In my latest City AM column I discuss Gordon Kerr’s recent book, which points to the role of accounting regulations in the obfuscation of the price system that contributed to the financial crisis:
When economists talk about the efficiency of the profit and loss system, we tend to take for granted that the profit and loss we observe matches with reality. But government interventions are liable to disrupt these signals – inefficient taxes, arbitrary subsidies, and monetary debasement all separate prices from the underlying conditions of demand and supply. Another source of noise is faulty accounting standards – as Gordon Kerr has pointed out in his fascinating new book The Law of Opposites: Illusory profits and the financial sector.
I was recently quoted in Management Today with some thoughts on current monetary policy:
The Bank of England’s policy rate has been historically low for some time now and this cannot continue indefinitely. The aim of low interest rates is to boost the economy by creating incentives to borrow money and invest. But higher capital requirements and policy uncertainty create counter forces that restrict bank lending.
In these circumstances the purported “benefits” of low interest rates fail to materialise, but the costs certainly do. These include the lack of an incentive to save (and actually rebuild banks’ balance sheets through voluntary lending), distortions to the capital structure of the economy (making white elephants like the HS2 line appear profitable) and the erosion of people’s savings.
The fact that real interest rates (the difference between inflation and the return you get on your savings accounts) is negative is a harmful confiscation of wealth.
When interest rates are close to zero policymakers look to alternatives, and quantitative easing has emerged as their favoured tool. However grateful banks and the financial community are in general to have an injection of freshly-printed money, it’s not clear how much this is helping the real economy. The aim shouldn’t be to preserve the status quo, but to find ways to allow banks to fail without exposing the general public to the fall-out.
Those of you based in London hopefully know that I have a regular column in City AM each Tuesday. Last week I discussed government vs. private investment:
When private sector investment declines, then the reasons need to be identified and a solution found. The key policy question needs to be “why aren’t businesses investing?” Attempting to offset it with government spending is just an accounting deception. And too much government intervention can be the underlying cause, not the cure – through high tax rates, burdensome regulations and policy uncertainty.
The print edition contained a chart in which I used the Gross Fixed Capital Formation data to compile and contrast government and private investment. That data has now been published by Kaleidic Economics: here is the announcement, and you can view the data here.
Regular readers will know that The Cobden Centre’s sister roundtable – Kaleidic Economics – is engaged in measuring the MA measure of the money supply, as discussed here several times. In October 2011 MA fell by 6.6% compared to the previous year, which is around twice the recent rate of contraction. As turmoil regarding the Eurozone and threats of a double dip recession continue, good policymaking requires good data. And the monetary aggregates paint a gloomy picture.
I think this is a complicated question to answer, and both sides of the debate have a tendency to over simplify.
If we understand the goal of QE to be an increase in aggregate demand such that the Bank of England’s implicit and explicit objectives are met, I think it’s reasonable to conclude that it worked “better” than its critics feared, but not as well as its advocates hoped. In other words, I think output is higher than it would have been without QE, inflation is lower than some people warned, but the former is lower than and the latter higher than the MPC would like.
In this week’s column for City AM I wanted to highlight an irony in the debate. If “above target inflation makes little difference if expectations remain anchored” one possible explanation of the muted effects of QE is the Bank’s decision to retain an inflation target. Therefore:
We now have the odd situation where those warning of impending hyperinflation – the sternest critics of QE – provide the intellectual prerequisites for it to work. By contrast, in pandering to those concerns, its proponents ensure that it will not.
It strikes me that unless the Bank of England allows inflation expectations to rise, QE will have a muted effect.
Read the whole article here.
My latest article for City A.M.
I’M A big fan of the Bank of England museum. I find the way it attempts to educate children about how monetary policy is conducted to be charming. There is an exhibit with a tube of clear plastic containing a ball. The tube is “balanced” when the ball is level with a marker for 2 per cent inflation, and there is a lever labelled “interest rate”. As you pull down on the lever, the tube rotates and the ball shoots over 2 per cent. If you pull up, the tube moves in the opposite direction. Just as you grasp the mechanistic relationship between the target and the tool, “economic shocks” are added to send the tube into constant motion.
When we updated MA (our Austrian school measure of the money supply) for August, we expected to see signs of the market turbulence that has characterised recent events. Although still in a monetary contraction, MA is falling at a lower rate than previous months. It has been indicating a tightening of credit conditions for several years now, but has not significantly deteriorated.
Those of you who work in London may have noticed the new “Forum” section of City AM, the free daily newspaper. Cobden Center Advisory Board Member Jamie Whyte has a regular column, and I am delighted to be writing one myself. Focusing on macroeconomic theory and policy, it appears every Tuesday in the print edition, and this week’s focuses on unemployment figures.
Obama’s jobs plan assumes that any job is better than no job – that the goal of public policy should be to employ idle resources. But resources are never idle. Regardless of whether they are in use, they are performing an important economic function, and it is costly to put them to the wrong use. The challenge isn’t to create more jobs, but to create the right type.
We live in a world of social media, so please keep an eye on the Forum and make sure you comment on, like and retweet articles you wish to promote. The climate of opinion is moving towards Austrian economics – help us turn a rumble into a roar.
The Cobden Centre’s Jamie Whyte appeared on BBC Radio 4 yesterday morning to discuss the prospect of further quantitative easing in the US and UK.
In my view, three key points came across:
- the economic situation was different in 2008 (only a serious monetary crisis can justify monetary stabilisation);
- central bank interventions get in the way of market discovery processes;
- previously injected money has been hoarded, so it hasn’t had the desired effects on broad money (central bankers are “pushing on the end of a piece of string”)
If you weren’t up at 6:20 to hear the original broadcast, you can catch it on iPlayer until next Thursday, 11 August, at 9:02 AM.
Last month I reported on a revised version of MA – an “Austrian” measure of the money supply – which suggested that the UK economy is undergoing a monetary contraction. As part of that project we are updating the measure on a monthly basis, and can report that in June 2011 MA continued to contract, but at the slightly lower rate of -5.1%.
Most economists accept that narrow money does not tell us much about the economy, but MA suggests that broad money is actually underestimating the scale of the problem.