Mark Carney, “an unreliable boyfriend”? I blame his Dad, George

A James Alexander post

(On the title see here)

Mark Carney is supposedly handsome, but I don’t really feel qualified to comment. One observation I would make is that handsome friends seem to be prone to unreliability. A bit like Hugh Grant, allegedly.

Carney’s lack of commitment was made clear from the day his appointment was announced when it was revealed that the new standard eight-year term for Governors of the Bank of England would, in fact only be five years for him, a special concession he negotiated. Mmm.

At Christmas a puff piece on Carney in the FT was followed two days later by a (related) story indicating he was now willing to make himself available for the full eight years . Mmm. Rather like a Premier League footballer he remains  open to offers. Mmm.

The list goes on

Carney floated the idea of NGDP Targeting back in December 2012 only to never mention it again. Mmm. He has also talked of fairly concrete “thresholds” for monetary tightening over the years, only to ignore them when they are passed through. Mmm. He has talked of “forward guidance” only to see that guidance ripped up as the “forward” time has arrived.

He was reportedly very tetchy at the press conference presenting the February 2016 quarterly inflation report. One tweet from the meeting suggested that he had said all members of the MPC agreed that the next move in rates would be up. I searched for confirmation in the official minutes but could find none. Mmm.

He has now rowed back again, apparently. In regular testimony to the House of Commons Treasury Select Committee he now says that the next rate move could be up or down, that the period to reach the 2% goal could be extended. He has even flirted with negative interest rates, the last refuge of a failed inflation-targeting regime the world over.

Extending the period to reach 2% is not a good idea if the goal is still the Bank of England’s own expectation of 2% inflation two years’ out. The constant threat of tightening every time their medium term range of expectations biases above 2% effectively tightens monetary policy, killing any hope of achieving the objective – thus depressing nominal growth lower and lower.

He is not really fit to be Governor, except that another candidate might be less reactive and more hawkish, like a new Mervyn King, and equally disastrous. An unreliable boyfriend is better than a violent one.

Personally, I blame Carney’s “dad” for this behaviour, Chancellor George Osborne. He needs to set firmer rules of behaviour. Broadening the inflation target regime to one of NGDP growth expectations targeting. A stable path of expected nominal spending, income or output – depending on your school of macro-economics – is all that is required. This stop-start monetary policy of targeting the Bank of England’s own inflation expectations two years out is just self-defeating and ultimately damaging nonsense.

“Join the dots”

A James Alexander post

Call me a conspiracy theorist but when three unrelated beasts of the global financial establishment all start talking about the same, previously unfashionable, thing it’s a bit of a coincidence. Maybe Larry’s put it in the agenda of next week’s G20? If it’s not, it should be.

George Osborne:

The MPC have revised down their forecast for real GDP growth and CPI inflation in the short term, implying weaker nominal growth. This, combined with threats from the international environment, mean we face the risk of a weaker outlook for nominal GDP. If realised this could present challenges for tax receipts in the future, and reinforces the importance of delivering our plan to achieve a surplus on the public finances by the end of the Parliament.

Bank of America Merrill Lynch:

3. Cut rates back to near-zero and strong guidanceif the equity market drops into a full bear market (or there is some other equivalent financial tightening) or if growth seems to be slowing to a sustained 1%, the Fed would likely cut and remain on hold until the financial/economic weakness reverses. They could introduce a nominal income growth target or price level target to signal an accommodative path for rates well into the future.

Larry Summers:

But monetary-policy makers need to acknowledge much more explicitly that neutral real rates have fallen substantially and that the task now is to adjust policy accordingly. This could include setting targets for nominal GDP growth rather than inflation, investing in a wider range of risk assets, making plans to allow base rates to turn negative, and underscoring the importance of avoiding a new recession.

Come on George, stand up for NGDP Targeting

A James Alexander post

It has been noted already by Market Monetarists and others that George Osborne and his UK Treasury team are concerned about the low level of expected Nominal GDP growth in the UK. The latest January 2016 CPI figures showing just 0.3% YoY growth will only worry them more. The correct inflation number for policy should be the GDP Deflator, not CPI, but it is also pitifully low and dragging down both RGDP and NGDP.


But whose responsibility is NGDP growth? It is no good Osborne worrying about it and then doing nothing. The Treasury sets the targets for Bank of England monetary policy.

Monetary Policy Framework: The Bank’s monetary policy objective is to deliver price stability – low inflation – and, subject to that, to support the Government’s economic objectives including those for growth and employment. Price stability is defined by the Government’s inflation target of 2%. The remit recognises the role of price stability in achieving economic stability more generally, and in providing the right conditions for sustainable growth in output and employment. The Government’s inflation target is announced each year by the Chancellor of the Exchequer in the annual Budget statement.

Is Mark Carney concerned by low NGDP growth? Not at all by the sound of it. He is still obsessed by managing to the Bank’s own forecast for CPI two years out, and keeping that forecast below 2%. He has UK the monetary policy set firmly for tightening. The evidence was crystal clear in this exchange  at the February press conference:

 Sam Nussey, Nikkei: Governor, with the BOJ having joined the ECB Switzerland, Sweden, Denmark, and having used negative rates, do you see negative rates as part of the BOE’s arsenal and could you envisage a situation in which they would be used?

 Mark Carney: Well let me start that discussion we had at the MPC was whether now was the right time to raise interest rates. And the judgement, as you’ve seen nine to nil, was that now was not the right time to raise interest rates, but we had a forecast – we have a forecast – which requires some increases in interest rates in order to sustainably achieve the inflation target.

And the markets understand this tightening bias, just look at UK stock markets and UK government bond yields. Sterling has been relatively weak vs the even tighter USD, and on rising trend vs the EUR although weak just recently.

The result is both lower and lower NGDP growth and lower and lower NGDP growth expectations.

Something has to change and it has to be led by Osborne and the Treasury. Central bankers change little once in office.

Osborne wants to follow his instinct and balance the budget by 2018 despite the most vocal mainstream macro-economists urging him not to. It’s sad that most are crypto-Corbynites, but that is social science academia for you, there are no jobs for free-marketers. It’s an increasingly closed shop for anyone not a socialist. Fortunately, students, and more importantly voters, aren’t so dogmatic. Our university social science departments will become like old theology colleges, with the professors just chatting amongst themselves.

Yet when Osborne ordered an inquiry into possible changes to the inflation target mandate he meekly accepted the macroeconomic consensus that there was no need to change, in fact it would be a bad thing. To his credit the crypto-Corbynites are amongst the most sympathetic to NGDP Targeting, but he shouldn’t let that worry him – they much still prefer big deficits over monetary policy.

Osborne needs to show some leadership about NGDP Targeting and not just the deficit. He should keep the CPI target if he has to, but combine the price stability and growth and employment targets into one NGDP Target. It really isn’t that difficult to understand.  He and his advisers can read some of the answers to the very weak mainstream macro criticisms here and here .

The ONS might need to raise its game a bit, but calculating NGDP really should be easier, faster and more reliable than RGDP. They should relegate the very tricky Output method of calculating GDP to the third choice (like in the US) and promote either the easier Expenditure method to first place (like in the US) or Income. The Output method was preferred once upon a time when advanced economies grew, dug or made stuff (i.e. agriculture, mining, manufacturing). The output of the dominant services sector cannot be so easily measured.

George Osborne: I’m proud of you today!

A James Alexander post

In a “currency war” it pays to be the loser. If you need an expansionary monetary policy, like most currency blocs today, don’t let anyone undercut with dirty devaluations. So, when a big baby like China decides to lower the value of its currency versus the biggest baby of all, the USD, make sure you are not caught in the cross fire.

George Osborne’s “dangerous cocktail” warning about foreign threats to UK economic growth was very well timed. And had the desired effect of weakening Sterling against both the USD and the EUR, and even against the weakening CNY. Good one George!

Of course, he has to do the heavy lifting on monetary policy thanks to his AWOL Governor of the Bank of England, Mark Carney. He seems to prefer commenting on Brexit, Climate Change, inequality and phantom inflation threats. On the one he can influence, he’s wrong. Deflation is the more dangerous threat and it would be great to see him showing some interest.