An Odd Phenomenon

The Inflation That Wasn't There

I'm trying to wrap my head around how something like this can happen.

The IMF's database shows goods and services costing $US100 ($A97) to produce in the US now cost $US41 to produce in India, $US67 in China, $US105 in Germany or Britain - but $US161 in Australia.
Only Norway and Switzerland are more expensive to do business, or spend money in. Since 2002, the dollar has turned Australia from a relatively low-wage, low-cost country to a high-income, high-cost one outpacing even Japan.

Here's the graphic from the page:

To be frank, I just don' get this. For the last decade, the Reserve Bank of Australia has been pretty rigid in insisting on sitting on the inflation rate, keeping it under 3%. To that end, they've run their interest rates up when the inflation figure hated up. During that 10year span, there were plenty of moments when they insisted the inflation rate was not so high even though cost of living figures kept coming in higher than the CPI.

So when you get to the bottom of the article you find that Taiwan has been printing its money furiously to keep their currency in line with China - to keep their labour force competitive - and somehow have experienced a price deflation.

This is really curious. The RBA didn't print money, sat on the inflation rate hard, and somehow Australia's index prices have inflated from 77 to 161. Taiwan printed money and somehow its index lowered from 62 to 52. I'm sure there's a tricky economics answer in there somewhere, but if I were to swing my Occam's Razor, I'd say the RBA has been getting their inflation figures totally wrong for a good decade and the net result is this rather nasty bit of price inflation. The article attributes the rise to the Australian Dollar, but this seems arse-about. The Australian Dollar is high because everybody else is furiously printing money and we are not.

It would also go some way toward explaining the elephant in the room, the property price bubble. Because the RBA kept reading the inflation to be much lower than it really was, it ran interest rates much lower than it should have, which resulted in too many people borrowing money to buy property, contributing to the bubble. So in that way, it can be understood that Australia did "print money" without actually printing the dollar bills. - we simply re-calibrated our property prices to being too expensive.

Which brings me to this other article today...

So Do We Re-Inflate The Bubble To Save The Government Now?

Here's Michael Pascoe saying that he thinks Wayne Swan is betting on a housing recovery.

Treasury's MYEFO forecasts for the 2013-14 domestic economy  make grim reading with predictions of flat or declining performances in all but two areas: dwellings investment and farm product.

It's a very brave decision, Minister, to get into the long-range weather forecasting business, but that effectively is what Treasury is doing by predicting that farm product will rise by 6 per cent in 2013-14, an upgrade from a 1 per cent rise guessed in the May budget papers.
More important for the credibility of the government's outlook is the belief that the housing industry will finally turn the corner.

Says Treasury: “Dwelling investment is forecast to be flat in 2012-13, before growing 4 per cent in 2013-14. Dwelling investment declined 3.3 per cent in 2011-12 on the back of continued weakness in the detached housing market. Conditions across the sector are expected to improve gradually over the remainder of 2012, consistent with the solid growth in dwelling approvals and commencements seen in the June quarter.

“The recovery is expected to gather momentum into 2013-14, driven by a pick-up in home buyer demand, improved affordability following declines in house prices over the past two years and the assumption that interest rates will remain below average across the forecast period.”
It's only housing and farm product and what seems a marginal improvement in net exports that hope to maintain real GDP growth at 3 per cent next year.

This business of the diminishing tax revenue for the Government is pretty drastic. The ALP government is gunning for a surplus as the world economy slips back into a double dip recession, and the commodity price boom comes to a shuddering halt.

In the midst of all the financial problems of the world, Australia has somehow managed to dodge the most lethal bullets. That doesn't make us bullet proof, as the world's problems really have started to impact on our receipts.  There's no telling how property prices could unravel if unemployment should go up; and nobody is saying it's going to go down. The most recent report somewhere had it that 12.5% of mortgages were in negative equity - that's 1 in 8 mortgages out there, which is no small number. 3% were in serious mortgage distress, if not defaulting. Property prices are still falling if anything - and the RBA wants it to be a slow deflation rather than a big bursting of the bubble.

So you have to wonder how on earth there can be a housing recovery if there are all these bad mortgages and distressed assets all over the place. A lot of people are going to have to swallow losses and be pushed to the wall before the sector can really  improve. I don't think the RBA has the stomach for such an outcome - probably because all those bureaucrats have properties too and don't want to take the loss. You can chalk that up to being a vested interest all of its own.