It’s Wednesday and a ‘blog lite’ day but there was an important speech delivered by the Governor of Australia’s central bank today that reveals the reasons that the RBA is once again refusing to be bullied into increasing interest rates rises by the ‘markets’. It is almost comical to observe the ludicrous self-importance that the ‘markets’ are exhibiting at the moment. Every day there is a new article or segment on the finance reports about how the ‘markets’ are going to win the battle against the RBA, who will buckle soon on interest rates. Well, yesterday the RBA didn’t buckle and they made fools of the ‘markets’. Remember the ‘markets’ is just a collection of economists who work for financial institutions that make more profits when interest rates are higher. It is no wonder they are always demanding higher rates. That is what vested interests are about. And for the media to just continually give them a platform, especially the national broadcaster, is a disgrace. Anyway, the ‘markets’ lost out yesterday and the RBA clearly doesn’t think that interest rate rises cure Covid and make trucks go faster.
As each day passes, there is another lurid article about how the ‘market’ is ‘pricing in’ interest rates rises and the central bank will have to move on rates soon or lose credibility or some other nonsense.
There have been recent articles telling mortgage holders that their monthly payments are set to rise by $A1,000 per month. That forecast came from an economist working for one of the big 4 banks who gouge massive profits from borrowers and will increase their gouging if rates go up.
The editorial in the Australian Financial Review (the business lobby paper) (January 24, 2022) – Interest rates to rise, markets correct – tries on a morality lesson about low interest rates being “unnatural” and a failure to “reward those who delay gratification now to enjoy more in the future.”
Apparently, we need interest rate rises “to get on top of the inflation outbreak”.
The ‘market economist’ bullies then run the story that unless the central bank does what they say it will lose all credibility and inflation will run out of control.
Believe that and I can sell you the Sydney Harbour Bridge cheap. Just ring me. We can close a deal real quick as the spivs say.
In fact, there isn’t much difference between the spivs and these ‘market’ commentators. They both try to rip the public off.
I also heard some character who runs a private macro consulting company and calls himself “Australia’s leading economist and speaker” on the radio the other day preaching interest rate rises and using the same old, worn-out arguments.
Remember, that when the ‘market’ says it is ‘pricing in’ rate rises, what they are actually doing is placing bets on the central bank increasing rates and then running a propaganda campaign that says rate rises are inevitable.
At present, the economics of the situation do not justify increasing interest rates.
For those pushing for interest rate increases, they must have a new theory that interest rate rises can:
1. Cure Covid and get sick workers back to work so the supply chain constraints ease.
2. Force the OPEC sheiks to lower oil prices.
3. Relocate various shipping containers to where they should be and where they currently are not.
4. Grow forests very quickly to repair the damage from the 2019-20 bushfires.
5. Make trucks go faster so they can deliver more. This is tied in with conjecture (1) because we also need truck drivers who are not sick.
6. Force the Chinese to abandon their correct approach to Covid (hard suppression) so that more stuff can be moved to ports etc.
7. Stop the export of various commodities in response to higher world demand.
8. And probably some other tricks.
Fortunately, the Reserve Bank of Australia understands the situation and yesterday declined to increase rates, which will cause some of those bets in the markets to fail.
The RBA governor gave a speech today (January 2, 2022) – Address to National Press Club of Australia – where he clearly laid out the reasons why the RBA has resisted the calls to push up rates.
He talked about the “ongoing difficulties on the supply side” and how the RBA expects that as these “problems are resolved”, the current inflationary pressures will moderate.
He noted “there is substantial inertia in aggregate wage outcomes” and wages growth “has only just returned to the rates prevailing prior to the pandemic”.
Need I remind readers that as we went into the pandemic, growth in wages had been at record lows for some years.
Importantly, he made a telling point about levels and rates of change:
… for inflation to be sustained at current rates the prices of many goods would have to keep increasing at their recent rates, not just settle at higher levels. All of this means that there are significant uncertainties as to the persistence of the recent price pressures. They may be the start of a period of persistently higher inflation, but they could also simply be a shift in the level of prices as a result of this unique period.
Many people use the term ‘inflation’ to describe a price level rise.
For a rise to become inflation it has to keep accelerating.
There is often a price adjust upwards coming out of a recession, which the ‘market economists’ then demand must be offset by interest rate rises. Yet, all that is happening is that firms are reversing the suppression of their margins as demand returns to more normal levels.
And on their interest rate intentions, the Governor said:
… the Board will not increase the cash rate until inflation is sustainably within the 2 to 3 per cent range …
Based on the evidence we have, it is too early to conclude that inflation is sustainably in the target range. In terms of underlying inflation, we have just reached the midpoint of the target range for the first time in over seven years. And this comes on the back of very significant disruptions in supply chains and distribution networks, which would be expected to be resolved over the months ahead …
As we navigate towards full employment, we have scope to take the time to distil the balance between supply and demand in the economy. Over the course of this year, we will be watching how the various supply-side problems resolve and the effects on prices. We will be watching consumption patterns and whether they normalise. We will also be looking for further evidence that labour costs are growing at a rate consistent with inflation being sustained within the target range. We expect this evidence to emerge over time, but it is unlikely to do so quickly.
So the ‘market’ gets it all wrong again and should just shut up for a while and do some research to see whether interest rates rises actually do cure Covid and make trucks run faster.
My Helsinki Lectures series 2022
I am currently presenting my annual set of lectures on Modern Monetary Theory (MMT) and the global economy at the University of Helsinki.
We are already up to Lecture 5 today in the 6 part series.
The teaching program will be:
- Tuesday January 25, 2022 – Streamed public lecture (YouTube) starting 10:15 Helsinki time.
- Wednesday, January 26 – first Zoom lecture with class – 08:15-09:45 Helsinki time.
- Thursday, January 27 – second Zoom lecture – 10:15-11:45 Helsinki time.
- Tuesday, February 1 – third Zoom lecture – 10:15-11:45 Helsinki time.
- Wednesday, February 2 – fourth Zoom lecture – 08:15-09:45 Helsinki time.
- Thursday, February 3 – final Zoom lecture – 10:15-11:45 Helsinki time.
The Zoom link for the lectures is:
Meeting ID: 535 417 4274
This is an MMTed initiative.
MMTed MOOC – Modern Monetary Theory: Economics for the 21st Century
MMTed – invites you to enrol for the edX MOOC – Modern Monetary Theory: Economics for the 21st Century.
It’s free and the 4-week course starts on February 9, 2022 (note edX adjusts the starting date for time zones, so for some the starting date will be listed as February 8, 2022).
The course is offered through the University of Newcastle edX program.
The course is self-paced so you can learn and participate as you choose. There is new material released at the start of each of the four weeks.
Learn about MMT properly with lots of videos, discussion, and more.
For – Further Details.
Music – Jethro Tull
In 1969, in my last year in high school – we started to get – Jethro Tull – records and the early releases from the band were exceptional.
The following year, my first at university, I lived in a big two-storey house (the ‘pink house’ – an old mansion in Melbourne, which was soon to be torn down and replaced with souless flats.
There ware about 8 bedrooms and my fellow housemates were mostly musicians and we played a lot of live music there but also listened to bands like Jethro Tull.
Their second album – Stand Up – which was released in September 1969 and was their most successful release. I also think the band didn’t progress much after that.
By the time it was recorded, they had replaced guitarist Mick Abrahams with Martin Barre, and although I preferred the playing by the former (on their first album in 1968 – This Was), the replacement didn’t degrade the band’s sound – it just changed it a bit.
This song – We Used to Know – was one of many great tracks on that album. It became a little controversial later on because the Eagles song ‘Hotel California’ has the same structure.
Anyway, I was listening to it this morning and music has memory associations and when it was released was a good time to be around.
That is enough for today!
(c) Copyright 2022 William Mitchell. All Rights Reserved.