It’s Wednesday and I have some comments on yesterday’s RBA decision (July 5, 2022) to go ahead with rate hikes – this time by 50 basis points – the third rate hike in as many months. If the rhetoric is accurate, it won’t be the last rally anyway. In its– Statement from Governor Philip Lowe: Monetary Policy Decision – The RBA noted that global factors are driving “inflation higher in Australia”, but there are also some domestic effects – such as “strong demand, tight labour market and capacity constraints” and “flooding also affecting some prices”. As I’ve explained in the past, it’s hard to understand their reasoning. Most “inflation-push” factors are not sensitive to increased borrowing costs. Banks laughed because despite their immediate increase in lending rates, deposit rates were still low — the result: huge profits for an already inflated industry. But what’s curious about the RBA’s stance is that they are defending themselves by claiming that “many households have built and benefited from huge financial buffers that will drive the economy into trouble and cause unemployment to rise”. from stronger income growth” – so increased mortgage and other credit costs will be absorbed by those savings (wealth destruction), allowing households to keep spending. You should be able to see a logical gap – if “strong” “Demand” is driving inflation, and inflation needs to come down, but the accumulation of savings will protect demand – go see it. Monetary policy is totally chaotic and driven by ideology. Let’s calm down after that, we have some great Music, that’s the norm on Wednesday.
RBA’s irresponsible rate hike
The Reserve Bank of Australia claims it is raising interest rates to curb inflationary pressures.
They cite factors driving these pressures:
1. “COVID-related supply chain disruptions” – not sensitive to changes in interest rates.
2. “Ukraine War” – Insensitive to interest rate changes.
3. High energy prices due to the monopoly power of the uncompetitive OPEC cartel – insensitive to changes in interest rates.
4. “Floods are also affecting some prices” – not sensitive to changes in interest rates.
So they obviously want to target:
5. Strong demand – this means they want to reduce spending growth to accommodate temporary disruptions in supply.
This is not a very sensible strategy because when these temporary disruptions ease, we are left with excess capacity, unsold inventory and rising unemployment.
and then?
6. “Tight labor market” – It’s tighter than ever, but that doesn’t mean much.
The broad workforce underutilization rate is currently at 9.6% and the underemployment rate is 5.7%.
The underemployed (807,300 as of May 2022) want to work around 15 more hours per week.
Approximately 345 full-time equivalent jobs are required before sources of labor waste are eliminated.
Furthermore, given the overall spending profile, unemployment is currently artificially low as the outer borders have yet to recover from the 2020-21 closure.
Once the growth of the working-age population resumes with the addition of new workers (especially now that the federal government has made the wrong decision to allow everyone to be exempt from COVID-19 status), then given the current state of overall spending growth, the workforce will of underutilization will rise.
Another point is that wage growth remains low, despite constant claims from businesses that they are unable to attract employees.
I have a solution for them that will give them immediate access to more labor – higher wages!
Businesses have told the RBA that wage growth is accelerating, but there is little evidence of that.
There are 807,000 underemployed people who desperately need more work if they really want to hire more workers.
7. “Capacity Limitations in Certain Industries”.
Newest – Monthly Business Survey: May 2022 – from NAB (published 14 June 2022) – indicates “business confidence and conditions eased in May”.
It also states:
Capacity utilization is currently near record levels before the 2021 delta outbreak, which should support investment and hiring in the coming months.
Three points:
(a) Capacity utilization increased from 84.2% to 85% in the month ended May 2022. Therefore, companies still have spare capacity.
(b) Previous record highs did not drive inflation (pre-delta).
(c) The report states that as capacity utilization tightens, firms are signaling to increase investment.
Investment has a dual character – it increases current demand and Build future productive capacity that enables the economy to absorb increases in nominal spending without creating inflationary pressures.
So the RBA’s logic seems to be that it wants to stifle business investment because capacity utilisation is rising, which would not only disrupt current economic activity, but also reduce potential GDP growth (and make it harder to achieve growth and growth in the future). achieve full employment) period).
Stupid logic.
A little about household savings
What I found interesting in the RBA’s statement yesterday was that it just repeated what the Governor has been making to justify the unreasonable, which is the reference to household savings.
The RBA said yesterday:
One source of persistent uncertainty about the economic outlook is household spending behavior. While household budgets are under pressure from rising prices and interest rates, recent spending data has been positive. Home prices have also fallen in some markets in recent months after sharp gains in recent years. Household savings rates remain above pre-pandemic levels, and many households have built up large financial buffers and benefited from stronger income growth.
First, it is misleading to have pre-pandemic household savings rates as a norm.
The chart below shows the household savings rate (as a percentage of disposable income) from the March 1960 quarter to the current period.
The table below shows how the savings rate has changed over the decades.
| ten years | Average household savings rate (% of disposable income) |
| 1960s | 14.4 |
| 1970s | 16.2 |
| 1980s | 12.0 |
| 1990s | 5.1 |
| 2000s | 1.4 |
| 2010s | 6.4 |
| 2020- | 15.3 |
One should also remember that households now have record debt levels. Close to 200% of disposable income, and in the 1980s it was closer to 60%.
Therefore, in my view, it would be irresponsible to think that the current savings rate is too high and provide households with a spending buffer.
Second, it is clear that the RBA sees the increase in household savings as a spending buffer when spending opportunities are limited during the lockdown.
But think about it.
They claim they are raising interest rates in response to strong domestic demand (spending).
They clearly know that rate hikes will not weaken the aforementioned global factors.
So it’s all about reducing domestic spending.
But then they were open to criticism that they were deliberately creating job losses — and using the unemployed as very inefficient pawns against temporary inflationary pressures.
More roughly, they will destroy workers’ material prosperity in the hope that this will stifle demand and force businesses to shrink profit margins…whatever else they think will happen.
So to address their purported criticism – no, wait, households may be squeezed by higher interest rates and rising living costs, but they have a buffer of wealth to use up to fill the gap, maintenance spending.
If they keep nominal spending growing (not particularly strong by any means), then rate hikes will only succeed in destroying household wealth (depleting savings) and so-called domestic inflationary pressures remain.
I could keep teasing out this twisted logic – but I think you’ll get the idea.
Surgeons cut people for meaning and function. This is their skill, but is unnecessary in most cases, other non-invasive techniques (physiotherapy, etc.) are better options.
The role of monetary policy is to drive interest rates. There are usually better options.
But how does a central bank maintain its place in the hierarchy?
That’s the problem.
retail sales growth
This is a measure of demand – retail sales.
The latest figures from the Australian Bureau of Statistics last week (29 June 2022) – Australian retail trade (May 2022).
The graph shows the monthly increase in turnover, which as you can see has been declining since the beginning of the year – before the RBA started its current rate hike phase.
There are some sectoral differences (department stores and cafes, restaurants and food delivery are all higher than overall), but total spending on retail goods and services has been falling.
total credit growth
The graph shows the monthly increase in major credit aggregates since January 2020.
These are the rate-sensitive aggregates that the RBA may affect through rate hikes.
Aside from the continued speculative frenzy on investment properties, aggregates have not accelerated, and growth in owner-occupier housing credit has been falling since May 2021, long before the RBA acted.
The investment housing boom is due to a distortion of the tax system, with high earners receiving massive tax breaks for accumulating multiple properties.
It should be addressed through tax reform.
Indeed, while the rate of change for most categories may level off, the absolute level may be too high. There is evidence that overall credit growth is currently higher than before the pandemic.
Reining in housing credit will do little to address headline inflation driven largely by energy and food prices.
If housing is excluded, credit growth is even more subdued.
If the RBA further curbs non-housing credit growth, it will affect already weak retail sales and push Australia into recession.
My new blog header photo
This photo is from Paterson Point, Victoria.
I am part of Australia’s most sustainable community development called – cape.
I wrote about it in this blog post – Biodiversity-Sensitive Urban Design and the Silence of Our Party (May 16, 2022).
This magnificent beach is just a short walk from the dunes.
I plan to hold a workshop on Modern Monetary Theory (MMT) in 2023 (after the building is completed) by – MMTed – On the coast, this will also provide training in sustainable living etc.
More details as this progresses.
Music – Ryo Fukui
Here’s what I’ve been listening to this morning at work.
Last week, I introduced a great Japanese tenor — Inagaki Jiro – I noticed one commentator suggested we listen to Ryo Fukui.
I got this album first — landscape ——Japanese jazz pianist—— Fukui Ryo – Shortly after its release in 1976.
One can buy a variety of albums that don’t normally come to Australia from import stores in Melbourne.
The album, his first, went largely unnoticed outside the recognized jazz scene, which meant that, at the time, it was ignored in America, knee-deep in disco.
Here’s the title track – the scenery – and features:
1. Ryo Fukui – piano.
2. Yoshinori Fukui – Drums.
3. Satoshi Denpo – double bass.
Ryo Fukui’s death in 2016 at the age of 67 was a huge loss.
It’s an interesting account (written after his death) of how America realized that not everything happens within its borders – Lost in Time: Ryo Fukui’s “Landscape” Retrospective (24 March 2016).
And, if you read Japanese, here are— biology.
Self-taught, he didn’t get into the piano until he was 22, and then made amazing music with his band.
Next week we might hear another giant of the Japanese jazz scene, the tenor – Matsumoto Hidehiko. I have a
Enough for today!
(c) Copyright 2022 William Mitchell. all rights reserved.
