Where do we start with the news that we saw deflation in Australia in the last quarter? We haven't seen deflation since 2009 when markets were at their nadir after the GFC broke.
The surprise drop in the price of a wider-than-usual range of items drove the Australian dollar down more than 1.5 per cent and could force the Reserve Bank of Australia to cut the cash rate as soon as next Tuesday, say economists.
The Australian Bureau of Statistics said on Wednesday the consumer price index (CPI) contracted 0.2 per cent in the three months to the end of March, taking the annual rate to 1.3 per cent, compared with 1.7 per cent at the end of December.
More importantly, the core annual rate, after lopping off or re-weighting volatile items such as fuel, came in at 1.55 per cent, well below the bottom of the Reserve Bank of Australia's target band of 2 per cent to 3 per cent. National Australia Bank described the core inflation rate as "the lowest ever".
And so we are led to believe that interest rates will be cut soon.
I know it's contrarian of me to say this, but the inflation rate has been under-reported since the ABS changed the way it measures inflation rate. Given that it is prone to (or rather, intended to) under-report the inflation, it's not surprising that a few commodities dropping below trend would give rise to such figures. In particular it's notable that health, insurance and education still went up. In an overall sense, things are not getting cheaper in the cost-of-living stakes as the deflationary figures would have you believe. It's not even certain that the deflation would persist into the next quarter.
Still, the cheated inflation rate has led to a very big tendency towards looser monetary policy which has fed the Property Bubble through low interest rates. In a way it is a self-defeating feedback cycle where, as inflation is cheated downwards it creates conditions for lower interest rates, which in turn create conditions that results in a Property Bubble forming because there is nowhere else for the money to go. As more and more money is tied up in Property and Financial instruments, the less money is spent in the economy so there is even more pressure downwards on inflation figures but not necessarily inflation itself. We know there must be heavy duty inflation going on somewhere because the very definition of inflation is too much money chasing too few assets, and Australia for all its riches isn't that rich in assets beyond housing and mining and banking.
What should be galling to the Government if not the RBA is how all the money that's flowed into the market through low interest rates is finding a way not into industrial capital investment but into housing and property. Given the lowered interest rates there should be a lot of money going around but somehow it all finds its way to the big four banks who then don't invest in anything because, well, there's nothing of note into which to invest. While the mining boom was going on, there were any number of things in which to invest, but the post Mining Boom economy has shown just how hollowed out Australia's economy has become.
Let's face it, the most glaring problem might be that even at 2% official interest rates, there is only anaemic economic growth in a country that cannot be described as mature industrial. It's not like wages are rising rapidly. It's not like the government has a plan beyond being excited and wanting to be agile. It sounds as hollow as the economy when the same government spent enormous political capital crippling the NBN. Should our country be in the sort of economic-figure-doldrums like Japan, Germany or France?
From TwIRP Towards ZIRP
Of course, the markets are factoring in a couple of rate cuts this year. If they do cut 0.25% in May and the another 0.25% by the end of the year, we'll be a lot closer to ZIRP than ever before.
I don't know if the Property Bubble is starting to affect people's spending, not so much through debt being a problem, but more in line with the fact that lots of Millennials are staying at home. They probably won't be buying whitewoods for a start but they are also restricted as to just how much stuff they can buy if they're still dwelling in their parents' house. There's a lot of demand right there that's essentially blocked by the very physicality of the economy. Even if people had money to spend, they can't buy things because they have nowhere to put them. They can't spend on services because in most part they are met easily by living at home. The only things they do buy are gadgets like smart phones.
Indeed, one of the interesting things about the Property Bubble in Australia is that has been going on for so long that it hasn't needed to pop to significantly hinder economic growth. The low interest rates that continue to fuel extraordinary valuations has led to record profits for banks, and that's no accident. The post-GFC economy might be hard on primary and secondary industries but the financial sector has been doing really well on the back of all the easing.
And lets face it, the Central Banks of the world are most likely swayed by the opinions of bankers so it comes as no surprise that banks have made out like bandits under these loose monetary policies. Pretty soon all the bankers are going to be telling the Reserve Bank how 'deflation' is killing asset prices and make it like there's a major crisis going on out there in the various markets. If the deflation goes two or three quarters, it will be a clamouring of bankers knocking on Glenn Stevens' door. You have to wonder then how long the RBA is going to take before it gets down to Zero Interest Rate Policy. When we get there, we'll understand the wealthy have locked in their advantage, and that Australia is officially 'post-industrial' like Japan and European countries with low interest rates, low inflation, and low growth. The joke would be that we were hardly industrial before we got there - we put the money into housing and the road came to an end.
John Howard Did Us No Favours
I guess you have to go back in time a bit to the Howard Government to see where the number-fiddling started. Unemployment in the second half of the 80s and first half of the 90s was a big thing. The figures were such that it was part of John Howard's pitch that he would bring these figures down together with the high interest rates. It was under the Howard Government that welfare was cut and privatised, while pushing people off unemployment benefits and on to things like disability pensions. It was an attempt to recategorised the people who couldn't easily find employment so that they wouldn't all show up as unemployed. They no longer showed up as unemployed so it looked like the Government was finding people jobs.
Similarly the under-reporting of inflation started during the Howard Government. When governments talk about inflation rates of the 80s and 90s as if those figures can be compared directly, they're being mightily disingenuous. Back then the inflation rate and cost-of-living figures were in line and almost interchangeable. Today, there is a huge blow out in the difference between the inflation rate and cost-of-living, so much so nobody's even talking about it any more.
So if part of the Howard Government's big achievements were lowering unemployment figures and interest rates then it did so by cheating on the numbers. By cheating so hard it set up this decade for the inherent contradiction of its claims to surface. The economic growth figures are so low because the Howard Government didn't make proper investments in its time - it chose to fiddle numbers and created the conditions for the Property Bubble to manifest instead. Now it's time for the subsequent Coalition government to clean up the mess but it's flying blind because the numbers are phoney. All thanks to the Howard Government.
But hey, we kept our AAA ratings!
And lets face it, the Central Banks of the world are most likely swayed by the opinions of bankers so it comes as no surprise that banks have made out like bandits under these loose monetary policies. Pretty soon all the bankers are going to be telling the Reserve Bank how 'deflation' is killing asset prices and make it like there's a major crisis going on out there in the various markets. If the deflation goes two or three quarters, it will be a clamouring of bankers knocking on Glenn Stevens' door. You have to wonder then how long the RBA is going to take before it gets down to Zero Interest Rate Policy. When we get there, we'll understand the wealthy have locked in their advantage, and that Australia is officially 'post-industrial' like Japan and European countries with low interest rates, low inflation, and low growth. The joke would be that we were hardly industrial before we got there - we put the money into housing and the road came to an end.
John Howard Did Us No Favours
I guess you have to go back in time a bit to the Howard Government to see where the number-fiddling started. Unemployment in the second half of the 80s and first half of the 90s was a big thing. The figures were such that it was part of John Howard's pitch that he would bring these figures down together with the high interest rates. It was under the Howard Government that welfare was cut and privatised, while pushing people off unemployment benefits and on to things like disability pensions. It was an attempt to recategorised the people who couldn't easily find employment so that they wouldn't all show up as unemployed. They no longer showed up as unemployed so it looked like the Government was finding people jobs.
Similarly the under-reporting of inflation started during the Howard Government. When governments talk about inflation rates of the 80s and 90s as if those figures can be compared directly, they're being mightily disingenuous. Back then the inflation rate and cost-of-living figures were in line and almost interchangeable. Today, there is a huge blow out in the difference between the inflation rate and cost-of-living, so much so nobody's even talking about it any more.
So if part of the Howard Government's big achievements were lowering unemployment figures and interest rates then it did so by cheating on the numbers. By cheating so hard it set up this decade for the inherent contradiction of its claims to surface. The economic growth figures are so low because the Howard Government didn't make proper investments in its time - it chose to fiddle numbers and created the conditions for the Property Bubble to manifest instead. Now it's time for the subsequent Coalition government to clean up the mess but it's flying blind because the numbers are phoney. All thanks to the Howard Government.
But hey, we kept our AAA ratings!
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