Monthly Video Archive 2019
An archive of Professor Tim Congdon's Monthly Monetary Updates from the year 2019. In this archive you can find a link to his Monthly Note videos, the Money Notes (PDF) and also the slides used in the Monthly Notes (PDF).
December: The Greek debt miracle: does it have a wider message?
This video looks at Greece, where better management of public debt has improved the economic situation dramatically. When Greece joined the Eurozone in 2001, the Greek government misled the European authorities about the size of its budget deficits. By the time of the Great Financial Crisis, these falsified figures had been accompanied by extravagance, with public spending being sharply increased. The debt ballooned to 15% GDP in 2009. Mass selling of this debt by banks in 2010 caused the yield to rise sharply. A higher interest rate was charged on new debt, causing the situation to spiral out of control. In 2011, the Greek government defaulted on almost half its debt. With the markets losing confidence, the yield on 10 year Greek government bonds rose above 30% the following year. The debt was approaching 140% of GDP. The Greeks were forced by the “Troika” (IMF, ECB and European Commission) to bring their finances under control. The measures imposed were very harsh, causing a sharp recession which reduced output by about 25%. The debt to GDP ratio moved up to 180%. Since then, however, there has been a turn round, with the government running a surplus (excluding interest payments) since 2013. Yield on 10 year bonds has fallen to 1½% and interest payments are now down to 3% of GDP.
What lessons can be learnt? Firstly, honesty always pays. If you are distrusted by the markets, you will have to pay more. Secondly, Keynesian budget deficits are a bad idea as they can slide into debt explosions as happened here. Thankfully, things are now under control.
November: A global round-up. What is the message for 2020?
At the end of 2018, Tim Congdon predicted that below-trend growth was more likely at the start of 2019 than trend or above-trend growth. Inflation was low and likely to remain low. These predictions turned out to be largely correct. This assessment was based on the Quantity Theory of money. Sharp fluctuations in the quantity of money, broadly defined, have an influence on macroeconomic outcomes in the short run through their effects on asset prices and balance sheets.
Looking at the USA, there has been an upturn in broad money in the last few months. This points to above-trend growth. The stock market and house prices have been buoyant, foreshadowing an upturn in the wider economy. US banks’ holdings of government debt have gone up in the last year, thanks to the monetization of its large deficit. The Eurozone has also seen broad money growth increasing. Eurozone bank deposits have picked up but not to excessive levels, China’s broad money growth is straight-lining at around 8% a year, suggesting stability. However, there have been attacks on the shadow banking sector, which may explain the disappointing levels of demand and output in the Chinese economy. This is part of a move to centralise the Chinese economy by the current leadership. Unfortunately, this tends to result in adverse economic outcomes. The growth rate is likely to slow. India has a more introverted, protectionist economy. Broad money growth has also been straightlining recently, suggested a stable economy in 2020. Japan’s broad money growth has fluctuated between 2% and 3½% over the last few years. The current pattern of low inflation and low GDP growth is likely to continue. Broad money growth in the UK has picked up after running at a modest level in 2018 and early 2019.
For the developed economies, the prediction is for trend growth and low inflation but worldwide, GDP growth is likely to be slightly lower thanks to greater protectionism and demographic issues.
October: How dangerous is Modern Monetary Theory?
This video focuses on the USA and in particular on “Modern Monetary Theory” which has been discussed widely, particularly within the US Democratic Party. Elizabeth Warren, one potential Presidential candidate, has shown some interest in it.
At the heart of MMT is the belief that governments can borrow from the banking system and use the proceeds to spend on whatever it wants. The implication is that governments can borrow as much as they want without any major problem. Larry Summers, an influential advisor to President Obama, has been very critical of MMT, stating that it could cause inflation or even hyperinflation. Summers may be correct in this, but he believes that monetary policy can be exhausted and at times increased budget deficits are sometimes required to stimulate the economy. Summers is being inconsistent in claiming in that such situations no imaginable increases in the quantity of money can stop deflation while saying that excessive growth in the quantity of money can cause hyperinflation.
In a limited sense, MMT is right. As a starting point, in the USA, broad money growth of between 4% and 4½% is the ideal level for steady growth and moderate inflation (about 1½% per year). This has actually been what happened in the USA in the 2010s. Banks’ assets also should be growing at the same rate. There is, in a sense a “Free lunch” for the banking system. If assets need to rise in line with liabilities associated with a particular rate of broad money growth, why may these assets not be claims on the state? This indeed was what happened with Quantitative Easing in the early 2010s - indeed, with banks being subject to the Basel III rules which restricted new bank credit to the private sector, borrowing from banks by the state prevented broad money growth from collapsing. There is no “credit free lunch” at the moment because of the growth of new bank loans while at the same time, claims on the state are increasing. Suppose that the US budget deficit was entirely funded by the banking sector, this would lead to a massive increase in the quantity of money – and serious inflation. MMT therefore is flawed.
September: Can monetary policy ever be “exhausted”? Can it ever fail to cure a recession?
This video returns to a theme which was covered in an earlier video (December 2018 to be precise): Can central banks “run out of ammo” in their attempts to stimulate the economy? If these claims were true, we would be in serious trouble. In August, Lord Turner wrote an article in the Financial Times which claimed that once interest rates are reduced to zero “central bankers are no longer important”. Larry Summers, writing in the Guardian, said something very similar – and that central banks should hand over to governments and fiscal policy to end economic stagnation.
In response, Professor Congdon points out that the role of central banks goes beyond setting interest rates. They have power to influence the quantity of money. They can create money through “Quantitative Easing” whereby they add to the cash reserves of commercial banks who can then buy any assets they choose from the non-banking sector. Governments can do the same thing – i.e., borrowing from the banking sector and making purchases from the non-banking private sector. The ability of the state to create money is unlimited – although if they overdo it, it will cause inflation or hyperinflation – as for example in Venezuela. What they buy is irrelevant – the importance of their actions is its effect on the quantity of money. This extra money can help ease companies’ liquidity problems and can also affect asset prices. There is a strong link between growth in the quantity of money and nominal GDP.
Returning to fiscal policy, there is no correlation between the rate of growth of domestic demand and the budget deficit. Essentially, fiscal policy doesn’t work in the way that Keynesian textbooks claim. On the other hand, monetary policy DOES work.
August: Money update. Will the world economy suffer a recession in 2020?
When this video was produced, there was much talk about there being a global recession in 2020. The claims were based on the Inverted Yield Curve, a forecasting tool. However, there is no correlation between bond yields and nominal GDP. Using monetary analysis, there seems no reason to expect a recession. US broad money growth is at its highest level in a decade. There is nothing to worry about in the USA economy in the next year or two. While broad money growth is rather weak in Australia and the UK, overall broad money growth is continuing at healthy levels.
Indicator indices are widely studied, such as the one produced by the OECD, which covers over half the global economy. Currently the indicator is heading downwards, but it did on 2012 and 2016 and no recession followed. The current downward move is therefore most likely a wobble. Likewise, the trade war between the USA and China will not have much effect on the global economy, especially as there are some moves to liberalise trade – e.g. the new free trade deal between the EU and Japan. Brexit likewise is not going to be a big problem.
In summary, the safest prediction for 2020 is trend growth with little inflation.
July: Does monetary policy suffer from “mysteries”?
This video begins with a summary of global monetary trends, noting firstly that broad money growth has accelerated in the USA and Eurozone, the latter being drive by currency inflows from elsewhere rather than growth in new bank credit. China and India are seeing stable money growth while in the UK and Japan, broad money growth is rather weak. In summary, the current slowdown is temporary, money growth remains at a satisfactory level, pointing to trend growth with low inflation.
The rest of the video consist of a response to Professor Robert Barro of Harvard University. The Quantity Theory of Money - that there is a correlation in the medium to long term between growth in the quantity of money on the one hand and asset prices, inflation and nominal GDP on the other - is based on empirical evidence. Professor Barro, who is not a monetarist, expressed his surprise in an article in Project Syndicate that recent macroeconomic outcomes in the USA have been so good. In the seven years to 2018, US inflation has been low and broad money growth has been both low and stable, averaging 4.1%. There is no reason to be baffled by the stability of the US economy, so why is Barro confused? One reason for this is that some economists focus on a narrow money measure. These do not provide a good model for predicting macroeconomic outcomes. Secondly, Barro believes that monetary policy consists merely of the Fed’s setting of interest rates (the Fed Funds Rate). This ignores QE operations, which create money, even if this may not have been why the Fed undertook these operations. If the Fed continues, albeit inadvertently, to deliver low and stable broad money growth, the US economy will continue to grow steadily.
June: Could the slowdown become a recession? And why is the Bank of England an outlier in the central bank response?
This video begins with a brief consideration of the slowdown in the global economy and fears that this may turn into something worse. Both the Fed and the ECB have indicated that they may ease monetary policy. The Bank of England does not intend to follow suit and recent statements from some BoE figures have hinted that interest rates may be raised. Their reasoning is based around the idea that a positive output gap requires higher interest rates to dampen the economy down. Interest rates are seen as the alpha and omega of monetary policy. This framework (“New Keynesianism”) ignores the banking system and the quantity of money. The concerns about a tight labour market therefore need to be weighed against a slowdown in M4x growth to its lowest levels since 1963. Professor Congdon therefore predicts falling inflation in 2020. To back up his argument, he points to the decline in the housing and second hand car markets, along with falling oil prices, concluding by warning that the Bank of England has committed a serious blunder in its analysis of the economy.
May 2019:
*** No video in May 2019 ***
April:
*** No video in April 2019 ***
March: How are asset prices determined (Part two) Fixed-income assets
This is a continuation of the issue covered in January’s video which argued that the movement in the value of equities and property was driven by changes in the quantity of money. This video deals with bonds and bond yields (the rate of interest). The first serious consideration on this subject took place in the late 19th century, notably by the Swede Knut Wicksell and the Austrian Eugen von Böhm-Bawerk. The American Irving Fisher wrote a book in 1907 called The rate of Interest which discussed the work of these two men. His key argument was that for any given real interest rate, if the expected rate of inflation rises, the nominal rate of interest must increase too. He was also a pioneer in developing the quantity theory of money. With increased broad money growth therefore, comes not just increased inflation but also an increase in the nominal interest rate. Moving on to the 1930s and the writings of John Maynard Keynes, his 1930 Treatise on Money mentions Wicksell, but he 1936 General Theory did not. Instead, he proposed the “liquidity preference” theory of the rate of interest (by which he meant the bond yield, not the central bank discount rate), which said that the higher its level, the keener institutions will be to hold bonds rather than cash. In short, the more money there is around, the lower the nominal rate of interest will be – the opposite of Fisher’s claims.
To test the theories, Professor Congdon looks at the Eurozone between 2008 and 2018. All member states shared the same central bank discount rate but had radically different macro experiences. There were calamitous recessions in Greece and Ireland, but Germany was relatively stable. How are they to be explained? Simply by a consideration of the banking system and the quantity of money in the different countries.
But does this subject matter? In reality, bond holdings for most institutions (and households) are relatively insignificant compared with their holding of equities or real estate. Furthermore, movements in the value of bonds can sometimes be in the opposite direction to movements in the value of real estate and corporate equities. With many economists and central banks being unclear when they talk about “interest rates” as to which interest rate they mean, this points to something being wrong with their analyses. Movements in asset prices and house prices – and above all, movements in the quantity of money, are far more important in determining macro outcomes.
February: Has US money growth picked up?
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Whereas in 2018, Professor Tim Congdon was concerned about a slowdown affecting among other places, the Eurozone and the USA in early 2019, demand in the USA has proven to be robust. The period 2011-2018 has been very stable, in contrast to the peaks and troughs of the previous 50 years. Slow and steady growth of nominal GDP has been accompanied by very modest inflation. Is this going to continue? Looking at bank credit, it fell from 2016 to 2018 at the same time that the Fed was unwinding some of its earlier asset purchases (QE) which led to concerns that money growth was falling – hence the predictions of a slowdown, Bank credit to the private sector has picked up, aided by a weakening of the Dodd-Frank regulatory tightening. Jay Powell has become less keen to shrink the Fed’s balance sheet.
All this suggests that the US economy is not going to slow during 2019 and that the current stability of the previous years is likely to continue.
January: How are asset prices determined? (Part one)
The final months of 2018 saw big falls in the stock market, raising concerns for the world economy in 2019. This video asks how the prices of assets such as house prices, stocks and shares are determined. This subject is barely touched in most university economics courses, even though many people do own assets and movements in their value affects their behaviour. The standard macro textbooks only deal with one asset – long-dated bonds, thanks to the prominence of bonds in Keynes’ liquidity preference theory. There are two types of assets – real assets such as ships, planes, cars, etc. and financial assets – for the most part, claims on returns on real assets. Another way of dividing assets is to separate them into fixed income (bonds) and variable income (stocks & shares, houses, commercial property). In the USA in 2016, bonds make up a very small (4%) percentage of overall wealth, although if one considers their claims on insurance companies and pension funds, who also hold bonds, the figure goes up to about 12%. Whatever, the variable income assets are far more important, yet not considered in most university textbooks. The Quantity Theory of Money implies that the rate of change of nominal asset prices as well as the rate of growth of nominal GDP should be similar to changes in the quantity of money over the long term. Figures from1946 to 2016 back this up: - the rates of change of personal disposable income, net worth and
money holdings are very close, even though in the short run, all manner of things can distort the numbers. It has to be said that the figures for the UK from 1995 to 2017 are not so good.
The prices of variable income assets are far more volatile than those of goods and services (or nominal national income) Also money held by financial institutions is more volatile than that held by households. The volatility of asset prices and the volatility of money holdings are related. The Bank of England’s extra round of QE in 2016 following the Brexit vote caused the money holdings of non-bank financial institutions to rise sharply but the overall money growth was much more modest. It was also the time of a stock market boom. The current weakness in variable income asset prices has been caused not by Brexit by weak growth in the quantity of money.