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...

Climate denier Mark Steyn turns law denier

Fellow Catallaxy Files exile Steve from Brisbane has had his Opinion Dominion blog linked by Yank Canuck wingnut footsoldier Mark Steyn for an article mentioning the fact that Steyn has fired his lawyers from his defamation defence against Michael Mann over comments surrounding climate change and the IPCC. Steyn supporters have flooded in to the comments to prosecute the case on his behalf, without a single invocation of the inoculatory abbreviation IANAL.

Patty Villanova said...
If you will read the motion that Mark Steyn recently submitted to the court on his own behalf, you will readily see the reason he dumped his lawyers- he is by far a more brilliant writer than anyone on his team. His understanding of the legal principles and his ability to convey the essence of the case is worthy of any legal scholar. He doesn't need the attorneys, he's doing a better job on his own.

Steyn thus joins such noted legal minds as Fort Hood gunman Nidal Malik Hasan, DC sniper John Allen Muhammad, 9/11 plotter Zacarias Moussaoui, cult leader Charles Manson, serial killer Ted Bundy and Jack "Dr Death" Kevorkian in representing himself in American courts. Things didn't turn out so good for those guys. Like Moussaoui, Steyn doesn't care about procedures and process and just wants his day in court, so he's given up on preventing the case going to trial.

Steyn has a history of hating on lawyers, having once put the sword to the legal team behind a lost case of his friend Conrad Black. Like local clone Andrew Bolt in the infamous s18C case on articles published in News Corporation papers about so-called white-skinned Aboriginals, Steyn's current case has been complicated by the efforts of his employer National Review, which Steyn accuses of wasting half a million dollars of fiat currency already for no result. Unlike Bolt, if Steyn loses this case then he's going to be up a for a motzah. One wonders if his decision to ditch the silks is money related, in part. All Bolt had to put up with was a public humiliation; Mann could put Steyn out of business.

From one ranga to another: best of luck Mark, you're going to need it.

Who do you think you are kidding, Mr Abbott?

To the astonishment only of credulous fools, Indonesia's politicians have reacted angrily to being bypassed by Australia's politicians on the asylum seeker issue by rattling sabres from across the Timor Sea. Anyone with half a brain could have predicted this development, after Tony Abbott and Scott Morrison authorised the head of the Australian military to negotiate directly with the head of the Indonesian military on a boat turn-back scheme without involving Indonesian politicians in the process.

It's as if we're China and Japan squabbling over a few godforsaken rocks. Those two giants of the Asian Century have some serious ordnance behind both their navies, however, whereas Indonesia's leaky rabble could be defeated by the starting fleet of the Sydney to Hobart yacht race.

This military imbalance does not mean that Australia can or should embarrass Indonesia into submission to get its way on asylum seeker policy. Indonesia's strengths are economic and diplomatic. Sending their political class into apoplexy doesn't seem very diplomatic, and will probably lead to a trade war if not an actual Konfrontasi, not to mention ruining much chance Abbott might have had of achieving anything in the rest of Asia. Just another day in Abbott's Jakarta-focused foreign policy.

The differing reactions to foreign minister Scott Morrison on both sides are instructive: the right wants him to replace Abbott as PM if not Francis as Pope, while Andrew Elder is on a campaign to sack him. He is but an instrument of conservative policy, however. Replacing him would not change anything, unless it was part of a broader capitulation and humiliation. Facts, not figureheads, are what will decide this one. I am still of the opinion that the Coalition's policy is brave but ultimately won't work. The more they try, the closer they get to the end game, which is another SIEV-X level disaster. I do not welcome it, but I think it is bound to happen.

NB: I don't see the torture story as being credible, save for one point: isn't this the same Navy that bastardises its own recruits in hazing rituals? The boaties should count themselves lucky they didn't get subjected to a broomstick lathered in vaseline.

On trolling and Catallaxy Files

Re my last post on my stoush with Sinclair Davidson over his stagflation call of 2011, Sinc has now decided to permanently ban me from the Catallaxy Files blog. His stated reasoning follows:

So yesterday I placed m0nty in auto-moderation so he couldn't continue to derail an otherwise interesting thread while I was out and about. During that time he posted this:

... where I spend a bit of time trolling the various Christianists, libertarians and other wingnut denizens. While admittedly I get away with a lot ...

making it clear that he doesn’t come here to argue and/or debate but rather simply to troll and derail threads. I can think of no good reason why someone who has no intention of making any sort of useful contribution should participate in our discussions. As such I have moved him from auto-moderation to the banned list.
No doubt like others (Bird, Homer and TonyN) he will continue to follow the threads but he will only be able to participate in discussions by writing at his own blog.

Of course Sinc has the right to ban me, the Cat is a private blog. This is not a freedom of speech issue, since I am perfectly free to post here and elsewhere. I ban people from my own site on a regular basis when they are consistently anti-social.

Where I will push back, however, is this notion he is pushing that the reasoning behind the ban is purely because he does not want trolls at the Cat, due to some noble goal of engendering useful discussion. The Cat is full of trolls! The Cat has a page about trolls! It states:

It all boils down to this: every so often you have to shoot a troll, the better to encourage the others. It’s fun!

Sinclair banned me not for some higher motivation, but purely because I had him by the short and curlies on his stupid stagflation call. I could call him names over this, but I'm more interested in the consequences of his actions on the Cat. The effect of his policy will be that the remaining trolls on his site will all be on his side, all agreeing with each other, in a boring echo chamber. I had thought the Cat was a more interesting site than that.

The last word belongs to Steve from Brisbane:

Freshwater economics gone stagnant

RMIT economics professor Sinclair Davidson runs the blog Catallaxy Files - self-styled as "Australia's leading libertarian and centre-right blog" - where I spend a bit of time trolling the various Christianists, libertarians and other wingnut denizens. While admittedly I get away with a lot, I am currently in moderation over there for taking up an old battle with him. I am not so much posting this entry to whinge, but to set it all down somewhere while I'm remembering, and for future reference once this topic inevitably resurfaces.

In 2011, Sinclair posted an article at The Drum entitled 'Stagflation' looms for Australia's economy predicting a rise in inflation to dangerous levels concurrent with a precipitous stall in growth, with an attendant Cat thread and then a follow-up thread a fortnight later (presenting a Zero Hedge graph of questionable construction).

Since that point, and contrary to Sinclair's predictions, growth in Australia has recovered to historical trend levels, while inflation has plumbed new depths - the latter so much so that there is now talk of deflation, which occasioned not just one Deflation risk thread on the Cat but a sequel as well. As is my wont, I immediately waded into Sinclair in the comments with hard economic numbers, plus a reference to Art Laffer's recent capitulation in the face of economic data which refuted his previous pronouncements on inflation. By the time the sequel thread came around the stoush was in full session, leading to the moderation. As Homer Paxton points out, it's hard to fathom why Sinclair can not admit he got it wrong, when the facts are staring at him in the face.

Denial is a distinguishing feature of many economists of the freshwater school, which is one of the many reanimations of right-wing supply side economic thought in the last century or so. Paul Krugman is the best prosecutor of the case against neoclassical economics - led by Milton Friedman of the University of Chicago -  after it failed to predict the Global Financial Crisis. Sinclair is part of an even older, less creditable sect: that of the classical economists. Classicists were embarrassed out of the profession, for the most part, by the Great Depression in the 1930s which saw the rise of Keynesianism as voters in recently enfranchised demographics realised they didn't like mass poverty and long-term unemployment. Empirical data which scientists did not expect tends to shake up scientific theory, or at least should do if said scientists are actually using the scientific method.

Despite several such fact-based setbacks to supply side economics, Catallaxy Files is the gathering point of a self-styled "Australian school" of economics, which takes its cues from the Austrian school headed by Ludwig von Mises. Chief hunter of the classicists is John Quiggin, economics professor at the University of Queensland. His characterisation of classicists as zombies in his popular book defined the battle.

Economists like Sinclair now sit in fetid, dried up billabongs, not having changed since the time of the dinosaurs, like freshwater crocodiles in a drought. The climate has changed for freshwater proponents, and they are not able to evolve to adapt to the new environment. This is why Sinclair can not accept reality. He will continue to bare his teeth and wallow in the dust, until the dry wind comes to pick his bones clean.

The Great Interregnum: Hillary and the mountain of gold

Perhaps I'm alone on this one, but hear me out on a theory. We are not living in the most interesting times imaginable. Things were more exciting and vibrant in the past, and will be so again. We are currently waiting out in an interregnum, a middle ages, like the movie Hobbit: The Desolation of Smaug - the second film of a manufactured trilogy which didn't have enough going on to merit three separate stories.

Every such narrative trilogy begins with an origin story. From an economic point of view, the current interregnum started with governments in America under George W. Bush and Australia under Howard instituting massive tax cuts for the wealthy. This created a structural deficit in the public books, which was hidden for a time by economic bubbles: America with their housing bubble that catalysed the Global Financial Crisis, and Australia with the resources bubble mainly caused by China's historic government stimulus. America has been able to recover somewhat due to currency devaluation and temporary nationalisation of strategic firms which allowed their manufacturing and financial sectors to survive, albeit their recovery is still hamstrung by fiscal austerity imposed by Republicans in Congress. Australia was saved from any recession at all due to fiscal stimulus, but saw its currency gain value to the point where every industry except resources came under massive export pressure, which is only now easing slightly. 

The structural deficit is now exposed in both countries, as both are back to something like historical trend GDP growth, but tax revenue does not cover government expenses. As a percentage of GDP, it is revenue which is lagging on historical measures, not expenses. The right's agenda is, as always, to dismantle the welfare state, but government spending levels had been perfectly affordable before Bush and Howard had slashed taxes, and would be again now if those tax cuts were all rolled back.

Inequality has risen across many Western countries (including Australia) since the advent of Reaganomics in the 1980s. It has risen so alarmingly now that the richest 1% are becoming a factor in the weakness of economic recovery, in that their income is saved more often than that of the poor, thus representing yet another reason why demand is depressed. 

The 1% are the dragon Smaug in this scenario; the ancient evil sitting on top of the mountain of gold and guarding it with fiery jealousy, while the poor folk of the countryside suffer with mere memories of how good things used to be. They are the apotheosis of the baby boomer generation, the demographic bulge passing ever so slowly on to the other side, soaking up wealth through its bloated power sources as it has done all its life.

What is their weakness, the chink in their armour, whose discovery will allow the third part of our story to begin, so that the golden mountain can be redistributed to kickstart demand once again and this interregnum can finally be done with? If anyone knows, it is the person who is most likely to play Bard the Bowman in our tale: Hillary Clinton. She looms as the hero of the third act of this morality play, if not the entire Third Age. What better candidate to conquer a mountain than a Hillary? Her accession to the US presidency in 2016 seems assured, as the Republicans flounder about like beached whales, bro. The rest of the Democratic Party seems like supporting characters in her own personal return-of-the-queen destiny. With husband Bill running economic policy - hopefully you remember how good that was the first time around - the Hillary administration could be the climax to the lull we are currently experiencing.

Before that, though, comes a little thing called the Battle of the Five Armies, as the remaining players squabble over ownership of the monty haul. Hopefully that's not a literal analogy!

Drum and Drummer 2: Wilson & Bernardi, Menzies & Howard

During the 2013-14 silly season, the Coalition government has presented the Twitterati with two of its brethren for which to lock in the stocks and have a jolly old time pelting rotten fruit. Before Christmas it was Tim Wilson, the lilywhite knight from the Institute of Public Affairs, being appointed Australian Human Rights Commissioner. The new year has brought scrutiny on Cory Bernardi, last seen pouring oil down the slippery slope between gay marriage and bestiality, for writing a book which contained conservative views.

Unlike most of the left, I am sanguine about both of these two sagas. Wilson is a capable and seemingly decent fellow, and I wish him all the best in his new role. There is a lot of work to be done to preserve human rights in an Australia with plenty of opponents to freedom on all sides, and Wilson is a true believer in his classical liberal credo so I trust he will fulfil the role to the best of his ability. That much of his job will consist of criticising right-wing governments - as in his statement on the Queensland anti-bikie laws - only underlines the worthiness of his appointment. Who better to stand up for liberty than a libertarian? It is the job that IPA mavens should do regardless of who is in government. Making them part of the system is more likely to change them than to change society.

As for Bernardi, I suppose Christmas is a time for the religious right to shine, but it's a side show at best. I didn't hear much out of the Catholic Church this festive season, no doubt Cardinal Pell was keeping schtum for fear of the media latching onto the royal commission. Who else is there in Australian public life to prosecute the case for sectarian feudalism but Cory? No one else is seriously auditioning to be the next B.A. Santamaria or P.P. McGuiness. Bernardi himself is an acolyte of Nick "Ho Chi" Minchin, one of the faceless men who control the current Liberal Party. He is essentially harmless, notwithstanding dark murmurings about Tea Party backing.

Wilson is an example of the Menzies tradition of the Liberal Party, as outlined by current Attorney-General George Brandis in the Alfred Deakin Lecture in 2009. Menzies founded the Liberal Party primarily on freedom according to Brandis, who is himself arguably the most prominent parliamentary carrier of this particular spear. Bernardi is the current champion of the Howard tradition, and he succeeded none other than the current Prime Minister in this role. The Liberal Party is thus defined as the broad church which spans from the Menzies classical liberals like Wilson, to the Howard conservatives like Bernardi.

What these two men are doing, inadvertently, is allow Abbott as PM to have a breather while the ideologues from opposite corners of the Liberal Party fight over what it means to be in government. Is it to restart the culture wars, as Bernardi would bid and Christopher Pyne would implement? Or is it to dabble with libertarianism, end industry protectionism and finally make good on the rhetoric about small government, unlike recent Coalition performances? This battle is necessary only because Abbott has not articulated which side of the Liberal church he will align himself with. This leaves the public to conclude that he has no bloody idea what to do, and no strategy to marshal his forces like Howard used to (on this, I do agree with Andrew Elder). Different factions inside the government are waging turf wars, with no consequences for embarrassing the government in public - Abbott saw to that very early by refusing to sack those who were obviously guilty of rorting travel entitlements, as Howard did in his first months in office. The party unity that defined the Abbott opposition is fast crumbling in office.

Ah, you might say, but why do they need to fight, can't they do both conservative social policies and liberal economic policies at the same time? To some extent yes, but there are issues in which the conservative elements clash with the small-l liberals in the big-L Liberal Party. Many of these revolve around the Libs' coalition partner, and so far the National Party has had its way. The Nats wanted the Graincorp foreign takeover stopped; it stopped. The Nats wanted talk of Australia Post's privatisation nobbled; it was nobbled. The Coalition is a three-cornered contest between the pastoralists, the moralists and the individualists.

The reality, though, is that Abbott is from the Howard school and no matter how much Brandis and Wilson shout, Abbott and the other wets in Cabinet, in conjunction with the Nationals, are going to make this a solidly conservative government. Abbott's job is to create the impression that he is navigating a "sensible" centrist course between fringe figures like Wilson and Bernardi, who will be frozen out when the real business of government is transacted. They will have to enjoy their moment in the sun now.