RBA has crossed the line – it is now a danger to society

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.


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.


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.

This Post Has 8 Comments

  1. Last 26 october, Adam Tooze wrote in Chartbook #164 “(…) as experience since 1945 has shown, the best way to undramatically liquidate an unmanageable debt burden is to modestly elevate the rate of inflation.”.
    So, inflation can be seen as a monetary tool.
    As a tool to manage debt levels, it’s up to governments to calibrate the inevitable redistibution process that goes along with rising inflation, with fiscal policy.
    With 10% inflation, those who have government bonds loose real value on their assets.
    Those who lives on wages, loose real income, if wages don’t grow above inflation.
    I believe that everybody knows this and the talk about bringing inflation down to 2% is just a way of saying: the elites can’t loose asset value – let the brunt be taken by workers. After all, they’re used to it.
    As we all know too, workers can’t reach the media.
    All talk will be out of the elite’s mouthpieces.
    Funny how the right and certain “left” seem to converge in this new TINA, as Tooze remarks.
    Aren’t we dealing with another version of blairite sort of “left”?
    It’s about time we liquidate all “credibles” out of politics.

  2. Isn’t it rather premature to declare the RBA to be a danger to society when real interest rates are still strongly negative?

    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.

    Ten minutes may be a realistic estimate, but as an upper bound it seems rather too optimistic. I reckon twelve, and possibly more if there’s traffic in the way.
    If you look at the map it’s clear what the cause of the problem is:: two planned road bridges over the Merri Creek haven’t been built yet. Nor has a link west to streets which connect to the Hume Freeway (which at that point isn’t a proper freeway).

  3. “Well under the RBA’s approach, we are likely to be left with recession and massive excess supply capacity.”

    Bill, you seem to be claiming that interest rate increases by the RBA would reduce demand.

    However, another MMT core author, Warren Mosler, claim that probably interest rate increases are stimulus that may increase demand (and possibly inflation).

    Would it be wrong to say that you have different views on this issue?

  4. @ Andre

    To me the gist of Bill’s writing on this topic (including posts other than this one) is that raising interest rates likely adds to inflation in the immediate term as firms seek to offset the rises in business costs by passing them on as higher prices – but if the central bank stays it’s course then ultimately it will probably succeed simply by inflicting enough social and economic damage, a course of action underpinned by the notion that elevated levels of unemployment and poverty are worth the cost (a cost that central bankers themselves do not pay, with their fat salaries many times that of the average worker).

    None of this will alter global supply-side factors so if those factors are still in place when the recovery begins, the whole shemozzle may simply start over again. Right now the sanctions on Russian energy exports are probably being offset by the fact that Europe has fully stocked up on gas ahead of winter and the US government has been releasing enormous amounts from it’s strategic petroleum reserve in order to try and place downward pressure on fuel prices. But both of these things are finite and if Vladimir Putin has not capitulated and run home by early in the new year, there may be another large surge in energy prices, feeding through to inflation.

    A country like Australia is in what should be a fortunate position in that respect and should be able to use it’s huge energy endowment to nullify a good portion of the energy spike if we were smart – but we are not smart and prefer to let a handful resource multinationals gouge the country as hard as they like.

    So at least as I interpret it, Bill differentiates between short-term and longer-term effects. I’m unsure if Warren also holds the view of the effect being along the lines of (price) stimulus now, catastrophe later.

  5. I actually think it’s probably reasonable to suspect that our policy maker class’s absolute willingness to allow the entire country to be bent over and forcibly reamed by a handful of energy extractors may predispose us to an ongoing inflation issue.

    Nothing is produced or distributed without energy so energy costs end up running through everything else. Our government has shown the gas cartel that they are so absolutely petrified of confronting them that wouldn’t it make sense from the cartel’s point of view to simply keep pushing domestic prices as hard as possible – even if the international price comes back down – safe in the knowledge that government is simply too weak to stop them, no matter how much harm they inflict?

    If nobody is prepared to stop them from absolutely maximising their shareholder returns to the detriment of the entire country – why would they ever moderate their own rapacious behaviour?

    Surely it just makes sense from their perspective to screw Australia as hard as possible for as long as possible? And in doing so, continue driving inflationary pressures.

  6. Just a comment about syntax in the English language, and how small simple words can completely change our thinking… from the RBA release that Bill quotes:

    “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.”

    Focus on the word “but”. It negates the previous clause. Change it to “and”, and the sense and intent of the statement changes significantly.

    Is this intentional? I don’t think so. I think the general level of competence in the English language is so low that no-one really notices these subtle influences.

    To really understand the divisiveness of the word “but”, think about your response to any argument that you choose to try to refute. The first word you’ll use is probably going to be “but”.

    If you want to build consensus, and bring people along with your views, then maybe use “and” instead.

    How this may or may not work in all the other languages in the world I have absolutely no idea!

  7. This heading and this post brings to mind a 1944 essay written by Arthur Koestler titled “On Disbelieving Atrocities” in which he wrote:

    “Clearly all this is becoming a mania with me and my like. Clearly we must suffer from some morbid obsession, whereas the others are healthy and normal. But the characteristic symptom of maniacs is that they lose contact with reality and live in a phantasy world. So, perhaps, it is the other way round: perhaps it is we, the screamers, who react in a sound and healthy way to the reality which surrounds us, whereas you are the neurotics who totter about in a screened phantasy world because you lack the faculty to face the facts. Were it not so, this war would have been avoided, and those murdered within sight of your day-dreaming eyes would still be alive. I said: perhaps, because obviously the above can only be half the truth.”

    Just for the record, I am in no way associating, suggesting, implying or equating central bankers within the same literal context as this essay; in a figurative sense, things could be much different if they could be reached – at the very least. Also, I am in no way likening you to Arthur Koestler.

    As an aside I was just watching Q&A and I was thinking it would be great if we could somehow educate Stan Grant on the insightfulness an MMT understanding brings so that when he interacts with people in power in a live environment, he can passionately deliver the truth about a sovereign nation; enlightening everyone at once.

  8. As a town planner, I can state that the failure has largely been at the political level as this neo-liberal ‘leave it to the market’ approach has dominated, especially at State Government level. Plans put forward by the technical experts (planners, engineers, architects etc.) tend to get eviscerated once the political decision makers get hold of the the proposal and the lobbyists get to work. Large-scale public transport investments are stripped out and/or delayed so that car-dependent travel patterns become established, There is also pressure from lobbyists to establish large monocultures of residential uses because residential is seen as more profitable and doesn’t come with the complexities of commercial leasing and mixed use.

    The flip side of this is the constant NIMBYism of existing detached dwelling owners in our major cities that prevent sensitive infill development occurring that can lift densities and mix use to the point where use of walking and cycling can predominate. Japanese cities for example are way more dense and heavily built that Australian cities and outside the major metropolises (Tokyo-Osaka etc) are relatively low rise and compact. Any attempt to introduce a similar land use pattern into Australian cities (even to up densities to 25 dwellings per hectare – the minimum to enable a basic public transport service that is useable) elicits howls of rage from the “Save Our Suburbs” and “Citizens Against Overdevelopment” brigades, who bemoan the loss of greenspace but in the same moment lack the self-reflection to understand the impact of their own lifestyle choices that effectively force new households out into the far flung reaches of the city fringe.
    Basically, we can’t have our cake and eat it too. If we want compact, walkable cities where car use is optional, we cannot also have large back yards and landscaped setbacks for each dwelling – it wastes urban land. The trade-off is to maintain publicly owned or accessible open space within walking distance of these compact, dense urban areas, both as a environmental and recreational resource and to counter the heat islanding effect of having buildings closer together. It would however, entail buying up existing houses and bulldozing them to create green breaks – something the pro-property rights advocates would never tolerate.
    So, we end up getting the worst of both worlds, fixing urban planning mistakes are difficult and expensive, as once you make a land-use decision, you are basically locking it in for the next 30 years – short-termism is to be avoided at all costs, but in a nation of 3-4 years election cycles, it’s all you’re going to get.

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