Why Trump’s Victory Was 30 Years in the Making and Why It Won’t Stop HereGoodhart's law. That would be Charles Goodhart.
The era of neoliberalism is over. The era of neonationalism has just begun.
Needless to say, must-read.
Global Trumpism
Mark Blyth | Professor of Political Economy at Brown University
"The new right favors nationals over immigrants and has, at best, a rather casual relationship with the liberal understanding of human rights." Hmm, that's funny, the "Left" also has, at best, a rather casual relationship with human rights. Just ask Barack I-run-the-largest-assassination-ring-in-the-world Obama and Eric due-process-is-not-judicial-process Holder.
ReplyDeleteMark Blyth gets it. Most Democrats/liberal/What-we-call-leftist-but-is-actually-right-wing absolutely refuse to critically look at the problem. Instead, we're all just a bunch of sexists/racists/bigots/whatever-the-fuck-phobic-or-ists-you-can-name.
ReplyDeleteI've never heard him mention MMT, but he gets it. In his talks, he gives little one-off side remarks about deficits equaling surpluses, even that govt debt is a non-govt asset. Of course, his audience doesn't know what he means, but never-the-less.. I'd be surprised if he hasn't read MMT, but he would be savvy enough to know if he says the term "MMT" he won't be considered a VSP anymore. But he does walk on VERY thin ice by explicitly saying the purpose of the way neoliberal globalization has proceeded was intentionally to destroy labor's power...
Really the only non-mmt consistent thing I've heard him say is he thinks interest rates are set by the global economy.. Could he be right? If Yellen were to try a dramatic raise, would other powerful people around the world rain holy hell down on her?
Really the only non-mmt consistent thing I've heard him say is he thinks interest rates are set by the global economy..
ReplyDeleteEven though the Fed sets the interest rate "by fiat," it doesn't set interest rate arbitrarily but based on assessment of the domestic economy and what effect changes in interest rates will have on the global economy since the FFR and LIBOR are the benchmarks.
So Blyth is not wrong about this. Of course he knows that the Fed sets the rate it chooses.
Thanks Tom, I agree. I was curious, because of one sentence Blyth had said in one of his talks made me wonder, something along the lines of "With interest rates low, might as well build the infrastructure you need for the next 50 years". Whereas I don't see how current interest rates really have any bearing in reality on the ability to build infrastructure. Is the govt sovereign and are the real resources available or not? Because it's not like the govt gets an estimate on the price and takes out a 50 year loan all at once for $5 trillion or whatever at a fixed interest rate. I'd think infrastructure would be a decade long project that will be paid for continually by congressional appropriations.
ReplyDeleteThere's a lot of people like Dean Baker or Ron Paul who are genuinely confused on this issue, on one hand they know the Fed sets rates, since the fed literally does this at their meetings. But in the next sentence talk about how investors are willing to lend the govt money at low rates, or that the deficit will cause rates to rise.
I should add, I too, of course, am still learning on this issue.
ReplyDeleteBuilding infrastructure when interest rates are low is a good idea but not because interest rates are low
ReplyDeleteInterest rates are low because the economy is underperforming and inflation expectations are reduced. This is, or at least may be, a single for increasing government spending as stimulus.
Mark Blyth is aware of MMT…
ReplyDeleteMaybe three or four years ago I came upon a youtube video of him give an hour or so long talk about austerity and the situation in the eurozone, and I noticied how he seemed to have a very MMT-ish persepctive, but never mentioned MMT and he framed things a bit differently than MMT does.
I then emailed him, explained MMT in a nutshell, and he said he hadn't heard of MMT before but he might be an MMTer and not even know it. I shared some MMT readings within him as well, e.g. Mosler' Innocent Frauds and Wray's books.
In this vid https://www.youtube.com/watch?v=o8LAUQwv77Q
ReplyDeleteat 30:19, Blyth says
"I don't think central banks really have much effect on interest rates... I think the interest rates of the global economy are set by the global economy."
He further clarifies that he thinks the CB's are pushing interest rates in the same direction as the rest of the economy, they're not capping rates (like the libertarians think).
So why is the "global economy" desiring low rates and what would make them want higher rates? My guess is there's just not much demand for credit so naturally the rates go down. But during the housing bubble, there was a lot of demand for credit, and we had the Greenspan Puts keeping them low. Wouldn't the demand for credit put upward pressure on them, but the CB was in fact capping them??
and presently deficits and QE keep reserve balances high, so that's brings the FFR down too, so low demand for credit plus high reserve balances leads to low rates??
ReplyDeleteBut during the housing bubble, there was a lot of demand for credit, and we had the Greenspan Puts keeping them low. Wouldn't the demand for credit put upward pressure on them, but the CB was in fact capping them??
ReplyDeleteGreenspan thought that the chief task of the central bank is to manage price stability. Goods inflation was under control and wage pressure was not rising. In the standard model, assets appreciate rather than inflate. Therefore, Greenspan saw no need to hike rates to curtail what became the housing bubble.
The problem was actually not economic or financial but initially forensic. Greenspan blew that off, ignoring the FBI report in Dec 2004 about rampant fraud in the housing/mortage market, which would spin over into the financial markets owing to securitization and the proliferations of designer products in finance. It was the derivatives that created the systemic risk.
Failure to raise rate was not the problem.
Joe
ReplyDeleteLong rates are mostly a function of inflation expectations. Central Banks typically set short term rates and allow the market to determine long rates. When inflation is expected to be high, bond holders demand a higher rate of return to avoid capital loss. So... low long rates throughout the world suggests very little inflationary expectation.
Blyth would be correct to say the global economy determines interest rates. He's talking about long rates.
As for demand for credit, the interest rates on borrowing will be function of inflationary expecation + a mark-up for default risk.
and presently deficits and QE keep reserve balances high, so that's brings the FFR down too, so low demand for credit plus high reserve balances leads to low rates??
ReplyDeleteWhen the Fed is paying interest on excess reserves, reserves make no difference since they do not affect the overnight market for federal funds. When the Fed is not paying IOER, then the amount of reserves affects the FFR in the overnight market, and the Fed manages the target rate by open market operations (OMO) that expands and contracts excess reserve balances.
Low demand for credit is associated with low rates because credit extension creates deposits. Most borrowing, which increases deposits (M1), is for investment, including residential housing. Low demand for credit signals low investment spending and investment is the driver of growth in a capitalist economy, since investment result in income and income is allocated to consumption and saving. Based on the standard model there is no reason for the Fed to raise the interest rate under such conditions.
The Fed, which sets the FFR as a policy rate, doesn't look at demand for credit as much as inflation indexes and employment and wage pressure to estimate inflationary expectations. The Fed has a long term target for the inflation rate, e.g., 2%. Inflation varies around that over a cycle and the Fed adjusts rates to smooth the variations toward the target. Of course, if demand for credit begins to rise and investment increases, that is a tell about things to come in the economy, and vice versa. But the Fed is mandated to keep one eye on inflation and the other on employment. The "sweet spot" is when the natural rate of interest is equal to the non-accelerating inflation rate of unemployment (NAIRU). According to MMT, this based on deeply flawed analysis.
Post-crisis, low rates did not stimulate economic activity enough to result in wage pressure and inflationary expectations, so QE was extended in the hope of creating inflationary expectations. No luck either because the model was based on dodgy assumptions.
@Tom: "Low demand for credit is associated with low rates because credit extension creates deposits."
ReplyDeleteThat statement is misleading. It's as if you're saying the demand for credit is the direct determinant of the level of interest rates.
My understanding is that demand for credit is an indirect determinant of the level of interest rates, in that when demand for credit is high, the economy is booming, and inflation expecations are rising. It's the higher inflation expectations that is the direct driver of higher interest rates (+ a mark-up for defaults risks).
Wouldn't it be more clear to say: Low demand for credit is associated with low rates because when demand for credit is low, economies tend to be slumping, and when economies are slumping, inflation expectations are low.
Yes, the CB sets the anchor rate as the FFR or interest on reserves, but the rest of the yield curve is mostly a product of inflation expectations. And then borrowing costs above that are simply mark-ups for default risk of borrowers.
What am I missing?
Wouldn't it be more clear to say: Low demand for credit is associated with low rates because when demand for credit is low, economies tend to be slumping, and when economies are slumping, inflation expectations are low.
ReplyDeleteYes, this is clearer.
But the Fed looks not only at inflation but also the economic activity (cycle) and employment.
The Fed lowers the rate in contractions not only because the inflation rate is low, but also to stimulate borrowing and buoy employment.
The neoclassical theory is that when consumption falls, demand for money slackens. Then interest rates will adjust downwards and firms will borrow to invest in capital improvements. Slackening employment in the consumption goods sector will reduce wage pressure and no longer needed employment in the consumption goods sector will shift to the capital goods sector.
When the economy is booming, the unemployment rate falls and wage pressure rises. The Fed raises rates to reduce the demand for money and increase the saving rate in order to reduce spending and cool the economy. This increases the unemployment rate, which reduces wage pressure and lowers inflationary expectations.
This is the standard model that central banks supposedly use in monetary policy. The idea is that interest rates are procyclical, being positively correlated with the economic cycle. Rates falls as the economy contracts and money demand slackens, and rates increase as the economy expands and money demand picks up. So the Fed can influence the cycle by getting ahead of it in setting rates iaw expectations, smoothing the curve, and avoiding overshooting by setting the interest rates as the cost-price of money.
So while the Fed operates on the basis of "inflation-targeting," there are other factors involved.
Yes, the CB sets the anchor rate as the FFR or interest on reserves, but the rest of the yield curve is mostly a product of inflation expectations. And then borrowing costs above that are simply mark-ups for default risk of borrowers.
Right. But MMT says that's not the whole story.
The mainstream theory is that while the cb sets the overnight rate, the bond market sets the inflation-risk premium through demand for bonds along the curve, which influence the relative price of bonds of different maturities, yield being inversely correlated with price. So if demand falls, then yields increase with greater maturity owing to the risk premium, and the yield curve steeps. This is supposed to send a signal to the cb that inflationary expectations are rising. Thus, bond vigilantes "force" the cb to raise the interest rate based on changing expectations.
According to MMT, the Fed sets the interest rate independently and can control the yield curve, too, if it wishes by expanding or contracting its balance sheet. There are no bond vigilantes.
"According to MMT, the Fed sets the interest rate independently and can control the yield curve, too, if it wishes by expanding or contracting its balance sheet."
ReplyDeleteRight, i get that. So what I'm saying is, yes, inflation expectations and other economic conditions influence what the Fed will do, but ultimately it's the Fed with the final say. If the Fed wants 10%, they can set ior there and that's the floor, is there anything stopping them?
Your explanation is quite different from "central banks [dont] really have much effect on interest rates".
Your explanation is quite different from "central banks [dont] really have much effect on interest rates".
ReplyDeleteCentral banks can set the rate as they wish as long as the government is sovereign in its currency and the economy strong enough not to need much in the way of foreign reserves.
But the fact is that none of them seems to realize this and act as if markets were dictating to them. As Alan Greenspan said, cbs act as if still on the gold standard.
So while MMT is correct, central banks generally act otherwise. So I can understand Blyth's statement that the global economy sets rates.
I think what ya'll might be missing is that Blyth probably isn't solely referring to the interest rates on government debt.
ReplyDeleteYes the central bank sets the policy rate, and yes the CB can control the whole yield curve on the federal government’s debt if it wants to (as seen with QE and Operation Twist, etc) which is something MMT emphasizes, but there's an enormous multitude of "interest rates" throughout national economies and the global economy. I think when Blyth says "interest rates" are set by the global economy, he's referring to this enormous multitude of private sectors debt contracts, e.g. corporate debt, forward and future contracts in commodities, etc. and traditionally includes the long rates on government debts (although as MMTers we understand the Fed has power over these if it chooses to exercise it).
"The market" is very much in control of most of the (private sector) interest rates in the economy.
As an aside and a point of logic, if the Fed were permitted to buy and sell any and all forms of private sector debt, the Fed technically has the purchasing power to set any interest rate in the economy: it would simply set a bid-ask spread and allow quantity to float. Do you agree Tom?
Yes.
ReplyDeleteA currency sovereign has a monopoly on the currency and the US is sovereign in the USD.
The monetary authority (central bank) can control the financial system and the fiscal authority (legislature) can control the economic system operationally. However, since the US is a democracy this might meet resistance politically.
For example, the US government exerted some of its enormous power to keep the system from collapsing financially and industrially, but made a choice to save only "vital" parts of it. This led to the subsequent political turmoil.
Yes the central bank sets the policy rate
ReplyDeleteOn the other hand, the UK has chosen to delegate setting the interest rate (libor) to the big banks. This was supposed to be a a closer approximation to a market rate than the technocratic command system used by other cbs, notably the Fed — until it was discovered to be fixed.
I think what ya'll might be missing is that Blyth probably isn't solely referring to the interest rates on government debt.
ReplyDeleteYes, that was my first comment in the thread.
"Even though the Fed sets the interest rate "by fiat," it doesn't set interest rate arbitrarily but based on assessment of the domestic economy and what effect changes in interest rates will have on the global economy since the FFR and LIBOR are the benchmarks.
So Blyth is not wrong about this. Of course he knows that the Fed sets the rate it chooses."