Committee for the Abolition of Illegitimate Debt

Every August the world’s top central bankers meet in Jackson Hole, Wyoming, a ski resort in central US for a ‘symposium’ organized by the Kansas City Federal Reserve. The bankers take this opportunity to discuss monetary policy and its efficacy in ‘managing the economy’, in particular, ‘controlling’ inflation Inflation The cumulated rise of prices as a whole (e.g. a rise in the price of petroleum, eventually leading to a rise in salaries, then to the rise of other prices, etc.). Inflation implies a fall in the value of money since, as time goes by, larger sums are required to purchase particular items. This is the reason why corporate-driven policies seek to keep inflation down. and providing the right amount of ‘liquidity Liquidity The facility with which a financial instrument can be bought or sold without a significant change in price. ’ to the financial system.

This year’s symposium took place when the US Federal Reserve FED
Federal Reserve Officially, Federal Reserve System, is the United States’ central bank created in 1913 by the ’Federal Reserve Act’, also called the ’Owen-Glass Act’, after a series of banking crises, particularly the ’Bank Panic’ of 1907.

FED – decentralized central bank : http://www.federalreserve.gov/ has been put on the spot about whether it should cut its ‘policy’ interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. rate, given some signs of a cooling economy and yet a ‘stickiness’ in the fall in the inflation rate towards the Fed target of 2% a year. The so-called policy rate sets the floor for all interest rates Interest rates When A lends money to B, B repays the amount lent by A (the capital) as well as a supplementary sum known as interest, so that A has an interest in agreeing to this financial operation. The interest is determined by the interest rate, which may be high or low. To take a very simple example: if A borrows 100 million dollars for 10 years at a fixed interest rate of 5%, the first year he will repay a tenth of the capital initially borrowed (10 million dollars) plus 5% of the capital owed, i.e. 5 million dollars, that is a total of 15 million dollars. In the second year, he will again repay 10% of the capital borrowed, but the 5% now only applies to the remaining 90 million dollars still due, i.e. 4.5 million dollars, or a total of 14.5 million dollars. And so on, until the tenth year when he will repay the last 10 million dollars, plus 5% of that remaining 10 million dollars, i.e. 0.5 million dollars, giving a total of 10.5 million dollars. Over 10 years, the total amount repaid will come to 127.5 million dollars. The repayment of the capital is not usually made in equal instalments. In the initial years, the repayment concerns mainly the interest, and the proportion of capital repaid increases over the years. In this case, if repayments are stopped, the capital still due is higher…

The nominal interest rate is the rate at which the loan is contracted. The real interest rate is the nominal rate reduced by the rate of inflation. on borrowing for households and businesses in the US (and for most of the world). And currently it is at its highest in 23 years. 

In early August, the financial markets panicked and started selling corporate stocks because the Fed decided not to cut the policy rate at its July meeting and then the jobs figures for July showed a sharp fall in net job increases with unemployment rising. However, then the latest inflation data came in showing a further (mild) fall in the inflation rate and markets calmed down, especially as Federal Reserve Chairman Jerome Powell started to give clear signals that the central bank Central Bank The establishment which in a given State is in charge of issuing bank notes and controlling the volume of currency and credit. In France, it is the Banque de France which assumes this role under the auspices of the European Central Bank (see ECB) while in the UK it is the Bank of England.

ECB : http://www.bankofengland.co.uk/Pages/home.aspx will cut its interest rate at its September meeting. 

Powell repeated that view during his Friday speech at the Jackson Hole Economic Symposium. “Progress toward our 2 percent objective has resumed. My confidence has grown that inflation is on a sustainable path back to 2 percent….. The labor market has cooled considerably from its formerly overheated state. It seems unlikely that the labor market will be a source of elevated inflationary pressures anytime soon….. We do not seek or welcome further cooling in labor market conditions. The time has come for policy to adjust. The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance Balance End of year statement of a company’s assets (what the company possesses) and liabilities (what it owes). In other words, the assets provide information about how the funds collected by the company have been used; and the liabilities, about the origins of those funds. of risks.”

Powell then went on to claim that inflation had come down without a recession in the US economy because of the Fed’s monetary policy. “Our restrictive monetary policy helped restore balance between aggregate supply and demand, easing inflationary pressures and ensuring that inflation expectations remained well anchored.” He argued that the inflation of prices had rocketed because of a combination of rising consumer spending and supply shortages. This is true, but the issue is which was the most dominant factor. Most, if not all, research on the inflation period has shown that it wassupply factorsthat dominated, not excessive demand from consumers, government spending or ‘excessive’ wage increases – the arguments presented at the time by central bankers to justify the huge hikes in interest rates. 

But in his speech Powell hinted at the real causes when he said: “high rates of inflation were a global phenomenon, reflecting common experiences: rapid increases in the demand for goods, strained supply chains, tight labor markets, and sharp hikes in commodity prices.” And that explained the fall in the inflation rate later: “Pandemic-related distortions to supply and demand, as well as severe shocks to energy and commodity markets, were important drivers of high inflation, and their reversal has been a key part of the story of its decline. The unwinding of these factors took much longer than expected but ultimately played a large role in the subsequent disinflation.”

Nevertheless, Powell continued to push the narrative that it was the central banks’ “restrictive monetary policy” that did the trick by “moderating aggregate demand”. Powell also reiterated the myth that central bank monetary policy helps to “anchor inflation expectations” which, it is claimed is key to controlling inflation. But again this is nonsense, as recent studies have clearly shown that ‘expectations’ have little or no effect on inflation. As Federal Reserve economist Rudd recently concluded:“Economists and economic policymakers believe that households’ and firms’ expectations of future inflation are a key determinant of actual inflation. A review of the relevant theoretical and empirical literature suggests that this belief rests on extremely shaky foundations, and a case can be made that adhering to it uncritically could easily lead to serious policy errors.”

Powell also dished up the other mainstream concepts to explain inflation and so justify their ‘restrictive monetary policy’. First was the so-called ‘natural rate of unemployment’ (NAIRU). The theory is that there is some rate of unemployment that is low enough to sustain economic growth without inflation but not too high to indicate a slump. But NAIRU is another ephemeral and movable feast that cannot be measured. 

NAIRU is related to the so-called Phillips curve, a Keynesian concoction that argues inflation is caused by excessive wage rises when the labour market is too ‘tight’ (ie the unemployment rate is below NAIRU). There is a ‘trade-off’ between wages and inflation. This theory was empirically refuted back in the 1970s when economies experienced ‘stagflation’ ie rising unemployment, low growth and rising inflation.

And since then, there have been several studies to show that there is no ‘curve’ at all, no correlation between movements in unemployment, wages and inflation. Indeed, Powell’s’ comments on NAIRU were in direct contradiction to what he said at the 2018 Jackson Hole symposium. Then Powell suggested that following the usual conventional ‘stars’, namely NAIRU, to gauge when the economy is at optimum speed), or the natural rate of interest (to gauge when the cost of borrowing is about right) may not be of any use.

Again, the idea that there is a natural rate of interest which keeps inflation down without damaging economic expansion and central banks should measure this and keep to it does not hold with the reality of capitalist production. Even hardline ECB ECB
European Central Bank The European Central Bank is a European institution based in Frankfurt, founded in 1998, to which the countries of the Eurozone have transferred their monetary powers. Its official role is to ensure price stability by combating inflation within that Zone. Its three decision-making organs (the Executive Board, the Governing Council and the General Council) are composed of governors of the central banks of the member states and/or recognized specialists. According to its statutes, it is politically ‘independent’ but it is directly influenced by the world of finance.

https://www.ecb.europa.eu/ecb/html/index.en.html central banker Isabel Schnabel has admitted that: “The problem is it cannot be estimated with any confidence, which means that it is extremely hard to operationalize …. The problem is we don’t know where it is precisely.”(!)

Apparently, these natural rates for harmonious non-inflationary growth keep moving about! “Navigating by the stars can sound straightforward. Guiding policy by the stars in practice, however, has been quite challenging of late because our best assessments of the location of the stars have been changing significantly. Schnabel went on: “Experience has revealed two realities about the relation between inflation and unemployment, and these bear directly on the two questions I started with. First, the stars are sometimes far from where we perceive them to be. In particular, we now know that the level of the unemployment rate relative to our real-time estimate of NAIRU (u*) will sometimes be a misleading indicator of the state of the economy or of future inflation. Second, the reverse also seems to be true: Inflation may no longer be the first or best indicator of a tight labor market and rising pressures on resource utilization.” So useless then as indicators.

The 2024 Jackson Hole symposium continued with the presentation of papers on the efficacy of monetary policy by several highly esteemed mainstream economists. One such paper reexamined the Phillips and Beveridge curves as explanations of the inflation surge in the U.S. post the pandemic slump of 2020. The Beveridge curve describes where, as job vacancies rise, inflation rises and vice versa. The presenters told the central bankers that “that the pre-surge consensus regarding both curves requires substantial revision.” In other words, the recent post-COVID inflation spike could not be explained by existing mainstream theories. The presenters tried to come up with a revised series of curves based now on job vacancies not unemployment.

Nevertheless Powell claimed success for monetary policy: “all told, the healing from pandemic distortions, our efforts to moderate aggregate demand, and the anchoring of expectations have worked together to put inflation on what increasingly appears to be a sustainable path to our 2 percent objective.” And this was without a recession that was once feared and panicked financial markets only three weeks ago. The ‘soft landing’ for the economy is still in the cards and the ‘Goldilocks’ scenario of robust economic growth and low unemployment along with low inflation is nearly with us. 

Now I have argued in previous posts that the market meltdown three weeks ago does not yet herald a recession. For me, the key indicator for that is first: corporate profits. And so far, they have not descended into negative territory in the major economies.

Source: Refinitiv, five major economies corporate profits weighted by GDP GDP
Gross Domestic Product Gross Domestic Product is an aggregate measure of total production within a given territory equal to the sum of the gross values added. The measure is notoriously incomplete; for example it does not take into account any activity that does not enter into a commercial exchange. The GDP takes into account both the production of goods and the production of services. Economic growth is defined as the variation of the GDP from one period to another. , my calculations

But the US economy and the other major economies are by no means out of the woods. Price inflation remains ‘sticky’ ie looking as though it will stick around at least 1% pt above central bank targets. 

And this is something that worries the central bankers from Europe attending the symposium. Bank of England governor Bailey put it this way: “We still face the question of whether this persistent element is on course to decline to a level consistent with inflation being at target on a sustained basis and what it will take to make that happen. Is the decline of persistence now almost baked in as the shocks to headline inflation unwind, or will it also require a negative output gap to open up, or are we experiencing a more permanent change to price, wage and margin setting which would require monetary policy to remain tighter for longer?” And the ECB chief economist Philip Lane was equally sceptical that monetary policy could go the ‘last mile’in the ‘war against inflation’.

At the same time, in the major economies, real GDP growth (and especially real output per capita growth) is very weak.  Only the US has any significant expansion and even there, when you strip out exports and stockpiles, sales growth is no more than 1%. The rest of the G7 economies remain either in stagnation (France, Italy, UK) or in recession (Japan, Germany, Canada). It is no better in other advanced capitalist economies (Australia, Netherlands, Sweden, New Zealand). And the manufacturing sectors of nearly all the major economies are deeply in contraction territory. 

Moreover, soon there will be a new US President that either wants to hike import tariffs to record levels, so strangling world trade and pushing up imports prices; or alternatively she wants to impose new taxes on corporate profits – neither is good news for US capital.

The Jackson Hole symposium celebrated success but what it really revealed is that central bank monetary policy played little role in getting inflation down from its peaks in 2022; that it has played little role in achieving output or investment growth; and it has little power to stop unemployment rising or any slump in production ahead. All high interest rates have done is to drive many small businesses into bankruptcy or more debt; and drive mortgage Mortgage A loan made against property collateral. There are two sorts of mortgages:
1) the most common form where the property that the loan is used to purchase is used as the collateral;
2) a broader use of property to guarantee any loan: it is sufficient that the borrower possesses and engages the property as collateral. rates and rents to peaks in housing. And cutting interest rates now will merely fuel the stock market, not the economy.