Steen Jakobsen of Saxo Bank writes
My view has long been that monetary policy is misguided and unproductive, but the difference now is that we are reaching the most major inflection point since the global financial crisis as central bank policy medicine rapidly loses what little potency it had. In the meantime, the harm to the patient has only been adding up: the economic system is suffering fatigue from QE-driven inequality, malinvestment, a lack of productivity, never-ending cheap money and a total lack of accountability.
The next policy steps will see central banks operating as mere auxiliaries to governments’ fiscal impulse. The policy framework is dressed up as “Modern Monetary Theory”, and it will be arriving soon and in force, perhaps after a summer of non-improvement or worse to the current economic landscape. What would this mean? No real improvement in data, a credit impulse too weak and small to do anything but to stabilise said data and a geopolitical agenda that continues to move away from a multilateral framework and devolves into a range of haphazard nationalistic agendas.
For the record, MMT is neither modern, monetary nor a theory. It is a the political narrative for use by central bankers and politicians alike. The orthodox version of MMT aims to maintain full employment as its prime policy objective, with tax rates modulated to cool off any inflation threat that comes from spending beyond revenue constraints (in MMT, a government doesn’t have to worry about balanced budgets, as the central bank is merely there to maintain targeted interest rates all along the curve if necessary).
Most importantly, however, MMT is the natural policy response to the imbalances of QE and to the cries of populists. Given the rise of Trumpism and democratic socialism in the US and populist revolts of all stripes across Europe, we know that when budget talks start in May (in Europe, after the Parliamentary elections) and October (in the US), governments around the world will be talking up the MMT agenda: infrastructure investment, reducing inequality, and reforming the tax code to favour more employment at the low end.
We also know that the labour market is very tight as it is and if there is another push on fiscal spending, the supply of labour and resources will come up short. Tor Svelland of Svelland Capital, who joins Charles and I at the Gateway to China event, has made exactly this point. The assumption of a continuous flow of resources stands at odds with the reality of massive underinvestment.
Central bankers and indirect politicians are hoping/wishing for inflation, and in 2020 they will get it – in spades. Unfortunately, it will be the wrong kind: headline inflation with no real growth or productivity. A repeat of the 1970s, maybe?
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