this – washington consensus – Rate hikes across the board by the Fed and RBA this week despite all indications that inflation peaked months ago and its downward trajectory has little to do with the absurd rate hikes since early 2022. The two banks, as well as most other central banks Banks, are just flipping through neo-Keynesian textbooks to see where they are headed, and pretending to assess the situation correctly. Both textbooks and assessments are far from accurate, and low-income mortgage holders suffer needlessly. But little is known to the public that central banks are conducting a grand global experiment that allows us to reflect on the accuracy of competing economic theories and approaches. Most central banks are currently raising interest rates, reflecting the neo-Keynesian view of monetary policy as an anti-stabilizing, anti-inflationary policy tool, prioritizing fiscal policy. One central bank didn’t follow suit – the Bank of Japan. The Bank of Japan did not change interest rates, maintained its yield curve control policy, and the government is expanding fiscal policy. The exact opposite of the New Keynesian approach. We now have sufficient data to assess the relative merits of these two approaches. Thanks to monetary and fiscal policy initiatives, Japan has lower inflation, no currency crises, and the lives of its citizens are better off.
western consensus
In Australia, interest rates have gone beyond what the RBA itself believes many mortgage holders can afford.
In Chapter 3 of the RBA – Financial Stability Review – April 2023 – Focusing on household and business finances, the RBA said about 15% of Australian households will not have enough cash reserves or income to stay solvent after yesterday’s interest rate hike again.
The RBA stated:
The risk is highest for people who also have low incomes. That’s because low-income households often don’t have the ability to leverage wealth or cut discretionary spending to free up cash flow to pay off debt.
farther:
Estimates suggest that approximately 16% of existing loans cannot meet repayability assessments at current interest rates…if mortgage rates were to increase by another 1 percentage point, the proportion of loans that cannot be refinanced with another lender is estimated to increase to approximately 20%.
So the RBA first set out to destroy the savings buffers people had built up, arguing that this would allow them to keep spending when liquidity was destroyed by rising interest rates.
The RBA then admitted it was deliberately increasing unemployment for around 180,000 workers who would be forced to receive unemployment benefits well below the poverty line, while the federal government refused to increase the payout.
In the end, the RBA is fully aware that around 20% of mortgage holders will go bankrupt as a result of rate hikes, if not more.
How did we get to a situation where an unelected body largely irresponsible to the public could do such damage?
Also, as I also pointed out yesterday — RBA loses conspiracy – Treasurer should use powers under the Act to suspend decision-making discretion of RBA board (3 May 2023) – The RBA’s decision is actually pushing inflation up, not down, through its impact on business costs and rental prices.
Therefore, we think it is absurd that inflation is falling because the factors causing the pressure (supply-side factors) are fading, and the RBA is actually prolonging the period of inflation, despite the claim that its rate hikes are aimed at reducing inflation faster.
Just kidding us people!
And, amidst all the outcry, this morning National Australia Bank announced that their half-year profit rose 17 per cent to a “record $4.1 billion” due to higher interest rates.
I have pointed out several times in the last year that due to the RBA’s interest rate mania, private banks stand to make huge profits and their clients are increasingly being scammed.
The crazy part is their stock price drops because a greedy bunch thinks profits will be higher than reported.
In the US, the Fed added to the mortgage pain yesterday (3 May 2023) when it raised its policy rate by a further 0.25 percentage point, bringing it to the highest level in 16 years.
They raised interest rates, redistributed income from the poor to the rich, and sparked a series of private bank failures.
Their charter requires them to remain financially stable.
Meanwhile, the Land of the Rising Sun
There has been little comment in the mainstream economic media on the global experiment that is now apparently underway.
The RBA and Fed are just part of a group of central banks currently pushing rates higher, pretending they are “winning” the war on inflation, which has peaked and is falling, for very different reasons than central banks are doing.
By the way, Gaggle can mean “a flock of geese” or “a flock of confused people.”
Considering that the word “goose” is an informal insult in English, both meanings may apply!
However, there is one central bank that does not engage in this agenda – the Bank of Japan – in the sense that it draws a direct comparison with the New Keynesian consensus approach.
I commented on this experiment earlier:
1. Ex-BOJ chief challenges current monetary policy consensus (March 22, 2023).
2. Bank of Japan continues to show who has the power (January 26, 2023).
3. Bank of Japan leaves monetary policy unchanged (December 22, 2022).
4. The monetary system is the same – but culture shapes the choices we make (December 8, 2022).
5. Two Opposite Ways to Deal with Inflation – The Stupid and the Japanese Way (October 6, 2022).
6. Why Japan avoided rising inflation – a more united approach could help (July 4, 2022).
7. As Bank of Japan keeps calm, we’re running an experiment (March 31, 2022).
Japan has experienced all the global supply shocks that other countries have experienced, and those shocks have created inflationary pressures.
Japan imports almost everything!
However, the BOJ did not raise its policy rate and left its yield target for 10-year JGBs unchanged.
The Japanese government has also eased fiscal policy further in response to the cost of living crisis – providing fiscal transfers to households and subsidies to firms as part of a deal to squeeze profit margins.
Meanwhile, companies elsewhere are raking in profits with impunity because our government refuses to pressure the corporate sector to do the same kind of behavior that the Japanese government has successfully wrought from its price setters.
Because of its policy stance, the Japanese currency has come under relentless attack from financial market “short sellers” who believe they can scare the Bank of Japan into changing policy and generate huge profits for speculators.
The bank refused to be intimidated and instead inflicted huge losses on short sellers.
I discuss this issue in the 2. blog post referenced above.
Progressives in the UK may have noticed the way the Bank of Japan stared at the financial markets – there was no yen currency crisis and the government didn’t have to turn to the IMF for funding.
Instead, the likes of Starmer and his gang (who carried out a purge of the British Labor left) are now reneging on policy promises — such as the dysfunctional privatization of utilities and nationalization of railways, among other violations. Promises because they are fiscally responsible — that’s the code that reassures financial markets.
Why? Because they have a morbid fear of the City dating back to the 1970s, when Callaghan and Healy used “running out of money, currency crisis, IMF bailouts” to purge Tony Benn and the his fellow socialists.
The left never really recovered.
They should look east to see how Japan is dealing with financial market speculators.
In any case, how will Japan deal with the inflation “fight” without changing its monetary policy stance?
Well, the answer is that they are proving that the rate hikes that other central banks impose on their citizens are not necessary to bring down supply-side inflation.
Here is the update.
Japan’s current annual inflation rate (all items) (March 2023) is 3.3% lower than its peak of 4.4% in January 2023.
For the US, the August 2022 peak is 8.3% and the current 4.98%.
The following four-panel graph captures key aggregates from January 2018 to March 2023.
The index was set at 100 in January 2020.
The question that should be asked is why Japan was able to resist raising interest rates and tightening fiscal policy while fending off high inflation?
We know the answer.
Also, the “currency crisis” crowd always claims that if financial markets are disrupted by national government policies, then they destroy currencies.
Well, as long as governments and central banks understand their own ability to fend off speculators, the evidence does not support such paranoia.
Initially, the yen depreciated as the Fed started raising interest rates and the U.S.-Japan interest rate differential emerged.
“Currency crisis is coming” said the ignorant.
The chart below shows the USD/JPY exchange rate in early 2022.
A few months of appreciation followed by a modest depreciation and a stabilization of the slightly lower exchange rate relative to before all rate hikes began.
Conclusion: No currency crisis.
in conclusion
My question is why doesn’t the mainstream financial media report all this?
We’ve all heard about the Fed raising interest rates, the boss is widely quoted in the Australian media.
The head of the RBA’s idiotic comments trying to justify the rate hike got full coverage.
But I guarantee the Australian public won’t know that the Bank of Japan is going against the western consensus, it’s actually doing a lot better than the hikers!
Enough for today!
(c) Copyright 2023 William Mitchell. all rights reserved.
