What a wonderful world we live in, the elites preach that the only way forward is if we accept “pain” or “sacrifice” to prevent some inflationary catastrophe from accelerating out of control, if workers dare to seek some cost as businesses drive profit growth Bankruptcy, the pain that policymakers will cause will be even greater. The annual elite gathering in Jackson Hole, Wyoming, over the past few days has been one of those “can you believe it” moments. First, we have the Fed chair almost happy to tell Americans that he will cause them pain because “that’s the unfortunate cost of lowering inflation.” At the same event, ECB board member Isabel Schnabel told the meeting that the central bank must raise unemployment to control inflation to stop wages being driven by inflation expectations. Then we look at wage growth in Europe and see that real wages are in free fall (down 5.9% in Q6 2022).
The Fed Chair gave this speech (26 Aug 2022) – Monetary Policy and Price Stability – At events in Wyoming.
This is light years from what he said at the Jackson Hole event almost two years ago (27 August 2020) – New economic challenges and the Fed’s monetary policy review – when he notices:
1. “Assessment of the economy’s potential or long-term growth rate has declined.”
2. “More disturbing is the decline in productivity growth, the main driver of higher living standards over time.”
3. “Historically strong labor markets have not sparked a significant uptick in inflation.”
4. “Inflation is slow to respond to labor market tightness, what we call the flattening of the Phillips curve…”
5. “Our revised statement emphasizes that maximizing employment is a broad-based and inclusive goal. This change reflects our appreciation for the benefits of a strong labor market, especially for many in low- and middle-income communities Humans.”
Observers see a major shift in the way the Fed thinks about monetary policy after the speech.
But after last week’s presentation, it became clear that the pandemic rhetoric was just an aberration, probably because everyone was facing deep uncertainty at the time, which made elites pause and worry about where they stood.
Now it’s back to normal neoliberal business.
Central banks are now back at their dysfunctional best.
We get the following statement:
… restoring price stability will take some time and will require the robust use of our tools to bring demand and supply into better balance.
“Force” – the use of brute force on workers to create as much unemployment as possible.
Well, it’s not really aligning “demand” with “supply”, but:
Lowering inflation may require a sustained period of below-trend growth.
Demand must be brought in so that unsold supply increases and companies are forced to lower prices.
This means they want:
…some pain to families and businesses…
If workers dare to try a pay rise, the central bank will do the following:
…more pain.
A day’s work for the elite.
He acknowledges that current inflation is global and supply constrained (caused by pandemic etc.)
But there was no clarity on how rising interest rates would address supply constraints, only that spending would have to be cut to “artificial” supply levels.
Well, the point here is that supply disruptions are temporary (how long – not sure), and when they ease, they ease quickly.
Some of the current supply disruptions in Australia are related to flooding.
Prices of fresh vegetables soared a few months ago, and now they are falling rapidly as agricultural conditions recover.
Another point is that unemployment is highly asymmetric.
It rises quickly when demand is suppressed, then takes a long time to fall again as demand improves.
The interim period wreaked havoc on the unemployed and their families and communities.
Short-term high inflation will not cause such damage.
So the Fed may be able to reduce demand by raising interest rates – maybe – but when supply returns (and it doesn’t know when) – the US will be left with massive job losses, stagnant spending, and unsold of goods and services.
Pursuing price stability is not a very sensible approach when the problem is not accelerating demand on the full supply side.
What we have now is a temporarily suppressed supply side, while demand is relatively normal.
The Fed wants demand to fall, but cannot stimulate the supply side unless it finds a cure for the coronavirus, ends the OPEC cartel and stops the war in Ukraine.
Powell claims they are learning from the 1970s.
In this context, he introduced the “inflation expectations” story, where “the public’s expectations of future inflation can play an important role in setting the path of inflation.”
He almost simultaneously admitted:
Longer-term inflation expectations appear to remain well anchored. The same is true for surveys of households, businesses and forecasters, and surveys of market-based measures. But that’s no reason for complacency…
So there are no lessons from the 1970s here.
Real wages in the U.S. are falling, and workers aren’t driving this inflation.
Also, keep in mind this Fed Discussion Paper (September 2021) – Why do we think inflation expectations matter for inflation? (Should we?).
I discuss it in this blog post – Fed research paper kills another neo-Keynesian core idea on inflation expectations (21 October 2021).
The authors of the Fed paper noted:
Mainstream economics is rife with the idea that “everyone knows” is true, but that’s actually nonsense…expectations… [are] … at the heart of the inflation process; likewise, many central banks see “anchoring” or “managing” the public’s inflation expectations as an important policy objective or tool… [there is] …has no convincing theoretical or empirical basis and can lead to serious policy errors.
The paper essentially debunks the current claim of the boss of his own organisation (above) that pain must be inflicted in case public expectations for inflation rise.
after one day
The next day (August 27, 2022), Isabel Schnabel, a member of the ECB board of directors, stood in Jackson Hole to give a speech, not to be outdone by the threat of pain – Monetary Policy and Big Volatility.
She also describes the inflation event of the 1970s and the role inflation expectations played in that event.
This role is controversial, by the way, but it remains the core business of New Keynesianism for the elite.
Her proposal differs from Powell’s rude “return to ideology” speech.
She acknowledges many future risks – epidemics, climate, etc.
She also conceded that “monetary policy operates with a long lag,” meaning outcomes are imprecise and uncertain, and that short-term “inflation overshoots” should not lead to policymakers becoming barbaric and causing the kind of damage Powell is overseeing. kind of pain.
Importantly, she acknowledged, the current inflationary pressures are coming, when the supply side is highly constrained by “pandemic and war”, leaving two “broad paths” for central banks:
One is a cautious path, consistent with the view that monetary policy is the wrong medicine for supply shocks…and the other is determination. On this path, monetary policy is more responsive to the current bout of inflation, even at the risk of slower growth and rising unemployment.
She then returned to the script by claiming the latter path was plausible.
Why?
1. If “the extent to which inflation will continue is uncertain”, then it is best to follow her logic and quickly decipher it.
This is really a remarkable statement conclusion.
There is no uncertainty about the “cause” of inflation. They are all temporary reasons.
Why add further damage when a supply reversal is imminent?
2. “The central bank should implement policy while inflation persists”.
So operate in the dark and see the problem as excess demand meets real estate, a fully loaded supply side, and intentionally hurts demand.
Almost unbelievable.
3. “The risk of inflation expectations de-anchoring is rising” – however, there is no sign that actual expectations (even if they matter) are rising.
The “risks” are rising…that’s the central bank’s cover code for the pain of the unemployed.
Where will these expectations rise?
Well, if it was the 1970s, then we would expect workers to make strong demands for negotiating wages, and after a year of rising inflation, they would incorporate that knowledge into their annual wage negotiations.
This is the latest negotiated wage increase in nominal (blue) and real (orange) in the euro area for the quarter ending June 2022.
Nominal wage growth has not trended upward, and real wages have fallen sharply as inflation has picked up over the past few quarters.
Since the September 2021 quarter, the annual growth rate of real wages in the euro area has declined overall by 1.5% (September quarter), 3% (December quarter), 3.3% (March 2022 quarter), and then 5.9%. cents (June 2022 quarter).
Conclusion: Wage growth does not drive inflation, and there is no evidence that rising inflation expectations lead to a wage price spiral.
The ECB also released a measure of consumer inflation expectations — Inflation perceptions and expectations (Last published on August 4, 2022).
Figure 6 tells us what respondents think will happen to inflation over the next 12 months.
This is (from an ECB publication).
Now, unless the downtrend since the start of the year means something different from the downtrend, consumers in the euro area have no reason to believe that inflation is accelerating and could get out of hand.
There doesn’t seem to be much uncertainty.
Figure 12 (if you look at it) shows the “Probabilistic measure of inflation uncertainty (forward-looking)” profile from February 2022.
Schnabel also concedes that “the Phillips curve has flattened over the past few decades” (that is, higher unemployment is now required to reduce inflation by a percentage point) and lower inflation:
…may require deep contractions.
In other words, monetary policy is not really the right tool to deal with when these problems arise.
in conclusion
The message is clear.
Neither the global financial crisis nor the pandemic has created a huge dissonance in mainstream macroeconomics, but neither has been enough to free us from the fiction that the industry promotes.
We started using higher unemployment rates again in case workers were better organized and started fighting for a higher share of national income.
Low unemployment — largely because Covid has wiped out thousands of workers who are now too sick to work — is too much for the elite to bear.
So they reverted to the dire inflation argument as a cover to address their paranoid fears that the balance of power had shifted to workers.
Enough for today!
(c) Copyright 2022 William Mitchell. all rights reserved.
