My new podcast episode is out

My new podcast is out.

My new podcast episode is out.

Money Printer Go Brrr ... And No Inflation? — Brian Romanchuk

Although a big fiscal package is in the pipeline (admittedly the Greatest Deliberative Body in the World is playing its usual log-rolling games), smashed supply, and rampant "money printing" (ha!), breakeven inflation in the United States is cratering (figure above). This is exactly what should have happened, although the big question is whether current pricing is an overshoot of fundamentals. (I leave that market call to the reader.) I outline why this puzzling inflation perspective is the correct call -- top down inflation analysis will not work, we need to go bottom up....

Bond Economics
Money Printer Go Brrr ... And No Inflation?
Brian Romanchuk

Inflation Is NOT The Most Significant Factor Determining Bond Prices — Brian Romanchuk

One of the pieces of pseudo-science that floats around in popular discussion of bonds is the belief that bond investors are deadly afraid of inflation. In particular, bonds "lose money" every time the Consumer Price Index rises -- which is most months, in most developed countries. As far as I can tell, this is the legacy of some Economics 101 textbook story that has been passed on from "expert" to "expert" over the decades.

The correct answer is that nominal yields largely reflect the expected path of the short-term nominal policy rate, and is thus a reflection of the central bank's "reaction function." (At this point, some people will jump in and start going on about the term premium. However, unless we using an obviously dysfunctional term premium model, the term premium is only a small deviation from the fair value determined by rate expectations.)

The advent of inflation-linked bond markets adds some extra qualifications to the previous statements. (My previous book discusses the inflation-linked markets.) If a bond investor is overweight inflation-linked bonds, they can get a big fat bonus if inflation turns out higher than expected. However, the beliefs about bond investors that I am discussing here were formed in an era when inflation-linked markets did not exist, so economics textbook writers were free to write in whatever campfire ghost story they wished.... 

Bond Economics
Inflation Is NOT The Most Significant Factor Determining Bond Prices
Brian Romanchuk

MMT And Price Level Determination — Brian Romanchuk

What determines the price level is a theoretical topic that pops up in Mosler's White Paper on Modern Monetary Theory (MMT - link to my discussion). Mosler's argument is that only MMT provides a proper understanding of price level determination. That is a strong claim, and difficult to assess. However, the discussion of price level determination is a distinctive part of MMT, and should receive greater prominence in discussion....

Bond Economics
MMT And Price Level Determination
Brian Romanchuk

Milton Friedman's Thermostat, redux — Jason Smith

Pesky physicists. 😃

Jason Smith "converses" with Milton Friedman.

Short, fun, and not wonkish.

Information Transfer Economics
Milton Friedman's Thermostat, redux
Jason Smith

Is There a Relationship between Inflation and Unemployment? — Menzie Chinn

While the equation fits relatively well, clearly it’s not perfect. As of 2019Q2 (first two months), year-on-year PCE inflation is underpredicted by 40 bps. I estimated the equation on a restricted sample ending in 2014; this imparts only a marginal difference — so it’s not that something has changed substantially over the last 4 and a half years. Rather the specification could be improved.

In other words, perhaps a different measure of NAIRU, or a nonlinearity might improve the fit. However, these specification or measurement errors do not invalidate the concept of the Phillips curve. More graphs (from my undergrad course), using the output gap, here.

For more on a cross country basis, see a recent working paper by Blanchard, Cerutti, and Summers (2015). They show that the slope of the Phillips curve has dropped around the early 1990’s; those who rely upon very old stylized facts might be excused for thinking the Phillips curve had gone AWOL.

Econbrowser
Is There a Relationship between Inflation and Unemployment?
Menzie Chinn | Professor of Public Affairs and Economics, Robert M. La Follette School of Public Affairs, University of Wisconsin–Madison, co-editor of the Journal of International Money and Finance, and a Research Associate of the National Bureau of Economic Research International Finance and Macroeconomics

See also

Information Transfer Economics
The Phillips Curve: An Overview
Jason Smith

Darren Williams — «How Populism Affects Our Business»

Most important, after a 40-year period in which capital has won out decisively over labor, there is much likelihood that global economic policy is to shift back in a much less business-friendly direction. Not only will that weigh on economic growth, but it’s also likely to push inflation higher. And that’s something markets are not currently prepared for.

Finenews
Darren Williams: «How Populism Affects Our Business»

Darren Williams | Global Economic Research Group for Fixed Income

Philip Pilkington — How Far Can We Push This Thing? Some Optimistic Reflections on the Potential For Economic Experimentation

Readers are probably aware that there is quite a lot of discussion of Modern Monetary Theory (MMT) and the potential for fiscal experimentation batting around at the moment. Others have weighed in on this already, and I have little to add.

It is striking, however, that most of the push-back — where there is push-back — is not focused on trying to discredit the idea that we should engage in fiscal experimentation. Indeed, the notion that we should engage in fiscal experimentation seems to be, if not mainstream, at the very least part of the discussion.

Yet, vulgar strawman-style arguments against MMT aside, no one seriously disputes the fact that if too much fiscal expansion is undertaken the economy will eventually hit a hard inflation barrier, past which any increase in spending will generate inflation rather than real output expansion. Interestingly, no one seems to have tried to come up with a new framework for estimating where this inflation barrier might be and whether it is too risky to overshoot it.

So, I’ve decided to fill that gap. Linked below is a paper where I use a new capacity utilisation-based framework to provide hard, yet optimistic numbers of how far we might push the economy in the spirit of fiscal experimentation....

Fixing the Economists
How Far Can We Push This Thing? Some Optimistic Reflections on the Potential For Economic Experimentation
Philip Pilkington

Peter Ireland — Modern Monetary Theory, Green New Deal Harken Us to Look Back at '70s

Thoughtful reflection on historical precedent.

These observations are particularly useful because they point to an intellectually rigorous way in which debates over the wisdom of the Green New Deal and the usefulness of MMT might be resolved: by examining more carefully the political and economic history of the 1970s. Was the high inflation of that decade a consequence of excessive money growth, engineered by the Fed to relieve budgetary pressures—the source of the “anguish” in Burns’ speech? Or was it mostly bad luck, because of shocks to imported oil and other commodity prices that had little to do with domestic economic policy, as Prof. Kelton suggests instead? MMT invites us on a trip back to the 1970s, to ask what really happened.

The inflation of the 70s has certain parallels with today, along with stark differences. Lyndon Johnson's combination of The Great Society and his and President Nixon's expansion of the Vietnam War resulted in increased government spending, which is similar to the present spending on endless war.

However, at that time the US was still on a gold standard for international settlement and there was a run to convert dollars to gold, resulting in Nixon's closing the gold window on Treasury Secretary John Connolly's advice. But this was a one-off event that likely contributed to inflationary pressure due to revised expectations.

The OPEC also imposed an oil embargo on nations supporting Israel in the Yom Kippur war. This lead to cost-push inflation as the increase in oil prices rippled through the economy. The US had recently lost self-sufficiency in oil production. Now the US has regained it. So presently, there is nothing anything like an OPEC boycott in the offing, barring a major war in the Middle East that disrupts oil production, which is, however, more than a remote possibility with the US threatening Iran.

In addition, there was a significant one-off change in employment numbers post-WWII, with women entering the workforce en masse. Moreover, the labor movement was weakening owing to both internal issues and its coming under attack from capital. Presently, labor is dominated by capital, and there is no large influx of workers in the offing, especially with immigration largely off the table.

It is always dangerous to transpose numbers across history without closely comparing situations to see how similar the context may be.

Economics 21
Modern Monetary Theory, Green New Deal Harken Us to Look Back at '70s
Peter Ireland | professor of economics at Boston College and a member of the Shadow Open Market Committee

Brendan Greeley — When DoJ and the FCC slowed inflation

Two weeks ago Alphaville published a clarification on modern monetary theory by Scott Fullwiler, Rohan Grey and Nathan Tankus. They argued that, counter to what had been reported, MMT does not rely exclusively on raising taxes to counter inflation. Proper MMT, they wrote, uses a lot of tools to manage inflation -- taxes only one among them....

FT Alphaville (Free registration required if not a FT subscriber)

When DoJ and the FCC slowed inflation

Brendan Greeley

John T. Harvey — Inflation…Huh…What Is It Good For?

Unfortunately, there are a great many misconceptions out there about inflation. Since I can't possibly address them all in a short blog post, I figured I'd take on just one: the idea that it is a net loss for everyone. The reason people believe this is partly because of the manner in which most economists teach the concept and also because we naturally transfer how a phenomenon affects us individually to the macro level. If inflation reduces my standard of living, then it must be doing the same to everyone. But what this ignores is the simple and fundamental fact that if I’m paying more, someone else is getting more. Every expenditure for one person is income for another. Hence, inflation can’t possibly be a net loss for everyone, but is instead a redistribution of income.….

Inflation is always and everywhere a redistribution of income. If you truly want to understand an episode of inflation, you have to ask, "Who's winning from this?"

Sometimes your answer will lead you to the conclusion that it's bad and sometimes not. From a broader perspective, what this means for government policy is that it should be tailored to the specific situation. We should not treat all inflation as the same....

Forbes — Pragmatic Economics
Inflation…Huh…What Is It Good For?
John T. Harvey | Professor of Economics, Texas Christian University

Bill Mitchell — Operationalising core MMT principles – Part 2

This is the second and final part of this cameo set, which aims to clear up a few major blind spots in peoples’ embrace with Modern Monetary Theory (MMT). This is all repetition. I don’t apologise for that and it does not reflect a slack or bad editorial approach from yours truly as some critics have claimed. Repetition is how we learn. Reinforcing things in different ways (aka repetition) helps people come to terms with concepts and ideas that give them dissonance.

MMT is certainly about dissonance as the current level of hostility towards our work is demonstrating. It is also challenging existing ‘fiefdoms’ in the academy and beyond, which also creates aggression and retaliation. The problem is that most of the current criticism merely rehearses the same tired lines of inquiry. A stack of mainstream (New Keynesian) economists now regularly claim they ‘knew it all along’. The short and truthful response is – ‘no they didn’t. The standard mainstream macroeconomic theory cannot accommodate MMT principles unless it jettisons its core propositions and becomes something else. 

At any rate, as noted in – Operationalising core MMT principles – Part 1 – I am happy to help clarify quandaries that newcomers have with MMT if they are genuinely trying to work out what it is all about. I have no desire to interact with ‘critics’ who are just defending mainstream macroeconomics in its death throes and have no genuine interest in really understanding MMT beyond the superficial and no penchant for reading the now lengthy body of work we have generated in the academic literature. Yesterday, I considered a typical inquiry about an important operational detail of implementing a Job Guarantee.

Today, I consider a related topic. If a government is facing a situation where it needs to shift workers to the Job Guarantee pool to stabilise inflation, how does it do that? The ‘critics’ often claim we only advocate tax increases to fight inflation and because they are politically tricky to engineer MMT essentially fails to have an effective price anchor.

Today, I bring together many past blog posts to summarise the MMT position on counter-stabilising fiscal policy for those that might be struggling to put it all together.…

[Paragraphing added.]

Bill Mitchell – billy blog
Operationalising core MMT principles – Part 2
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

Tcherneva, Sawicky and Kaboub on MMT and policy

Pavlina Tcherneva:

There is nothing more crippling to a bold policy agenda than the myth that the government can run out of money. This myth is behind every But how will you pay for it? objection to proposals such as a Green New Deal and Medicare for All. New House Majority Leader Nancy Pelosi (D-Calif.) has even proposed instituting self-defeating PAYGO (pay as you go) rules, which would require all new government spending to be matched with increased revenue, wrongly prioritizing the balancing of the budget over the well-being of the public.

Dispelling this myth is at the heart of an economic approach that is rapidly gaining a global following, known as modern monetary theory (MMT). MMT stresses that, in the modern world, where government-backed currencies are no longer backed by gold or other commodities, federal governments can’t run out of financial resources. Unlike states and municipalities (which have hard constraints on spending), for the federal government, all funding shortages are artificially created. Understanding this changes everything—from the economic possibilities before us to what the public can demand from our government.

In These Times

PAYGO Is Based on a Fallacy
Pavlina R. Tcherneva | program director and associate professor of economics at Bard College and research associate at the Levy Economics Institute

Max Sawicky:

Pavlina asserts that an ideology of fiscal rectitude, embodied in the How will we pay for it? mantra, places impossible barriers before progressive public spending initiatives. For a number of reasons, however, this isn’t quite right.… 

There are a bunch of ways to justify additional public spending without recourse to MMT....

In These Times
The Best Way To Argue Against PAYGO
Max B. Sawicky | independent economist and writer based in Virginia, formerly at the Economic Policy Institute in Washington, D.C.

 Fadhel Kaboub:

The rising popularity of modern monetary theory (MMT) has inevitably brought misconceptions. Critics across the political spectrum often claim that MMTers want sovereign governments to “just print money” with no concern for the national debt or, as Max B. Sawicky suggests, inflation. Some, especially on the Right, point to Venezuela and Zimbabwe as classic cases of hyperinflation.

But MMT points to a different primary cause of inflation in developing countries: not domestic spending, but foreign debt and a resulting lack of “monetary sovereignty.”...

In These Times

Why Government Spending Can’t Turn the U.S. Into Venezuela—When poor countries fall prey to inflation, it’s not because they’re “too socialist.”
Fadhel Kaboub | associate professor of economics at Denison University, and president of the Global Institute for Sustainable Prosperity

Reuters — Fed plans major review of how it pursues inflation, employment goals

The Federal Reserve will conduct an extensive review next year of how it tries to guide the U.S. economy, the U.S. central bank said on Thursday.

“Now is a good time to take stock of how we formulate, conduct, and communicate monetary policy,” said Federal Reserve Chairman Jerome Powell, noting that the Fed was close to meeting its goals of maximum employment and a 2 percent inflation rate. 

In a statement, the Fed said it would reach out to a “broad range” of stakeholders and that it planned to host a research conference in June to support the review. The research conference will be held at the Federal Reserve Bank of Chicago.

Admission that current policy is not working?

Reuters
Fed plans major review of how it pursues inflation, employment goals

Asad Zaman — Modern Monetary Theory

The starting point of MMT is that our thinking about money is conditioned by the view that money is based on gold, which leads us to ignore the radical differences between gold-backed money and “fiat” money, which comes into existence by government decree, and does not require any backing. With a gold-backed currency, the concept of a government deficit makes sense – the government must have gold, in order to spend it. However, with a fiat currency, a deficit must always be self-imposed; the government chooses not to print money in order to pay its obligations.The idea that the government does not have money to fund social welfare or investment is wrong, because the government creates money by sovereign fiat, and can always print as much money as it likes. MMT raises the question of why the government should impose taxes on citizens to generate revenue – why not just print the money instead? Readers who have been conditioned by economic theories will eagerly proffer the standard answer: because this will lead to inflation! But this answer is neither sufficient, nor satisfactory.

Based on his experiences as Governor of the New York Federal Reserve Bank, Daniel Tarullo has written that at present we do not have a working theory of inflation. Similarly, Joseph Stiglitz has written that the stable relationship between money and inflation broke down in the 1980’s, leaving us with no reliable guide to monetary policy. 

Asad Zaman is teaching MMT in Pakistan.

WEA Pedagogy Blog
Modern Monetary Theory

Asad Zaman | Vice Chancellor of the Pakistan Institute of Development Economics, Islamabad, and formerly Director General of International Institute of Islamic Economics, International Islamic University, Islamabad

also of interest

Moneyness
The credit theory of money
JP Koning

also

Real-World Economics Review Blog

Uploaded: ‘The role of money in economic theory’ by Wesley Claire Mitchell (1916)

Merijn Knibbe

Peter Cooper — Job Guarantee as Nominal Price Anchor

I’ve been thinking about the job guarantee as it is envisaged by proponents of Modern Monetary Theory (MMT). My focus has been on various quantity effects of the policy that can be considered using the standard income-expenditure model as a base (for preliminary posts along these lines, see here and here.) Since the income-expenditure model takes the general price level as given, it does not directly shed light on the aspects of a job guarantee that would pertain to price stability. To provide some context for a possible future discussion of quantity effects, it is perhaps worth summarizing how the job guarantee would moderate price pressures. Clear statements of the MMT position on the topic can be found in a billy blog post (here) and closely related academic articles by Bill Mitchell (here) and Warren Mosler (here).…

heteconomist
Job Guarantee as Nominal Price Anchor
Peter Cooper

Brian Romanchuk — Coming To Grips With Neoclassical Views On Inflation And The Cycle

The role of prices and inflation in neo-classical ("mainstream") economic theory is awkward for us non-mainstream inclined. The price level is simultaneously of critical important for explaining activity as well as being an outcome of other parts of the economy. This makes the subject of inflation extremely awkward for my planned book on business cycles -- as I am pushing the subject of inflation to a later book. Instead, I only aim to have a short chapter explaining the absence of inflation analysis. This article are some preliminary comments that I hope to work into that chapter....

Bond Economics
Coming To Grips With Neoclassical Views On Inflation And The Cycle
Brian Romanchuk

Brian Romanchuk — Bear Market Meditations

Many of Brian's posts are somewhat specialized and of interest chiefly to those involved in bond markets and fixed income assets, or who seek a more detained understanding from a Post Keynesian perspective that is also in paradigm with MMT. 

This installment will be of interest to everyone with an interest in MMT and Post Keynesian economics and its approach to finance, as well as anyone interest in the general features of the current market. 

Easy read even with a pretty minimal understanding of the subject, as most people following MMT may be presumed to have acquired. If you haven't been following Brian, this is a good place to begin.

Bond Economics
Bear Market Meditations
Brian Romanchuk