Saturday Sanity Break, 20 July 2019 – RBA ‘trapped’

It is great to find a nice article on economics in The Age. Thanks to Shane Wright for pointing out that there is ‘No easy escape on interest rates’. As he says ‘Central banks in Australia and world-wide have fallen into a cheap money trap’. Read on here.

Harry Houdini in Chains

There seems to me to be three reasons reason for the latest rate cuts. First to increase the rate of goods and services inflation to within the agreed target range of 2% to 3 %. Second, in a possibly vain attempt to reduce the Aussie exchange rate. Third, to help first home owners to get into the housing market.

However, the RBA failed to raise interest rates when the economy was, or seemed to be, ticking along nicely and house prices were booming. This failure was despite governor Phil Lowe’s own research that concluded interest rates should be raised to provide some check to asset inflation.

The global problem, that the RBA shares, is that failure to raise cash interest rates when the economy was ticking along has left little room to cut rates. Recent cuts were arguably not needed but have left even less room for rate cuts that might be desperately needed if global growth stalls.

A question that must be answered.

• Why do nations have very strong jobs growth coupled with weak wages growth?

This is a question bedevilling central banks everywhere, As already suggested in answering the first question in this set, low goods inflation generally is driven by low wages growth. But this is surely not the whole story. In most models of goods inflation is partly driven by monetary policy, and after the GFC central banks threw everything at the economy to maintain real growth. But as our UK analysis shows, ‘monetary disequilibrium’ has a significant effect on goods inflation, but a far stronger impact on share inflation.

In the equation for share inflation there is an additional inflationary effect when Animal Spirits are positive, which is absent in the equation for goods inflation. So my hypothesis is that wages growth is low because of the factors outlined in answering the first question, therefore goods inflation is low while share inflation is high.

In addition, weak wages growth helps to explain strong jobs growth.

But we need also to explain weak income growth, and my only hypothesis is that cautious workers spend less on consumption, hence output growth is weak. More needed on this issue perhaps.

Kulture

Fiona Prior adores the ballet, the Cold War politics and the story of Rudolf Nureyev’s defection in the Ralph Fiennes directed biopic ‘White Crow’.

Sporting Life

Today Caaaarlton! won a fourth game out of six games since Coach Teague replaced Coach Bolton. The Suns looked beaten at half time but fought back to make a game of it.

Richmond flogged Port Adelaide and is beginning to look like a serious finals contender after a bad period.

More sporting news when the weekend is over.