monetary policy

Intergenerational Equity

In this article, in the FT, Sarah O’Connor argues that the impact of high interest rates is less effective at demand suppression than has historically been the case. The exclusion of the young from the housing market and the impact of older people having finished paying off their mortgages has led to reduction in the number of households with mortgages, from 40% to 30%. It interests me, that the author argues the purpose of increasing interest rates is demand suppression and yet its effectiveness as a demand suppression tool is less than it once was. This article also looks at the role of tuition fees in discriminating against the young and asks if demand suppression is an effective tool in reducing inflation. Fore the whole article, "read more" ...

Crisis, what crisis!

Some aspects of this are hard to understand, here's my attempt. The UK has been in a balance of trade deficit for decades. For most countries it is the main factor in determining foreign exchange rate between sterling (GBP) and other currencies. In the case of the UK, there is significant additional incoming flows buying sterling quoted stocks, bonds and gilts. Sterling has been falling ever since Brexit, in my mind as a result of a drop in confidence due to Brexit and the growing relevance of the balance of payments deficit; the fear of inflation has added to that recently. This article looks at the history of bond prices and interest rates and warns that increasing interest rates may cause mortgage defaults. I conclude, "A triple whammy of inflation, pension losses, and mortgage payment increases, suddenly the UK seems a lot poorer than it was. " The full article and diagrams can be seen overleaf ...

Alchemy

The New Statesman interviews Mervyn King, the most recent ex-Governor of the Bank of England. He’s just published a book, “The end of alchemy” and King is now exploring if Central Banks have run out of policy tools. They examine the problem of banks, “too big to fail”, King proposes a transition from the role of the Central Bank as a lender of last resort to that of a pawn broker or insurer, requiring the banks to pay for the underwriting of their customer deposits. Also they look at King’s assertion that people at work don’t have enough time to think and read, he observes that he only got this back when he got the top job at the Bank. It’s true of all of us though and it reminded me of Mike Threlfall who publicly stated that the desirable utilisation for his consultancy team was 50% since otherwise they ceased to be consultants. The article looks at the heavy reliance on Maths that King’s generation of economists depended upon, and the probability that they thus underestimated the reaction of people. Economic rationalism has been challenged by modern behavioural economists, and in the interview King argues that people (& firms) are pursuing “coping” strategies, rather than utility maximisation strategies and that the traditional macro economic tools no longer work. He’s quoted as saying, “People’s beliefs and expectations cannot be captured by an economist’s view of how the world works”. He’s obviously learned from the 2008 crash, but whether his lessons are enough is another matter. Traditional economists are turning away from austerity, and innovations in both macro-economics and monetary policy are being developed. I should read the economic press’ book reviews of his book. …

Beyond People’s QE

A day or two ago, Alex Little, published a blog post called ‘Lessons for Corbyn in “Lerner’s Law”’. Lerner’s law suggests that using your opponents language limits your ability to make the argument. Little quotes Bill Mitchell, the inventor of Modern Monetary Theory (MMT) as to how Labour’s leadership in articulating the Darling Plan and its successors talk about balancing the budget and fixing the deficit concede the argument to the Tories. Little’s article also points at Lerner’s economic theories, described as “functional finance” and points at the wikipedia article on it. He argues that by describing the proposed pump priming as PQE, and accepting that when growth takes off, the government may transition to bond financing, by even accepting that we need to live within our means, the theory and benefits from the a more overt radical financing will be lost. …

Does QE work?

In an article in the Guardian, Will Hutton examines the use of QE and the failure of the Bank and Treasury to use it to stimulate investment. Increasing investment is both an expansion of demand, it creates income for its suppliers, and capacity for the economy. The Government and the Bank’s ideology will not permit them to use QE to buy corporate debt and so is doomed to fail to meet the needs of business investment and productivity improvement.

QE creates asset inflation, including house prices; it does not increase demand. …