UK NGDP growth not playing to Osborne/Carney tune

A James Alexander post

UK NGDP growth was released today together with the second estimate of RGDP figures. NGDP picked up slightly to 2.5% YoY. We had earlier shown a similar trend using Nominal GVA data. The very messy and subsequently revised figures from 3Q and 4Q last year now show two quarters of a very low 2.2% YoY growth.

NGDP growth was very poor before Brexit concerns and has, if anything, now picked up slightly as those concerns have increased. Rather ironic given all the scaremongering – perhaps the GBP weakness helped ease the concerns.

Carney solemnly swore that there had been no government interference forcing the Bank of England to take its strong anti-Brexit stance. We believe him. All the ruling elites of both the UK and the Rest of the World are taking the same view. They are not at the sharp end of the woeful nominal growth that constantly drags down real growth. Above everything they prefer governments to be remote from the public and in the hands of self-selected technocrats who should be trusted to do the right thing.

The evidence from the UK is that Carney is failing badly. “Remain” economists remain surprised by the strength of the Brexit support despite all their best efforts. Well, they should look at nominal growth and not be so surprised. Mainstream macro-economists fail in so many ways, but none more so in their relaxed attitude to low Aggregate Demand (aka NGDP) growth. The Brexit debate is a sideshow compared to this abdication of responsibility.

Carney and his political master George Osborne should have been alarmed at the trend of nominal growth in the UK. Even if Brexit concerns are not preventing a small rise in nominal growth the rate is still far too low.


Carney still believes that the next move is up in interest rates, so cementing a policy of passive monetary tightening. When he strongly repeated his view this week, Sterling rose strongly. Just great. It’s not clear if all his Monetary Policy Committee agree with him but they don’t seem brave enough to speak out much.

In recent exchanges over Brexit Carney looks like a very hard man to cross. His responses to Jacob Rees Mogg in Parliamentary questions over the BoE’s anti-Brexit stance were a cross between Tony Blair and Bill Clinton. About right as he has passed from wannabe Canadian politician to global stage-trotter. He has become the model of a very modern hawkish central banker more concerned about fighting non-existent inflation threats than doing his upmost to help create prosperity. This is a shame.

We had high hopes back in the day he openly talked about NGDP Targeting. If he had to face an electorate worried about prosperity perhaps he would change his tune. It probably wouldn’t have much effect given the little impact it seems to have on his boss, Osborne.

Where do “beliefs” come from?

Blanchard & Posen are “believers:

“I have a sense that the recovery is slow but it is not in great danger, at least no more than usual,” Mr Blanchard says. “We can talk about risks, they are always there. But the notion that around the corner there is a catastrophe waiting — that really strikes me as totally off.

“For the last seven years we have been thinking about the legacies of the crisis and all the things that have pulled the economy back. I think they are becoming less important,” Mr Blanchard argues, adding: “And so the question is why is it, that with no fiscal consolidation and banks in decent shape, at least in terms of lending, and zero interest rates, we don’t have an enormous demand boom? That is now the puzzle.”

The answer, he suspects, lies in a concern about the future that has led consumers to curb their spending and companies to decrease investment. “I think it is now much more weakness due to the expected future rather than the past,” he says.

That, says Mr Posen, ought to be depressing. But the reality is that the world has also for the first time in a long while found “a sustainable rate of growth”.

Mr Blanchard thinks the biggest risk for the US economy may be that markets are misreading the data and being too gloomy instead of recognising that the recovery is “one of the most balanced … we have had in a long time”.

And to top it off:

Yet in the end, he argues: “You could avoid some of this mess … by just switching to expansionary fiscal policy.”

They should have a better reading of history.

The world even managed to recover from the Great Depression (for the US it happened before it got into WWII). Why not from a much “milder” one?


And calling this “recovery” as “one of the most balanced” borders on criminal!

“If it´s summer, this must be Greece”

And we´re on to the seventh chapter of the IMF-Greece-Germany Slapstick:

A truce between Greece’s creditors averts an immediate panic over Greek bankruptcy this summer, yet as officials and onlookers digested the deal, it became apparent that less was agreed than meets the eye.


The deal, struck in the small hours of Wednesday morning at the Eurogroup meeting of eurozone finance ministers in Brussels, broke an impasse between Germany and the International Monetary Fund that was holding up Greece’s bailout funding for this summer.

The main breakthrough, heralded by German Finance Minister Wolfgang Schäuble, is that the IMF agreed in principle to rejoin the Greek bailout effort this year with new loans. In return, Germany and other eurozone countries pledged to restructure Greece’s rescue loans in 2018 “if…needed.” That promise fell short of the IMF’s demand that Europe should decide now how it would relieve Greece’s debt in coming years.

But the IMF’s main negotiator at the talks, European department head Poul Thomsen, stressed at a news conference early Wednesday that the fund isn’t on board just yet. The eurozone still needs to tell the IMF what it is prepared to do in 2018, consenting to a menu of debt-relief measures for later use, he suggested. “We will need to assess the adequacy of the measures, and we will only go ahead if there is an assessment that they are adequate.”

Mr. Schäuble on Wednesday dismissed Mr. Thomsen’s caveats, insisting that new IMF loans were now assured. “He probably was tired then,” Mr. Schäuble told reporters.


Mr. Thomsen on Wednesday hailed the IMF’s main gain: a promise by German-led eurozone creditors to undertake a far-reaching restructuring of Greek debt in 2018. “We welcome that it is now recognized by all stakeholders that Greek debt is unsustainable, and…that Greece will need debt relief to make that debt sustainable,” he said.

However, Germany previously promised the IMF and Greece in 2012 that it would offer debt relief later if needed—only to reject such a move afterward, citing Greece’s failure to implement all of its promised economic overhauls.

The latest debt promise hinges once again on Greece’s ability to complete its side of a tough bailout plan that has proved beyond the political stamina of all Athens governments so far.

Germany´s trick is to make contingent promises, when it knows the conditions will be impossible to meet!

Meanwhile, Greece´s RGDP has acquired a Bell-shaped appearance, capped below at the 1999 level!

Greece_Bell Shaped

These shenanigans remind me of a post from 5 years ago:

The nature of these meetings is that the hallway chatter is always more interesting that the formal program. Part of the reason why is that, particularly when talking to journalists, the businesspeople or politicians tend to regard those conversations as off the record. So I’ll abide by that here. One of the German execs was a consultant, and the other headed what I’ll call a quasi-official German organization.

They were slightly irritated by the pessimism I’d expressed earlier in the day. “Don’t you realize,” one of them said, “that the cost to us (Germany) of bailing out Greece is far less than it cost us to reintegrate East Germany after the wall came down in 1989?”

I almost choked on my croissant. Yes, I replied, I am aware of that. I lived and worked in Berlin as a journalist in the mid 1990s, when that very painful (economically speaking) process was taking place in Germany. But doesn’t that, I said politely, rather beg the question: Germany integrating their brethren, who’d been isolated and impoverished during the cold war, was a dream come true, whatever the cost. Germans, on the other hand paying to bail out Greece is, to average German, rather the opposite of a dream come true, is it not?

He waved me off. No no, he said, it will be taken care of. The Germans, he said, understood how beneficial to them membership in the euro zone has been. Without it, the gentleman said, the value of the Deutschemark would be 50% or 75% higher than it is under the euro. “German industry would be wiped off the map.”
Why Germany needs the euro

Here was my ‘choking on my croissant’ moment number two. Most economists would agree with what my friend at the meeting had said; but he seemed either oblivious (not likely) or simply unconcerned (more likely) with the flip side of what he had just uttered. Italy, to take the third-largest economy in Europe, one with a sizeable and modern industrial base, is stuck with a currency — the euro — which is stronger than the old lira would be under current circumstances. But membership in the euro zone means Italy can’t devalue to bring some relief to its exporters.

I pushed back politely. Look, I said, it’s not Greece I’m worried about. It’s Italy. Third-biggest bond market in the world. Bond spreads this morning again heading over 7%(before the ECB intervened this to push them back down again.) Too big to fail, too big to save. Is the government, even one under a new Prime Minister, going to push through sufficient austerity to avoid a default?

Now the consultant perked up, speaking what he too believes to be the unvarnished truth. They have to, he said, because “to be blunt about it, we have them [both the Greeks and the Italians] by the balls.”

And make no mistake – that, in essence, is where the European crisis stands.

It seems it still does!

Inflation: A Schizophrenic Target!

In the US, many, like Blanchard and Krugman, have for long advocated a higher inflation target as a means of getting the economy ‘moving’.

However, if the Fed, just as the ECB, BoE or BoJ are having a hard time pushing inflation up to the 2% target, why should a higher target “solve” the problem?

Australia, on the other hand seems to be ‘flirting’ with the opposite tack: reduce the inflation target:

The RBA is likely to indicate that it remains wedded to the target, stressing that there is a high degree of flexibility for policy that goes with it.

But the target doubters argue that if low inflation is entrenched, there seems little sense in promoting a target that won’t be achieved without driving interest rates still lower and inviting financial sector stresses in the process. In other words, why risk the fallout from a domestic housing bubble by obsessing over a price target that global forces are keeping out of your reach?

Funny how central banks all over are quick to say they´re “powerless”. That´s just like a “forger” saying that he has no money to buy a new car!

What central banks miss is that inflation is low, not because of “structural” (or entrenched) reasons, but because they are conducting monetary policy to make it so!

Australia provides a good example of good monetary policy that has more recently turned bad.

The chart shows that since the IT regime was adopted, inflation has clocked 2.5% on average, for either the headline or core measures. That´s exactly the center of the 2% to 3% target band.

Australia IT Change_1

Meanwhile, monetary policy was mostly good, keeping NGDP evolving close to a level target path.

Australia IT Change_2

For the past two years, however, the RBA has been “sleeping at the helm”. NGDP has deviated systematically from the “target level”.

Australia IT Change_3

So, it´s not at all surprising that inflation, in either guise, is also trending below the target band!

Australia IT Change_4

The “solution” is not to have a higher or lower inflation target, but to “get a grip” on nominal spending (NGDP). If the RBA says it´s “powerless” to do so, bring in a “master forger” like Gideon Gono, the former head of Zimbabwe´s central bank.

A Grumble About Mainstream Economists, the Minimum Wage and the Fed’s Unemployment Target

A Benjamin Cole post

We all know the minimum wage is bad.

Whenever a national, state or local government raises the minimum wage, there is a justified Niagara of negative commentary from mainstream economists, who correctly (if histrionically) point out that employment must be reduced to accomplish the goal of a higher and artificial minimum wage.

Yet there is also wide and general assent among macroeconomists that the U.S. Federal Reserve Board cannot let the unemployment rate sink too low.  We are informed the current official unemployment rate of 5% is treacherous territory, and dangerously pushing our inflationary luck. The Phillips Curve and all that, leading to Sodom, Gomorrah and Zimbabwe.

So we have this: The Fed as a matter of explicit policy must ensure that at least one in twenty Americans who want to work is instead jobless and job-hunting, and the minimum wage should be scuttled ASAP.

Really, is this supposed to be an appealing pair of policies for anybody who is an employee (the vast majority of Americans, that is)?

As long as the Fed is targeting 5% unemployment, then having no minimum wage laws would result in continuously falling wages. Every time lower wages resulted in something approaching full employment, the Fed would have to step in and undercut the economy back towards 5% reported unemployment. (Is this happening anyway?)

Class Bias

Sad to say, the craft of macroeconomics in academia and punditry remains steeped in class bias, not liberal bias. At any moment, macroeconomists are thundering against the minimum wage, and the Fed is accused of feckless money-printing.

Yet rarely (if ever) do macroeconomists rant against property zoning (including housing and retail stipulations), or the ubiquitous criminalization of push-cart vending.

Deregulating property and push-cart vending would open up millions of low-barrier-to-entry business opportunities of the type average people could fulfill—ordinary retailing, Push a cart and sell clothes, small electronic goods, food, handicrafts, CDs, and so on. Whatever consumers and the market wants.

Such widespread business opportunities would tighten up labor markets, of course. (Is that a perceived cardinal sin?)

To be sure, unzoning property and decriminalizing street-vending are not everyday topics in the mainstream macroeconomics profession.  In fact, research in these areas is scant at best, and commentary nil.

But bashing the minimum wage is of evergreen, compelling interest. Get out the megaphones.

PS MM´s are right: The Fed should not target unemployment, or inflation.  The Fed should target nominal GDP growth, and a healthy dollop of it every year. Government, in general, should tax and regulate as lightly as possible.

But “lightly as possible” also means the most minimal regulations possible on property use and push-cart vending.

The “Overly Optimistic” Fed

In “Reluctant Parties: The Fed and the global economy”, Gavyn Davies writes:

To judge from last week’s surprisingly hawkish FOMC minutes, which I had not expected, the Fed seems to be reverting to type (see Tim Duy). Many committee members have downplayed foreign risks and have returned to their earlier focus on the strength of the domestic US labour market, which in their view is already at full employment.

In his column today for Bloomberg View, Kocherlakota writes:

This kind of uncertainty — about which goals will define the Fed’s policies — is not healthy. Consumers and businesses can’t make good decisions if they don’t have a strong enough sense of how the central bank will act in any situation. Fed officials must have — or be given — a much clearer set of shared objectives for managing the economy.

To wrap up, commenter Bill sent me “Why the Unskilled Are Unaware: Further Explorations of (Absent) Self-Insight Among the Incompetent”:

People are typically overly optimistic when evaluating the quality of their performance on social and intellectual tasks. In particular, poor performers grossly overestimate their performances because their incompetence deprives them of the skills needed to recognize their deficits. Five studies demonstrated that poor performers lack insight into their shortcomings even in real world settings and when given incentives to be accurate. An additional meta-analysis showed that it was lack of insight into their own errors (and not mistaken assessments of their peers) that led to overly optimistic estimates among poor performers. Along the way, these studies ruled out recent alternative accounts that have been proposed to explain why poor performers hold such positive impressions of their performance.

I just became more pessimistic!

“Heredity” at the Fed?

In Kansas City serial dissenter Hoenig was followed by frequent dissenter (mind you, all in the upward direction) George.

At the Philly Fed it seems that “ultra” hawk Plosser is well represented by would be “clone” Harker:

Although I cannot give you a definitive path for how policy will evolve, I can easily see the possibility of two or three rate hikes over the remainder of the year. That said, all forecasts are subject to fairly wide confidence bands, and mine is no exception.

So, even though I am aware that many of you are growing tired of the phrase “data dependent,” that is exactly what I will be. In the end, it is the tried-and-true way for conducting monetary policy.

If only they were able to interpret data properly! His “mentor”, Plosser, did a great job of interpreting data back in July 2008 (right at the cusp of the “Great Recession”!!!):

In sum, this year and next will be quite challenging. The economy will grow this year but at a slow pace, and the unemployment rate is likely to get worse before it gets better. At the same time, inflation will be uncomfortably high for a while.

I am more optimistic about the outlook for 2009 and I expect we will see economic growth return to near its longer-term trend. But to prevent recent inflation from continuing to plague the economy and to avoid a rise in inflation expectations, I believe the current very accommodative stance of monetary policy will need to be reversed, and depending on how economic conditions evolve, I anticipate that this reversal will likely need to begin sooner rather than later.

As policymakers, we must remember that the path of inflation over some intermediate term is not independent of our policy decisions. While monetary policy cannot control relative price movements, sustained inflation is not something that is imposed on us. As policymakers we have a choice. If we remain overly accommodative in the face of these large relative price shocks to energy and other commodities, we will ensure that they will translate into more broad-based inflation that — once ingrained in expectations — will be very difficult to undo. I believe we must and will take the appropriate steps to ensure that does not happen.

“Crying Wolf”…Frequently

Cry Wolf_0

The Federal Reserve wants you to believe that the June policy meeting could result in the bank raising interest rates. Really. It could happen. They want to do it. No kidding.

There’s been a virtual Greek chorus outside the Eccles Building proclaiming this the past week or so. John Williams, from the San Francisco Fed, was at it again this morning, insisting that nothing will keep the Fed from raising rates (except the data, of course) if it deems doing so appropriate.

The market is listening, but not exactly buying it.

In fact, the Fed seems to be “looping”!

Cry Wolf_1



“Undercover Investigation”

This was funny:

Earlier this year, Sydney-based asset manager John Hempton teamed up with Jonathan Tepper, who runs U.S.-based hedge-fund consultancy firm Variant Perception, for an undercover investigation of Australia’s property market. Posing as a gay couple, they drove around Sydney, from glitzy beachside suburbs to the shabby city fringes, to probe potentially risky lending practices. What they found was considerably worse than what they had expected.

Maybe gays pay a premium!

The charts show a handful of property markets. In some the “bubble” “burst”, in others the “bubble” didn´t “burst” and in others, the “bubble” is still “ongoing”!

Gay Bubble_1

Gay Bubble_2