Monetary Policy

Rethinking Britain – How to build a better future

 Published this month by Policy Press in partnership with PRIME and the Progressive Economic Forum (PEF), Rethinking Britain is not only for the many – it’s also written by the many. As a result, it doesn’t set out the vision of one or two people, but instead offers the assessment of a wide range of experts, who are working in or studying the areas we cover. We not only set out the problems and suggest policy solutions to address them.  Our aim is to help improve life for people living in today’s Britain.

Thus Spoke the Bond Market

Will market volatility amidst global trade tensions and uncertainty cause a global recession? Although the world’s major central banks had managed to avoid risks in the first week of June, despite some small variations at some maturities, the United States yield curve remained more or less as it was at the beginning. What will happen in the not-so-distant future?

Economic Guidelines for a better European Union

Whether the UK finally leaves or remains a Member of the EU, progressives are generally united in viewing the existing Treaty and legislative rules on economic oplicy as dangerously dysfunctional. In their second joint paper, emeritus Professor John Weeks and PRIME co-director Jeremy Smith set out proposals for “Economic Guidelines for a Better Union - facilitating policies that enhance not constrain EU economic policy”.

To Secure a Future, Britain Needs a Green New Deal

This is an extract from a chapter in Economics For the Many (Verso, 2018) edited by Rt. Hon. John McDonnell MP. The chapter was written in August, 2017. 

If we are to secure a sustainable, stable and liveable future for the people of Britain, then implementation of the Green New Deal will be vital. Not just for the sake of the ecosystem, but also for the sake of rebuilding a stable, sustainable economy. A sustainable economy will be one dominated by a “Carbon Army’ of skilled, well-paid workers.

Did This Straw Break the Finance Sector's Back? 

The world’s financial markets are hurtling towards a new phase of crises ranging from currency to balance of payments  to sovereign debt to banking crises. The monetary tightening policies of the United States Federal Reserve and the European Central Bank will only precipitate crises in emerging market as well as peripheral eurozone economies, which will have global repercussions.

The Bank of England should not raise rates: here's why

The biggest danger facing the British economy is this: at their meeting in May the Monetary Policy Committee of the Bank of England is very likely to raise rates – despite a warning from the governor - because of the ongoing fear of inflation. Raising Bank of England rates at this point of fragility, would be like deliberately and repeatedly pointing a sharp dagger at a bubble of household, corporate and financial debt.

Those who helped break the economy cannot fix it 

Yesterday’s increase in interest rates was a big deal. Painful as it might be for many, the real point is that the Bank is signalling the end of a particular phase of monetary policy. 

Since 2010 the counterpart to self-defeating austerity policies has been expansionary monetary policies. These have inflated assets - enriching the already-rich, while failing to stimulate wider economic recovery. Yesterday the Bank of England’s Monetary Policy Committee signalled an end of this dangerous game. 

But this technocratic realignment makes no difference to the fact that Bank and Treasury economists have failed to revive the economy.

New Bank of England data bring post-1979 'dear money' into even sharper relief

The Bank of England have just updated their incredibly useful historic data resource, not only adding another six years of figures to 2015 but also expanding greatly the range of information included. Of particular interest is a measure of UK corporate interest rates that extends back to the mid-1840s. 

Looking back over the 170 years, the only precedent to the dear rates of the second financial liberalisation (post 1979) are those of the first liberalisation in the 1920s - rates which Keynes warned should be avoided “as we would hell-fire”.

Do real interest rates follow "historical norms"?

On the 'Bank Underground' website, Gene Kindberg-Hanlon makes a most welcome contribution to the evolving debate around real interest rates. Importantly, he dismisses the standard mainstream account of real interest rates conforming to economic growth:

“Global growth was much higher in the 1950s to 1970s than in the 1980s, yet real interest rates were significantly lower on average.”

And he observes that “The factors thought to account for the majority of the fall in real rates since the 1980s can explain none of the prior rise in real rates to their abnormally high level”. 

But with the conventional theory dismissed, it is replaced with a theory of real interest rate historical ‘norms’ which in turn fails to provide an adequate answer.

Fed policy means Trump to label China as currency manipulator?

With the Fed talking up the likelihood of rate hikes in 2017 while other central banks are still in easing mode, the potential for a US dollar rout and a concomitant closing of the US trade deficit is pretty low.  Therefore, given Donald Trump’s hawkish rhetoric, the potential for the incoming US government to label China a currency manipulator is high.

Tory MPs have a nerve to attack the Bank of England

The current political mandate is for the Bank to use unconventional monetary tools to boost the economy. - the very thing that Mr. Davies and many of his pro-Brexit colleagues object to.  But these MPs have a nerve to complain about the mandate. It was after all issued by their Conservative colleague, George Osborne in March  2013, as the BBC reported here

"The Bank of England has been ordered to consider using unconventional monetary tools to boost the economy, as growth forecasts were cut again."   

Japan's negative rates: the China connection

Japan has just introduced negative rates on reserves, following the example of the Riksbank, the Danish National Bank, the ECB and the Swiss National Bank. The Bank of Japan has of course been doing QE in very large amounts for quite some time now, and interest rates have been close to zero for a long time. But this is its first experiment with negative rates.

But why is the Bank of Japan so intent on cutting interest rates? After all, it has just produced a pretty upbeat forecast for the Japanese economy.  

It’s about China, mostly.

2015: Monetary and fiscal policy discord

In this contribution to "Cracks Begin to show: a Review of the UK Economy in 2015", published by Economists for Rational Economic Policies, Ann Pettifor sees a discord between (radical) monetary policy and (tight) fiscal policy, with the major beneficiaries of the government’s “lop-sided approach” being big corporations and the rich - owners of assets whose value are inflated by QE.  Yet due to the failure of its fiscal policy, the government has borrowed 7.5 % points of GDP more than expected since 2010/11.  

This is despite the large windfall gain to government from QE and monetary policy, with the government (through assistance from the Bank of England’s Asset Purchase Fund) having access to a pool of virtually debt-free borrowing.  

The economic reality is high and rising interest rates

My response to the US Council of Economic Advisers historical perspective on interest rates has just been published in The Real-World Economics Review.

My main objection is to the increasingly common claim that the main trend of note has been a 30-year decline of interest rates. Instead I argue that the most important feature has been a prolonged elevation of rates since financial liberalisation.

Taking into account inflation (using the CPI which is constructed on a monthly basis, and projecting unchanged into November), rates over the past three months are now at their highest for eight years

Rethinking government debt

This article is the first in our new series on debt, deficits and the role of central banks.  It is cross-posted from Coppola Comment.

There is a huge amount of hysteria about government debt and deficits, not just in the UK but throughout much of the world. As I write, Brazil has been downgraded by Standard & Poors because of concerns about rising government debt and weakening commitment to primary fiscal surpluses in a context of political uncertainty and deepening recession. It is the latest in a long line of downgrades and investor flight over the last few years. The global economy is a very stormy place.

Economists agree with Corbyn: “austerity a policy choice, not economic necessity”

Over 30 economics teachers and researchers (including PRIME’s Ann Pettifor and Jeremy Smith) have signed an open letter welcoming Jeremy Corbyn’s economic policies which open up key areas for debate, and fundamentally challenge “the shared assumptions behind the narrow range of policies advocated by both the Conservative government and the other Labour leadership candidates.”

Why the Euro is the gold standard writ large…

The euro not only replicated key elements of the gold standard – but went much further: European currencies were simply abolished. States lost control over both their currency and their central bank. Parallels with the operation of the gold standard explain why, like the gold standard, the euro will fail.

The euro system denies monetary policy autonomy to states, and like the gold standard, insists on full capital mobility, over-values the shared currency, creates a sense of euphoria and excess when introduced into a new state...

What will Mr Vlieghe bring to the MPC from his big tax haven hedge fund?

Today, UK Chancellor George Osborne appointed hedge fund economist Gertjan Vlieghe of Brevan Howard Asset Management LLP as the latest member of the Bank of England Monetary Policy Committee (MPC).  The MPC is responsible for setting the Bank’s interest rate and plays an influential role in national life. So who is Dr Vlieghe, and what is his recent experience? And who are Brevan Howard?

Bernanke's fierce attack on Eurozone economic and fiscal policy

Just a day after Donald Tusk gave his FT interview telling the world, it’s “an economic and ideological illusion that we have a chance to build some alternative to [the] traditional European economic system” (in fact, Tusk thinks the debate is “very similar to 1968”!) – along comes Ben Bernanke, to argue the precise opposite.  In a scathing article for Brookings, “Greece and Europe: Is Europe holding up its end of the bargain?” he concludes, in effect, that it is not.