Thus, the IMF was late on temporary inflation. What was obvious a few months ago is now at the top of the IMF’s forecasts. I guess better late than never. It is increasingly clear that most indicators still do not predict a major demand-side collapse in most countries. Growth has moderated slightly, and forward-looking indicators are looking up. At the same time, global inflation data showed that price pressures have peaked, and inflation is expected to move lower. Real wages continue to fall, which means that inflationary pressures are not driven by wages. So there is no wage-price spiral mechanism at work. The PMI data and related indicators such as transportation costs suggest that supply constraints driving inflationary pressures are easing. So is all of this the result of rising interest rates imposed on countries by central bankers (except Japan)? not necessarily. Rising interest rates and falling inflation are coincidence rather than causation. What does this mean for damage to low-income debt holders and a surge in bank profits from higher interest rates?
What are central bankers thinking?
Now that the IMF has come to believe that inflation is receding (rapidly), one wonders what the technocrats who advise central bank monetary policy committees (named differently around the world) are thinking.
We’ve seen central banks aggressively push for higher interest rates (except the very sensible Bank of Japan), what we’ve observed:
1. Growth remains robust in most countries.
The EU economy is hard to assess because of the ridiculous way capital investment is accounted for in Ireland these days.
Latest National Accounts data (published by Eurostat on 31 January 2023) – Eurozone GDP up 0.1%, EU stable – shows that if you exclude Ireland (15.7% annualized growth in the December 2022 quarter), then the growth rate in the EU is close to zero.
For example, Germany and Italy (-0.1%) had negative growth rates (-0.2%) in the December quarter.
Headline GDP growth in the EU in the December quarter was 0.1%, with Ireland at 3.5%.
So maybe Europe is headed for recession.
But given what’s going on there (Ukraine situation, etc.), it’s not surprising and has nothing to do with the recent ECB decision.
2. US consumers are still borrowing heavily.
U.S. consumer credit data — Consumer Credit – G.19 – Released by the Federal Reserve Bank, it does not show any fundamental slowdown in the percentage growth of outstanding consumer credit.
3. Wages have not moved more than the CPI (see below).
4. Global inflation data peaked.
5. In its latest World Economic Outlook Update (released 30 January 2023)— Global inflation to fall in 2023 and 2024 due to poor economic growth – The IMF predicts no global recession.
They forecast a high probability of “accelerated decline in inflation”.
6.—— Purchasing Managers Index (PMI) – China data for January 31, 2023 showed strong growth in economic activity in January 2023, with domestic consumption and orders propelling the economy despite mass deaths due to incomprehensible health policy shifts.
The services sector rebounded even stronger than manufacturing.
The chart below shows the trailing 12-month trend to the end of January 2023.
The news is that supply-side constraints are loosening rapidly.
So we have a problem.
A question of observational equivalence arises.
Those who justify a rate hike will point to the shift in inflation data as “evidence” that the shift in monetary policy is working.
Those who argue that rate hikes are irrational, such as the author of this article, will argue that the inflation data shifted before any identifiable impact of rate hikes could be discerned.
This means that these two phenomena – the rate hike and the inflation regime – have no causal relationship at this time, just coincidence.
The former group has to point to a recession and a collapse in aggregate spending to be able to link the monetary policy shift to the shift in inflation data.
After all, this is how monetary policy (raising interest rates) works in a demand-pull inflation environment – i.e. too much nominal spending chasing available supply.
But as I said before, the period since the pandemic started is rather unusual given the supply-side impact.
So yes, we may observe some excess demand (spending) that puts pressure on prices.
But if the excess demand is the result of a temporary collapse in supply, which is returning to pre-pandemic conditions, it is a rather dangerous proposition to deal with possible price pressures as if nominal demand exceeds the “normal” increase in production capacity.
Why is it dangerous?
The reason is simple, if central banks impose large enough interest rates on the rather resistant demand side, they will end up hurting low income people holding mortgages, most of whom will borrow (and probably outperform) a corrupt banking industry ) to their limit.
This means that if interest rates suddenly start rising, those households will be closer to default and lose their home to the bank under the foreclosure mechanism.
At the same time, central banks are orchestrating one of the biggest redistributions of income as bank profits surge and the bank-holding class rubs off on each other.
While this was happening, temporary supply-side constraints began to ease, production capacity returned to more “normal” levels, and “excess demand” disappeared not because of changes in demand, but because of easing of supply-side constraints.
Raising rates is a blatant abuse of policy.
american indemnity
The latest data from the U.S. Bureau of Labor Statistics on worker compensation further compensates for the so-called “wage-price spiral” that the central bank has been suggesting is an illusion, or should I see, justifying its irresponsible rate hikes.
Real wages fell in all categories — civilian workers, private industry, and state and local government.
The chart below shows these groups in terms of total compensation, wages and salaries, the difference between benefits added to wages and salaries, and more.
Note also that the actual pay cuts for state and local government workers are not vertically proportional to the already draconian pay cuts for private workers and civilians in general.
The point is that since inflationary pressures emerged in 2021 and intensified in 2022, nominal wages in the U.S. economy have lagged behind the movement of the CPI.
They didn’t drive changes in the CPI.
The graph below shows the data in a different way.
At the start of the pandemic (March 2020 quarter), I indexed real total compensation for private sector and state and local government workers at 100.
The graph shows the significant real cuts in total compensation since the pandemic accelerated in 2021 and 2022.
For all private sector workers, total real compensation is about the same as it was pre-pandemic (December 2019 quarter).
However, for state and local government workers, the actual results for the December 2022 quarter put them back to the September 2016 quarter.
devastating.
MMTed and edX MOOC – Modern Monetary Theory: Economics for the 21st Century – Now Open
MMTed invites you to register for the edX MOOC – Modern Monetary Theory: Economics for the 21st Century – and registration is now open.
This is a 4-week free course that will start on 15 February 2023.
You will be able to understand MMT properly through lots of videos, discussions etc. Various MMT scholars make appearances.
For those who have completed previously offered courses, some new material will be presented this time.
New video and text material will be provided discussing current inflation events from an MMT perspective.
There will also be some live interactive activities where students can discuss the material with me and ask questions.
more details:
https://edx.org/course/modern-monetary-theory-economics-for-the-21st-century
Music – Good for Travel
Sometimes you need to really focus on a new album and play it a few times to appreciate the nuance and subtlety of the artist’s performance and the producer’s mastery.
It’s such an album – sound – by post-minimalist composers – Max Richter.
It was published on July 31, 2020 and is “inspired by the Universal Declaration of Human Rights”.
This article (June 25, 2020) – Max Richter Announces New Album ‘Voices’ – Provide some background on the organization and sources of the readings.
The album has a vocal section (with various readings) and then a silent version of the music.
Here’s the whole album, with what Max Richter calls a “passive orchestra” (“almost all bass and cello”).
At certain stages on the album, you think you hear a low rumble – I suspect it’s one of the deepest sounds the human ear can hear – and it’s a very stark background to the passive orchestra.
The entire album runs for 56 minutes and is played on repeat in clean mode.
My favorite track is Mercy, the violin soloist is – Mary Samuelson.
Mercy starts at 48:51, followed by the end of the second version of the album.
I can tell you an amazing way to spend 10 hours driving.
Here’s a short video by Max Richter explaining the motivation for the album and what it means.
There was always a very sound and progressive intention behind his music.
He rated the album:
I love the idea of a piece of music as a place to think, obviously we all have some thinking to do at this moment. The Universal Declaration of Human Rights shows us the way forward. While it’s not a perfect document, the manifesto does represent an inspiring vision of the potential for a better, kinder world.
He goes further in this NPR interview (August 2, 2020) — Composer Max Richter on ‘Sound,’ a new album envisioning a better world.
Here’s the British Gramophone’s review of the album – Voice of Richter.
Enough for today!
(c) Copyright 2023 William Mitchell. all rights reserved.
