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I see Philip Lowe is likely for the chop. Once the powers that be start making snide remarks about you, the jig is up. Once Anthony Albanese in one of his fly-in visits makes fun of your untoward interest rate prediction your successor has been lined up. Postulating aloud that rates would be unlikely to rise before 2024 was monumentally silly, it must be said. Is it a hanging offence? Maybe. People and financial institutions were undoubtedly led astray. Of course, the RBA board as a whole was complicit. Still, Lowe, as the top guy has to take the responsibility. Applies generally, unless you’re in the Australian Army, that is.
That all said, I hope Lowe survives. I knew him professionally at one stage, closing on two decades ago now. He’s a sound chap. As good as they’ll get and less likely to err in the future, I would think. Incidentally, this doesn’t mean I think that he’s good at his principal job, containing inflation. I listened to his long speech after the latest interest rate decision. He talked about inflation mainly, and about wages, the budget, aggregate supply and aggregate demand.
Hello!What is aggregate supply and aggregate demand? Well, you’ll need to read John Maynard Keynes’s General Theory to get a good handle on them. I wouldn’t bother, it’s a turgid read, and they are useless concepts that have led economists and central bankers down the garden path ever since 1936.
Not once in his speech did Lowe mention the money supply. Extraordinary, in a speech principally about inflation and trying to tame it! I needed to get away halfway through the questions he fielded. Nothing there either, so far as I heard. To be clear, inflation is a monetary phenomenon. An appreciable and persistent rise in the general level of prices has its counterpart in an appreciable and persistent fall in the value of money. Inflation is too much money chasing too few goods, as it is often put in common or garden terms.
It is plainly misguided to talk about inflation without talking about the money supply. It shows how far down the Keynesian rabbit hole the RBA’s economists have gone. Keynes largely ignored the influence of money because he assumed that the demand for money behaved like a “will-o’-the-wisp” and was indeterminate. He was wrong, as Milton Friedman later showed.
Inflation comes about when increases in the money supply exceed the growth in the production of goods and services. The money supply in Australia and elsewhere grew very strongly during the COVID lockdowns. Governments spent lavishly. The RBA and other central banks monetized the spending by buying government bonds.
What to do when the inflation genie is out of the bottle?Turn to Friedman. Slowly and gradually rein in the rate of growth of the money supply until it is growing at about the pace of real economic growth; or, in keeping with latest theory of keeping inflation to between 2 and 3 percent, to two or three percentage points above the pace of real economic growth. Don’t try to dampen things down too suddenly or too fast. To paraphrase Friedman, this will cause unnecessary economic misery. I wonder whether the RBA is now on course to produce such misery.
I think we would, or should, have more confidence if the we knew that the RBA is closely monitoring the money supply and its drivers — government deficit spending and bank lending. As it is, when the Governor can make a major speech about inflation and not mention the money supply, all bets are off.
To the end of April M1 money (notes and coin in circulation plus at-call bank deposits), which I think provides the best guide to the current state of affairs, though admittedly that’s a judgment call, had fallen by 3 percent over the year. That, it seems to me, is a warning sign that monetary tightening is going at too fast a pace. The RBA would have later figures. Is it focusing on them? That’s the question.
Hopefully, the Bank totally discounts the latest inflation number. Leave that to the imbecilic press and to financial economists who earn their keep as talking heads. It is irrelevant. Historical and full of noise. The money supply is the key variable, Bring its rate of growth down gradually and inflation will start to fall, and without necessarily sending the economy into a tailspin.
By the way, if I don’t think Philip Lowe knows what he’s doing on the monetary policy front, why do I think he should be kept on? Simple, the chances of any replacement eschewing Keynesianism and understanding economics is slim to zero. Better the bloke we know, informed by his misstep.
He’s a Keynesian who studied under Paul Krugman. Enough said.
Keynes (a closet homosexual) once said “In the end , we’re all dead” . Not too optimistic from a famed economist . He has zero credibility IMO , and that he is the go-to man for the media says everything .
We are owed far better from our economists. Peter describes the source of our economic management woes. Surely a review of history would show which approach to inflation is most effective at lowest cost?
Inflation is the obvious outcome of printing money at the same time as suspending production…which the great Covid circus ‘lock-down’s achieved. Much money chasing fewer goods and services, much fewer if the closed shops in my local mall are anything to go by, has to bid up the cost of those fewer purchasables.
Oops, inverted comma in wrong place: ‘lock-downs’.
Exactly , Daffy . This is a contrived , confected assault on the economy and the middle class . Covert 19 and climatemongering combined to put boot on neck . My wife , a nurse in aged care is set to get a 15% pay rise , while the minimum wage skyrockets , yet no correlation between these and Inflation !? Sure , my wife is happy with a pay rise (5% would have sufficed) but our mortgage payments have gone up by $15,000 per year , and counting . To sell a property (our super) to lower our debt , but massively decrease our assets is not on for me , having invested for my retirement , only to have Govt intrusion and malfeasance to hobble us near the finish post is disgraceful.
The Albanese government is fuelling inflation through its moronic energy and immigration policies.
The mad rush to renewables and the closure of coal baseboad generation has made Australia increasingly reliant on gas for grid firming. However, with the exception of WA, Australia doesn’t have enough gas reserved to properly supply the domestic market at affordable prices. Albanese’s proposed remedy? Even more renewables, including “green hydrogen”.
Meanwhile, Albanese’s extremist immigration intake – 400,000 net this financial year and another 350,000 the year after – is creating explosive demand for housing, thereby pushing up prices and adding to overall inflation.
>” … fuelling inflation through its moronic energy and immigration policies” [part quote from Farnswort comment].
Worse than inflation, I think, but rather heading into a black start one deep winter’s night. Many people will be utterly distressed, damaged, injured, with some certainly dying. So far, this has been avoided by turning off smelters and other industrial users (in the case of the Tomago smelter, over 35 times in one month last winter). The grids are now without safety factors, with the loss of the coal-fired generators in both Vic and NSW.
A few years ago my colleagues and I were discussing just this. I made a John Cleese type sarcastic remark about filling the Simpson Desert with windmills and sun panels and connecting them to the cities with 30,000km of high tension kV lines.
Now our ex Chief Scientist (he of Tesla fame and a mate, he says, of Lord Waffle) has just this weekend seriously advocated exactly this. From sea to shining sea, as the song goes.
Funny ianl , have said “From sea to shining sea ” on many an occasion my self re the madness of wind turbines . How do the left/greens square the circle of advocating these non- renewable , short shelf life , extremely fuel thirsty in delivery and erection , needing millions of tonnes of concrete bases , bird killing , environment destroying eyesores with their proposed love of nature in it’s pristine beauty ?! Answer is , they give a damn about the environment , only power (‘scuse the pun) . Ditto of course for solar farms , and it’s the west who’s being punished , by our own !
Farnswort
A very astute comment.
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But yours is like a cry in the wilderness because Coalition policies aren’t very different.
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At least – as you’re rightly alluded to – WA has helped reserve some of our immense energy reserves for Australians, or more accurately West Australians
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I’m amazed Australians aren’t more upset – that one of the most energy rich countries in the world has to endure such high energy prices. And of course when you look at your energy bills it’s pretty obvious the impact of energy prices on inflation.
Economist Leith Van Onselen on how Australia’s self-inflicted energy and mass immigration woes are fuelling inflation: http://www.skynews.com.au/opinion/erin-molan/funny-situation-inflation-responsibility-left-to-the-reserve-bank/video/1f41c359ea6993fcf5cf580559a4702a
*baseload
As Lowe himself put it: “The population’s increasing by two per cent this year. Are there two per cent more houses? No.
“The rate of addition to the housing stock is very low.
“We’ve got a lot of people coming into the country, people wanting to live alone, it doesn’t work.
“The way that this ends up fixing itself, unfortunately, is through higher housing prices and higher rents.”
More inflation and misery on the way thanks to Albo’s ludicrous immigration open door policy.
Peter,
Here are some more questions that Dr Lowe might need to address more deeply. Geoff S
http://www.geoffstuff.com/rba.docx
Geoff, your link doesn’t seem to work. Peter
On iPad the doc can be downloaded or viewed, had to try twice.
Downloaded 2nd try on a W7, first try on a W10.
It’s pointless getting into an argument over who’s a Keynesian or who’s monetarist. That’s arguing over ideology. The implication in this article is that if we sacked all Keynesians our problems with inflation would be solved overnight. What we need is some sort of political purge of Keynesians.
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It’s treating economics like a quasi religion which it certainly isn’t. It’s a practical day to day predominantly evidence based discipline.
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Fortunately most economists who actually run things for government don’t base what they do solely on ideology. There’s a heavy emphasis on contemporary evidence and of course their thinking is also informed by past theories.
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All professional economists will have studied the theories of both John Maynard Keynes and Milton Friedman to provide a framework to help understand how economies work. They will also have studied earlier theories of economics like those of the classical school.
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“Inflation comes about when increases in the money supply exceed the growth in the production of goods and services” (para 6 in the above article). On the surface that seems to make sense. But that’s exactly what happened for many years after the Global Financial Crisis and the problem wasn’t inflation. Many actually saw a problem with inflation being too low for many years.
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That shows the problem with investing too much confidence in one economic tool like the size of the money supply and older economic theory and disregarding more contemporary evidence.
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The world following the GFC was awash for years with a bloated money supply. Interest rates in some countries like Germany were actually negative as a result of using monetary tools like lower interest rates and expanding the money supply to increase economic activity. But inflation was not a problem. Many even considering it to be too low.
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However the big problem now is analogous to the point I was making above. We are relying almost exclusively on one tool to get inflation down: interest rates.
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It suits Labor politically because it can deflect all backlash from measures to get inflation down onto the Reserve Bank.
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Whereas the government should be at the forefront with the RBA using the government’s available tools, like fiscal policy ( by reducing government spending) to help get inflation down. But Labor actually increased spending in the recent budget. That’s counterproductive in the inflation fight.
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It’s an irrefutable and critical economic fact that the Treasurer deliberately undertook new spending and lifted the government’s overall level of spending by billions of dollars in the last budget over what was previously planned at a time when we’re facing a serious inflation threat. No responsible government should ever do that.
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Given a lack of any effective fiscal action by the Government to curb inflation the RBA has had to raise interest rates much faster and higher than if effective fiscal action had been taken – increasing the risk of a recession.
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The best and fairest way to get inflation down is a combination of spending restraint and wage and monetary policy restraint.
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The first two are arguably Labor’s responsibility and they’ve done absolutely nothing effective with either. What Labor’s done has actually been counterproductive in the inflation fight.
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Using all the above policy responses, instead of just interest rates, would have tackled the inflation problem far more effectively and minimized the negative impacts of anti inflation action.
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Monetary policy is the RBA’s responsibility and it’s acted responsibly. Because of Labor’s lack of any effective fiscal action the RBA has had to raise interest rates faster and higher than it probably would have preferred to. But Labor has given it no choice.
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So how has Labor been able to get away with this? An inept opposition with no coherent alternative approach has helped a lot. So have the undoubted communication skills of the silver tongued Treasurer, Jim Chalmers. A compliant and uncritical left media – eager to support Labor – has also helped.
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While Labor may have got away with it our economy hasn’t. We now face a heightened threat of recession because of Labor’s lack of effective anti inflation action.
Oops ! (Don’t) give a damn .