Wednesday, June 19, 2024
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The delusional RBA has everyone convinced that they are the reason inflation is falling – William Mitchell – Modern Monetary Theory

It’s Wednesday and as usual I present commentary on a range of topics that are of interest to me. They don’t have to be connected in any particular way. Today, RBA interest rate decisions, COVID and some great music. Yesterday, the Reserve Bank of Australia (RBA) held their target interest rate constant. In their media release (June 18, 2024) – Statement by the Reserve Bank Board: Monetary Policy Decision – the RBA claimed that “higher interest rates have been working to bring aggregate demand and supply closer towards balance”. The journalists duly digested the propaganda from the RBA and throughout yesterday repeated the claim relentlessly – that the RBA had done a great job in ‘getting inflation down’ and now was attempting to ‘navigate’ a sort of knife edge between effective inflation control and the increasing probability of recession. It was an amazing demonstration of being fed the narrative from the authorities, and then, pumping it out as broadly as possible through the mainstream media channels to the rest of us idiots who were meant to just take it as gospel. Not one journalist that I heard on radio, TV or read questioned that narrative. The emphasis was on the ‘poor RBA governor’ who had a difficult job protecting us from inflation and recession. Well, my position is that the decline in inflation since the December-quarter 2022 has had little to do with the 11 interest-rate hikes since May 2022 and more to do with factors changing that are not sensitive to domestic interest rate variations. Further, the impact of two consecutive years of fiscal austerity (the Federal government has recorded to fiscal years of surpluses now) has mostly been the reason that GDP growth is approaching zero and will turn negative in the coming quarters at the current policy settings.

Monetary Policy

The RBA claimed that there was “continuing excess demand in the economy, coupled with elevated domestic cost pressures, for both labour and non-labour inputs”, which they then conclude means that interest rate diligence is essential.

It is very hard to make the ‘excess demand’ argument given how weak total spending is at present.

The latest National Accounts showed that GDP grew by only 0.1 per cent in the March-quarter 2024.

There is growing excess capacity in Australia – meaning that the nominal spending is not absorbing the capacity of the economy to produce.

Further, the ridiculously low wages growth in Australia is interpreted by the RBA as “above the level that can be sustained given trend productivity growth”.

In the last two years, the RBA bosses claimed that wages growth was about to break out and threaten the ‘fight’ against inflation.

It was a 1970s-style narrative – we have to increase unemployment to stifle the non-sustainable wages pressure.

Except, the problem for them was that the wages pressure never eventuated and their so-called private business briefings, which were never published, were obviously false.

The RBA acknowledge that “growth in unit labour costs have eased” but fail to mention that the change in real unit labour costs (the relationship between real wages and productivity) has fallen consecutively over the last 6 quarters, and that the private sector real wage has since the June-quarter 2021 fallen in 10 of the 12 quarters and remains below the June-quarter 2021 level.

Trying to push the blame for the inflationary pressures on wages growth is one of the more insidious aspects of the current RBA leadership.

Interestingly, the RBA talk about the “high level of uncertainty about the overseas outlook” and how the “geopolitical uncertainties, including those related to the conflicts in the Middle East and Ukraine, remain elevated, which may have implications for supply chains.”


And how the RBA thinks interest rate movements in Australia will have any impact on those ‘risks’ is another question.

In her press conference yesterday, the RBA Governor who in June last year claimed the NAIRU was 4.5 per cent and then later in the year denied that the RBA knew what ‘full employment’ meant (which in the New Keynesian paradigm that she operates means the NAIRU is unknown), expressed a bullying tone, with veiled threats that interest rates might have to continue rising because as the statement yesterday claimed “Inflation is easing but has been doing so more slowly than previously expected and it remains high.”

Threats are the norm for this institution now.

The whole narrative has shifted though given that inflation has fallen considerably since 2001.

Now the story is that it is not falling fast enough and that sort of nonsense has no basis in any economic theory.

The only tenuous link is that the New Keynesians claim that inflation rates will become embedded in expectations and then become a self-fulfilling event.

The evidence – that inflationary expectations are very moderate at present and have been for some years – doesn’t help establish that link in Australia (or anywhere at present).

So it is just another of the many dodges that the RBA has been using to justify their unjustifiable rate hikes.

What the rate hikes have done is redistribute huge amounts of national income from low income mortgage holders to high income and asset rich cohorts who hold financial assets.

They have presented the shareholders of the commercial banks with a windfall.

And an Oxfam Australia report released today (June 19, 2024) – Cashing in on Crisis – demonstrates that the profit and price gouging was instrumental in creating and sustaining the inflationary pressures.

I will comment more on that another time.

But the conclusion is clear:

Between the COVID-19 pandemic and high inflation caused by war and corporate profiteering, it was a tough start to the decade for most. Even in relatively wealthy countries like Australia, millions of people have been pushed to the brink by rising prices of food, energy and unaffordable rent. In stark contrast, this has been a profits bonanza for some of Australia’s biggest corporations.

The RBA has consistently denied that there was any profiteering going on and even went as far as lying about the profit boom.

Finally, if we look at the movements in the components of the Australian CPI since the pandemic it is very hard to make the case that the inflationary pressures were the result of an excessive spending event where the supply side was operating at potential.

The dominant contributors to the pressures were food and non-alcoholic beverages (in the face of drought, floods and fires and pandemic supply problems), housing (most rents), transport (OPEC oil price hikes), and recreation and culture (post pandemic adjustments to travel in the face of profit gouging by the airlines).

The housing component in interesting because this is one way in which the RBA rate hikes have actually been inflationary.

The major driver here has been rents and landlords have taken the liberty in a tight rental market to push the rising rate costs onto the tenants.

The other major drivers are due to the pandemic, war and OPEC and are hardly sensitive to local shifts in interest rates.

And as they abate, the inflation rate abates.

Nothing much to do with the RBA.

More data coming through on COVID outcomes

Regular readers will know that I have taken a rather different perspective on the pandemic from what seems to be the norm.

My position is that humanity is dealing with a dangerous virus and has not demonstrated sufficient caution and will rue the long-term consequences of that indifference and myopia.

As time passes, the evidence is mounting to support my position and is demonstrating that those who considered it a ‘bad flu’ or something similar and/or who claimed it was best just to let it ‘run through the herd’ to build immunity have underestimated the threat significantly.

Those who bombarded us with Tweets, Op Eds and books about the folly of being cautious and laced their berating with all sorts of conspiracy type theories have done us all a disservice.

We are slowly gaining a clearer picture about the disease – what it does, who it impacts on, etc.

A recent ABC analysis (June 16, 2024) – Too many children with long COVID are suffering in silence. Their greatest challenge? The myth that the virus is ‘harmless’ for kids – synthesised the most recent knowledge on the issue, with specific reference to children.

The denialists all claimed that COVID was not a problem for children and any attempt to protect them via restrictions, better ventilation in schools, mask-wearing protocols and vaccination was an affront and would cause untold mental health problems.

The mounting evidence is contrary to those claims.

In terms of long COVID, there are now:

… millions of children who have it worldwide are practically invisible, their suffering — and the formative years they’re losing to this disease — obscured by the myths that COVID is “harmless” for kids and the pandemic is “over”.

And the medical profession in Australia is in denial about the problem preferring to take the position that the children that present with debilitating symptoms are malingering in some way – “their pain and fatigue is ‘all in their head’”.

The teaching profession that has refused to demand proper ventilation in schools are also implicated as “parents have been gaslighted and blamed” for the ‘laziness’ of their children.

The article notes that:

… experts are concerned that all this ignorance and apathy — and the unwillingness of governments to do more to curb COVID transmission — is exposing a generation of children to the same chronic illness and disability, with potentially devastating consequences.

I had dinner with some friends the other day, after ensuring that they were free of any respiratory illnesses, and I was amazed to hear them articulate a denialist viewpoint.

They are both highly educated, progressive and great people.

An expert who runs a newly badged long COVID clinic in New York told the ABC that:

We see kids missing school, being unable to participate in sports, we see social isolation.

The other problem is that the “acute phase” of a COVID infection is typically milder for kids.

But the evidence is mounting that:

It doesn’t matter how mild your acute COVID infection is … You have the same risk of developing long COVID. And I say ‘cumulative’ because the latest data shows us that with every reinfection, your risk of long COVID increases.

What does the data say about proportions?

Up to 5 per cent of kids are now vulnerable.

Even if the proportion was 1 per cent, that is:

… significant given huge swathes of the population are getting (re)infected — and the impacts of long COVID are so severe …

… long COVID can affect multiple organ systems and trigger a constellation of symptoms that can last for months or years: the most common are fatigue, including post-exertional malaise (PEM) or “crashing” after even light activity; cognitive dysfunction and headaches; gastrointestinal issues and allergic reactions; nerve and muscle pain; dysautonomia; and shortness of breath.

The New York doctor summed it up:

I just worry we’re going to have a generation of kids who have a post-acute infection syndrome because we failed to protect them.

There was also a new study published on Monday (June 17, 2024) in JAMA – I just worry we’re going to have a generation of kids who have a post-acute infection syndrome because we failed to protect them – that adds to our knowledge of how bad this disease is turning out to be.

I will leave it to those interested in the topic to read it in full.

The research design is sound.

Its conclusion:

In this cohort study of 4708 participants in a US meta-cohort, the median self-reported time to recovery from SARS-CoV-2 infection was 20 days, and an estimated 22.5% had not recovered by 90 days. Women and adults with suboptimal prepandemic health, particularly clinical cardiovascular disease, had longer times to recovery, whereas vaccination prior to infection and infection during the Omicron variant wave were associated with shorter times to recovery.

More than 20 per cent of people are still sick 3 months after infection.

And what will be the consequences in the years to come for these people?

That remains to be seen but the growing evidence suggests bad things are coming.

My response: I am keeping my mask on when in public and avoiding public situations where I have no control on the interactions.

Advance orders for my new book are now available

The manuscript for my new book – Modern Monetary Theory: Bill and Warren’s Excellent Adventure – co-authored by Warren Mosler is now with the publisher and will be available for delivery on July 15, 2024.

It will be launched at the – UK MMT Conference – in Leeds on July 16, 2024.

Here is the final cover that was drawn for us by my friend in Tokyo – Mihana – the manga artist who works with me on the – The Smith Family and their Adventures with Money.

The description of the contents is:

In this book, William Mitchell and Warren Mosler, original proponents of what’s come to be known as Modern Monetary Theory (MMT), discuss their perspectives about how MMT has evolved over the last 30 years,

In a delightful, entertaining, and informative way, Bill and Warren reminisce about how, from vastly different backgrounds, they came together to develop MMT. They consider the history and personalities of the MMT community, including anecdotal discussions of various academics who took up MMT and who have gone off in their own directions that depart from MMT’s core logic.

A very much needed book that provides the reader with a fundamental understanding of the original logic behind ‘The MMT Money Story’ including the role of coercive taxation, the source of unemployment, the source of the price level, and the imperative of the Job Guarantee as the essence of a progressive society – the essence of Bill and Warren’s excellent adventure.

The introduction is written by British academic Phil Armstrong.

You can find more information about the book from the publishers page – HERE.

You can pre-order a copy to make sure you are part of the first print run by E-mailing:

The special pre-order price will be a cheap €14.00 (VAT included).

Music – Fleetwood Mac

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

The original – Fleetwood Mac – which was formed by one of my favourite guitar players – Peter Green – were one of my favourite bands when I was a teenager trying to learn guitar.

I had a lot of their records and just loved the way Peter Green played.

This Peter Green song, which was not one of their big ‘hits’ – Black Magic Woman – was released in 1968.

It demonstrated his sharp, biting tone and exquisite phrasing in a D minor blues setting with Latin overtones.

It is 2:46 of some of the greatest playing one could ever hope to hear.

It was first released as a single then was included on a ‘compilation’ album released in 1969 – The Pious Bird of Good Omen.

Readers will be more familiar with the version by Carlos Santana that became one of his biggest hits.

Unfortunately, Santana altered the chord pattern and rendered the song relatively uninteresting from a musical perspective, although his own playing was exceptional.

Peter Green’s run down from Dm7 to C7 to Bb7 to A7 back to Dm7 – which is not included in Santana’s version is a thing of beauty in shift and resolution.


That is enough for today!

(c) Copyright 2024 William Mitchell. All Rights Reserved.



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