It’s Wednesday and so we have a few brief items relating to monetary policy and property scandals before a final music offering to calm our nerves.
RBA has crossed the line – it is now a danger to society
The heading might sound alarmist and extreme but when you have a central bank governor essentially saying he is prepared to drive the unemployment rate to whatever levels will deliver such mayhem and suffering that price pressures recede then you might take a different view.
Of course the RBA governor is not openly saying that.
He is trying to coerce behaviour using words like:
The Board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that.
That statement ended the official release yesterday after the RBA had increased interest rates again – this time by 0.25 points – the seventh successive increase since it began the current tightening in April this year.
In that release – Statement by Philip Lowe, Governor: Monetary Policy Decision (November 1, 2022) – the RBA reasoned that:
1. “Global factors explain much of this high inflation, but strong domestic demand relative to the ability of the economy to meet that demand is also playing a role.”
But even the domestic factors are probably insensitive to the interest rate changes.
Massive floods this year have driven food prices up – hammering mortgage holders will not help that problem.
Energy prices are high because the federal government refuses to deal with the foreign owned gas cartel operating in Australia that is diverting our gas to export markets and then gouging the domestic market at export price levels.
That problem requires the Federal government to show some leadership and take control of our gas and force price caps and guaranteed domestic supply.
That alone will drive the inflation rate down significantly independent on interest rate changes.
2. “Returning inflation to target requires a more sustainable balance between demand and supply.”
That is true but it depends on what is driving the inflation.
If it is demand driving the price acceleration in the context of a healthy supply-side then measures do have to be taken to stifle spending.
Those measures are best left to fiscal policy which is direct and more predictable in impact. It can also be supplemented with a Job Guarantee to minimise the negative impacts on employment.
But if the supply-side is temporarily disabled (by Covid) then it doesn’t make sense to compound that situation with a policy that deliberately aims to damage the demand side.
What happens when the supply constraints ease? Well under the RBA’s approach, we are likely to be left with recession and massive excess supply capacity.
3. Even the RBA admits that “Inflation is then expected to decline next year due to the ongoing resolution of global supply-side problems, recent declines in some commodity prices and slower growth in demand.”
So why not just wait it out and use fiscal policy to help the lowest income families who are not well placed to defend themselves against the cost of living increases?
A recent speech by ECB Member of the Executive Board, Isabel Schnabel (August 27, 2022) – Monetary policy and the Great Volatility – is typical of the logic that central bankers are now using to attack demand when they know the problem is a temporary one on the supply side.
She told the audience at Jackson Hole that there was “large uncertainty” about the current situation.
She said there were:
… two broad paths central banks can take to deal with current high inflation: one is a path of caution, in line with the view that monetary policy is the wrong medicine to deal with supply shocks. …
The other path is one of determination. On this path, monetary policy responds more forcefully to the current bout of inflation, even at the risk of lower growth and higher unemployment.
Within that context, she also suggested that the economic models used by central banks are extremely limited in what they can tell us about the future.
The ECB Economic Bulletin (Issue 3/2022) recently published a research paper – What explains recent errors in the inflation projections of Eurosystem and ECB staff? – which analyses the appalling prediction record of the ECB economic models.
Yet, despite the inability of the economic theory that they are using to justify their actions, Schnabel said that when there is this level of uncertainty it is best to introduce:
… a forceful response to a deviation of inflation from the target to reduce the risks of inflation remaining high for too long.
She claimed it was “largely irrelevant whether inflation is driven by supply or demand” – it was best to assume it was a conventional excess demand episode and use interest rate increases to scorch demand.
Why?
To avoid inflationary expectations becoming “de-anchored”, which is a fancy term central bankers and New Keynesian economists use to describe a situation where people think inflation will keep accelerating so they then behave in their pricing and wage strategies to maintain real value of their nominal aggregates.
So we have a situation where these central bankers are operating in the fog of uncertainty and are using economic frameworks that consistently produced biased forecasts that are not fit for purpose and yet they rely on these economic models to justify going hard – which means creating as much unemployment as is necessary to kill off spending and wage demands.
We really are in a state of dysfunction.
The RBA even admitted in it statement that:
Medium-term inflation expectations remain well anchored, and it is important that this remains the case.
Which means that no-one is expecting this inflationary episode to last very long.
Which also means that the no-one is believing that the RBA’s claims about wages becoming a problem is true.
The RBA claimed that:
“Wages growth is continuing to pick up from the low rates of recent years, although it remains lower than in many other advanced economies …
The official data doesn’t support the conclusion of accelerating wages growth.
The RBA claims their private surveys of business tell us that but do not release the data so that we can verify the claims.
Of course, business leaders will claim this as part of their on-going campaign to keep wages growth low – hoping the interest rate rises will increase unemployment and put a brake on any wage aspirations from workers.
The RBA should release this data.
If wages were really following the RBA’s claims then inflationary expectations would not likely be ‘anchored’.
The two things are mutually inconsistent.
Finally, the RBA refuses to acknowledge that pushing interest rates up adds to business costs and businesses have demonstrated they have the market power to push those cost increases onto consumers.
That says that interest rates rises cause inflation.
Further, the higher interests rates may stimulate consumption of high income earners who have financial wealth.
People ask me about this and appear confused.
The point is that in the short-run, the interest rate rises can easily be an inflationary impetus, yet create recession after some time.
Why?
First, the interest rate impact on business costs and the ability of households to access credit to maintain current spending levels means that the short-run effects of interest rate rises are likely to be inflationary not deflationary.
Second, over time, as the rate rises continue, the capacity of households to continue maintaining consumption via credit diminishes and the squeeze on real income increases.
There is only so much substitution consumers can make to defend their spending on essentials, while maintaining solvency in terms of their nominal contractual commitments (such as their mortgages).
Further, household saving stocks are finite and eventually run out.
At some point, the marginal households lose their houses because they default on their contractual commitments and there is a multiplicative effect that reverberates through the economy.
The spending withdrawal of higher propensity to spend, low-income households becomes greater than than the interest-rate boost to those with financial wealth and total spending starts to decline.
At that point, as sales start to retreat and inventories start building up, firms lay off workers after cutting hours of work and a recession looms.
That becomes a very damaging period.
And when the RBA governor says they will do whatever it takes – he is talking big but really saying they are prepared to push the economy into recession and deliberately damage the prosperity of those least able to cope.
We know that when the economy enters recession it is the bottom end of the income distribution that bears the brunt.
Those with high incomes usually can defend themselves and also they take advantage of the failing property markets and buy assets at fire sale prices.
The RBA is deliberately seeking that sort of outcome.
The RBA governor only has about 10 months to run in his job – then he will be out and Australia will be better off for it.
The failure of urban planning
There was an article from ABC News (October 31, 2022) – An hour and a half to drive 3km — why is traffic so bad in Melbourne’s outer suburbs? – which exposes the failure of local governments in Australia – who are in the thrall of property developers and leave citizens short.
This is an on-going problem and until there is a tighter regulative environment on zoning, development approvals etc, it will get worse.
Land planning in Australia is essentially driven by the profits that the property developers can gouge out by building as many houses in the smallest space that they can get away with.
So we get hectares of just roofs and concrete (heat sinks) with hardly any extra social infrastructure being provided.
Lax local government approval processes aid and abett this disastrous approach to land management.
State governments are also implicated because they allow such zoning and approvals to continue, given that local councils are creatures of state legislation.
The state governments have been obsessed with ‘fiscal responsibility’ (read: irresponsibility) and cut spending on public infrastructure where they can get away with it.
Hence the context for the ABC News article.
It tells the story of a new suburban development on the Northern outskirts of Melbourne where residents have to queue for 20 minutes in their cars just to leave the estate and then take “more than an hour to travel” 3 kms to access the main highway south to where employment is located.
The story is repeated across all these outer-suburban developments which are left short of public transport infrastructures, have hardly any access roads, and precious else other than ‘roofs and concrete’.
The suburb of the ABC story has grown from 105 people in 2016 (before the development) to 6,466 in the 2021 Census as a result of the development.
There is “one road in and out” of a segment of the development that has 2,000 residents.
There is very little work available so residents have to commute relatively long distances each day.
Clearly, bottlenecks and long commuting times are the norm in these cases and undermine the quality of life of the residents.
The story also reports the experience of one resident who sometimes has to drive for 90 minutes to take her daughter to school “which is just 3 kilometres away”.
While the general tenet of the story is valid and I am not one to degrade the concerns of the residents, the story did miss the chance to make another important point which is part of the development scandal.
I wondered why the mother didn’t just ride a bike to take the child to school. The journey would take 10 minutes at most.
The point is that if we are to deal with the climate emergency then more people will have to refrain from using private cars and bicycle places.
That means that the local governments should insist on the provision of adequate bike riding infrastructure as being compulsory aspects of any new residential development and state governments should ensure there are bike lanes on all major commuting arteries and routes to schools, shops etc.
It also means that the federal or national governments should provide generous subsidies to families to allow them to purchase adequate bicycles (even E-bikes) so that the cost is not an impediment to uptake.
One of the stark things one notices living in Kyoto where I am currently working is the usage of bikes.
Every morning, I see mothers and fathers commuting on their bikes with a kid on the front and a kid or more on the back in seats on the way to dropping them off at school.
This picture is common here.
Even if there is insufficient dedicated infrastructure for cycling, the authorities should allow commuters to use footpaths.
The law in Kyoto, for example, allows people to ride bikes on footpaths and pedestrians and cyclists mix well in that process.
I often hammer down the footpaths to get places on my bike. Most roads also have marked bike lanes some insulated from other vehicles some not.
None of this absolves the local governments in Australia but I find it ridiculous that a person would drive a car 90 minutes there and 90 minutes back again when they could ride a bike in a fraction of that time – and get fitter in the process.
Music – Peter Tosh Bush Doctor
This is what I have been listening to this morning while I have been travelling to the airport. as part of the growing violence associated with the political divisions and drug gangs in Jamaica during the 1970s and 1980s, one of the original Wailers – Peter Tosh – was gunned down on September 11, 1987 during an extortion attempt.
Several other people were killed and injured by the gang and only one was brought to justice in 1995.
This Jamaica Observer article (April 22, 2012) – The night Peter Tosh was killed – tells the story in detail.
Peter Tosh was the most radical of the old Wailers in terms of demanding equal rights and the overthrow of the political elites that took over the mantle from the Colonial oppression.
This track – Bush Doctor – is taken from the his third album – Bush Doctor – which was released in 1978.
The backing band is comprised of the whos who of Jamaican recording – Robbie Shakespeare on bass, Sly Dunbar on drums, Mickey Chung on guitar and synths, Robert Lyn on piano, Keith Sterling on other keyboards, Luther Luther François on soprano sax, Donald Kinsey on guitar, Larry McDonald and Uziah “Sticky” Thompson on percussion.
A fabulous album.
That is enough for today!
(c) Copyright 2022 William Mitchell. All Rights Reserved.
