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  • Writer's picturePete Jonson

Saturday Sanity Break, 22 October 2016 - pollies v technocrats

Theresa May, Prime Minister of the United Kingdom, recently dared to note that modern monetary policy, notably near zero interest rates and 'Quantitative easing', have damaging side effects.

"... People with assets have got richer. People without them have suffered. People with mortgages have found their debts cheaper. People with savings have found themselves poorer."

Mark Carney, Canadian governor of the Bank of England, took exception to this entirely, in my view non-controversial, statement of the bleeding obvious."... the policies are done by technocrats. We are not going to take instruction on our policies from the political side”.

Thanks to Michael Gove and The Times for appraising us of this storm in a large tea cup. The problem with Mr Carney's position is that serious thinkers about economic policy believe the high gods of Macroenomics have lost their way. More here.

Paul Romer, current Chief Economist at the World Bank, concludes with his 'The Trouble with Macroeconomics' with the following: 'Some economists counter my concerns by saying that post-real macroeconomics is a backwater that can safely be ignored; after all, "how many economists really believe that extremely tight monetary policy will have zero effect on real output?" To me, this reveals a disturbing blind spot. The trouble is not so much that macroeconomists say things that are inconsistent with the facts. The real trouble is that other economists do not care that the macroeconomists do not care about the facts.'

I am a mature macroeconomist who has attempted to analyse important macroeconomic issues with both simple and deeply sophisticated tools - here is a link to the first type. I have no doubt that 'extremely tight monetary policy will adversely impact on real output'. (See Paul Romer's simple analysis of Paul Volcker's extreme tightening of US monetary policy, based on the image of the week below.)

I also believe that wildly easy monetary policy, now practised by Mr Carney in the UK, Ms Yellen in the USA and Messrs Stevens and Lowe in Australia is already creating asset inflation and will eventually cause goods and services inflation. It gets worse. Asset inflation is always eventually replaced by asset deflation, and the longer wildly easy monetary policy is allowed to run the bigger will be the eventual deflation of asset prices.

Mr Carney, Ms Yellen and Messrs Stevens and Lowe are all highly trained technocrats. They all have been grant licence to act independently to implement objectives determined by their governments. (The emphasised phrase is vitally important.) Criticising those government for discussing the bleeding obvious side-effects of what are quite likely to eventually be seen as mistaken policies is unacceptable, though so far only Mr Carney has done this so overtly.

There is no such discussion I am aware of among the local macroeconomic heavyweights. Indeed, it is difficult to find such people, and even harder to extract a statement of belief on these key points.

The sporting life

This week has seen the likely implosion of Nick Kyrgios, Australia's best hope for real tennis stardom. As well as being banned from tennis tournaments for 10 weeks, CNN reports he has opted to play in an all star basketball game instead of getting back to tennis as soon as possible. Given his stated preference for basketball, perhaps this is a wise move.

What is so hard to understand is Mr Kyrgios's decision to simply give up, this time without clutching his groin to provide an excuse. I can report that the Mont Albert Fourths always fought it out, even when confronted by the powerhouse team that was Nunawading seconds. That is surely required behaviour, especially when people have paid to watch.

It's about to be the cricket season, if the rain will ever stop to allow pitches to be prepared that can be played upon. If it were the Indians who were coming, our pitch-makers could prepare wonderful greentops, but the South Efricans have their own demon fast bowlers. It seems we have only two or three quicks worth playing, and after all the time and effort put into our best cricketers, this seems like an unfortunate outcome.

Image of the week

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