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Starmer is right – for now at least

Published by Anonymous (not verified) on Mon, 04/07/2022 - 10:23pm in

The link to the FT article was tweeted by Starmer himself so I imagine he approves of the FT’s account of his ‘living with Brexit’ speech that he is giving today: He will claim that Labour can “make Brexit work”… [That it has] created a hulking fatberg of red tape… Good association there – because... Read more

Unaccountable central bankers once again out of controls

Published by Anonymous (not verified) on Thu, 30/06/2022 - 2:01pm in

On August 27, 2020, the US Federal Reserve Chairman, Jerome Powell made a path breaking speech – New Economic Challenges and the Fed’s Monetary Policy Review. 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. I analysed that shift in this blog post – US Federal Reserve statement signals a new phase in the paradigm shift in macroeconomics (August 31, 2020). It appeared at the time, that a major shift in the way central banking policy was to be conducted in the future was underway. A Reuters’ report (August 28, 2020) – With new monetary policy approach, Fed lays Phillips curve to rest – reported that “One of the fundamental theories of modern economics may have finally been put to rest”. At the time, I didn’t place enough emphasis on the ‘may’ and now realise that nothing really has changed after a few years of teetering on the precipice of change. The old guard is back and threatening the livelihoods of workers in their usual way.

Powell’s August 2020 shift meant that the central bank was to focus on creating “maximum employment” rather than sacrifice jobs growth because some measure of future expected inflation had risen above the desired rate.

It meant that the central bank would no longer tighten monetary policy as employment growth strengthens before there are inflationary effects – that is, they are rejecting all the ‘forward-looking’ bias that mainstream theory imparted that policy had to kill off employment growth before unemployment had fallen significantly.

After Powell’s apparent shift several other central banks followed suit with similar commitments to full employment and a more calm attitude to inflation dynamics.

And, unemployment fell all around the world, which is a good thing for workers.

Someone must have been reading Robert Louis Stevenson, because within the space of a few months Mr Hyde is back in town, more lethal than before.

The ECB has just run a conference in Sintra (Portugal) and Jerome Powell appeared yesterday (June 29, 2022) with ECB boss Madame Lagarde and basically confirmed that our hopes that a real change had occurred in 2020 were just a pipe dream.

Powell’s narrative took us back to the 1980s and onwards with talk about ‘soft landings’ and an ‘inflation first’ imperative.

He claimed that the Federal Reserve was now prioritising its fight against inflation and would be raising interest rates “just enough” to achieve that goal.

The problem is that central bankers do not know what ‘just enough’ is because of the inexact nature of monetary policy exercised through interest rate increases.

We have always known it to be a rather ‘blunt’ policy tool – which just means there are several reasons why impacts are ambiguous and subject to unpredictable time lags.

First, central bankers do not know whether interest rate increases take pressure of price rises. There is every reason, at least in the short-run to expect they worsen the inflationary pressures, especially if those pressures are the result of corporations exercising market power to pass on rising unit costs via their mark-ups.

Second, there are also counter distributional effects of interest rate rises, where creditors and those on fixed incomes enjoy a stimulus and debtors endure reduced purchasing power.

How those distributional impacts play out is uncertain.

Third, there are time lags that are unpredictable. Even under mainstream logic, the rate rises influence interest-rate sensitive costs and expenditures. They are not linear in impact.

People take time to adjust and may well, for example, just eat into prior savings before curtailing expenditure and borrowing.

Time lags make policy difficult to implement because if the aim is to influence the cycle and the policy intervention only starts to impact when the cycle has already shifted then the outcomes can be perverse indeed.

Fourth, eventually, interest rate levels will reach such a height that they cause recession and an escalation in unemployment, which discourages the firms from exercising that market power as costs drive bankruptcies and even OPEC oil sellers realise they are losing profits due to volume falls.

But the economic and social cost of that strategy is massive and unjustifiable.

At least according to my calculus.

But not, it seems to the likes of Powell.

He told the audience at Sintra:

Is there a risk that we would go too far? Certainly there’s a risk, but I wouldn’t agree that it’s the biggest risk to the economy … The bigger mistake to make, let’s put it that way, would be to fail to restore price stability.

He also said that there was “no guarantee” that the Federal Reserve would not create a recession as a result of the current policy shift.

So unemployment is not the biggest risk – which is the familiar narrative in the neoliberal era.

Deliberately creating recession – the worst of economic evils – is now back within the policy set – a sort of contagion outcome.

Unemployment is no longer a policy target to be kept low, but a deliberate policy tool to be used to keep inflation low.

Every time I have done the calculations on the relative costs and benefits of that strategy the answer is the same – costs massive, benefits low.

It can never be a responsible and efficient strategy to waste millions of income generating potential on a daily basis just to see inflation drop to low levels.

Powell also admitted that the inflationary pressures were coming from the on-going effects on the pandemic and more recently, the Russian invasion of Ukraine.

He didn’t mention the anti-competitive behaviour of OPEC who exert monopoly power to push up oil prices to suit their own ends.

But the point is that if it is true that these factors are driving the inflationary pressures, then how does raising interest rates solve the problems that those factors present?

By increasing the borrowing costs they might be able to influence demand, but will do nothing to influence the shipping disruptions, factory closures, increasing pools of sick workers from Covid, the Russian invasion, and OPEC.

There is no answer from the central bankers to this anomaly other than to return to script.

1. Inflation must be our priority.

2. Inflationary expectations might escape and become self-fulfilling.

3. The only tool we have is to drive the economy into recession, induce rising poverty, etc.

4. But we won’t comment on the obscene CEO salary increases that get reported each day in the financial press.

Back to the 1980s.

It is a complete contradiction of the August 2020 statement.

We are now back to the ‘forward-looking’ approach – where even before any expectational blowouts have been detected – the central bank hikes rates and drives unemployment up.

It is a very costly strategy.

What they are effectively saying is that even though there are supply constraints, they are prepared to reduce aggregate demand down to the reduced level of supply.

The question then is what happens when supply recovers as factories reopen, ships move around and so on?

Well then they will be left with a massive pool of jobless people, some of whom will have been forced to default on their mortgages and lose their houses as a consequence, some of whom will have committed suicide, not to mention the generation of workers leaving school who will face limited opportunities in the labour market to progress with.

A clusterf*xk!

It would be far better to understand that the inflationary pressures are transitory and to maintain low levels of unemployment while the transitory factors play out.

Powell and Lagarde told the Sintra conference that they had waited to raise interest rates because they through the rising prices were the “temporary result of supply chain” disruptions due to Covid.

And indeed they are.

The mistake they are making is to equate “temporary” with short-term.

Transitory does not have a time element. It has a causal element.

The causes will take time to work out that is beyond doubt.

But it is folly to add an additional (very costly) problem into the mix (recession) when those causal factors will dissipate eventually.

The other claim these central bankers made at Sintra was that there are plenty of private savings in the system which will act as a buffer against the rising interest rates.

In other words, deliberately create unemployment and income loss, and hope that expenditure doesn’t fall as much as the unemployed are forced to run down their wealth holdings to stay afloat.

All of which will devastate lower income households.

The only central bank that is holding firm at present against all this madness is the Bank of Japan. Smart.

The European Commission Spring Forecasts

If you go back and read the European Commission’s – Spring 2022 Economic Forecast: Russian invasion tests EU economic resilience – you will note that the inflation forecasts for 2022 and 2023 do not signify any entrenched inflation problem.

The following graph shows the forecasts for 2022 and 2023.

Spot any major on-going inflationary acceleration.

Now the Commission may be wrong (probable) but the way the ECB is now talking – lockstep with the irresponsible US Federal Reserve – one can clearly see a breakdown in policy coherence in Europe at least.

The Commission think inflation will dissipate quickly by next year – while the ECB is talking about being prepared to create a recession to ‘tame’ accelerating inflation.

Conclusion

Unaccountable central bankers once again out of control.

That is enough for today!

(c) Copyright 2022 William Mitchell. All Rights Reserved.

Brexit ‘benefits’ beginning to be pointed out…

Published by Anonymous (not verified) on Wed, 22/06/2022 - 4:52am in

There is remarkable agreement on the Brexit disadvantages – if not disasters – from both commerce and also the FT, who say: The UK is lagging behind the rest of the G7 in terms of trade recovery after the pandemic; business investment, seen by Johnson and Sunak as the panacea to a poor growth rate,... Read more

Eurozone anti-fragmentation confusion – its really simple – the ECB has to continue to fund deficits or kaput!

Published by Anonymous (not verified) on Mon, 20/06/2022 - 6:07pm in

The French National Assembly results from the weekend are a good outcome. Not the best, but good, although the continued presence of the Right is disturbing. At least Macron’s group of Europhiles has lost its absolute majority with the new Left alliance becoming a viable opposition. The polarisation – with a surge from the Right and the strong performance of the real Left rather than the lite Socialist Party version – is indicative of what Europe has become – a fractured, divided, divergent set of nations and regions. If the Left had have seen the value in this unity ticket during the Presidential election things might have been different. But better late than ever. France will now find it hard pushing further neoliberal policies and there will be pressures on the government to defy the fiscal rules and redress some of the shocking deficiencies that the neoliberal period has created. But, those pressures are coming squarely up against the impending crisis facin gthe monetary union. All the economics talk in Europe at the moment is indicative of the plight that monetary union faces after papering over the cracks during the first two-and-a-half years of the pandemic. After years of holding the bond spreads down, with their asset purchasing programs, things are changing as the ECB is pressured to follow suit and hike interest rates and abandon their bond buying. If they do both things, then there will be a crisis quick smart because nations like Italy will face increasing yields on their borrowing which will run out of control. So, the solution – another ad hoc response – an “anti-fragmentation” tool. If it sounds like a joke that keeps on rolling, you would not be wrong. More paper, same cracks.

What is happening to bond spreads?

On March 24, 2020, the – DECISION (EU) 2020/440 OF THE EUROPEAN CENTRAL BANK – created an additional layer to their already large asset purchasing program – the “temporary pandemic emergency purchase programme” (PEPP).

In the immediate period prior to that announcement and the implementation of further large public bond purchases, the bond spreads against the German bund benchmark were starting to rise quite sharply, particularly in Greece, Italy and Portugal, and less so in, say, France and Ireland.

This was in the face of growing alarm that the pandemic recession would be deep and costly to governments unable to issue their own currency.

Both the ECB and the European Commission acted in response to that alarm – the PEPP from the ECB and the relaxation of the fiscal rules from the Commission.

Both policy responses were in recognition that the mainstream architecture of the monetary union that they had created back in the 1990s would not be capable of withstanding another severe economic shock.

Only the large scale bond buying of the ECB during the GFC kept the union together for without it many nations, including Italy, Spain and Portugal would have definitely become insolvent.

Since then the various configurations of the asset buying programs have been funding the fiscal deficits of the Member States, although the ECB likes to play the charade that they are just maintaining liquidity conditions in money markets.

But those schemes were not large enough to cope with what was happening in February and March 2020 as a result of the pandemic.

Cue the PEPP (the date of introduction shown by the vertical black line in the following graph).

The following graph makes it clear what the impact of the PEPP was – it is unambiguous – the ECB pushed the yield spreads back down to low levels and took the fiscal pressure of the Member States.

The next graph shows the complete history of the Italian government 10-year bond spread against the German 10-year bund since the inception of the monetary union.

The near catastrophe in 2010-12 was averted by the ECB bond purchases and later in the period the PEPP reinforced the cheap funding mechanisms for the Italian government.

But the pressure is now rising.

Why is that happening and so suddenly?

It is because the ECB has been to-ing and fro-ing about their plan for so-called monetary ‘normalisation’ for some time, but then, out of the blue really, changed their strategy

They had been signalling since December 2021 that they would terminate the PEPP sometime in the first quarter of 2022.

On May 23, 2022, the ECB boss Madame Lagarde wrote in her – Blog post by Christine Lagarde, President of the ECB – that:

That has now been done.

The process continued with our announcement of an expected end date for net purchases under the asset purchase programme (APP). And as the inflation outlook has evolved, we have also adjusted our communication on the likely timing of interest rate lift-off, in line with our forward guidance.

So just like that the terrain had changed – no more PEPP, no more APP reinvestment, and interest rate hikes – in a highly uncertain environment where each of those policy changes is unlikely to address the root cause of the inflation but certain to cause chaos for Member State bond markets.

And the changes did!

The Governing Council meeting (June 9, 2022) produced this outcome – Monetary Policy Decisions – where the ECB basically reverted back to New Keynesian form.

The logic is simple as it is asinine.

Inflation rising -> hike interest rates -> cause unemployment and squeeze workers and business income -> create sufficient misery that they stop spending -> eventually scorch the inflation out of the system.

Then …

See what awful damage has been created and start blaming the unemployed for ‘wanting to live off welfare’.

Of course, if demand was the problem, that unemployment buffer stock would eventually achieve its goal of expunging inflation from the system.

But at great cost.

The problem is that such an approach will do little to arrest the current inflationary pressures because they are endemic to the supply-side of the economy.

It is destructive to inherit a dramatically constrained supply and then aim to reduce the previously ‘normal’ level of demand back to this temporary constrained level of supply.

When the transitory inflationary factors evaporate, then you are left with a trail of destruction of insolvent firms, impoverished workers, house mortgage foreclosures, increased suicides and worse.

In one swoop, the Governing Council:

1. “decided to end net asset purchases under its asset purchase programme (APP) as of 1 July 2022” – they will “continuing reinvesting” for a while as bonds held mature but the size of the pool will shrink.

2. will “reinvest the principal payments from maturing securities purchased under the programme until at least the end of 2024” – but no new purchases.

3. will “raise the key ECB interest rates by 25 basis points at its July monetary policy meeting” and “expects to raise the key ECB interest rates again in September.”

Of course, they knew full well that these changes would set the cats off in the bond markets.

So, as usual, the tough talk was followed by more realistic talk:

In the event of renewed market fragmentation related to the pandemic, PEPP reinvestments can be adjusted flexibly across time, asset classes and jurisdictions at any time. This could include purchasing bonds issued by the Hellenic Republic over and above rollovers of redemptions in order to avoid an interruption of purchases in that jurisdiction, which could impair the transmission of monetary policy to the Greek economy while it is still recovering from the fallout from the pandemic. Net purchases under the PEPP could also be resumed, if necessary, to counter negative shocks related to the pandemic.

Stay tuned for some new asset purchasing program to add to the alphabet soup of programs.

Quite simply, the ECB cannot allow the trends in the graphs above to continue.

It has to intervene, or else the bond markets will drive nations like Italy to the brink of insolvency with a deepening crisis along the way.

So now we have an abandoned PEPP policy bar reinvestment which allows for flexibility – meaning they will do what is required independent of the signals.

The problem is that the current rate of redemptions is too low in volume (perhaps around 20 billion euros per month) to allow the ECB to take on the bond markets.

Increasing flexibility in the bonds they reinvest in will give them more scope.

Cue the ‘anti-fragmentation’ instrument

The latest ad hoc response to the cracks reappearing is the statement by the ECB that it was going to create a new monetary policy tool to ensure there is no – wait for it – “fragmentation” across the union.

They are referring this new tool as an “anti-fragmentation instrument”.

Since the GFC, when it introduced the Securities Markets Program (SMP) in May 2010, the ECB has been the quasi fiscal authority, effectively funding fiscal deficits across the 19-Member State bloc through its asset purchasing programs,

Now it is going to take responsibility for the so-called ‘convergence’ that has evaded the European Commission since the common currency was introduced.

In a Speech on June 14, 2022 – Commencement speech by Isabel Schnabel, Member of the Executive Board of the ECB, to the graduates of the Master Program in Money, Banking, Finance and Insurance of the Panthéon-Sorbonne University – Executive Board member Isabel Schabel said that:

1. “In the spring of 2020, concerns about some countries’ perceived lack of fiscal space to deal with the pandemic led to a sharp divergence of financing conditions across euro area economies”.

2. “the vulnerability to such fragmentation risks will only disappear with fundamental changes to the euro area’s institutional architecture.”

She went on to define “bond market fragmentation” as a state where bond yields among separate units within a monetary union diverge from economic fundamentals to the point that the “wedge between the risk-free rate and national borrowing conditions”
leads to “financial instability”.

3. “Put simply, fragmentation reflects a sudden break in the relationship between sovereign yields and fundamentals, giving rise to non-linear and destabilising dynamics.”

I will write more about this topic in coming weeks as the discussion within the ECB moves forward and we get more detail.

But effectively, without really having a clear definition of what actually constitutes fragmentation (is it levels of the spreads, the pace of change or variance of them, etc), they are acknowledging what everyone knows but rarely wishes to acknowledge.

The architecture of the monetary union is dysfunctional and no amount of papering over will solve that.

That needs root-and-branch reform – that is Treaty Change – which is going to be impossible in the direction that is needed – including scrapping the euro.

The ECB knows what it has to do and continue to do – fund the fiscal deficits irrespective of what smokescreen it erects to call it something different.

Otherwise, kaput!

There are those who think the rising bond yields in Italy are good for the economy – Yes, they exist

I saw lots of people in the financial markets applauding the rising spreads and telling the ECB to keep out and just hike rates (rewarding their bets).

One of their arguments is that the ECB’s spread control traps Member States in state of “perpetual ECB dependence”.

That is correct.

But without their own currencies, that dependence is the only thing that keeps the Member States solvent.

Without it, they go broke.

The problem is the basic architecture of the union and arguing about the form of paper that covers the cracks misses the point.

Another high profile character (background Goldman) wrote this Tweet on June 10, 2022, claiming that the rising spreads would fast-track structural reform in Italy.

He clearly doesn’t read the literature very closely.

Mario Draghi opened an ECB conference on October 18, 2017 with these remarks (Source):

ECB research finds no convincing evidence that high interest rates lead to more reforms, if one controls for the business cycle and other factors. In fact, the opposite is more likely to be true: lower rates tend to promote reforms, since they lead to a better macroeconomic environment.

He was referring to this ECB research paper some years ago (June, 2017) – When do countries implement structural reforms? – which concluded that:

1. “structural reforms implementation, in particular on labour markets, is more likely during (deep) recessions and when unemployment rates are high.”

2. Importantly, “Turning to monetary policy, contrary to the frequent claim, low interest rates tend to promote rather than discourage structural reforms.”

Got it!

Conclusion

All this amounts to is that the ECB remains caught between a rock and a hard place.

Whatever it chooses to call its policy intervention, the substance of it will have to be a continuation of its government bond buying activities.

For without that funding of the deficits, the Member States will be vulnerable to insolvency and the shifts towards that state would be sudden once the horse started bolting.

That is enough for today!

(c) Copyright 2022 William Mitchell. All Rights Reserved.

Britain’s attack on its own protocol is one more exercise in Brexit gaslighting | Fintan O'Toole

Published by Anonymous (not verified) on Wed, 15/06/2022 - 3:00pm in

Ministers are portraying themselves as victims of a deal they created for Northern Ireland. A classic blame-shifting strategy

Forget, for the moment, the technical details of the Northern Ireland protocol bill that seeks to renege on Britain’s commitments under its withdrawal agreement with the European Union. Forget – as the British government itself has done – old-fashioned principles of conservatism such as telling the truth, keeping your word and obeying the laws you yourself have made.

Think, rather, of the strategy that Johnny Depp’s lawyers employed against Amber Heard. It is called Darvo – deny, attack and reverse victim and offender. This legislation should be called the Darvo bill: deny the flagrant breach of international law. Attack the very thing you are purporting to defend, which is the political and economic stability of Northern Ireland. And blame others (in this case the EU) for the known consequences of your own choices.

Fintan O’Toole is a columnist with the Irish Times

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Presentation to Economic Society of Australia

Published by Anonymous (not verified) on Wed, 25/05/2022 - 5:20pm in

It’s Wednesday and I just finished a ‘Conversation’ with the Economics Society of Australia, where I talked about Modern Monetary Theory (MMT) and its application to current policy issues. Some of the questions were excellent and challenging to answer, which is the best way. You can view an edited version of the discussion below and then enjoy The Meters.

Economic Society Presentation – May 25, 2022

Here is an edited version of the discussion including the Q&A section. The whole session ran for 52 minutes including introductions etc.

The production quality – resolution, sound, etc – is not the best because it was taken of a Zoom recording on low resolution. The video was created by the organiser – the Economic Society of Australia.

I did what I could to enhance the quality of this edited version – at times you will not cuts which corresponded sometimes to degraded audio.

Thanks to Belinda and Diane for their work in organising this.

Inflation may be peaking in Europe

There was also some consternation about the annual Euro area negotiated wage growth for the first-quarter which rose to 2.8 per cent.

The usual Pavlov reaction from mainstream economists was that it signalled a need for the ECB to intervene quickly and scrap its asset purchasing program and start hiking rates.

They should have read the latest – Deutsche Bundesbank Monthly Report – for May 2022 (in German).

In the opening chapter – Die Wirtschaftslage in Deutschland im Frühjahr 2022 (the economic situation in Germany for Spring 2022) – we read:

1. “Der deutsche Arbeitsmarkt entwickelte sich im ersten Vierteljahr 2022 ausgesprochen günstig” (German labour market is evolving well in the first quarter 2022).

2. “Damit kehrten jedoch auch die Engpässe von Arbeitskräften aus Vor-krisenzeiten zurück” (But the pre-crisis labour shortages returned) – why? because of Omicron (workers getting sick) and the Russian invasion.

3. “Die Tarifverdienste stiegen im Winter 2022 deutlich stärker als im Herbst 2021. Sie erhöhten sich gegenüber dem Vorjahr um 4,4%, maßgeblich wegen hoher Sonderzahlungen und Corona-Prämien. Die um solche Sonderzahlungen bereinigten Grundvergütungen legten hingegen lediglich um 1,6 % zu. Die Effektivverdienste dürften im ersten Quartal vor allem aufgrund im Vorjahresvergleich spürbar niedrigerer Kurzarbeit noch kräftiger gestiegen sein als die Tarifverdienste”

This is the important part – summarising – Winter 2022 negotiated wages rose more sharply than Autumn 2021 – 4.4 per cent annual.

Why?

“mainly as a result of high one-off payments and coronavirus bonuses”

“By contrast, after adjustment for such one-off payments, basic remuneration was up by only 1.6%.”

So once we take out this one-off boost in Germany, the Euro wide area negotiated wages outcome is likely to be around 2 per cent for the year – which I don’t need to remind anyone is very low and not pushing the inflation rate.

Further, the latest – Flash Euro PMI – came out yesterday (May 24, 2022), which provides a very current indication of what is going on.

The headline read in part “Cost pressures ease for the second month”.

Among other quotes:

1. “Factory output continued to be constrained by widespread supply shortages, with the Ukraine war and China’s lockdowns having exacerbated existing pandemic-related supply chain pressures.”

2. “Slightly slower rates of inflation were seen for both goods and services, principally reflecting the slower growth of costs recorded during the month.”

3. “there are signs that inflationary pressures could be peaking, with input cost inflation down for a second successive month and supply constraints starting to be less widely reported”.

The takeaway?

Transitory.

Once all these supply disruptions dissipate, inflation will fall rapidly.

Tragic farce of all time

Republican politicians in the US sending the victims of gun violence – including massacres of children – their ‘thoughts and prayers’.

Just ban the f**k**g guns!

Without the guns there can be no mass shootings.

Levy Summer Seminar 2022

I will be presenting in several sessions at the – Levy Institute 2022 Summer Seminar – which runs from June 11-18, 2022.

If you are interested in attending (I am not sure whether spaces remain) you can find details at the site.

This will be my first international flight since February 2020 and I have a good stock of masks at hand.

It will be great to reconnect in person with some of my MMT mates in the US and to talk MMT with those who seek to learn more.

Music – The Meters

This is what I have been listening to while working this morning.

One of the best funk bands of the 1970s was – The Meters – and they remain one of my favourites on my regular play list.

This track – Ain’t no use – is on their fifth studio album – Rejuvenation – which was released in 1973 and is a classic of its type.

I remember the day I purchased this album sometime in 1975.

You here their lines in so many records since such was the influence of this band.

The guitarist – Leo Nocentelli – has it down for sure.

All that syncopation drives a person crazy with delight.

That is enough for today!

(c) Copyright 2022 William Mitchell. All Rights Reserved.

Failure to control inflation or mitigate its effects helps to control us

Published by Anonymous (not verified) on Mon, 23/05/2022 - 6:55am in

Inflationary fears are another useful tool to keep the masses suppressed and more fearful than they should be – particulalrly when this government, as it does, tells us there is not much they can do about it. While usually infation is controllable, government seems to suggest this time it is an ‘act of God’. Actually... Read more

And Johnson even admits he was responsible

Published by Anonymous (not verified) on Tue, 17/05/2022 - 12:25pm in

And to a BBC journalist: He must feel that never mind the UK, he, Johnson, now has nothing to lose. The duped nation simply has to look on in hopeless resignation.... Read more

Johnson demonstrates yet again that he is unfit for office

Published by Anonymous (not verified) on Tue, 17/05/2022 - 11:30am in

In this, quite remarkable clip: Johnson says he signed the NI protocol because he ‘hoped & believed our [European] friends would not necessarily want to apply it.’ So that was yet another lie that the Brexit deal was ‘oven-ready’. He now admits that he simply signed an internationl treaty in the full expectation that it... Read more

With corporate profits booming, business can afford to pay higher wages

Published by Anonymous (not verified) on Wed, 11/05/2022 - 5:17pm in

Last week, I provided a graph in this blog post – The Left/Right distinction is as relevant as ever as corporations gouge profits out of pushing inflation (May 2, 2022) – which showed negotiated wages growth in Europe was declining and real negotiated wages had fallen sharply over the last several months. I am continually on the lookout for evidence that the current inflationary episode, no matter how alarming, is not being driven by structural forces in the labour market even though unemployment rates have fallen somewhat. A music segment follows.

Wages outlook in Europe

There was an interesting graphic presented by Philip Lane, a ECB Executive Board member during a speech he gave on May 5, 2022 – The euro area outlook: some analytical considerations.

The ECB is one central bank that hasn’t pursued the kneejerk interest rate rise, which increasingly mark a reimposition of the old NAIRU mentality that I had hoped was being abandoned.

So I watch what its officials say and write because every nuance provides information on what they might do.

Philip Lane identified three major challenges facing “the economic and inflation outlook for the euro area.”

1. The on-going pandemic – a “first-order driving force”.

2. The “significant jump in energy prices … represents a major macroeconomic shock” – which, importantly, he noted correctly was “ultimately a level effect” rather than necessarily being an on-going source of inflationary pressure.

The rising energy price level has effectively been a redistributive process – transferring income to the oil companies and their shareholders at the expense of the rest of us.

It can only drive higher inflation rates, if the oil prices keep rising continuously, and a major global recession that would follow would bring an end to that anyway.

3. “the Russian invasion of Ukraine” – which has amplified the “energy shock”, created new supply bottlenecks, and pushed down “consumer and business confidence”.

Together, these factors impart both an inflationary impulse on nominal aggregates and a recessionary impact on the real aggregates (output).

That is, of course, a difficult duo to deal with.

It would have been worse in Europe if not for government spending.

Philip Lane showed that “consumption and investment remain below pre-pandemic levels, whereas government spending (the sum of public consumption and public investment) has been substantially above the pre-pandemic level since the second half of 2020.”

We use words in different ways.

Substantially to Lane is government consumption and investment spending being around 5.5 percentage points above the December-quarter 2019 level, whereas to me that is a relatively modest fiscal response, given the circumstances that were being faced in early 2020.

Private consumption is about 4 points below the December-quarter 2019 level and private capital formation (investment) is around 10.2 points below.

So it is no wonder real GDP is still below the pre-pandemic level, which tells me the fiscal intervention was too weak.

He also showed that these factors are killing manufacturing new orders and export demand in Europe.

This is a contagion effect arising from the initial supply disruptions that then work their way through the supply chain.

One factory stops producing or has trouble delivering materials to another process further down the chain and the disruption multiplies.

And then the OPEC oil restrictions pushing up energy prices have spread throughout the entire sectoral landscape.

It was always going to be difficult avoiding inflationary impulses in these circumstances.

Philip Lane does acknowledge the transitory nature of these impulses:

Bottlenecks are also generating temporary upward pressure on costs, even if the eventual resolution of these bottlenecks should reverse these cost pressures in the future …

To the extent that the increase in energy costs is ultimately a level effect and bottlenecks eventually are resolved, this suggests that there is a temporary component in the current rate of goods inflation.

Which is why I maintain my position that the current inflation, however difficult for low income families to deal with, is transitory in nature.

And I repeat, what some commentators, including ABC finance tweeters do no seem to get.

Transitory doesn’t necessarily mean short-lived. It means as long as the extraordinary drivers are driving.

And that view is reinforced by the next part of his analysis.

He presented this interesting graph (Chart 8), which is the “development of nominal wages, including the information embedded in an experimental forward-looking wage tracker developed by the ECB staff”.

This is a very telling graph.

The evolution of wages since early 2019 has been firmly down until the latter half of 2021.

After that there has been a very modest rise.

Using the forward-tracker, which takes into account “microdata on wage agreements in Germany, Italy, Spain and the Netherlands”, the predicted trajectory is to flatten out well below the pre-pandemic growth rate.

That growth rate was not seen as being problematic.

Now the outlook is for wages to grow even more slowly than that.

Philip Lane concludes that:

The overall tracker indicates only sideways movement in aggregate wage growth at around an annual two percent rate … In assessing wage developments, it is also relevant that, under typical conditions and allowing for labour productivity growth at about one per cent, nominal wage growth at three per cent is consistent with the two per cent inflation target.

Which is why the ECB has not joined the rush to push up interest rates.

They clearly have a better understanding of what is driving the inflation than other economists who are getting ahead of themselves in calling for rate hikes.

He also shows that estimates of inflation expectations from the ‘market’ indicate that there is a convergence on a medium-term stable inflation rate around 2 per cent.

He concluded that:

For these reasons, the calibration of our policies will remain data-dependent and reflect our evolving assessment of the outlook.

Evidence not ideology.

A good thing in this case.

Fast track to the Australian election campaign

Yesterday, the Labor Opposition leader who remains in a good position to win the May 21, 2022 federal election from one of the worst conservative governments that we have had to endure here, was cornered about what he would do with respect to the federal minimum wage if he won government.

Each year the Fair Work Commission makes a judicial judgement on what the minimum wage will be for the next 12 months and takes submissions from all interested parties, including state and federal governments.

The conservative government doesn’t make a submission based on a percentage change and usually plays along with the wage moderation case presented by the business lobbies who typically argue for miniscule increases.

I saw the Chamber of Commerce CEO on the morning show early today and the presenter asked him whether the minimum should rise by 5.1 per cent (the current inflation rate), which is what the Australian Council of Trade Unions (ACTU) has submitted to the Fair Work Commission.

He said no that was reasonable for it to be a maximum of 3 per cent.

The presenter then said – so you think it is reasonable to cut the real purchasing power of the lowliest paid workers in Australia – many who are in cleaning and health care positions, which saved us during the pandemic.

He replied that it was not a cut in real living standards.

That is, saying, bold-faced, that black is white.

The current government refuses to say what the rise in July should be.

But the Opposition leader told reporters yesterday that he supported the ACTU’s position that the lowest paid should not fall behind the inflation rate.

Well the torrents of abuse he has received from the federal government – “undermining the economy”, “killing jobs”, and more is only matched by input from economists and their mates in the corporate lobbies who are claiming business cannot afford this and they would have to lay off workers as a result.

The usual problem these creeps present to the unknowing populace that says – things are bad whichever way we go, but it is better to keep working for us on poverty wages than get wage rises and lose your jobs.

Except, not everything is bad in this little play act the corporates spin out each time a wage rise is mentioned.

Early in the pandemic, the wage share in Australia (in national income) fell below 50 per cent for the first time since 1959.

Of course, that means the profit share increased further.

In the June-quarter 2020, national accounts release we observed company profits jumping by an unprecedented 14.9 per cent in the quarter, while total wage bill paid to workers fell by a record 2.5 per cent.

The profit surge, was in part, funded by the fiscal support provided by the federal government. It shows that when designing fiscal interventions, governments have to be sure they don’t just transfer income to the corporate sector at the expense of the rest of us.

The situation hasn’t improved for workers since.

Company earnings in Australia are at record levels – 10 per cent higher in 2022 than in 2019

Corporate profits are also booming.

Just yesterday, we learned that the big four banks recorded first-half 2022 profits on around $A14.4 billion, which was an increase of 5.1 per cent on the results the year before.

Energy companies are ‘rolling’ in profits.

Russia’s invasion of the Ukraine “has led to ‘windfall gains’ tp Australian companies” that sell iron ore, gas, and base metals – that is huge profits. (Source)

The latest ABS data – Business Indicators, Australia – shows that for the year-ended December 2021, corporate profits overall rose by 13 per cent.

That is, a huge real gain in company profits.

So the question is why should the lowest paid workers in Australia endure real cuts to their wages when the firms they work for are going ahead in leaps and bounds?

What sense can we make of the claim that business cannot afford to pay higher wages (which are at record low growth rates) when their profits are booming?

No sense at all.

Music – the Lester Young Trio

This is what I have been listening to while working today.

It is played by one of the greatest tenor players – Lester Young – who I featured a few weeks ago playing Hoagy Carmichael’s Stardust from 1952.

I was talking with another sax player yesterday about the evolution in technique from Coleman Hawkins to Lester Young and so this morning I put this album from 19

He was also the mentor for one – Charles Christopher Parker Jr. – which means he played really well.

This song is the George and Ira Gershwin number – The Man I Love – which came out on the 1955 release from the – Lester Young Trio (the cover is from the 1994 Verve Records re-release of the 1946 Hollywood recordings).

The sonority of Lester Young’s playing was something else really.

The trio comprises 3 of the biggest jazz players ever:

1. Lester Young – tenor sax

2. Nat King Cole – piano

3. Buddy Rich – drums

That is enough for today!

(c) Copyright 2022 William Mitchell. All Rights Reserved.

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