It’s Wednesday, and there’s been a Twitter storm overnight, and like most of these Tweet Crazes, it doesn’t make any sense at all and only embarrassing Tweeters, not making them aware of the humiliation. I am referring to the statement made overnight by the Governor of the Bank of England, who reiterated the press release the day before that the bank would not continue to support pension funds with poorly managed assets. Twitterati doesn’t seem to really understand this. When we discuss central banking, former IMF chief economist Olivier Blanchard has been interviewed in the past few days (which I won’t relate to) claiming to be related to the U.S. economy, “the way to avoid a recession” Very narrow because the economy is still overheating.” He then concluded that the Fed “is no longer behind the curve, but still has work to do to address stubborn underlying inflationary pressures.” He thinks the Fed’s funds rate (its policy rate) will be above 5%. The planet is not Earth. After these contributions to public discourse, to keep us straight, we end today with some piano music. It’s always a good idea to stay calm and reflect.
Bank of England in charge – no doubt
I wrote about the UK’s recent turmoil with pension funds and the Bank of England in this blog post – Key MMT propositions presented in final week in UK (September 29, 2022).
Twitter went crazy, predicting the pound was about to be destroyed, and various commentators came forward, claiming that fiscal deficits were causing the pound to collapse.
Some standard intervention by the Bank of England (buying some bonds) brought the value of the currency back quickly to where it was before the tumult and peace returned.
The central bank’s intervention proves that the central bank can always stabilize bond yields at any level it chooses, and there is little “bond investors” can do about it.
But the intervention didn’t solve the fundamental problem facing pension funds, which pursue greed for their main business – providing a steady stream of payments to retirees and the like in a fairly predictable fashion.
As I explained in my blog post above, this task is not difficult.
It’s hard for pension fund managers to do because they strayed from the playbook and started using all sorts of questionable methods to increase returns and put assets where they shouldn’t be — presumably also to ensure they get huge management bonuses at the end of the year.
As one might reasonably expect, greed overtook itself and pension funds were forced into an unpleasant bond sell-off, in a market with too much “supply” and threatened solvency.
The Bank of England’s move to sharply boost bond market quotes the previous week provided the liquidity pension funds needed for the time being, but did not address the structural mismatch between pension funds’ assets and liabilities.
Then came yesterday in the UK.
Premier Andrew Bailey told the BBC (resource):
…the bond-buying program for stabilizing pension funds must end on Friday…Managers must make sure their funds are resilient…you now have three days. You have to get this done.
Predictably, the pound fell in value (it’ll come back don’t worry).
The top body of the pension industry, feeling that the government (the central bank sector) deserves more corporate benefits, begged banks to keep buying bonds.
Twitter has gone savage to suggest that the bank doesn’t know what it’s doing, and that the president is just a loose cannon that opens his mouth at will.
The day before (11 October 2022), the Bank issued two press releases:
1. Bank of England expands gilt purchases, including index-linked gilts.
2. Temporary purchase of index-linked gilts – market announcement October 11, 2022.
I wonder how many Twitter disaster armies read them. I guess not much.
Bailey simply told the BBC what those press releases outlined in detail.
Whether you agree with this decision or not, discussions with the BBC are no small talk.
The reality is that pension funds need to be reined in and forced out of their “greedy” status and re-ensure they have sufficient assets and commensurate returns to cover their liabilities.
If the Bank of England maintains an effective bailout of these funds, you can guess what these funds will continue to do.
Yes – the pursuit of greed and overmanagement.
The Bank also pushed the pension issue back to the political wing of funds and governments.
If they can’t retreat to safety, the funds will be on the brink of collapse.
No government will allow the pension system to collapse.
So whether it’s Treasury action – nationalisation would be a good start after firing managers – or more central bank action in a different name – just supporting pension funds indefinitely is not sustainable.
I would prefer to nationalize them and return them to the core business under public ownership.
US inflation trends
According to Olivier Blanchard’s comments, one would think that inflation is accelerating.
We use the term “overheating” to describe an economy where nominal demand pressure exceeds supply, but infer that demand is accelerating rather than supply contracting due to temporary restrictions caused by COVID-19 or war or cost pressures caused by OPEC decisions.
The first graph shows the monthly changes in versions of the US CPI from January 2015 to August 2022 (latest data).
Clearly, it is energy prices that are driving persistent inflation.
After recording zero growth in July 2022, the all-item CPI rose 0.1% in August 2022.
“All items minus food and shelter” has fallen for the second month in a row.
The chart below shows the “net percentage” (higher minus lower) for small business pricing plans for the next three months.
The data was released by NFIB Research, which surveyed small businesses in the United States extensively.
If the “net percentage” line falls, it means that fewer businesses plan to raise prices in the next three months relative to those that intend to cut prices.
What the graph tells us is that the inflation peak may have passed and is due to temporary factors, some of which are fading.
The NFIB study also showed that expected sales have been falling sharply, hardly a sign of an overheating economy.
That challenges the credibility of commentators like Blanchard, who and several of his cronies have recreated hysteria about inflation and forced the Federal Reserve to act savagely.
Don’t worry it’s not another play of class struggle.
As I explained before, rising interest rates have helped the big banks and the wealthy, which is one of the reasons why they are not very effective tools to reduce total spending by any means,
But at the same time, they also hurt low-income workers who are trying to accumulate modest wealth in the form of home ownership.
If the Fed pushes interest rates high enough, eventually, the economy will struggle and unemployment will rise, further jeopardizing the prosperity of weaker nations.
The data also tells me, and this is something I’ve been emphasizing for the past year or so, that central banks don’t have the tools to deal with the specific pressures that drive inflation.
Their only path is to raise interest rates, which they hope will stifle spending, destroy sales and jobs, and force workers into poverty, with companies adopting conservative pricing policies.
In the short term, this very blunt approach isn’t even very effective at dealing with spending, as even the Fed is uncertain whether the borrowing costs for businesses from rising interest rates will be passed on at higher prices.
But this becomes even more absurd when we learn that sources of inflation are largely insensitive to rising interest rates.
On May 12, 2022, just after the central bank raised interest rates by the most in 22 years, the chairman of the Federal Reserve made a speech on the US public media project Marketplace – Fed Chair Jerome Powell: “Whether we can achieve a soft landing may actually depend on factors beyond our control.
The title of the interview really says it all.
Powell said:
What we can control is demand, we can’t really influence supply with our policies…and supply is a big part of the story here. But more importantly, there are major events going on around the world, geopolitical events that will play a very important role in the economy over the next year or so. So the question of whether a soft landing can be made may actually depend on factors beyond our control.
In other words, WTF!
As mentioned above, they can’t even control the demand very closely.
When asked about the prospect of a recession and rising unemployment, he also claimed that “the one thing we really can’t do is restore price stability”.
So it’s more important than people’s work.
So you can conclude that the Fed is more of a proxy for capital than a responsible economic policy maker, the image portrayed by Blanchard et al.
music – keep calm
Here’s what I’ve been listening to this morning at work.
Last night I watched a movie – Man on Wire – about the French tightrope walkers who walked through when the World Trade Center Twin Towers were still standing.
This isn’t a movie where Walker basically burns down his friends who seem committed to his obsessive-compulsive display in high places.
But at one point, the background music was by a French composer and pianist— Eric Satie – Who is my favorite person.
While the movie uses – gynecology – Written by Erik Satie in 1888.
Simple as it looks, it’s actually very complex pieces – getting the rhythm right and balanced – have been making fun of me for a while now. This is a very hard sport.
It’s hard to get a clean separation between the melody and the chord accompaniment, including getting the right pedal in perfect harmony with the bass notes.
The juxtaposition between sonic simplicity and technical sophistication is what makes Erik Satie a genius.
This is the late Dutch pianist — Reinbert de Leu – He makes a career out of Erik Satie, playing Gymnopédies 1 and 3.
Gymnopédies 1 goes from D major to D minor, while Gymnopédies 3 is in A minor. Both are at 3/4 time.
Erik Satie could also have achieved post-minimalist status 100 years before his time. That’s how I see his work.
As an added treat – here is the version – blood, sweat and tears – from their – Variations on a Theme by Eric Satie (1st and 2nd movements) – Appeared on their second album in 1968.
In stark contrast to the rest of the album.
Enough for today!
(c) Copyright 2022 William Mitchell. all rights reserved.
