Osborne needs to learn some Market Monetarism

A James Alexander post

Keynesians, especially left-wing ones, are hyper-quick to attack George Osborne, the U.K. Chancellor of the Exchequer (aka the Finance Minister or Treasury Secretary) for the smallest attempts at controlling the budget deficit and howl him down whenever he is so economically illiterate to think there is the smallest problem with Britain’s 80% debt to GDP ratio.

Perhaps on the day when Osborne’s deficit reduction plans went a bit astray they were all too busy cracking open the prosecco that they failed to spot significantly worrying remarks about monetary policy.

The Times reported thus , while Osborne was tripping through ChIna:

Mr Osborne hinted earlier yesterday that interest rates were going to rise, clearly siding with Mark Carney, the Bank of England governor, against Andy Haldane, its chief economist, who recently suggested that rates might have to stay low for longer because of problems in the Chinese economy, or may even need to fall.

Mr Osborne appeared to play down last week’s decision by the US Federal Reserve to hold rates rather than put them up, saying it had been dictated by the circumstances at the time.

Then he added, in what was close to a departure from the traditional reluctance of chancellors to interfere with the independence of the Bank, that the signals of rate rises in recent weeks reflected the growth in the American and British economies and that the “general signal coming from the Bank and the Federal Reserve is that the exit from very loose monetary policy is going to come”.

For starters, I thought this might trigger a debate about Central Bank Independence. (CBI) which has been filling then UK macro blogs like here and here since the Corbynomics debate exploded. Personally, I am CBA about CBI, the policy is the key, and often central bankers can’t be trusted to make good policy, but governments can, eg Japan. Of course, we see things often the other way around, too, but it is a sterile debate about means rather than ends.

The bigger issue is why Osborne thinks monetary policy is very loose. To be fair mainstream macro and “mediamacro” (HT Simon Wren-Lewis for the term) make the common mistake all the time of confusing interest rate levels and the amount of QE with the stance of monetary policy. The stance of monetary policy can only be measured by looking at whether demand for money is outstripping supply of money, and that can only be seen by looking at where nominal growth (aka Aggregate Demand) is headed. If on a downward trend money is tight, if on an upward trend money is loose. If in trend monetary policy is just right.

The recent historical economic evidence is that UK NGDP is slowing down, 2Q15 was quite poor. The relevant inflation rate for macro policy, the GDP Deflator was worse than poor. Tax revenue growth on incomes is still not great, just like the more difficult to measure wage growth itself. Looking forward, implied UK NGDP growth forecasts are weakening too, judging by market indicators like Sterling strength, long term bond yields, commodity prices and the stock market.

Despite some interestingly radical thoughts from the BoE Chief Economist Andy Haldane, Governor Carney seems squarely in the Janet Yellen/Philips Curve camp of warning rates must rise soon.

Hopefully, Osborne’s Treasury advisers will get him to see sense, if not things won’t turn out well. They won’t turn out disastrously as markets will force more delays in further monetary tightening. But the guidance on policy from Carney and his boss Osborne (and Yellen) will remain a mess. And the mess will, of itself, crimp NGDP growth.

One thought on “Osborne needs to learn some Market Monetarism

  1. “mediamacro”, brilliant! I’d been calling it “the Financial Times school”, for when people tried to piece together a framework from bits they picked up in the FT. Mediamacro gets right at the idea though.

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