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RBA aims to cut policy stimulation by adding to it

It’s Wednesday, and we have some analysis and news and then my music segment for the week. Yesterday, the Reserve Bank of Australia (RBA) stunned the nation by pushing up interest rates by 0.5 points, claiming it was the responsible thing to do given that inflation was higher than expected. They then outlined all the factors driving inflation – none of which are going to be responsive to interest rate rises. Further, when one dissects the way in which interest rate rises work through distributional effects and effects on business costs, it is not clear that increasing rates will not just add to the stimulation rather than reduce it as the RBA claims. Next, we Fact Check the Fact Checkers and after all of that we have some Tupelo Blues, to restore some sense of decorum.

RBA decision

On June 7, 2022, the RBA Board lifted their cash rate target by 50 basis points to 0.85 points.

It also lifted the support rate on Exchange Settlement Accounts (bank reserve accounts) from 50 to 75 basis points – a reward to the banks.

In the – Statement by Philip Lowe, Governor: Monetary Policy Decision – we learned that the RBA considers:

Inflation … is higher than earlier expected. Global factors, including COVID-related disruptions to supply chains and the war in Ukraine, account for much of this increase in inflation. But domestic factors are playing a role too, with capacity constraints in some sectors and the tight labour market contributing to the upward pressure on prices. The floods earlier this year have also affected some prices.

Okay.

Supply factors.

Covid.

War.

Floods.

How will interest rate rises attenuate these driving forces?

They won’t!

Note, the RBA insinuates that the ‘tight labour market’ is contributing to the rising prices.

How?

That would have to come via wage pressures principally.

There are no wage pressures – see my recent blog post – Australian wages growth remains flat despite RBA claims that a breakout is about to occur (May 18, 2022).

The RBA claims that:

The Bank’s business liaison program continues to point to a lift in wages growth from the low rates of recent years as firms compete for staff in a tight labour market.

I doubt the veracity of the program’s responses.

I have a long record of working for unions in wage tribunals and I have rarely ever seen submissions from business supporting wage increases and always see them complaining about wage pressures and the need to keep workers down.

They lie!

The RBA Statement also said that:

Inflation is expected to increase further, but then decline back towards the 2–3 per cent range next year. Higher prices for electricity and gas and recent increases in petrol prices mean that, in the near term, inflation is likely to be higher than was expected a month ago. As the global supply-side problems are resolved and commodity prices stabilise, even if at a high level, inflation is expected to moderate.

So they are already predicting the problem will go away as the temporary factors dissipate.

Why then risk adding a further problem of rising unemployment, rising mortgage defaults, and other bankruptcies?

The interest rate rises have no clear outcomes anyway because of their distributional effects.

First, they increase in the income of those on interest-rate sensitive assets (the so-called fixed-income cohort).

It is hard to characterise this class as being strugglers but there may be some within that group who have experienced hardship as a result of the low interest rates.

For them, the interest rate rises are stimulative – and may well increase their spending – the opposite to what the RBA claims it is doing (suppressing demand).

Second, they reward the ‘markets’ who have ‘priced in’ the rate rises. As I have said previously, ‘priced in’ means they have placed bets on the rising rates. So the RBA just gives these unproductive gamblers massive profits by ratifying their bets.

Nothing productive comes from that. Just higher luxury spending by the wealthy elites.

Third, the rate rises hit those with mortgages reducing their purchasing power and exacerbating the lost real income that the inflation generates.

They will reduce their spending on goods and services and transfer the shift into bank profits.

Given the record household debt, some will lose their homes, especially those who were lured into the housing market while it was booming by RBA promises that rates would not rise until 2024.

Some of those mortgage holders committed to payments well in excess of what would normally be considered sustainable given their incomes. They will suffer and many will go broke.

Fourth, interest rate rises increase the costs for all businesses who have borrowed money to fund their working capital and investment plans. Given how successful, corporations have been in using their market power to pass on all costs to consumers, the interest rate rises are in fact inflationary.

So we are left with some inflationary impacts and some deflationary impacts.

We are also left with a highly regressive outcome – rewards to asset holders, costs to the least well-off.

The RBA doesn’t have a clue as to the net outcome. No central banker has ever worked out these distributional factors.

But, at any rate, even if the distributional factors net out to be detrimental to total spending, such an outcome will not do too much to address the driving forces propelling the current inflationary episode.

It just amounts to the RBA reverting to mainstream form.

Pathetic.

But I think the ‘markets’, who are claiming we will be at 2.5 or 3 per cent by sometime later this year or early next, are pushing their special pleading for the RBA to reward their gambling too far.

Even the RBA Statement said that they were going to monitor if the interest rate rises to date damage household consumption expenditure too much – “the Board will be paying close attention to these various influences on consumption as it assesses the appropriate setting of monetary policy” – and that was a signal they may not be pushing rates up much further.

Fact Checking the Fact Checkers

Yes, I have added a new layer to the Fact Checking service that the Australian Broadcasting Commission (ABC) instituted to keep politicians honest.

My addition is the ‘Fact Checking the Fact Checkers’ service where I expose the failure to fact check properly.

Here is an example of a ABC Fact Check (‘gotcha’) which needs checking – Fact Check: Katy Gallagher says the government has inherited the worst set of budget books in history. Is that correct?.

Katy Gallagher is the new Finance Minister in the new Australian Labor Government and seems to think it is a good idea to repeat several times in each interview that the Australian government has a $1 trillion public debt balance outstanding while forgetting to mention a lot of that is being held by the Government itself, courtesy of the Reserve Bank of Australia’s bond buying program.

Government loaning itself $As and going through an elaborate charade to pay itself interest (right pocket to left pocket), then pay itself to retire the debt on maturity (right pocket to left), then pay itself dividends (left pocket to right) and think we are all fooled.

Well, we are mostly fooled, which is a testament to the scale of public mis-education that prevails in this nation.

But back to the task.

The ABC Fact Check declared that the new Finance Minister was not telling the truth when she claimed the new Labor government had inherited the worse fiscal books in history.

They concluded after analysis:

On two key economic indicators, debt and deficit, previous incoming governments have inherited worse “budget books”. The only fair way to make historical comparisons is to take into account the size of the economy and measure the indicators as a proportion of GDP.

On this basis, gross debt levels were historically much higher for previous incoming administrations than the figure faced by the new Labor government.

Similarly, the deficit as a percentage of GDP is not the worst on record.

The ABC Fact Check also quoted a person from the Australia Institute, which claims to be a progressive voice in the Australian political debate, as insinuating that if the public debt to GDP ratio is high then that is ‘bad’.

They narrated a labyrinth of queries relating to whether we should be comparing ‘gross debt’ or ‘net debt’ over time to assess the new Minister’s claims and whether there was comparable data back to 1901 anyway.

They also claimed they were “unable to locate any official data on budget balances covering the period from federation to 1970-71”, well I have data back to the early 1950s that is comparable, but that is not the point anyway.

The point is this – the assertion that a high fiscal deficit is worse than a low deficit, say 2 per cent of GDP is better than 4, or that a surplus of 1 per cent is better than a deficit of 2 per cent of GDP is fundamentally flawed and reflects a misunderstanding of what fiscal policy is for.

We cannot say anything about the goodness or badness of a fiscal position just by comparing financial ratios or numbers.

A 10 per cent of GDP fiscal deficit might be a responsible and superior fiscal position at some point in time, while if the government was running a 1 per cent surplus at that time, we might consider that to be totally irresponsible.

We need a functional context before we can make any assesssments.

There are not good or bad fiscal positions per se.

The context is provided by what the other sectors – private domestic and external – are doing and how well the government is meeting functional objectives such as full employment, high quality public services, etc.

The purpose of fiscal policy is not to record particular deficits or surpluses, but to use the capacity of the currency-issuing government to advance desirable socio-economic objectives.

If the government is achieving those objectives, then whatever the fiscal balance turns out to be will be the ‘appropriate’ balance.

I have said before that we might call a deficit ‘bad’ if it was the result of the government initially not providing sufficient net spending relative to the spending of the non-government sector, and the resulting unemployment and recession, caused a fall in tax revenue and a rise in welfare payments.

In that case a rising deficit would be ‘bad’ but not because the deficit to GDP ratio had risen, but, rather, because the government was not advancing well-being.

In an alternative scenario, if the deficit started rising and employment was growing and services were being improved, then the fiscal position would be signalling an improvement.

But we can only attach those qualitative labels or assessment by applying an understanding of the context.

Similarly, looking at levels of outstanding public debt and concluding higher is worse reflects a failure to comprehend what public debt is and how it arises.

Public debt is just a manifestation of past fiscal deficits that have not been taxed away yet.

As such it reflects portfolio decisions taken by wealth holders in the non-government sector to move some of the net financial assets created by those deficits into risk-free government bonds.

We might worry that a particular segment of the non-government sector holds the largest stake – such as the speculators in financial markets – which would signal that the debt was really just masquerading as corporate welfare.

But that is a separate discussion.

So the ABC Fact Check is wrong.

Higher fiscal deficits and higher public debt ratios are neither worse or better as they stand.

And that should have been the conclusion presented to the public not perpetuating the fictions of mainstream economics.

Levy Summer School – Change of Plans

I previously mentioned that I would be presenting four sessions at the upcoming Levy Summer School in the US.

The school runs between June 10-18, 2022 and the full program is – HERE.

I can update that information following some changes today.

Covid infection numbers are on the rise again in the US and I have taken advice concerning the risk of travel there, particularly given all the connections (airports, stations, etc) that I would need to make when travelling from Australia to the workshops.

I decided today, reluctantly, not to take the risk and have informed the organisers that I am cancelling my travel plans later this week.

We are now working out remote delivery via Zoom for at least some of the advertised sessions that I was to participate in. I will update readers on when those plans are finalised.

I hope to do the two stand-alone sessions I was committed to do but I understand the panel sessions will probably not work with me on Zoom and the others live.

My sessions in the program are (the times are New York State times):

Monday, June 13 14:45-16:00 – MMT and ZIRP: What Happens If Treasury Stops Issuing Debt?

Monday, June 13 16:15-18:00 – Breakout Discussion: MMT and Policy Design

Thursday, June 16 10:30-12:00 – The Buffer Stock Approach

Friday, June 17 15:15-16:15 – Thirlwall’s Law (this is about the balance-of-payments-constrained growth theory).

I am hoping the Thursday and Friday sessions will remain (with me via Zoom) but the two Monday panels I doubt will see my involvement.

As to the program, the highlighted sessions will be offered to the public via Zoom using the following link

https://bard.zoom.us/j/83597014068?pwd=SmNNUHJZYXhhamJ3RmlnWlJxMnAzQT09

and Pass-code 083828

More news when I hear back from the organisers.

Unlike others, I still believe there is a dangerous pandemic out there and I am very cautious in what I do.

First Dog on the Moon agrees – Remember Covid!? I AM PRETENDING EVERYTHING IS NORMAL EVEN THOUGH I KNOW IT ISN’T

Music – Tupelo Blues

This is what I have been listening to while working this morning.

It is from the 1995 album – Chill Out – from John Lee Hooker.

There is reference in the song to the – Great Mississippi Flood of 1927 – although from maps I have seen of the flood spread, Tupelo was spared.

The climate records show that the worst daily rain came on March 21, 1955 when 238.76 mm fell (9.4 inches)

This version is smoother than the original which lacks dynamics in my view.

The original is on his 1959 album – The Country Blues of John Lee Hooker – recorded while he was working in car assembly plants in Detroit.

That is enough for today!

(c) Copyright 2022 William Mitchell. All Rights Reserved.

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    This Post Has 13 Comments
    1. Again this month, the RBA repeated the refrain that wages are growing widely and strongly, this month apparently by enough for them to be demonstrably (to them) feeding into inflationary pressures.

      Yet it continues to be very difficult to find any actual significant evidence pointing to this being the case and most evidence by our main statistics taker – the ABS of course – continues to not merely contradict the RBA’s claim but point in the opposite direction.

      We shouldn’t have a situation where two of our most major public institutions differ to such an extraordinarily stark degree about whether a fundamental aspect of the economy as wages growth does or does not exist. It says that one of the party’s information sources is so flawed as to be worthless for what they are tasked with understanding.

      I have to ponder if the RBA’s Business Liaison Programme is little more than an exercise in gathering a bunch of anecdotes from mates in the business sector who put their own self-interested spin on the situation and the RBA then digests this as fact.

      It’s not acceptable to have a public institution that are tasked with making policy that affects millions of people acting on anything less than the clearest and most comprehensive information available. Accordingly, I doubt the Business Liaison Programme is fit for purpose.

    2. The supposed independence of central banks, is a way to push away the responsability and public scrutiny of governments.
      Government say: it’s not our fault – the central bank is to blame.
      And I live in the eurozone, the grotesque home of the euro, with an informal governing body and where nobody is to blame for anything, except the victims of the euro.
      But, interest rates rises and mortgages rises too, as my mortgage rate is pegged to the CB rate.
      The truth is: my bank is loosing QE gains and so I have to pay to offset those losses (they still don’t pay a penny for deposits, so this is a win-win game).
      On the government side, soaring prices translates to more tax money beeing collected (remember that MMT doesn’t apply to the eurozone, so taxes really matter here).
      My potential savings go away, so that someone else can spend more.
      The question is: who will be spending my money?
      Will it be the government, to improve roads, or to cut taxes to the elites, or to give it away to Ukraine (maybe we won’t need roads after all, as petrol is becoming a luxury).
      Maybe my bank will lend my money to some rich fellow, with no collateral and with no strings atached.
      Maybe it will all be lost in some ruinous business (as usual), and so the rich fellow will default.
      Maybe the bank will be bankrupted, as it did in 2012.
      Maybe I will be called to pay more taxes to pay for the bankrupcy, as I did in 2012.
      Maybe we should call the EU a circus.

    3. Can someone explain from MMT perspective how interest rates set by the central bank affects the interest rate of mortgages?

    4. “Can someone explain from MMT perspective how interest rates set by the central bank affects the interest rate of mortgages?”

      Banks like to make money. They’d happily lend at 4% and let you keep your deposit at 0%.

      However competition from other banks drives that lending rate down towards zero, as they fight amongst themselves for business, until the lending rate is slightly above the natural deposit rate of 0%.

      And that’s where it would stay if the central bank wasn’t there. The alternative to a deposit is cash and that doesn’t pay any interest either.

      However, once there is a central bank providing banks with a deposit facility and a lending facility, there is an opportunity for a clever bank to take the, say, 2% the central bank is offering and start offering, say, 1% to depositors. Depositors would move to gain the extra money, and the original bank would then be in trouble having to borrow from the central bank at the higher lending rate, or offering the new bank more than 2% to get them to lend the money back.

      So the original bank responds by increasing the deposit income they pay to stop depositors moving, and that largely neutralises the game.

      All of this increases the base cost of retaining depositors. If the central bank moves the interest rate up or down, then the base cost of retaining depositors changes with it. The cost of lending then moves in tandem with the new deposit base cost.

      And that’s how the central bank rate influences mortgage rates, and also why the deposit and lending facilities of the central bank have to be there even though they are rarely used.

    5. I assume that the government deficit is the government spending minus tax and, my understanding is that the deficit is savings? If so when the government wants to lower the government debt it is really saying that it wants to take away peoples savings. If this was understood people might be more worried about the government wanting to lower government debt. Not the good thing as it is currently believed.

    6. @Ben,
      I’m no expert, but I don’t think that US bonds count as savings.

      OTOH, they are assets. So, like you said, having a surplus means less assets for someone. In point of fact only taxing the rich can make a dent in the national debt, and the rich hate the idea that they should be taxed to eliminate their assets. I agree with them that this seems totally unfair. As does taxing the poor (or reducing their services) or the middle class. So, it’s a good thig that once a nation is off the gold standard, it doesn’t ever need to reduce the national debt, unless there is hyperinflation.
      .

    7. Off topic.

      What will happen when the $US is not the world’s reserve currency? This my guess, is this close to right?

      Foreign holders of US bonds will want dollars in ‘cash’ so they can spend them.
      This means that the US Gov. & Fed will have to roll-over bonds as they come due, but selling bonds to the Fed.
      This will mean big increases in the supply of cash dollars in the US banking system.
      Now, I don’t think that the foreigners want dollars in US banks either.
      So, they will want to sell them for the new reserve currency, for now assumed to be the euro.
      So, some of the foreigners’ dollars will go to holders of euros. I predict that this will be a small amount.
      So, the foreigners will want to buy something more real in the US with their dollars. Things like corp stock, real estate, bridges and toll roads, etc.

      My question is will this be bad for the mass of Americans or for the 1%?

      If it is bad, will the US pass laws to limit this and the damage it is causing?

      An example is, in the UK foreigners are buying up London real estate and so driving up prices of those things. The UK Gov. is not passing laws about this, right?
      .

    8. My fallback John Lee Hooker recording is The Cream, a double live album from the 1960s, that also has an excellent version of Tupelo. Thanks for the blog. I’ll be referring to it in this week’s show on 3CR.

    9. Steve_American, complex question, but I think it would make sense to look at every sector individually are there any sort of problems as a result of foreign ownership. Are foreigners buying up houses and keeping them vacant? Then maybe higher taxes on vacant properties, and lower on occupied ones to encourage lending them out.

      That the foreigners can buy property in the US also means that US people can buy foreign property. You cannot just unilaterally say no to the one and keep the other.

    10. @Hepion,
      Thanks for a reply.

      Many nations don’t let foreigners buy houses.
      Where I live, Thailand, is one of them. Here, foreigners need a Thai partner to start a business, and I think the Thai needs to control it too.

      AFAIK, Japan is another such nation.
      .

    11. @Steve_American
      “Where I live, Thailand, is one of them. Here, foreigners need a Thai partner to start a business, and I think the Thai needs to control it too”.

      I don’t know if I should mention this, but as a person of fact (like most MMTers), the urge is always there.

      Well, when you have a moment, why don’t you look up a treaty signed around a couple of hundred years ago between the US and where you reside on this issue. You will be surprise in terms of understanding.

      You might ask if this is still in practice? Well, if you any difficulty, give me a shout, but do ask whoever you are dealing with at the ministry of commerce first if they really want to break the law.

      This, in tern and by logic, simply goes for any property you are dreaming of, too.

      Well, now I wonder if I should keep all this long forgotten knowledge to just myself…

    12. @Ben You can make the cognitive dissonance starker by offering John citizen the choice of paying tax or buying a government bond of equal value. This debate is immensely, colossally stoopid.

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