Central bank policy rates and the real economy

A version of this letter was published in the Financial Times today. 

Dear Sir,

Larry Summers is right to point out how few tools central bankers have to “delay and ultimately contain the next recession”. (FT, 6 December, 2015). We share his pessimism. However his analysis of the so-called “neutral rate of interest” being lower in the future than in the past” is based on the flawed notion of a “growing relative abundance of savings relative to investment”.

As Keynes explained and understood, in an economy based on credit, investment is not constrained by savings (and vice versa). Many of those who lay claim to his theories still do not accept this basic principle of a credit-based economy – applied in the UK since the founding of the Bank of England in 1694.

This flawed analysis leads Summers to misunderstand the direction of interest rates for those active in the real economy – rates often distinctly higher than prevailing central bank policy rates.

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Thatcher: should we pay out all that money for Trident?

There is a fascinating review by David Runciman in the LRB of Charles Moore’s: Margaret Thatcher: The Authorised Biography, Volume ll: Everything She Wants.

In it Runciman recites the tale of Mrs T, the Labour leader Neil Kinnock’s support for nuclear disarmament, and President Reagan’s sudden conversion (in 1986) to nuclear disarmament. It turns out that at a meeting in Reykjavik in the autumn of 1986 Reagan and President Gorbachev, backed by George Shultz Reagan’s Secretary of State, agreed to eliminate nuclear weapons. The implications of this sudden meeting of minds were… ‘cosmic’ writes Runciman.

Mrs Thatcher was not happy. Suddenly the Labour Party’s position on nuclear disarmament appeared credible…”in line with the unfolding logic of superpower politics and….(where) the Tories would be the ones out on a limb.”

So Mrs Thatcher began to work to change Reagan’s mind, and “bring him back into line.” A note was written to the American President, with the emphases made by Mrs T herself:

“You will cause me very real political difficulties if you pursue your proposal for eliminating ballistic missiles too actively. In our people’s mind it will raise two questions: isn’t Labour right after all in wanting to get rid of nuclear weapons….? And why on earth should we pay out all that money for Trident, if its going to be abolished in 10 years? The next British general election could ‘turn’ on these points, so you must help me deal with these arguments.”

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The Autumn Statement: a comment

Has George Osborne stopped beating up the economy? Certainly many are nervously relieved at having evaded the big stick he waved earlier. Others have noted that he was helped in his more benevolent approach by optimistic forecasts from the Office of Budget Responsibility (OBR).

Despite this apparent benevolence, the Chancellor still plans to cut public spending and increase taxes. The OBR forecasts that “fiscal consolidation (will) continue to depress the level of GDP, while acting as less of a drag on growth over the past four years.” (OBR)

However even this bit of cheer is predicated on the global economy expanding, and inflation rising. While we can speculate that the additional stimulus applied to the private property sector may cause asset prices to rise (if house builders are confident of selling new properties at a profit, and do build) the fall in CPI has far more to do with weak domestic and global demand.

The OBR would have us believe that falls in consumer prices mainly reflect “falls in commodity prices”. But falling commodity prices reflect weak global demand or spare capacity, and take the form of gluts and rises in inventories.

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“What are the economic possibilities for our grandchildren?”

 

Kings College, Cambridge, David Loggan, 1690

Kings College, Cambridge, David Loggan, 1690

Notes for a speech given by Ann Pettifor at an event commemorating Keynes and the completion of Kings College Chapel, at Kings College Chapel, Cambridge, on the 16th November 2015. The full version of the paper, co written with Geoff Tily, is available on PRIME.

Ideas and Power

It is a great honour to speak at this celebration of Kings and Keynes. The greatest honour I can do to both Keynes and Kings College is to get down to business and speak frankly.

The world desperately needs to recover Keynes, but to do so it also needs to confront some deeply uncomfortable truths about the nature of power and the acceptance or otherwise of ideas.

In his 1902 Imperialism, John Hobson observed:

“No one can follow the history of political and economic theory during the last century without recognizing that the selection and rejection of ideas, hypothesis, and formulae, the moulding of them into schools or tendencies of thought, and the propagation of them in the intellectual world, have been plainly directed by the pressure of class interests. In political economy…….we find the most incontestable example.” (Hobson, 1902, pp. 218-19)

Given the pressure of class interests on today’s economic ideas and on the economics profession, the long-standing neglect of Keynes’s ideas, most significantly here in Cambridge, comes as no surprise.

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On brilliant, neglected women economists – for Woman’s Hour.

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Joan Robinson

Yesterday I was invited on to Woman’s Hour to talk about outstanding women in economics that have never properly been recognized and acclaimed for their contributions.

The context is the Virago/New Statesman women’s prize for new, young writing on politics and economics. The prize was launched in late October to address the underrepresentation of women in non-fiction publishing  “and most particularly in the vital, society-shaping fields of economics and politics”.

At first, the producer of Woman’s Hour (Helen Fitzhenry) had asked if I wished to put forward a list of women economists and writers. I did so with alacrity. At the top was Emeritus Professor Victoria Chick, a formidable and outstanding monetary theorist and macroeconomist. She is best known for the integrity and rigour with which she evaluated both Keynesian and monetarist traditions in her book, The Theory of Monetary Policy (1973). And for her magnum opus: Macroeconomics after Keynes, published in 1983. (Listen to her here on the subject of “why economists don’t understand money.”)

Then there was Susan Strange (no longer with us sadly) one of the architects of the field of political economy and author of the prescient Mad Money – when markets outgrow governments in 1998 and Casino Capitalism in 1997. Cheryl Payer’s The Debt Trap: the international monetary fund and the third world – had a significant impact on many economists working in the field of sovereign debt – but her work and insights go largely unrecognized. Then there is the wonderful Yves Smith, editor of the website naked capitalism, and author of Econned: how unenlightened self interest undermined democracy and corrupted capitalism. Yves’s fearless commentary on finance, economics, politics and power makes her a proper and courageous role model for any young women writers on economics. Finally, I was very keen to promote the outstanding work and writing of Professor Mariana Mazzucato and her book, The Entrepreneurial State.

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Ann on BBC World at One

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Ann is a member of the newly-formed committee of economic advisors to the leader of the Labour party. Today she was interviewed on her views on Osborne’s Fiscal Charter, and Labour’s response.

Listen to Ann Pettifor on BBC’s World at One.

It’s time to escape “Stockholm syndrome”

Child in escape chute, US National Archives, 1924

Child in escape chute, US National Archives, 1924

Mr Osborne’s most striking political achievement, with the connivance of the economics profession and media, is to reframe the debate about the most severe crisis in living memory away from finance and towards the welfare state – identified as causal of the crisis.

In reframing the debate he has succeeded in ‘capturing’ some of his opponents and convincing them of his framing and narrative.

He has done so by accusing Labour of reckless management of state finances.

Now Labour, egged on as it was under Gordon Brown by orthodox economists in both the Treasury and academia, does share responsibility for ‘light touch regulation’ of the City. But in no way can the Labour government be found guilty of “overspending”.

The opposite is true.

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Ending ‘life support’ (QE) for western economic model underlies China crisis

After two days of trouble and strife in global stock markets, the Federal Reserve’s New York President William Dudley said in remarks to reporters that a September interest rate hike seemed “less compelling” now than in recent weeks. These two words alone calmed global financial markets, and pushed up the price of oil.

So everything’s going to be all right then? That is what some would have you believe. “Relax. Its just a correction” say the analysts. “The stock market always goes up and up and up. Hang on in there.”

However, I do worry. Where there’s volatility and instability, the causes are ultimately fundamental. Given this week’s events what can they be? Is it all to do with China?

I doubt it. When the governors of the People’s Bank of China announced a cut in interest rates – stock markets continued to fall. When a Fed governor uttered two words off the cuff – markets rallied. So when looking for a cause we need to look west, not east.

Most agree that the panic was sparked by a slowdown in China. The question then becomes: why is China slowing down? Some put it down to China’s credit binge, and the rise in debt hobbling local governments and property developers. Demographic change is another. Others believe that China’s extraordinary investment levels will now dive lower.

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China has exposed the fatal flaws in our liberal economic order

Floor of the New York Stock Exchange, Thomas J. O'Halloran, 1963

Floor of the New York Stock Exchange, Thomas J. O’Halloran, 1963

How can we make sense of volatile global stock markets? Economists explained this week’s dramatic falls by pinning responsibility on China. They are at pains to assure us this is not 2008 all over again. I beg to disagree.

Even though data is not reliable, it appears that China is slowing down. By 2009, the Chinese authorities were embracing the Western economic model that had just brought down much of Western capitalism. Undeterred, they launched a massive credit-fuelled investment programme. Growth soared at 10 per cent per annum. Investment recently peaked at an extraordinary 49 per cent of GDP. Total debt (private and public) rocketed to 250 per cent of GDP – up 100 points since 2008, according to the IMF. Property and other asset markets boomed, as did consumption. The Chinese should have been warned, for they won accolades from Western economists for their “Goldilocks” economy.

China’s stimulus helped keep the global economy afloat in the years following. But there are economic, ecological, social and political limits to a developing country like China continuing to support richer economies. And there are limits to Beijing’s willingness to abandon control and adopt in full the Western neoliberal economic model; the Communist Party has begun intervening. It is this intervention, we are led to believe, that spooked global markets.

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Camp Kotok, Maine, USA – fishing and forecasting

View+from+Robert's+handmade+canoe

The view from Robert’s handmade canoe

I have just spent a delightful few days in the US on some of Maine’s Grand Lakes. I was there at the invitation of David Kotok, chief executive of Cumberland Advisers. David has been visiting this area, the poorest county in the United States, for twenty five years. His annual fishing expedition has now morphed into an invited gathering of economists and analysts, mainly from the US, but this year including myself and Ross Ashcroft of Renegade Economics.

There are no powerpoint presentations at Camp Kotok; no formal speeches or debates. Just dining (and not a little wining), barbecueing, swimming, networking, singing (country and western, with lots of Johnny Cash) – and fishing. Proud to say my fishing went well…catching perch, bass and on the last day a fine salmon – hauled from a depth of 60ft. The guides and Grand Lake are governed by strict conservation regulation, and – with lures and hooks designed to cause minimum harm – most were returned to the lake. Which eased my conscience a little…

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