Wednesday, 15 April 2015

Money's too tight to mention

The base rate in the UK has been stuck at 0.5% for years; in the US and Japan the equivalents are close to zero; even in abstemious Germany, the central bank is practically giving cash away. The Swiss and German governments are able to charge people to lend them money for up to ten years. UK mortgage rates for the safest borrowers are at all-time lows: both First Direct and Nationwide are offering ten-year fixes at 2.89%.

Easy money, right? Possibly not.

Saint Milton tells us that low nominal interest rates may tell us that monetary policy has been too tight, and high rates do not necessarily mean that money is too tight.  So is money too easy or too tight? Are low interest rates storing up trouble or are we sacrificing growth because our monetary generals are fighting the last war?

Mark Carney and Mario Draghi say that Europe is on an even keel, but UK inflation is at a modern-era low. Carney says that the only way up, baby, for UK rates, but committee colleagues are not so sure. Keynesians are still calling for fiscal stimulus.

So how can we decide what to do?

In 1933 the US government started down the road towards the paper-money era, but it took until 1972 for the post-gold regime to be formalised. For nearly 20 years after that, western nations experimented with various regimes, some more successful than others. In Britain we suffered from micro-managed money-rationing, to wage-price regulation, from hyper-inflation, to economic breakdown; we "shadowed" the Mark, during a period of great divergence between our great nations, and we narrowly avoided joining the Euro. But since 1992 the UK has enjoyed ever more stable inflation and huge long-term reductions in interest rates, thanks to inflation-targetting by the Bank of England.

But with the rise of China and the others, suddenly inflation is not what it used to be. A boom in Britain does not cause a wage spike as it used to, because so much is imported. Even though GDP is rising at a heady clip, average wages are fairly stagnant. So the question remains: how do we know when we are booming or bust? Does inflation targetting do now what its inventors aimed for?

Enter "nominal GDP targetting". Nominal GDP is a measure of the total amount of spending in the economy. Experts seem to think that to avoid hyper-inflation and debt traps it ought to be kept to about 5% a year. In times of proper growth, inflation will fall as productivity soars; in less prosperous times, real growth will falter, and inflation will rise, but never too high to cause difficulties.

Mark Carney is keen on NGDP, and his views seem to be based on the UK's healthy but sustainable NGDP numbers. The US apparently does not enjoy such a healthy situation, and so money is too tight there. The eurozone needs to fire up the printing presses until they run hot.

Don't be surprised if the next UK government moves towards NGDP targetting, whoever wins the election.


Steven_L said...

Well I wouldn't be surprised if the government move to NGDP targeting or some other way of making bad figures look good.

The fact is, for about 15 years now, the UK has borrowed 10% of NGDP to get about 5% of NGDP every year. If the private sector and households aren't borrowing it, the government just steps in and borrows it instead.

And when it goes pear shaped they print money and buy back the debts.

I fully expect more of the same to continue whoever the government is.

The elephant in the room is that the election will be stalemate where neither the tories and lib dems of labour and the SNP really have a majority.

DJK said...

As soon as you start targeting a metric it becomes distorted and useless. Many years ago the monthly trade figures were widely reported in the news and governments could rise or fall on the balance of payments figures. Indeed, Harold Wilson lost an election because that months trade figures were in the red by £30M (yes, million) or some such small amount. Now we have an annual trade defecit of £35 billion and nobody bats an eyelid.

Long story short, NGDP targeting is just this years fad amongst very important people and will be replaced by something else entirely after it proves not to be that magic secret of controlling an economy.

MyCrusadingName said...

I have deep, deep scepticism about anything to do with Economics at all.
I think, at best, its a politicised pseudo-science. Look at Feynmans critique if you want a sharper mind than mine....
Every week we have a new set of figures that contradicts the previous set... and thats before the previous set have been revised upward or downward! Whats really depressing is the gullibility of the electorate towards these bullshit promises from all sides. A pension/housing/non-Dom promise from either of the parties that have been in government almost continuously for 100 years isnt worth shit.

And yet people continue to be swayed by it... or do they?

Could this election finally waken the English from their stupor?

One can only hope.

Sebastian Weetabix said...

Inflation is only "low" if you exclude housing. Add it back in and it looks to me like the value of paper money is dcreasing every year... Like it always has.

Demetrius said...

The trouble is that all these experts seem to think that it is possible to attain some kind of equilibrium. But given the way the world works and necessary change of various kinds it is impossible to have one. NDGP is just another botch job that seems to work short term but in fact doesn't simply stoking up the bad stuff for the next time around. The bad news is that all the prospective next times are going to be bad ones.

Nick Drew said...

I agree, err, with, err ...

Praise the Lord I never did PPE

One thing I am forming an opinion on is Mr Carney. When it gets to be fully-formed it may be quite ugly.

Suffragent said...

Never a truer word spoken. Keep on crusading matey. True Capitalism works on a basis of sound figures, to enable someone to make, a pragmatic decision on future developments. Economics is to empirical mathematics what ______’s top model is to attractive women(or intelligent life for that matter).
It’s worse than a pseudo-science. Psychology, sociology, David Beckham studies graduates mean that you might end up with a dullard at your dinner party (only once mind) but economics are the foundations of the Bollards, the politicians spout, to strip us of our assets. “It’s not for you, it’s very complikatud”

Seb- Housing and anything else that goes up in price or down in size or *quality. Anybody wandering around their local supermarket will tell you what rate inflation is running at. (*anybody heard anything about the dawn raids on those involved in the horse meat scandal? Or is that just reserved for enemies of the state)

Demetrius- Precisely! Nature, like the free market, finds a way.

ND- and I guess that formulation didn’t start in a good place and your right it is ugly. While these masters of the universe think the pointy finger look (in any photo op) gives them the “grasp on the situation impression”, the real impression is Nosferatu. Top Tip- If you want to look like the person who knows what’s going down, buy a pipe (ask Gandalf). Nope just remembered Harald Wilson, buy a staff. Nobody questions a man with a glowing staff.

Anonymous said...

Its this election or never. from the gurnard
Mr Mehmet highlighted earlier ONS data which showed babies born to foreign born mothers "now account for over a quarter of the total while births to UK born mothers are remaining static".

Benjamin Cole said...

Excellent blogging. You nailed it.

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