By how much should the Bank of England increase interest rates in a traditional monetarist economy

[Weekender]

0.5% to 1.75%

 

[Ponty]

1.75%

Still staggeringly cheap money.

 

[ks.234]

I'm not sure it does see workers demanding a living wage as the problem it just looks at aggregate demand and seeks to reduce it. It's tools may be rather crude and so the result is the poorer suffer more but I don't think they seek to do that, rather than regard it as collateral damage.

The one reason they might account for it is marginal propensity to consume however. If you want to maximise the impact of your policy, you want to reduce the demand of people who spend a higher proportion of their income and save less which tends to be the poor. I think the issue here is that they look at economics as "positive" rather than "normative" ie they dont consider the morality of their policy, just the effectiveness, within the framework of their accepted model of the economy.

I'm actually interested in other options to address inflation, just not those espoused by MMT as there are lots of threads covering that already.

I would disagree. ‘Aggregate Demand’ is a Keynesian thing and Monetarism was an explicit attack on all things Keynesian including the New Deal and our post war consensus. Monetarist economists attacked Keynesianism because the believed that any government spending on public services was literally a “slippery slope to totalitarianism”

Monetarism is opposed to public spending on ideological grounds

Unemployment is essential under the NAIRU, which despite no evidence at all is taken by monetarist to determine that a minimum level of unemployment is necessary to control inflation.

Unemployment under monetarism is deliberate, not accidental.

Under Monetarism, there is no alternative, so I’d be interested to hear what these other options to control inflation are and where they come from.

 

[lawrence001]

So you are rejecting a view of the economy which provides the basis for full employment, prosperity and low inflation based upon an issue that you 'don't know how all that works' and instead prefer to talk about a system which uses unemployment, poverty, despair, alcoholism, depression etc etc to keep inflation down.

No I'm keeping it out of this discussion as I already know the answers it provides from numerous other threads. What I'm interested in is the alternatives provided by other models of the economy, most notably moneterism as that seems to be the model used by the rate setters.

 

[ks.234]

No I'm keeping it out of this discussion as I already know the answers it provides from numerous other threads.

Sorry, but you clearly don’t, as you’ve already indicated

What I'm interested in is the alternatives provided by other models of the economy, most notably moneterism as that seems to be the model used by the rate setters.

According to Monetarism, there is no alternative.

 

[Sue Pertwee-Tyr]

No I'm keeping it out of this discussion as I already know the answers it provides from numerous other threads. What I'm interested in is the alternatives provided by other models of the economy, most notably moneterism as that seems to be the model used by the rate setters.

ISTM we've already established what the alternatives are, and they're a bit limited. If that's what you want, I think this thread is done isn't it?

 

[lawrence001]

Well, can't it? Doesn't it do that anyway?

I was under the impression that the Bank of England had that responsibility, and the Bank of England is independent of the elected government. In theory anyway.

 

[ks.234]

ISTM we've already established what the alternatives are, and they're a bit limited. If that's what you want, I think this thread is done isn't it?

Yes, alternatives to what? Tackling inflation? But we weren’t supposed to be looking at inflation? Alternatives to monetarism? but we’re not supposed to be looking at alternatives to monetarism.

 

[PaulMB]

Having read most of the previous posts, one thing occurs to me:

Almost the entire discussion is about the BoE, the UK's national debt, control of Sterling and relative interest rates. But are there not global aspects that can and often do override this? To sell Sterling bonds, for instance, you have to offer a rate that will attract buyers, who can also buy bonds in other currencies. If the prices of oil and gas shoot up, this will affect the UK economy. If the Chinese produce things cheaply, this will affect British industry. If the Germans and Italians produce better value-for-money cars, this will affect the UK car industry (which still exists, apparently.)

I've also read that MMT is about 100 years old, so if it is so universally valid, why has it not yet replaced traditional economic theory?

 

[lawrence001]

Yes, sorry, but I think you might have got a few things in the wrong order.

All that MMT ‘says’ is that our Government is the currency issuer and cannot therefore run out of the thing it is issuing

Spending is what Government chooses to spend what it issues on.

Tax is what happens after spending and is no more than a drain of excess.

To try to bring things back to Monetarism, when it comes to spending, monetarism is ideologically opposed to spending on public services. The mechanism it uses to restrict spending on public services is to tell the lie about the role of tax and therefore shift the cost of spending on public services back onto the public.

I've always thought of moneterism as a model of the economy including not just nominal output/demand/income but also interest rates and price levels. I put the anti government spending/supply side stuff into the New Classical camp. Maybe there's a bit in the middle where there meet, or I'm just wrong, happy to be corrected.

 

[Sue Pertwee-Tyr]

That the govt when setting tax and spending can also choose the level of the money supply. I could be wrong on that but that's how I read the numerous threads on this issue.

Well, can't it? Doesn't it do that anyway?

I was under the impression that the Bank of England had that responsibility, and the Bank of England is independent of the elected government. In theory anyway.

The Bank of England is part of government. The independence is limited to the setting of interest rates to moderate inflation, which feels to me to be distinct from choosing the level of the money supply. I may have that wrong, mind you. But it seems to me that the level of money 'in the system' is set by the amount of money government chooses to put into the system, ie its budget. That's a Treasury thing.

 

[Sue Pertwee-Tyr]

Yes, alternatives to what? Tackling inflation? But we weren’t supposed to be looking at inflation? Alternatives to monetarism? but we’re not supposed to be looking at alternatives to monetarism.

To be fair to the OP, I think what he's getting at is: 'given we have a government that believes 'X', what options does it think it has at the moment, so what might happen next?'

Which feels like a reasonable question. And in those terms, saying 'yes, but believing 'X' is wrong' might be correct, but isn't going to help us anticipate what happens next so as to deal with it.

 

[Super Bigote]

I'm not rejecting it or accepting it, I'm trying to discuss what the MPC should do given its view of how the economy works, how they should balance the pros and cons of interest rate rises in a very difficult situation. Assuming they don't suddenly all see the light and embrace MMT as a model of the economy.

Well you've had your answer. You can't play with interest rates to help those who suffer.

 

[ks.234]

I've always thought of moneterism as a model of the economy including not just nominal output/demand/income but also interest rates and price levels. I put the anti government spending/supply side stuff into the New Classical camp. Maybe there's a bit in the middle where there meet, or I'm just wrong, happy to be corrected.

We have had 3 distinct era of modern capitalism.

The first was Classical Economics written by people like Adam Smith and based on the freedom of self interested actors to compete in an unfettered market. It should be noted that Smith also recognised that the market could not provide public goods, so said that things such as free schools should be provided by Government. Adam Smith did not recognise unemployment as an issue, but as the industrial Revolution developed people like the Progressives started to predict mass unemployment.

The second was the New Deal economics of Keynesianism based on full employment. This immediately came under attack by the likes of Milton Friedman who saw government spending as the cause of Hitler in Germany and Stalin in USSR.

The third era is neoliberalism which came to the US and UK after the inflation of the 70’s. Monetarism is the economic policy of neoliberalism that has all the characterises we have discussed already but also has a tendency to authoritarianism and in the U.K. where we only have a choice between two evils, is profoundly undemocratic

 

[Sue Pertwee-Tyr]

It feels like what we're going through now might be the death throes of Neoliberalism and Monetarism. Both ideologies are manifestly failing their professed objectives, and are being seen so to do. Whether they actually fail and die might be down to whether there is enough resilience in the political and democratic systems to enable alternatives to emerge.

 

[ks.234]

To be fair to the OP, I think what he's getting at is: 'given we have a government that believes 'X', what options does it think it has at the moment, so what might happen next?'

Which feels like a reasonable question. And in those terms, saying 'yes, but believing 'X' is wrong' might be correct, but isn't going to help us anticipate what happens next so as to deal with it.

Yes, thanks for that. Makes a bit more sense. However, my fundamental problem remains, in that monetarism is not going to help us in the coming storm. It is incapable of helping us, it was not deigned to help us, and most of all, it is the causal reason why we need help so desperately.

Our present system will not help us.

 

[Sue Pertwee-Tyr]

Yes, thanks for that. Makes a bit more sense. However, my fundamental problem remains, in that monetarism is not going to help us in the coming storm. It is incapable of helping us, it was not deigned to help us, and most of all, it is the causal reason why we need help so desperately.

Our present system will not help us.

Yup. See my immediately preceding post.

 

[Colin L]

Au contraire...the rich are getting richer..it's working just fine for the power holders and decision makers.

 

[Sue Pertwee-Tyr]

Au contraire...the rich are getting richer..it's working just fine for the power holders and decision makers.

There's a difference between 'professed objectives' and 'unackowledged objectives'. Monetarism was sold to the populus on the basis of it being the rational way to run a stable economy to the betterment of all. That's the professed objective. I wouldn't disagree that the unacknowledged objective is to concentrate power and wealth in the hands of those who have it, but the populus wouldn't wear that if it was offered to them.

 

[Super Bigote]

It feels like what we're going through now might be the death throes of Neoliberalism and Monetarism. Both ideologies are manifestly failing their professed objectives, and are being seen so to do. Whether they actually fail and die might be down to whether there is enough resilience in the political and democratic systems to enable alternatives to emerge.

It'll probably fail by one death at a time as those progressives who have too much invested in monetarism expire and are replaced by the new generation.