It’s Wednesday, so just a few snippets before some great music from the early 1960s. Over the last few weeks, the commentary in the financial and economic press has been that the ‘market’ has priced in higher inflation and the central banks will have to concede to the market prerogative. Even people I personally like in the media have been running this line and headlines last week included statements like the RBA has run the white flag up. All of this is a self-fulfilling outcome, if every one acts as if there is an imperative to give the ‘markets’ the running, then it will happen. And we should all be clear on what that means. Corporate welfare abounds. And it is not the only example in the last week.
Corporate welfare #1
How is that the Biden administration is struggling to honour almost any of its promises leading into last year’s Presidential election yet it can hand out billions to private companies that sends their share values through the roof?
Last week, we read that the Hertz rental car has purchased 100,000 Tesla Model 3 cars from Elon Musk’s company.
The contract was reported to be worth around $US4.2 billion in revenue to Tesla and the value of its share capital passed 1 trillion $US.
So a massive increase in wealth for the owners of the company.
The purchase order is equivalent to around 10 per cent of the company’s annual production.
We also learned that under the auspices of the House reconciliation spending bill, specifically, the section on decarbonising the US motor vehicle stock, that while consumer subsidies (tax credits) being offered would exclude Tesla because it is an anti-union workplace, the provisions relating to commercial vehicles would give up to a 30 per cent tax credit.
That means the subsidy would save Hertz around $US1.26 billion, which means that Tesla’s competitor becomes a pretty standard Toyota.
They will also receive subsidies for the EV-charging infrastructure they are going to build.
Several things struck me when I read about this.
1. I applaud the shift to EVs.
2. Tesla has long supply-side delays on delivering cars to consumer, which means there is already excess demand.
3. Hertz spun the decision as a “strategic decision” to reduce unit costs and boost profits.
4. If (2) and (3), then why is the US government providing profit-seeking firms with a massive public subsidy, at the same time, the politicians are reneging on their promises to do other worthwhile things because they ‘don’t have enough money’?
Answer: Corporate welfare as per normal.
Corporate welfare #2
Back to the central banks.
When we hear that the ‘market’ has ‘priced in’ higher interest rates, what that means is that a host of gamblers in the financial markets have taken bets on interest rates rising and stand to gain massive profits if that outcome occurs.
These gamblers manipulate the media to put pressure on authorities to fulfill their wishes by suggesting that rate rises are inevitable to deal with an apparent outbreak of inflation that threatens to escalate into hyperinflation.
Every day, during this phase of manipulation, some financial market ‘economist’ will be wheeled out in the media saying central banks have to act to safeguard us from higher inflation.
Which is code for saying that they want the central bank to validate their bets and deliver the massive returns to their companies, including their own bonuses.
The unsuspecting public think that these investment bank commentators on TV, who appear daily, are ‘experts’ providing informed commentary to help us all understand what is going on in the economy, which, in turn, we think helps us make better decisions about our borrowing and spending decisions.
The media companies, including the public broadcasters (such as the ABC, BBC, etc) never indicate that their ‘experts’ actually have a massive conflict of interest in that the companies they work for stand to gain massively if the advice or commentary (like, interest rates will have to rise, etc) transpires into reality.
Stupid us, for being so gullible.
The ‘markets have priced it in’ con also reinforces the idea that is constantly implanted into the public psyche that these amorphous ‘markets’ are actually more powerful than the treasury and central bank together (that is, the government).
Which then leads to all to narratives that we are confronted with about ‘inevitabilities’, ‘TINA’, ‘nothing the government can do about it’, ‘markets rule and deliver efficiency which government interference undermines’, and all the rest of it.
Which then leads to all the other spin-offs that fiscal deficits are bad and the financial markets will kill currencies of nations that run them. And all of that.
Which then infests social democratic political parties, like the British Labour Party in 1976, who lied to the people about having run out of money with only recourse to the IMF loan facility as the option left.
And all of that.
All the while, the billionaires in the markets are laughing at our stupidity and ordering the next luxury yacht or buzzing off to a climate change conference in Glasgow in their private jets and given platforms to lecture us on climate change.
And, in some cases, after blasting themselves into space and who knows what costs to the environment just to confirm that the atmosphere is ‘thin’.
Stupid us, for being so gullible and tolerating all of this.
Last week, the RBA caved in to the ‘interest rates will have to rise’ ruse by abandoning their targetting of the 3-year Australian government bond yield, which they had held close to 0.1 per cent since March 2020, as part of their pandemic response.
They demonstrated their power against the markets since March 2020 through their bond-buying capacity.
In the last few weeks, the ‘markets’ – the gamblers – have been selling bonds in the maturity range of April 2024, which in fixed income markets has the consequence of pushing up yields.
The flow-on then is to interest rates on other assets and if that occurs, then the speculative trades (short selling etc) become profitable.
The central bank has two options: (a) kill the speculation by maintaining strong demand for those bonds in the secondary market; or (b) stop controlling the yield and allow the profits to be made
Last week, the RBA chose Option (b) and delivered massive corporate welfare benefits to the gamblers.
Last Friday, the RBA could have choked off the speculation by buying up a tranche of April 2024 maturing bonds.
There was no bid from the RBA, which meant that gamblers won.
In its statement yesterday (November 2, 2021) – Today’s Monetary Policy Decision – the RBA governor confirmed that the policy interest rate would remain unchanged at 0.10 per cent.
He also said that the RBA would “continue to purchase government bonds at the rate of $4 billion per week until mid February 2022, with a further review to be undertaken then” but that it would “discontinue the target for the yield on the April 2024 bond”.
The RBA claimed that the yield targetting had been introduced to keep rates low while the economy was enduring the worst of the pandemic.
The statement then said that:
But its effectiveness as a monetary policy tool declined as expectations about future interest rates shifted due to the run of data and the forecast progress towards our goals.
Which makes it look as though the gamblers have the power.
But, of course, the RBA could have held the yield at whatever level it chose, irrespective of what the gamblers claimed was the inevitable future.
The RBA effectively abandoned their ‘promise’ to keep short-term rates unchanged until 2024, which is why the three-year yield was targetted.
Now they are admitting that they will probably increase rates before that because inflation might be higher than previously thought.
However, they sent mixed signals because the statement also claimed that:
I want to make it clear that this decision does not reflect a view that the cash rate will be increased before 2024.
The other issue relates to the claim that interest rates have to rise to deal with the ‘alleged’ inflationary problem.
Certainly prices have risen in some products, transport costs are up due to misallocation of boats and containers, and so on.
But wages haven’t budged.
And during a pandemic where consumption expenditure patterns have changed due to lockdowns and constraints on travel and factories and wholesalers have experienced massive disruptions, it was always going to be the case that there would be some inflationary pressures.
But how will higher interest rates work to ease these temporary supply chain blockages?
They won’t – so we are once again locked into the destructive New Keynesian mantra about the primacy of monetary policy and its corollary – the need to run fiscal surpluses as soon as possible.
If we return to that nonsense the damage will be massive.
Music – Scrapper Blackwell
This is what I have been listening to while working this morning.
I hadn’t listened to the album – Mr. Scrapper’s Blues (released 1962 on the Prestige Bluesville label) – which was one of three studio albums recorded by – Francis Hillman ‘Scrapper’ Blackwell.
The tracks were recorded by – Art Rosenbaum – as part of his archival work preserving the folk music traditions of the US.
You can now get that album on CD and it is a fantastic.
It demonstrates the – Piedmont Style – of guitar playing which grew out of the ragtime playing styles.
Scrapper Blackwell didn’t sing much in his early days – particularly in his partnership with pianist Leroy Carr, but when that relationship ended, and after a long hiatus when Blackwell was not active in the scene, he did start singing and we are thankful he did.
Great playing and beautifully empathic vocals.
That is enough for today!
(c) Copyright 2021 William Mitchell. All Rights Reserved.