The idea of government intervention and demand-side fiscal stimulus was born by Keynes, eradicated by neoclassical economics, lazily reintroduced by the new Keynesians, and is now enjoying a renaissance. It’s fiendishly difficult to judge history in real time, but I would bet that the current shift has momentum, a position that has been strengthened by the response to the Covid-19 crisis. It is perhaps unfair to insist on a marriage between this story and MMT, but it serves as an introduction to the issues at hand. The idea that governments with sovereign Chartalist currencies can’t run out of money, and that this power should be used to achieve full employment, is enticing. It is also, however, naive. MMT easily dodges the main theoretical critique, at least in the current environment. The Phillips Curve probably still exists, but it has also flattened significantly, making it difficult to attack MMT armed with the traditional trade-off between unemployment and inflation. If MMT passes this first test, however, it fails the subsequent trials. The implementation of MMT in today’s economy requires significant shifts in the relationship between fiscal and monetary policymakers and an end to the free flow of capital. My sense is that about half the proponents of the theory don’t have a clue about any of this. The other half understands that MMT requires an end to central bank independence, and a significant reduction in capital mobility. The problem is that this latter group aren’t being honest, and for that reason, I am skeptical about their true motivation. If you want to dial back globalization, the least you can do is to be honest about what this means for households and firms. If you think that an independent central bank is a suboptimal institution, how will the alternative look, and how will it be held accountable?
Read MoreSeven years ago I did a thesis on demographics and capital flows, which informs my thinking on economics and finance to this day. That’s a long time ago, though, so I thought that I would provide an update on one of the key pillars of that work. It starts with ageing. The breadth and speed of population ageing currently sweeping the global economy is unprecedented in human history. It is partly driven by rising life expectancy, which we can crudely hold to be a linear function of economic development. But it is also a result of a complex fertility transition. Two stylised facts should be highlighted at the outset. Firstly, the demographic transition does not end with a homeostatic “equilibrium” of replacement level fertility. Secondly, the decline in fertility seems to be driven by two forces; the quantum effect which operates on a quantity/quality trade-off and the tempo effect, which is the phenomenon of “missing births” as women postpone having their first child. The two are connected in complex ways, that we probably don’t quite understand. My goal here is to understand what is happening to global fertility rates. My sample is the World Bank’s data and their estimates of total fertility rates across countries.
Read MoreThe sharp fall in oil prices was the most interesting market news last week. It sends a signal that investors are waking up the fact that the brittle OPEC output deal always was going to be challenged by U.S. producers restarting their drills as prices rose. I am no expert, but this does not come as a surprise to me. OPEC is an unstable alliance, and U.S. producers are governed by one thing and one thing only, price. Whatever detente exists in the global oil market, I am pretty sure that it is a fragile one. A significant leg lower in oil could be significant for a number of reasons. It could herald the speedy end of the "reflation trade," which would suit me well. But if it morphs into something more dramatic, we're back to the story of stress in energy high yield debt, default risks, and perhaps liquidity/fund closure risk in the broader corporate bond market. I am not sure that would suit the portfolio one bit.
Read MoreI am generally a tolerant guy, but when it comes to a debate on international capital flows I am a raving lunatic. I have no time for amateurs, and it is my clear impression that president Trump’s trade advisors, and those who agree with them, are just that. You need to understand where I am coming from, though. Specifically, you need to read my two essays about QE, population ageing and the global paradox of thrift. Here is a summary if you don’t want to read the whole thing; read it carefully.
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