Australian inflation plummets as the fiscal vandals undermine the economy

The Australian Bureau of Statistics released the Consumer Price Index, Australia data for the March 2012 quarter today and the inflation rate has plummetted in the face of a slowing economy. The trend over the second half of 2011 was for inflation to ease. But the plunge in the first three months of 2012 that today’s data reveals is pointing to a very sick economy. The annual inflation rate is now estimated to be 1.6 per cent with a downward trend. As I noted last September if the trend that was apparent then continued, then the annualised rate would fall below the Reserve Bank of Australia’s (RBA) lower inflation targetting bound. That has now happened in today’s data, which means that the RBA has to consider inflation to be “too low” now and significant monetary policy easing (via their own logic) should be forthcoming next Tuesday when the RBA Board meets again. You might ask whether the “bank economists” (the private sector mavens who always think inflation is about to accelerate out of control) predicted that the March quarter inflation rate would be 0.1 per cent. The answer is that they predicted that inflation for the March would be running at 7 times the actual rate (0.7 per cent), which raises the question yet again – why does the mainstream media rely on their input to guide the public on where the economy is heading. Today’s data signals that the Australian economy is not in robust shape and the major cause of this slowdown is the irresponsible fiscal policy obsession that the Government has with achieving a budget surplus in the coming fiscal year. It is an act of vandals.

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US inflation expected to average 1.3827935 per cent for the next ten years

Yesterday (March 18, 2012), the Cleveland branch of the US Federal Reserve Bank released their latest estimates of US inflationary expectations. This data estimates what the “public currently expects the inflation rate to be” over various time horizons up to 30 years. The data shows that the US public “currently expects the inflation rate to be less than 2 percent on average over the next decade”. The ten-year expectation is in fact 1.38 per cent per annum. In the light of the massive expansion of the US Federal Reserve’s balance sheet and all the mainstream macroeconomic theory is predicting that such an expansion would be highly inflationary, how can the public expect inflation to be so low over the next decade? Answer: the mainstream macroeconomic theory is deeply flawed and should be disregarded. Modern Monetary Theory (MMT) correctly depicts the relationship between the monetary base and the broader measures of money and explains why movements in the former are no inflationary.

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Australia – falling inflation belies all the boom talk

The Australian Bureau of Statistics released the Consumer Price Index, Australia data for the September 2011 quarter today and it revealed that the easing in the inflation rate detected in the June quarter has continued. The last three quarters have delivered inflation rates of 1.6 per cent in March 2011, 0.9 per cent in the June quarter and now 0.6 per cent in the September quarter. If that trend continues the annualised rate will fall below the Reserve Bank of Australia’s (RBA) lower inflation targetting bound. The annualised inflation rate fell from 3.6 per cent in the June quarter to 3.5 per cent in the 12 months to September 2011. The ephemeral factors associated with the impacts of the natural disasters (floods and cyclones) that our food growing areas endured earlier this year are now dissipating. The major factors driving inflation now are utility price increases, travel and accommodation. The RBA’s preferred inflation measure (explained below) grew by 0.3 per cent. That will put downward pressure on interest rates. You might ask whether the “bank economists” (the private sector mavens who always think inflation is about to accelerate out of control) predicted this significant easing. The answer is that they predicted that inflation for the September would be running at twice the actual rate. That is, a 100 per cent error – which raises the question yet again – why does the mainstream media rely on their input to guide the public on where the economy is heading.

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Accelerating inflation has to be out there somewhere … in the dark or somewhere

Today I was trawling through old issues of the now-defunct The Public Interest quarterly today and unfortunately stumbled on a recent issue of its successor National Affairs (Number 9, Fall 2011 edition) which carried an article – Inflation and Debt – written by Chicago economist John H. Cochrane – a known free market/anti-government commentator. It was one of those articles where the analytical framework was taken from some textbook rather than being ground in the realities of the monetary system and all the evidence pointed away from the major conjecture but the conjecture was still asserted as an inevitability. The title reflects the sort of wan, desperate need to find inflation despite vast volumes of excess capacity and zero wage pressures. Accelerating inflation has to be out there somewhere … in the dark or somewhere.

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Painstaking, dot-point summary – bond issuance doesn’t lower inflation risk

I will finish this week with a painstaking, dot-point summary of some key elements of Modern Monetary Theory (MMT) to show clearly why bond-issuance which might accompany a budget deficit doesn’t lower the inflation risk of the deficit spending – not now, not tomorrow, nor at some mythical “long-run” point in time. All the inflation risk is on the spending (aggregate demand) side. The monetary arrangements that might or might not accompany the spending decisions of government do not add or subtract from the inflation risk. Mainstream theory thinks they do. That theory is demonstrably false. I will also cover several related myths that seem to have cropped up over the last week – both in the international media and among the comments made on this blog. It seems that we need some baby steps. So with my fire-suit (always) on I hope you all enjoy it. Some of the critics might like to read this news item before they start.

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Australian inflation rate – or rather – the banana rate

The Australian Bureau of Statistics released the Consumer Price Index, Australia data for the June 2011 quarter today and it revealed a significant easing of the inflation rate on last quarter (0.9 per cent compared to 1.6 per cent in March 2011). The annualised inflation rate rose to 3.6 per cent up from 3.3 per cent in the 12 months to March 2011. While many commentators are calling this the start of a spiral in core inflation spike the data is still being driven by ephemeral factors associated with the impacts of the natural disasters (floods and cyclones) that our food growing areas endured earlier this year. The major factors driving the inflation rate are food (and that is mostly bananas) and world oil price movements. I still consider these impacts to be mostly of a transitory nature. Given that the core inflation rate is still well within the RBA’s targeting band, I do not consider there is a case for an interest rate rise next week (using their own logic). Bananas cannot keep increasing by 470 per cent every 6 months. And if they do, they are easily substituted away from.

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Australia CPI data – benign inflation outcome

The Australian Bureau of Statistics released the Consumer Price Index, Australia data for the March 2011 quarter today and it revealed a sharp spike in the headline inflation rate (up 1.6 per cent for the quarter) but a very benign underlying inflation story. Overall, the impacts of the natural disasters (floods and cyclones) are driving food prices up and world oil price movements are causing local petrol prices to rise. These impacts are likely to be transitory. It is interesting that there is considerable disagreement among bank economists about what the data release means. Many are joining my chorus and suggesting that the transitory nature of the inflation influences will not compel the Reserve Bank to push up interest rates. At present, the data tells us that there is no inflationary outbreak evident and other data suggests that the economy is slowing.

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Printing money does not cause inflation

A number of readers have written to me asking me to explain why the US government (and any sovereign government) should not learn the lesson of the inflation that was caused by the spending policies of the Confederacy during the 1860s in the US. They have tied this query variously in with the rising budget deficits, the quantitative easing policies of the Bank of England and the US Federal Reserve Bank, and more recently the “injection of liquidity” by the Bank of Japan as a reaction to their devastating crisis. The proposition presented is simple – the Confederacy funded their War effort increasingly by printing paper notes (and ratifying counterfeit notes from the North) and saw runaway inflation as a result. This blog examines that point. What you will learn is that the experience of the Confederate states during the Civil War does not provide an case against the use of fiscal policy or the proposition that sovereign governments should run deficits without issuing debt. The fact is that “printing paper notes” does not cause inflation per se. It might under certain circumstances. Those circumstances were in evidence in the Civil Wars years in America.

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There is no inflationary outbreak evident – the economy is slowing

The Australian Bureau of Statistics released the Consumer Price Index, Australia data for the December 2010 quarter today and it showed that inflation continues to fall. The ABC News reported that – CPI figure comes in below expectations. Who’s expectations you might ask? Yes, the bank economists and other main-streamers who have a one track obsession that whenever there is some sign of growth there must be inflation. Wrong again. It was clear that inflation is moderating notwithstanding the spikes that will come in the next months as a result of the flood disasters. But when will the inflation-obsessives give up on the idea that the budget deficits cause inflation. The reality is that the Australian economy is slowing down and there is still a significant amount of spare capacity available for real output expansion should aggregate demand rise. Some sectors are growing strongly (mining) but that unlikely to create significant cost pressures elsewhere in the economy given the amount of labour slack. Last month I gave the bank economists a tip. Consult the ideological chart and then predict the opposite. They would have predicted the data movements more accurately if they had have taken my advice. There is no inflationary outbreak evident – the economy is slowing.

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Modern monetary theory and inflation – Part 2

The UN Food and Agriculture Organisation (FAO) released their monthly index of food prices yesterday (January 5, 2011) which showed that the index reached a record high in December 2010 “surpassing the levels of 2008 when the cost of food sparked riots around the world, and prompting warnings of prices being in “danger territory”” (Source). There are several reasons why food prices will move even higher – the catastrophic floods in Northern Queensland being among them. The rising food prices are once again leading to calls for interest rates to rise in order to minimise the inflationary consequences. That motivated me to write Part 2 of my series on inflation – in this case supply-side motivated inflations. In Part 1 of the series – Modern monetary theory and inflation – Part 1 – I concentrated on demand-side origins.

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Modern monetary theory and inflation – Part 1

It regularly comes up in the comments section that Modern Monetary Theory (MMT) lacks a concern for inflation. That somehow we ignore the inflation risk. One of the surprising aspects of the public debate as the current economic crisis unfolded was the repetitive concern that people had about inflation. There concerns echoed at the same time as the real economy in almost every nation collapsed, capacity utilisation rates were going down below 70 per cent and more in most nations and unemployment was sky-rocketing. But still the inflation anxiety was regularly being voiced. These commentators could not believe that rising budget deficits or a significant build-up of bank reserves do not inevitably cause inflation. The fact is that in voicing those concerns just tells me they never really understand how the monetary system operates. Further in suggesting the MMT lacks a concern for inflation those making these statements belie their own lack of research. Full employment and price stability is at the heart of MMT. The body of theory and policy applications that stem from that theory integrate the notion of a nominal anchor as a core element. That is what this blog is about.

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Hyperdeflation, followed by rampant inflation

The title of the blog is a little misleading but was too good not to use. I get to that five-year forecast (2010-2015) later in the blog but the first part is material that sets the scene. Yes, I am writing about deficits and debts … again! But new nuances come out in the public debate which need to be addressed. The conservative assault on government support for their economies at present is multi-dimensioned and is being pushed along by two main journalistic approaches. The manic Fox new-type approach which I realise is influential but is so patent and ridiculous that I don’t care to comment on it often. Then we have the approach adopted by journalists in so-called credible media outlets such as the UK Guardian. They dress their deficit terrorism up in arguments that the middle classes, who think they are far above Fox new rabble intellectually, will find convincing. But when you bring both approaches down to basics – rubbish = rubbish.

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Building bank reserves is not inflationary

Today I am working in Dubbo, which is in the western region of NSW and getting into the remote parts of the state. There is a great beauty to enjoy in remote Australia which often passes people by. My field trip is in relation to continuing work I am doing with indigenous communities in this region. I will report on this work in due course. But today’s blog continues the theme I developed yesterday on bank reserves. In yesterday’s blog – Building bank reserves will not expand credit – I examined the dynamics of bank reserves but left a few issues on hold because I ran out of time. One issue is the possible impact of expanding bank reserves on inflation. This is in part central to the mainstream hysteria at present about the likely legacies of the monetary policy response to the crisis. The conclusion is that everyone can relax – the only problem with the monetary policy response is that it will be ineffective and more fiscal policy effort is required.

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Let’s just focus on inflation

It’s Friday and today has been very hot (nigh on 40 Celsius). One could also easily get hot (under the collar) just engaging in one’s daily reading given the amount of misinformation and sheer terrorist journalism and public commentary there is at present. The IMF released its latest Economic Outlook calling for a general return to surpluses. Why have we fallen prey to this insidious notion that government surpluses are normal and deficits are for fighting fires? In fact, the latter is more the truth. Surpluses are only required if the external sector is so strong that the economy will overheat if the government doesn’t drain private purchasing power. Anyway, I just stay calm through it all … like any good modern monetary theory (MMT) soldier. There is a war going on out there in ideas land and cool heads are needed.

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I have found an inflation threat

I read a news report today – 13,000 riot police, troops guard Obama. Hmm, I thought it might finally be the groundswell of people imbued with the logic of modern monetary theory (MMT) and anger over rising disadvantage, who had decided to take action. Especially after hearing the President’s latest foray into the media as an “expert” on matters fiscal. And only 13,000 troops … good odds I thought. But he was actually in South Korea and the report says that the assembled crowds were chanting “We love Obama”. Don’t they know anything … these people? Didn’t they hear or read his latest interview?

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Inflation targeting spells bad fiscal policy

Australia’s central bank governor is now appearing in the world press as something of a hero for putting interest rates up recently in defiance of world trends. Today he is featured in many finance home pages for his statement that the RBA cannot afford to be timid in putting rates up in the current months. This has raised expectations that we are in a race to get the target rate up towards their so-called neutral rate sometime soon. So almost rock star status for our central bank governor. Pity, the whole paradigm he is representing is destructive and helped get us into this mess in the first place. This blog explains why inflation targeting per se is not the issue. The problem is that fiscal policy becomes subjugated to the monetary policy dominance. This passivity manifests as the obsessive pursuit of budget surpluses which allegedly support the inflation-first stance. But this policy strategy is extremely damaging in real terms and will provoke another debt-bust cycle sometime in the future.

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Does rising income inequality explain the rising support for right-wing political movements?

We know that after the Second World War, as nations embraced their major national policy statements (White Papers in many countries) to build their societies after the disruption of the War and the Great Depression, income inequality fell significantly. Since the 1970s, the post WW2 trend has been somewhat reversed in many (but not all) nations. The rising income inequality is particularly apparent in the Anglo advanced economies, with the US leading the way. In other nations, the trend is mixed, which suggests the link between rising income inequality and the rising support for right-wing political movements is less obvious than some commentators are suggesting. In fact, there is credible research that suggests the swing to right-wing political parties is not coming from the most precarious workers who appear to remain loyal to Leftist ideas. It is the next segment of workers up who have not yet been ravaged by globalisation but sense they are about to be who seem to have swung to the Right. In this blog post, I discuss some of these ideas and the research that is accompanying them.

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US government is pinning its tariff hopes on some unlikely to be realised assumptions

Last week, the US President honoured his election promise, indeed his long-held commitment, to increase tariffs on imported goods and services to the US. The formula they came up to differentiate between countries was bizarre but I don’t intend commenting on that here, except to say, the imposition of tariffs on the – Heard Island and McDonald Islands – which are an ‘Australian external territory’ that is a ‘a volcanic group of mostly barren Antarctic islands, about two-thirds of the way from Madagascar to Antarctica’ (where penguins live) ranked up there with their Signal chaos. These guys have access to the ‘red button’ after all. That’s the scary thing. Anyway I was sent a document that seemingly is the theoretical rationalisation for the tariff decision (thanks Mahaish, appreciated) and so I thought I would give it some time.

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Majority of Australians want fiscal deficits to be maintained and the majority of younger Australians want to ditch capitalism

We are now full-swing into the national election campaign in Australia (election on May 3, 2025) and we have a new party – the Trumpet of Patriots – (funded by a property developer/miner) channelling Trump’s approach, the conservatives channelling Trump’s approach (although with a slight more subtle voice but not much), the Greens chasing their tails, and the Labor government desperately trying to stay in power after running scared of doing very much over the last three years. It is not a great choice. The usual scare tactics from the Opposition are out in force – immigration, defence vulnerabilities, etc and the usual ‘free market’ stuff. The Labor government keeps hammering on about their fiscal rectitude – two surpluses out of three – as if we are all mainstream economists who are obsessed with those irrelevancies. But it seems that the voters are not so aligned with mainstream economists.

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The hollowing out of the middle class in the US and beyond

The Post WW2 period was marked by the mass consumption boom and the rise of the ‘middle class’, which is a sociological designation that is intended to say that the working class had segments that had experienced better conditions and outcomes than the labouring cohorts. The fact that Capital (as a class) deigned to concede to the rise of this cohort was due to the threat that the Soviet Union and the increasing interest in Marxism in Western nations during the mid-C20th posed to the on-going hegemony of capital. The solution was to share a bit of the booty out with workers, improve pay and working conditions, and provide the basis for a ‘divide and conquer’ strategy, which would effectively segment the working class into ‘individual’ elements that could be played off against each other. And to maintain the profits, sales had to expand and what better way than to encourage the ‘middle class’ households to consume like crazy and fill their ever increasing size homes with stuff. That strategy worked for some decades until the middle class and the trade unions started to get too vocal and demand more at which point something had to give. And in the early 1970s, give it did, and with Monetarism running rife in the academy and industrialists plotting to capture the legislatures (think Powell Manifesto), the conditions for neoliberalism were laid. And the next several decades have seen that ideology become dominant and establish a dynamic that is now likely to implode.
Today, I report on dimensions of that implosion.

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