Down the Jackson Hole

Jay Powell, the chair of the US Federal Reserve, made a keynote speech at the annual summer symposium of central bankers in Jackson Hole, Wyoming, USA.  This was closely watched by financial investors and economists to see if Powell was going to support the strategy of a ‘Fed pivot’ on interest-rate policy.  The pivot is supposed to be a softening on the current aggressive hiking of the Fed’s policy rate. The pivot would keep interest rates from rising too much and thus sustain the stock market and the economy.  After all, the US year on year inflation rate had subsided a little in August from a high of 9.1% to 8.5%; and real GDP was again confirmed in decline in the first half of 2022, while consumer spending has been falling back.  So the signs of recession have increased, if the US is not already there.

US CPI inflation (yoy %)

But that made no difference to Powell. His speech made it clear that there would be no ‘Fed pivot’.  Powell reckoned that inflation was still too high and so the Fed’s tightening cycle was far from done.  “With inflation running far above 2% and the labor market extremely tight, estimates of longer-run neutral are not a place to stop or pause. ” He went on to tell us that we are going to suffer a hit to jobs and living standards as a result of the Fed’s tightening policy, but that could not be avoided: “Restoring price stability will take some time and requires using our tools forcefully to bring demand and supply into better balance. Reducing inflation is likely to require a sustained period of below-trend growth. Moreover, there will very likely be some softening of labor market conditions. While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.”

Financial investors took the speech badly.  The US S&P 500 and the Nasdaq tumbled 2.5% and 3%, respectively.  So no Fed pivot then.  Powell was determined: “a lengthy period of very restrictive monetary policy was ultimately needed to stem the high inflation and start the process of getting inflation down to the low and stable levels that were the norm until the spring of last year. Our aim is to avoid that outcome by acting with resolve now.”

Powell claimed that “The first lesson is that central banks can and should take responsibility for delivering low and stable inflation.”  Well, they may take responsibility, but the problem is that central banks cannot deliver on low inflation with their monetary tools of higher interest rates and withdrawing liquidity in what is called quantitative tightening (QT).  All through the decade of the Long Depression after the Great Recession of 2008-9, central banks tried to get inflation up to their 2% target rates by keeping interest rates at zero or even below and through quantitative easing (QE) ie buying government and corporate bonds and increasing the money supply.  But none of these measures worked.  Inflation stayed below target and so did economic growth.  Instead, what QE brought was a huge stock and property market bubble.  Now it’s the other way round and it still won’t work.  QT will bring a stock market and property crash; and recession, not lower inflation.

That’s because inflation depends on the relation between supply and demand for goods and services.  That’s obviously a truism of capitalist economics.  But while central banks may affect aggregate demand to some extent, monetary policy has little or no effect on aggregate supply.  That depends on productive investment, which in turn depends on the profitability of that investment.  And that’s the problem. 

The current inflationary spiral is mainly due to constrictions on supply, particularly in energy, food and other commodities, as well as global supply chain blockages for many components and products needed to meet demand.  But underlying these immediate causes is the long-term decline in productive investment and labour productivity growth in the major capitalist economies, as I have argued before.  So the Fed and other central banks can do little but sink their economies further into the Jackson Hole by raising the cost of borrowing for investment and consumption.

At Jackson Hole, various mainstream economists present papers on the state of capitalist economies and on the efficacy of monetary policy.  It was revealing what Gita Gopinath, the former IMF chief economist had to say. “Existing (mainstream – MR) models cannot explain the inflation surge”, Gopinath said.  For example, the so-called Phillips curve which purports to show that tight labour markets and rising wages cause inflation, does not fit the facts, said Gopinath, as economies have experienced rising inflation without wages leading it.  She also admitted that the IMF had failed to predict any rise in inflation rates (not just in energy and food but in what are called ‘core prices’ in the shops and services).  

Gopinath argued that the current high inflation rates were due to massive global fiscal stimulus by governments during the COVID slump, putting too much money into the hands of households (!); heavy spending on goods (!); and an unexpected fast recovery in demand globally after COVID (!).  But having presented an array of graphs to justify her argument that inflation was the result of too much demand; she then slipped in a sentence: “Alongside a contraction in potential output and employment.”  And here we have it.  It was the inability of capitalist production to deliver to meet demand.  This was the main cause of demand exceeding supply and driving up inflation.  So when the Fed and other central banks continue to tighten monetary policy, they will drive down demand (ie investment and consumption) and given already weak and stagnating supply, all that will happen is that they will trigger a slump because the ‘supply side has not recovered from both the Long Depression and the COVID slump. 

At Jackson Hole, former White House economist Jason Furman was there to tell us that neither the US nor the Eurozone had returned to the pre-pandemic trend growth, as hoped for.  Instead, both economies were heading south again.  And that the main reason was very poor productive investment growth. “Using the expenditure components, the biggest source of the shortfall is the that non-residential fixed investment (or business fixed investment) remains way below what the CBO (Congressional Budget Office) thought it would be.”

But the Fed, the ECB and the BoE will plough on driving up interest rates just as the economies they preside over head towards a slump.  The US Conference Board’s index of the US Top 10 Leading Indicators has had a 100% success rate in anticipating every recession over the last 40+ years. And the indicators are now on the cusp of forecasting a new slump.

“The US LEI declined for a fifth consecutive month in July, suggesting recession risks are rising in the near term,” said Ataman Ozyildirim, Senior Director, Economics, at the Conference Board. “Consumer pessimism and equity market volatility as well as slowing labor markets, housing construction, and manufacturing new orders suggest that economic weakness will intensify and spread more broadly throughout the US economy. The Conference Board projects the US economy will not expand in the third quarter and could tip into a short but mild recession by the end of the year or early 2023.”

We shall soon see how ‘mild’ or deep the Jackson Hole is for the major economies.

9 thoughts on “Down the Jackson Hole

    1. Michael this is not a comment on this post, but addressed to you, regarding your unwillingness to post three of my comments on the previous two blogs. I can understand why: malapropism (inability to distiguish between a rooster and a hen), commenting on a commentor’s comment and not the topic of post, and, in the Putin post, calling out two commentators by name. Fair enough…But getting NATO’s war on Russia right is of extreme importance, and I think I have something important to say about it. So I’m asking you to post what I have written below among the other comments on the Putin blog, just for the record. Thanks if you do or if you don’t.

      Marx viewed social orders as coming into being as embryos within the womb of the existing social systems and materially dependent on them for sustenance until birth—for instance, socialism’s material dependence on capitalism for sustenance until parturition: a truly democratic socialism, peacefully creating networking communist communities…

      Maybe this biological analogy is only a rhetorical device, too weak to support an argument against the tendency of orthodox Western marxists to reject all or most existing “socialist” states as only socialist in name and really just forms of capitalism and even imperialism (China, the Soviet Union). Nevertheless, the analogy fits Marx’s view that socialism is not communism, but a transitional economic formation requiring, for a given period of time, a political “dictatorship of the proletariat” (a class conscious “embryo”). Some pure “marxists’ don’t like this kind of pure marxism. They want “socialist democracy” immediately—bourgeois democracy of course (not primitive matrilineal democracy, the only real democracy that has ever existed)—then dismissing, say, Cuba or China as reeking with capitalism and authoritarianism …Some concede that they were once “socialist”, for a while—after a “revolution”.

      This misses the point that social “revolution” is conception, not birth. But t I have to concede that in regard to capitalism’s response to revolutionary states, the feminine analogy does not work. The proper analogue for patriarchal capitalism’s murderous, suicidal drive to destroy every form of developmentally healthy, embryonic socialism since the conception of the Soviet Union is Saturn’s devouring of his own children.

      As early as the Manifesto, Marx viewed industrial capitalism as a global system, and, analyzing the structural determinants of the capitalist mode of production, was able to predict the spread of capitalism into every nook and cranny of the globe, early on, establishing a global working class. In the event, the concentration and digitalization of capital in the form of financial capital and tightly knitted global division of labor under imperial hegemony led to its present apocalyptic crisis, one which Marx, assuming the inability of the Western working class to successfully produce the necessary revolutions, predicted with uncanny accuracy. Embryonic revolutions have occurred, but only in the peripheral regions of the global system. All have been met by Saturnine destruction. The particular socialistic object of the present stage of world war against the socialist movement is China, though taking the form of NATO’s war on Russia, which is itself still embryonically socialist, whatever Putin is or would like to be. Marxists who view both Russia and China as capitalist are of the sort which led Marx to quip that he is no “marxist”.

  1. “The Conference Board projects the US economy will not expand in the third quarter and could tip into a short but mild recession by the end of the year or early 2023.” WTF!? These dudes keep repeating the “we are NOT in a recession” mantra. But in November or so they will say “three consecutive quarters of contraction do not constitute a recession.” But now they are forecasting a mild recession…but at the same time, they are saying this when actually standing on a mild recession that may just be the gateway to a longer recession that has not yet reached the bottom of the valley. It’s difficult to find serious people in the bourgeois economy.

  2. “The current inflationary spiral is mainly due to constrictions on supply, particularly in energy, food and other commodities, as well as global supply chain blockages for many components and products needed to meet demand. But underlying these immediate causes is the long-term decline in productive investment…”

    The COVID-19 pandemic continues to choke some supplies, especially with the Chinese government’s stupid zero-COVID measures. The Ukraine war has bumped food and energy prices. Mismatches in the spectrum of semiconductor output still affect automobile production. Are not these specific events the cause of most of the inflation? If so, how does a long-term decline in productive investment “underlie” them as regards inflation? Seems a stretch. It would seem that instead a “a long-term decline in productive investment” is more important in explaining slow growth and stagnation, not inflation.

    1. ‘Stupid zero-covid policy’ hilarious how the emphasis on human life is characterised as stupid by westerners who despite letting covid ravage their elderly & general population haven’t been able to save their mammon deity aka economy. History will definitely look back in favor at the US/western genius policy of millions of infections & deaths to keep the stock market line up {which ultimately failed}.

  3. I was surprised by the tone of Powell’s announcement. I suspect it was directed to Wall Street where the recent rise in share prices was beginning to be exuberant. In a highly unequal society share prices disproportionately influence the spending of the top 10% of income earners. Therefore if demand is to be stifled to “control inflation” so too must the spending habits of the top 10% whose discretionary spending equals the bottom 80% of society.

  4. I’m sending this in English now:
    As almost always, inflation is just a pretext to raise interest rates for other reasons with interests to hide. Not even the intelligent monetarists themselves believe in the reality of monetarist theory. An important but unmentionable reason this time is to attract capital from Europe; from the EU, which has just had the ‘”plug pulled” on it with the sanctions.

    Translated with (free version)

    1. Hello, what language did you translate from? I hope that my response in English is understandable.

      I agree with you. The US Federal Reserve seems set on bringing down the rest of the world’s economies in an effort to buoy up the US economy, since they do have control over global monetary policy as the USA is the dominant imperialist that built the international system after World War Two. Yet their raising interest rates to “curb inflation” and ensure US dominance seems like it will do little but ruin the rest of the world while not even helping the USA… although of course the ruling class only cares about the economy insofar as it continues to enrich them, so from that perspective this policy makes total sense.

  5. “That’s because inflation depends on the relation between supply and demand for goods and services. That’s obviously a truism of capitalist economics.”

    I think we have to look a little deeper than that. Like most truisms about supply and demand, this one conceals more than it reveals.

    “The current inflationary spiral is mainly due to constrictions on supply, particularly in energy, food and other commodities, as well as global supply chain blockages for many components and products needed to meet demand. But underlying these immediate causes is the long-term decline in productive investment and labour productivity”

    I don’t agree. The inflation spike started in 2021, and is indexed pretty well by oil and gas prices. There was no shortage of either, nor was there any decline in long term in productive investment. On the contrary, the previous long term uptick in investment in shale oil and gas production triggered overproduction leading to a dramatic decline in oil prices after the 2014-2015 “boom.”

    Likewise the current supply chain difficulties are certainly not the result of a lack of productive investment in ships, port facilities (particularly in Europe), or railroads. In the US the shadow recession of 2016 triggered railroads to reduce their operating margins by placing into storage the fixed instruments of previous productive investments– mainly locomotives.

    I think we have to look at what generalized price increases accomplish. Increases accomplish the movement, transfer of revenues and profits up the food chain so to speak,, and bolster the profitability of the most technically intensive sectors of capitalist production. I think we have to acknowledge that this inflation marks the attempt to offset the general decline in profitability that took hold in 2019, and also is expressed as the petroleum sector, far and away the most technically intensive sector, attempt to achieve the average rate of profit which has been so difficult to maintain.

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