Containing viral inflation is a process that must begin right now

I am about to quote John Maynard Keynes with approval, from his 1919 Economic Consequences of the Peace.

Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.

I do not actually believe that Keynes ever resiled from that belief which is why towards the end of his life he is reported to have said, “I am not a Keynesian.” But whether he was or he wasn’t, it now seems everyone else today still is. The biggest mystery to me till now has been why these policy makers in Treasuries across the world have not tried to finance the huge increases in public deficits by cutting the public sector wages bill, at least for the “non-essential” workforce. It finally occurred to me today why governments have left public sector wages alone.

With their “stimulus” packages, immense gaping budgetary holes have been created through stopping dead a large part of the economy, in this way losing immense tax revenues while funding tremendous increases in their outlays. I believe they have left public sector wages alone because they believe it is important to maintain demand as the economy sinks into recession. They seem to believe their zero-productivity workforce can maintain the level of aggregate demand, while employees within the actually productive parts of the economy – the ones employed by the private sector – have lost their jobs and their incomes with a massive fall in their ability to spend as much as they previously did.

Naturally, those same public servants, the ones who are advising our governments, believe how important it is that they keep receiving their full salaries even though their own decisions have mutilated the livelihoods of millions across the world, both among business owners and their employees. It is disgusting and maddening. Were it not for the absolute junk theories their heads are filled with, this would be as obvious as the day is long.

Our governments have now done two things simultaneously. They have cut production (Q) while pouring money (M) out into the economy. So let me take you to a bit of ancient economics that has never been refuted since basically it is an identity, absolutely true because it cannot be otherwise. This is known as the Quantity Theory of Money. As an equation, it states that P = Mv/Q – the more rapid the amount of money in circulation (M), especially if the increase in the stock of money is coupled with a fall in output (Q), the more rapid the rate of inflation will be. There is also “v” which is an indication of how fast each unit of money passes from hand to hand, “v” standing for “velocity of circulation”. Which leads to this conclusion that no economist denies:

The price level increases with every increase in the amount of money in an economy relative to the amount of output being produced and bought. The faster the money supply grows while output is being cut back, the greater the rate of inflation must be.

And as a matter of policy, that is just exactly what we are doing. We are increasing the amount of money being spent while reducing the amount of goods and services available to buy. The outcome will be an inevitable large increase in the rate of inflation.

There is absolutely no reason, given the potential for runaway inflation following the policies we are now about to endure, to leave public sector wage rates untouched. They must be reduced as a matter of both equity and economic necessity.

The correct policy given our circumstances, a policy which I fully endorsed from the start, was to fill in the income losses for those who lose their jobs, but only for those who lost their jobs, so that they could continue to buy what they need. This is not a stimulus. We are obviously not trying to grow the economy. This is just to make sure people are still able to buy what they need and to pay their bills. The same necessity was to reduce business costs wherever possible. A business without revenue because the government has shut them down and deprived them of their customer base, should have its tax bills deferred along with assistance provided to cover their outgoing costs while they are in shut-down mode, such as taxes, interest payments and rent.

To hammer private sector employees while leaving public service wages untouched is an outrage. It defies explanation for governments to leave untouched the public service wages bill while forcing private sector employees out of their jobs. The most equitable policy is for every one of us to share the sacrifice. It is beyond explanation for the government to hammer private sector employees and leave the public sector earning the incomes they continue to earn.

There is then the inflation that is to come. This inflation will only be contained if it is understood by one and all right now that when this emergency is over that interest rates will have to rise to stop inflation from rising by soaking up the excess liquidity that has now been unleashed. Unless, of course, the aim really is to destroy the capitalist system.

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37 Responses to Containing viral inflation is a process that must begin right now

  1. Pyrmonter

    Let’s test that.

    Government has bargained in a competitive market to buy the labour of often skilled workers: the doctors and engineers and, err, economists it employs could work elsewhere. In so doing, it has made promises of nominal remuneration for the coming year. What are the effects on sovereign risk if it defaults on those contracts? Why should it default on public sector employment contracts but not, say, on consultancies or debt repayments? Surely if government is to default, it should do so by increasing taxes? (If even just a public sector specific tax?)

  2. Adelagado

    The biggest mystery to me till now has been why these policy makers in Treasuries across the world have not tried to finance the huge increases in public deficits by cutting the public sector wages bill,

    I hope this crisis so thoroughly bankrupts the Federal Government, and all State Governments, that they have no choice but to resort to mass public service sackings, ruthless wage slashing, and cancellation of countless money wasting schemes. Some good may yet come out of this mess.

  3. RobK

    Thank goodness tomorrow is the 2nd of April.

  4. wal1957

    The private sector bears the brunt of the shutdown. Job losses, businesses closed or bankrupt.
    Public sector??? No change, even talking about pay rises!!!!

    The Government should be looking at cutting wages for all public servants. This will share the burden and assist with the cost of the corona virus packages.

    BTW, jobs are going to be hard to get, even after this scare is over. If inflation runs amok, I wonder how those who are mortgaged to the hilt going to cope with %%% increase on their loans???

  5. mundi

    Just read this gem on the ABC.
    Calls to the domestic violence line are not up, but in true leftist fashion, that is a big problem:

    Ms Braybrook said they were not seeing a rise in the volume of calls to the service — and that was a “real problem”.

    It is not because women are not in need of support, but because they cannot get to a phone.

    “They might be isolated with the perpetrator,” she said.

    Yes folks we need government goons going door to door because it’s clear from the lack of calls that women are being abused in their homes.

  6. Bad Samaritan

    Does anyone have a link to find out what types of businesses are shut / not shut? Can’t find anything except for retail. What about manufacturing, food production / processing of every type, trades, mechanics…every business in the industrial area near me. Can I find a car dealer, boat dealer, business broker, tradesman of any description operating? WTF is the go?

    Much appreciated if anyone knows where to look.

  7. tombell

    Why no cuts to the public sector wage bill? Let me see. In the case of the Labor party, the public sector votes for them. In the case of the Liberal party, they are afraid of them,

  8. Mak Siccar

    They have cut production (Q)

    Is this meant to be production (P) ?

  9. Art Vandelay

    I believe they have left public sector wages alone because they believe it is important to maintain demand as the economy sinks into recession. They seem to believe their zero-productivity workforce can maintain the level of aggregate demand, while employees within the actually productive parts of the economy – the ones employed by the private sector – have lost their jobs and their incomes with a massive fall in their ability to spend as much as they previously did.

    You’re giving them too much credit, Steve. They are not cutting public sector wages because they know they can get away with it.

  10. Art Vandelay

    You’re giving them too much credit, Steve. They are not cutting public sector wages because they know they can get away with it.

    To add to my comment, the policy responses to Wuhan flu and the ensuing economic destruction has largely been dictated by the ABC and Labor (with the government meekly implementing every demand from the Left).

    The ABC are all public servants so there’s no way they’d argue for a public sector wage cut. Moreover, support for the current system of perpetual pay increases for politicians, judges and senior public servants is bipartisan. And you certainly won’t see argument for pay cuts from publicly-funded academia.

  11. 2dogs

    Great call, Steve, in identifying that inflation will burst forth once the restrictions are lifted, and one I agree with.

    The RBA will, of course, respond to that by raising rates, causing a lot of people to lose their homes. There a a lot of high LVRs at the moment, and these cases will mean a lot of bankruptcies.

  12. Mitchell Porter

    What about deflation due to demand destructio Like the oil price crashing. Is that also a factor?

  13. Judge Dredd

    I have been reading that this could all be deflationary, rather than inflationary. This is based on the fact that new money enters the monetary system largely through the creation of loans, and although the government is printing money (effectively), the business sector is not going to be making many loans in the current climate, therefore leading to deflation.
    I guess we will see.

  14. Fair Shake

    If we are raising our borrowings who is holding the debt?

  15. gary

    Scott Morrison will go down in history as the greatest wealth destroyer in Australia’s history.

    There is no way the debt will be paid off. Labor won’t even try t0 pay the debt off. They will incur even more debt.

    The debt will be defaulted on in some way most – likely high inflation. Inflation has been much higher than the CPI measures (CPI is inflation adjusted for quality improvements). In the early 1950’s inflation was massive – 24% in one year, we will get the same in the near future.

    Prudent responsible people who have savings to support themselves if times go bad, once again get crushed by high inflation deliberately manufactured by the government and RBA to bail out speculators.

  16. Mother Lode

    Regardless of how politicians think the economy works, eventually they are going to start seeing that their revenue declines even as spending increases.

    I would not be entirely surprised if they start looking all around the world for an excuse they can dragoon into justifying easing the restrictions.

    Their devotion to themselves and what they fancifully call their careers will overcome all.

  17. Alex Davidson

    Steve, I don’t know why you find it so hard to understand that our masters have isolated themselves from the economic impacts of the destruction they are imposing on the rest of us. Where in history have the powerful voluntarily given up their power and wealth to benefit those they rule?

    Also, I don’t agree with your repeated suggestions amounting to an endorsement of government handouts to those who have made no provision for disaster. Apart from the timing, anyone who paid attention could see that an economic disruption was inevitable given the bizarre monetary policies and growth of government, and made provision for it. We have warned of it often enough on the Cat.

    Now we have a situation where those who were prudent and who create wealth stand to be plundered further to pay for handouts to insulate those less responsible from the consequences of their actions. A moral hazard, and the reverse of what should happen if we are aiming for a just, free and prosperous society.

  18. nfw

    With regard to politicians and public servants not taking pay cuts I am reminded of a passage I read in a book, The House of Government, about the early Soviet Union. The writer recounts how when a Bolshevik woman was asked how it was the new elite had access to Czarist facilities such as spas and fancy hotels while the manual workers did not she replied (and I paraphrase) “They work so hard their brains hurt and they need special attention.” Waiting for that excuse.

    Also still waiting for Peter Big Man Dutton to crack down on all those panic buyers and hoarders, you know the bus loads of Chinese nationals who went around buying up goods and caused this panic stupidity buying. Any day now Peter.

  19. Petros

    How about for every job lost in the private sector there is a job lost in the public sector? One for one. Perhaps a billboard tally somewhere.

  20. Mother Lode

    “They work so hard their brains hurt and they need special attention.”

    I wonder if they did not tell themselves that they were so important and their decisions (and their decisions consequences) so far reaching that the slightest lapse at just the wrong time through tiredness, ailment, or general malaise could be disastrous.

    A guy in a tractor factory is careless tightening a bolt and you just get a broken down (but reparable) tractor. A member of the upper echelons makes an error authorising the number of shoes produced and thousands go barefoot in winter.

    So, for the sake of the people, they must go to spas, take holidays on the Caspian, drink the finest vodka, drive luxurious cars etc. Exactly the attitude of the Tsarists.

    And no doubt the attitude of our political leaders and their bureaucratic mandarins.

  21. Bad Samaritan

    What I find maddening is that I immediately asked the correct question at 2.15am , but no-one has answered, so without knowing, I’ll assume it’s retail only which has been closed down, and all places were people “gather”; pubs, clubs, cafes, footy grounds , cinemas etc etc.

    If this is the case then all that free money will be chasing goods which are still in full production, which is why QE in the US did not affect consumer good prices…or even durables….all that much….

    Example; If the cheese factory is still producing 10,000 tonnes of cheese per month as it was three months ago, then supply will not have been squeezed if it’s still open.. Likewise if the electricians are still out + about then they will still be on $100 an hour as before. Etc Etc.which means the free money will not be chasing fewer goods+ services. the cafes are not open, so there’s no opportunity to ask $20 a cup!

    The only stuff which is no longer being “produced” as before seems to be many retail services etc. And since they are not there at all for the free money to chase, there will be be no price rises

    Ok, so next…..For those workers laid-aside their income will have fallen. The $275 pw will not be as good as the $1200 they got before. Maybe they’ll get the normal dole $300pw + the $275 =$575 ,which is surely less than they used to get.

    Thus there will still be less money than before, chasing stuff, but as the quantity of stuff being chased is not reduced, then no inflation…maybe deflation!

    Can somebody please tell me this is wrong, and direct me to somewhere to get the facts on whether factories and manufacturing are closed or not? thanks.

  22. BrettW

    Totally agree with Steve’s comments regarding the public sector doing their share.

    The PM, Premier of Qld and Together Union Qld are lying to us. Other Premiers probably also.

    NOT. ONE. SACRIFICE. MADE. BY. A. CIVIL. SERVANT / POLITICIAN. (not talking about real frontline like medical and police etc).

    So far the press interest is all about spending more billions on the unlimited credit card. Seems like we are into giving away so many billions that some no longer consider savings might also be necessary.

    The PM has mentioned all Australians will have to make sacrifices and share the burden in the coming months. The Qld Premier said “we are in the fight of our lives”. I think she really meant “you are in the fight of your lives” because her staff are going to get their usual pay rise when the economy is experiencing a meltdown.

    Alan Jones interviewed Finance Minister Cormann Tuesday morning (1hr 10 mins in on podcast) and asked him about Politicians, civil servants and ABC doing their bit to make sacrifices. Cormann replied that very early on they had agreed to a pay freeze and said, I quote, “I am not sure to what degree taking this further would help”. Correct answer should have been the billions that could be saved.

    Firstly the freeze he is talking about related to top judges, top civil servants and politicians. By co-incidence same response Angus Taylor and Joel Fitzgibbon gave to Deb Knight last week. Basically they are saying they have sacrificed a future pay rise when hundreds of thousands have lost their incomes and businesses and now depending on a Government handout.

    There are over 4000 people working in Parliament House in Canberra alone. Many get allowances for working there (in some cases $30,000 per year). If they are shut down for four months should they receive full pay and allowances ? All cultural centres, libraries and swimming pools have closed. There are 372 libraries in NSW alone. War Memorial, National Gallery VIC, Qld Museum closed. No way they can all be working at home, yet on full pay. I did note the State Library of WA web site is claiming their workers are still inside working although closed. Even the security and guides etc ? I call BS. Are all ABC workers still going into work ? There are no doubt many more examples.

    When business’s laid off their workers overnight due to Govt directives I doubt it was in accordance with employee agreements in relation to notice of termination of employment etc. This is because the impact was so sudden. Yet the Civil Service can’t decrease their staff expenditure for people working less than before (ie. One week on and one week off) or not at all (ie. Driving tests not being conducted in NSW and Qld for next 2/3 months).

    Alex Scott, secretary of Together Qld lied when he said no stand-downs made so far (Oz Wednesday). Many are at home on full pay or on reduced hours. Does his Union include the library workers and cultural centre workers ?

    Forget the gotcha question on the politicians pay as it is insignificant compared to the 2 million in the civil service. Payroll $160 billion +. However I can bet that if you ask the PM, Treasurer or any Minister about cuts to the civil service, ABC, politicians etc their automatic response will be they have forgone this years payrise. That is peanuts in the scheme of things.

    Cormann’s reply shows that the PM lied as not all are sacrificing. I guess money really does grow on trees as no Government has so far announced any plans to cut staff expenditure in non-essential areas.

    Example of savings in Pt 2.

  23. Harpo of Wolli Creek

    More likely we will get something a bit different from the last 20 years. We have had, courtesy globalisation, declining real prices in most consumer goods and massive inflation in asset prices like real estate and shares. From now we will get high inflation in consumer goods (lots of money chasing declining supply) and big deflation in asset prices. Who is going to commit to, and more pertinently, who is going to offer a long term loan when risk perceptions have been so thoroughly transformed. Unless the government tries to resolve this debacle by literally selling Australia as a safe haven for moneyed elites, I see real estate prices falling to levels that can be supported by a five year mortgage. Given the pitiful pushback against draconian levels of social control I think we will also get a ban on cash transactions, rationing of purchases deemed socially undesirable (alcohol, nicotine, meat) and probably, coming soon, an identity card. This shemozzle has revealed most of the populace of the west to be a flock of innumerate, hysterical sheep. If you are one of them you deserve your fleecing.

  24. BrettW

    Heard Wednesday Brisbane City Council’s 10,000 workers will not be getting a pay rise over the next two years. Savings will be $36 million over the two years. It works out at $3,600 each worker.

    Well done to the Liberal Lord Mayor. Same day the Oz revealed Qld State workers going to get a pay rise 2.5% plus $1250. Assume 200,000 of the 220,000 State workers get the $1,250 then that is a cost of $250 million not including the pay rise.

    Rough calculation of no pay rises (ie. $3600 each) to the 220,000 Qld state civil servants. Over 2 years a cool $792 million in savings.

    Total savings $1.042 billion over 2 years. Easy. Multiply by 10 (ie. whole country ) gets you to $10.4 billion just on no pay rises for 2 years. $10 billion is nothing compared to what the Govt’s are spending at a time of massively reduced income. However it would be a sign to those in the private sector that the public sector is also part of the team and sharing the burden.

    Channel 7 has reduced it staffs pay as has Australia Post CEO, board and senior executives. Govt zip.

    What would the savings be if all non-essential Government workers took a 25% pay cut for the next few months or until all clear given ? If private sector Union workers can lose their jobs overnight then why not have public servants take a cut to share the burden. Are Govt’s still recruiting ?

    So far not heard any politician or Government leader say they are urgently looking at who is not working and who is on reduced hours and taking some steps to cut their pay.

    Lord Mayor Brisbane at least made a start but more needs to be done.

    Brisbane bus passengers dropped by 67% recently according to Courier Mail Wednesday. Are the buses and trains still running as normal ? If not what are the staff doing ? Is overtime being claimed as that has been a constant issue with the train drivers. Multiply that by all such services around the country.

  25. 2dogs

    the business sector is not going to be making many loans in the current climate, therefore leading to deflation

    It is the lifting of the restrictions after this issue has passed that will bring on inflation.

    Think of it as though the government has been priming the pump, while at the same time shutting the flow off at the tap. When the tap gets turned on, a lot of built up pressure will be released.

  26. BrettW

    Premier Qld just announced pay rise on hold.

    Guess she must have read the Courier Mail today.

  27. FelixKruell

    The correct policy given our circumstances, a policy which I fully endorsed from the start, was to fill in the income losses for those who lose their jobs, but only for those who lost their jobs, so that they could continue to buy what they need.

    That’s pretty much what most of the packages have been doing. Just at times trying to fill the income losses at the employer level rather than the employee level, to minimise how many people formally lose their jobs (given they are less likely to be quickly back at work once this is over).

    As for inflation, what’s the time element? If this is a 6 month blip, and production quickly recovers, and the money pump is shut down – does it still necessarily mean inflation?

  28. bollux

    Qld Rail are still running 6 car sets every 15 minutes off-peak with no-one on them so the drivers can get their overtime in. Gotta love the Left. Go Anna go.

  29. Bad Samaritan

    There will be no inflation. You read it here first.

    Look at QE in the US. $4 trillion and no CPI rises of note. Asset inflation yes, but will that happen here with mortgage defaults on the cards…and the Stock market crashing? No!

    I’ve told Cats for the past year to buy gold…but only a few have contacted me to say they did, so I’m guessing they are the few who are laughing now.

    When free money is chasing consumer goods + services, inflation may occur when those things are restricted…cut back. However, in our case they have either been stopped altogether, or not restricted at all (see supermarkets, pharmacies, tradies, food production / processing etc). The ones no longer available cannot be “bid up’. the ones still available (see supermarkets etc) are unlimited, and being chased by less money than before. this because the govt handouts of $275 per week CV supplement and theh normal dole $300 pw is less than the wages previously received.

    You read it all her first!

    BTW: Dutring the great depression, the US was the big Keynesian big-spender nation. Deflation for as far as the eye coud see!

  30. mundi

    Bad Samaritan,

    You are mostly correct. When thinking about the economy it is best to leave money out of the picture, as it is a tool for trade only. So thinking in terms of production, trade, then consumption:

    The government has made a whole bunch of things illegal, which has dropped production.

    The real question is: Will this drop consumption?

    Some consumption, like that of alcohol, has just shifted from bars to liquor stores, but is sourced from the same place. Similar for restaurant food to home cooked food. So the drop in consumption is in the service and not the good.

    There is also clear drop in consumption of services in the hospitality/holiday industry, and consumers don’t appear to be making alternative consumption activities – but instead saving.

    Lets consider ideal case that consumption has dropped by the amount needed to match the lower production.

    In this situation there should be no cash injection. However we have the government injecting billions by going into debt. It does this by issuing bonds. If the market does not buy the bonds, the RBA steps up and buys them artificially with completely fake made up money.

    That process does not increase production. It may increase consumption. It definitely increases the amount of money and thus distorts trade value, so will cause inflation.

    So the key to inflation will be how much the RBA is having to prop up bonds in the secondary market.

  31. mundi

    Remember: Government bonds are at 0.18%…

    If people are dumb enough to buy these, they are essentially taking a loss, which should prevent wider inflation in the economy.

    If the RBA starts artificiality buying the bonds at below market rates, that is when we will see wide spread inflation.

  32. Unfortunately to be expected.

    “Qld Rail are still running 6 car sets every 15 minutes off-peak with no-one on them so the drivers can get their overtime in. Gotta love the Left. Go Anna go”.

  33. John A

    And as a matter of policy, that is just exactly what we are doing. We are increasing the amount of money being spent while reducing the amount of goods and services available to buy. The outcome will be an inevitable large increase in the rate of inflation.

    Telegram from RBA HQ: QED

  34. Andre S

    For some, who have great economic and political influence, their aim is to destroy the capitalist system. For the most, the importance of the existence of the capitalist system and the attack upon it by these rats is not understood in the context of their future outcomes- people are complacent and or ignorant. I think the capitalist economy is likely to disappear or go underground over the next few hundred years as one disaster after another solicits politically and socially flawed collective efforts lacking genuine foresight plus the deliberate destruction of common mediums of exchange.

  35. Bad Samaritan

    mundi (10.50am) Care to have a go at explaining the lack of inflation in the consumer goods + services in the US during QE, or during the Keynesian big-spend in the 1930s? Or in every other Keynesian effort in 1st world economies?

    Also…has production of goods in Oz declined? Will it decline, or, possibly increase if imports decline as the dollar weakness works it’s way through? What about the multiple billions which used to go on tourism; where’s it going now? I see a glut coming in goods…and deflation.There is far less money chasing goods + services despite the cash injection

    Services like trades +lawn-mowing+ cleaners + medical etc; have they been outlawed restricted /declined? Since no cat seems to know…it appears that everything outside a very select range of service businesses is going as strongly as ever.

    And as for what money is. This thread is based on Steve’s article talking about money, is it not? here’s the guts of it….

    “The price level increases with every increase in the amount of money in an economy relative to the amount of output being produced and bought. The faster the money supply grows while output is being cut back, the greater the rate of inflation must be.”

  36. Tel

    Steve, I don’t know why you find it so hard to understand that our masters have isolated themselves from the economic impacts of the destruction they are imposing on the rest of us.

    Their isolation is temporary … they are going to discover we are all in this together.

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