Podcast Summary
Debate over pension funds investing in private equity: Voters feel misunderstood by Washington, UK push for 5% pension funds investment in private equity, no obligation to invest in UK, potential impact on listed companies, and uncertainty about private equity success post-ultra-low rates.
There's ongoing debate and confusion surrounding the investment of pension funds in private equity. Solea Mohsen, from The Big Take DC, has highlighted how voters feel misunderstood by Washington and how money, politics, and power shape government. In the UK, there's a push for defined contribution pension schemes to invest 5% of their funds into private equity to boost the economy. However, as Sarah Holder pointed out, there's no obligation for these funds to invest in the UK, and doing so could potentially take money away from listed companies. Additionally, the success of private equity during the ultra-low rate era may not continue. The complexity of these issues and potential consequences for investors make it crucial to stay informed. Listen to The Big Take DC and The Big Take on Iheartradio, Apple Podcasts, or wherever you get your podcasts for in-depth analysis and understanding of these economic stories.
Proposals to shift investment focus raise concerns of financial repression and government control: Former Bank of England governor Mervyn King warns against moving away from cost focus in investing and expresses concern over potential government control and financial repression
The industry body's proposals to shift focus from cost to other factors in investment, such as private equity, raises concerns about potential financial repression and government control over asset allocation. Lord Mervyn King, a former Bank of England governor, emphasized the importance of cost in investing and warned about the potential dangers of moving away from this focus. He also pointed out the influence of powerful lobbyists in shaping financial policies. Despite the voluntary nature of these proposals, King expressed concern about the potential for future governments to direct investment in various sectors and projects, potentially leading to financial repression.
Belief in money's lack of influence on inflation: Central banks' belief in money's lack of impact on inflation, rooted in a desire for scientific approaches, has led to the current inflation crisis through perpetuating circular logic and ignoring historical evidence
The current inflation crisis can be traced back to a widespread belief among economists, particularly those in central banks, that money has no influence on inflation. This belief, rooted in a desire for a more scientific approach to economics, led to the assumption that inflation expectations, rather than actual economic conditions, drive inflation. Central banks' computer models, which assume that inflation will always return to a target of 2%, perpetuate this circular logic. However, history and the economic reality of the pandemic demonstrate that inflation is not always transitory and that printing large amounts of money during a period of reduced productive capacity can lead to significant inflation. This misguided belief, shared among major central banks, has contributed to the current inflation crisis.
Ignoring the role of money in inflation: Central banks' misconception about money's impact on inflation led to excessive quantitative easing, risking a recession while trying to correct inflation.
The widespread belief among economists and central banks that money does not significantly impact inflation led to groupthink and inaction during the early stages of the current inflation crisis. This misconception, coupled with a failure to act swiftly and raise interest rates when necessary, resulted in excessive money printing through quantitative easing. Now, as central banks attempt to correct their mistake, there is a risk they may overshoot and induce a recession while trying to bring inflation back to 2% - a mistake in both directions over a period of 3 to 4 years. This situation underscores the importance of acknowledging the role money plays in inflation and the potential consequences of ignoring it.
Central banks face challenges in navigating economic policies: Central banks struggle to understand the impact of monetary policy due to intellectual failure to consider money's role in economics. They may keep interest rates high to maintain credibility, causing economic hardship, and face challenges adjusting due to long-term mortgages.
Central banks, including the Bank of England and the Federal Reserve, are facing challenges in navigating economic policies, particularly monetary policy, due to the erratic nature of inflation and the potential for deeper economic downturns than currently expected. The intellectual failure to consider the role of money in economic theory has left central banks without a clear understanding of how changes in interest rates or money supply impact the economy. As a result, they may be forced to keep interest rates higher for longer to maintain credibility, even if it means prolonged economic hardship for individuals and businesses. Additionally, the transmission mechanism of monetary policy has been extended due to the prevalence of long-term fixed-rate mortgages, making it difficult to quickly adjust interest rates and dampen demand. The falling credibility of central banks and the uncertain economic environment make it crucial for them to proceed with caution and consider the potential for a sharper fall in inflation and a deeper recession than anticipated.
Restoring public trust in inflation control: To bring inflation back to a stable level, monetary action is necessary but restoring public trust is crucial. The Bank of England aims to meet the 2% target, but addressing the belief that inflation is a thing of the past may require labor market weakness and public awareness.
Bringing inflation back down to a stable level requires not only monetary action but also regaining public trust. The speaker believes that the Bank of England can bring inflation back to 2%, but the challenge lies in restoring the belief that inflation is a thing of the past. This may involve a period of labor market weakness and heightened public awareness of inflation's impact on purchasing power. The speaker emphasizes that the target of 2% is important as it is a round number that people don't talk about inflation when it is met, making it an effective target for maintaining price stability. The speaker also notes that the official measures of inflation do not fully capture quality improvements, and adjusting the target for this would be impractical. Changing the target during a period of difficulty would undermine the credibility of the regime, and the academic approach to monetary policy advocating for a higher target should be resisted.
Maintaining the independence and effectiveness of the Bank of England: The Bank of England's independence and clear objectives are crucial for maintaining public trust and price stability. Adjusting inflation targets arbitrarily could undermine these efforts.
The independence and effectiveness of the Bank of England, particularly in maintaining price stability through inflation, should be prioritized. Arbitrarily changing the inflation target could undermine public trust and make the bank's objectives less clear. The bank's expanded responsibilities and the increasing trend of remote work pose challenges, but the importance of clear communication and focus on core objectives remains crucial. The Bank of England's reputation for having one of the best defined benefit pension schemes, although no longer available to new entrants, highlights the importance of offering competitive packages to attract and retain talent. Employers in the city, including the Bank of England, face challenges in balancing work-life balance, financial rewards, and maintaining a strong workforce.
Working from home becomes more valuable and housing affordability a concern: Economists predict asset price declines due to rising interest rates, but external factors can significantly impact prices and economies.
The ability to work from home is becoming increasingly valuable, especially for those who live far from their workplaces. Additionally, the housing market may see a price crash due to rising interest rates, making affordability a concern. Economists predict that asset prices, including stocks, bonds, houses, and others, will fall relative to incomes as we transition from a low-interest-rate environment to a higher one. However, it's essential to be cautious about economic predictions, as external factors like global crises and geopolitical events can significantly impact asset prices and economies. The ongoing pandemic and the Russian invasion of Ukraine are two recent examples of such external factors. Furthermore, the debate around Brexit and its impact on inflation is ongoing, with opinions divided, and it's challenging to draw definitive conclusions due to the numerous external factors at play.
Brexit's Impact on Inflation and Central Banks' Role: Central banks' actions, like avoiding monetary overhang and raising interest rates, influenced inflation outcomes after Brexit. CBDCs, while discussed, may not be a necessary innovation due to potential drawbacks like creating a state monopoly and destabilizing the banking system.
The relationship between Brexit and inflation in various countries is not straightforward. While some countries experienced higher inflation, others did not. Central banks' actions, such as avoiding monetary overhang and promptly raising interest rates, played a significant role in inflation outcomes. Central bank digital currencies (CBDCs) were discussed, but it was expressed that there seems to be more hype than necessity for this innovation. CBDCs would still be in the existing currency, and being digital is not new. The potential drawbacks include creating a state monopoly and the risk of destabilizing the banking system if people rush to switch their funds to the central bank. Overall, it was suggested that CBDCs might be a solution in search of a problem.
Central banks increase gold holdings as a hedge against instability: Central banks view gold as a stable form of value for international transactions, increasing their holdings as a hedge against potential political instability and uncertainty, while Bitcoin remains a less accepted alternative.
Gold continues to play a role in the financial system, particularly for countries and central banks, due to its universally accepted value and the potential for instability in traditional currencies. Central banks have been increasing their gold holdings as a hedge against potential political instability and uncertainty. While Bitcoin may have its advocates, gold is a more stable and widely accepted form of value for international transactions. The complexities of the global economy extend beyond Brexit, and it's essential to consider multiple factors when analyzing economic trends. The political nature of economics is often overlooked, but it plays a significant role in shaping economic policies and debates.
Economics lacks objective foundations, with MMT and Bitcoin as examples: Despite the uncertainty surrounding economic theories like MMT and Bitcoin, it's crucial to approach economic analysis with objectivity and rationality.
Unlike physics, where laws are consistent regardless of political or ideological perspectives, economics lacks such objective foundations. The speaker criticizes Modern Monetary Theory (MMT) as an example of this uncertainty, as its validity is subject to change with political regimes. However, the speaker also acknowledges the equally questionable nature of Bitcoin as a potential solution. Ultimately, the speaker emphasizes the importance of objective analysis and rationality in understanding economic matters. The Big Take DC, hosted by Solea Mohsen, aims to provide such analysis by examining the intersection of money, politics, and power, and its impact on voters. Listen to The Big Take DC on the Iheartradio app, Apple Podcasts, or wherever you get your podcasts for in-depth discussions on these topics.
