Rudd concedes his economic policies will increase interest rates.
“Australia was the only advanced economy in 2009 not to go into recession,” he said.
“That’s come off the back of strong action by ourselves through our national stimulus strategy, school modernisation plan and through the banks, to bring down interest rates as radically and quickly as they did.
“But obviously there’s going to be upward adjustment.”
No mention of a generation of economic reform that is more likely to have insulated the economy. But when you’re busy reregulating the economy you hardly want draw attention to little things like that.
Interest rates are going up next week. Inflation remains high. Before the last election Rudd and Swan had heaps to say about inflation, so let’s have a look at the inflation record over the past few years. I have graphed the variable the RBA looks at – the average of the Weighted Median and Trimmed Mean measures of inflation.
Doesn’t look good. The RBA measure hasn’t once fallen into the 2 – 3 percent band that they target in the last two years (despite the greatest economic crisis since the great depression).
Update: Stephen Long on ABC PM has just said that the preferred RBA inflation measure is the lowest it has been in three years – that is incorrect. It is the lowest since September 2007.
All things being equal (including the base money supply) economic contraction is inflationary. Obviously if credit deflation is the cause of the contraction the effect won’t be as apparent but irrespective of that distraction less goods chasing the same money will lead to rising prices. Of course all things have not been equal.
TerjeP (say Tay-a)
27 Jan 10 at 7:39 pm
Terje – the contraction itself is inflatonary?
Sinclair Davidson
27 Jan 10 at 7:50 pm
Does anybody have cross-country comparisons to check Rudd’s positive attribution of stimulus packages to prosperity – however measured?
Peter Patton
27 Jan 10 at 8:53 pm
Terje – I think you’ve tried to point something out and mangled quite badly – negative economic growth is quite different to inflation. In a recession, incomes change – the store of value per se does not.
Semi Regular Libertarian
27 Jan 10 at 10:51 pm
If we double the money supply without any economic growth we get inflation. Likewise if we halve production without any change in the money supply we get inflation. Probably the most dramatic historical example being when plague hit medieval Europe. I stand by what I said. All things being equal economic contraction is inflationary.
TerjeP (say Tay-a)
28 Jan 10 at 4:55 am
You’re calling economic growth deflationary?
Semi Regular Libertarian
28 Jan 10 at 8:24 am
SRL – I’d let it go, there’s going to be some crazy gold standard story underpinning all this. Terje is applying a very mechanical model with very, very strong ceteris paribus conditions.
Sinclair Davidson
28 Jan 10 at 8:26 am
Sinkers is doing a Forrest.
Interest rates are higher when economic growth is strong. They are lower when it is weak.
Rudd successfully combated the GFC by ignoring Crackpots such as lurk here hence emergency low levels of interest rates are not needed anymore.
The foot is gradually coming off the accelerator .It has yet to go on the brakes.
Fiscal policy on the other hand is putting on the brakes.
I think Stephen meant two years not three years.
Is Sinkers actually saying he wants emergency rates and not normal rates? Is this why he advocated policies that would have us still mired in recession with emergency low rates.
Butterfield, Bloomfield & Bishop
28 Jan 10 at 10:29 am
Homer:
Interest rates are higher when economic growth is strong. They are lower when it is weak.
In order to bring to argument to its logical absurdity would you say that Zimbabwe’s economy is strong with 3,000,000% inflation?
Would you argue that the economy was strong when we last applied strong doses of Keynesian economics in the 70′s?
The RBA is on an inflation target you moron, which means that they have to act when the rate is above their target.
As we were taught at uni, inflation is a monetary phenomenon which means it doesn’t have a high correlation with the strength or weakness of the economy.
Which uni did you go to? Oh that’s right Clayton’s uni, which is the place you go when you’re not really going to uni.
Go away.
JC
28 Jan 10 at 11:47 am
oh dear who hasn’t read what Glenn Stevens said to the Senate Committee.
the RBA like ALL Central banks targets economic growth.
When it is too high the put up interest rates to curb inflation in the wind, when it is low they cut interest rates to enable the economy to grow faster.
Who doesn’t understand what Central Banks do.
have you heard of the Taylor rule per chance?
you guessed it our old mate Forrest.
Butterfield, Bloomfield & Bishop
28 Jan 10 at 12:07 pm
That’s come off the back of strong action by ourselves through our national stimulus strategy…
Nope. Recession was never seriously forecast for Australia. In mid 2008, the IMF correctly predicted the “GFC” would not seriously affect Australia.
It didn’t.
The reason?
Rudd inherited a cakewalk from Howard and Costello.
C.L.
28 Jan 10 at 12:14 pm
Homer says:
the RBA like ALL Central banks targets economic growth.
Nope. The RBA targets the core inflation rate as it says here on its site.
The principal medium-term objective of monetary policy is to control inflation, so an inflation target is thus the centrepiece of the monetary policy framework. The Governor and the Treasurer have agreed that the appropriate target for monetary policy is to achieve an inflation rate of 2–3 per cent, on average, over the cycle.1 This is a rate of inflation sufficiently low that it does not materially distort economic decisions in the community. Seeking to achieve this rate, on average, provides discipline for monetary policy decision-making, and serves as an anchor for private sector inflation expectations.
Thats the prime policy objective unless of course you think they have changed it as you seem to think they have.
You tool, Homer. You shoddy intellectual tool.
JC
28 Jan 10 at 12:22 pm
CL cannot even lie straight in bad.
the IMF forecasts for the Australian economy were May -1.4%, June -0.5% and October 0.7% in 2009.
The IMF rarely indulges in so many changes. The reason was the success of the Stimulus!
Butterfield, Bloomfield & Bishop
28 Jan 10 at 12:23 pm
Glenn Stevens giving testminoy to the Senate Committee/
“What we are
responding to is total demand, more or less, rather than where it comes from. It is really the total
that counts most.”
Oh dear Forrest wrong AGAIN
Butterfield, Bloomfield & Bishop
28 Jan 10 at 12:36 pm
They no longer have an inflation target, Homer?
JC
28 Jan 10 at 12:38 pm
Forrest no-one could be that stupid.
how in the hell do they target inflation?
They either curb demand or stimulate it.
Butterfield, Bloomfield & Bishop
28 Jan 10 at 12:42 pm
Homer:
how in the hell do they target inflation?
You’re really asking this question or is this some sort of joke?
Don’t they apply core inflation as the market, Homes?
I’ll ask you again..
Do they have an inflation target any longer or not?
JC
28 Jan 10 at 12:47 pm
I was wrong you are that stupid.
How do they attempt to reduce inflation?
They do this by reducing demand in the economy until they are confident inflation is back within the target range.
Putting up interest rates and reducing interest rates is merely about changing demand.
It is that change in demand which allows for a change in inflation.
that is why Glenn said they respond to demand
Butterfield, Bloomfield & Bishop
28 Jan 10 at 12:50 pm
Homer:
Yes, you’ve mentioned demand management which was a way of changing the subject. However, you’re still not answering the question, which I’ll repeat again for you.
Do they have an inflation target any longer or not?
JC
28 Jan 10 at 12:53 pm
We all know how Homer comes on here with his anti-intellectualism peddling Nazi economics and forced labor camps were really good places to work, as well as suggesting that the 1937 US down swing was caused by fiscal tightening.
Here’s Allan Melzer, in today’s WSJ giving an unsurprisingly different interpretation of that period.
Christina Romer, chairman of the Council of Economic Advisers, reminds us regularly about the Fed and the Treasury’s tig ht-money mistakes in 1937 which aborted the recovery, and she warns against repeating these mistakes. The principle drivers behind the recovery in 1934-36 were the veterans’ bonus in 1936 and a gold inflow following the 1934 devaluation of the dollar—accomplished by unilaterally raising the gold price. The bonus ended, and the Treasury began to sterilize gold inflows in 1937 by selling securities, while the Fed doubled reserve requirements. Monetary policy shifted from excessive ease to excessive restraint.
Whom to believe. Homer or Allan Melzter? I’ll take a big bet and go with Allan Meltzer on this one.
Mr. Meltzer is a professor at the Tepper School of Business, Carnegie Mellon University, and the author of “A History of the Federal Reserve” (Chicago, 2003 and 2010).
Why would I go with Meltzer? That’s because Homer’s an idiot.
JC
28 Jan 10 at 1:05 pm
Forrest please go back to your ESL classes.
Oh dear Forrest attempts to bring up forced labour camps which he conflates with the RAD. Always the same.
Fiscal policy changed in 1937. the Structural budget changed some 3% points from deficit to balanced.
Yeah that had no effect.
If the annual economic growth between 32-36 was around 10-11% then it took more than a veteran’s bonus.
Gosh what were real interest rates during this time.
Wow this was when Base money was expanding but M3 declined. wow fancy that
Butterfield, Bloomfield & Bishop
28 Jan 10 at 1:38 pm
April 2008:
Australia safe from US recession, says IMF”.
Nothing to do with Rudd’s toilet-building binge.
C.L.
28 Jan 10 at 2:05 pm
oops CL what did they say in 2009.
because in 2008 they forecast the US to grow by 1.3% and Unemployment to rise to 5.9%, The UK to grow to 1.6% but something happened what was it?
This is Forrest like research got Forrest like people
By the way Sinkers is being somewhat hypocritical here.
Instead of applauding interest rates rising to reduce inflation he wanted interest rates to be cut.
Oh that’s right.
His policy was at least four quarters of negative growth
Butterfield, Bloomfield & Bishop
28 Jan 10 at 2:24 pm
The IMF forecast that Australia would not be seriously impacted by the “GFC,” Homer. They were right. The reason was that the country was in very sound shape after the Howard-Costello years. It has very little to do with Kevin’s toilet-building program.
C.L.
28 Jan 10 at 2:31 pm
yeah that is why their forecast and most other forecasters had negative growth early on in 2009.
Gee that’s funny the IMF seem to think the Stimulus did a pretty good job. So does the OECD
Butterfield, Bloomfield & Bishop
28 Jan 10 at 2:39 pm
April 2009:
Australia’s recession mild, says IMF.
Milder than Keating’s recession, the IMF advised.
Nope. All the toilets and school halls still weren’t necessary.
C.L.
28 Jan 10 at 2:46 pm
A mild recession where GDP falls 1.4%!!!
Butterfield, Bloomfield & Bishop
28 Jan 10 at 2:50 pm
Milder than Keating’s recession, the IMF pointed out. You were saying Australia was headed for a new Great Depression. Oops.
C.L.
28 Jan 10 at 2:52 pm
A mild recession where GDP falls 1.4%!!!
Which recession was that, Homer? Not the most recent one according to the ABS figures.
Jun-2007 1.4
Sep-2007 0.7
Dec-2007 0.5
Mar-2008 0.7
Jun-2008 0.6
Sep-2008 0.1
Dec-2008 -0.1
Mar-2009 0.2
Jun-2009 0.4
Sep-2009 0.5
Where does the 1.4% come from? Source please.
(I hope you didn’t take the June 07 figure and add a minus sign to it, did you?)/
JC
28 Jan 10 at 3:01 pm
Yes economic growth is deflationary. In fact the Reagan tax cuts helped to fight inflation by stimulating economic growth. I know it shocks people but it is rather basic economics. An increase in trade will increase demand for currency and all else being equal the value of currency will rise. Growth is deflationary. If you combine deflationary growth with other factors (eg money supply growth) that are inflationary in nature then the net effect may be otherwise, however this doesn’t change the influence of growth. And of course economic contraction is inflationary.
To believe the opposite is a form of madness.
TerjeP (say Tay-a)
28 Jan 10 at 3:03 pm
I actually think it depends on what type of currency you are using and the time frame. Cet. par. there should be a long term stability in prices. Let’s say there is an increase in the demand for holding cash:
Gold standard: more outflows/exports
Privately issued notes: an increase in currency supply to arbitrage the optimal loan book
Semi Regular Libertarian
30 Jan 10 at 10:48 am