Inflate this

As should be evident from some of his posts, TAFKAS is a reader of the financial review.

He was just having a look at the website before moving on for the evening when he came upon this article – Inflation set for worst quarter on record.

Clicking through, the first paragraph said this:

Economists are bracing for the worst quarter of inflation on record and facing domestic inflation expectations that won’t return the economy to the Reserve Bank’s target band for a decade if financial markets are right.

TAFKAS thought to himself, all this monetary and fiscal stimulus, especially the “quantitative easing”, ie crypto money printing, by the RBA may finally start costing Australians.

Then reading further:

Market consensus for a headline consumer price index contraction of 2 per cent for the June quarter would beat the previous worst quarter of minus 1.5 per cent recorded in 1953, and drag the annual figure to minus 0.5 per cent.

Good greif!  The AFR is concerned about deflation and not inflation.  Oh for heaven’s sake.

This is why we are in such dire economic straights.  Economic ignorance gives us goldy locks governance.  Spending not too high or too low, but juuust right.  Inflation not too high or too low, but juuust right.

RBC Capital Markets is leaning more bearish than consensus, forecasting deflation of 2.4 per cent for the quarter.

Bearish.

I don’t know about AFR or RBC, but TAFKAS prefers to prices to be lower than higher.  He gets more bang from his buck that way.  TAFKAS does not dream of $2 per litre petrol but $0.20 per litre petrol.

The only losers from deflation are borrowers, particularly governments, who can’t inflate their way out of debt.

Yeah ok, we all carry the can for the government’s profligacy, but perhaps and hopefully it might instill some discipline.

But hang on.  Look over there.  Thatcher and Reagan.

Fair dinkum.

Cats.  Please repeat after TAFKAS.  The problem is not deflation.  It is inflation that is the problem.  At least it is the problem for savers and responsible spenders.

Don’t believe the Keynesian nonsense that businesses will go broke or won’t invest if there is deflation.  It has not happened with cars.  It has not happened with computers.  It has not happened with televisions.

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22 Responses to Inflate this

  1. 2dogs

    The things is – we probably are facing a huge bout of inflation, as soon as the plague lifts. All that government expenditure has, ultimately, got to go somewhere, and it is currently being constrained by COVID regulations.

  2. Archivist

    The only losers from deflation are borrowers, particularly governments, who can’t inflate their way out of debt.

    Interesting. That explains the mystery.

    I’ve often wondered why deflation is such a scary boogyman of economics, when in simple terms, it just means, “everything just got cheaper.” That is the literal definition of deflation.

  3. JC

    Spartacus

    Don’t underestimate the problems associated with deflation. Wages aren’t sticky in Australia. They’re super glued. There’s a damned good reason why the RBA has an inflation mandate of ~2% where it’s considered to promote price stability. Lowe is unwilling to ensure we maintain the mandate because he’s frightened of his own shadow.

    There’s good inflation of the sort we see in technology and there’s bad deflation, which is a fall in the general price level because of the state of the economy. This is bad.

  4. sfw

    We haven’t had ‘measured’ inflation in Australia because the things that are measured have been generally inflation proof, in as much that supply has risen to meet demand. Now that the world is going to disengage with China the elastic flow of goods will evaporate. Up to now the inflation has confined itself to those things that the supply of which is limited, real estate and stocks etc. Our farmers and the Chinese have been able to expand supply to meet demand. That’s over, get ready for inflation at scales we thought were for third world dictatorships.

  5. sfw

    For anyone on a fixed income or a low income, deflation is good. For the borrowers and speculators it’s often bad. There are winners and losers, guess it depends on which side you’re on.

  6. Texas Jack

    Asset inflation is all around, but particularly in the price of bonds, bunds especially. All those Kohler-MMT-Dollars have to go somewhere. Meanwhile goods inflation is on life support.

  7. Pyrmonter

    @ JC

    Broadly agree, especially as regards wages: there is a culture that nominal wages must never fall (and probably also real ones, now that everyone under 45 has forgotten everything they were told about the 1970s). A better policy would have been a price level target; but we don’t get to choose to start from there (thanks, Peter Costello …)

  8. Squirrel

    “The only losers from deflation are borrowers, particularly governments, who can’t inflate their way out of debt.”

    This is what it’s all about – the system has been based on slow motion theft of savings, masked by under-stated inflation – a racket which is somewhat harder to maintain if that means venturing into the scary realm of negative interest rates.

    Truth be told, we’ve had inflation in the magic band much more than has been acknowledged, but the thing we call inflation has been so massaged and manipulated (to look lower than it really is – to justify ever lower interest rates) that we’ve convinced ourselves we had a low inflation “problem”, long before the Chinese Overseas Viral Infection Disaster 19 was ever heard of.

  9. Chris M

    For anyone on a fixed income or a low income, deflation is good.

    Spot on sfw! Some things are nice inflated, money supply not so much.

    But stagflation may be what we end up with, and that’s not so good.

  10. JC

    Lowe/RBA has lost control of monetary policy. It’s that bad.

  11. Damon

    Prices of cars go up: good
    Prices of groceries go down: bad
    Basic economic theory?

  12. JC

    No Damon, you’re missing the point completely.
    What you’re describing is not bad deflation. Bad deflation is a fall in the general price level caused by a shock to economic activity and with that you also have inappropriate monetary policy for the time . That’s not the same thing as what you’re suggesting at all.

    For anyone on a fixed income or a low income, deflation is good.

    Should the RBA run monetary policy on an old yokels fixed income standard? Instead of the ~2% stable prices mandate, the RBA should now cause general price falls in order to assist old folk on fixed incomes. That’ll work.

    FFS.

  13. H B Bear

    If you were relying on inflation to take care of about $650bn of debt you might see it as a problem.

  14. Bad Samaritan

    C’mon Cats. I explained this to you long ago when I very patiently pointed out that we have a glut of production world-wide and far less income chasing it. QE/Money printing cannot cause inflation if the amount printed is less than what was earned by employers and employees before the money printing took place. We have a world-wide glut of almost everything, which is being chased by a diminished amount of spending = automatic deflation..

    OK, so whiners and whingers reckon very weak inflation over the past five decades is “theft”, because the inane view is that more money (be it cash or electronic cyphers) diminishes the value of the already existing amount of money. In this child-like view, a Paddle Pop cost 10 cents back in the day and is now $1 = 90% stolen = a bad thing. Meanwhile these people do not want to recall that they were receiving $80 back then and $1600 now, and that in reality they can buy double the number of Paddle Pops as back then.

    FFS. Face reality, and do something about it. The Comm govt has almost all it’s debt in $A. The Comm govt is also borrowing very heavily from itself. In both cases it can cancel it’s debt by either printing more money, or else by forgiving the debt. That the market knows this while it pushes interest rates ever lower, simultaneously strengthening the $A = Magic Money Tree economics is working; the key being to do it in moderation….

    BTE; that japan has a govt debt to GDP ratio of about 260% and no collapse after 30 years of Magic Money Tree spending indicates that current squealing in Oz is premature. The End

  15. sfw

    The US had steady deflation from around the last third of the 19th century right up to the start of the 20th, it was a period of price falls and yet the average person improved their standard of living year after year.

  16. Bad Samaritan

    TAFKAS wrote “The only losers from deflation are borrowers, particularly governments, who can’t inflate their way out of debt.’

    Not totally correct, since many (most?) borrowers are on variable rates. Thus when they borrowed that million bucks a few years back and were figuring on needing $80,000 pa to cover the interest repayments, and now rates are down to 3% = $30,000 pa, due to very low inflation and now deflation….they are winners too, are they not?

    The only (BS) argument I’ve ever heard against deflation is that it “causes buyers to hold off buying, in anticipation of lower prices still to come”, but that’s obvious BS since falling prices on all manner of electronic gadgets has not stopped the constant buying of new ones, has it?

  17. Archivist

    Texas Jack:

    Asset inflation is all around, but particularly in the price of bonds, bunds especially. All those Kohler-MMT-Dollars have to go somewhere. Meanwhile goods inflation is on life support.

    “Asset inflation vs goods inflation” sounds like an important distinction.

    So if we have asset inflation but not goods inflation, then hypothetically, everyone could afford the latest smartphone, but nobody can afford to buy a house.

    Gee, I hope that never happens!

  18. Stability in value of the currency is good. Rapid inflation or deflation is not good. Given the choice between inflation or deflation within small ranges, I’d prefer deflation. Governments prefer inflation, for the reasons TAFKAS pointed out.

  19. Eyrie

    2% inflation IS NOT price stability. Sheesh!

  20. JC

    sfw
    #3526361, posted on July 28, 2020 at 6:43 am

    The US had steady deflation from around the last third of the 19th century right up to the start of the 20th, it was a period of price falls and yet the average person improved their standard of living year after year.

    Sure and it was also a period of negligible debt. Shut up.

  21. sfw

    JC, so unkind, all I did was point out that a deflation,even ongoing deflation can be good, especially for those at the bottom of the money chain. Isn’t that of important? The only ones who benefit from ongoing inflation are those who get the money first, the poorer people pay the price.

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