Inflation rates are tumbling in Europe, the UK, and the USA.
Despite what mainstream economists in all these places suggested, which was that this would not happen until significant unemployment was created, which desired increase in unemployment required an increase in interest rates to precipitate an economic crisis requiring that redundancies happen, the reality is that the impact on unemployment of those rate increases has, so far and thankfully, been limited and inflation has fallen anyway.
Those who, like me, argued that inflation of the sort that we suffered was always going to be transitory would appear to have been proven right; that is exactly what it was.
However, despite this, the European Central Bank retained its high level of interest rates this week, and no one expects the US Fed to cut its rates next time around, and nor does anybody have any realistic hope that the Bank of England will do likewise.
What we now have is a quite extraordinary economic situation. Although it is now apparent that there never was a reason to increase interest rates, high interest rates are being maintained, nonetheless.
As a result, economies that have survived for over a decade on negative real interest rates are now having to endure positive real interest rates, i.e. base rates of interest that are in excess of the rate of inflation. What we can be sure of is that these positive real interest rates will do three things.
Firstly, they will redistribute income and wealth upward in society.
Second, they will penalise those who borrow, significantly reducing their capacity to spend. That reduction will be suffered most by the young and those on low incomes, who tend to have greater borrowings in proportion to income. The downward economic multiplier effects of that will be significant.
Thirdly, this creates the possibility that although it is now very clear that unemployment was not needed to reduce inflation we will get a recession and significant unemployment anyway as a consequence of the positive choice of central bankers to perpetuate these high rates of interest.
In that case, it is appropriate to ask what is motivating central bankers in their clearly stated desire to maintain high rates of interest when there is no identifiable economic need for them now if ever there was.
So far, the only explanation that those central bankers can provide is that they fear that there will be inflation in the future, although they cannot say from where it will come. Nor can they explain why high interest rates will be any more appropriate as a tool to deal with the inflation that they fear than it clearly was not with regard to the last round, where rate rises clearly had no impact on the fall in inflation.
We are, therefore, left with a situation where central bankers' self-serving and self-fulfilling paranoia about inflation provides cover for the redistribution of wealth within society while simultaneously creating a recession with cost to the majority without there being any logical explanation for their fear that supposedly motivates the retention of high interest rates in the economies of Europe and the USA.
To put it another way, we are being governed by irrationality, and politicians appear to think themselves helpless in the face of this fact as if the power of democracy is to be sacrificed to the whim of financial ideologues who have lost any sense of rational ideology.
As a recipe to precipitate the collapse of economies and to create a consequent invitation to fascists this approach makes sense. In every other context, it can only be seen as deeply dangerous.
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No disagreement at all with above.
I feel like that unfortunate fox I saw being ripped apart on C4 news last night
I get the sickening sense that we are being sheppared/herded into a situation that can only be to enable us to be manipulated by politicians into accepting things that most of us do not want.
What does anyone else think?
We are certainly being prepped.
R4 are busy reinforcing the conventional TINA wisdom of debt reduction. Using the IFS as a goto source, and then the IEA “for balance” seems to be becoming rigid editorial policy.
Evan Davis’s assumption in PM earlier ths week that increasing growth rates is the absolute bottom line in the next parliament for both parties spending programmes was an unquestioning echo of Rachel Reeves’ own mantra.
R4’s Briefing Room, allegedly an in depth analysis, is about to look at the economic constraints on both Tory and Labour parties for the next government in next Friday’s edition. The trailer was depressingly obvious.
It is a pretty certain bet it will all be about ‘fiscal headroom’; desirable debt to GDP ratios; and will presume debt reduction as the ultimately desirable goal. ALL the reporting I have heard in recent weeks on R4 has been straight down the line neoliberalism.
We rarely even see a reference to alternatives outside this conventional wisdom, let alone explanations of what these options are.
Even coverage of the impacts of the US Inflation Reduction Act has been somewhat sniffy.
With repeated reinforcing messages such as Ed Balls’ ludicrous recommendation to completely abandon the £28bn Green investment intention (formerly a commitment), manipulation is all in the direction of reinforcing the inevitability and correctness of the neoliberal consensus.
The need for dissident voices like Richard’s has rarely been greater.
But they never come calling….
Agreed; and it’s maddening that MSM (almost ALL media actually, at least national – ie. English, London based) consider balance or alternatives only within this narrow neoliberal window.
BBC repeatedly putting up the likes of M El Erian or IFS…
Is there some way to call this out, to press the Beeb to have real balance? But also not to have Richard put up as the ‘oddball dissident’ or labelled as a Corbynite or some stereotype?
This is driven by the obsession with reducing national debt; strictly, not reducing the underlying debt, but the debt-to-GDP ratio. This itself should wave a red flag; using an indirect measure (a ratio here) as a fixed point carries implicit dangers because it is not measuring the underlying disparate elements of the (real) phenomena, each affected by multiple different causal influences, but a simplified abstraction. Ever since Rogoff and Reinhart there have been determined efforts to ‘prove’ (and remember, economics is not science; it has no idea how to prove anything), largely by bullying assertion nd more and more complex econometric regression modelling that a Debt-to-GDP above 85% is bad for growth. In fact over the last ten years the uncertainties over the accuracy of the models have grown (they are models detached from reality); but while the downsides are known this has led, not to abandoning the models; but rather to a peculiar phenomenon that mens that as the models become more complex, the results they produce tend to reduce the cut-off point, while increasing the uncertainties. Now we are in the territory below 70%, and in some cases falling well below even these levels. The mainstream neoliberal economic, abstract world we are moving towards is one where growth is only possible with no public borrowing exists at all.
Here is Balázs Égert, ‘The 90% Public Debt Threshold: The Rise & Fall of a Stylised Fact’, (2013) using ‘nonlinear threshold models’:”For general government debt (1960-2009), the threshold beyond which negative growth effects kick in is considerably higher at about 50%. Finally, individual country estimates reveal a large amount of cross-country heterogeneity. For some countries including the United States, a nonlinear negative link can be detected at about 30% of GDP. For others, the thresholds are surrounded by a great amount of uncertainty or no nonlinearities can be established. This instability may be a result of threshold effects changing over time within countries and depending on economic conditions, not captured in our estimations. Overall, our results can be seen as a formal econometric confirmation that the 90% public debt threshold is not in the data. But our results also seem to suggest that public debt might have a negative effect on economic performance kicking in at already fairly moderate public debt levels. Furthermore, the absence of threshold effects or low estimated thresholds may not preclude the emergence of further threshold effects, especially as public debt levels are rising to unprecedentedly high levels”. Is this really valuable, policy driving information?
We may find a more robust way of thinking about the problem by standing back from over-complicated modelling of recalcitrant data, by looking at the real world, observing the effects of inflation and simply measuring how matters actually turn out. This is CJ Neely, US St.Louis Federal Reserve, ‘Inflation and the Real Value of Debt: A Double-edged Sword’, (August 01, 2022):
“The U.S. has previously experienced unexpectedly high inflation rates that reduced the real value of the national debt. Perhaps most notably, the U.S. ran very high inflation rates of 12.9% and 11% in 1946 and 1947, respectively, when the country was recovering from World War II and the government had recently removed wartime price controls. ……. This inflationary burst helped reduce the U.S. debt-to-GDP ratio from 119% in 1946 to 92% in 1948”.
Thanks
Neither the UK or the EU will move until the US does.
From what I understand, if the UK were to cut rates before the Americans, the pound would fall and most of the stuff we import would become more expensive.
So basically we’re running some sort of peg to the US $
Maybe, but there is little evidence for your claim: rates have not moved exactly in line
If I remember correctly Rogoff and Reinhart made a mistake on their spread sheet which negates their claim that high debt affects GDP.
According to Velichka Dimitrova, now a micro-economist, university of Warwick, who wrote this in an LSE Blog titled ‘Reinhart-Rogoff revisited: Coding errors happen – key problem was in not making the data openly available from the start’, in 2013′:
“Thomas Herndon, Michael Ash and Robert Pollin from the University of Massachusetts (UMass) tried to replicate the results of Reinhart and Rogoff and criticised them on the basis of three reasons:
Coding errors: due to a spreadsheet error five countries were excluded completely from the sample resulting in significant error of the average real GDP growth and the debt/GDP ratio in several categories
Selective exclusion of available data and data gaps: Reinhart and Rogoff exclude Australia (1946-1950), New Zealand (1946-1949) and Canada (1946-1950). This exclusion is alone responsible for a significant reduction of the estimated real GDP growth in the highest public debt/GDP category
Unconventional weighting of summary statistics: the authors do not discuss their decision to weight equally by country rather than by country-year, which could be arbitrary and ignores the issue of serial correlation.
The implications of these results are that countries with high levels of public debt experience only “modestly diminished” average GDP growth rates and as the UMass authors show there is a wide range of GDP growth performances at every level of public debt among the twenty advanced economies in the survey of Reinhart and Rogoff. Even if the negative trend is still visible in the results of the UMass researchers, the data fits the trend very poorly: ‘low debt and poor growth, and high debt and strong growth, are both reasonably common outcomes'”.
There were also further alleged problems for the UMass researchers, because the base data was not made avaialable to them to review the hypothesis for several years. More generally it is a reminder that when economists try to produce complex analytical explanations to recondite economic problems, there are significant risks in handling the data in areas fraught with systematic, inherent uncertainties.
Thanks
The unemployment picture is pretty mixed.
For those seeking work the headline rate is currently 4.2% versus 3.7% in Jan 2023.
The inactivity rate is 20.8% versus 21.1% in Jan 2023. Many people seem to drop out of the labour force voluntarily, but a trickle has come back.
Overall there’s been not much movement with the employment rate unchanged at 75.8 across the period.
I’m beginning to wonder if inflation might be a monetary phenomenon.
George wonders if inflation might be a monetary phenomenon. Indeed, George, the inflation we’ve suffered in the last 18months/2 years was largely due to the impacts of Brexit (food and other imports), the war in Ukraine (international energy prices) and wages catching up after 2 years of Covid lockdowns, but it’s worth noting that inflation was already rampant before the wage catch-ups started. There must have been some impact from the loss of foreign nationals returning home in the aftermath of Brexit and Covid, but I suspect it was minimal in terms of the big picture.
On the wider topic of management of the economy and how it is portrayed by the UK MSM and the political parties, very little of it makes any sort of sense to me. Take the ratio of National Debt to GDP, which seems to be exercising politicians and MSM alike as if it was a matter of some immutable logic and vital importance, when it is a house of straw, where neither component has any coherent or logical structure and, as a result, the resultant data has no consistent or probative audit trial. In other words, the ratio is a bit like GERS: an incoherent jumble of partial fact, guesswork and downright fiction. As Richard’s analysis has shown, the so-called National Debt is significantly overstated by money owed by the UK Gov’t to itself and by QE. Likewise there seems to be little logic and much estimating in the components of GDP – e.g. omission of the economic benefits of the UK’s biggest employer (the NHS); estimation of incomes of the sex industry and drug-dealing etc.
Given all that, the National Debt:GDP ratio is unsafe as a basis for fiscal policy. That’s bad enough, but comparison of the UK ratio with the corresponding ratios of other countries is both pointless and misleading, since there are no internationally-accepted standard definitions of GDP or National Debt structures.
This arrived as I was typing the above and is entirely off-topic, so I apologise for including it here: https://www.gov.scot/news/record-renewable-energy-output/ It’s just a pity that the Scottish Gov isn’t demanding a rethink on UK energy distribution and charges.
Thanks Ken
This is why it is so dangerous -it IS entirely rational……
…. if (and only if) you start from a false premise.
Now, I am all in favour of “small wins” in terms of changing policy where it helps without challenging the paradigm…. but we do need to keep challenging these basic axioms that are just plain wrong
Agreed
Is there any evidence that inflation is a deliberate economic policy of dominant economic forces in the world as a response to external price shocks but to reinforce the forces of the capital order?
Proof, no
Is is possible, yes
If you’ve not listened already. I’d recommend the Debunking Economics podcast by Steve Keen and Phil Dobbie. It’s quite informal and chatty but enables Prof Keen to demolish such myths as the Debt:GDP ratio being useful in quite robust ways (he’s Australian and often calls a spade a ‘f&%£in shovel).