It’s Wednesday – post some brief comments and relax with some music. Today I consider some of the statements from the Bank for International Settlements that suggest there are “serious practical flaws” in the mainstream inflation approach based on the new Keynesian Phillips curve. In other words, it’s not fit for purpose, which means you shouldn’t be surprised that central banks are raising rates to stem short-lived bursts of supply-side inflation. Deception leads to deception. I also considered some recent evidence that supply disruptions are easing. Then we learned that the UK Labour Party was no longer something workers should strike. If that’s driving you crazy, then we’ll restore your calm with some great music by Jiro Inagaki.
New Keynesian inflation approach is ‘severely flawed’
The Bank for International Settlements released – 2022 Annual Economic Report — June 26, 2022.
I’ve been reading this 138 page document and will write more about it when I have a chance to fully understand all the details.
But a central banker friend of mine sent me an excerpt today (ie Box B The Phillips Curve and Behind-the-Scenes Inflation – section on pages 50-51) – which contains some very interesting statements.
Statements that typical mainstream economists in this field wouldn’t write, but words that I can and often write.
My doctoral dissertation was on these issues.
I won’t go into the details here (later), but the BIS admits that the usual neo-Keynesian representations of the Phillips curve (and their inflation models) “miss some important elements”.
which one?
1. A “single measure of economic depression” (usually the overall unemployment rate or some measure of the aggregate output gap) “doesn’t capture differences in sectoral development and the sensitivity of prices to sectoral depressions.”
2. “Wage and price-setting mechanisms and their interactions … are central to the inflation process, but are bound to be obscured in the Phillips curve representation.”
The mainstream Phillips curve typically does not have the ability for workers to “make up for lost purchasing power” or for businesses to “make up for falling profit margins.”
Thus, the power game between workers and capital is hidden.
3. “A weakening of workers’ bargaining power), will lead to a “flattening” of the Phillips curve, a well-documented and typical fact.
4. The “New Keynesian Phillips Curve” approach is “severely flawed in practice.”
the most important is:
So even starting with a microscopic version of the Phillips curve, researchers usually end up estimating a simplified form of the relationship between inflation and slack that looks a lot like the prototype version described above. Additionally, the Standard Edition only features bundled consumer goods, so relative price changes are not allowed. And even in the multi-sector version, relative price changes simply reflect different rates of price adjustment, so long-term trends have no effect.
Thus, all claims of theoretical purity of the “micro-foundation” model give way to a complete to this The statistical model does not tell us anything about the accuracy of the theory.
This means that in the end there is no authority that neo-Keynesians can claim.
Their theory was statistically untestable, so they fabricated it and then fabricated something.
In short, there is no neo-Keynesian macroeconomics.
I wrote in this blog post- Mainstream macroeconomic fads – just a waste of time (September 18, 2009).
My 2008 book with Joan Muysken — give up full employment – Consider all of this from a technical point of view.
I have an upcoming research paper on this topic – I’ll make it available when I can.
This means that the mainstream inflation model that drives monetary policy is wrong — not fit for purpose.
No wonder central bankers are derailed during the current inflation explosion.
Supply chain disruptions eased
I keep seeing signs that cost pressures are coming down.
For example, on March 7, 2022, nickel was trading at $48,256 per metric ton. It sells for $23,876 a ton today.
There were many other commodities that fell rapidly.
The latest Diffusion Index from the Federal Reserve Bank of Philadelphia is also interesting.
The Federal Reserve Bank of Philadelphia released a monthly business survey, the latest of which are— Manufacturing Business Outlook Survey for June 2022.
The full dataset of their indexes is available – here.
The Diffusion Index is calculated by subtracting the percent reported increase from the percent reported decrease.
The first graph shows the “Current Backlog” Diffusion Index, which changed from 17.9 in May 2022 to -7.0 in June 2022, the largest monthly increase in the history of the series starting in May 1968 one of the changes.
Forward expectations (6 months from now) changed from -24.5 to -32.0.
As a result, U.S. manufacturing companies experienced fewer delays (overall) in fulfilling orders, a sign that supply chains are loosening.
The graph below shows Current Delivery Times, which reports the change in delivery times for reporting manufacturing companies compared to the previous month.
The index fell to 9.9 in June from 17.5 in May 2022.
Forward expectations (6 months from now) changed from -29.1 to -36.3.
Therefore, both the immediate situation and the anticipated future (six months from now), American manufacturing companies see shorter lead times as they can more easily meet the demands of current production.
The survey results were generally poor – suggesting that demand pressures have eased due to fiscal and monetary tightening in the US.
But these specific metrics are about the supply chain.
My expectation is that price pressures will dissipate quickly as supply disruptions ease.
The only question is whether the economy can avoid a recession – despite the best efforts of misguided policymakers to create such a crisis.
UK Labour leadership forgot where it came from
This UK Labour Party – Founded in 1900 by a coalition of socialist parties and trade unions.
Prior to this, there were many organisations representing working class interests in the political process.
These groups were united in 1900 under the banner of the modern British Labour Party to allow the trade union movement to gain political representation in the national government.
They are social democrats, leaning towards nationalisation, welfare state support and redistribution of national income for equity.
With the dawn of the neoliberal era (Callaghan, 1976), the British Labour Party began to abandon its roots.
Under Blair, this accelerated – the current leadership is a product of that era.
Now they don’t even support the union’s strike action.
In a recent Trainwreck interview, the Shadow Foreign Secretary – David Lamy – Made news this week by claiming that workers shouldn’t be on strike for better wages and conditions.
One would think Labour should shut up and let the Conservatives implode. But that won’t work either, because Labour is very unfit to lead modern Britain because it can’t remove the Blairs from its ranks.
Lamy pushed the ice cream cone further into the party’s face after the leader (Starmer) told MPs they should not join union pickets in support of striking workers, claiming that despite being photographed, “a serious government party would not Join the Picketing Lines” on Picketing Lines 2018.
In an interview, he was asked if he supported BA check-in staff who were forced to take a 10 per cent pay cut during the pandemic and are now seeking to restore their wages.
Lamy starts by stating that he doesn’t understand the situation: “Many of us probably want a 10% upside — in fact, most of us understand that you’re unlikely to get that, it’s negotiating, it’s definitely not right, it’s not Responsible objection, if every strike I suggest is yes, you deserve your…”
Then, in response to whether he supported strike action, he said:
No, I don’t, no, I don’t, it’s a no, an absolute no.
The workers just want to reinstate the previous pay cut, not the 10% increase. Lamy didn’t even get that (resource).
Can’t choose.
Music – Jiro Inagaki and His Soul Media
Here’s what I’ve been listening to this morning at work.
One of the lesser-known talents in jazz is the tenor— Inagaki Jiro – He was a pathfinder for the jazz fusion of the 1960s and 1970s.
I first heard his voice in the early 1970s when I was wandering the import store of Keith Glass on Bourke Street in Melbourne.
This 1973 album — in the groove – Now a collectible in its original vinyl version (requests a very high selling price).
However, if you weren’t lucky enough to buy the original when it was released, you can grab the digital version for $14.99.
This has always been one of my favorite albums.
The track is- That’s how I feel – and has some great bass playing and star appeal.
The author of this song- Wilton Field – and recorded by his band – crusader – In 1973, the same year Jiro Inagaki released his album.
Soul Media’s explanation is a better version.
The band of this song is:
1. Inagaki Jiro – alto and tenor.
2. Pine Changxiu – Guitar.
3. Akira Okazawa – Bass.
4. Shi Songshi – drum.
5. Takeshi Kamachi – Keyboard.
6. Takashi Imai – trombone.
More about his Inagaki Jiro and his band – blog (Japanese).
Inagaki Jiro is one of the great players few people know outside of the Jazz.
Enough for today!
(c) Copyright 2022 William Mitchell. all rights reserved.
