Snippets

• Bonds and equities continue to point in opposite directions as far as how they are discounting the future,

Econ thoughts

There is a huge amount of discussion about MMT. It occurred to me that MMT is “true” when the economy is in a liquidity trap, i.e. changes in the interest rate has no impact on the willingness of savers to hold cash. This implies that fiscal spending is not actually constrained.

Inflation again

I listened with interest, as usual, to the latest Macro Musings podcast. You can read the transcript here. Bilal Hafeez was talking about various macroeconomic issues, but the one I found most interesting is inflation.

He is basically is very sceptical about the ability of central banks to create inflation. You should read the transcript or listen to the podcast to hear the full argument, but a few of his reasons are as follow:

• there is no real inter-country correlation between debt levels and inflation,
• wage increases seem to have become detached from inflation, and central banks are not really targetting inflation, they’re targetting labour income, and as long as that keeps going up they will not push too hard to hit their notional inflation targets,
• there is no real evidence that there really is any likelihood of political unrest, which would lead to a big increase of government spending in the real economy (by subsidizing labour for example),
• developed economies now are principally service economies. The only inflation which is seen in these economies is service inflation (higher education, healthcare, professional services, and housing services). The Covid crisis has delivered a positive supply shock to all of these sectors: university teaching can be delivered via Zoom, GPs will have consultations and diagnosis via Skype, we’ll start to use lawyers and accountants based in India via the Internet and everyone will move away from expensive urban centres to remote rural and post-industrial centres where houses are enormously cheaper.
• as populations age, demand for most services decline, so the supply shock is amplified.

To summarize, we’re turning Japanese, and Zoom is going to do for services what the container did for manufacturing: outsource it to cheaper places.

I don’t know whether he’s right. If he is, they should take back Milton Friedman’s Nobel Prize. Having said that, he makes some strong points: ones which the crypto-MMTers would be wise to amplify.

The other point that Hafeez concedes, though, is that the dollar is probably moving down. He talks about the demand for dollar-denominated assets being supported by the actions of the Fed buying Treasuries and other dollar-denominated assets, but I don’t really understand this: surely this just results in more dollars being in the system. We’ll see: I’ll have to re-read the piece, because there is a lot to digest in it.

Wrap

Today things were pretty much risk neutral, maybe marginally risk on. Bitcoin was up, as usual. Indices flat. Gold up a bit, oil up a bit more. Soybeans down. Energy shares did well. The dollar (DX) fell again. It’s now very close to 91. This is an interesting level.