Thursday, June 9, 2022
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RBA aims to cut policy stimulation by adding to it – Bill Mitchell – Modern Monetary Theory

It’s Wednesday, and we have some analysis and news and then my music segment for the week. Yesterday, the Reserve Bank of Australia (RBA) stunned the nation by pushing up interest rates by 0.5 points, claiming it was the responsible thing to do given that inflation was higher than expected. They then outlined all the factors driving inflation – none of which are going to be responsive to interest rate rises. Further, when one dissects the way in which interest rate rises work through distributional effects and effects on business costs, it is not clear that increasing rates will not just add to the stimulation rather than reduce it as the RBA claims. Next, we Fact Check the Fact Checkers and after all of that we have some Tupelo Blues, to restore some sense of decorum.

RBA decision

On June 7, 2022, the RBA Board lifted their cash rate target by 50 basis points to 0.85 points.

It also lifted the support rate on Exchange Settlement Accounts (bank reserve accounts) from 50 to 75 basis points – a reward to the banks.

In the – Statement by Philip Lowe, Governor: Monetary Policy Decision – we learned that the RBA considers:

Inflation … is higher than earlier expected. Global factors, including COVID-related disruptions to supply chains and the war in Ukraine, account for much of this increase in inflation. But domestic factors are playing a role too, with capacity constraints in some sectors and the tight labour market contributing to the upward pressure on prices. The floods earlier this year have also affected some prices.


Supply factors.




How will interest rate rises attenuate these driving forces?

They won’t!

Note, the RBA insinuates that the ‘tight labour market’ is contributing to the rising prices.


That would have to come via wage pressures principally.

There are no wage pressures – see my recent blog post – Australian wages growth remains flat despite RBA claims that a breakout is about to occur (May 18, 2022).

The RBA claims that:

The Bank’s business liaison program continues to point to a lift in wages growth from the low rates of recent years as firms compete for staff in a tight labour market.

I doubt the veracity of the program’s responses.

I have a long record of working for unions in wage tribunals and I have rarely ever seen submissions from business supporting wage increases and always see them complaining about wage pressures and the need to keep workers down.

They lie!

The RBA Statement also said that:

Inflation is expected to increase further, but then decline back towards the 2–3 per cent range next year. Higher prices for electricity and gas and recent increases in petrol prices mean that, in the near term, inflation is likely to be higher than was expected a month ago. As the global supply-side problems are resolved and commodity prices stabilise, even if at a high level, inflation is expected to moderate.

So they are already predicting the problem will go away as the temporary factors dissipate.

Why then risk adding a further problem of rising unemployment, rising mortgage defaults, and other bankruptcies?

The interest rate rises have no clear outcomes anyway because of their distributional effects.

First, they increase in the income of those on interest-rate sensitive assets (the so-called fixed-income cohort).

It is hard to characterise this class as being strugglers but there may be some within that group who have experienced hardship as a result of the low interest rates.

For them, the interest rate rises are stimulative – and may well increase their spending – the opposite to what the RBA claims it is doing (suppressing demand).

Second, they reward the ‘markets’ who have ‘priced in’ the rate rises. As I have said previously, ‘priced in’ means they have placed bets on the rising rates. So the RBA just gives these unproductive gamblers massive profits by ratifying their bets.

Nothing productive comes from that. Just higher luxury spending by the wealthy elites.

Third, the rate rises hit those with mortgages reducing their purchasing power and exacerbating the lost real income that the inflation generates.

They will reduce their spending on goods and services and transfer the shift into bank profits.

Given the record household debt, some will lose their homes, especially those who were lured into the housing market while it was booming by RBA promises that rates would not rise until 2024.

Some of those mortgage holders committed to payments well in excess of what would normally be considered sustainable given their incomes. They will suffer and many will go broke.

Fourth, interest rate rises increase the costs for all businesses who have borrowed money to fund their working capital and investment plans. Given how successful, corporations have been in using their market power to pass on all costs to consumers, the interest rate rises are in fact inflationary.

So we are left with some inflationary impacts and some deflationary impacts.

We are also left with a highly regressive outcome – rewards to asset holders, costs to the least well-off.

The RBA doesn’t have a clue as to the net outcome. No central banker has ever worked out these distributional factors.

But, at any rate, even if the distributional factors net out to be detrimental to total spending, such an outcome will not do too much to address the driving forces propelling the current inflationary episode.

It just amounts to the RBA reverting to mainstream form.


But I think the ‘markets’, who are claiming we will be at 2.5 or 3 per cent by sometime later this year or early next, are pushing their special pleading for the RBA to reward their gambling too far.

Even the RBA Statement said that they were going to monitor if the interest rate rises to date damage household consumption expenditure too much – “the Board will be paying close attention to these various influences on consumption as it assesses the appropriate setting of monetary policy” – and that was a signal they may not be pushing rates up much further.

Fact Checking the Fact Checkers

Yes, I have added a new layer to the Fact Checking service that the Australian Broadcasting Commission (ABC) instituted to keep politicians honest.

My addition is the ‘Fact Checking the Fact Checkers’ service where I expose the failure to fact check properly.

Here is an example of a ABC Fact Check (‘gotcha’) which needs checking – Fact Check: Katy Gallagher says the government has inherited the worst set of budget books in history. Is that correct?.

Katy Gallagher is the new Finance Minister in the new Australian Labor Government and seems to think it is a good idea to repeat several times in each interview that the Australian government has a $1 trillion public debt balance outstanding while forgetting to mention a lot of that is being held by the Government itself, courtesy of the Reserve Bank of Australia’s bond buying program.

Government loaning itself $As and going through an elaborate charade to pay itself interest (right pocket to left pocket), then pay itself to retire the debt on maturity (right pocket to left), then pay itself dividends (left pocket to right) and think we are all fooled.

Well, we are mostly fooled, which is a testament to the scale of public mis-education that prevails in this nation.

But back to the task.

The ABC Fact Check declared that the new Finance Minister was not telling the truth when she claimed the new Labor government had inherited the worse fiscal books in history.

They concluded after analysis:

On two key economic indicators, debt and deficit, previous incoming governments have inherited worse “budget books”. The only fair way to make historical comparisons is to take into account the size of the economy and measure the indicators as a proportion of GDP.

On this basis, gross debt levels were historically much higher for previous incoming administrations than the figure faced by the new Labor government.

Similarly, the deficit as a percentage of GDP is not the worst on record.

The ABC Fact Check also quoted a person from the Australia Institute, which claims to be a progressive voice in the Australian political debate, as insinuating that if the public debt to GDP ratio is high then that is ‘bad’.

They narrated a labyrinth of queries relating to whether we should be comparing ‘gross debt’ or ‘net debt’ over time to assess the new Minister’s claims and whether there was comparable data back to 1901 anyway.

They also claimed they were “unable to locate any official data on budget balances covering the period from federation to 1970-71”, well I have data back to the early 1950s that is comparable, but that is not the point anyway.

The point is this – the assertion that a high fiscal deficit is worse than a low deficit, say 2 per cent of GDP is better than 4, or that a surplus of 1 per cent is better than a deficit of 2 per cent of GDP is fundamentally flawed and reflects a misunderstanding of what fiscal policy is for.

We cannot say anything about the goodness or badness of a fiscal position just by comparing financial ratios or numbers.

A 10 per cent of GDP fiscal deficit might be a responsible and superior fiscal position at some point in time, while if the government was running a 1 per cent surplus at that time, we might consider that to be totally irresponsible.

We need a functional context before we can make any assesssments.

There are not good or bad fiscal positions per se.

The context is provided by what the other sectors – private domestic and external – are doing and how well the government is meeting functional objectives such as full employment, high quality public services, etc.

The purpose of fiscal policy is not to record particular deficits or surpluses, but to use the capacity of the currency-issuing government to advance desirable socio-economic objectives.

If the government is achieving those objectives, then whatever the fiscal balance turns out to be will be the ‘appropriate’ balance.

I have said before that we might call a deficit ‘bad’ if it was the result of the government initially not providing sufficient net spending relative to the spending of the non-government sector, and the resulting unemployment and recession, caused a fall in tax revenue and a rise in welfare payments.

In that case a rising deficit would be ‘bad’ but not because the deficit to GDP ratio had risen, but, rather, because the government was not advancing well-being.

In an alternative scenario, if the deficit started rising and employment was growing and services were being improved, then the fiscal position would be signalling an improvement.

But we can only attach those qualitative labels or assessment by applying an understanding of the context.

Similarly, looking at levels of outstanding public debt and concluding higher is worse reflects a failure to comprehend what public debt is and how it arises.

Public debt is just a manifestation of past fiscal deficits that have not been taxed away yet.

As such it reflects portfolio decisions taken by wealth holders in the non-government sector to move some of the net financial assets created by those deficits into risk-free government bonds.

We might worry that a particular segment of the non-government sector holds the largest stake – such as the speculators in financial markets – which would signal that the debt was really just masquerading as corporate welfare.

But that is a separate discussion.

So the ABC Fact Check is wrong.

Higher fiscal deficits and higher public debt ratios are neither worse or better as they stand.

And that should have been the conclusion presented to the public not perpetuating the fictions of mainstream economics.

Levy Summer School – Change of Plans

I previously mentioned that I would be presenting four sessions at the upcoming Levy Summer School in the US.

The school runs between June 10-18, 2022 and the full program is – HERE.

I can update that information following some changes today.

Covid infection numbers are on the rise again in the US and I have taken advice concerning the risk of travel there, particularly given all the connections (airports, stations, etc) that I would need to make when travelling from Australia to the workshops.

I decided today, reluctantly, not to take the risk and have informed the organisers that I am cancelling my travel plans later this week.

We are now working out remote delivery via Zoom for at least some of the advertised sessions that I was to participate in. I will update readers on when those plans are finalised.

I hope to do the two stand-alone sessions I was committed to do but I understand the panel sessions will probably not work with me on Zoom and the others live.

My sessions in the program are (the times are New York State times):

Monday, June 13 14:45-16:00 – MMT and ZIRP: What Happens If Treasury Stops Issuing Debt?

Monday, June 13 16:15-18:00 – Breakout Discussion: MMT and Policy Design

Thursday, June 16 10:30-12:00 – The Buffer Stock Approach

Friday, June 17 15:15-16:15 – Thirlwall’s Law (this is about the balance-of-payments-constrained growth theory).

I am hoping the Thursday and Friday sessions will remain (with me via Zoom) but the two Monday panels I doubt will see my involvement.

As to the program, the highlighted sessions will be offered to the public via Zoom using the following link

and Pass-code 083828

More news when I hear back from the organisers.

Unlike others, I still believe there is a dangerous pandemic out there and I am very cautious in what I do.


Music – Tupelo Blues

This is what I have been listening to while working this morning.

It is from the 1995 album – Chill Out – from John Lee Hooker.

There is reference in the song to the – Great Mississippi Flood of 1927 – although from maps I have seen of the flood spread, Tupelo was spared.

The climate records show that the worst daily rain came on March 21, 1955 when 238.76 mm fell (9.4 inches)

This version is smoother than the original which lacks dynamics in my view.

The original is on his 1959 album – The Country Blues of John Lee Hooker – recorded while he was working in car assembly plants in Detroit.

That is enough for today!

(c) Copyright 2022 William Mitchell. All Rights Reserved.



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