Posts Tagged ‘monetary policy’
“We do not inherit the earth from our ancestors, we borrow it from our children”*…
… and the interest rate on that loan is rising.
There’s much discussion of what’s causing the sudden-feeling spike in prices that we’re experiencing: pandemic disruptions, nativist and protectionist policies, the over-taxing of over-optimized supply chains, and others. But Robinson Meyer argues that there’s another issue, an underlying cause, that’s not getting the attention it deserves… one that will likely be even harder to address…
Over the past year, U.S. consumer prices have risen 7 percent, their fastest rate in nearly four decades, frustrating households and tanking President Joe Biden’s approval rating. And no wonder. High inflation corrodes the basic machinery of the economy, unsettling consumers, troubling companies, and preventing everyone from making sturdy plans for the future…
For years, scientists and economists have warned that climate change could cause massive shortages of major commodities, such as wine, chocolate, and cereals. Financial regulators have cautioned against a “disorderly transition,” in which the world commits only haphazardly to leaving fossil fuels, so it does not invest enough in their zero-carbon replacements. In an economy as prosperous and powerful as America’s, those problems are likely to show up—at least at first—not as empty grocery shelves or bankrupt gas stations but as price increases.
That phenomenon, long hypothesized, may be starting to actually arrive. Over the past year, unprecedented weather disasters have caused the price of key commodities to spike, and a volatile oil-and-gas market has allowed Russia and Saudi Arabia to exert geopolitical force.
“This climate-change risk to the supply chain—it’s actually real. It is happening now,” Mohamed Kande, the U.S. and global advisory leader at the accounting firm PwC, told me.
…
How to respond to these problems? The U.S. government has one tool to slow down the great chase of inflation: Leash up its dollars. By raising the rate at which the federal government lends money to banks, the Federal Reserve makes it more expensive for businesses or consumers to take out loans themselves. This brings demand in the economy more in line with supply. It is like the king in our thought experiment deciding to buy back some of his gold coins.
But wait—is it always appropriate to focus on dollars? What if the problem was caused by too few goods? Worse, what if the economy lost the ability to produce goods over time, throwing off the dollars-to-goods ratio? Then what was once an adequate number of dollars will, through no fault of its own, become too many...
… if the climate scars on supply continue to grow, does the Federal Reserve have the right tools to manage? Stinson Dean, the lumber trader, is doubtful. “Raising interest rates will blunt demand for housing—no doubt. But if you blunt demand enough to bring lumber prices down, you’re destroying the economy,” Dean told me. “For us to have lower lumber prices, we can only build a million homes a year. Do you really want to do that?
“Raising rates,” he said, “doesn’t grow more trees.” Nor does it grow more coffee, end a drought, or bring certainty to the energy transition. And if our new era of climate-driven inflation takes hold, America will need more than higher interest rates to bring balance to supply and demand.
A provocative look at the tangled roots of our inflation, suggesting that “The World Isn’t Ready for Climate-Change-Driven Inflation,” from @yayitsrob in @TheAtlantic. Eminently worth reading in full. Via @sentiers.
* Native American proverb
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As we dig deeper, we might send carefully calculated birthday greetings to Frank Plumpton Ramsey; he was born on this date in 1903. A philosopher, mathematician, and economist, he made major contributions to all three fields before his death (at the age of 26) on this date in 1930.
While he is probably best remembered as a mathematician and logician and as Wittgenstein’s friend and translator, he wrote three paper in economics: on subjective probability and utility (a response to Keynes, 1926), on optimal taxation (1927, described by Joseph E. Stiglitz as “a landmark in the economics of public finance”), and optimal economic growth (1928; hailed by Keynes as “”one of the most remarkable contributions to mathematical economics ever made”). The economist Paul Samuelson described them in 1970 as “three great legacies – legacies that were for the most part mere by-products of his major interest in the foundations of mathematics and knowledge.”
For more on Ramsey and his thought, see “One of the Great Intellects of His Time,” “The Man Who Thought Too Fast,” and Ramsey’s entry in the Stanford Encyclopedia of Philosophy.
“A fair day’s-wage for a fair day’s work: it is as just a demand as governed men ever made of governing.”*…
As low-wage employers struggle to find workers, it seems as that labor– which has been left behind over the last several decades, as the economic benefits of growth have flowed to executives and owners– may be about to have its day. But will it? And what might that mean?
In her first statement as Treasury Secretary, Janet Yellen said that the United States faced “an economic crisis that has been building for fifty years.” The formulation is intriguing but enigmatic. The last half century is piled so high with economic wreckage that it is not obvious how to name the long crisis, much less how to pull the fragments together into a narrative. One place to start is with the distribution of national income between labor and capital (or, looked at another way, between the wage share and the profit share of national income). About fifty years ago, the share of income going to labor began to decline, forming a statistical record of the epochal collapse of working class power. Episodes of high employment in the 1990s and the late 2010s did not reverse the long-term pattern. Even today, with a combination of easy money and fiscal stimulus unprecedented since World War II, it is unclear what it would take to reverse the trend in distribution.
Few would seriously dispute that hawkish Federal Reserve policies have played a direct role in the decline of the labor share since the 1970s. This is the starting point for thinking about monetary policy and the income distribution, but many questions remain. Today’s expansionary program extends beyond monetary policy to include fiscal stimulus and even industrial policy, but the first sign of an elite rethinking was the Fed’s dovish turn around 2016. (The Fed chair then was Yellen, whose current tenure as Treasury Secretary has been marked by close coordination with her successor, Jerome Powell.) In a fundamental sense, the entire Biden program hangs on the Fed: low interest rates made possible a reevaluation of the cost of massive government debt, which has in turn opened new horizons for a would-be activist government.
If the age of inequality was the product of a hawkish Fed, could a dovish central bank reverse the damage? Today, there is more reason to speak of a “pro-labor turn” than perhaps at any time over the last half century. But history is not so easily reversed. The new policy regime is not a simple course correction to decades of misguided neoliberalism. There is evidence that the current experiment was made possible by a recognition that workers had suffered a secular defeat—specifically, that they had lost the ability to increase or even defend their share of the national income. What would happen if labor became stronger?…
Tim Barker (@_TimBarker) explores: “Preferred Shares,” in Phenomenal World (@WorldPhenomenal).
On a related note: “The economics of dollar stores.”
[Image above: source]
* Thomas Carlyle
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As we re-slice the pie, we might send acquisitive birthday greetings to Claude-Frédéric Bastiat; he was born on this date in 1801 (though some sources give tomorrow as his birthday). An economist and writer, he was a prominent member of the French Liberal School. As an advocate of classical economics and the views of Adam Smith, his advocacy for free markets influenced the Austrian School; indeed, Joseph Schumpeter called him “the most brilliant economic journalist who ever lived”… which is to say that Bastiat was a father of the neo-liberal economic movement that’s been central to creating the situation we’re in.
“What is it that happens in an inflation? The unit of money suddenly loses its identity.”*…
Today the Bureau of Labor Statistics releases its Consumer Price Index for the month of March. Here is some important context to help understand the figures…
When inflation numbers come out on April 13, they will likely look very high. And measured annually, inflation will probably rise further over the next few months. These headline numbers will be used to argue against the American Jobs Plan and future infrastructure investments, and even to advocate austerity.
But this response will be wrong, for three reasons:
1) The high year-over-year inflation of the coming months will reflect the falling prices of a year ago, whether or not prices are rising more rapidly today.
2) Achieving the Federal Reserve’s price-stability goals requires a period of above-trend inflation; if inflation, correctly measured, rises modestly in the coming months, that’s a good thing.
3) Even if inflation is a genuine problem, scaling back infrastructure investment is not the solution. It might even make the problem worse…
The full explanation at “The Illusion of Inflation: Why This Spring’s Numbers Will Look Artificially High.”
(Image above: source)
* Elias Canetti, Crowds and Power
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As we steel ourselves, we might spare a thought for James Buchanan “Diamond Jim” Brady; he died on this date in 1917. A businessman and celebrity in the Gilded Age, he made his fortune semi-scrupulously in the rail industry and less scrupulously in stock trading and fixed bets.
His appetites for indulgences of all sorts were legendarily huge; but his nickname was a nod to the main among them– to his obsession with jewels, especially diamonds. He amassed stones worth $2 million (equivalent to approximately $61,464,000 in 2019 dollars).
“Humanity’s 21st century challenge is to meet the needs of all within the means of the planet”*…
One evening in December, after a long day working from home, Jennifer Drouin, 30, headed out to buy groceries in central Amsterdam. Once inside, she noticed new price tags. The label by the zucchini said they cost a little more than normal: 6¢ extra per kilo for their carbon footprint, 5¢ for the toll the farming takes on the land, and 4¢ to fairly pay workers. “There are all these extra costs to our daily life that normally no one would pay for, or even be aware of,” she says.
The so-called true-price initiative, operating in the store since late 2020, is one of dozens of schemes that Amsterdammers have introduced in recent months as they reassess the impact of the existing economic system. By some accounts, that system, capitalism, has its origins just a mile from the grocery store. In 1602, in a house on a narrow alley, a merchant began selling shares in the nascent Dutch East India Company. In doing so, he paved the way for the creation of the first stock exchange—and the capitalist global economy that has transformed life on earth. “Now I think we’re one of the first cities in a while to start questioning this system,” Drouin says. “Is it actually making us healthy and happy? What do we want? Is it really just economic growth?”
In April 2020, during the first wave of COVID-19, Amsterdam’s city government announced it would recover from the crisis, and avoid future ones, by embracing the theory of “doughnut economics.” Laid out by British economist Kate Raworth in a 2017 book, the theory argues that 20th century economic thinking is not equipped to deal with the 21st century reality of a planet teetering on the edge of climate breakdown. Instead of equating a growing GDP with a successful society, our goal should be to fit all of human life into what Raworth calls the “sweet spot” between the “social foundation,” where everyone has what they need to live a good life, and the “environmental ceiling.” By and large, people in rich countries are living above the environmental ceiling. Those in poorer countries often fall below the social foundation. The space in between: that’s the doughnut.
Amsterdam’s ambition is to bring all 872,000 residents inside the doughnut, ensuring everyone has access to a good quality of life, but without putting more pressure on the planet than is sustainable. Guided by Raworth’s organization, the Doughnut Economics Action Lab (DEAL), the city is introducing massive infrastructure projects, employment schemes and new policies for government contracts to that end. Meanwhile, some 400 local people and organizations have set up a network called the Amsterdam Doughnut Coalition—managed by Drouin— to run their own programs at a grassroots level…
You’ve heard about “doughnut economics,” a framework for sustainable development; now one city, spurred by the pandemic, is putting it to the test: “Amsterdam Is Embracing a Radical New Economic Theory to Help Save the Environment. Could It Also Replace Capitalism?“
* Kate Raworth, originator of the Doughnut Economics framework
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As we envisage equipoise, we might recall that it was on this date in 1791 that President George Washington signed the Congressional legislation creating the “The President, Directors and Company, or the Bank of the United States,” commonly known as the First Bank of the United States. While it effectively replaced the Bank of North America, the nation’s first de facto central bank, it was First Bank of the United States was the nation’s first official central bank.
The Bank was the cornerstone of a three-part expansion of federal fiscal and monetary power (along with a federal mint and excise taxes) championed by Alexander Hamilton, first Secretary of the Treasury– and strongly opposed by Thomas Jefferson and James Madison, who believed that the bank was unconstitutional, and that it would benefit merchants and investors at the expense of the majority of the population. Hamilton argued that a national bank was necessary to stabilize and improve the nation’s credit, and to improve handling of the financial business of the United States government under the newly enacted Constitution.
History might suggest that both sides were correct.
“Exorbitant privilege”*…
Economic history books will commemorate the era we currently live in as the second wave of financial globalization, following the first wave during the Classical Gold Standard period. Our era is characterized by an unprecedented expansion of global financial flows. Partly, these flows form the counterpart to global value chains and the globalization of trade in goods and services. In the last few decades, however, they have been increasingly decoupled from the real sector. The financial infrastructure that enables this expansion is the international monetary system…
In its current shape, [the international monetary system] has a hierarchical structure with the US-Dollar (USD) at the top and various other monetary areas forming a multilayered periphery to it. A key feature of the system is the creation of USD offshore – a feature that in the 1950s and 60s developed in co-evolution with the Bretton Woods System and in the 1970s replaced it. Since the 2007–9 Financial Crisis, this ‘Offshore US-Dollar System’ has been backstopped by the Federal Reserve’s network of swap lines which are extended to other key central banks. This systemic evolution may continue in the decades to come, but other systemic arrangements are possible as well and have historical precedents. This article discusses four trajectories that would lead to different setups of the international monetary system by 2040, taking into account how its hierarchical structure and the role of offshore credit money creation may evolve. In addition to a continuation of USD hegemony, we present the emergence of competing monetary blocs, the formation of an international monetary federation and the disintegration into an international monetary anarchy…
Americans tend to take the global primacy of the U.S. Dollar for granted (indeed, often complaining about the current account imbalances to which huge quantities of off-shore dollars lead). But there’s no mistaking that this system has been been hugely advantageous to the U.S. Yet, as Steffen Murau (@steffenmurau) explains, it may not last: “The evolution of the Offshore US-Dollar System: past, present and four possible futures.”
See also Mernau’s “International Monetary System” (from whence, the image above), and Ben Bernanke’s “The dollar’s international role: An ‘exorbitant privilege’?“
* Valéry Giscard d’Estaing (then the French Minister of Finance; later French President), referring to the benefit that accrues to the U.S. as a result of the U.S. Dollar being the world’s reserve currency
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As we count our blessings, we might recall that it was on this date in 1890 that journalist Nellie Bly completed her 72-day trip around the world.
In 1888, Bly suggested to her editor at the New York World that she take a trip around the world, attempting to turn the fictional Around the World in Eighty Days into fact for the first time. A year later, at 9:40 a.m. on November 14, 1889, with two days’ notice, she boarded the steamer Augusta Victoria, and began her 24,899-mile journey.
She brought with her the dress she was wearing, a sturdy overcoat, several changes of underwear, and a small travel bag carrying her toiletry essentials. She carried most of her money (£200 in English bank notes and gold in total as well as some American currency) in a bag tied around her neck.
Bly traveled through England, France (where she met Jules Verne in Amiens), Brindisi, the Suez Canal, Colombo (Ceylon), the Straits Settlements of Penang and Singapore, Hong Kong, and Japan. Just over seventy-two days after her departure from Hoboken, having used steamships and existing railway lines, Bly was back in New York; she beat Phileas Fogg’s time by almost 8 days.
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