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July 20, 2017


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Ralph Musgrave

We have a recession sparked off by excessive and irresponsible borrowing. The solution adopted is to cut interest rates so as to encourage more borrowing. So far so logical.

But when that proves inadequate, QE is adopted so as to encourage even more borrowing. Even more logical.

And more logical still: the people who advocate more borrowing as a solution to excessive and irresponsible borrowing simultaneously give somber warnings about excessive household debts, i.e. borrowing. Or as I think Positive Money put it, “The Bank of England’s solution to excessive household debt is more household debt”.

The moral: we can all sleep soundly in the knowledge that the great and the good know what they are doing.

James Peach

Hi Chris, been a lurker here for a long time and your blog is the best on the sphere. ALways a fresh burst of wisdom. i have attached a blog post on the effectiveness of some of the Bank's newer monetary policy tools if you're interested.


James Peach

Ralph I do not know any of the MPC personally but I would be willing to hazard a guess that if any of them could, they would scream from the high hills: do not take on more debt.

The institutional set up is the problem. With a government making fiscal policy irresponsibily tight, an inflation targeting central bank has one choice; loosen monetary policy or fail to hit its target. The MPC iis accountable for this to parliament.

No central bank wants to fail to fulfill its mandate and lock horns with the government by actively criticising the fiscal stance. It's a sure step to getting fired or managed out. I fear they just have to accept the situation and work accordingly.


"But when that proves inadequate, QE is adopted so as to encourage even more borrowing."

QE is not designed to encourage more borrowing.


P.S. I agree with you in principle, yes we need looser fiscal policy, better still if financed by printing money (i.e. QE).

James Peach

As far as I am aware that is precisely what Q.E attempts to do.

Reduce yields, increase issuance, and stimulate bank lending (according to mainstream theory).

Stimulating lending = increasing borrowing.

James Woods

The merits of QE aside, the discussion of irreversible processes was most interesting. Within thermodynamics it is well known that the vast majority of processes are irreversible as most processes result in an increase in entropy. It'd be interesting to see this analogy expanded upon.


(1) "All twelve US recessions since 1955 were preceded (approximately 12 to 18 months earlier) by an inversion in the yield curve (Estrella, 2010)." Et. al.

(2) "it is very common to have a recession without a yield curve inversion first. In-fact, there were 6 of them following The Great Depression into the 1950’s."

The Fed had no prescience: St. Louis Fed's senior technical staff: “Although the evidence is mixed, the MSI (monetary services index), overall suggest that monetary policy was ACCOMMODATIVE before the financial crisis when judged in terms of liquidity (just like before the Great Depression). —Richard G. Anderson and Barry Jones.

The facts, what SA author The Nattering Naybob coined: “Elephant Tracks”, argue otherwise. It is Yale Professor Irving Fisher’s pioneering distributed lag effect of my monetary flows, volume Xs velocity, that determines a “Hyman Minsky moment” (“A Minsky moment is a sudden major collapse of asset values which is part of the credit cycle or business cycle”)

All boom/busts, U.S. recessions since 1933 (regardless of their monetary transmission mechanisms), are entirely the Fed’s fault.

If the Fed pursues a restrictive monetary policy, interest rates tend to rise in concert with their policy rate hikes. This places a damper on the creation of new money, but paradoxically drives existing money (voluntary savings) out of circulation into stagnant commercial bank-held savings deposits (creating disequilibria / instability – not homeostasis).

In a twinkling, the economy begins to suffer (as evidenced by a deceleration in R-gDp during the same period), and / or with a monetary offset, subsequently generates higher levels of stagflation (drop in incomes).

Thus the Fed is given false signals relative to real growth prospects. In order to maintain their AD trajectories, instead of boosting R-gDp, the Fed, being stagflationists, boosts N-gDp (principally increasing gDp’s inflation component). So the FOMC falls victim to schizophrenia, do I stop? >because inflation is accelerating; or do I go? >because the economy is slowing).

That was exactly the FOMC dilemma in July 2008 (just before the substantive drop in AD stemming from the sudden and sharp deceleration from the unvarying distributed lag effect of M*Vt (contrary to Friedman’s and Schwartz’s inference of “long and variable”). That means Ludwig von Mises and Friedrich Hayek had the Austrian Business cycle theory of mal-investment all wrong.

Monetary policy objectives should be formulated in terms of desired rates-of-change Δ, RoC's, in monetary flows, M*Vt (volume X’s velocity), relative to RoC's in R-gDp. RoC's in N-gDp (though "raw materials, intermediate goods and labor costs, which comprise the bulk of business spending are not treated in N-gDp"), can serve as a proxy figure for RoC's in all transactions, P*T, in Professor Irving Fisher's truistic: "equation of exchange". RoC's in R-gDp have to be used, of course, as a policy standard.

The recent rate hike by the Fed is prima facie evidence – as the FRB-ATL’s GDPNow model’s forecasts were once again, repeatedly - revised downward.


ALM rebalancing/rollover of wholesale NBFI funding is not yet complete (as opposed to the DFIs, where lending/investing is not predicated on the prevailing level of free-market clearing interest rates).

As I said one year ago (after the experience with the 1st rate hike): "The economy is behaving exactly as it is programed to act. Raise the remuneration rate and in a twinkling the economy subsequently suffers. The Fed's 300 Ph.Ds. in economics don't know the differences between money and liquid assets." Apr 28, 2016. 11:25 AMLink

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