More terrible advice from the IMF

Economics is moving steadily into pseudo-science territory if this front-page story from today’s AFR is anything to go by: IMF warns Australia faces low-inflation trap.

The International Monetary Fund has put Australia in the same category as deflation-wracked Japan, saying the Reserve Bank of Australia may need to cut interest rates again to prevent inflation slowing too quickly.

The warning raises the prospect of Australia succumbing to the weak growth and inflation malaise that has gripped Europe and North America since the 2008 crisis.

I don’t know how we could have a “weak growth and inflation malaise” caused by inflation being too low, but logic doesn’t seem to be the basis for much of this anyhow.

I know that after three-quarters of a century of macro theory, it is impossible even for many economists to understand that it is relative prices that matter and that the aggregate price level is a datum with NO real world consequences. Unless, of course, policy makers decide to mismanage our economies because of these numbers and their irrational fears, but that’s a different matter.

Interest rate levels are just fine, if not already too low. We do not have a savings glut. Is the AFR running a campaign to have rates brought down? Hard to tell, but they might as well suggest raising wages to boost demand.

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9 Responses to More terrible advice from the IMF

  1. Empire says:

    Hard to tell, but they might as well suggest raising wages to boost demand

    Probably best not to give them any ideas, Steve.

  2. sfw says:

    The word “Inflation” confuses me, what is the exact meaning when they use it? I always thought that inflation was due to an increase in the money supply but then I learned most of my stuff many years ago. Wouldn’t lowering rates theoretically allow more money to be in circulation?

    We could end up like the US where the cost of money is so low that it’s difficult to get people to lend it to you. That would be a'” credit crunch” wouldn’t it?

  3. I Am the Walras, Equilibrate and Price Take says:

    I know that after three-quarters of a century of macro theory, it is impossible even for many economists to understand that it is relative prices that matter and that the aggregate price level is a datum with NO real world consequences. Unless, of course, policy makers decide to mismanage our economies because of these numbers and their irrational fears, but that’s a different matter.

    Not really.

    Falling prices in a modern economy are associated with falling wages.

    Households currently have a shedload of debt to service from their incomes – not least because yields for property investors are so low. If incomes start falling because of deflationary pressures, we risk falling into a debt deflationary trap.

    That won’t be pleasant for a lot of people and businesses.

    Of course the best solution is to avoid loading up with debt in the first place. Way too late for that now.

    Next best thing is just to write off the bad debts. Watch the vested interests squeal like stuck pigs against that one.

  4. mundi says:

    Its pretty pathetic that macro economists are always telling us what to do, yet they can’t even give a coherent explanation of the cause of stagflation.

  5. Bruce of Newcastle says:

    How can we have deflation when the RB has managed to talk down the $Oz by a third in a year?

    The IMF has been sucking on euro juice ‘way too long and has forgotten what exchange rate changes do.

  6. Yohan says:

    Geez, our electricity rates and grocery shopping bill has stopped rising in price the last 6 months. Oh the horror.

    Please Mr Reserve Bank, turn on the printing press and drop interest rates to 0% to save us from this mess.

  7. Arky's Mum says:

    Test

  8. Tel says:

    You do have to ask yourself in passing, “How much risk is the IMF itself taking on this advice?”

    I mean, the IMF makes money as a payday lender to burnt out and broke economies, so if every economy was healthy, where would they make money? Would you go to your local pawn shop and ask them to help you plan your budget?

  9. . says:

    sfw
    #1656856, posted on April 15, 2015 at 3:49 pm
    The word “Inflation” confuses me, what is the exact meaning when they use it? I always thought that inflation was due to an increase in the money supply but then I learned most of my stuff many years ago. Wouldn’t lowering rates theoretically allow more money to be in circulation?

    We could end up like the US where the cost of money is so low that it’s difficult to get people to lend it to you. That would be a’” credit crunch” wouldn’t it?

    Sort of, rates are low but the banks have no money because they’ve lent to what would normally be uneconomic projects. This lowers the growth rate and with their leverage, many are over-sensitive to income variability.

    The US was particularly vulnerable because the US printing press actually subsidised US XCP (commercial paper). When the banks suddenly had counterparty risk, the banks stopped lending to businesses – or they couldn’t get interbank loans to do so.

    In the early part of the cycle, banks profit in real terms immensely because of the inflation and unsustainably low cost of capital which ramps up the return on funds levered during this time.

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