Infla­tion or Nofla­tion?

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The lat­est CPI data from the ABS has revealed nofla­tion for first quar­ter of 2012. The pre­vi­ous Decem­ber 2011 quar­ter also recorded nofla­tion, con­trary to RBA expec­ta­tions of infla­tion­ary pres­sure from the min­er­als boom.

Quarterly CPI

It is likely that Tuesday’s meet­ing will be the point at which the RBA will have to aban­don their expec­ta­tions of ris­ing inter­est rates to tame an Infla­tion bogie that has turned out to be Nofla­tion in prac­tice. In the April meet min­utes, the RBA board fin­ished with:

…If slower growth in demand could be expected to result in a more mod­er­ate infla­tion out­come, then a case could be made for a fur­ther eas­ing of mon­e­tary pol­icy. The Board would have the oppor­tu­nity at its next meet­ing to review the infla­tion out­look based on com­pre­hen­sive new data on prices, as well as infor­ma­tion on demand and out­put. Mem­bers judged it pru­dent to eval­u­ate those data before con­sid­er­ing a fur­ther pol­icy adjust­ment.

Can an annu­alised infla­tion rate of 1.6% make this case? Inter­est­ingly enough, it was less than one year ago when com­mer­cial news head­lines were still talk­ing about a rate rise — RBA’s Stevens hints at August inter­est rate rise:

The mar­ket has been pay­ing more atten­tion to a recent run of mixed domes­tic data which has shown jobs growth slow­ing, weak­ness in hous­ing and credit and a sharp con­trac­tion in the econ­omy in the first quar­ter as flood­ing hit coal exports.

Mr Stevens, how­ever, made it very clear that he remains focused on the longer term impact of a huge trade and min­ing boom that should boost incomes and invest­ment over time.

One could be almost cer­tain that such a deci­sion is off the cards now, espe­cially given the recent decline in gov­ern­ment bond yields for the month of April.

Government Bond Yields

There will also be no fis­cal stim­u­lus for the month of April, thanks to the recent aus­ter­ity mea­sures of the Aus­tralian Gov­ern­ment. This leaves mon­e­tary pol­icy to take up the slack for a slow down in Gov­ern­ment deficit funded growth.

Date: Gov­ern­ment Secu­ri­ties on Issue (AU$ mil­lions)
Jan-2012 221646
Feb-2012 229706
Mar-2012 236036
Apr-2012 228426*

*As at 20 April 2012

It seems Wayne Swan is play­ing ball with the big rat­ing agen­cies to pro­tect the nation’s AAA rat­ing.

Nofla­tion clearly indi­cates that exces­sive con­sumer debt and a lack of liq­uid­ity in present mar­ket are caus­ing down­ward pres­sure on prices. The stand­out nofla­tion­ary phe­nom­e­non has been the decline in house prices of 4.8% per cent over the year to Decem­ber 2011, which is strain­ing many house­holds as many homes fall into neg­a­tive equity. Graph 3.6 from the RBA Finan­cial Sta­bil­ity Review for March 2012 shows a notice­able increase in LVRs greater than or equal to 90%. Accord­ing to Perth Now, West­ern Aus­tralia is the sec­ond high­est state in Aus­tralia in terms of neg­a­tive equity, where 8.5% of homes are cur­rently worth less than was paid for them. Hav­ing said this, Graph 3.10 shows home loan arrears appear to have taken a sharp turn from the increas­ing trend in the 2011 Finan­cial Sta­bil­ity Reviews.

It seems quite trans­par­ent that with­out a stim­u­lus to liq­uid­ity via a rate cut next Tues­day, nofla­tion could eas­ily become defla­tion in months to come. Some min­ing boom…

About Steve Keen

I am Professor of Economics and Head of Economics, History and Politics at Kingston University London, and a long time critic of conventional economic thought. As well as attacking mainstream thought in Debunking Economics, I am also developing an alternative dynamic approach to economic modelling. The key issue I am tackling here is the prospect for a debt-deflation on the back of the enormous private debts accumulated globally, and our very low rate of inflation.
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  • I would assert to you that plumb­ing the depths of homo sapi­ens (homo wis­dom) instead of empha­siz­ing the “real­ity” of homo eco­nom­i­cus is the key to REAL progress”

    Eco­nom­ics is a key aspect of the wis­dom required for real progress. So we should focus on it as much as any­thing else. Eco­nom­ics is how we organ­ise our­selves, the more organ­ised we are the more effec­tive we are at per­form­ing any func­tion and the more we learn about the nature of the envi­ron­ment we are in.

  • cyrusp

    Actu­ally, so far as the actual con­tin­u­a­tion of tech­nol­ogy and tech­no­log­i­cal inno­va­tion is con­cerned Star Trek is more accu­rate than the image.”

    That’s gen­er­ally how human brains work. See a trend, draw a straight line through it and extrap­o­late that trend indef­i­nitely into the future.

    Like Pro­fes­sor Keen says, peo­ple gen­er­ally find it hard to think sys­tem­i­cally and see feed­back loops. That’s why very few peo­ple antic­i­pate bub­bles burst­ing.

  • What hap­pens when this envi­ron­men­tal bub­ble bursts and eco­nomic growth is no longer pos­si­ble?”

    That’s a clas­sic case of con­fus­ing a stock with a flow.

    There is a a finite amount of stuff, but there are an infi­nite amounts of cycles we can put that stuff through. 

    And that’s before we get to the matter/energy con­ver­sion process.

    So the idea that eco­nomic growth isn’t pos­si­ble is clap­trap. The cleanup and recy­cling indus­tries are all in their infancy. Essen­tially we need more indus­trial fungi. 

    Growth in its clas­sic form has to slow down and be replaced with a form of growth that is more resource light, or prefer­ably resource neu­tral — emu­lat­ing the nat­ural car­bon and water cycles.

    So the road we take is a choice, not an inevitabil­ity.

  • Like Pro­fes­sor Keen says, peo­ple gen­er­ally find it hard to think sys­tem­i­cally and see feed­back loops.”

    There’s a dif­fer­ence between being able to think sys­tem­i­cally and see feed­back loops and being a doom mer­chant.

  • cyrusp

    So the idea that eco­nomic growth isn’t pos­si­ble is clap­trap.”

    🙂

    Any­one who believes expo­nen­tial growth can go on for­ever in a finite world, is either a mad­man or an econ­o­mist.” ~Ken­neth Bould­ing

    http://physics.ucsd.edu/do-the-math/2011/07/can-economic-growth-last/

  • Any­one who believes expo­nen­tial growth can go on for­ever in a finite world, is either a mad­man or an econ­o­mist.”

    Cor­rect. Which is why I didn’t use the word expo­nen­tial.

  • Frank

    Any­one who believes expo­nen­tial growth can go on for­ever in a finite world, is either a mad­man or an econ­o­mist.”

    ..or expressed their belief befor about 1980. There was a time when it was com­pletely within almost everyone’s expec­ta­tions, that by the year 2000 we’d be well on the way to colonis­ing the moon, other plan­ets, and have mas­tered inter­galac­tic space travel with exotic warp dri­ves.

    This was a time when peo­ple invented and built road net­works, tele­phone net­works, radio net­works, satel­lite net­works, health­care infra­struc­ture, atomic power, space ships and moon walks. 

    Unfor­tu­nately, after Thatcher and Rea­gans lit­tle escapade with the US print­ing press, all that stag­nated. Now our tech­nol­ogy expec­ta­tions have been reduced to drool­ing over the next iPad ver­sion, and higher bitrates to down­load more porn. 

    It’s in this cul­ture of spoilt, obese, unam­bi­tious infatil­ity, that we have to suf­fer the atti­tude men­tioned ear­lier. Eco­nomic growth is lim­it­less. With the right atti­tude and lead­er­ship, we should be able to achieve any­thing and go any­where.

  • Any­one who believes expo­nen­tial growth can go on for­ever in a finite world, is either a mad­man or an econ­o­mist.” ~Ken­neth Bould­ing

    Its rel­a­tive. Like Neil said growth can go on as long as what we take from the envi­ron­ment doesnt exceed what we put back. Growth can be expo­nen­tial if our tech­no­log­i­cal progress and effi­ciency is expo­nen­tial also. Sus­tain­abil­ity is key. So far the nature of tech­nol­ogy has been expo­nen­tial growth Im pretty sure so we just have to apply tech­no­log­i­cal devel­op­ments to areas like envi­ron­men­tal man­age­ment , energy etc…

  • Frank

    we just have to apply tech­no­log­i­cal devel­op­ments to areas like envi­ron­men­tal man­age­ment , energy etc…”

    and that’ll take a another world war or the col­lec­tive real­i­sa­tion that huge amounts of gov­ern­ment spend­ing in tech­nol­ogy pro­grammes is the only viable way for­ward.

  • alain­ton

    Im gen­er­ally with Neil on this but

    1) putting some­thing back through a cycle requires energy — even stor­ing infor­ma­tion on a hard drive does

    2) As for expo­nen­tial growth all com­pound­ing of prof­its and inter­est will gen­er­ate this, what really mat­ters though is whether the rate of increase is high in heav­ily resource con­sum­ing sec­tors or not — you could have for exam­ple have neg­a­tive growth in resource hun­gry sec­tors because demand for those resources are declin­ing and slow but none the less expo­nen­tial growth in other energy effi­cient sec­tors.

    So from the above you could still have eco­nomic growth at 2% say if over­all phys­i­cal resource use was declin­ing by more than that.

  • Steve Hum­mel

    Eco­nom­ics is how we organ­ise our­selves, the more organ­ised we are the more effec­tive we are at per­form­ing any func­tion and the more we learn about the nature of the envi­ron­ment we are in.”

    Actu­ally we orga­nize our­selves based on an eco­nomic sys­tem whose PRIMARY pur­pose is profit. That’s why we act so unwisely eco­nom­i­cally, so often. Wis­dom comes pri­mar­ily through inte­gra­tive think­ing. Inte­grat­ing true human wis­dom through­out human soci­ety, and par­tic­u­larly in eco­nom­ics which is the dis­ci­pline that most occu­pies our time and effort, is there­fore essen­tial.

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