Jackson Hole dilemma

Marxist analysis of QE.

Michael Roberts works as an Economist for the City of London. He is also a prolific blogger.

Cross-posted From Michael’s Blog

This weekend the central banks of the world will gather in Jackson Hole Wyoming USA for a reduced COVID annual Jamboree. Jay Powell, Fed chair, and Janet Yellen from the US Treasury will speak to bankers. Additionally they will review academic papers commissioned and written by monetary economists.

One of the biggest issues is when it’s time for central bank to stop purchasing government bonds, bills and other instruments that are used to credit countries. The aim was to keep businesses from going under during the recession. The Federal Reserve bought 11% of US GDP while the Bank of England purchased 14% of UK gross domestic product in the COVID 2020 year. There were also purchases by many banks from the G7, which accounts for around 10% of all national GDPs.

Source: IIF

These purchases are known as “quantitative ease”. In order to promote borrowing, central banks have been increasing the dollar, euro, yen, and pounds that they pump into the banking sector and financial system instead of raising interest rates. In other words, central bank policy (i.e. short-term rates) has already reduced interest rates to zero. Central banks were left with no weapon other than printing money to stimulate economic activity. They could buy corporate bonds or government bonds at financial institutions and then loan that money to the firms.

The amount of central bank assets contained in these bonds soared during the Long Depression. At 19.3 percent, assets in the United States held by Federal Reserve were estimated to have been worth 19% of America’s GDP as of December 2019. Compare this to 39.5 percent at the European Central bank (as of November 2019,) and 103.5% for Bank of Japan (103.5 percent). In the last 18-months, central banks purchased $834million an hour. After the outbreak, the Fed’s assets more than doubled and now total $8tn. European Central bank now has assets in excess of EUR8tn. Bank of Japan’s has approximately $6tn. And the UK has doubled the size of its QE program to PS895bn. This is an increase of over 50% from pre-pandemic levels. The top central banks have more PS18tn in assets and government bonds.

It is unclear whether the massive increase in credit has a purpose other than to help keep the economies growing.

For longer-term interest rate stability, the Fed buys $120bn (PS88bn). Fed members debate whether QE should be maintained at current levels to maintain recovery. However, they also discuss whether to cut back on monetary injections before inflation rises and then a financial crisis ensues. In 2013, the Fed attempted to “taper” its monetary generosity in 2013, but it caused a crash in stock markets, and increased debt. Stock markets plunged last week due to the mere mention of the Fed’s issue by Fed leaders.

The problem is that central banks have been able to print more money, making it easier for stock market investors as well as governments to get their problems solved. The most important thing is that, in addition to helping with productivity growth and productive investment during the Long Depression, zero interest rates as well as QE did nothing but boost stock and bond prices to historic highs. A study by the Bank of England concluded that “output, inflation and other indicators show a small impact in comparison to some of previous studies” and “the main reason the economy has been so weak since QE was implemented is the fact that money injections funded more financial asset prices growth than consumption or investments.”

Financial speculators have been able to create massive amounts of what Marx calls ‘fictitious money’. They are not investing in value-creating assets like the’real economic’, but in stocks, bonds and cryptos. In this fantasy world, a handful of billionaires become rich while the majority of workers who don’t own stocks or homes see no rise in income or wealth. QE has played a large role in increasing inequality of incomes in G7 nations over the last ten year.

The main economic discussion is like that of the central bankers: Should we continue to increase government borrowing, quantitative easing or do we need to stop?

The Keynesians, post Keynesians as well as Modern Monetary Theorists remain in strong favor. Rising government and corporate debt is nothing to worry about. If governments attempt to lower their debts in the same way they did during Long Depression without any success, this ‘austerity policy’ will slow or reverse economic recovery. Keynesians don’t recognize the evidence that deficits, government spending, and tax increases have little to no impact on economic recovery.

In this post-COVID era, Keynesians push another argument for QE along with monetary as fiscal largesse. Martin Sandbu (the European economics correspondent to the Financial Times) has an idea that he describes as a “novel idea”. He believes QE, along with the type of fiscal stimulus US President Biden is seeking will in fact increase wages as inflation increases. This will provide workers with new bargaining tools and restore “class conflict” in the workplace.

Sandbu understands that employers are likely to try to avoid this situation. This is why Sandbu refers to Michal Kacecki’s post Keynesian paper on why capitalists resist wage hikes and full employment. Sandbu however, is positive about that conflict. Based on the Keynesian principle that profit is irrelevant but only sufficient “effective demand” in an economy, Sandbu believes that increasing wages will encourage companies to improve their labour productivity. Because we promote “an enlightened perspective of capital owners’ selfinterest”, it will be possible for us to achieve “full-employment capitalism”. It is important to remember that class conflict does not have to be a zero-sum game. However, higher productivity can lead capitalists and workers to make higher incomes.

This is, however, not the view held by the majority. These view points are closer aligned with that of the mainstream spectrum, which is that central banks and governments shouldn’t intervene in market and economy markets. John Plender harshly condemned QE as well as all of its effects in the same issue of FT where Sanbu shared his Leibniz perspective on capitalist economies. Plender observed that “the central bank have been busy topping off the punch bowl” with their ongoing bond purchases in order to keep interest rates low and a never-ending debate over when to stop support. The central banks’ claims of a “transitory risk” for inflation look more and more questionable.

Plender makes the argument that “central banks’ claims that QE could boost gross domestic products are less convincing…instead, unconventional monetary policies is creating ever greater imbalance sheet vulnerabilities.” Keynesians fail not to recognize that QE, while near zero interest rate keeps the cost of servicing corporate and government loans low, QE increases the maturity of such debt. Governments and businesses are now faced with the task of renewing this debt in shorter time frames. Plender remarks: “The Bank for International Settlements estimates that between 15 and 45 percent of all sovereign debts from advanced economies can be renewed in a matter of hours.” It will save governments money in the short-term. But, they are more vulnerable to rising interest rates because of their increased exposure at floating rates.

IMF reports that government debt-to GDP ratios in advanced economies increased to 120% in 2020 from under 80 percent in 2008. Although the interest rate on the debt was lower, this encouraged Panglossian beliefs that the debt can be sustainably. In 2019, debt reached an all-time high of 91.1%.

Plender adds: “Against such background, investors have caused severe mispricings and misallocations in capital, as well as a misallocation of risk.” Plender also predicts: “The trigger here may be a fatal combination of financial instability and rising inflation. Problem is, central banks have to be able to lift rates but not weaken balance sheets. This will leave the economy in ruins.

Raghuramrajan, a former Indian central bank Governor, expressed the same fears in an article for Group of 30. It is not well-known as a group of central bank institutions and government officials. Rajan also discusses the risks of QE. According to Rajan, the burning desire for money in financial markets that offer zero interest credit is likely to lead the country into a financial meltdown. Inflation could also lead to rising government interest costs. “If the government has a debt of around 125%, any percentage-point change in interest rates equals to a 1.25 percent increase in the annual fiscal surplus as a part of GDP. It is not how long the average maturity of debt will be, it is the amount of debt that will quickly mature and should be rolled over at an increased rate.

The net interest paid on government debt has been very low over the past, at just 1% of GDP annually. That is in contrast to GDP growth rates of 2-3% per annum. According to the Peterson Institute, those who are certain that interest rates will not increase “are too sure of themselves.” Low rates were not possible to predict. Even small rate changes can cause substantial movements in net interest, as a proportion of the economy, in the future.

This is the core debate. The main argument is that increasing government and corporate credit should be ignored as QE/fiscal stimulus will lead to economic recovery. Inflation will then dissipate. In addition, increasing wages can encourage capitalists in order to invest more and thus increase productivity. This will help to offset any increases in interest rates that central banks may ‘taper’. However, some argue that all the QE goes into financial speculation which causes misinvestment and inflation that can only be stopped if there is a catastrophic financial crash.

Is there a Marxist perspective on the debate? My view is that both Keynesians, and Austrian, are correct. In my view, rising debt to government and corporates does not need to cause problems if countries recover in order to sustain high real GDP growth. It is possible to reduce or manage government debt ratios relative to GDP if the GDP growth rate exceeds the interest rate. These Keynesians prove that the Austrians were wrong and they are correct.

Austrians agree that if the economic recovery is not successful, then the constant rise in fictitious rather than productive capital could lead to a crash. The addiction to drugs can make it difficult for a user to quit using them. However, if the addict continues with the habit of taking the drug every day they could end up dying. Plender described it as “the imperative to ensure that the Post-Pandemic Debt splurge find its way into productive Investment.” However, how does that happen if capitalists refuse to invest effectively? How profitable capitalists view productive investment and how it compares to QE’s’search for return’ in bond and stock markets, are the two main factors that determine its level.

Recall the words and phrases of Michael Pettis, Keynesian economic firm: “The bottom line: if the government is able to borrow additional money so that GDP growth can be faster than its debt, politicians won’t need worry about either runaway inflation, or piling up debt. It’s not true that this money can’t be used to produce anything.

The pandemic caused profitability to plummet in many of the most productive areas of the major economies. While the recession further impacted profitability, it appears that it is currently recovering well. But will profitability get up to levels that will sustain productivity-enhancing investment in the next few years, especially if wage rises start to squeeze profit margins?

Jackson Hole won’t discuss that issue this week.

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