The Jackson Hole dilemma

30 August by Michael Roberts

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Next weekend, the central bankers of the world meet in a slimmed down COVID annual jamboree at Jackson Hole, Wyoming US. The bankers will hear from Fed chair Jay Powell and US Treasury secretary Janet Yellen and wade though academic papers commissioned from various mainstream ‘monetary economists’.

The big issue is whether it is time for central banks to wind down on their purchases of government bonds and bills designed to pump credit money into economies, which had the aim of avoiding a meltdown of businesses during the pandemic slowdown. In the COVID year of 2020, the 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 :
made purchases equivalent to 11% of US 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.
, the Bank of England 14% of UK GDP and many other banks in the G7 of around 10% of national GDPs.

Source: IIF

These purchases are called ‘quantitative easing’. Instead of lowering 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.
to encourage borrowing, since the onset of the Great Recession in 2008-9, central banks have gone for increasing sharply the quantity of dollars, euros, yen and pounds pumped into the banking and financial system. ‘Policy’ (ie 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.

short-term rates) 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. rates had already been driven down to zero and below. The only weapon left to central banks to stimulate economies was to ‘print’ money, in practice buying government and corporate bonds Corporate bonds Securities issued by corporations in order to raise funds on the Money Markets. These bonds resemble government bonds but are considered to be more risky than government bonds and other guaranteed securities such as Mortgage Backed Securities, and therefore pay higher interest rates. from financial institutions holding them and hope that banks lend that cash on to firms.

Throughout the Long Depression (as I call it) from 2009 to 2019, the level of central bank assets in these bonds rocketed. By December 2019, the assets held by the Federal Reserve in the United States were valued at 19.3 percent of the U.S. economy’s gross domestic product. This compares to 39.6 percent for the European Central bank 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.
, and 103.5 percent for the Bank of Japan (as of November 2019). And central banks have been purchasing $834 million an hour for the last 18 months. Since the start of the pandemic, the Fed’s balance sheet has more than doubled to $8tn. The European Central bank has total assets worth more than €8tn, the Bank of Japan has about $6tn, while the UK has doubled its QE programme to £895bn. Leading central banks now own more than £18tn in government bonds and other assets, an increase of more than 50% on pre-pandemic levels.

The questions facing the monetary authorities are: whether this huge increase and level of credit is a) working to keep economies growing; b) whether it is necessary any more given the supposed recovery in economies as the pandemic ends; and c) whether it is increasing the risk of a financial crash unless action is taken to curb QE.

The Fed is still buying $120bn (£88bn) a month in US government bonds and 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.
-backed securities to keep longer-term interest rates low. But the debate is underway among the Fed members about whether to keep QE going at this level to ensure recovery or whether this level of monetary injection should be curbed now before high 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. sets in, interest rates rise and a financial crash ensues. But the last time the Fed tried ‘tapering’ their monetary largesse in 2013 on the grounds that economies had recovered from the Great Recession, it led to a collapse in stock markets and in emerging market currencies increasing their debt burden. Even the just recent talk among Fed leaders on the issue took stock markets down last week.

And that’s the problem – it seems that banks, stock market investors and governments have become ‘addicted’ to solving their problems by getting central banks to ‘print’ more and more money. Most important, far from helping to restore productive investment and productivity growth during the Long Depression all that zero interest rates and QE have done is to boost stock and bond market Bond market A market where medium-term and long-term capital is lent/borrowed in the form of bonds. Bonds are creditor stakes issued by companies or States. levels to all-time highs. As one empirical study concluded: “output and inflation, in contrast with some previous studies, show an insignificant impact providing evidence of the limitations of the central bank’s programmes” and “the reason for the negligible economic stimulus of QE is that the money injected funded financial asset Asset Something belonging to an individual or a business that has value or the power to earn money (FT). The opposite of assets are liabilities, that is the part of the balance sheet reflecting a company’s resources (the capital contributed by the partners, provisions for contingencies and charges, as well as the outstanding debts). price growth more than consumption and investments.”

All the monetary injections have done is allow banks and financial speculators to build up massive amounts of what Marx called ‘fictitious capital’ ie not investment into value-creating assets in the ‘real economy’ but into stocks and bonds and cryptocurrencies – a fantasy world where a very few become billionaires while working people who don’t have stocks or even houses of their own see no increase in real incomes or wealth. QE has been a major contributor to rising inequality of incomes and wealth in the G7 economies in the last ten years.

Like the central bankers, mainstream economics is divided over whether continuing with government borrowing and quantitative easing is needed or whether continuance will lead to eventual disaster.

The Keynesians, post-Keynesians (including Modern Monetary Theorists) remain strongly in favour. There is no need to worry about rising government or even corporate debt. If governments resort to trying to cut back their debts as they did during the Long Depression (without much success), such an ‘austerity’ policy will only delay economic recovery and even reverse it. The Keynesians ignore the evidence that government spending and deficits have had little effect on achieving economic recovery anyway.

But in this post-COVID period, some Keynesians are pushing another argument for QE and monetary and fiscal largesse. Mark Sandbu, the European economics correspondent of the Financial Times has come up with what he calls a ‘novel idea’; namely that QE along with the sort of fiscal stimulus that US President Biden is pursuing will actually force up wages as inflation rises. This will give new bargaining power to workers and restore ‘class conflict’ in the workplace.

Sandbu recognises that employers will want to resist this situation as it might damage their profits and refers to the famous post-Keynesian paper by Michal Kalecki on why wage rises and full employment are resisted by capitalists. But Sandbu is sanguine about that conflict. Starting from the Keynesian premiss that what matters is not profits in an economy but sufficient ‘effective demand’, he reckons that rising wages “can encourage employers to increase both labour productivity and output if they expect demand growth to be strong.” So it will be possible to have “what Kalecki called “full employment capitalism”, because we can promote “an enlightened view of capital owners’ self-interest”. So “far from class conflict being a zero-sum game, productivity incentives from greater worker power can boost profits as well.” So it’s the most perfect of all possible worlds: workers get higher wages and capitalists get higher profits – all thanks to QE, Bidenomics and inflation.

This, of course, is not the view of the other side of the mainstream spectrum. These are closer to the view that governments and central banks should not intervene in markets and economies and ‘distort’ natural interest rates and cause ‘overinvestment’ in financial assets leading to a crash. In the same issue of FT that Sanbu presented his Leibniz view of capitalist economies, John Plender was severe in his condemnation of QE and all its works. Plender remarked that “the central banks have been busy topping up the punch bowl through their continued bond Bond A bond is a stake in a debt issued by a company or governmental body. The holder of the bond, the creditor, is entitled to interest and reimbursement of the principal. If the company is listed, the holder can also sell the bond on a stock-exchange. purchases to keep interest rates low while conducting an interminable debate on when and how to remove support. Their protestations that the risk of inflation is “transitory” look increasingly questionable.”

Plender makes the point that “central bankers’ claims that QE would boost gross domestic product are less convincing…in the meantime, unconventional monetary policy is creating ever greater 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. sheet vulnerabilities.” The Keynesians fail to recognise that, although near zero interest rates keep the cost of servicing government and corporate debt low, QE shortens the maturity of that debt. That means governments and companies are faced with renewing that debt at shorter intervals. As Plender comments: “The Bank for International Settlements Bank for International Settlements
The BIS is an international organization founded in 1930 charged with fostering international monetary and financial cooperation. It also acts as a bank for central banks. At present, 60 national central banks and the ECB are members.
estimates that 15 to 45 per cent of all advanced economy sovereign debt Sovereign debt Government debts or debts guaranteed by the government. is now, de facto, overnight. In the short run, that yields a net interest saving to governments. But their increased exposure to floating rates heightens vulnerability to rising interest rates.”

In the advanced economies, the IMF IMF
International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.
estimates that the government debt Government debt The total outstanding debt of the State, local authorities, publicly owned companies and organs of social security. -to-GDP ratio went from under 80 per cent in 2008 to 120 per cent in 2020. The interest bill on that debt nonetheless went down over the period, encouraging a Panglossian belief that the debt must be sustainable. A similar surge in the global non-financial corporate sector led to debt hitting a record high of 91 per cent of GDP in 2019.

Plender goes on: “Against that background, investors’ search for yield Yield The income return on an investment. This refers to the interest or dividends received from a security and is usually expressed annually as a percentage based on the investment’s cost, its current market value or its face value. has caused severe mispricing of risk, along with widespread misallocation of capital.” In true Austrian school mode, Plender predicts that: “The trigger now may be a lethal combination of rising inflation and financial instability. The difficulty is that central banks cannot take away the punch bowl and raise rates without undermining weak balance sheets and taking a wrecking ball to the economy”.

Former Indian central bank governor, Raghuram Rajan, raised the same worries in a piece for the Group of 30, a not well-known association of government and central bank institutions. Entitled, the Dangers of Endless Quantitative Easing, Rajan also points out the risks of letting QE rip on. He reckons the raging desire to make money in financial markets with zero interest credit risks a financial crash down the road. His worry is also that government interest costs could rise sharply with rising inflation. “If government debt is around 125% of GDP, every percentage-point increase in interest rates translates into a 1.25 percentage-point increase in the annual fiscal deficit as a share Share A unit of ownership interest in a corporation or financial asset, representing one part of the total capital stock. Its owner (a shareholder) is entitled to receive an equal distribution of any profits distributed (a dividend) and to attend shareholder meetings. of GDP… and what matters is not the average debt maturity, but rather the amount of debt that will mature quickly and must be rolled over at a higher rate.”

There is no doubt that net interest on government debt is currently very low historically, only slightly more than 1% of GDP a year compared to a GDP growth rate of 2-3% a year ahead. But the Peterson Institute argues that those “who believe that rates will almost certainly not rise are too confident in their own views. The forces that have contributed to lower rates are universally difficult to predict, and, as noted above, even modest changes in rates can produce sizable movements in net interest as a share of the economy in the future.”

There you have the mainstream debate. On the one hand, rising government and corporate debt is nothing to worry about because QE and fiscal stimulus will achieve economic recovery and inflation will dissipate. Moreover, rising wages might encourage capitalists to invest and so raise productivity to pay for any rise in interest rates when central banks ‘taper’ their spending. On the other hand, goes the argument that all this QE is just going into financial speculation, causing malinvestment and inflation that will only be stopped by some financial crash of disastrous proportions.

What is the Marxist view on this debate? Well, in my view, the Keynesians and Austrian are both right and wrong. Rising government debt and even rising corporate debt does not have to be a problem if economies recover to achieve and sustain a good rate of real GDP growth and profits for companies. Government debt to GDP ratios can be reduced or at least managed if GDP growth is higher than the going interest rate. So the Keynesians are right and the Austrians wrong here.

But the Austrians are right that the continual rise in fictitious capital rather than investment in productive capital is laying the basis for a crash down the road if economic recovery should falter. Once a drug user is addicted, it is difficult to wean the user off the drug while ‘cold turkey’ could kill the patient. As Plender put it: “The imperative should rather be to ensure that the post-pandemic debt splurge finds its way into productive investment.” Exactly, but how can that be done if capitalists do not want to invest productively? What decides the level of productive investment is its profitability for capitalists and its profitability compared to the ‘search for yield’ from stock and bond market speculation that QE has bred.

Let me repeat yet again the words of Michael Pettis, a firm Keynesian economist: “the bottom line is this: if the government can spend additional funds in ways that make GDP grow faster than debt, politicians don’t have to worry about runaway inflation or the piling up of debt. But if this money isn’t used productively, the opposite is true.” That’s because “creating or borrowing money does not increase a country’s wealth unless doing so results directly or indirectly in an increase in productive investment… If US companies are reluctant to invest not because the cost of capital is high but rather because expected profitability is low, they are unlikely to respond ….by investing more.”

Profitability in the productive sectors of the major economies was near an all-time low before the pandemic struck. The pandemic slump took profitability down further and no doubt it is recovering fast right now. 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 Profit The positive gain yielded from a company’s activity. Net profit is profit after tax. Distributable profit is the part of the net profit which can be distributed to the shareholders. margins?

That issue will not be part of the debate at Jackson Hole this week.

August 22, 2021

Michael Roberts

has worked in the City of London for over 30 years as an economist. He is author of several books on the world economy: The Great Recession, The Long Depression and World in Crisis. He blogs at

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