I hope my chauffeur ignores my instructions and finds me the best dance club in London
Here’s Vince Cable, my favorite member of the Cameron government:
LONDON (Reuters) – British business minister Vince Cable said Britain could fall back into recession for a third time since the 2008 financial crisis but expected the economy to stagger on with minimal growth.
In an interview published on Sunday, Cable, one of the most senior ministers in the coalition’s junior Liberal Democrats, said Britain could also face a Japanese-style stagnant “lost decade”.
“There is a real worry about (that), a real risk of that,” he said. Asked if the economy was heading for a ‘triple-dip recession’, after falling twice into negative growth since the financial crisis, he said: “There is certainly a risk.”
. . .
Conservative finance Minister George Osborne announced new official forecasts on Wednesday that slashed expected growth to 1.2 percent in 2013 and 2 percent in 2014, with the economy seen shrinking this year by 0.1 percent.
Cable, a former economist who is responsible for Britain’s industrial policy, has long said Britain’s economy is starved of demand, but supports the coalition’s austerity program aimed at slashing its budget deficit.
The government hopes that loose monetary policy and record low interest rates will nurture a private sector recovery, but Cable said he hoped the Bank of England’s new governor Mark Carney would come up with fresh ways to assist the economy when he takes up the post next summer.
“We have got to have a very expansionary monetary policy, which we have had until quite recently, but I sense the Bank of England is running out of steam, or perhaps motivation. A lot depends on this new governor,” he said.
What’s really going on here? It would be easy to make fun of Mr. Cable, as he is basically hoping that Mark Carney will ignore the instructions from the Cameron government to hit a 2% inflation target, and go for faster nominal growth. How do I know this? Because previously he’s called for the BOE to switch to NGDP targeting.
Now read it again. Don’t you sense a depressed individual who has lost the argument within the administration (to the VSPs) and is afraid the growth may not materialize?
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10. December 2012 at 08:02
Yes, definitely. The original interview is here:
http://www.guardian.co.uk/politics/2012/dec/09/vince-cable-osborne-wrong-to-demonise-jobless
and nice post title!
10. December 2012 at 08:43
The problem is in the politics as usual rather than the economics. It is clear that the BoE needs to take action but I think we are some way off them adopting a NGDP target. There is no discussion about that over here yet and senior economists are not aware of MM ideas.
I live in the UK, work in a (very good) university and that’s the impression I’ve got. If people think I’m wrong please correct me.
I was pleasantly surprised by the choice of BoE governor and if I remember correctly he was endorsed by Scott Sumner a couple of weeks ago. Before he was announced by the Chancellor. Why is that Scott? Did the bank of Canada adopt MM ideas, what should we expect from Mark Caney?
10. December 2012 at 08:45
Hard to know what is in the head of a parasite like that. He probably congratulates himself on being a very “practical” person.
10. December 2012 at 08:51
Cable is basically adopting a market monetarist line, and has done for some time (he has good advice, as you know).
What’s weird is that even David Cameron used to say something not dissimilar: http://www.forexlive.com/blog/2010/10/11/uk-cameron-backs-monetary-activism-fiscal-conservatism/
At some point, a decision must have been taken to limit the scope of monetary policy. If I had to guess, I’d say that this decision was taken by Mervyn King, but that’s pure guesswork – I have literally no inside information whatsoever. To be fair, the BoE did drive inflation above the target for a while, under the guise of “flexible inflation targeting”, but they were never willing to tolerate a rise in medium-term inflation expectations. I’m a bit puzzled by the current situation, but I have to assume that Cameron/Osborne are unwilling to sanction or insist on further monetary action out of some genuine belief that to do so would be harmful – they’re willing to miss their own much-heralded deficit targets and risk a politically ruinous “triple-dip” recession, so one can hardly accuse them of political expediency. Perhaps they simply don’t believe it’s possible, or that it would work?
Do you visit the UK often at all Scott? Given the current level of exasperation at our perpetual economic troubles, I imagine that if you were to give a speech or two over here, you’d pick up quite some coverage (by the standards of visiting econ professors, at least).
10. December 2012 at 09:30
But don’t you agree that the BoE should be able to offset any ongoing austerity within its mandate?
10. December 2012 at 09:41
Vince would like to see the Bank brought to heel, like other “quangos”, as he calls them. As the British prepare to endure yet another year of near-stagnation, the idea that it should have a formal mandate to boost growth is gathering increasing support among economic commentators.
To judge by his record in Canada, Mr Carney will be ready to experiment. British economists have noted that in 2009 Mr Carney pioneered the approach to monetary policy later adopted by the US Federal Reserve. My own guess is that if inflation and inflationary expectations remain subdued when he takes office, Mr Carney will persuade the Bank’s monetary policy committee to adopt a highly expansionary policy – maybe dressing it up as a NGDP target. He took risks in holding down Canadian interest rates at 1% through the commodity and China booms of 2009-11 – as reflected in what many see as a property price bubble, now about to implode, and a currency bubble. It appears that the jury is still out on this experiment. For further comment, see http://www.themoneytrap.com/2012/11/carneys-likely-priorities.
10. December 2012 at 10:25
To anyone who supports market monetarism and more inflation in the present:
If the central bank does what you want and inflates by very large degrees, in order to combat deflation in the short term, and let’s suppose it succeeds in stabilizing NGDP growth in the short term, then I want to know if any of you will blame yourselves if, at some point in the future, the inflation is unable to be contained by the central bank because its balance sheet is insufficient in removing sufficient liquidity from the economy to stabilize NGDP.
Would you say that this is a failure of the central bank to control NGDP, despite the fact that the inflation was called for by you, which you didn’t expect to be non-containable because you assumed the central bank can remove any quantity of money it wants?
10. December 2012 at 10:38
MF, money is central bank liabilities. It receives assets of equal value in return for issuing them, why wouldn’t it be able to reduce the money supply to zero if it wanted to? Other forms of money cannot function without the base. And these days we can even use IOR, etc. Worst comes to worst we can always run govt budget surpluses and destroy the receipts.
10. December 2012 at 10:40
Anyway to stop inflation you don’t need to remove money, you just need to stop creating it. It’s simply a matter of caring enough about nominal stability, and recognizing that money drives inflation. Inflation never gets out of control under a fiat currency when the currency issuers don’t want it to.
10. December 2012 at 10:46
MF, why do you fear inflation more than deflation?
10. December 2012 at 10:51
Saturos:
MF, money is central bank liabilities. It receives assets of equal value in return for issuing them, why wouldn’t it be able to reduce the money supply to zero if it wanted to?
Because, I am saying that it is possible, and hence the purpose of my question, that the market values of the Fed’s assets are insufficient to soaking up enough liquidity. I am asking what if the Fed can’t stop a long term price inflation tornado that is contained only in the short run because of short run deflation/deleveraging.
(BTW, it’s wrong to say the Fed receives “assets of equal value”, because not only do trades never contain equal value, but different, offsetting values which motivated the trade, but also the value itself is in part determined by the Fed’s inflation in the first place).
Other forms of money cannot function without the base. And these days we can even use IOR, etc. Worst comes to worst we can always run govt budget surpluses and destroy the receipts.
Ah, thank you.
OK, suppose those in government are unwilling to raise taxes to the degree that would prevent inflation? Or, suppose they did increase taxes, but they are not willing to refrain from spending it, as politicians are wont to do?
Would you hold yourself intellectually responsible for calling for inflation NOW?
10. December 2012 at 10:54
Saturos:
Anyway to stop inflation you don’t need to remove money, you just need to stop creating it. It’s simply a matter of caring enough about nominal stability, and recognizing that money drives inflation. Inflation never gets out of control under a fiat currency when the currency issuers don’t want it to.
I am asking you WHAT IF it gets out of control, because all the money the Fed has created in the short term has so far been relatively contained? Would you say “I was wrong”?
MF, why do you fear inflation more than deflation?
I don’t fear inflation more than deflation.
10. December 2012 at 10:56
I should add that I don’t fear deflation more than inflation either.
10. December 2012 at 11:05
MF, sure if MM policies led to catastrophic consequences like hyperinflation, or uncontrollable inflation, I’d freely admit I was wrong. But that isn’t going to happen, as I’ve explained.
10. December 2012 at 11:42
MF, sure if MM policies led to catastrophic consequences like hyperinflation, or uncontrollable inflation, I’d freely admit I was wrong. But that isn’t going to happen, as I’ve explained.
You can’t say it WON’T happen, because it is contingent upon the future choices that individuals make.
10. December 2012 at 11:43
And I am not talking about MM policies per se, I am talking about the additional inflation MMs are calling for.
10. December 2012 at 12:12
I don’t understand why Scott Sumner doesn’t snap and try to strangle everyone who tries to increase fiscal stimulus and decrease monetary stimulus at the same time. “QUICK! FLOOR THE ACCELERATOR AND HIT THE BRAKES!”
10. December 2012 at 12:24
Thanks Britmouse.
Sarkis, Actually I didn’t endorse him. I don’t have strong feelings either way.
Rob, I always enjoy visiting Britain, one of my favorite countries. But then I like most of the European countries.
Saturos, British inflation has averaged 3.3% over the past 5 years, so I see the mandate as a real constraint. Having said that, inflation is currently dropping so perhaps they’ll be able to do a bit more in the future.
Robert, It will be interesting to see if they do better than we did after our housing bubble. My hunch is that they will.
10. December 2012 at 12:28
Eliezer, What’s scary is that they have started calling my discussion of the interaction of monetary and fiscal policy “The Sumner Critique.” I fear for our profession if something so obvious is being named after me.
I’m just trying to make the profession “less wrong,” so that we can “overcome our bias” toward fiscal stimulus.
10. December 2012 at 12:59
Scott, do you agree with yglesias here?
http://www.slate.com/blogs/moneybox/2012/12/10/price_stability_and_wage_declines.html
10. December 2012 at 13:29
ChargerCarl, Yglesias is actually wrong here: we should not expect labor’s share of income to be affected by monetary policy in the long run. Also, it’s quite natural for monetary policy to “lean against” wage changes in either direction (because labor income is a large share of GDI and wages are pro-cyclical); Yglesias is wrong in implying that there’s anything mischievous about that.
10. December 2012 at 18:32
anon, I agree.
10. December 2012 at 19:53
In Canada, it was widely discussed in the early 1990s that efforts at fiscal stimulus (most consciously, by Ontario’s NDP government — provinces have far more fiscal room than American states) were being defeated by the Bank of Canada — then run by extreme deflationist John Crow. The federal government of that era may have wanted to reduce Canada’s deficits, but was unable to — at least in part because of Crow’s approach. Crow’s successors increased the inflation target, and Canada moved towards a political consensus in favour of fiscal restraint. These would have been formative years for Carney.
10. December 2012 at 19:56
“What’s scary is that they have started calling my discussion of the interaction of monetary and fiscal policy ‘The Sumner Critique.’
I fear for our profession if something so obvious is being named after me.”
Hahaha, you should ask Lucas how he feels about the Lucas Critique.
10. December 2012 at 20:25
P.S.
There will never be a “Krugman Critique”. There will be a Krugman Column and a Krugman Nobel Prize, but no Krugman Critique. A “Critique” requires placing intellect above politics and ambition, which isn’t in Krugman’s character.
10. December 2012 at 20:26
Major_Freedom
10. December 2012 at 10:25
“If the central bank does what you want and inflates by very large degrees, in order to combat deflation in the short term, and let’s suppose it succeeds in stabilizing NGDP growth in the short term, then I want to know if any of you will blame yourselves if, at some point in the future, the inflation is unable to be contained by the central bank because its balance sheet is insufficient in removing sufficient liquidity from the economy to stabilize NGDP.”
In the event of a scenario where the assets on the central bank balance sheet were insufficient to absorb surplus liquidity from the banking system. The central bank could issue to banks their own central bank bills to absorb the liquidity. Central bank bills are issued in developing economies where the government security market is undeveloped. There are currently 55 central banks who issue their own bills for draining excess liquidity from the banking system. This IMF paper covers central bank bills.
http://www.imf.org/external/pubs/ft/wp/2012/wp1240.pdf
10. December 2012 at 20:48
Scott, but it’s still dumb to blame spending cuts for Britain’s woes, right? Monetary policy can continue to offset austerity, and within inflation targeting I guess if they really want to get spending back on track there will have to be offsetting pressure on prices via supply-side reforms as well, which Britain needs more anyway.
I see what you did there…
10. December 2012 at 22:19
Religion often calls for sacrifice, for self-flagellation, for self-denial of carnal and material comforts in service of a divine or higher calling.
In secular societies, has monetary asceticism replaced religion, for many?
We have to suffer to preserve the value of paper currency. We must genuflect to the paper currency. The real-world costs of moderate inflation are not measurable, probably insignificant, but that is unimportant. The goal is not economic growth, but a stable value of paper currency.
Here is poor old Britain doing the Japan.
The scary thing is that long-term charts of sovereign yields globally are headed towards zero.
What is it about zero-bound that becomes a quicksand death trap for economies? Once there, it is like fallen-down Grandma to get up off of the ice. Yes, I mixed images.
Man, oh man, the Fed should target huge nominal growth and five percent inflation as a floor immediately.
10. December 2012 at 22:24
Add on:
Given what happens to economies in the zero bound, should the Fed target two percent inflation not as a ceiling but as a floor?
And what if we are at zero bound for many many years? Does QE–and monetization of debt—become not only advisable, but the only choice?
And if we monetize another two trillion in debt, and no inflation results, then what?
I guess the wealthy should be happy if we do. They claim they pay the taxes, and soon there will be no more federal debt to pay down.
10. December 2012 at 23:02
Scott, Eliezer,
Nice to see to rational people I admire make piss poor jokes. :-p
As a EUropean though, the only thing worse than living in a closed economy with the UK is living in Eurozone hell.
I snapped a year ago, now I’m just depressed at the ECB’s staggering incompetence.
11. December 2012 at 03:53
Just found this Arnold Kling gem from April 2008: http://econlog.econlib.org/archives/2008/04/the_muddle_that.html
“now I’m just depressed at the ECB’s staggering incompetence.”
So much so, that you linked to the Yglesias post with your handle!
11. December 2012 at 07:01
@ Cole
“The scary thing is that long-term charts of sovereign yields globally are headed towards zero.
What is it about zero-bound that becomes a quicksand death trap for economies? Once there, it is like fallen-down Grandma to get up off of the ice. Yes, I mixed images.
Man, oh man, the Fed should target huge nominal growth and five percent inflation as a floor immediately.”
In the medium term, real interest rates (aka, the natural rate of interest) is required to match savers and investors, and ultimately, is therefore set by the marginal return on capital invested. Now, you can dress this up in terms of saving preferences vs investing preferences, but saving preferences are obviously dependent on interest rates – People save more when they can get a better return. Similarly, people invest more when they can borrow more cheaply.
Ultimately, we should see declining interest rates as a sign that we are in a great stagnation. Sooner or later will come a new technology shock, that will suddenly create a pool of new technologies that enhance productivity, and interest rates will rise as there is suddenly competition to invest money in these technologies.
Also, when the babyboomers retire, they will dis-save via their pensioners, which will reduce the pool of available savings, and that will also raise interest rates.
In the end, monetary policy only moves (real) interest rates a small amount (and temporarily) away from their natural rates, unless the central bank is willing to tolerate recession or high inflation. A higher NGDP target would not move real interest rates much at all, they would still be constrained by their natural rate.
11. December 2012 at 08:19
Pithlord, Thanks for the info.
Saturos, Yes, it makes no sense to blame fiscal austerity for the low RGDP grwoth rat ein Britiain. It would be equally sensible to say fiscal austerity is responsible for Britain’s 3.3% inflation rate over the last 5 years. But I never hear fiscal proponents making that claim.
11. December 2012 at 08:56
Of course Vince Cable wants easier monetary policy – he is a politician. While I have respect for Vince Cable’s economic understanding, he is the politician who, at the height of the most recent housing boom in Britain’s housing-distorted economy, proposed to abolish the last value-related tax on housing wealth, to be replaced with an additional income tax. You would think that someone in charge of the Department for Business, Innovation and Skils, the self-styled “department for growth”, could think of some growth-promoting policies that he could apply himself.
Saturnos and MF might be interested to read the debate I had with a money creationist type here: http://www.irisheconomy.ie/index.php/2012/12/04/interpreting-target2-balances/
(Saturnos – when you ask “It receives assets of equal value in return for issuing them, why wouldn’t it be able to reduce the money supply to zero if it wanted to?” you are forgetting that the assets that the central bank buys are not guaranteed to hold their purchase value. In fact, quite the opposite if inflation did look like a realistic threat.)
Why should you fear inflation more than deflation? Ask “cui bono”, and then ask how the answer relates to who influences monetary policy. In the US or UK, with voters and their governments in lots of debt and with the country as a whole a net external debtor in its own currency, the answers should be clear.
Benjamin, I recommend that you see a psychiatrist for help with your obsession with self-flagellation, self-denial of carnal comforts, religion, peevishness etc. And then when you are cured, study some game theory and learn the objective, mechanical importance of trust, in this case, of money. We seem to be blithely tossing away the painful lessons about monetary policy that we learned in the 1970s.
11. December 2012 at 13:18
For whatever it’s worth, I was just at a speech by Carney about “Guidance”. He seemed to be moving towards the idea of NGDPLT and stressed its usefulness when monetary policy was operating at the zero-lower-bound.
Link to the full speech:
http://www.bankofcanada.ca/2012/12/speeches/guidance/
What I thought was the relevant portion of the speech:
Further Enhancing Guidance May Require a Change in Framework
From our perspective, thresholds exhaust the guidance options available to a central bank operating under flexible inflation targeting.
If yet further stimulus were required, the policy framework itself would likely have to be changed. For example, adopting a nominal GDP (NGDP)-level target could in many respects be more powerful than employing thresholds under flexible inflation targeting. This is because doing so would add “history dependence” to monetary policy. Under NGDP targeting, bygones are not bygones and the central bank is compelled to make up for past misses on the path of nominal GDP (Chart 4).
Bank of Canada research shows that, under normal circumstances, the gains from better exploiting the expectations channel through a history-dependent framework are likely to be modest, and may be further diluted if key conditions are not met. Most notably, people must generally understand what the central bank is doing – an admittedly high bar.
However, when policy rates are stuck at the zero lower bound, there could be a more favourable case for NGDP targeting. The exceptional nature of the situation, and the magnitude of the gaps involved, could make such a policy more credible and easier to understand.
Of course, the benefits of such a regime change would have to be weighed carefully against the effectiveness of other unconventional monetary policy measures under the proven, flexible inflation-targeting framework.
11. December 2012 at 18:43
Phil–
Maybe so, but I bet if we got inflation up to 5 percent, we would sop up excess savings pretty quickly.
Higher inflation would mean savers would ask for higher interest rates.
This would allow central banks to go back to conventional monetary policy, i.e., raising or lowering interest rates.
Right now, all the Fed can do is QE, and the bigger the better.
I disagree with you that we are impotent, and must wait for a new technology to spur general macroeconomic growth. I think monetary policy is an incredibly effective tool, when used insistently and diligently.
All that said, I still enjoyed your comment, and think new technologies are wonderful!
12. December 2012 at 05:02
Thanks Andrew, I did a post.