Fiscal policy must be the tool of choice to respond to major climate related calamities – BIS

“Fiscal support can manage the direct economic fallout from extreme weather events.” That quote came from an interesting new research paper published in the 98th edition of the Bank of International Settlements Bulletin (February 10, 2025) – Macroeconomic impact of extreme weather events. The paper seeks to tease out what the economic impacts and policy implications are of the climate changes that are now manifest in various extreme weather events, such as droughts, wildfires, storms, and floods, which are increasing in incidence across the globe. The researchers recognise that such events are increasingly imposing “high economic costs” and “social hardship” on communities around the world. Their conjecture is that the “most extreme weather events have been rising and are likely to increase further” which will challenge policy makers. They discuss the implication of this increased exposure to such events for fiscal and monetary policy but recognise that fiscal policy must be the frontline tool to respond to the damage caused by such events.

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The Left has created the swing to the Right – some reflections

The last several decades of what is termed the neoliberal era has led to some fundamental changes in our social and economic institutions. It was led by the interests of capital reconfiguring what the polity should be doing, given that most of the significant shifts have come through the legislative or regulative capacity (power) of our governments. In turn, this reconfiguration then spawned shifts within the political parties themselves such that the traditional structures and voices have changed, in some cases, almost beyond recognition. The impacts of these shifts have undermined the security and prosperity of many citizens and redistributed massive wealth to a small minority. The anxiety created as the middle class has been hollowed out has been crying out for representation – for political support. Traditionally, support for the socio-economic underdogs came from the Left, the progressive polity, which, after all was the Left’s raison d’être. But that willingness by the Left politicians to give voice to the oppressed has significantly diminished as it surrendered the macroeconomic debate to the mainstream and got lost in post modernism. As a consequence, the ideological balance has demonstrably shifted to the Right, and the former progressive parties have been abandoned. My thesis is that the Left has created a burgeoning return of the Right with a daring and resolve that we haven’t seen for decades. The election and aftermath of Donald Trump’s elevation to presidency demonstrates the situation. Last weekend’s general election in Germany demonstrates the situation. And today a poll was released in Australia that suggests the current Labor government, which slaughtered the conservatives in the last election just 3 years ago are now facing a clear loss to the Opposition – that is advocating Trump-style radicalism. As the saying goes – you get what you deserve.

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Economics as politics and philosophy rather than some independent science

Last week, I wrote about – The decline of economics education at our universities (February 6, 2025). This decline has coincided and been driven by an attempt by economists to separate the discipline from its roots as part of the political debate, which includes philosophical views about humanity and nature. In her 1962 book – Economic Philosophy – Joan Robinson wrote that economics “would never have been developed except in the hope of throwing light upon questions of policy. But policy means nothing unless there is an authority to carry it out, and authorities are national” (p.117). Which places government and its capacities at the centre of the venture. Trying to sterilise the ideology and politics from the discipline, which is effectively what the New Keynesian era has tried to do, fails. The most obvious failure has been the promotion of the myth of central bank independence. A recent article in the UK Guardian (February 9, 2025) – You may not like Trump, but his power grab for the economic levers is right. Liberals, take note – is interesting because it represents a break in the tradition of economics journalism that has been sucked into the ‘independence’ myth by the economics profession.

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Australia – inflation continues to fall and the RBA should cut interest rates

The Australian Bureau of Statistics (ABS) released the latest – Consumer Price Index, Australia – for the December-quarter 2024 today (January 29, 2025). The data showed that the inflation rate rose by just 0.2 points in the quarter and has fallen to 2.4 per cent on an annual basis (down from 2.8 per cent). The inflation rate has been within the RBA’s inflation targeting range for the last 6 months and with inflationary expectations falling, the RBA has no justification left for holding to its elevated interest rates. Using the RBA’s own logic, interest rates should now be cut.

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Field trip to the Philippines – Report

I have been working in Manila this week as part of a ‘knowledge sharing forum’ at the House of Representatives which was termed ‘Pathways to Progress Transforming the Philippine Economy’ that was run by the Congressional Policy and Budget Research Department, attached to the Congress (Government). I am also giving a presentation at De La Salle University on rogue monetary policy. It has been a very interesting week and I came in contact with several senior government officials and learned a lot about the way they think and do their daily jobs. I Hope the interactions (knowledge sharing) shifted their thinking a little and reorient to some extent the way they construct fiscal policy. This blog post reports (as far as I can given confidentiality) what went on at the Congress.

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ECB research shows that interest rate hikes push up rents and damage low-income families

I have been arguing throughout this latest inflationary episode that the central bank rate hikes were actually introducing inflationary pressures through a number of channels, the most notable one in the Australian context being the rental component in the Consumer Price Index. The RBA has categorically denied this perversity in their policy approach, and, instead, claimed the rapidly escalating rental inflation was the result of a tight rental market, end of story. Well the rental market is tight, mostly due to the massive cutbacks in government investment in social housing over the last few decades. But the rental hikes followed the RBA rate hikes and the simple reason is that landlords when in a tight market will always pass on the costs of their investment mortgages to the tenants. They weren’t doing that before the rate hikes. A recent ECB research report – How tightening mortgage credit raises rents and increases inequality in the housing market (published January 16, 2025) – provides some robust evidence which supports my argument. That is what this blog post is about.

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Underlying inflation in Australia continues to decline

Today (November 27, 2024), the Australian Bureau of Statistics (ABS) released the latest – Monthly Consumer Price Index Indicator – for November 2024, which showed that the annual underlying inflation rate, which excludes volatile items continues to fall – from 3.5 per cent to 3.2 per cent. The overall CPI rate (including the volatile items) rose slightly from 2.1 per cent to 2.3 per cent, but that was mostly due to the timing of government electricity rebates between October and November. In other words, the slight rise cannot be interpreted as signalling a renewed inflationary spiral is underway. All the indicators are suggesting inflation is declining and the major drivers are abating. The overall rate has been at the lower end of the RBA’s inflation targetting range (2 to 3 per cent) for four successive months now, yet the RBA continues to claim they fear a wages breakout and that unemployment needs to increase. The RBA has gone rogue and its public statements bear little relationship with reality. It is clear that the residual inflationary drivers are not the result of excess demand but rather reflect transitory factors like weather events, institutionally-driven price adjustments (such as indexation arrangements), and abuse of anti-competitive, corporate power. The general conclusion is that the global factors that drove the inflationary pressures have largely resolved and that the outlook for inflation is for continued decline. There is also evidence that the RBA has caused some of the persistence in the inflation rate through the impact of the interest rate hikes on business costs and rental accommodation.

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Bank of Japan research refutes the main predictions made by economists about the impacts of large bond-buying programs

Welcome to 2025. My blog recorded its 20th year of existence on December 24, 2024 which I suppose is something to celebrate. But when I look out the window and try to find optimism I fail. Who knows what the year holds and global uncertainty is dominating the narratives surrounding economic developments. We have a crazy guy about to take over the US along with his band of crazy guys. Government coalitions are failing all over the place and international cooperation is giving way to nationalism. We have Israel still slaughtering tens of thousands of innocent civilians using the equipment made available by the US and other advanced nations. Apparently opposing that slaughter makes one anti-semitic. I could go on. Those observations will clearly condition my thinking in the next year. But today, I am catching up on past work. On November 29, 2024, the Bank of Japan published a research paper – (論文)「量的・質的金融緩和」導入以降の政策効果の計測 ― マクロ経済モデルQ-JEMを用いた経済・物価への政策効果の検証 (which translates to “Measuring the effects of the “Quantitative and Qualitative Monetary Easing” policy since its introduction: Examining the effects of the policy on the economy and prices using the macroeconomic model Q-JEM” – the paper is only available in Japanese). The research uses innovative statistical techniques to assess the impact of the low interest rate, large bond-buying strategy deployed by the Bank of Japan between 2013 and 2023. The Bank of Japan research refutes the main predictions made by economists about the impacts of large bond-buying programs.

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The federal government would sack the RBA Board and Governor except it is too busy jumping at its own shadow

It’s Wednesday and as usual I cover a few topics briefly rather than provide a deeper analysis of a single issue. Today, I consider yesterday’s RBA monetary policy decision which held interest rates at elevated levels despite the inflation rate dropping towards the lower range of its targetting band. The RBA has lost credibility and the federal government should sack the RBA Board and Governor. The problem is that the federal government is too busy jumping at its own shadow to actually take any meaningful decisions about almost anything. I also reflect on the recent decision by the Nobel Committee to award the Peace Prize to the – Hibakusha – which reminds us of the devastation that nuclear arms can (and did) cause. Some other matters then precede today’s great music segment.

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Australian inflation episode well and truly over – please tell the RBA to stop trying to push unemployment up further

Today (November 27, 2024), the Australian Bureau of Statistics (ABS) released the latest – Monthly Consumer Price Index Indicator – for October 2024, which showed that the annual inflation rate was steady at 2.1 per cent and is now at the lower end of the RBA’s inflation targetting range (2 to 3 per cent). It is clear that the residual inflationary drivers are not the result of excess demand but rather reflect transitory factors like weather events and abuse of anti-competitive, corporate power (travel fares etc). The general conclusion is that the global factors that drove the inflationary pressures have largely resolved and that the outlook for inflation is for continued decline. There is also evidence that the RBA has caused some of the persistence in the inflation rate through the impact of the interest rate hikes on business costs and rental accommodation.

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