Implications of Secular Stagnation and A Low Growth World

I would dearly love to have provided just a link in my previous blog piece with a comment or two on this most excellent (as usual) post from ‘Rick’ at the Flip Chart Fairy Tales blog. It goes much deeper than I would have been capable of. It is definitely worth reading the whole lot. Unfortunately his blog appears to be partially down while I write this, so here it is in full. Apologies to ‘Rick’ if publishing the whole lot here has been naughty… In the meantime Here is the general link to his site. And this is what he wrote and quoted from some other excellent people especially Duncan Weldon and Andrew Haldane:

Are we prepared for a low growth world?

Duncan Weldon declared himself a productivity pessimist earlier this week:

Productivity – the amount of output produced for each hour worked – rose at a fairly steady annual rate of about 2.2% in the UK for decades before the recession. Since the crisis though, that annual growth rate has collapsed to under 0.5%. The OBR has decided to revise down its future assumption on productivity from that pre-crisis 2.2% to a lower 2%. That small revision was enough to give the chancellor a large fiscal headache in his latest budget, but it still assumes a big rebound in productivity growth from its current level. What if that rebound doesn’t come?

It’s still perfectly possible to argue that productivity pessimism is overdone, that we are still suffering the lingering after-effects of the financial crisis that will eventually end. But with each passing year that becomes more difficult. A good strategy is to hope for the best but prepare for the worst. And the worst is pretty bad.

Why is it so bad?

Productivity is one of two key factors determining the trend growth rate of an economy; the speed limit at which a country can expand without pushing up prices. The other is population. Falling birth rates across the advanced economies created a demographic “sweet spot” that lasted from the late 70s until fairly recently. Fewer children meant a rising share of the population was of working age. But fewer children in the past means fewer workers today and rising longevity means a rising share of the population who are retired. Across the west, the amount of workers for each retired person is heading in the wrong direction. Increasing the retirement age and more immigration are both theoretical fixes, but the scale of both required to fundamentally change the picture is almost certainly politically impossible.

That demographic sweet spot, a rising working age population and fewer dependents, was one of the factors that caused the spurt of growth after the Second World War. Historians and economists will be debating the causes of the postwar economic boom for years to come but, when compared to previous fifty-year periods,  the last half of the twentieth century saw unusually high GDP growth. It is starting to look as though we have seen the last of it.

Duncan produced this graph a few weeks ago, form the Bank of England’s Three centuries of macroeconomic dataHe notes that, although it is early days, the early 21st century is looking more like the late 19th than the late 20th.


When compared to most of the last 300 years, the last half of the twentieth century was an extraordinary time. Looked at in the longer term context, it was an extraordinary time within an extraordinary time. As Andy Haldane said, economic growth only really started around 300 years ago.

[T]he long history of growth looks rather different than the short. Secularly rising living standards have become the social and economic norm. No-one can recall a time when the growth escalator has moved anything other than upwards.

Yet viewed through a long lens telescope, ‘twas not ever thus. Chart 2 plots estimates of global GDP per capita back to 1000 BC. This suggests a very different growth story. For three millennia prior to the Industrial Revolution, growth per head averaged only 0.01% per year. Global living standards were essentially flat. Since 1750, it has taken around 50 years for living standards to double. Prior to 1750, it would have taken 6000 years.

Screen Shot 2015-02-23 at 18.02.36

It wasn’t until the start of the 19th century that most people’s living standards began to improve. It is, as Andy Haldane said, as though someone flicked a switch somewhere around 1750 and the technological take-off then fed through into a massive jump in per capita GDP.

Per capita GDP increased gradually during the 19th and early 20th centuries but steepest rise came after the Second World War. The period between the end of the war and the crash of 2007 saw unprecedented economic growth.

Real UK GDP Per Capita

Source: Bank of England: Three centuries of macroeconomic data.

And, to illustrate Duncan’s point, productivity followed a similar pattern.

Productivity BoE

Source: Bank of England: Three centuries of macroeconomic data.

If, over the next decade, we are to achieve the same increase in per capita GDP that we saw in the last half of the 20th century, the economy would have to grow by between 3 and 3.5 percent every year. Even the most optimistic forecasts are nowhere near that. As Duncan says, even the government’s revised projections might be a bit optimistic.

In the UK, policymakers once thought trend growth was 2.75% and have now cut that to 2.2%. Without a productivity bounce that could fall to closer to 1-1.5% in the coming years.

It might be early days but the chances are that Duncan’s bar chart won’t look that much different in 2025. Unless there is a sudden productivity spurt, which looks very unlikely at the moment, real per capita GDP growth will probably average something like 1.3 percent for the 25-year period.

It looks like this productivity slow down will be set in for some time. The recent improvement which might have indicated that we had turned a corner came to a halt at the end of last year. That most other western economies are also seeing something similar suggests that the causes run deep, although the UK seems to have particularly severe symptoms. The IMF has urged governments to invest to prevent a slide into what Christine Lagard called the “new mediocrity” but, even if governments rise to this challenge, they may find themselves trying to jump-start a dead battery. We have no idea what the multiplier effect of such a stimulus would be. It might be disappointingly small. What level of investment it would take to return the UK to 3 percent growth is anybody’s guess but it is likely to be a very big number.

This gives us a huge problem. Most of us grew up and formed our opinions and expectations during that extraordinary post-war period. We thought that the growth we enjoyed during that lucky half-century was normal. We assumed that living standards would improve and that each generation would always be better off than the last one. Furthermore, we built a state based on the assumptions of late 20th century growth.

The trouble is, the pressure on state spending will almost certainly increase. The ageing population will cost more even if we all work longer and stay healthier. We have no idea what the effect of climate change will be but it is likely to put extra demands on local authority budgets.

But low productivity means low wages which means low tax revenues and continued reliance on in-work benefits. Governments will struggle to keep public spending down and to raise revenue. A combination of higher taxes, cuts to public services and continuing government deficits looks likely.

This is bad news both for anti-austerians and for state-shrinkers. Governments will have their work cut out just to keep public services running at their current level. The brutal arithmetic of public spending means that even a real-terms freeze means significant service cuts.  A return to 2010 levels of staffing and provision looks unlikely unless people suddenly develop an appetite for much higher taxation. For the same reason, significant tax cuts also look improbable. Governments will be scratching around for every penny they can get.

A lower-growth world means that we will have to adjust the assumptions that we built up in the higher growth world. We will find our views about work, pay, living standards, property ownership, health and retirement challenged but none more so than our assumptions about what the state is there for and what it can and should provide.

Secular Stagnation … I Think

I’m not totally sure what secular stagnation means – other than growth is low and difficult to jump-start, and that is the new normal.

But I do know that large companies are not investing significantly, preferring to sit on cash-piles and pay their most senior executives enormous salaries and bonuses instead. This is because large corporations are oligopolies – pretty close to monopolies. So they have near complete control of their pricing and profit levels, which are hardly reined in at all by either the competition nor by adequate regulation. If a competitor does break rank, that competitor may well be bought out. So the large corporations are in an excellent position to milk their customers, their existing products and their productive methods for all they can. They have little or no incentive to invest in better products or services or better means of producing them. Why do that when they can give their senior executives bigger salaries and bigger bonuses instead. And it’s not even as if shareholders get a raise in dividends either, because fund managers who hold most of the shares have no real incentive to perform better – and, if they do protest at meagre dividends , they can safely be ignored: after all share prices can be kept high by the simple method of buying more of their own shares to distribute to employees, especially the most senior ones. The ‘light touch’ low regulation situation was initiated by Mrs Thatcher in the UK and Ronald Reagan in the USA. And then continued by Messrs Blair/Brown and Mr Clinton.

Free enterprise is easily corrupted into monopolies/oligopolies without adequate regulation. This kind of corporate behaviour illustrates the difference between short-term greed and long-term self-interest, because if the corporations were to be investing economies would grow more and everyone would live happier, healthier and longer lives, assuming reasonable wealth distribution, natch. (But the inequitable wealth distribution we currently have also started in the 1980s and is a linked phenomenon). Better growth and better wealth distribution would benefit the corporate execs’ descendants. But I suppose said execs are holding to the view that in the long term we are all dead, and in the short term ‘mine’s bigger than yours’ competition among the top 0.1% must be a very difficult mental habit to shake.

It is largely because of all this that productivity is so low – most especially in the UK, where it is now in a particularly abysmal state even compared with other major (G7) economies where it is none too healthy. And, of course, low productivity leads to low growth, which further inhibits investment because of lack of confidence. A viscious circle, indeed.  Employment of cheap labour from a cowed and nervous workforce has been kept up for a while, as cheaper than new plant, etc. But it now looks as if even that may be slipping, too.

Attempts to boost economies via central bank quantitative easing have not been particularly successful, as we are constantly reminded (it was well known to be a gamble from the beginning – likened to ‘pushing on a string’).

So now central banks are toying with the idea of negative interest rates – and some, including the ECB, are actually implementing it. This is also likely to prove ineffectual in its aim to boost investment and consumer spending. So some (wishful thinkers) are predicting ‘helicopter money’ as a last resort (just distributing cash to consumers to spend).

In an economy your spending is my income and my spending is your income. That’s why an economy is not like a household or a firm. So ‘Schwabian Housewife’ economics (we-must-all-live-within-our-means-and-debt-is-inherently-bad) is such total rot. It is based on a fallacy of composition (the whole is exactly like its parts: national economy=firm=household=individual), and takes no account of the ‘paradox of thrift‘ where if everyone saves and no-one spends, we are all impoverished.

The simple answer in a case like this is through what is called fiscal expansion by governments. Governments need to spend, even if it means borrowing to do so. But because of Schwabian Housewife economics this has become politically unfeasible. Most Western governments don’t even want to spend on infrastructure investment, let alone welfare, health, the military, research into carbon dioxide capture and storage, etc (etc). In the UK if the hapless Mr Osborne were to be seen contemplating anything more than a short tactical about-turn from austerity, as he did in 2011 and is now doing after his latest budget fiasco … well he couldn’t because the press would not let him. Plus, of course, the theology of shrinking the state in order to ‘unshackle’ so-called free enterprise remains a convincing-sounding argument to many like Mr Osborne, despite the fact that we have seen what unshackling free enterprise has led to so far. Obviously free enterprise has not been unshackled enough…? Ayn Rand stuff, anybody? That’s an argument like proper communism has never really been tried? Both obviously bullshit.

Of course what would really lead to fiscal expansion would be a good war. But that really would not be the kind of rescue from North Korea or Mr Putin that I would be hoping for.




On the IT/Robotics third (fourth?) industrial revolution, employment and wealth distribution

A certain panic has recently been setting in that the IT/Robotics revolution, as it continues to mature and develop, will significantly eat into employment opportunities among the middle-and-highly-skilled-working classes.

Highly skilled weavers (the Luddites) lost their role as a result of the first industrial revolution in the late 1700s as weaving became mechanised in Britain. And the industrial revolutions of steam, electricity, the combustion engine, and even later, early automation caused significant and painful socio-economic and employment disruptions – before the wealth and growth created engendered further employment opportunities.

In 1930, as Keynes looked into the future, he predicted an enormous growth in leisure, with people only needing to work for 15 hours a week to provide for their needs. So much, as the Adam Smith Institute people would say, for Keynes’ prediction.  For, not only did ‘needs’ change, but the actual distribution of income and wealth confounded Keynes’ prediction. If the wealth generated currently were distributed more equitably between ‘capital’ and ‘labour’ we might (or might not) be on our way to fulfilling his prediction. But it is not and we are not.

In the developed world, since the 1980s to the present, it is now agreed that there has been a very significant growth in inequality. It is all very well not needing to work as much in a more IT/Roboticised economy, but this has translated into under- and unemployment and/or low incomes for many rather than an unadulterated increase of pleasure in leisure. The very wealthy have garnered most of the wealth of economic growth into their own hands rather than it being equitably distributed among all. This is not because they are evil but because they, themselves, are most likely on a vanity treadmill to ‘keep up with’ (and, if possible, surpass) their own ‘Joneses’. Human nature. Wouldn’t you?

Throughout this process what we in Britain define as the middle-classes – lawyers, accountants, engineers, architects, market researchers, economists, and so forth, have remained reasonably comfortable on the whole. Though it is agreed that middle-class real income in the USA has not actually advanced since since the 1980s. While that of those in the top 0.1% of the population has increased enormously. Here is the picture for the USA.  In the UK the picture is more complex, and open to more ‘interpretation’ but there is some agreement that the ‘middle-income’ group of households is shrinking in comparison with the poor and the wealthy. A detailed ONS analysis of UK middle-income households’ changing wealth since 1977 is provided here.

Many predictions now point to a lot of these people losing their full-time employment to continuously maturing IT/Robotics, therefore, doubtless, needing to join the relatively poorly paid ‘gig’ economy in the next few years, or taking on more poorly paid work in other sectors, save for those with the most enterprising spirit. That doesn’t sound good unless something happens to encourage a more equitable distribution of wealth in advanced economies. Which does not seem very likely.

However, all is not necessarily doom-and-gloom, because this argument ignores the ‘demographic time bomb’ in advanced economies. Populations are tending to decline and age in advanced economies, following Japan’s lead. There will be a medium term demographic respite in some countries, like the UK, where there has been significant recent immigration. But as immigrants settle in, the declining-and-greying population trend will continue even in these countries. This points to a decline in growth and wealth in advanced economies. Unless…

…Unless IT/Robotics turns out to be less of a threat to employment and incomes than has been predicted. It could be a benefit if, instead of increasing unemployment or lower incomes, it ends up substituting for the inevitably missing population numbers. Some really interesting analysis of this is provided in these excellent blog pieces from ‘Rick’ at Flip Chart Fairy Tales, first here and subsequently here.

The distribution of wealth, however, will remain a major issue which is unlikely to be resolved.  Largely because of ‘capture’ of the political process by very wealthy people running the oligopolies and much of the media.  So, although it could, I am not at all optimistic that everything will come together at the right time and in the right way.

I think we may be in for some very turbulent times in the next few decades. This, from here, may be putting it mildly….

In today’s parlance, we speak of “disruptive technologies.” But no-one should be gulled by jargon: New ways of producing things often kill off old industries and jobs before the full benefits of the successor mode of production are realized. A certain degree of violence inevitably accompanies human progress.

According to Steven Pinker human violence is very much on the decline. This is, of course, disputed. But maybe we shall see a reversal, if decline there has been.

In the meantime here is the WEF’s latest report (2016) on the Future of Jobs. Among many other things it posits the following for jobs lost and created worldwide via the ‘fourth industrial revolution’

Winners and losers
Jobs lost
4,759,000 clerical/administration
1,609,000 Manufacturing and production
497,000 Construction and mining
151,000 Sports and creative industries
109,000 Lawyers
40,000 Mechanics/maintenance
Jobs created
492,000 Banking, accounting, insurance
416,000 Management
405,000 IT/data analysis
339,000 Architecture and engineering
303,000 Sales
66,000 Teaching and training

The report needs some digesting. It is survey-based. And while I note ageing population effects are covered in respect of demand and employment I don’t think it really covers the interaction between IT/Robotics/Artificial-Intelligence and ageing/population decline on employment. I need to read the report… (but I may not).

I should mention an amusing but dystopian SF story by Frederick Kornbluth in 1954, called The Midas Plague, which envisaged robots taking over most jobs. Which, of course, meant that most of the ex-workers were too impoverished to consume the robotic production. Yes, indeed, ‘lack of demand’ ensued (or maybe it was Secular Stagnation?). The solution was to force the poor to consume more and more by giving them reverse ration cards. The poorer you were the more your ration card forced you to use the production of the robots. There were sanctions if you didn’t because otherwise the economy would collapse (sound familiar?). Eventually one bright spark got their house robot to do the consuming… It’s a long time since I read that story, but I think it ended in the discovery of the miscreant, who was then promoted to the upper classes, needing to consume less, in order to keep him shtum. But I think Kornbluth may have found a solution to secular stagnation… (Are you listening Prof Krugman, Prof Summers?)

Oh… And here be yet another suggestion of things turning very nasty as a result of what I now guess we must all call the 4th Industrial Revolution (even though I still think it is really the 3rd coming home to roost, but who am I to argue with the Very Serious Gurus of Davos?).

I think I ought to link this to my post of Sept 29 2013. But I’ve just noted that in that post I incorrectly quoted Kornbluth’s 1951 novella The Marching Morons rather than his 1954 novella The Midas Plague.

I’ve edited this post more than enough and will now leave the subject alone.

More on the damage austerity can do when it can’t be offset by monetary policy because of ZLB

Demand creates its own supply and lack of demand reduces future supply. As reported here

Using E=mc2 to determine if you can lose weight at the gym

Below, we ignore the fact that muscle weighs more than fat because fat loss is what people want when they talk of weight loss.

Einstein derived his equation relating mass to energy E=mc2 (Energy=mass multiplied by the square of the speed of light) as a by-product of his Special Theory of Relativity.

²We can re-write E=mc2 as m=E/c2  – ie mass (or weight, as we know it here on earth) equals energy divided by the square of the speed of light.

The units are normally expressed in Joules (for energy E), kilograms (for mass m) and meters-per-second (for the speed of light c).
1 kilocalorie – better known as food calories – or simply Calories as measured roughly by our gym cardio-equipment = 4184 Joules. The speed of light in vacuum is a constant 299,792,458 meters per second. Let’s call that 300,000,000 meters per second for easier arithmetic. And if we square that it is going to be a big number. In fact it is 90,000,000,000,000,000.

OK, so we are at the gym and we have just expended 100 Calories (100 KCal) in about 9 minutes over two different cardio machines. We are now exhausted because, while reasonably fit, we are 73 years old – so give us a break.

So how much mass have we lost from our body in our first 10 minutes at the gym before we move on to the weights for more punishment? Answer: we have expended 100 Calories multiplied by 4184 to get 418400 Joules. And we need to divide that by 90,000,000,000,000,000 to get mass equivalent in kilograms. Which turns out to be approximately zero mass annihilated. And, in fact, even if we had expended 1000 calories in the gym (phew, indeed) – the weight loss in kilograms would still be approximately zero. Suppose we choose grams instead of kilograms? Now we are getting somewhere. According to Einstein’s equation by expending 1000 gym-machine Calories we will have lost 0.000000005gm. Suppose you expended 1000 Calories at the gym every day for a year – that would be 365×0.000000005gm. Less than 0.000002gm over a whole year of gym-induced very high energy expenditure.


And… rewarding yourself for going to the gym by an extra bar of chocolate (you deserve it for expending all that effort and energy, don’t you?) is going to give you far, far (ahem, far) more extra weight than what you lost in the gym. In that respect, regarding just weight, going to the gym could even be counterproductive.

So by all means go to the gym to get fit or build or strengthen muscle – but do not expect it to lose you any measurable weight at all.

(Must be errors in this – mathematical or conceptual. Be interested if someone could point them out and amazed if anyone apart from a bot actually read this.)


OK – found the fallacy.

The calorific value of food used to be measured by placing a given quantity of the food in a sealed container surrounded by water, an apparatus known as a bomb calorimeter. The food was completely burned and the resulting rise in water temperature was measured to calculate its energy content. This method is not frequently used today, but the principle is similar. Also because it is known that some of the food will not be digested (fibre, mainly), the amount of the undigestible part has to be deducted from the calculation. Further, of course, burning the food is not at all the same as converting it all to energy – as the carbon and some other stuff that remains has not been converted to energy but remains as particles of solid carbon and molecules of fluid residue (mainly gas). Which means there is far more atomic energy in the food than the calories actually given on the label. And this extra energy is not used by the human body.  The labelled calorific value of the food is far, far less than its atomic energy. Several orders of magnitude would be an understatement..

Thus suppose normal dietary intake is 2500 calories (actually kC) per day. And that leave you steady in weight. Then you reduce your intake by 500 calories per day for a year. I think we can all agree you will lose some kilograms over the year by not consuming 182,500 calories you might otherwise have consumed.

And that is equivalent to far, far more than 182,500 calories of actual atomic energy. It has been calculated that if we were able to convert matter perfectly to energy with 1 kg of matter the energy produced from just that small amount of matter is about 42.95 megatons of TNT.  So an adult male weighing in at around 200 pounds has somewhere in the vicinity of 4000 megatons of TNT potential stored up in their matter if completely annihilated. Charming… A 90kg male has around 4000,000,000 tons of TNT (approx) equivalent energy stored up in his body.

I’ve had enough for now. But clearly, E=mc2 has no relevance to stuff you do at the gym, after all. So you can lose weight at the gym…(Probably)



On lack of business investment, fiscal stimulus and austerity

This very clear exposition of the reasons for poor levels of business investment from Paul Krugman in his NY Times blog

Jason Furman of the Council of Economic Advisers gave an illuminating talk on the sources of weak business investment, largely aimed at refuting the “Ma! He’s looking at me funny!” school, which attributes US economic weakness to the way the Obama administration has created uncertainty, or hurt businessmen’s feelings, or something. As Furman shows, it’s a global slowdown, very much consistent with the “accelerator” model in which the level of investment demand depends on the rate of growth of overall demand.

It seems worth pointing out, or actually reiterating, several implications of this analysis that go beyond Obama-bashing and its discontents.

First, if weak demand leads to lower investment, which it does, and if fiscal austerity is contractionary, which it is, then in a depressed economy deficit spending doesn’t crowd investment out — it crowds investment in. Or to be more explicit, austerity policies don’t release resources for private investment — they lead to lower private investment, and reduce future capacity in addition to causing present pain. Conversely, stimulus in times of depression supports, not hinders, long-run growth.

Second, secular stagnation — persistent difficulties in achieving full employment — is a real concern if potential growth is slowing due to a combination of demography and weak technological progress, which seems to be happening. Lower growth means lower investment demand, so getting the private sector to spend enough gets harder.

Finally, an extreme case of this arises in China, where the exhaustion of the reserve of underemployed peasants plus, perhaps, a slowdown in the rate of technological catchup means that the very high investment rates of the past can’t be sustained. Look out below.

On Central Bank Interest Rates Panic (UK Edition)

The Bank of England (BoE) pays 0.5% interest to commercial banks on their deposits and it has remained that way for a long time now.

During this period quantitative easing (QE) has been used by the BoE. It does this by purchasing open-market gilts from existing holders of previously issued gilts – pension funds, insurance companies, high net worth individuals, etc, – who sell them indirectly to the BoE via banks, since the BoE doesn’t deal directly with other kinds of institution. This increased demand for ‘second hand’ gilts is what increases their price on the open market thus reducing the amount of interest they pay (since the original interest amount paid is fixed at the ‘coupon’ the government put on them when it initially sold them, so that as the price of gilts goes up or down on the open market the actual market interest rate relatively decreases or increases). The money the BoE pays the banks for these gilts then goes back into to the accounts of the people or organisations who sold them back to the BoE via said banks. Less the banking commission charged.

All this is done in an attempt to stimulate the economy by getting the gilts-sellers to do other stuff with their money. There has been similar behaviour from the US Federal Reserve (Fed) where interest rates have been set at 0.25% for a long time.

‘Normally’ it wouldn’t be necessary to do such a convoluted thing as QE because the economy could be stimulated through monetary policy by simply lowering a central bank’s interest rate to encourage spending, borrowing and investing. But you can’t do that when the official interest rate is already so low – at or near what is called the ‘zero lower bound’ (ZLB).

But in more ‘normal’ times there are actually two ways an economy can be stimulated – one is via central bank ‘monetary easing’ (reducing interest rates) – while the other is via government ‘fiscal policy’ (the government puts more money into the economy by lowering taxes and/or spending more itself). If the government can’t or won’t do it via its fiscal policy then the central bank has to try to do it via its ‘monetary policy’. This is the current situation because the UK government considers it essential to be as frugal as possible in its spending. As do governments in the USA and Europe. The answer to this conundrum since the Great Recession has been the ‘unconventional’ policy of QE. The Jury is said to be out about how well this has actually worked.

Now the UK economy has officially ‘recovered’, for whatever reason, albeit in a somewhat fragile manner: with GDP per head hardly at all, low levels of corporate investment, appalling level of business productivity, poor balance of payment figures – but, on the upside, with significantly lower unemployment figures and real wage/salary increases helped by an exceptionally low inflation level.  Therefore there has been increasing pressure on the BoE to start raising interest rates again in order to regain ‘normal’ levels of interest. The pressure of late has been somewhat noisy.

But the rationale for returning to ‘normal’ bank rate now is not at all clear. There are irrational arguments (about the evils of ‘printing money’, ‘unnatural interest rates’ etc) and some apparently rational arguments for increasing rates. One potentially rational argument for increasing the central bank rate is that continuing to stimulate an economy which is already growing under its own steam risks inflation. Another argument is that if the economy does tank again (China? House price bubble bursting?) then, at the ZLB, there will be no room for monetary easing to stimulate. Though the government cold still use fiscal policy to do so. However government action via borrowing (issuing fresh gilts) or otherwise printing money would be politically very difficult because of the emphasis the government, press and even the Labour opposition have been putting on eliminating the deficit. This would therefore be considered the mother of all U-Turns, causing the government to lose credibility.

However there is a funny thing about the inflation argument. It is generally agreed that there is a desirable amount of inflation to have. The official target set by governments in most advanced countries is 2%. In the UK the Governor of the BoE, who is charged with keeping inflation at that government-set level, has traditionally been required to write a letter of explanation to the Chancellor of The Exchequer for any up or down divergence from that level. But for quite a while now inflation has been below 2%.  Indeed, ‘core inflation’ (that is, excluding more volatile goods like oil and food, normally included in the official inflation measure) is currently only 1%, while the main official inflation figure (CPI) is about 0%. There is, therefore, some significant risk of deflation, not of inflation.

As far as the wriggle-room argument is concerned – that is all very well, but if you fear the economy may to go back into recession, the last thing you want to do is raise interest rates, thus possibly precipitating what you fear.

One further argument sometimes used for increasing rates now is that the official inflation figure (CPI) is misleading as it takes no account of the cost of housing. For the UK, while CPI is currently near 0%, an unofficial measure (proposed) which does take housing into account is CPIH, which gives a current annual figure for inflation of 0.3% (ONS to March 2015). So this argument is poor because even if we do try to take housing costs into account (in terms of average weighted ‘rental’ costs – which includes estimates based on cost of housing as well as actual rents) we still have very, very low inflation. A home is an asset which most people purchase relatively rarely, and some not at all – so raw house-price inflation cannot be included in the inflation figures.

It is a wide-spread assumption that ‘printing-money-causes-inflation’. It is clear that it can do so (Weimar, Zimbabwe) if an economy is already working to capacity and the money just goes to increase wages instead of producing more investment and goods. But it can be seen that over the last 6 years or so there has been very little inflation and the bigger risk now is that of deflation. The risk is worse because once deflation takes hold things can get very fraught. Deflation leads to a downward spiral of lower and lower spending by ordinary people and lower investment by companies: why buy now when the prices will be lower next month/year? Hence demand slackens and this feeds back again into lower spending and lower investment. This can even lead to complete economic collapse (as in Bruning’s Germany, after Weimar, which brought Hitler to power).

It is now well-understood by most advanced economy governments how to control inflation: usually just take the heat out of the economy by central banks increasing interest rates, which may go very high indeed if the inflationary problem looks like getting serious. But it is not at all well understood how to control deflation. As the Japanese may currently testify. And most especially if increased government spending is ruled out. Traditionally this problem is finally solved by governmental fiscal policy of investing and stimulating production via A-Good-War. Not so Good. Russia is probably spending a fortune on armaments. China?

So, given the small upside risk of keeping interest rates very low (excessive inflation which can be controlled by a reversal of policy) but the dire downside risk of raising interest rates prematurely: crashing the economy and increasing the deflationary spiral (need for a Good War), why are some people – meaning the press, bankers, retired people and allied pressure groups – demanding that the BoE must increase interest rates now?

The answer is easy to see as far as the banks are concerned. They make their money largely by the spread between what they have to pay for it and what they can get by lending it out. And this spread is very squeezed when official interest rates are near zero. So banks (read bank executives) are definitely losing out.  And woe betide a bank economist who breaks ranks. Obviously people who depend on the interest on their savings to live are also losing out, most especially the very wealthy who perceive themselves to be losing big as they just don’t know where to put their money to get a good return. As well, unfortunately, as pensioners. Property may seem like a good bet. But as its price goes up it gets more and more difficult to rent it out at a level which gives a ‘decent’ return. So the buy-to-let bubble, at least, may certainly burst.

You do not have to be much of a conspiracy theorist to believe that the press and many politicians are on the side of wealthy bankers, property investors and (good-heartedly… why not, if it suits?) pensioners.

You also do not have to be much of a conspiracy theorist to work out that a less than well-hidden motive for deficit reduction at-all-costs and as-quickly-as-possible is less a matter of economics than an ideological desire to ‘shrink the state’. Ultimately to the short-to-medium term benefit of the most wealthy via concomitantly reduced taxation. Unfortunately this has, indeed become what has been termed ‘deficit fetishism’. Deficit-Reduction and The-Debt-Must-Be-Reduced now-now-now have become memes with a life of their own.

Hence the pressure on the BoE to increase interest rates as soon as possible despite the fact that the official government-set remit of central banks is to maintain inflation at the level of 2%, which it is nowhere near, by any measure, while, anyway, inflation is quite easy to control by increasing interest rates if and when it occurs. And despite the fact that to increase the bank rate prematurely does risk tanking a still fragile recovery and bringing on full-bloodied deflation.

As it happens many economists have argued that 2% is too low an inflation level to set because, as has recently been well-demonstrated, it leaves little room to bring rates down before hitting the ZLB. The consensus among these economists is that 4% might be a more sensible target.


In its latest Global Financial Stability Report the IMF has warned that a global rise in central bank interest rates now would risk a series of defaults and a financial crisis in emerging markets as debts of non-financial firms in emerging market economies quadrupled, from $4tn (£2.6tn) in 2004 to well over $18tn in 2014. Thus liquidity in financial markets could dry up again, as Andy Haldane – Chief Economist at the BoE – has also warned.

Thus, we are again entitled to ask, as with the severe austerity policies of heterodox macroeconomics (but the so-called ‘conventional’ and ‘commonsense’ economics of the ‘right thinking’ mainstream political and business class) – Cui bono? – to whose benefit?

And now (mid Jan 2016) does not look good for the US Federal Reserve after it very recently raised its rate against much of academic macroeconomist advice. Ho Hum

And here we go again.

But at lease the cry for the BoE to increase interest rates seems to have quietened somewhat of late…

Not at all surprising, really when we view the situation the US Fed now finds itself in, as viewed by  Ryan Avent of The Economist


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