Maurice Höfgen does not see classic inflation in the currently high prices, but rather a price shock. In an interview, the economist explains why and with which controversial approach he wants to fight it. Höfgen is one of the best-known representatives of the controversial “modern monetary theory”, whose supporters do not completely negate the connection between the money supply and inflation, but ultimately see the state as more responsible for getting inflation under control. Höfgen is a research assistant to Christian Görke, a left-wing member of the Bundestag, a book author, speaker, YouTuber, podcaster and columnist. He studied business administration for a bachelor’s degree and economics for a master’s degree.
You are one of the best-known representatives of the controversial “Modern Monetary Theory” in Germany and have now written “Teuer”, a book about inflation. What does someone like you actually understand by inflation?
Maurice Höfgen: That is a very important question. The term inflation is now used inflationarily for any price increase. My understanding is that inflation means a rising price level across the board and there are self-reinforcing effects – something like a wage-price spiral. It’s difficult to stop something like that, so it’s a problem and, for me, classic inflation. But what we’ve been seeing for the past year and a half is something different.
What then?
We have neither a booming economy nor extreme wage increases – on the contrary. What we had are external shocks from war and pandemic. For example, the Russian sanctions have caused energy prices to rise extremely quickly. It still eats through the economy today. However, we can already see that this development is declining again. In other words, these self-reinforcing effects don’t exist. We have a price shock and no inflation.
Maurice Hofgen
(Photo: Maurice Hoefgen)
Is it a price shock or a devaluation?
Since one is quickly at terminology. I would speak of a price shock if prices rise very quickly as a result of an external shock – as is the case with energy. Currency depreciation is misleading here, because purchasing power is not gone forever. It is now often said that savings are being devalued. And that’s true for now – but only as long as prices stay high. For example, we see producer prices falling again. Then the savings will be worth more again.
Is that so? We are currently experiencing second-round effects in the core inflation rate everywhere. The economist Isabella Weber recently published a highly acclaimed paper on this…
But at some point it goes down again. And that is a decisive diagnosis for later therapy. We can already see that from the declining producer prices, which are leading the consumer prices. The other way around, things have also gone up: first the import prices rose, then the producer prices and then the consumer prices. It goes back in this order. When the price shock disappears, I can afford more for my money again – even if that doesn’t happen overnight. We all have different terms for our gas, rental and electricity contracts. Depending on the term, one is relieved earlier than the other. Individually, people have very different inflation rates, which is why the average inflation rate is actually not useful at all.
So you mean we’ve peaked?
Yes, and this is primarily due to falling energy prices, which are gradually spreading throughout the economy. There is also no self-reinforcing effect with gas, as there is with wages, because the worst scenario has already happened – that Putin will no longer supply us with gas. When he shut down the pipelines in September, prices were at their peak. Since then, however, they have fallen back below the pre-war level on the stock exchange, and that is a good thing.
You recently criticized the fact that many economists paint horrible pictures of inflation. What’s wrong with it?
Since Mario Draghi’s “Whatever it takes” speech, many of these criticized economists have been warning that low interest rates, higher national debt and large bond purchases will inevitably lead to inflation, if not to a crash. And now that the inflation rate has deviated from its target value due to the external price shock – i.e. war, pandemic and sanctions – they feel right.
Can’t both be right?
Oh well. I’m already wondering why it takes three of these external and historically large shocks at the same time for their warning to come through once in ten years.
Nevertheless, the ECB and the Fed have recently raised interest rates further. You are pretty much alone in your opinion that low interest rates and high government debt are not major drivers of inflation.
It is disastrous that central banks are doing this. As I said: We have very different inflation rates individually, but the central bank wants to solve the problem with a flat-rate instrument, the interest rate. At least the wind seems to be turning a bit now. On the one hand, with financial market pragmatists who are afraid for the banks, which still have many low-interest bonds on their balance sheets. And Marcel Fratzscher from DIW is also slowly warning of a collapse in the construction industry. If we now also choke off the construction industry through rising interest rates, that will result in a great deal of collateral damage. Then we will never manage to push ahead with the necessary energy-related renovations. I just don’t think interest rates are the right tool to get inflation down. Everything the government is doing to expand the offer – for example building LNG terminals – brings significantly more.
So you’re calling for a stronger role for the state?
Yes. I can even understand central banks raising interest rates. They are mandated to achieve 2 percent inflation. If the rate is above that, then everyone expects them to do something, which means they have to raise interest rates. The central banks are victims of their mandate – and therefore my proposal: free them from this mandate and hand it over to the national governments. Central banks should ensure financial stability. They already have enough to do with that.
That would massively expand the mandate of the state. Can we really want that – or wouldn’t that just create more inefficiencies?
The biggest inefficiencies have become apparent at the central bank. For years it has tried to generate inflation at all. Negative interest rates, massive bond programs, and, and, and. None of that helped. Now the external shocks are coming and everyone expects her to get inflation down in the short term. Even then she is overwhelmed. But someone has to do it, and the central bank obviously cannot. The only thing that remains for me is the state.
What do you think of the middle ground that has been taken – that is, an expansionary fiscal policy that cushions rising energy costs and rising interest rates so that falling demand causes prices to fall?
I don’t want to deny that higher interest rates can help with classic inflation. But we don’t have that. What we need right now is investment. We need them not only to become independent from Russia, but also for energy renovations and the transformation of the economy. High interest rates hinder investment. So the damage from high interest rates is far greater than the potential benefit.
Rising interest rates mean that healthy and efficient companies are more likely to get credit than worse ones. As a result, the market is clearing itself out and wiping out some zombie companies. What’s wrong with it?
Nothing for now. In theory, it’s good when bad companies disappear from the market and the better ones prevail. That is the great strength of the market economy. I just doubt that the interest rate will change that much because firms in an industry typically have a similar level of leverage and can therefore pass on higher interest costs to customers through higher prices. That doesn’t help against inflation.
But how does that fit in with the fact that we should keep interest rates low – and ultimately be able to pour endless amounts of money onto the economy? According to the Modern Monetary Theory (MMT) then not much would happen.
Spending endless amounts of money on it is a theoretical thought. You only have a certain number of professionals who can get the job done. No matter how much money I splurge on the baker’s trade, I can’t get an infinite number of rolls out of it. And that is also crucial for MMT. It becomes inefficient when I, as a state, invest in an overheated industry. That would actually be bad. But we are not in this situation. We haven’t fully utilized our economy for decades.
We have a record number of vacancies and everyone is talking about a shortage of skilled workers. How do you put that together?
If you do an honest calculation in Germany and include all job seekers – including those who are unintentionally working part-time, for example women who cannot find a daycare place for their daughter – then you get three to four job seekers per vacancy. I see the production potential in this country is far from exhausted. During the oil price shock in the 1970s, a somewhat comparable situation, we had an unemployment rate of 0.7 percent. We are now at over five percent. Something like that is really inefficient, we waste manpower, and there is far too little talk about it for me.
Jannik Tillar spoke to Maurice Höfgen.
This interview first appeared on capital.de