Friday, January 24, 2014

Stagflation: hothouse of hype inflation

Further to the stagflation scare, David Bassanese of the Fin has waved his wand of conjuration, an indiscretion for which Stephen Koukoulas has threatened excommunication from the guild of economist wizards.

Those who are predicting stagflation hope to win the same argument that Milton Friedman won against the Keynesians over the 1960-70s stagflation episode, as John Quiggin notes in passing. However, that episode coincided with a savage supply shock in the form of oil crises. The current situation is quite the opposite: the US is now a net exporter of oil due to the shale oil boom, while Australia is tipped to be the next big beneficiary of this phenomenon, if only it can rid itself of agrarian socialists who would rather farm arable land than drill under it.

As the Kouk pointed out yesterday in the middle of his sugar rush from the latest inflation figures - headline figure well within the RBA-favoured band of 2-3% but the second half of 2013 running at an annualised 4% - there is all the room in the world for the RBA to lift rates and cool down the overheated sectors of the Australian economy.

Speaking as someone who just shouldered not one but two mortgages at the same time, and having gone through a year-long process of finding, bidding for and buying a new house, I can vouch for the fact that the real estate agents on the ground have been pushing low interest rates like Rob Ford's crack dealer pushes crack to Rob Ford. Having watched it closely for more than a year, it does not surprise me at all that the housing market is growing at double digit rates. 12 months ago I was watching Elwood as a target suburb but this time last year every house went up by about quarter of a million dollars, as prices there started equalising with neighbouring St Kilda and Brighton. Similarly, this summer I looked hard at Newport which bordered Williamstown but was relatively sanely priced... until I attended an auction where the house went for $126,000 over the listed maximum, as part of a recordsetting day where much the same effect happened overnight in Newport as had occurred in Elwood.

Far from a stagflation scenario, the current situation is merely a normal overheating from a strongly performing economy, for which Glenn Stevens knows exactly the levers to pull and can pull them without fear or favour. Joe Hockey might squeal, and no doubt Bill Shorten will make some hay about interest rates being at their lowest under Labor, in the face of John Howard's famous claim to the contrary, but it's standard operating procedure for a reserve bank in current conditions. The only reason for GDP growth stagnation would be if the federal government went on an APS pogrom for ideological reasons, as Campbell Newman did recently by slashing public servant numbers in Queensland causing a near-recession in that state. Hmm, what are the chances of that...


  1. What the hell, man. You're a wonk.

  2. I thought Ross Gittins' 2008 discussion of stagflation (and why it is not the concern it used to be) sounded pretty convincing.

  3. A couple of points here.

    nominal GDP is less than half its normal trend so we aint going strong growth yet.

    Inflation has been higher than any of the models have predicted which is why everyone has got it wrong.
    Given the benign nature of wages at present inflation on an underlying basis
    should be a lot lower.
    David should know this and would have been wrong if still working at BT.

    for Stagflation to actually get going you have to have a regulated workforce keeping real wages higher after a supply shock alah 1970s.

    none of this has occurred.
    We have a much h more deregulated workforce. Ironically getting rid of workchoices helped in this regard!

    And no large increase in Government spending to be seen either according to the Davidson thesis!

  4. Homer, so what you're saying is that due to wage flatness, the effect of all of this is going to be to lower Australians' purchasing power? The AUD plunging toward .80 USD would also give this effect. The RBA jacking up interest rates to historical trend levels would further limit discretionary spending levels.

    Given that they can't lower taxes due to the budget situation, Abbott and Hockey must be looking at all this and thinking that fracking is the solution to all their problems. An energy boom would lower inflation and input prices. Time to declare war on Alan Jones.

  5. M0nty the main thing I am saying is that inflation is much higher than any model would forecast given the wages situation.
    I haven't found anyone yet who has come up a reason for this.

    The $A is simply the market starting to wake up our commodity prices are falling.

    Fracking would help in boosting nominal GDP.

    You can only cut taxes IF you cut spending as well.
    If you cut taxes simply because of bulging revenues, as advocated by Davidson and other fools at Catallaxy, then you increase the structural deficit.

    this highly simplistic fact is something they cannot comprehend over there which is why they always get fiscal policy wrong.

    I always have great fun in pointing out Both Davidson and Samuel J said the tightest budget we have ever seen which the budger records support was according to them an expansionary budget. All the clueless commenters agreed.
    They are so brain dead there it is not funmy!