Tuesday, November 29, 2022
HomeEconomyRBA Governor Jumps the Shark - Bill Mitchell - Modern Monetary Theory

RBA Governor Jumps the Shark – Bill Mitchell – Modern Monetary Theory


Today, we consider the idiotic statements of Australian monetary policymakers. Yesterday, I reported on the massive income redistribution that is currently occurring due to central bank rate hikes. Not only does this benefit those with rate-sensitive assets and penalize borrowers, but under current policy settings, it would also require central banks to pay millions to trillions in cash to banks holding excess reserves. Excess reserves are the result of the quantitative easing program. Some might say this is the fault of the quantitative easing program. But Modern Monetary Theory (MMT) explains that, under the optimal policy of not issuing public debt at all, bank reserves would still accumulate. The MMT stance will pay no backing rate, and the Japan-style zero-interest rate regime will remain at the short end of the yield curve. In this case, there is no transfer of cash to the bank for holding excess reserves. Today, there are many more. On Tuesday (November 22, 2022), the Governor of the Reserve Bank of Australia addressed yesterday (November 22, 2022) – Price Stability, Supply Side and Prosperity – Attended the annual CEDA Dinner in Melbourne. He told the audience that we were entering a period of global uncertainty that would require moving interest rate settings up and down more quickly in response to the growing threat of inflation. It was a shocking display of arrogance, and September couldn’t come soon enough — when his contract as governor expires.

RBA Governor Jumps the Shark

jumping shark – Refers to resorting to ridiculous exaggerations or gimmicks to get attention when the underlying message and presentation loses its luster.

That roughly sums up the performance of the RBA governor in Melbourne on Tuesday.

The “gimmick” made headlines in the news media, which was clearly his intention.

But the news is hard to understand.

He’s talking to CEDA (Council for Economic Development of Australia), which bills itself as a “bipartisan” think tank, but is so saturated with mainstream economics that there is little pluralism in sight.

It stretches the meaning of bipartisanship to the absurd.

This is an ideological neoliberal advocacy group whose members will embrace the RBA governor’s message, especially when he says wages should not rise as inflation rises.

Before I consider the rest of his speech, the correct statement is that if wages catch up to inflation, then inflation will devolve into a self-fulfilling battle between capital and labor to maintain real incomes.

But stress that the real losses should be borne by workers, rather than blaming the profit fraud that is now fueling inflation, or the federal government lacking the courage to refuse to take responsibility for the large energy companies that produce at scale. With profits made by diverting gas to export markets inflated by the situation in Ukraine and forcing a shortage in the domestic market, the RBA chief is proving his bias.

If the Australian government had emulated Japanese policy makers rather than blindly imitating the Americans, our inflation would have been much lower and workers’ well-being would not have been compromised.

In his speech, the RBA governor acknowledged that the current inflation episode will fade over the next year or so.

Given the supply pressure that sparked this event and the OPEC+ and Ukraine situation that made it worse, I maintain that this event is temporary in nature.

There is no wage-price propagation mechanism to push it further like in the 1970s.

The Governor acknowledged:

1. “COVID supply disruptions are being addressed: lead times and shipping costs have fallen, and commodity price pressures are easing.”

2. “Commodity prices have stabilized and, in many cases, have fallen back to levels near where they were at the start of the year; the impact of this will be felt in consumer prices over time.”

He also claimed that the rise in interest rates since April had dampened aggregate demand, but the evidence in this regard was not clear.

Retail sales data (released on November 4, 2022) showed only a slight decline, with some industries still booming (such as food and hospitality).

The point is that the main drivers of inflationary pressures are supply side factors which are temporary and fading, and trying to counter this with a sharp reduction in aggregate spending will leave damage worse after the supply side normalizes than Distortions temporarily endured due to supply constraints.

He then turned his attention to considering future supply shocks.

He concedes that monetary policy is largely focused on manipulating aggregate demand, even though we know it is a very ineffective tool in this regard.

Impact lags are uncertain and largely unknown.

The RBA is not clear how changes in the distribution of interest rate changes (among borrowers and lenders) will play out.

While billed as a policy tool to fight inflation, rate hikes are likely to actually lead to an acceleration in inflation, at least in the short to medium term, as they increase costs for businesses that can afford to pass them on to end consumers.

The RBA governor, though, foreshadowed that these current types of supply shocks would be more frequent and larger in the future.

His speculation is that inflation will be a persistent problem from here on out.

Why?

1. “Reversal of globalization” – For some reason, he believes that the move by countries to return to some self-sufficiency will lead to higher global prices.

I bet if China becomes less important as a source of our imports and world trade contracts, we will only accelerate our shift to reducing litter, plastic and waste.

2. “Demographics…” – He argues that aging society issues are inflationary, but doesn’t give a reason.

The point is that addressing an aging society as a fiscal problem undermines the real solution, namely increasing the productivity of young workers and investing in education and training institutions.

Almost the exact opposite of what proponents of austerity advocate.

There is no reason for supply constraints to worsen, because if we invest in young people correctly, we will grow old.

3. “The frequency of extreme weather and climate events has increased in recent decades and this trend is likely to continue” – a huge problem that requires a massive increase in public spending to accelerate our transition from carbon energy to The transition to renewable energy and related practices.

The Premier cited recent flooding in Australia as a source of price pressure given the damage floods have done to food production.

However, these pressures cannot be resolved by interest rate changes.

We have long-standing experience with crop reductions caused by weather and fire events. When lettuce hits $10 a head, consumers stop buying it and just buy something else.

Soon new crops appeared and prices fell sharply.

The art of policymaking is not constantly changing the policy environment in which households and businesses make spending and saving decisions.

Sudden swings in the policy environment can themselves create uncertainty, in which case a new lettuce crop won’t grow any faster.

4. On the basis of climate events, the governor cited the ongoing “energy transition” as a source of future inflationary pressures.

He claimed that energy companies need to raise prices to cope with the transition.

He may have noticed that the government has the ability to reverse the destructive privatizations that created these private energy fraudsters in the first place.

They also have the ability to price at cost if needed to allow the energy transition to take place without profiteering.

We currently have an example of what has gone wrong with energy policy in Australia.

I noted earlier that Australia produces more natural gas than it consumes domestically.

However, prices have been rising sharply due to the threat of domestic supply shortages.

These price increases are largely responsible for our current inflationary pressures.

why?

Simply because foreign-owned energy companies have all but been given the federal government free reign to profit from our natural gas resources and price domestic supply based on world prices.

With rising demand for non-Russian gas across Europe fueled by the situation in Ukraine, the energy companies are shifting supplies from the domestic market to exports and haggling for huge profits.

They then price the domestic market based on world prices.

This can be easily fixed if the federal government is not intimidated by energy companies.

There is enough free gas (i.e. supply not currently locked in long-term export contracts) to supply the domestic market.

Governments can lock up supply at any time and, if they wish, enforce price caps at cost.

Then a significant drop in CPI will become apparent.

Monetary policy has no place in this solution.

Overall, the transition to a low-carbon world requires a major shift in fiscal policy – through new taxes to divert resources and reduce spending in many areas (such as military spending, subsidies to carbon industries, and stricter regulation of various areas ) Such as vehicle standards, housing quality, etc.

It will also require more state ownership of essential services – reverse privatization.

If central banks try to dampen economic activity by raising interest rates to counter any cost pressures from these transitions, they will only undermine that effort.

The governor acknowledged that as these events and shifts unfolded, it would become impossible to try to keep inflation within a narrow range, meaning we had to adapt to more changes and seek solutions of the kind I outlined above .

He also claimed that labor and product markets must become more flexible, a guideline for deregulation and less job protection.

With workers struggling to get pay rises and the rise of the “gig” economy, it’s hard to see how much more flexible the labor market can be.

Flexibility is all about bosses, and it has turned national income into profits, with wage shares at an all-time low.

Governments certainly need to reduce the ability of corporations to extract profits.

I doubt the governor will remain silent on this issue.

He also claimed that fiscal policy must be restrained to “prepare for future disasters”.

Still, so-called independent central banks stepped in with fiscal policy.

in conclusion

The kind of challenges that the governor has identified on the supply side are certainly real and will play out increasingly in the future.

But they only underscore how inadequate policy dominance is with interest rate adjustments being the main tool of destabilization.

These supply challenges point to the growing role of fiscal policy and regulation, including public ownership of basic resources and services.

Enough for today!

(c) Copyright 2022 William Mitchell. all rights reserved.



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