Regular readers will know that for the last few years I have been documenting the way that the dominant paradigm in macroeconomics (New Keynesianism) is slowly disintegrating as the dissonance between its empirical predictions and reality becomes too great to ignore and justify. The once-in-a-century pandemic hasn’t given us much to celebrate in 2020. One cause for optimism, perhaps, is that we might finally jettison the mainstream economics fictions about government deficits and debt, which have hampered prosperity over several decades. Last week (August 27, 2020), the US Federal Reserve Bank Chairman, Jerome Powell made a path breaking speech – New Economic Challenges and the Fed’s Monetary Policy Review – at the annual economic policy symposium sponsored by the Federal Reserve Bank of Kansas City at Jackson Hole. On the same day, the Federal Reserve Bank released a statement – Federal Open Market Committee announces approval of updates to its Statement on Longer-Run Goals and Monetary Policy Strategy. We have now entered a new phase of the paradigm shift in macroeconomics.Winning.
Bill Mitchell – billy blog
US Federal Reserve statement signals a new phase in the paradigm shift in macroeconomics
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia
See also
The duel: are tax rises now inescapable? Post-Covid, are taxes hikes essential to fund the future? Or should we abandon “deficit fetishism” and spend our way to prosperity?
aka Mikes “full japan”....
ReplyDelete“ the labor force participation rate flattened out and began rising even though the aging of the population suggested that it should keep falling.”
ReplyDeleteThat’s because with rates at zero just like the MMT people advocate for, nobody can retire as interest income is nil... under this new Fed zirp policy many people are going to have to be working till they die...
Matt -- that does not hold. A lot of it is institutional: government and businesses can return to old days in which retirees were given defined benefit pension plans. I concede, though if rates are to remain at zero, or at some low positive real rate (following John Smithin), there has to be institutional adjustments to reflect that. WITH zero and NO new arrangements, retirees are in trouble. But banks don't want to invest in the real economy when buying politicians and asset- stripping are so much easier.
DeleteMatt -- that does not hold. A lot of it is institutional: government and businesses can return to old days in which retirees were given defined benefit pension plans. I concede, though if rates are to remain at zero, or at some low positive real rate (following John Smithin), there has to be institutional adjustments to reflect that. WITH zero and NO new arrangements, retirees are in trouble. But banks don't want to invest in the real economy when buying politicians and asset- stripping are so much easier.
DeleteFed interest isn’t necessary to generate retirement income. If your stocks are taking off, sell a few shares each month.
ReplyDeleteMaybe cut your retirees a check every month
Asset prices will just adjust to a new (higher) equilibrium level and stay there under zirp...
ReplyDeleteWarren Buffett recently said “if govt set interest at zero for 50 years the Dow would immediately go to 100,000...”
So it’s just going up to a new higher equilibrium level based on a zero or near zero risk free rate then what?
All pension plan actuarial functions assume a much higher risk free rate... look at all the Covid states trying to get a big pension bailout from Trump right now... That is all thanks to zirp...
I think at some level they understand this and want higher risk free rates but not with China USD zombies holding so much USD bonds...
So they will probably use Covid to get a big financial judgement against China for causing the Kung flu...and confiscate all of chinas USD based assets as compensatory damages...
THEN try to get the rates moving slowly back up...
Here:
ReplyDeletehttps://en.wikipedia.org/wiki/Net_present_value
At zirp the denominator converges to 1 and the present value is simply = sum of all the future earnings of the asset...
Then it just stabilizes at that new higher equilibrium level... then what?
MMT people will just then complain about more “inequality!”....
Looks like they may be getting ready to do something about Japan’s usd hoard also:
ReplyDeletehttps://www.cnbc.com/2020/08/30/warren-buffetts-berkshire-hathaway-buys-stakes-in-japans-five-leading-trading-companies.html
Japan and China are the big 2 usd zombie nations...
ReplyDelete"Maybe cut your retirees a check every month"
ReplyDelete+100
So interest rate policy is about punishing countries who did legitimate deals with you over the last few decades and held some savings? How Trumpian...renege on deals.
ReplyDeleteIt’s not punitive it’s compensatory .... two different legal concepts
ReplyDeletethey gave us the plague so now we can go get compensatory damages...
Marian we have 40+ years of ERISA behind us that is Plan A... can’t just change the rules in the middle of the game...
ReplyDeleteAnd state and local govt pension plans are operated via actuarial functions which assume a certain risk free policy rate, there is no direct federal responsibility or authority..
We need higher rates pronto to increase interest income for retirement savers...
they gave us the plague so now we can go get compensatory damages...
ReplyDeleteThat’s asinine
The only world in which this idea holds even a shred of legitimacy is one where 1) an intentional effort was made to send the virus to the world 2) an effort to pretend the virus didn’t exist or wasn’t serious at a time when they did know, can be shown
Our authorities had proper knowledge of the pathogen in plenty of time to have the proper response...... they refused
China didn’t treat the initial phase of the pandemic much different than any Western country would have done but their lockdown, buildup of facilities and testing/contact tracing efforts were Herculean and pretty much squashed the spread in China.
Holding a country where the first case of a pathogen appears responsible on the world stage is ignorant. By that standard we’d be pretty indebted considering the pathogens western societies have unleashed
But ignoring all that the idea that it’s compensatory is ignorant as well. Does China holding those trillions deprive us of anything? No. Any such talk is right up there with talk about borrowing from China. So if taking them gives us nothing it cannot be viewed as compensation,it’s pure punishment ......AND it’s punishment which hurts us almost as much. “ I’m gonna cut your hand off but I’m gonna have to cut four of my fingers off too!” Brilliant
It’s telling of the modern American conservative mind that simply punishing someone else is considered compensation.
ReplyDeleteThe new economic paradigm requires a new textbook
ReplyDeleteComment on Bill Mitchell on ‘US Federal Reserve statement signals a new phase in the paradigm shift in macroeconomics’
Bill Mitchell summarizes current events “Regular readers will know that for the last few years I have been documenting the way that the dominant paradigm in macroeconomics (New Keynesianism) is slowly disintegrating as the dissonance between its empirical predictions and reality becomes too great to ignore and justify. … Last week, the US Federal Reserve Bank Chairman, Jerome Powell made a path breaking speech ― New Economic Challenges and the Fed’s Monetary Policy Review ― at the annual economic policy symposium sponsored by the Federal Reserve Bank of Kansas City at Jackson Hole. On the same day, the Federal Reserve Bank released a statement ― Federal Open Market Committee announces approval of updates to its Statement on Longer-Run Goals and Monetary Policy Strategy. We have now entered a new phase of the paradigm shift in macroeconomics.”
Bill Mitchell feels validated “This has progressively opened the door for Modern Monetary Theory (MMT), the emerging rival paradigm.” Mainstream economics has failed “But we are making progress.”
“And, if you scanned the textbook market in macroeconomics looking for guidance to all of this, then you would find only ONE offering that allows you to understand all of this ― yes ― Macroeconomics (William Mitchell, L. Randall Wray and Martin Watts). Small sales pitch – but that is the fact.”
Yes, a Paradigm Shift is going on, but it is not headed towards MMT. Yes, mainstream textbooks are obsolete #1, #2, #3 but this does not mean that the new MMT textbook is scientifically acceptable. The fact of the matter is that the foundational MMT sectoral balances equation is provably false.#4 Because of this, the analytical superstructure of MMT is false and as a consequence, the new MMT macroeconomics textbook is scientifically worthless.
The Paradigm Shift moves from false Walrasian microfoundations and false Keynesian macrofoundations to true macrofoundations.#5
The good news for teachers and students is that the axiomatically correct textbook Sovereign Economics is now available.#6
Egmont Kakarot-Handtke
#1 To this day, economists have produced NOT ONE textbook that satisfies scientific standards
https://axecorg.blogspot.com/2019/03/to-this-day-economists-have-produced.html
#2 Economics textbooks ― tombstones at the Flat-Earth-Cemetery
https://axecorg.blogspot.com/2019/06/economics-textbooks-tombstones-at-flat.html
#3 Textbooks and the mental cloning of dumb economists
https://axecorg.blogspot.com/2017/06/textbooks-and-mental-cloning-of-dumb.html
#4 Wikipedia, economics, scientific knowledge, or political agenda pushing?
https://axecorg.blogspot.com/2020/06/wikipedia-economics-scientific.html
#5 Refuting MMT’s new Macroeconomics Textbook
https://axecorg.blogspot.com/2019/03/refuting-mmts-new-macroeconomics.html
#6 Sovereign Economics, Amazon, BoD, etc.
https://www.bod.de/buchshop/sovereign-economics-egmont-kakarot-handtke-9783751946490
"Does China holding those trillions deprive us of anything? "
ReplyDeleteCurrently yes. They are, and have been, deliberately refusing to spend those trillions into the US economy, thereby depriving the US economy of demand and making millions unemployed.
Discounting foreign currency into local currency is modern mercantilism. The rational response is to remove the interest income from those assets and accommodate the excess savings.
"That’s because with rates at zero just like the MMT people advocate for, nobody can retire as interest income is nil"
ReplyDeleteBzzz. Static/Dynamic error.
Retirees retire on the pension contributions of the working. Always have done. Everything else is essentially a rounding error.
Pension funds are little more than private tax collectors and welfare payers. They change the pointers on a bunch of assets to make it look like you are saving something and to give them something to base their essentially arbitrary distribution decisions upon.
No Neil
ReplyDeleteIf we want that spending, Congress could just appropriate that spending. Blaming Chinas saving makes as much sense as blaming BillGates’ saving. It has been pointed out numerous times that while their may be good reasons to tax rich people more (essentially confiscating some of their savings) relying on the argument that we need those savings in order to provide the public services we desire is specious.
China has no obligation to spend the dollars that the US makes them accept in the transactions between the countries. If we are short of demand we can rectify that.
It is ridiculous for anyone to argue that when person A buys something from person B (or country A) for x person B must now buy x$ worth of something from person A. There is no obligation there. Especially when what they might wish to purchase is not for sale. Insisting on those conditions turns a monetary economy into a barter economy, which is exactly the mistake the monetarist makes. Person B might want something from person C and this is exactly how a monetary exchange economy is to work.
Frankly, I’m surprised YOU of all people made that argument.
@ Greg
ReplyDeleteAgree. But what does US forcing China to save in dollars actually imply? It needs to be unpacked. In a unipolar world under dollar hegemony, countries need to save in USD in order to avoid being put in a squeeze by the US.
If China believes that the US was contemplating cutting then off from SWIFT, watch how quickly they unload those US Treasuries. They would be likely to follow Russia's lead and switch from dollar-denominated reserves for settlement to physical gold. In fact, they are already considering this, as I gather.
They are also cooperating with Russia to set up an alternative payments system beyond the reach of the US and also a central bank digital currency, as are other countries affected by US economic warfare. US policy is now driving de-dollarization. Who is becoming isolated?
Here is an interesting post by Alastair Crooke on this. Although I don't take him as an authority on economic and financial issues, he is usually pretty good on geopolitical analysis.
The Quiet American Reset
It is ridiculous for anyone to argue that when person A buys something from person B (or country A) for x person B must now buy x$ worth of something from person A. Greg
ReplyDeleteYes, but it's also ridiculous that the risk-free debt of a monetary sovereign like the US should return more than ZERO percent MINUS overhead costs = NEGATIVE. Otherwise we have welfare proportional to account balance.
Also, it's ridiculous that the US may not charge non-citizens (and large users/hoarders) for the use of a public utility, its fiat and other sovereign debt - according to its national interest.
So Neil is correct except for MMT's (willful*?) blindness to the ethical necessity of negative yields and interest on inherently risk-free sovereign debt.
*Because the MMT School is decidedly in favor of special privileges for banks.
It's unrealistic to expect China to "spend" their trade surplus. As for investment, it is their prerogative to invest it wherever they wish.
ReplyDeleteAs for investment, it is their prerogative to invest it wherever they wish.
ReplyDeleteNot really. For example the US could (and should) limit land ownership in the USA to citizens only - e.g. we sure don't need any more landlords.
Or go a step further and put an end to land speculation and rent seeking.
ReplyDeleteDon't hold your breath.
"China has no obligation to spend the dollars that the US makes them accept in the transactions between the countries."
ReplyDeleteThey have a moral obligation to do so, and when they don't they have to accept the policy changes that will occur - which is that interest will be removed, and either the leak accommodated (as we would suggest), or if the belief is in a different direction stopped by import barriers, encouraging internal substitution.
Which is what is happening.
There are several ways to solve the China leak. From Bancor to gold standards to trade sanctions. MMT accommodate the saving approach is just the best one :-)
P.S. People can entertain notions without subscribing to them.
This comment has been removed by the author.
ReplyDeleteThis comment has been removed by the author.
ReplyDeleteMMT accommodate the saving approach is just the best one NeilW
ReplyDeleteBeyond legitimate needs such as for liquidity, risk-free savings constitute hoarding, the abuse of a public utility.
https://www.pewtrusts.org/en/research-and-analysis/issue-briefs/2019/12/state-pension-funds-reduce-assumed-rates-of-return
ReplyDelete“ State and local public employee retirement systems in the United States manage over $4.3 trillion in public pension fund investments, with returns on these assets accounting for more than 60 cents of every dollar available to pay promised benefits.”
Checkmate..,, AGAIN....
“. Static/Dynamic error. Retirees retire on the pension contributions of the working. Always have done. Everything else is essentially a rounding error. “
ReplyDeleteYo Neil 60% is not a rounding error...
You zirp people are bankrupting public employees pension systems... AND .... AND .... adjusting financial asset prices EVEN HIGHER than you always complain about ... AND.... AND... creating EVEN MORE “inequality!” that you are always complaining about too....
You’ve hit a trifecta!
https://en.wikipedia.org/wiki/Employee_Retirement_Income_Security_Act_of_1974
ReplyDeletehttps://en.wikipedia.org/wiki/Individual_retirement_account
“ Individual retirement arrangements were introduced in 1974 with the enactment of the Employee Retirement Income Security Act (ERISA).[8] Taxpayers could contribute up to fifteen percent of their annual income or $1,500, whichever is less, each year and reduce their taxable income by the amount of their contributions.[8] The contributions could be invested in a special United States bond paying six percent interest,“
SIX percent....
"MMT accommodate the saving approach is just the best one"
ReplyDeleteRight. It seems that the people running the US are too dense to realize that the US is benefiting over China in real terms of trade, while China has been satisfied holding dollars. That is changing not only because of sanctions. The perception is that the USD is becoming less unstable financially and politically.
China is also moving beyond the export-dependent developmental stage now, cutting back exports and shifting production to domestic consumption as the largest and fastest growing market in the world economy.
"There are several ways to solve the China leak. From Bancor to gold standards to trade sanctions."
China seems to favor something like a bancor solution (basket of currencies and PMs) for settling international trade rather than using a national currency for the global reserve currency.
"P.S. People can entertain notions without subscribing to them."
Right. I certainly don't agree with the entirety of the content of stuff I link to and point out what I think is worth knowing about in it.
@Franko,
ReplyDelete6% (or any other positive rate) on a risk-free asset, even with a $1,500/year (or any other) savings limit, is still welfare proportional to account balance and violates equal protection under the law.
Otoh, an equal Citizen's Dividend does not violate equal protection under the law. Nor does welfare according to need.
@Neil
ReplyDeleteOf course one can discuss the merits of other peoples idea without wholeheartedly accepting them but it was not clear at all that you were putting someone else’s thoughts out there for evaluation but .....if you say so
I also have issues with your “moral obligation” comment. Using my above framing, if I buy something from you, you have zero moral obligation to use that money to buy something from me. ZERO. Money is supposed to be how you settle transactions between strangers, people you have no knowledge of or real care for. They are customers not friends. The only moral obligation is to fulfill a contract. Now, maybe the trade deals between US and China had an “if we buy your cheap plastic toys you need to buy our carcinogenic processed pork” clause and they have in fact violated that. I am ignorant of details of our trade agreements with China but something tells me China would not be multiple trillions of dollars in violation of such a clause. This would have been brought up earlier
@Tom. You said earlier;
If China believes that the US was contemplating cutting then off from SWIFT, watch how quickly they unload those US Treasuries. They would be likely to follow Russia's lead and switch from dollar-denominated reserves for settlement to physical gold. In fact, they are already considering this, as I gather.
They are also cooperating with Russia to set up an alternative payments system beyond the reach of the US and also a central bank digital currency, as are other countries affected by US economic warfare. US policy is now driving de-dollarization. Who is becoming isolated?
. It seems that the people running the US are too dense to realize that the US is benefiting over China in real terms of trade, while China has been satisfied holding dollars. That is changing not only because of sanctions. The perception is that the USD is becoming less unstable financially and politically.
——————————————————————-
Exactly! This is what I meant about cutting off China’s hand and four of our own fingers. Maybe I should have said four fingers off left hand and then the right thumb.
Well then take the ERISA to Federal court and try to get it thrown out as unconstitutional Judeo-Christian synthesis shit for brains...
ReplyDelete“ Who is becoming isolated?”
ReplyDeleteThat is what we Trump people voted for dummy...
How does you guys brains work?
ReplyDeleteYou are always complaining about “US Empire!” and then when we vote in trump to dismantle the “empire!” and he wins and starts to do that you complain about THAT!...
You are all worse than fickle females....
There are several ways to solve the China leak. From Bancor to gold standards to trade sanctions. NeilW
ReplyDeleteYou don't mention negative interest rates on inherently risk-free sovereign debt - especially for foreigners (and large domestic users/hoarders).
Or does MMT think the number line stops at ZERO?
MMT accommodate the saving approach is just the best one :-) NeilW
MMT is way too accommodating of unjust wealth accumulation and possession while throwing the bone of a pathetic job guarantee to the victims.
Here's:
ReplyDeletehttps://www.worldoil.com/news/2020/8/21/china-charters-19-tankers-for-record-us-crude-oil-shipment
They better spend them fast:
ReplyDeletehttps://www.theguardian.com/world/2020/apr/28/trump-says-china-could-have-stopped-covid-19-and-suggests-us-will-seek-damages
Right. It seems that the people running the US are too dense to realize that the US is benefiting over China in real terms of trade, while China has been satisfied holding dollars. Tom Hickey
ReplyDeleteOh yes, becoming dependent on foreigners for face masks, drugs and other necessities was oh so brilliant.
And de-skilling the US population is brilliant too.
https://www.nydailynews.com/coronavirus/ny-coronavirus-trump-freeze-evictions-20200902-lv54hpjuzraovdvb24xxywneli-story.html
ReplyDeleteThink of all the 100s $billions back rents the chicomms are going to owe damages for now that we’ve had to put a moratorium on evictions due to the China plague...
Better spend it fast zombies... there soon won’t be any left..
“ And de-skilling the US population is brilliant too.”
ReplyDeleteMMT unlimited trade deficits is tailored for people who don’t do anything of real value...
Finger painters...
ReplyDeleteThere's an entire world for China to trade with and "spend, spend, spend".
ReplyDeleteWith a seemingly hostile US administration, especially in terms of trade, China is being coaxed towards doing business elsewhere.
Winning!
P.S. Don't vote for Joe.
Tom Hickey
ReplyDeleteBill Mitchell commented on the FED’s announcement of a new monetary strategy: “We have now entered a new phase of the paradigm shift in macroeconomics.” And “Jerome Powell’s speech at Jackson Hole was described by a Reuters’ report (August 28, 2020) ― With new monetary policy approach, Fed lays Phillips curve to rest ― in this way: ‘One of the fundamental theories of modern economics may have finally been put to rest.’
This may be politically true but is scientifically false because the Phillips curve had been put to rest already in 2012.#1
The folks at the FED are a bit slow, worse, they still do not get the point.
The axiomatically correct macroeconomic Employment Law states that in order to increase employment, wages must go UP and/or prices must go DOWN. To push inflation is pure idiocy.
Yes, for the micro-brains of economists this appears counter-intuitive. But then, microeconomics is long dead. The Paradigm Shift from false Walrasian microfoundations and false Keynesian macrofoundations to true macrofoundations is an accomplished fact.#2
Egmont Kakarot-Handtke
#1 Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster, see Links on the Phillips Curve
https://axecorg.blogspot.com/2019/10/links-on-phillips-curve.html
#2 Cross-references Paradigm Shift
https://axecorg.blogspot.com/2015/02/essentials-cross-references.html
Isolationists my ass
ReplyDeleteThe Amish are isolationists. They have their own community, very tight knit, very committed to their way. They trade with the rest but have no desire to expand their influence. They stay OUT of the spotlight. They keep their noses clean and live a life that is quite respectable.
Trumpists want to renege on every deal that has given them some responsibility to someone other than themselves. Anything that requires them to have some accountability. If Trumpists would just go live in some white supremacist compound in Idaho/Montana/Oregon and stay the fuck away from decent rational people that would be great. But they want to be on TV, pushing their agenda trying to infect the rest of world with their small minded virus. They want to control other people but have no leash on them selves.
I wish they were true isolationists
Matt Franko: You are always complaining about “US Empire!” and then when we vote in trump to dismantle the “empire!” and he wins and starts to do that you complain about THAT!...
ReplyDeleteWell, the liberals, progressives, democrats or even socialists who do that, who empowered Trump by falsely accusing him with the Russiagate farce are as bad as he is. You're right, they attack Trump the most when he tries to do something good. Thus driving him to new levels of craziness.