So, I was wrong. I think the Reserve Bank of Australia (RBA) will keep rates on hold this month because they tell everyone they’ll wait until there is evidence that wage growth is picking up. They also lured tens of thousands of first-home buyers into the red-hot housing market under this promise, allowing commercial banks to push mortgage debt onto these borrowers, sometimes at interest rates six times the borrower’s income (in other words, , is a large amount of excessive debt). The RBA has also seen record levels of household debt and knows hundreds of thousands of borrowers are now on the verge of solvency. All of this is happening while the RBA promises borrowers that they won’t push rates higher until wage growth is apparent. So far, there is no evidence that wage growth will accelerate. Unemployment is lower, but that’s largely because our external borders have been closed for two years or more and labor supply growth has been stagnant. That has now changed. I also think the RBA is resisting the greedy push by the banks to raise interest rates and redistribute the income of struggling households with huge mortgages to bank shareholders, who are rich, if any. I think the RBA finally understands that the current spike in inflation has nothing to do with excessive spending in the economy. But I was wrong. Stupidity prevails.
Yesterday, the RBA raised its cash rate target from 0.10% to 0.35%, and the major banks have not hesitated before pushing up long-term rates and profits!
The RBA also raised support for excess reserves from zero to 25 basis points, giving banks more opportunities to profit.
RBA — Statement from Governor Philip Lowe: Monetary Policy Decision (May 3, 2022) – said:
The economy has proven resilient, with inflation rising faster and at higher levels than expected. There is also evidence that wage growth is picking up. Given this, and the very low level of interest rates, it is appropriate to initiate a process of normalizing monetary conditions.
Unless the RBA gets a pre-briefing from the Australian Bureau of Statistics, there is no public, strong evidence that “wage growth is accelerating”.
Interestingly, some companies are offering higher wages to attract labor, but there is no tendency to raise wages if a check business has recently struck a bargain.
Real wage cuts across the board are the current norm.
In addition, state governments are sticking to the 1.5% wage cap introduced a few years ago, which has led to a decline in wage bargaining across the economy and ensured that their workforces suffered from a slump in purchasing power while corporate profits hit record highs.
We won’t know what’s happening on the broad wage front until May 18, 2022, when the ABS releases the latest wage price index, which is why I think the RBA will wait until the June meeting to push rates higher.
I don’t even think the WPI data will show any evidence of a wage “breakthrough”.
So the RBA is just throwing it into it, providing cover for themselves because by any standard they are breaking their promises to Australian society.
Economists keep talking about a central bank’s credibility as the most important thing a central bank can protect (they apply this to mean the bank is free from political manipulation).
But yesterday’s RBA decision challenged its credibility after it issued a statement about waiting for wage growth to happen before raising interest rates.
Tens of thousands of borrowers may now be under financial stress, and many are set to lose their homes as the RBA reneges on its public commitments, and they have a right to feel betrayed, cheated or whatever word they want.
The RBA statement also said:
The central forecast is for the unemployment rate to fall to around 3.5% by early 2023 and to remain around that level thereafter. That would be the lowest unemployment rate in nearly 50 years.
This is where the contradiction lies.
The only logic that tells us that raising interest rates will help contain inflationary pressures is through their effect on curbing aggregate spending.
Basic macroeconomic facts: spending equals income equals output, which in turn drives job growth.
As a result, the RBA believes they must cut economic spending now, which, if successful, will push up unemployment.
The RBA is back in the NAIRU world, using unemployment as a policy tool to restrain aggregate spending and push the economy into recession according to prevailing logic.
There are many problems with this logic.
First, the ever-booming real estate market, largely because tax policy favors speculation on the housing stock, is now past its peak anyway.
Home prices in major cities are starting to fall, and they will continue to do so.
This means for low-income households who overextended into the market when the market was nearing its peak, not only would their monthly payments increase due to rising interest rates, but they would be so indebted relative to their income that they are now facing There is a danger of hitting negative equity in the near future, depending on how much the market falls.
In some market segments, the price drop will be significant.
Second, real incomes are already severely squeezed by rising inflation, as wages are not growing as fast, so households are already deciding to cut other spending.
This process is already reducing total spending on goods and services (as national income is redistributed to the bank’s shareholders) and slowing economic growth anyway.
Third, business speakers today claimed on national radio and television that business costs are killing profits, etc., but at the same time praised the “normalisation” of the RBA’s monetary policy.
They are foolish to say that rising interest rates will burden businesses with costs, which they will use market forces to pass on as higher prices – that is, driving higher inflation.
The fourth and most telling fact is that higher interest rates will not dampen inflation in the short term, given that the pressures are not demand-driven.
The RBA statement said:
The rise in inflation largely reflects global factors. But domestic capacity constraints are playing a growing role, inflationary pressures are mounting, and companies are more willing to pass on cost increases to consumer prices. Inflation is expected to rise further in the near term, but is expected to fall back to the 2% to 3% target range as supply-side disruptions are resolved.
Even weirder contradictions.
The RBA sees inflationary pressures as temporary – that’s been my narrative.
They argue that it is worthwhile for the OPEC cartel to defraud everyone as the pressure comes from apparently extraordinary factors – war in Ukraine, bushfires and floods on the east coast, global pandemic killing factory production, shipping, trucking, etc. of.
Everyone can see this.
So how will rising interest rates affect the trajectory of these extraordinary factors?
They won’t — not a single flicker.
Then, in that statement, we see that the RBA also wants to curb the ability of businesses to “pass on cost increases to consumer prices”.
The only way this can happen is if the RBA can create higher unemployment and put companies in a sales crisis, then they will dampen their desire to maintain real profit margins.
Tell me if you think macroeconomic policymakers who are largely irresponsible to the Australian people have strategies to force: (a) lower purchasing power of low-income workers; (b) increased insolvency of low-income workers due to mortgage stress (after they promised these borrowers no rate hikes until 2024), and (c) creating high unemployment and everything that comes with it, when they acknowledge that inflationary pressures will subside in the medium term.
I don’t think it’s responsible – a little bit.
I think the RBA is returning to form – back to neoliberal, irresponsible form – and the government should step in and fire the governor and the board.
The happiest of all are the shareholders of the big banks, who have a disgusting track record of cheating, lying and profiteering (see royal commission evidence).
Moody’s becomes politicized
Then you get the distasteful political meddling from Moody’s, the U.S. Congress revealing that the credit-rating agency poached dubious profits through its “AAA-rated” conglomerate before the global financial crisis.
The current Australian Treasurer, I hope he, in the last 17 days of his term (21 May 2022 election), today released a Moody’s analysis statement attacking the opposition Labour Party in the winning position in the upcoming federal election .
This is news from Moody’s. Their apparent preference for conservatives is a telling revelation that deserves more forensic investigation.
Report of the U.S. House Committee on Oversight and Government Reform (October 22, 2008) – Credit Rating Agencies and Financial Crisis – There are some options for Moody’s and other credit rating agencies to say, including:
Moody’s profits quadrupled between 2000 and 2007. In fact, Moody’s had the highest profit margin among S&P 500 companies for the fifth year in a row. Unfortunately for investors, the AAA rating that was so lucrative for rating agencies quickly disappeared… Moody’s had to downgrade more than 5,000 mortgage-backed securities.
In today’s testimony, the CEOs of S&P, Moody’s and Fitch will tell us that “hardly anyone expected what was going to happen.” But the documents obtained by the committee tell a different story.
After noting the Moody’s CEO’s claim that the global financial crisis was unthinkable, the hearing revealed the contents of a “confidential statement” he made to Moody’s board in October 2007, in which he acknowledged that Moody’s was in trouble.
Evidence was also provided to Congress by a member of Moody’s management team, who admitted that the agencies’ personnel were lying and said the evidence showed that the credit rating agencies were “either incompetent in credit analysis or… sold his soul to the devil.”
Leopards don’t change their position.
This is unconscionable behavior.
Music – Tenor Charlie Routh
Here’s what I’ve been listening to this morning at work.
One of the underrated tenors in history is- Charlie Laws – who has played – Thelonius Munch – Quartet from 1959 to 1970. Before that, he played with Billy Extin, Dizzy Gillespie and the Duke Ellington Orchestra.
He continues the tradition of bebop and hardbop, but can still sound very smooth in the low register at times.
He’s from his 1961 album — yes – Play the classics – you don’t know what love is.
I first heard this song on the 1954 Miles Davis album in the early 1970s, then I quickly bought the Charlie Rouse album, and I’ve worn it a hundred times or more since then!
On this album, he accompanies:
1. Peck Morrison – Bass (prominent in Lou Donaldson’s late 1950s recordings).
2. Dave Bailey – Drums (with Gerry Mulligan for many years).
3. Billy Gardner – piano.
nice playing.
Here is the obituary (December 2, 1988) – https://www.nytimes.com/1988/12/02/obituaries/charlie-rouse-64-a-saxophonist-known-for-work-in-monk-quartet.html.
This memory (January 16, 2021) – Charlie Rouse – creativity on tenor saxophone – also very interesting.
I love the line “If Charlie Rolles didn’t exist, Thelonious Monk would have to invent him”.
Enough for today!
(c) Copyright 2022 William Mitchell. all rights reserved.
