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An interesting MMT test

No deal Brexit will cause the £ to fall. OK, change in terms of trade, change in value of currency, obvious. But it’s a nice test for MMT:

Consultant Capital Economics suggests an even bigger drop to $1.15 against the dollar and below parity against the euro. Capital says the Consumer Prices Index (CPI) might hit 3.5pc next year, the highest since George Osborne’s austerity VAT hike pushed up prices in 2011.

We get inflation. At which point Snippa tells us we have to curb new money creation – and thus spending – and raise taxes. But this will be at a time of rising unemployment and spare capacity in the economy. Which is when we shouldn’t curb spending nor raise taxes.

That is, we’ve a test of the MMT contention, that we can control the money supply, inflation and the FX rate all at the same time through the same instruments. We can’t, of course. There ain’t no economic philosophers’ stone.

6 thoughts on “An interesting MMT test”

  1. No deal would cause the £ to drop to $1.15. I think that’s bollocks, like most economic forecasting, but let’s run with it as a Gedankenexperiment. What’s the probability of a deal vs ‘no deal’? It’s looking 50:50 to me, and I haven’t seen anyone come up with a better analysis (though any ‘deal’ is looking like pretty thin gruel). The £ is currently at ~$1.34, so if we get a deal, shouldn’t that mean it would shoot up to $1.53 or thereabouts? No, me neither, and that’s because the effect of no deal is already largely priced in.

    (IMHO and I’m in no way qualified to give investment (or most other forms of) advice)

  2. Bloke in North Dorset

    What the markets hate is uncertainty and this looks like one of those situations where the £ will rise no matter what happens, deal or no deal.

  3. “What the markets hate is uncertainty”

    I hear this statement trotted out so often its a cliche

    Of course they like uncertainty, how else would they make money? The whole stockmarket thrives on uncertainty – if everryone knew what was going to happen how could markets operate?

    For every winner there is a loser, that’s the way it works. Some assess/forecast/guess correctly, some don’t – it was ever thus

  4. “For every winner there is a loser, that’s the way it works.”

    Not really. Both sides of all transactions agree to it, for whatever their reasons.

    To wit, I can’t buy a stock unless someone sells it to me; I can’t sell a stock unless someone buys it.

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