A blow for Elynomics

Truly. something of a blow:

The Bank of England has been forced to revise up its inflation forecasts as surging energy costs, labour shortages and chaos in the supply chain hold back Britain’s recovery from Covid.

Inflation will rise above 4pc and stay there into the middle of next year, the Bank of England warned, meaning prices will be climbing more than twice as fast as its 2pc target.

It suggests that policymakers may raise interest rates faster than previously expected in a bid to tame rising prices.

Just, for a moment, assume all this is true. Inflation is to move to 4%.

Firstly, this tells us that real interest rates are indeed changing. As opposed to the recent insistence that interest rates haven’t changed in yonks.

But more fun here. So, the MMT view, as from the Sage, is that interest rates cannot rise as everyone will go bust. It’s not possible to reverse QE to suck money out of the economy because that would be to, umm, suck money out of the economy. The only correct response is to increase taxation.

Which gives us two questions. The first is, well, what tax rate, upon what, reduces the inflation rate by 2%? We’d like to see the calculation please. Second, do the political incentives work? We all know that politicians love to spend and hate to tax because that’s the way electors like it. So, given the three choices, reverse QE, increase interest rates or increase taxes, which will politics deliver to us?

My bet is that if taxes are the only possible solution then politics will leave the inflation to run.

But Sage, what say you?

12 thoughts on “A blow for Elynomics”

  1. Of course they’ll leave inflation to run. This is in all likelihood a temporary blip in inflation; Covid will end, gas prices will regress to the mean, more HGV drivers will pass their driving tests, Ukrainian fruit-pickers will be given temporary visas, and so on.

  2. ” It’s not possible to reverse QE to suck money out of the economy because that would be to, umm, suck money out of the economy. The only correct response is to increase taxation.”

    Isn’t that (in MMT world) the same thing? I thought that tax revenue in MMT world was just cancelled, that was the whole point, you taxed people to get money out of the economy, just as you reverse QE by selling the gilts back into the market place and cancelling the cash received.

    And doesn’t this make your assertion that QE isn’t money printing a bit redundant (code for plain wrong)? You say QE isn’t money printing because it can be reversed (it never will be because politicians) but then MMT can be reversed too, via taxation (which it never will be either because politicians). So where’s the gap to slide a fag paper between the two concepts?

  3. I always say that QE is money printing, just in a reversible form. On the grounds that it is money printing in a reversible form.

  4. Pah! 4%? I grew up in an environment of 10% inflation and 15% interest rates, and digging through the snow to the coal shed. Youngsters, etc.

  5. Whatever the Sage says will, inevitably, be pompously punctuated with “Firstly”, “Secondly”, etc.

    Mrs Long-suffering Sage-Potato (if there be one): “Good morning Professor, dear. What would you like for breakfast, Professor, dear?”

    “Firstly, I shall break my fast by partaking of a fully carbon-costed nutritious repast of superiority, topped with a generous serving of juicy smugness. Secondly, I will wash that down with a large cup of steaming self-aggrandisement. Thirdly, it is not a ‘good morning’, my five-hundredth missive to the United Nations demanding that they immediately appoint me ‘Supreme World Controller’ has still not been actioned. Fourthly, there has been an insufficiency of fawning in the comments section of my latest genius prognostications on my web log. Fifthly, the bastard Worstall, has called me out again. Sixthly…”

    At this point Mrs Long-suffering Sage-Potato spontaneously combusted in a conflagration of exasperation.

    The Sage tutted, made a mental note to calculate the necessary carbon offset and used her flame to brown his toast.

  6. Dear ANNRQ

    There is more than one (ex) Mrs Sage-Potato but, as exes, they are no longer long-suffering, at least at the hands of the Sage-Potato.

    Suspiciously, the most recent ex Mrs Sage-Potato remains a member of Tax Research LLP presumably so that the Sage-Potato can retain limited liability. Whether she has twigged this I cannot say.

    However, putting that aspect to one side, the Sage-Potato has confirmed that, because she is (or I think was) a GP, she had the requisite expertise in tax that contributed significantly to the LLP’s business of (grifting for grants and donations in respect of) tax policy comment and research. The more cynical might suggest that the only contribution she could be capable of making would be to correct the Sage-Potato’s fist-typing and appalling grammar.

  7. ANNRQ

    That’s a brilliant post – what I enjoy is that frequently even within the same post point ‘fourthly’ might well contradict the ‘firstly’ – it’s a bizarre ‘stream of consciousness’ style rant which would be sad were there not so many who apparently take him seriously.

  8. “I always say that QE is money printing, just in a reversible form. On the grounds that it is money printing in a reversible form.”

    All money printing is reversible. You just tax people and burn the notes, or cancel the money electronically. Ergo to defend QE as ‘not really money printing because its reversible’ is sophistry.

  9. All macro-economists should be lined up beside a trench & neck shot. Macro-economists got the country into this mess in the first place. Now you expect them to get you out of it? Even uttering the word should be a capital crime.

  10. ” The first is, well, what tax rate, upon what, reduces the inflation rate by 2%?”

    Actually. Just this.

Leave a Reply

Your email address will not be published. Required fields are marked *