Let’s get right to the point and suggest that Reserve Bank of Australia deputy governor Rick Battelino was talking to the banks yesterday and not anyone who lives on planet Earth, or Terra Australis Incognito, where last we heard, inflation was running at 4.5% on a yearly basis.
The RBA was pretty clear in its Statement of Monetary policy that it would like to cut rates. The Aussie dollar fell in response. So why bother making the point as directly as he did yesterday? Because he knows the banks have no intention of passing on lower borrowing costs to Australians and like the Treasurer he wants to put “maximum downward pressure on inflation.” Good luck with that.
Do you think the Reserve Bank is a tad premature and a tad triumphant in declaring victory over inflation? After all, the Bank has conceded recently that it’s the tidal wave of cash coming onshore from the favourable terms of trade that it fears the most. All that coal and iron ore money has to turn into someone’s wages or profits, doesn’t it? Has that changed?
Probably not. But everywhere the mainstream economists look, they find an excuse to lower the price of money and encourage people into taking on more debt. It’s not a coincidence most of these economists work for banks, which make money when people owe money.
And perhaps these bank economists-and the folks at the RBA-can see further into the future than the rest of us mere mortals. We don’t even know what we’re having for lunch today, much less whether consumer prices will moderate in the next quarter. But the RBA apparently DOES know, and thinks it’s safe to cut rates now, even as wages and prices rise.
“We cannot wait to see a fall in inflation before we start cutting rates, because by then it would be too late,” Battelino said yesterday. He did admit that at 4.5%, inflation was high and likely go higher. But he also insisted it was going to come down later this year, thanks largely to the Bank’s heroic efforts.
“Things have worked out, broadly speaking, the way we intended them to,” he modestly told a parliamentary committee. “As well as costs going up, businesses were widening their margins, so there was a pronounced increase in inflationary pressure. The danger was that if that continued, it would cause severe difficulties for the economy in the years ahead.”
“We’ve asked households to cut back on spending and we’ve given them the inducement to do so (with higher interest rates). Households have responded favourably. Households have been prudent in cutting back on spending and lifting savings. That is why the Reserve Bank can talk about cutting interest rates.”
If we had more time today we would provide you with an amusing vignette from Kafka or Dostoevsky in which something patently absurd is taken at face value by most people because they are too polite (or scared) to point out the absurdity. After all, everyone else seems to take it seriously. It must be serious!
But blaming household spending for inflation is grotesquely absurd. Have households cut back spending in a careful and thoughtful response to the RBA’s policy? Or is the price of petrol and food and health care going up while property and shares go down? Does the Reserve Bank really insist that inflation is caused by consumer spending and not an increase in the money supply?
As we’ve said before, prices can rise naturally for many good reasons. Demand exceeds supply, or a good or service is relatively scarce are just two examples. But inflation is always and everywhere a monetary phenomenon, as Milton Friedman said.
Pretending that consumers are responsible for inflation and have to be punished by higher rates is what makes central bankers so nauseating…that and the conceit that they manage a complex economy the way you might pilot a remote control boat on Albert Park lake. It’s the height of arrogance.
Meanwhile, beneath the summit of Mt. Olympus, Aussie purchasing power looks like it’s in decline. This is the end result of all central banking, which as Bill mentioned earlier this week, is an inherently inflationary enterprise (since it assumes a regular increase in the money supply and a tolerable 3% annual increase in prices).
According to figures published by the Australian Bureau of Statistics yesterday, wages are rising at about 4%, half a point less than the rate of inflation reported at the end of July. Why is the Reserve Bank worried about wage inflation when the opposite is clearly the case? Wages aren’t even keeping up with inflation in consumer prices.
By cutting rates, does the RBA assume that consumer price inflation will come down in coming months because consumer demand has moderated or because food and petrol places are permanently lower? People are spending less money on discretionary goods for a simple reason: they have less money to spend. Petrol and food prices have made sure of that. Aussies are “binging on debt” as an article at News.com.au reports today to keep up with the Joneses.
A word to the wise: the battle against inflation isn’t won. At best, it’s a cease fire or a truce. But you know how those things go. They can blow apart at any second. July inflation in the U.S. came in at a 17-yearh high of 5.6%. While you can expect to see debt-deflation (falling financial asset values), we’d expect the global central bank response to this to be what it always is: money-printing leading to inflation.
Markets and Money