11 at the end of this article:
http://www.vox.com/2015/7/6/8900659/greek-crisis-blame
Put simply, you could start with the basics and remind your public that they have been needlessly deprived and isolated from the rest of the world.
The rest of the world also happens to be a place where ‘modern fables’ about virtuously austere Irish & Latvians don’t wash. They’ve got to many Irish immigrants (refugees) – recent ones.