It must have been “Central Banker Day” in a few countries recently. It’s like Groundhog Day but where central bankers come out into public and we can tell from their behavior whether it’s another year of inflation or not.Global Economics is a reader-supported publication. To receive new posts and support my work, consider becoming a free or paid subscriber.
In the end a currency is only as valuable as the government that issues it. There were clearly concerns about the UK government's finances based on the tax cut and increased spending plan. I was surprised by this like everyone. Personally, I think it was a communication problem for sure and poorly planned policy generally. Instead of explaining that tax cuts were to help the supply side and the spending was to mitigate hardship on the population, it was seen as double stimulus (tax cuts and spending increases) to boost GDP and that would clearly add to inflation.
Thanks for your comment. I actually plan to write about the 1970s soon so watch for that column. But, in short, it's VERY HARD to tell what stops inflation. For sure there needs to be less money printed (technically, a slow down in the growth rate of money printing). This usually means higher interest rates initially, then falling interest rates as inflation subsides. But, it is also true that disinflation programs are usually a combination of less money (higher interest rates initially) and supply side reform that includes tax reforms, some liberalization of policies, etc., all aimed at increasing the supply side of the economy. Both occurred in the early 1980s and are considered to have been important to getting long-term control of inflation. You are right. Just hitting the demand side is brutal and harsh.
I have seen arguments that the rate hikes of the 70's and 80's were largely ineffective against the inflation and stagflation of the time. From what I have seen the tax cuts of the Reagan administration may have actually been the cure to inflation because it actually helped the supply side instead of attacking the demand side through making people not feel wealthy. Is there any validity to this and if so why would the UK have a liquidity crisis in the bond market over tax cuts?
UK liquidity crisis. Why this happened it a bit of a mystery. I wrote about it twice now. I refer you to those: https://globalecon.substack.com/p/economic-fragility-and-global-concerns and https://globalecon.substack.com/p/the-upside-down-world-of-government.
In the end a currency is only as valuable as the government that issues it. There were clearly concerns about the UK government's finances based on the tax cut and increased spending plan. I was surprised by this like everyone. Personally, I think it was a communication problem for sure and poorly planned policy generally. Instead of explaining that tax cuts were to help the supply side and the spending was to mitigate hardship on the population, it was seen as double stimulus (tax cuts and spending increases) to boost GDP and that would clearly add to inflation.
Thanks for your comment. I actually plan to write about the 1970s soon so watch for that column. But, in short, it's VERY HARD to tell what stops inflation. For sure there needs to be less money printed (technically, a slow down in the growth rate of money printing). This usually means higher interest rates initially, then falling interest rates as inflation subsides. But, it is also true that disinflation programs are usually a combination of less money (higher interest rates initially) and supply side reform that includes tax reforms, some liberalization of policies, etc., all aimed at increasing the supply side of the economy. Both occurred in the early 1980s and are considered to have been important to getting long-term control of inflation. You are right. Just hitting the demand side is brutal and harsh.
I have seen arguments that the rate hikes of the 70's and 80's were largely ineffective against the inflation and stagflation of the time. From what I have seen the tax cuts of the Reagan administration may have actually been the cure to inflation because it actually helped the supply side instead of attacking the demand side through making people not feel wealthy. Is there any validity to this and if so why would the UK have a liquidity crisis in the bond market over tax cuts?