Today we consider how asinine Australian’s monetary policy makers are now sounding. Yesterday, I reported the massive income redistribution that is going on at present as a consequence of central banks now hiking interest rates. This not only favours those with interest rate sensitive assets and punishes borrowers, but also necessitates, under current policy settings that central banks pay millions to trillions of cash to the banks that hold excess reserves. The excess reserves are the consequence of quantitative easing programs. Some might say this is the fault of the QE programs. But an Modern Monetary Theory (MMT) interpretation is that under optimal policy where no public debt is issued at all, the bank reserves would still accumulate. The MMT position would see no support rate paid and a Japan-style zero interest rate regime maintained at the short-end of the yield curve. In that case, there would be no transfers of cash to the banks as a result of their excess reserve holdings. Today, there is more though. On Tuesday (November 22, 2022), the Reserve Bank of Australia governor gave an address to yesterday (November 22, 2022) – Price Stability, the Supply Side and Prosperity – to the Annual CEDA dinner in Melbourne. He told the audience that we are entering a period of global uncertainty which will require more rapid adjustments in interest rate settings, up and down, to deal with the growing threat of inflation. It was an appalling display of hubris and September cannot come quick enough – when his contract as governor expires.
The RBA Governor jumps the shark
Jumping the shark – refers to the resort to ridiculous overstatement or stunt to catch attention when the underlying message and performance has lost its sheen.
That about sums up the performance of the RBA governor on Tuesday in Melbourne.
The ‘stunt’ captured the headlines in the news outlets, which was his intention obviously.
But the message was hard to fathom.
He was talking to CEDA (Committe of Economic Development of Australia), which claims to be a “bi-partisan” thinktank but is full of mainstream economics with little pluralism in sight.
It stretches the meaning of bi-partisan to the absurd.
It is an ideological neoliberal propaganda organisation and its members would have lapped up the RBA governor’s message, especially when he said that wage should not rise as inflation rises.
Before I consider the rest of his speech, it is correct to say that if wages catch up to inflation, then the inflation will spiral into a self-fulfilling battle between labour and capital for real income maintenance.
But in emphasing that it should be workers who take the real loss rather than calling out the profit gouging that is now driving the inflation or calling out the lack of courage in the federal government who refuse to take on the big energy companies who are making massive profits by diverting gas to export markets inflating as a result of the Ukraine situation and forcing shortages in the domestic market, the RBA governor is demonstrating where his biases lie.
If the Australian government had have followed the example of the Japanese policy makers, rather than slavishly trying to imitate the Americans, then we would have much lower inflation and the well-being of the workers would be less compromised.
In this Speech, the RBA governor admitted that the current inflationary episode would peter out over the next year or so.
I have stood by my assessment that this episode is transitory in nature, given the supply pressures that started it and the OPEC+ and Ukraine situation that made it worse.
There are no wage-price propagating mechanisms operating to drive it further as was the case in the 1970s.
The Governor admitted that:
1. “the COVID disruptions to supply are being resolved: delivery times and shipping costs have declined and the pressure on goods prices is abating.”
2. “commodity prices have stabilised and, in many cases, have declined to be back around their levels at the beginning of the year; in time, the effect of this will be evident in consumer prices.”
He also claimed that the rising interest rates since April had suppressed aggregate demand, but the evidence is less than clear on that score.
Retail sales data (released November 4, 2022) shows only a modest decline with some sectors still booming (like food and hospitality).
The point is that the main drivers of the inflationary pressure are supply side factors which are temporary and abating and trying to deal with that sort of situation by significantly reducing aggregate spending will leave a residue of damage after the supply side normalises that will be far worse than the distortions temporarily endured as a result of the supply constraints.
He then shifted focus to consider future supply shocks.
He admitted that monetary policy was largely concentrated on manipulating aggregate demand, although as we know it is a very inefficient vehicle in that regard.
The impact lags are uncertain and largely unknown.
The RBA does not know clearly how the distributional shifts of interest rate changes (between borrowers and lenders) play out.
While professing to be inflation fighting policy tools, interest rate increases may very well, at least in the short- to medium-term actually cause inflation to accelerate, given they increase the costs for businesses that have the capacity to pass them on to final consumers.
The RBA governor though foreshadowed a future where these current type of supply shocks a more frequently and their amplitude larger.
His conjecture is that inflation will be a constant problem from now on.
Why?
1. “reversal of globalisation” – for some reason, he thinks that a move to restore some self-sufficiency by nations will lead to higher prices around the world.
My bet is that if China becomes less important as a source of our imports and world trade contracts somewhat we will simply accelerate the move to less obsolscence, less plastic, and less waste.
2. “demographics … ” – he thinks the ageing society problem will be inflationary but there is no reason given.
The point is that addressing the ageing society as a fiscal problem undermines the actual solution, which is to enhance the productivity of the younger workers and investing in education and training institutions.
Almost exactly the opposite to what the fiscal austerity proponents advocate.
There is no reason for supply constraints to worsen because we are getting older if we invest in the youth correctly.
3. “the frequency of extreme weather and climate events has increased over recent decades and it is likely that this trend will continue” – this is a huge problem and requires a significant increase in public spending to fast track our shift from carbon to renewable energy and related practices.
The governor cited the recent floods in Australia as a source of price pressure – given the damage they have caused food production.
However, these pressures are not solved through interest rate changes.
We have a long experience of crop disruption caused by weather and fire events. Consumers stop buying lettuce when it reaches $10 a head and just buy other things.
Soon the new crops emerge and prices drop dramatically.
The art of policy making is not to be continually altering the policy environment in which households and firms make spending and saving decisions.
Sudden swings in policy settings create uncertainty themselves and in this case will not get the new lettuce crops growing any quicker.
4. Building on the climate events, the governor cited the on-going “the energy transition” as a source of future inflationary pressures.
He claimed that energy companies would need to hike prices to deal with the transition.
He might have noted that governments have the capacity to reverse the damaging privatisations that created these private energy profit gougers in the first place.
They also have the capacity to fix prices at cost if need be to allow the energy transition to proceed without profiteering.
We have a example at present of everything that has gone wrong with the energy policy in Australia.
I have noted before that Australia produces more gas than it can ever consume domestically.
Yet the price has been rising dramatically with threatened domestic supply shortages.
These price hikes are a major cause of our current inflationary pressure.
Why has that happened?
Simply because the foreign-owned energy companies were given an almost free run by the federal government to profit from our gas resources and price domestic supply on world prices.
With the growing demand for non-Russian gas across Europe as a result of the Ukraine situation, these energy companies are diverting supply from the domestic market to export and are reaping massive windfall profit gains into the bargain.
They are then pricing the domestic market on world prices.
This could be solved quite easily if the federal government was not cowed by the energy companies.
There is more than enough free gas (that is, supply not currently locked into long-term export contracts) to supply the domestic market.
The government can sequester that supply any time it wants and force a price cap at cost if it wants to.
Then a significant drop in the CPI would become evident.
Monetary policy has no place in that solution.
In general, the shift to a reduced carbon world will require a major shift in fiscal policy – with new taxes to shift resources and reduces spending in many areas (such as military expenditure, subsidies to carbon industries, accompanied by tighter regulation on all sorts of things, such as vehicle standards, housing quality etc.
It will also require more state ownership of essential services – a reverse privatisation.
If central banks attempt to stifle economic activity with interest rate hikes to deal with any cost pressures as a result of these transitions, they will just undermine the effort.
The governor admitted that trying to keep inflation within a narrow band as these events and transitions are underway will become impossible, which means we just adjust to more variability, and seek the sort of solutions I have outlined above.
He also claimed labour and product markets have to become more flexible, which is code for more deregulation and less employment protections.
Given the difficulties workers have gaining wage increases these days and the rise of the ‘gig’ economy, it is hard to see how much further the labour market could be rendered more flexible.
The flexibility is all in favour of the bosses and it has transferred national income to profits, with the wage share at an all time low.
What is certainly needed is for government to reduce the capacity of corporations to gouge profits.
I suspect the governor would be silent on that issue.
He also claimed that fiscal policy had to be contained to ‘save’ up for future calamities.
The so-called independent central bank butting in about fiscal policy nonetheless.
Conclusion
The sort of challenges that the governor identified on the supply side are certainly real and will increasingly play out in the future.
But they just highlight how inadequate is a policy dominance where interest rate adjustments are the primary tool for counter-stabilisation.
These supply challenges indicate a stronger role for fiscal policy and regulation, including public ownership of essential resources and services.
That is enough for today!
(c) Copyright 2022 William Mitchell. All Rights Reserved.
