🤦‍♀️ Why are Economic Policy Makers so Irresponsible?

Irresponsible policy

I cited Matthew 15: 1, as the best description of President Biden recently meeting with Treasury Secretary Yellen and Fed Chair Powell – 

"Let them alone: they be blind leaders of the blind. And if the blind lead the blind, both shall fall into the ditch."

However, the White House meeting wasn’t just about Biden channelling his inner Reagan[1]; it was about being seen to be doing something about inflation and about playing the blame game, or as I told Bloomberg’s Juliette Saly 

“This was really badly scripted, badly directed, badly produced Kabuki theatre with three really terrible actors in the lead roles, telling us, in turn how each is so concerned about inflation but how it's the others' fault Biden is 'laser-focused' on inflation but won’t interfere, because it's the Fed's job (and therefore the Fed’s responsibility i.e., fault). 

Yet, the notes of the last Fed meeting were very clear: 

This is supply shock inflation.

Monetary policy can't do anything about supply.

It can reduce aggregate demand, which would cause a slowdown 

Therefore, rate hikes a️nd Quantitative Tightening [2] are a really bad idea 

Yet they tightened anyway & they're going to keep tightening.

Why are policymakers so determined to screw things up?

The first issue is core competence - most global policymakers, certainly in the west, are wedded to a mainstream vision of how the economy works, which owes more to a broader socio-political belief set than to the empirical study of economics. Lots of things that we want to believe about the world, about opportunity, about equity, about equality tend to cause and effect assumptions that have no basis in reality. For a better understanding of this, we’d recommend the latest book from a good friend and mentor to the MBMG Group, Professor Steve Keen - The New Economics: A Manifesto.[3]

Policymakers believe that they have a far greater and more precise degree of economic control than the evidence indicates. 

Policy makers capability to generate negative impacts exceeds that to create positive outcomes. They don’t realise, in Boom Economics author, Gerry Brady’s words, that “they’re much more effective when they use the brake pedal than when they use the accelerator.”

Other thoughts - China and Western Markets Divergence

China will re-open and will adopt less destructive economic policies than the west. Expect divergence - China may well not boom but we don’t see the same risks of a major bust that the west faces. We're already starting to see capital market divergence in an increasingly bipolar global economy. Asian markets produced positive returns in May, western ones didn’t. This gap could continue to become wider.

I also pointed out that an even bigger challenge for the American and global economies than monetary policy mistakes is fiscal policy headwinds-

“The biggest problem is that the 2022 US federal budget is around $1.5 trillion net lighter than 2021. If the government takes away $1.5 trillion from the economy, you have to make that up from somewhere. Instead of making up some of that, QT is taking even more away. That’s the real problem.”

This was echoed by Professor Stephanie Skelton, author of the excellent ‘Deficit Myth'[4]

"The deficit is already collapsing from $2.8T in 2021 to around $1T this year.

The bulk of the reduction, however, is coming from the active withdrawal of fiscal support—e.g., the $1,400 checks that went to most Americans last year ($350B in stimulus) is done.

The expanded (CTC) child tax credit ($110B) lapsed in December.

Student loan repayments are likely to start back up for tens of millions of Americans, robbing the economy of substantial spending beginning in a few months"

Things could get bad and if they do, they could easily become very bad.

And if that happens, we’re relying on policymakers who have historically been very poor on the accelerator to suddenly step up and step on the gas.

Many of these themes are also covered in our latest monthly Outlook ‘Flaming June…heating up’.

Please contact us if you’d like a copy. 📖📥 info@mbmg-group.com

[1] Then Fed-head, Paul Volcker was summoned to the White House in 1984 to ensure that spiralling inflation didn’t prevent another disastrous 4 years of the self-styled ‘Gipper’ driving the economy into ditch (as opposed to letting Walter Mondale do it. As a terrible actor before becoming a terrible President, Reagan been so taken with playing the role of American football hero George Gipp, that he liked to be referred to as the Gipper thereafter)

[2] QT (or Quantitative Tightening) refers to the Federal Reserve selling assets from its balance sheet and removing the proceeds from circulation, reducing the volume of liquidity in circulation, primarily in capital markets.

[3] https://www.amazon.com/New-Economics-Manifesto-Steve-Keen/dp/150954528X

[4] https://www.amazon.com/Deficit-Myth-Monetary-Peoples-Economy/dp/1541736192/

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About the Author:

Paul Gambles is licensed by the SEC as both a Securities Fundamental Investment Analyst and an Investment Planner.

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