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d that led to a mindset in which people abandoned the friedmanite view that inflation is always and everywhere a monetary phenomenon too much money too few goods inflation in other words he accused central banks of acting like their control over people s expectations was so good that they could control the money demand function and keep ngdp expectations and ngdp absolutely nailed down no matter what the circumstances a bit like mk himself sort of implied twenty years ago comparing himself naturally enough to maradona honestly because inflation expectations matter to the behaviour of households and firms the critical aspect of monetary policy is how the decisions of the central bank influence those expectations and i think later mk is right to criticize maradona era mk because it is apparent that if the circumstances are special enough post pandemic households stuffed with money an energy shock interest rates not appearing to rise enough the sheer fact of the money just outweighed people s hazy expectation that eventually the central banks will come in and rein demand growth back to where it should be things can get out of hand this caused the great ish inflation but i personally as a stupid person felt that the 2021 24 period only made it all the more obvious what causes inflation it was not some mysterious moment where the central banks and economists were suddenly flummoxed but its very opposite we really understand inflation now i think they were much more flummoxed in the twenty years before to make a serious point at a time when ordinary people are apparently distrustful of experts economic ones in particular it does not do any of them any good to pretend even slightly that they do not know the basics like this i am absolutely sure they do we know what causes inflation the economy is a big complex thing with mutliple half hidden variables playing upon one another it is hard to see in real time and it is easy for policy to misfire but something being complicated is not the same as it being mysterious posted by freethinkingeconomist december 5 2025 posted in uncategorized tags economics economy finance inflation investing 1 comment on so now we re pretending we don t know what causes inflation what the fiscal rules again the conventional wisdom at least of the sort of crowd i hang out with is that there is nothing wrong with the fiscal rules nor with the office for budget responsibility obr that measures policy against them you can t blame them for the state we re in not low growth nor strained public services and not even the high public debt that they were in theory set up to help control the centre for policy studies has written a piece all about this that i think disagrees i think parts of it are excellent they are right to point out that chancellors appear to have no incentive to pay down debt when times are good and this is revealed in their behaviour linking to an excellent piece of work from the ifs on just this when times are better than expected the revenues are spent when worse the debt takes the strain they make an interesting point that chancellors are not punished when a previous forecast is subsequently shown to be too optimistic no one apart from a band of determined geeks looks back 5 years reminds the chancellor what he said he would do and berates him for it chancellors get fired quite often but never for that the result is that people in the treasury have a strong incentive to pencil in wildly ambitious for which read low targets for future spending but when the year in question rolls in what it spent is not longer binding at least not by the fiscal rules cue a few dozen boring columnists quoting st augustine but other parts of the piece confuse me on second reading as much as the first the cps complains about policy being made to meet these forward facing fiscal rules and the fuss made by all and sundry about future headroom like everyone they criticise the way reeves tried to adjust welfare policy midyear to find savings and fell flat on her face you could argue as the institute for government has that we should only look at policy once a year and as everyone suggests have more headroom then you won t be jiggered around by random exogenous shocks but what should the rules be if not binding and demanding policy responses at some point the standard complaint which the cps magnifies with some brilliant charts is that forecasting is well nigh impossible and therefore a terrible basis for policy here i think the cps are just a tad disingenuous for all the multiplicity of blue dots there have been four or five giant macro uncontrollables that have knocked the uk economy and its fiscal forecasts sideways the recovery from 2010 was too deflationary covid happened there was a big post covid inflationary surge that both raised ngdp and also introduced a massive energy supply shock and brexit looks to have half murdered future productivity growth unless you are the kind of wally who thinks this can be blamed on resolution foundation these are largely not the fault of the fiscal rules nor the obr s forecasting capability yes they show that forecasting is hard but not that you should never make any i don t really understand what other basis you can suggest for budgeting spending and tax policy have to be sticky over the medium term or you wreck the certainty of the economy and public services do this without a revenue forecast and the bond market will go bananas budgets need forecasts the more controllable reason the forecasts are reliably wrong is the point the cps makes so well earlier a persistent inability of governments to be honest with themselves or the electorate about the spending they need to make for public services as the cps says hard decisions are put off but another way of putting this is that everyone politicians voters and many right wing think tanks have conspired in a fiction that a future government can run public services on far lower resources than they in fact need i have been complaining about this for a dozen years now i am not going to be so petty as to go back over everything the cps has said on spending but i would be amazed if they have been urging realism on this topic realism means preparing the voters for higher taxes or drastically curtailed services it feels unfair but everyone has the right to play one truss card and i remember very clearly their enthusiasm for that let s cut taxes like crazy i am sure we can find the spending cuts later moment in a much more hawkish mood now the cps nobly suggests that governments should adopt a charter that includes strategy for addressing long term spending pressures identified in the obr s fiscal risks reports well bravo but they immediately notice the contradiction they have been caught on in this glorious acknowledgement of course any long term models of spending and debt should be treated with caution and not used to replace today s arbitrary targets with even hazier ones decades hence their usefulness lies in that they show broad trends and can indicate whether current tax levels are adequate for projected levels of spending and force politicians to confront those choices so this is why i am confused if you want to show whether current tax levels are adequate for projected levels of spending and force a confrontation you have to forecast the state of the economy for a good few years those forecasts will keep changing and you will have to respond or it is meaningless so how does that leave us substantially in a different place to where we are now i am also confused that they want chancellors held accountable for current year outcomes i e be responsible for failing to hit past forecasts without spelling out how this would actually change behaviour suppose a chancellor learned half way through the year that rates were rising revenues falling and current year deficit going to be blown right through is the cps idea that the chancellor just looks ashamed or that they adjust policy if the former nothing has changed if the latter this would trigger the kind of in year tax rises and spending cuts that are supposedly a fault of the current fiscal rules or to quote their own eloquent complaint in response to extremely fine grained changes in projected spending or tax revenues the chancellor announces policy designed purely to meet these fiscal objectives just replace projected with realised it is still policy instability realised near term outcomes are just as big a driver of volatility as changing future forecasts and muleishly refusing to use the highly convenient device of borrowing cheaply because of some promise your predecessor made 3 4 years ago is a bit crazy i am glad chancellors do not have to perform this way the final bit of the report contains some useful comparisons with more virtuous or fortunate countries i am not sure everyone would agree the german debt brake has been the ideal policy it may explain why they have been such a growth laggard but like they say it is political they add an interesting discussion of using public sector net worth as a target though noting in an ironic aside quite how it moves with interest rates and can therefore be somewhat unstable well quite all in all this is a good short read that encourages people to think about the rules but i think it inadvertently reveals that the volatility uncertainty and asymmetry in the fiscal system is fairly intrinsic and can t be designed away and you can t change what chancellors get fired for even if they have to endure the horror of presenting an account to parliament on what went wrong politicians inherently have near term incentives that outweigh longer term considerations and it takes acts of statesmanship to get beyond it maybe some day in the future one of them will stand up and speak this truth straightforwardly either a left wing think tank accepting that lots of spending needs to be cut or a right wing one setting out how taxes have to rise i actually have more money on the latter it may even be the cps posted by freethinkingeconomist november 24 2025 posted in uncategorized tags economics economy finance news politics leave a comment on what the fiscal rules again is this really a boe whatever it takes moment there is a striking column in the ft from adam tooze the incredibly prolific chartbook author which as i see it boils down to this prolonged stagnation has thrown the uk into a desperate position the 2022 truss faceplant has magnified an already strong tendency to overreact to the bond market past such overreactions like those of 2010 15 led to some terrible policymaking we need to emulate the qe enacting demand boosting heroics of carney draghi et al from a decade ago and affirm the priority of reviving investment led growth somewhat coded it is nevertheless bracing stuff including such sentences as one could follow donald trump in demanding interest rate cuts really he hedges himself with a warning not to ignore inflationary pressures or long run debt the most concrete suggestion is for an immediate end to quantitative tightening qt which he says would help to lift the fear of bond market crisis which is apparently what standing in the way of democratically elected politiciants delivering all that investment there is a fair bit to agree with from tooze and a large proportion of bluesky might swallow the whole package longstanding readers of this blog will know that i have called for the bank to pursue ngdp growth rather than stable inflation for over a decade five years ago i set out what you need to believe if you are to call for this top of the list more important than all the rest is a strong conviction that the economy is demand constrained more cash spending will produce more real output otherwise all you are doing is creating that inflationary pressure that tooze admits we should not ignore anyway is he right well i have questions first i want to protest my demand side bona fides for years i felt strongly that weak nominal growth demand in other words was why the economy was underperforming so what if inflation was on target it was too much of a coincidence that it should have happened all at once i produced slides like this for fellow government insiders and i was particularly exercised by the idea that what may have been a positive labour supply shock was being seen as a negative productivity shock because it just lowered wages i wasn t sure i just thought it was under explored because it was a heresy this is my roundabout way of saying that i think adam tooze is right about the failures of 2011 15 partiularly with regard to the eurozone when trichet raised rates in the face of a weak economy this probably brought about the crisis that draghi had to do whatever it takes to solve but now here is how i see things demand is the problem when ngdp growth is too low and resources are not fully mobilized supply is a problem when a lot of ngdp growth generates inflation and not real returns and here is the chart showing how these have both behaved it compares the post great financial crisis recovery 2010 17 say nominal and real with the one that began in october 2021 up to the most recent moment the blue lines go up at 3 7 and 2 05 respectively the gap between inflation actually the gdp deflator was clearly not the problem i personally think that if we had yanked up the thick blue line the dotted one would have risen too we would have had more real growth now look at the red lines our nominal growth has been far higher since 2021 about 6 per year the dotted one has been much lower about 1 this means most of that nominal growth has been inflationary with significant consequences for inflationary expectations bond yields living standards and more it is not that mysterious why we have enacted a really bad brexit deal suffered a terrible energy price shock that is only half dissipated and the hangover of covid which has enduring labour market effects you can argue about government present and former culpability in some of these but the mode of their effect is clear it is on the supply side they are not causing their effect through insufficient spending to be very clear i am worried about a great many things weak technology diffusion stubborn energy costs low levels of dynamism the need for tax reform crappy regional transport networks but right now unlike from 2010 20 i am not worried that the bank is doing something that is holding down spending and investment in the uk economy my second criticism is about tooze s apparent unconcern about how his suggestions would lift the fear of a bond market crisis what he seems to be calling for is fiscal dominance for growth concerned policymakers to be allowed to assert that investment should be allowed to take place without incurring unduly high interest rates the implication of the call to end qt is that it is central bank selling that is driving down bond prices driving up yields and so the reverse ...