Down the Jackson Hole

27 August by Michael Roberts


Jay Powell, the chair of the US Federal Reserve, made a keynote speech at the annual summer symposium of central bankers in Jackson Hole, Wyoming, USA. This was closely watched by financial investors and economists to see if Powell was going to support the strategy of a ‘Fed pivot’ on interest-rate policy. The pivot is supposed to be a softening on the current aggressive hiking of the Fed’s policy rate. The pivot would keep interest rates from rising too much and thus sustain the stock market and the economy. After all, the US year on year inflation rate had subsided a little in August from a high of 9.1% to 8.5%; and real GDP was again confirmed in decline in the first half of 2022, while consumer spending has been falling back. So the signs of recession have increased, if the US is not already there.

US CPI inflation (yoy %)

But that made no difference to Powell. His speech made it clear that there would be no ‘Fed pivot’. Powell reckoned that 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. was still too high and so the Fed 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/
’s tightening cycle was far from done. “With inflation running far above 2% and the labor market extremely tight, estimates of longer-run neutral are not a place to stop or pause. ” He went on to tell us that we are going to suffer a hit to jobs and living standards as a result of the Fed’s tightening policy, but that could not be avoided: “Restoring price stability will take some time and requires using our tools forcefully to bring demand and supply into better 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. . Reducing inflation is likely to require a sustained period of below-trend growth. Moreover, there will very likely be some softening of labor market conditions. While higher 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.
, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.”

Financial investors took the speech badly. The US S&P 500 and the Nasdaq tumbled 2.5% and 3%, respectively. So no Fed pivot then. Powell was determined: “a lengthy period of very restrictive monetary policy was ultimately needed to stem the high inflation and start the process of getting inflation down to the low and stable levels that were the norm until the spring of last year. Our aim is to avoid that outcome by acting with resolve now.”

Powell claimed that “The first lesson is that central banks can and should take responsibility for delivering low and stable inflation.” Well, they may take responsibility, but the problem is that central banks cannot deliver on low inflation with their monetary tools of higher 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 and withdrawing liquidity Liquidity The facility with which a financial instrument can be bought or sold without a significant change in price. in what is called quantitative tightening (QT). All through the decade of the Long Depression after the Great Recession of 2008-9, central banks tried to get inflation up to their 2% target rates by keeping interest rates at zero or even below and through quantitative easing (QE) ie 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. and increasing the money supply. But none of these measures worked. Inflation stayed below target and so did economic growth. Instead, what QE brought was a huge stock and property market bubble. Now it’s the other way round and it still won’t work. QT will bring a stock market and property crash; and recession, not lower inflation.

That’s because inflation depends on the relation between supply and demand for goods and services. That’s obviously a truism of capitalist economics. But while central banks may affect aggregate demand to some extent, monetary policy has little or no effect on aggregate supply. That depends on productive investment, which in turn depends on the profitability of that investment. And that’s the problem.

The current inflationary spiral is mainly due to constrictions on supply, particularly in energy, food and other commodities Commodities The goods exchanged on the commodities market, traditionally raw materials such as metals and fuels, and cereals. , as well as global supply chain blockages for many components and products needed to meet demand. But underlying these immediate causes is the long-term decline in productive investment and labour productivity growth in the major capitalist economies, as I have argued before. So the Fed and other central banks can do little but sink their economies further into the Jackson Hole by raising the cost of borrowing for investment and consumption.

At Jackson Hole, various mainstream economists present papers on the state of capitalist economies and on the efficacy of monetary policy. It was revealing what Gita Gopinath, the former IMF chief economist had to say. “Existing (mainstream – MR) models cannot explain the inflation surge”, Gopinath said. For example, the so-called Phillips curve which purports to show that tight labour markets and rising wages cause inflation, does not fit the facts, said Gopinath, as economies have experienced rising inflation without wages leading it. She also admitted that 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.

http://imf.org
had failed to predict any rise in inflation rates (not just in energy and food but in what are called ‘core prices’ in the shops and services).

Gopinath argued that the current high inflation rates were due to massive global fiscal stimulus by governments during the COVID slump, putting too much money into the hands of households (!); heavy spending on goods (!); and an unexpected fast recovery in demand globally after COVID (!). But having presented an array of graphs to justify her argument that inflation was the result of too much demand; she then slipped in a sentence: “Alongside a contraction in potential output and employment.” And here we have it. It was the inability of capitalist production to deliver to meet demand. This was the main cause of demand exceeding supply and driving up inflation. So when the Fed and other central banks continue to tighten monetary policy, they will drive down demand (ie investment and consumption) and given already weak and stagnating supply, all that will happen is that they will trigger a slump because the ‘supply side has not recovered from both the Long Depression and the COVID slump.

At Jackson Hole, former White House economist Jason Furman was there to tell us that neither the US nor the Eurozone had returned to the pre-pandemic trend growth, as hoped for. Instead, both economies were heading south again. And that the main reason was very poor productive investment growth. “Using the expenditure components, the biggest source of the shortfall is the that non-residential fixed investment (or business fixed investment) remains way below what the CBO (Congressional Budget Office) thought it would be.”

But the Fed, the 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
and the BoE will plough on driving up interest rates just as the economies they preside over head towards a slump. The US Conference Board’s index of the US Top 10 Leading Indicators has had a 100% success rate in anticipating every recession over the last 40+ years. And the indicators are now on the cusp of forecasting a new slump.

“The US LEI declined for a fifth consecutive month in July, suggesting recession risks are rising in the near term,” said Ataman Ozyildirim, Senior Director, Economics, at the Conference Board. “Consumer pessimism and equity Equity The capital put into an enterprise by the shareholders. Not to be confused with ’hard capital’ or ’unsecured debt’. market volatility as well as slowing labor markets, housing construction, and manufacturing new orders suggest that economic weakness will intensify and spread more broadly throughout the US economy. The Conference Board projects the US economy will not expand in the third quarter and could tip into a short but mild recession by the end of the year or early 2023.”

We shall soon see how ‘mild’ or deep the Jackson Hole is for the major economies.




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 thenextrecession.wordpress.com

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