On July 20, the Reserve Bank of Australia (RBA) published the Minutes of its last board meeting (July 6, 2010). This caused headlines for the day – the journalists must have been bored that day – because it raised the possibility that the RBA would increase interest rates in August – right in the middle of an election campaign (the federal election is late August). The bank economists as usual predicted rising rates and significant spikes in the inflation rate. Well today the the Australian Bureau of Statistics released the Consumer Price Index, Australia data for the June quarter and it showed that inflation is moderate and falling. The market economists were “surprised”. I wonder if their organisations have any money dependent on the judgement of their economists? I wouldn’t bet a cent on the basis of their opinions. They continually make false predictions on the outcomes of all the major data releases – always claiming that the economy is overheating and that fiscal support has to be withdrawn. Nothing could be farther from the truth.
It regularly comes up in the comments section that Modern Monetary Theory (MMT) lacks a concern for inflation. That somehow we ignore the inflation risk. One of the surprising aspects of the public debate as the current economic crisis unfolded was the repetitive concern that people had about inflation. There concerns echoed at the same time as the real economy in almost every nation collapsed, capacity utilisation rates were going down below 70 per cent and more in most nations and unemployment was sky-rocketing. But still the inflation anxiety was regularly being voiced. These commentators could not believe that rising budget deficits or a significant build-up of bank reserves do not inevitably cause inflation. The fact is that in voicing those concerns just tells me they never really understand how the monetary system operates. Further in suggesting the MMT lacks a concern for inflation those making these statements belie their own lack of research. Full employment and price stability is at the heart of MMT. The body of theory and policy applications that stem from that theory integrate the notion of a nominal anchor as a core element. That is what this blog is about.