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central banks
A Progressive Political Economy Guide to Inflation
Mainstream economics failed miserably in addressing the financial crisis of 2007-08, so why would it be any different now when it comes to making sense of the rising inflation of the past 18 months?
Jan 06, 2023
Since 2021, prices have surged dramatically across countries and inflation has become a global challenge. Global central banks delivered historic rate hikes in 2022 in order to tame inflation and continued doing so even when inflation was falling, thereby risking a global recession.
Indeed, for the past five months, average inflation in the U.S. has been at 2.4%. Across Europe, inflation has also been dropping. In Spain, for instance, consumer prices rose 5.8% in December, down from 6.8% in the previous month. The December figure represented the fifth consecutive month of declining inflation in Spain. Yet, the European Central Bank—which like the U.S. Federal Reserve has also set the target rate for inflation at the arbitrary number of 2% per year—plans to continue raising interest rates “significantly further” as it deems that inflation “remains far too high and is projected to stay above the target for too long.”
Meanwhile, both the U.S. and European economies are expected to enter a recession in 2023. For what it’s worth, the head of the IMF expects a full one-third of the world to slide into recession this year.
What has been causing the upward trends in inflation and why do central banks around the world keep raising interest rates, a policy which will slow economic growth and result in lower wage increases and fewer jobs? Several factors are at play in causing a surge in prices, which include the Covid-19 pandemic, geopolitics, and corporate mark-ups and profit margins, while pure capitalist logic and interests explain why central banks are raising interest rates to fight inflation.
These were some of the conclusions reached by the progressive economists who participated in an international conference on “Global Inflation Today” organized by the renowned Political Economy Research Institute (PERI) at the University of Massachusetts Amherst and held from December 2-3, 2022.
To start with, a co-authored paper by Robert Pollin (Distinguished Professor of Economics and Co-Director of PERI at UMass Amherst) and Hanae Bouazza shows convincingly that there is no justification why the Federal Reserve and other central banks aim for an inflation target of 2%. Indeed, their research finds “no consistent evidence supporting the conclusion that economies at any income level will achieve significant GDP benefit when they maintain inflation within low single digits, i.e., between the 0 – 2.5 percent inflation range.” Not only that, but the “evidence… suggests that, in general, economies are more likely to achieve higher GDP growth rates in association with inflation ranges in the range of 2.5 – 5 percent, 5 – 10 percent and, for the most part, 10 – 15 percent.”
These are significant findings which raise serious questions about the goals of macro policy. Indeed, if inflation-targeting policy is not conducive to promoting economic growth, what is its primary aim? Citing the work of scholars who have done extensive research around this question, such as Gerald Epstein (Professor of Economics and Co-Director of PERI at UMass Amherst) and others, Pollin and Bouazza suggest that corporate profitability is the primary aim of inflation-targeting policy. “Protecting the wealth of the wealthy” is the reason why the Fed has taken aggressive steps to tame inflation by raising interest rates, Epstein pointed out in a recent joint interview with Pollin.
Needless to say, the mainstream economic paradigm keeps silent on such matters, and one will never find answers in it on the most important processes that affect the workings of the real world and on the issues that are of paramount importance to the lives of working people.
To be sure, mainstream economics failed miserably in addressing the financial crisis of 2007-08, so why would it be any different now when it comes to making sense of the rising inflation of the past 18 months?
With regard to the actual causes of inflation in 2021-22, a paper co-authored by Asha Banerjee and Josh Bivens of the Economic Policy Institute identifies the Covid-19 pandemic and the Russian invasion of Ukraine as key factors in the inflationary surge of the past 18 months or so but argues that profit mark-ups added immensely to inflationary pressures over the same period. Of equal importance here is that the authors present more than sufficient evidence to counter the mainstream economic perspective that lays the blame for the rise of inflation in the U.S. on the American Rescue Plan. Indeed, the data they present, on both the domestic and international fronts, does not support the claim that too much fiscal spending overheated the economies, fueling runaway inflation.
Another paper presented at the PERI conference, co-authored by C. P. Chandrasekhar and Jayati Ghosh, on how low-and middle-income countries can respond to inflation, also argues that there are more important factors than the pandemic and Russia’s invasion of Ukraine behind the current inflation crisis. The sharp rise in global prices of food and fuel, Chandrasekhar and Ghosh contend, was driven by “profiteering, price expectations, and associated speculation.” They show, for instance, that while there were sharp spikes in the prices of food and fuel between February and July 2022, “the supplies of oil and gas to Europe remained largely unaffected.”
The analyses on inflation and its causes, as well as the actual aims of inflation-targeting policy, made by all of the presenters at the PERI conference (which included many leading progressive economists such as William Spriggs, Gerald Epstein, Thomas Ferguson, Nancy Folbre, James K. Galbraith, Servaas Storm, and Isabella Weber, among others) can be described as a Progressive Political Economy Guide to Inflation. Indeed, they show how powerful heterodox economic approaches are in disclosing the real forces driving inflation and the actual reasons for central banks raising sharply interest rates. And, by extension, they also reveal the flaws and limitations of mainstream economics, which is in dire need of a major overhaul.Keep ReadingShow Less
'Finally': In Potential Nod to Biden Win, Federal Reserve Applies to Join Climate Network for Central Banks
The move came after the Fed, for the first time, formally acknowledged the threat climate change poses to the global financial system.
Nov 10, 2020
In a decision seen by some as a subtle acknowledgement of President-elect Joe Biden's victory even as President Donald Trump still refuses to concede, the Federal Reserve has applied to join what Bloomberg called "the climate change club for central banks," a group that requires participation in the Paris climate agreement.
"The Fed is a latecomer to this party and is still propping up the oil industry (and other giant corps) through huge purchases of debt."
--Alan Zibel, Public Citizen
"We have requested membership. I expect that it will be granted," Fed Vice Chair for Supervision Randal Quarles said during a Senate Banking Committee hearing Tuesday, Bloomberg reported. Quarles added that the Fed may become a member of the Network for Greening the Financial System (NGFS) before its annual meeting in April.
Launched in late 2017, the NGFS sets out to bolster the world's efforts to meet the goals of the Paris agreement and "to enhance the role of the financial system to manage risks and to mobilize capital for green and low-carbon investments in the broader context of environmentally sustainable development," according to its website.
The primary goal of the Paris deal, which took effect in 2016, is to "strengthen the global response to the threat of climate change by keeping a global temperature rise this century well below 2 degrees Celsius above pre-industrial levels and to pursue efforts to limit the temperature increase even further to 1.5 degrees Celsius."
Just over a year ago, the Trump administration began the one-year process of withdrawing the United States from the agreement; the U.S. exit became official last week, the day after the general election. While Biden has vowed to rejoin the deal, progressives around the world are urging him to go far beyond that and serve as a #ClimatePresident.
Bloomberg's Akshat Rathi suggested on Twitter Wednesday that by seeking NGFS membership, "the Fed tacitly accepts that Biden has won the presidency."
Although Biden's win may be a factor, earlier this year, before the U.S. officially ditched the Paris agreement, Fed Chairman Jerome Powell suggested the country could join the NGFS, Newsweeknoted Wednesday.
"We have been looking at joining in one form or another and talking to them about that," Powell said in late January. "We probably will do that at some point."
According to Newsweek:
Powell's remarks led to some speculation the Trump administration might alter its approach to climate change, with the Financial Times reporting on January 31 that some at the Fed had been privately pushing for membership of the banking group.
"The Fed's interest is another sign of the importance of the work of the NGFS," Bank of France governor Francois Villeroy de Galhau told the FT at the time. "It's a coalition of the willing. Climate risk is clearly a part of financial risk."
Quarles' comments about NGFS membership came a day after the Fed formally acknowledged for the first time that climate change potentially threatens the stability of the financial system and urged banks "to have systems in place that appropriately identify, measure, control, and monitor all of their material risks, which for many banks are likely to extend to climate risks."
"The Federal Reserve is evaluating and investing in ways to deepen its understanding of the full scope of implications of climate change for markets, financial exposures, and interconnections between markets and financial institutions," the central bank said in its semiannual report on financial stability.
Politico pointed out that the report followed related comments by Powell and was welcomed by another key leader at the Fed:
Powell said last week that the "science and art" of incorporating climate change into financial regulation is new but that the Fed is "very actively in the early stages" of getting up to speed and working with officials around the world.
"I welcome the introduction of climate" into the semiannual report, Fed Governor Lael Brainard, who heads the central bank's financial stability committee, said in a statement. "A lack of clarity about true exposures to specific climate risks for real and financial assets, coupled with differing assessments about the sizes and timing of these risks, can create vulnerabilities to abrupt repricing events."
Alan Zibel, research director of Public Citizen's Corporate Presidency Project, which focuses on corporate influence and conflicts of interest in the Trump administration, also praised the Fed's inclusion of climate risk in the analysis but noted that it "is a latecomer to this party and is still propping up the oil industry (and other giant corps) through huge purchases of debt."
Public Citizen, Friends of the Earth, and BailoutWatch released a report in late September titled Big Oil's $100 Billion Bender that showed "how the U.S. government provided a safety net for the flagging fossil fuel industry." The report said the Fed's emergency financing during the Covid-19 pandemic is "forestalling the demise of an industry that has always relied on government largesse."
\u201cAs we pointed out here: https://t.co/AdLkPw9rTS\u201d— Alan Zibel (@Alan Zibel) 1605021440
Last month, as Common Dreams reported, Sen. Jeff Merkley (D-Ore.) introduced legislation to prevent banks and international financial institutions from financing fossil fuels. David Arkush, director of Public Citizen's Climate Program, declared that he "is showing real leadership by introducing the first-ever bills to cut the money pipeline fueling the climate crisis."
When unveiling the pair of bills, the senator referenced a September report from the Commodity Futures Trading Commission warning that the climate emergency endangers the U.S. financial system. In response to the report, Arkush said that "U.S. financial regulators have the authority to help mitigate the climate crisis, and they need to use it. The best way to protect anything from climate change, whether people in wildfire or flood zones or giant banks, is to stop climate change."
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In Troubled Times, the Federal Reserve Must Work for Everyone
Aug 25, 2015
The world's markets have been chaotic these past few days. Recent events do not suggest a stable economy guided by rational minds. Instead, global finance seems more like a playground in need of adult supervision.
Like other nations, we have a central bank. What should the Federal Reserve do in troubled times? For that matter, what is the Fed's role in preventing troubled times from occurring in the first place?
Global Shock
Many of the causes of the recent stock market turmoil are indeed global rather than domestic. But those distinctions are becoming less important in a world of unfettered capital flow. Regional markets, like regional ecosystems, are interconnected.
Europe is struggling because of a misguided attachment to growth-killing austerity policies. Like Republicans in this country, Europe's leaders are focused on unwise government cost-cutting measures that hurt the overall economy.
China's superheated markets have experienced a sharp downturn, and its yuan devaluation will likely affect American monetary policy. Many so-called "emerging markets" are in grave trouble, their problems exacerbated by an anticipated interest rate hike from the U.S. Fed.
Plunging crude oil prices are a major factor in the last few days' events. However, questions remain about the underlying forces affecting those prices. Demand is somewhat weaker, and Saudi officials are refusing to cut production. However, there is still some debate about whether these and other well-reported factors are enough to explain that the price of a barrel of oil is roughly half what it was just over a year ago, in June 2014.
American Turmoil
Here in the U.S., the talk of recovery has been significantly dampened by events of the last several days. The now-interrupted stock market boom had been Exhibit A in the case for recovery.
Exhibit B was the ongoing drop in the official unemployment rate. There, too, signs of underlying weakness can be found. As economist Elise Gould notes, the labor force participation rate remains very low for people in their peak working years and has only come back about halfway from pre-2008 levels. Jared Bernstein notes that pressure to raise wages, which one would also expect in a recovering job market, also remains weak.
All this argues for a rational and coordinated policy in which the Federal Reserve and the U.S. government act together to restore a wounded economy. What would that look like?
Nevertheless, it would not include raised interest rates, continuing to be a serious discussion topic. As Dean Baker points out, China's currency devaluation alone should have been enough to take that idea off the table. What's more, as Baker rightly notes, such a move would only make sense if the Fed "is worried that the U.S. economy was growing too quickly and creating too many jobs." That's a notion most Americans would probably reject as absurd. Most are not seeing their paychecks grow or their job opportunities multiply.
Anxiety about inflation, while omnipresent in some circles, is not a rational fear. A slow rise in prices (0.2 percent in the 12 months ending in July, as opposed to the Fed's recommended 2 percent per year) tells us that inflation is not exactly looming on the horizon.
Now what?
"Everything is going to be dictated by government policy," the chief investment officer of a well-known investment firm said this week. In that case, isn't it time for a national conversation about that policy?
Another investment strategist told the Wall Street Journal that today's challenges come when "global central banks have exhausted almost all their tools ... It's difficult to see how central banks come in to support markets."
If they've exhausted all their commonly used tools, it may be time to develop new ones - not to support "markets," but to promote jobs and growth for everyone.
First, do no harm. The Fed needs to hold off on any move to raise interest rates. But inaction is not enough. Congress gave it a dual mandate: to stabilize prices and keep employment at reasonable levels.
Activist groups like the "Fed Up" coalition, led by the Center for Popular Democracy (and including the Campaign for America's Future), are working to move the Fed toward that second objective. They've been pushing to change its governing boards, which are heavily dominated by big banks and other major financial interests, and have called for policies that focus on improving the economic lives of most Americans.
Those policies could take a number of forms. One idea comes from Jeremy Corbyn, the populist politician who's on track to become the next leader of Great Britain's Labour Party. Corbyn's economic plan includes "quantitative easing for people instead of banks." Corbyn proposes to grow the financial sector in a targeted way, by giving the Bank of England (the UK's version of the Fed) a mandate to "invest in new large scale housing, energy, transport and digital projects."
A headline on the website of the Financial Times says (with apparent surprise) that "Corbyn's "People's QE" could actually be a decent idea."
Corbyn also proposes to "strip out some of the huge tax reliefs and subsidies on offer to the corporate sector." The added revenue would go to "direct public investment," including the creation of a 'National Investment Bank' to "invest in the new infrastructure we need and in the hi-tech and innovative industries of the future."
Qualitative Easing
Call it "qualitative," rather than "quantitative," easing. It would increase the money supply, but for money that is to be invested in the real-world economy - the one that creates jobs, lifts wages, and creates broad economic growth.
Could something like Corbyn's plan ever happen here? There's no reason why not. The Federal Reserve wasn't created by bankers, nor is it there to serve bankers - although a lot of people inside and outside the Fed act as if it were. (The choice of a former Goldman Sachs executive for its latest major appointment won't help change that.)
The Federal Reserve was created by the American people, through an act of Congress. Its governors and its policies are there to protect and serve the public. The Fed should use its oversight capabilities to ensure that banks don't behave recklessly or help private funds and other unsupervised institutions to behave recklessly.
We are still paying the price for allowing big-money interests to dominate both lawmaking on Capitol Hill and monetary policy at the Federal Reserve. That must change. Congress and the Fed, acting together, should ensure that our nation's policies benefit the many who need help, not the few who already have more than they need.
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