JC It’s getting a little tedious explazining to you that the rise in the terms of trade and RGDI are ion $A terms ie the rise in the exchange rate is arleady accounted for in the numbers.

Tax cuts during a downturn help support demand, tax cuts when demand is running above trend are inflationary. The same goes with increases in government spending. They both end up as deposits in private bank accounts.

My agreement with Austrian economics relates to the dangers of credit booms, that is about it. Much of the rest appears to me to just dogma.

Firstly let’s deal with monetary policy. I have said on this blog on numerous occasions that I thought the RBA kept the cash rate too low through the boom. I have cited the fact that the cash rate was consistently below nominal GDP growth as my major exhibit in arguing this point. No-one to my recollection agreed with me on this point so sorry if I downgrade your sudden conversion.

That does not have any relevance to the argument as to whether tax cuts were inflationary however, to coin an old phrase, two wrongs don’t make a right.

I’m at a loss as to why you don’t get the fact that tipping more money into a household sector where consumption growth is already growing well above trend is inflationary.

Price signals. Inflation is as much a psychological phenomenon as it is monetary, in other words it is sticky. Breaking inflation once it has taken hold is costly. This has been proved time and time again.

I’m glad you acknowledge economies are dynamic, nothing else you have said has indicated you understand this point. As far as I can remember the fiscal theory of prices basically suggests years of structural deficits are inflationary and that balanced budgets are required for price stability. However this does not explain the dynamics of funneling excess revenue from company profits into the household sector during a period of rapid income growth.

Your constant downplaying of the effect of a terms of trade boom is either disigenuous or suggests you have a poor understanding of the effect of a huge increase in national income on demand. While the appreciating exchange rate did mitigate the rise in export prices to some extent it was not a full sterilisation. RGDI in year on year terms averaged 5.1% between the beginning of 2005 and the end of 2008, real GDP averaged 3.2% over the same period. These are $A prices and I these figures suggest the boost to income was profound.

Your last comment was as usual pointless.

JC I’m gonna have to get back to you, my daughter is insisting I play some netball with her.

What role did monetary policy play? Take out the money and then tell us what is left over. Then we can see if inflation driven by actual increases in demand is really that terrible after all. Signalling of scarcity isn’t entirely a bad thing altogether.

The fiscal theory of prices is entirely relevant. Being a dynamic model of a period of several years, it explains a lot more than a static model applied to several different data points. The notable thing during this increase in inflation was that Government spending grew to unprecedented levels as well, albeit in a series of balanced budgets that carried surpluses. I think you would also need to discount this as well as the monetary impacts before you are left with the actual inflationary impact of taxes. Notwithstanding some appalling micro policies re: land release etc and the money and ever expanding budget, actually revealing scarcity may have allocative efficiency benefits. Given the mining boom only ever accounted for 7% of GDP, up from roughly half of that, it is really a stretch to say that tax cuts during this time alone caused the unwanted inflation and it had only costs and no benefits.

“Should we go into the multiplier from increased employment? The business investment tax break? It’s tough dealing with real numbers isn’t it.”

It’s tough dealing with non-linearities, isn’t it?

We had a resource price spike. The exchange rate and interest policy absorbed the effect of tax cuts. We had tax cuts during that time dumphy and it didn’t exactly send us into hyperinflation mode.

I think you’re making a mountain out of a cup cake.

Lastly one of the things that helped us absorb the crisis were the series of tax cuts we saw (fiscal stimulus remember)

SDFC, you’ve said often enough that you have a lot of respect for Austrian economics.

Can you please explain your position (being anti-tax cuts during that time) when Mises looked at inflation from a money supply question and as long as money supply is well behaved he essentially explained that we should ignore price fluctuations from a policy perspective to all intents and purposes.

I would go further and say Mises suggested it is vitally important that prices should be left alone to allow for signal effects and any attempt to tamper with the price mechanism ought to be viewed with hostility.

Do you know what a terms of trade boom is SRL?

The fiscal theory of prices? What that the government can influence the price level by running deficits or balanced budgets? It of course makes intuitive sense but is irrelevant in this context. Let me put it simply for you, tipping more money into the private sector when demand is already elevated is inflationary, why this is so hard for you to understand I don’t know, but once again your objections to the premise are at odds with the data.

Over to the US and its liquidity trap. This is exactly where fiscal stimulus should be employed or are you arguing the first homebuyer tax credit hasn’t contributed to the stabilisation in the housing market? Are you arguing the cash for clunkers scheme and the sharp rise in motor vehicle output were just coincidence. Are you arguing the personal tax cuts have not supported household disposable income and expenditure?

That the stimulus is entering a contractionary phase is not open to much doubt, it is simple national accounting.

Your last comment is fairly pointless so one again I’m going to have to spell it out for you. DQ rise in GDP 0.9%, direct government expenditure contribution 0.9 pps. Should we go into the multiplier from increased employment? The business investment tax break? It’s tough dealing with real numbers isn’t it.

Will be back on tomorrow if your free, good-night.

So when you use the phrase “terms of trade boom” and then imply that a tax cut is a permanently unfunded liability, you’re not implying that the growth in GDP vis a vis increased global demand is temporary?

You’re as clear as mud pal.

“Are you aware of the inflationary impact of loosening fiscal policy when RGDI is growing strongly? No I didn’t think so.”

Okay, explain how this works. You seem to be a big fan of Rubinomics/the importance of structural deficits, so explain this to me in terms of the fiscal theory of prices.

You should explain it to Homer as well. He thinks the stimulus is now contractionary.

“Your last comment I know is to Homer but it really does reveal how little you know about how the economy actually works. When there is a liquidity trap there is no monetary mechanism of inflation because the drop in the money multiplier renders monetary policy ineffective.”

…and if people have such an extreme preference to dispose of non cash assets, they believe that bankruptcy is lurking left, right and centre. Stimulus packages do not help here. The reality is the problem is simply won’t go away quickly, no matter how much unwanted public works are commissioned.

“Its a pity your constant complaining that the fiscal stimulus did nothing has been so thoroughly refuted by the data.”

It’s interesting that rates were cut by 57% and the ASX rose by 62%.

Homes, wrong person. I’ve never spoken about health care rebates.

I am not denying a credit crunch here after-all it reduces the effectiveness of monetary policy hence the need for fiscal policy.
Oh Credit crunch Forrest believes everyone is entitled to the health rebate. That is called middle class welfare.
no there is a lovely looking graph in the budget papers showing you are wrong AGAIN about the surpluses.
golly those research skills again showing up.

No if there is a liquidity trap there isn’t the remotest chance of inflation. See US, Japan etc.

you are barking up the wrong tree . We do not have and will not have a liquidity trap.
There is one in US, Japan, Europe and the UK . this is why they are indulging in QE. They cannot cut rates any further.

go away and take your pills.

Are you aware of the inflationary impact of loosening fiscal policy when RGDI is growing strongly? No I didn’t think so.

Your last comment I know is to Homer but it really does reveal how little you know about how the economy actually works. When there is a liquidity trap there is no monetary mechanism of inflation because the drop in the money multiplier renders monetary policy ineffective.

I agree with much of what Steve Keen has to say, unfortunately for him he didn’t factor in to his forecast the huge fiscal stimulus and the slashing of cash rate to a near 50-year low.

Its a pity your constant complaining that the fiscal stimulus did nothing has been so thoroughly refuted by the data.