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🔔 This Ain't Your Daddy's Inflation

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I'm massively drawn to unconventional economists, especially those who deride mainstream theories and challenge conventional wisdom.

Now, I'm not drawn to them because they're right (that's why I chose the picture at the top of this article: the guy got it completely wrong).

It's more that I've seen how every school of economic thought can be tribal, dogmatic and so completely blinded by their ideology that they totally miss the big picture. Basic version 👇

Keynesians disagree with monetarists, the Austrian school disagree with everyone, Marxism is associated with communism and easy to deride. Behavioural economics doesn't fit in to anyone's models so best to ignore it.

That's before we even talk about MMT (which isn't the best economic theory, but IS the best theory for understanding government spending and the deficit).

Getting exposure to loads of different ideas is the best way to understand this weirdness that we call an economy.

Which is why I like this guy, and his honest approach to figuring stuff out 👇

He wrote a book in 2011 called "Debunking Economics". This Wiki review sums it up well 👇

“While Keen has made some important critical points, his claim to have ‘debunked’ economics seems premature. On the whole, the most promising response to the problems identified by Keen would seem to be the continued development of more sophisticated and realistic approaches to mainstream economics, and the cultivation of an open-minded and skeptical view of the world, in which economic theories are seen as tools to aid understanding rather than as bodies of received revelation.”

Keen's written a series recently called "This Ain’t Your Daddy’s Inflation". It makes good reading and helps understand what's going on.  

Basically, there's every chance our enlightened policy-makers will once again respond to the wrong cues, and things will go more wrong than they need to. Over to Steve...

After a long period of being low and even negative, inflation is now higher than it has been in almost 40 years.

Though still well short of the twin peaks of 1975 and 1980, it is the fifth highest rate recorded since the end of WWII, and is still rising.

But it ain't your Daddy's inflation: what's driving it is very different to what drove the inflation of the 1970s. Unfortunately, the 1970s experience changed economic theory for the worse, and that theory will guide how the Federal Reserve tries to tackle today's inflation.

How's it going to go wrong? What happened back in the '70's?

"Keynesians" asserted that there was a tradeoff between inflation and unemployment: unemployment could be lowered by expansionary fiscal policy, but at the price of a higher rate of inflation.

The "Keynesian" belief was that there was a negative relationship between inflation and unemployment: if inflation went up, then unemployment would go down.

This was called the "Phillips Curve", after the New Zealand engineer-turned-economist Bill Phillips, who wrote a famous empirical paper on inflation and unemployment called "The Relation between Unemployment and the Rate of Change of Money Wage Rates in the United Kingdom, 1861-1957".

Except this wasn't actually a Keynesian belief at all. One of the other tribes (Friedman's monetarists, those dastardly demons) misrepresented his views so they could hop into the driving seat and spread their ideology instead. Sneaky... 👇

Trusting Friedman's explanation of Keynesian economics is like trusting the fox's account of why the chickens in the hen house died.

The true inheritor of Keynes's mantle was the renegade economist Hyman Minsky (who was the chief inspiration for my work), and he argued that credit was the main factor behind the economy's ups and downs.

When people and firms are borrowing heavily, the economy will boom, and when they borrow less or repay debt, the economy slumps. The important link, in Minsky's genuinely Keynesian economics, is between credit and unemployment, not between inflation and unemployment.

So what evidence is there that the Fed and other central banks are still bound to this?

We could start with Powell's press conference. He mentioned employment and a softening in the labour market multiple times. Where was the conversation about lending and credit needing to slow?

Now, this isn't a perfect gauge of credit, but it's a half-decent proxy for risk appetite (availability of credit): JNK, the junk bond ETF 👇

It's now rallied after both the June & July meetings.

If you're a central bank trying to create tighter lending conditions, is that the reaction you want to see in risky debt?

In any case, as Steve suggests will this cure be worse than the disease..? And is it even the right treatment?

Have a read and see what you think 👇

When it comes to economic theories, you know what to do...

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