Yes, It's Not $1.5 Trillion Of Spending — Brian Romanchuk

Excellent summary of monetary versus fiscal. 

Bond Economics

Yes, It's Not $1.5 Trillion Of Spending

Brian Romanchuk

Bill Mitchell — The central bank independence myth continues

One of the enduring myths that mainstream macroeconomists and the politicians that rely on their lies to depoliticise their own unpopular actions continue to propagate is that of ‘central bank independence’. This is the claim that macroeconomic policy making improved in the ‘neoliberal’ era following the emergence of Monetarism because monetary policy was firmly in the hands of technocratic bankers who were not part of the political cycle. As such, they could make decisions based on fundamentals rather than the requirements of the political cycle. The corollary was that vote-greedy politicians, who operate on short-term political cycles, would be willing to compromise the ‘longer-term’ health of the economy to splurge on populist programs that might increase their chances of re-election. As a result of the mismatch between the political cycle and the, longer, economic cycle, the neoliberal solution was to make monetary policy independent of the political cycle. Except, of course, it didn’t and cannot. The latest scaremongering about the ‘loss’ of central bank independence was published in the UK Guardian last week (February 28, 2020) – From the Fed to Bank of England, central banks must up their game. The author is a former deputy governor of the Bank of England Board and former director general of the CBI. The interesting point about the article was not the further elaboration of the myth, but, rather, his assessment that the chances of reforming the European Union treaties in any direction “are vanishingly small”. Read: zero. From the mouth of the elites. I hope our Europhile Left colleagues absorbed that bit, at least....

Bill Mitchell – billy blog
The central bank independence myth continues
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

The Monetarist fantasy is over — Robert Skidelsky

Quite a good piece that pushes the MMT view without naming it.

Progressive Economy Forum
The Monetarist fantasy is over
Robert Skidelsky | Crossbench peer and Emeritus Professor of Political Economy at Warwick University

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

Central Bank Objective Functions — Brian Romanchuk

One topic of research that keeps popping up is the question of what the central bank objective function should be. In simpler terms, what is the target of the central bank? (At present, most central banks have an inflation target, possibly with secondary objectives.) This is a preoccupation of many "conventional" economists -- those in the neoclassical tradition, as well as those that are somewhat out of the mainstream (e.g., Market Monetarists are pushing for a Nominal Gross Domestic Product Level Target (NGDPLT). If one sticks to the usual Modern Monetary Theory (MMT) story, this is not really a topic of interest. However, even if I take my MMT hat off, I think these discussions are putting the cart before the horse....

All you need to know: "Until model error is taken seriously, the debate about the mathematical definition of the central bank target is very much akin to debating the number of angels that can dance on the head of a pin."

But it's an interesting and informative read if you are at all into this, although it helps to have a basic understanding of mathematical modeling and control theory since this is the basis of Brian's analysis.

While this is not directly relevant to understanding MMT, it is a good simple explanation of why MMT economists reject reliance on monetarism of any sort, that is, using monetary policy to "steer" the economy rather than fiscal policy. It puts the burden on those defending central bank independence based on the ability of the central bank to tune the economy if left free to do so.

Bond Economics
Central Bank Objective Functions
Brian Romanchuk

Why Rate Expectations Dominates Bond Yield Fair Value Estimates — Brian Romanchuk

Although there are various attempts to downplay rate expectations as an explanation for bond yields. the reality is that they dominate any other attempt to generate a fair value estimate by using "fundamental data". (Since we cannot hope to explain every last wiggle of bond yields without having a largely content-free model, we need to look at fair value estimates.) The reasoning is rather straightforward: so long as the risk free curve slope is related to the state of the economy, bond yields are pinned down by the front of the curve, and the slope....

Bond Economics
Why Rate Expectations Dominates Bond Yield Fair Value Estimates
Brian Romanchuk

Mainstream economists are getting radical — Dion Rabouin

No mention of MMT though, and a reliance on central banks to combine fiscal policy with monetary policy under the rubric of "helicopter money," a term that Milton Friedman coined. They still can't pry loose from his influence, apparently. 

Democracy? Meh. Go with technocracy that the elite control.

Axios
Mainstream economists are getting radical

Dion Rabouin

Bill Mitchell — Is the British Labour Party aboard the fiscal dominance train – Part 1?

As I type this (Sunday), I am heading to Brighton, England from Edinburgh. We had two sessions in Edinburgh yesterday (Saturday) and it was great to share ideas with some really committed people. We had to dodge a Hollywood closure of the streets (‘Fast and Furious 9 had commandeered the inner city to film a car or two swerving out of control or whatever, and I hope the city received heaps for the inconvenience to its citizens. But, with the direction now south, and tomorrow’s two events (more later), I am thinking the place of the British Labour Party in the progressive struggle. It doesn’t look good to me. The news overnight has been that the Party’s “head of policy and the author of the party’s last election manifesto” (quoting the Times today) has quit the Party claiming “I no longer have faith we will succeed”. The blame game starts and, as usual, Jeremy Corbyn’s leadership is in focus. The Times cartoon had the caption “They’ve got what it takes to form a government” with two ducks (in Brighton) looking at a sign against a wall saying “Labour Civil War Chaos”. What should we make of all this? My take is this: there is a clear paradigm shift going on in macroeconomic policy thinking. Every day (it seems) a new article pops up with someone claiming monetary policy has run its course and a new era of fiscal policy dominance is the only viable way ahead. That means that the central bank imprimatur on policy – determining whether such policy can continue to be effective and relying on interest rate adjustments etc as the primary counter-stabilisation policy – is over. That means that New Keynesian economics is over. That means that fiscal credibility rules that are neoliberal central are over. And that is why I think British Labour are looking poorly in the polls. They have taken advice from a number of characters who have pushed them into a ‘New Keynesian’ mindset and they are now ‘yesterday’s news’. They have missed the boat on these major shifts that have been going on. That is why they need a major shift in macroeconomic thinking. Only Modern Monetary Theory (MMT) offers a consistent and credible path for them to make that shift....

Bill Mitchell – billy blog

Is the British Labour Party aboard the fiscal dominance train – Part 1?
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

TASS — Russia’s Central Bank cuts key rate to 7% for first time since 2014

Interest rates represent cost of borrowing and income from saving. Both are reduced by cutting rates. Since is this is a decrease in price, it is disinflationary, which is opposite to what central bankers assume. Savers receive less income, which would likely have been spent on goods purchases. Lower of the cost of firm investment potentially results in lower goods prices.

On the other hand, in deciding on a monetary policy using interest rate setting, central banks assume that lower interest rates are inflationary. This is an overly simplistic approach that called into question by the inflationary potential of rising rates and the disinflationary potential of falling rates.

Inversely, an increase is price occurs in bond markets, where change in securities price is the inverse of change in the interest rate. Lower interest rates imply that the market price of previously issued securities rises rise in adjustment to the change in the yield. This is a case of asset appreciation, which is considered irrelevant to goods price level that figures in inflation rate. The increase in asset price offset the decrease in income from lower yields. 

Of course, new issued securities reflect the going interest rate. Lowering interest rates means that the government issuer is injecting less funds into non-government than previously. This lowers the fiscal balance.

Specifically, the Central Bank of Russia is assuming that the lowered cost of borrowing will result in an increase in firm investment and that the lowering of interest income will not significantly affect demand, since income from saving may go disproportionately into more saving, given savers revealed preference for saving. The current central banking assumption is that savers fund borrowers, which presumes a loanable funds theory that has been shown to be incorrect. This disproof was confirmed recently by the Bank of England, but much of finance and economic is still based on the erroneous theory.

This is an MMT-based summary analysis contrasted with current central banking assumptions.

TASS

Russia’s Central Bank cuts key rate to 7% for first time since 2014

To cut or not? Dueling Fed views boost pressure on Powell — Howard Schneider, Ann Saphir

This explains one major flaw in monetary policy. There is no criterion for applying. The Fed has experimented with a rule and failed. The present policy is discretionary. The board member disagree over the most basic issue, whether to raise or lower rates. There might be legitimate debate over how much to raise or lower based on expectations. But when there is no objective way to decide whether to increase or decrease rates, thereby picking winners and losers, it's insane rather than scientific. 

It supports Hayek's argument in favor of the information processing power of markets over command systems, especially in highly complex areas where functions cannot be written reliably. NAIRU has been a failure.

The Fed should set the rate to zero permanently and issue securities at a fixed rate based on demand, and let the market set price. Fiscal policy is ample to manage government economic policy through injection and withdrawal. 

Operational requirements should also reflect that fiscal injection through spending is funded by issuance alone, and that fiscal withdrawal through taxes, tariffs, fees and fines is dual-purpose, controlling for inflation and discouraging socially negative behavior.

Reuters

To cut or not? Dueling Fed views boost pressure on Powell

Howard Schneider, Ann Saphir

James Dorn echoes John Taylor. 

So we make up some rule to preserve central bank independence? Been tried and failed. 

There is no rule that remotely scientific in the sense of a formal model that passes the empirical test.

John Dorn admits it and suggests a committee to find one:

The problem is how to induce the Fed to trade off its discretionary powers and adopt a monetary rule that will decrease the uncertainty that now plagues the present system. Congress has the authority to make the Fed accountable for following a rule, but thus far has not been able to even commence a national monetary commission to evaluate the Fed’s performance and recommend reforms.

This is a critical first step. Until then, it is imperative that we continue to examine alternative monetary rules so that, when the time is ripe, an effective rule-based monetary regime can be adopted to limit the power of the central bank, insulate it against political opportunism, and safeguard citizens’ right to sound money....

Really.

Alt-M
Why the Fed Needs a Monetary Rule to Protect Its Independence

James Dorn

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 Fiscal The New Monetary? — Nicola Mai, Peder Beck-Friis

Curiously, no mention of MMT. But useful for the analysis showing that monetary policy is not cutting it and that fiscal policy will inevitably gain in prominence. It is now pretty widely recognized that the period of monetarism spearheaded by Milton Friedman (and the Chicago School) as the "successor" of John Maynard Keynes as international policy guru is over. The question now is, who will the new gurus be? Will the pendulum swing back to Cambridge and Wynn Godley?

FA — Financial Advisor
Is Fiscal The New Monetary?

Nicola Mai, portfolio manager and a sovereign credit analyst and Peder Beck-Friis is a portfolio manager, both at PIMCO

Whither Central Banking? Lawrence H. Summers

In an environment of secular stagnation in the developed economies, central bankers’ ingenuity in loosening monetary policy is exactly what is not needed. What is needed are admissions of impotence, in order to spur efforts by governments to promote demand through fiscal policies and other means.

Throwing in the towel (but not endorsing MMT). Politically, this is about control of the Democratic Party after the transition from Clinton-Obama-Third Way. Summers is on the side of the Establishment, while Stephanie Kelton is Bernie's advisor and in league with The Squad.

Project Syndicate
Whither Central Banking?
Lawrence H. Summers & Anna Stansbury

Is There Really A Trade-Off Between Inflation And Unemployment? — Brian Romanchuk

Rather than attempt to explain what the mainly neoclassical economists are going on about, I want to step back and try to translate their debate into terms that would be understood by people who do not share the same assumptions. I am pretty sure that post-Keynesian economists have a lot to say about the topic as well, but once again, they tend to be discussing wonkish points that would elude an outsider.…

I have an engineering background, and engineering is largely the science of trade-offs. I have no strong objections to qualitative discussions, but I would argue that we need to at least know the sign of the exchange ratio between two variables in order to say that there is a trade-off between them.

Very simply, if we can have a policy that lowers both the unemployment rate and the inflation rate (or at least leaves inflation unchanged), we cannot pretend there is a meaningful "trade-off" between them.

And this is hardly theoretical: in the United States, we saw a near monotonic decrease in the unemployment rate after the Financial Crisis, yet the inflation rate has done absolutely nothing interesting....

Bond Economics
Is There Really A Trade-Off Between Inflation And Unemployment?
Brian Romanchuk

Richard H Clarida — The Federal Reserve's review of its monetary policy strategy, tools, and communication practices

I am delighted to be in Helsinki at this important conference on monetary policy and the future of Europe's monetary union. Today I would like to discuss the broad review of the Federal Reserve's monetary policy framework that my fellow policymakers and I are undertaking this year. We are examining the policy strategy, tools, and communication practices that we use to pursue our dual-mandate goals of maximum employment and price stability. In my remarks, I will describe the motivation for and scope of this review and discuss some of the events that are taking place. In our review, we are being transparent and open minded, and we are seeking perspectives from a broad range of interested individuals and groups, including academics, other specialists, and the public at large.
The fact that the Federal Reserve is conducting this review does not suggest that we are dissatisfied with the existing policy framework. Indeed, we believe our existing framework has served us well, helping us effectively achieve our statutorily assigned dual-mandate goals. Nonetheless, in light of the unprecedented events of the past decade, we believe it is a good time to step back and assess whether, and in what possible ways, we can refine our strategy, tools, and communication practices to achieve and maintain these goals as consistently and robustly as possible. I note that central banks in other countries have conducted periodic reviews of their monetary policy frameworks, and their experience has informed the approach we are pursuing.

BIS
Richard H Clarida: The Federal Reserve's review of its monetary policy strategy, tools, and communication practices
Richard H Clarida, Vice Chairman of the Board of Governors of the Federal Reserve System, at "The Bank of Finland Conference on Monetary Policy and Future of EMU (Economic and Monetary Union)", Helsinki, 1 July 2019

The World of Monetary Policy, According to Christine Lagarde— Carolyn Look

While Lagarde said MMT is no panacea, she didn’t reject it outright.

“While it is tempting, when you look at the sort of mathematical modeling of it, and it seems to stand, there are big caveats about it, such as if the country is in a liquidity trap, such as if there is deflation. Well then, in those circumstances, it could possibly work for a short period of time probably, because interest rates stay low until such time when they start going up. And then it is a bit of a trap.”-- April 11, 2019, IMF press conference

Interestingly, Christine Lagarde finds that MMT economist's modeling is solid, but she can't quite bring herself to follow though. Still progress, even so.

Bloomberg
The World of Monetary Policy, According to Christine Lagarde

Carolyn Look

Bill Mitchell — Reliance on monetary policy is mindless, ideological nonsense

It is Wednesday and so a less intensive blog post. Note how I no longer claim it will be shorter. The less intensive claim refers to how much research I have to put in to write the post. Apart from some beautiful music, the topic for today is yesterday’s RBA decision to cut interest rates to record low levels. The decision won’t save the economy from recession and highlights the sort of desperation that central bankers now face as governments shunt the responsibility of counterstabilisation onto them while claiming that achieving fiscal surpluses is the brief of the treasuries. This self-defeating strategy – failing to use the most effective policy tool in favour of an ineffective tool is the neoliberal way. It is the recipe that New Keynesian macroeconomics offers. It is mindless, ideological nonsense and the problem is that it is not the top-end-of-town that suffers from the negative outcomes that follow. Quite the opposite in fact....

One would be tempted to think that the policy is designed for a purpose rather than in ignorance. But the policy designers probably aren't that smart.

Bill Mitchell – billy blog
Reliance on monetary policy is mindless, ideological nonsense
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

Bill Mitchell — Talking of elephants–plain old, garden variety fiscal policy

If there were two lessons that can be taken from the GFC among others then we should know, once and for all, that, first, monetary policy (in all its glorious forms these days) is not a very effective tool for influencing the level of economic activity nor the price level, and, second, that fiscal policy is very effective in manipulating total spending and activity. Of course, those lessons provided the evidence that turned macroeconomics on its head because for several decades, as the Monetarist surge morphed into all manner of variants, tried to eulogise the primacy of monetary policy and rejected the use of fiscal policy. There were all sorts of justifications – time invariance, lags, politicians cannot be trusted, etc – but at the heart of the shift towards supposedly independent central banks was the political desire to neuter the capacity of governments to use their currency capacity to advance the well-being of the many, while at the same time, using that same capacity to advance the interests and real income shares of the few. Depoliticisation worked a treat for the top-end-of-town. The problem is that the lessons have not been learned and all manner of commentators still think that monetary policy is the king. Eventually, we will move beyond that but the pain of holding on to the myth is damaging for people, especially those who are without work, are underemployed or have been forced into early retirement by the poor economic performance in this austerity-biased era.…

Bill Mitchell – billy blog
Talking of elephants – plain old, garden variety fiscal policy
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

Dirk Ehnts — Monetary policy and the zero lower … oh, wait!

Dirk Ehnts asks, what zero lower bound.

econoblog 101
Monetary policy and the zero lower … oh, wait!
Dirk Ehnts | Lecturer at Bard College Berlin

ANG Traders — It Is Inevitable

Economies are human constructs, not inevitable natural phenomena. Humans make up the rules that participants must follow when playing the game, and as the economy grows and evolves, humans must change the rules of play in ways that optimize the well-being of the majority of participants. In this piece, we argue that the MMT fiscal policy proposition of government spending into the private sector, with inflation being the only limiting factor, is not only needed for a real recovery from the great recession but is inevitable.

We have been pounding the table publicly since 2015 and privately since 2009, with the assertion that monetary policy alone was not enough to optimize the economy for the benefit of the majority. We have repeatedly pointed out that lowering interest rates (to encourage credit creation) and buying financial assets (to save the banks), while necessary, were not sufficient to engineer an economic recovery for the masses. Fiscal policy, that delivers money to the base of the economic-pyramid, was missing.... 

Seeking Alpha
It Is Inevitable

ANG Traders — Macro, gold & precious metals, long/short equity, newsletter provider