The Reserve Bank of Australia (RBA) “doesn’t fight inflation, it manufactures and maintains it.” This is a quote from the 2011 book The Evil Princes of Martin Place which I used in my first public piece on the RBA and inflation. That was in July 2013 for the LNP’s policy magazine at the time called Dialogue and published by, then editor but now senator, Amanda Stoker. Interestingly, this piece was originally written for the IPA but was rejected by, then editor but now senator, James Paterson. (And by the way, the LNP didn’t change a word.) I have since written and spoken about inflation dozens of times, both in Australia and the USA including for Townhall, Good Sauce and LibertyWorks. Inflation was a problem then, but it is far worse now a decade later.
The ‘Aussie’ mainstream media…be it Murdoch, Fairfax or ABC or be it ‘print’, online or TV…rarely gets inflation right or even tries to. And the RBA’s central role in this is largely unknown or untouchable (unlike that of The Fed in the USA). That sadly also goes for the ‘right wing’ media ‘down under’, including Sky News Australia. To be fair to them, they tend to focus on the ‘culture wars’ and other non-economic ‘wars’ such as on borders, climate, Covid-19, etc. However, such ‘cold wars’, like ‘hot’ ones, are heavily funded and influenced by economics. As for Australia’s two leading think tanks on the ‘right’ of IPA and CIS, both to their credit were tackling the topic in recent years, albeit from nearly ‘polar opposite’ viewpoints, but not so much in 2021 when it is most needed.
The Indicators of Inflation (Part 1)
There is no shortage of indicators of inflation which get cited on a regular basis in the mainstream and financial media. One of the best online places to find such economic indicators is Trading Economics, where all sorts of graphs, over all sorts of time periods, from across the world, can be found and displayed in a plethora of different ways. Indirect indicators of ‘Aussie’ inflation and expectations include: government bonds; government debt; gold reserves; stock markets; and GDP (noting the latter is an essentially a price x quantity metric). More direct indicators include: interest rate; exchange rates; labour costs; PPI; and CPI. Yes, CPI is an indicator; not a measure of, nor itself, inflation as such.
The 3 to 10 year graphs of all these indicators show some very strange goings on the past two years. Of course, that does correlate with the appearance of, and (public) responses to, Covid-19. However, that also correlates with the appearance of, and (private) responses to, inflation. As is well known in statistics, correlation is a ‘necessary but not sufficient’ condition for trying to get at cause and effect (noting that the latter two can be multiple in nature as well as in one or both directions). CPI, for better or worse, is most associated with inflation. As can be seen in the left graph below of CPI as an annual percentage change, “[t]he annual inflation rate in Australia fell to 3.0% in Q3 2021 from a 12-1/2-year high of 3.8% in Q2”. Context always matters. As can be seen in the right graph below of CPI as a cumulative index, consumer price ‘inflation’ has been largely accumulating like compound interest since the mid-1970s but with a bit of a break of sorts around the 1990s (during a ‘golden’ era of policy).
The Economics of Inflation (Part 1)
Inflation is usually portrayed in the media, think tanks and even academia as simply, and only, a rise in prices. The focus is usually on consumer prices, but sometimes other prices are mentioned such as those of production, labour, borrowing, investment and trade. But for hundreds, if not thousands, of years inflation meant, and was only known as, inflation of the money supply. This clearly points to the cause behind the effect of a general and sustained rise in prices. Money is the cause; prices are the effect. The modern, or post WWII, portrayal of inflation is essentially saying that: “the rise in prices is caused by the rise in prices.” That is unhelpful at best; circular at worst.
But don’t just take my word for it. Let me quote three of the most influential economists of the 20th, or any, century. The first two are on the ‘right’ (Austrian and Chicago); the third on the ‘left’. They said:
- “What people today call inflation is not inflation, i.e., the increase in the quantity of money and money substitutes, but the general rise in commodity prices and wage rates which is the inevitable consequence of inflation.” – Ludwig von Mises
- “Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.” – Milton Friedman
- “By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some.” – John Maynard Keynes
The Measures of Inflation (Part 2)
An inflation indicator is something that correlates as an effect. An inflation measure is something that correlates as a cause. The RBA, somewhat ironically, measures the cause, ie money supply, which they somewhat vaguely (and perhaps intentionally) call “monetary aggregates” or “financial aggregates”. These include the following three that can also be found on the Trading Economics website:
- M0 is “holdings of notes and coins by the private sector plus deposits of banks with the Reserve Bank and other Reserve Bank liabilities to the private non-bank sector”.
- M1 is M0 plus “transaction deposits with authorised deposit-taking institutions (ADIs)”.
- M3 is M1 plus “all other deposits at ADIs (including negotiable certificates of deposits) from the private non-ADI sector”.
As can be seen in the left graph below of M0 in annual billions of Aussie dollars, RBA money supply (which is more or less just printing money) has skyrocketed in the past two years almost four fold. Context still matters. As can be seen in the right graph below of M3 in annual billions of Aussie dollars, RBA plus Big Banks money supply (which is known as the legal fraud of Fractional Reserve Banking) has been a largely ignored and growing problem since the mid-2000s (post ‘golden’ era of policy).
The public policy justification for reckless money printing used to be Quantitative Easing (QE) in order to temporarily “stimulate the real economy of normal businesses and consumers, in the wake of the Global Financial Crisis (GFC)”. Nowadays it is Modern Monetary Theory (MMT) in order to neverendingly “stimulate the political economy of Woke corporations and activists, in the wake of” The Great Reset of not just culture, covid and climate but also even of nations, democracy and liberty themselves. “The revolution [may] not be televised”, but it will need to be monetised.
Economics provides crucial, and obvious, insights into the real economy. It also provides no less crucial, but not so obvious, insights into the political economy. This is called Public Choice economics. It reminds us that politicians and bureaucrats are neither selfless nor omnipotent. It also points out that policy has a marketplace where concentrated special interests seek relatively large benefits for themselves at the relatively small costs to the dispersed masses. Unlike those in a free market: the overall benefits are smaller than the overall costs; and largely not created in a win-win way but transferred to the beneficiaries from the non-beneficiaries in a win-lose way. These benefits can be material and/or psychic. The beneficiaries are usually some combo of ‘bootleggers and baptists’, the former seeking the material (such as power and/or easy money) and the latter seeking the psychic (such as change and/or virtue signaling). All of this goes for the RBA’s unelected executives and permanent technocrats when it comes to inflation of the money supply.
