A Ten years ago, the financial press, echoing the predictions of mainstream macroeconomists, was obsessed with whether governments would run out of money as deficits grew to tackle the global financial crisis. The harsh predictions of rising bond yields and inevitable defaults have turned out to be in vain.
Now, with much larger deficits, the headlines are all about inflation. No one seems to worry about government insolvency anymore because capitalism survives on survival tax systems. Attention has shifted from meaningless financial ratios to substantive issues related to the actual scarcity of resources (i.e. how close nations are to full employment). However, the inflation mania is as misconstrued as previous solvency fears.
Grim statements like this one in the Wall Street Journal: “Concern about inflation is at its height, among economists and in the markets“And this title in the Marketwatch belonging to Dow Jones:”Biggest “fear of inflation” in 40 years is coming», Feeds the frenzy. Apparently, increasing household savings during closings will turn into a spending spree as restrictions ease. As a result, former US Treasury Secretary Larry Summers claimed that Biden’s tax injections would “overheat”The economy and cause inflation to accelerate.
Former German finance minister Wolfgang Schäuble also claimed that the acceleration in inflation would result from the government bond buying program of the European Central Bank, which bought most of the euro area’s government debt. issued since the start of the pandemic. He wants a return to austerity or “monetary and budgetary normality”, A normality that has maintained high levels of unemployment and stagnant growth.
Inflation hawks claim that large deficits and central bank bond buying programs – quantitative easing, or QE, which is falsely referred to as “printing money” – will produce results similar to those in Zimbabwe. However, they misunderstand how governments spend and ignore the story of hyperinflation.
All government spending is facilitated by central banks which type numbers into bank accounts. There are no ongoing tax or bond sales or “printing” expenses. All spending – public or non-government – carries an inflation risk if nominal expenditure growth exceeds production capacity. As full employment is achieved, governments must restrain spending growth and may need to raise taxes to reduce private purchasing power. But we’re a long way from that point, with high unemployment levels and largely flat wage growth.
Japan’s experience since the 1990s demonstrates the fallacious nature of traditional macroeconomics, which wrongly predicted bond market revolts and accelerating inflation in the face of its large deficits and quantitative easing program, that most countries have now copied. Modern Monetary Theory (MMT) demonstrates that QE involves central banks buying government bonds by adding liquidity to bank reserves. Bank loans are not limited by available reserves – they are never lent to consumers. Rather, loans are driven by demand from creditworthy borrowers, which are rare in deep recessions. The only way for QE to stimulate total spending is its ability to lower interest rates. When the central bank buys bonds in secondary markets, increased demand reduces yields and this is reflected in lower rates for related financial assets. Falling bond yields may have spurred increased demand for equities, but it did not push total spending beyond resource constraints
In addition, massive supply shocks explain the hyperinflation of Germany in the 1920s and Zimbabwe today. The Zimbabwean government’s confiscation of highly productive white-run farms to reward soldiers with no farming experience caused the collapse of agricultural production, which in turn damaged manufacturing. Even with budget surpluses, hyperinflation would have occurred, such was the contraction of supply. The current supply chain disruptions are temporary and relatively small in comparison.
There are misconceptions about what inflation really is. Inflation is the continuous rise in the price level. A one-time rise in prices does not constitute inflation. For example, after recessions, companies often withdraw discounts and reduce prices to pre-recession levels. These adjustments do not constitute inflation. Booms in the stock market are not the same as generalized inflation.
Some price pressures have emerged as the pandemic abates. Oil prices have fallen sharply as lockdowns kept us from rolling. The increased demand for fuel, as cars are returned to the roads, is pushing up prices. But OPEC’s Reference Basket (ORB) for global oil prices is still below pre-pandemic levels and well below stable levels post-global financial crisis. The United States Energy Information Administration predicts that oil prices flatten out until 2022.
Alarmists point to OPEC hikes in October 1973, when world oil prices fell from an average of US $ 2.48 per barrel in 1972 to $ 11.58 in 1974. However, there is little chances that 1970s-style inflation will emerge. Then powerful unions and companies with pricing power engaged in a conflict aimed at shifting the real income losses from rising oil prices onto each other. But the strength of the relationship between oil prices and inflation has weakened since the 1990s. The ability of workers to engage in this type of distributive struggle has been limited by the rise in precarious work, persistently high levels of unemployment and underemployment, and pernicious legislation that has reduced the ability of unions to defend their wage demands. Since 1995, the IMF World Economic Outlook data shows that the average annual inflation in advanced countries was only 1.87%. In Japan, the average inflation rate was 0.2%. A 1970s-style wage breakdown will not happen.
Modern monetary theory draws attention to inflationary triggers that are independent of aggregate spending pressures: for example, administrative pricing practices (eg indexation agreements with privatized energy or public transport companies to raise prices under current conditions) and abuse of market power (such as cartels). In addition, one of the problems exposed by the global financial crisis, which has not been adequately addressed, is the speculative movement of hedge funds in agricultural commodity markets, which has triggered massive increases in commodity prices. food in 2008. These triggers require legislative attention.
I believe the current price spikes, however, are transient and will be absorbed without entrenched inflation. Consequently, they do not justify a return to austerity.
William Mitchell is Professor of Economics at the University of Newcastle, Australia, and Full Professor of Global Political Economy at the University of Helsinki, Finland. He is one of the co-founders of modern monetary theory