Inflation or Noflation?
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.
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:
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:
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.
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…
Discussion (62) ¬
There is always a danger in looking at high level numbers with pre-conceived ideas. The devil as usual is in details and you don’t have to look far.
http://www.abs.gov.au/ausstats/abs@.nsf/mf/6401.0
2 -ve contributors to inflation were food and recreation. Food supply is increasing as yields are normalising post natural disasters. Domestic recreation demand is down due to the high exchange rate. I’m sure in some way this is due to “Some mining boom…”, miners should really eat more bananas.
Another thing households are falling into -ve equity has nothing to do with the increase in LVR shown in Graph 3.6, which shows LVR of new loans. The link isn’t stated explicitely but it’s fairly clearly implied.
Everyone is expecting a rate cut, I think they will go but it’s not as clear cut as it appears on the surface.
nice ad by the way, apparently Stephanie is only 2.8 miles from me and wants to meet me. It is walking distance…
Hi all,
Been a very long time since my last post, this is not quite on topic here but close enough given we are discussing central banks… My apologies to anyone who feels it is off topic.
On the 25th of this month the editor of the Economic Policy Journal Robert Wenzel was invited to lunch and to speak to the New York Federal Reserve
and delivered the following speech to Ben Bernanke . It really is a MUST read.
http://www.economicpolicyjournal.com/2012/04/my-speech-delivered-at-new-york-federal.html
Steve your not alone.. Others also have the guts to speak the truth… the emperor has no clothes
Aspro
This seems a strange use of the term “negative equity” to mean a house is simply worth less than the purchase price. I was always of the impression that negative equity was when your house is worth less than the amount you borrowed. The latter, of course, is a much more dire state of affairs.
ASPRO,
Great speech is right. Now the FED and the rest of the population need to get together and decide that the PRIMARY purpose of the economic system is to be the abiltity to liquidate production AS IT HITS THE MARKET. That means you craft policy PRIMARILY TO MAKE THAT POSSIBLE. Profit and employment are fine economic purposes, but they are poor PRIMARY ones. Economics MUST EVOLVE. Otherwise its just the struggle between the two present primary purposes forever and ever…..and the resulting pain, suffering, waste and futility. Distributism. Its the next step economically and socially.
hi aspro,
that article ,
a total load of austrian gold standard crap,
actually it gives crap a bad name
do austrians even know what money endogeniety is,and how the central bank has no choice but to accommodate the demands placed on it by the payments system.
and those vieled references to US central bank gold holdings.
we allready have an example of gold standard failure staring us in the face at this very moment. its called the european monetary union.
instead of gold flowing from trade deficit nations to trade surplus nations, we have euros.
and to make matters worse we have a central bank (ecb) that only belatedly and half heartedly has decided to act.
the austrians say get rid of the central bank
if the austrains want an example of what happens when a central bank decides not to get involved , under a gold exchange standard framework, we need look no further than the euro zone mess.
what essentially the austrians are suggesting is a currency peg of sorts, by tying currencies to gold, and the history of the last 100 years is that currency pegs get destroyed by the political pressure that trade imbalances place on them.
Aspro
Interesting paper – thanks for the link. The closing remark is not nice:
“Let’s have one good meal here. Let’s make it a feast. Then I ask you, I plead with you, I beg you all, walk out of here with me, never to come back. It’s the moral and ethical thing to do. Nothing good goes on in this place. Let’s lock the doors and leave the building to the spiders, moths and four-legged rats.”
There have been a number of critics invited to speak at the Fed. Here is a speech by Jim Grant:
http://www.zerohedge.com/news/must-read-jim-grant-crucifies-fed-explains-why-gold-standard-best-option
He makes an interesting distinction between deflation and progress. One of his closing remarks:
“Finally, my pièce de résistance, I would commission, staff and ceremonially open the Fed’s first Office of Unintended Consequences.”
Mahaish
Endogeneity of money is imbalanced as I see it. It means profit oriented banks issue the medium of exchange and determined the quantity of issuance and how it will be directed into the system at its creation. It will also mean that money will need to be debt based. It will mean that to maintain a specific level of money in circulation over time the debt level of the economy to the banking system will have to continually increase. In other words whatever entities create the money will dominate the system. Right now the financial sector is very powerful due to this very reason.
“It will also mean that money will need to be debt based.”
Money is a financial asset. IT IS ALWAYS DEBT BASED (backed by debt). It is today and has been throughout history.
The only question is. Is it backed by non Govt debt or Govt debt. One can result in a large wealth transfer from the majority to a small select few (non Govt debt). The other (Govt debt) can if fairly implemented reduce this transfer.
The key is to get the balance right. Today there is far too little Govt debt.
mahaish
April 29, 2012 at 10:37 am | #
hi aspro,
that article ,
a total load of austrian gold standard crap,
Agree. Its ignorant nonsense.
RJ
“Money is a financial asset. IT IS ALWAYS DEBT BASED (backed by debt). It is today and has been throughout history.”
In all history peoples ignorance, close mindedness and resistance to progress has resulted in them being subjected to economic misery, tyranny and oppressive regimes.
Common shares are a financial asset that arent recorded as debt. New money created by the central bank can be recorded as equity instead of debt. That is the correct way of accounting anyway because the central bank is a creature of the people that the people own.
“Its ignorant nonsense.”
But it was a great speech, I’m sure.
Austrians are not capable of evaluating the banking/financial system properly at all. Every one I’ve ever run accross over on Mish Shedlock’s blog including Mish himself will give lip service to the evils of TBTF banks, but when push comes to shove they will parrot the agenda of the same and not think twice about it. When someone or something is dominating you to death and refuses to stop, and they go along with the dominators plan in the name of lassizez-faire free markets you know they aren’t ACTUALLY confronting realities.
Finance IS different. Its at the nexus of power in any economic system. It isn’t making shirts, its enabling Fruit of the Loom to make shirts paying rip gut wages to Honduaran peons. It doesn’t make geegaws galore, it enables China to make geegaws galore with the equivalent of slave labor. Finance needs to be downsized….permanently. The best way to do that is to effectively take away their biggest market….consumer finance. A sufficient dividend would do just that. Thats the only long lasting way we’re going to square the circle of capitalism and save free markets, private property and a profit making system. Distributism…the REAL capitalism.
Common share are not clearly a financial asset. Its a grey area because there is no debt held by another party. For this reason I would not call common shares a financial asset although I know many do
The value of shares is determined by the assets held by company not by the strength / creditworthiness of the debt liability holder.
“New money created by the central bank can be recorded as equity instead of debt. ”
You’re confusing our money (bank deposits or notes and coins) with the Govts and banks money (bank reserves). The central bank does not create our money
But regardless there is always an offsetting debt liability REGARDLESS OF HOW IT IS RECORDED IN THE ACCOUNTS.
For example using creative accounting to
credit SHF’s or
credit P+L
rather than
credit liability account
does not make the debt laibility magically disappear. In reality the debt still exists
Money is a financial asset. IT IS ALWAYS DEBT BASED (backed by debt). It is today and has been throughout history.”
And this statement is correct.
“Thats the only long lasting way we’re going to square the circle of capitalism and save free markets, ”
It is not the only way. It is one way that was proposed many years ago that has no relevance today. And will never happen anyway.
The other way is more Govt debt. Either by
-Large tax cuts (my preference)
-Increased pensions and unemployment benefits (my 2nd preference)
-More Govt spending (not for me as Govt spend to much already)
This will increase Govt debt (essential) and allow people to slowly reduce non Govt debt.
“Common share are not clearly a financial asset. Its a grey area because there is no debt held by another party. For this reason I would not call common shares a financial asset although I know many do”
They are definitely a financial asset. They are an asset if I hold them and they are financial in nature. I cant believe you continue to insist that money needs to be debt based.
“You’re confusing our money (bank deposits or notes and coins) with the Govts and banks money (bank reserves). The central bank does not create our money”
I know money is created by commercial banks as debt. This is an imbalance. What Im saying is that the solution to this is that the central bank conduct monetary policy directly with the public and instead of the money being accounted for as debt it is accounted for as equity at the point it is created.
Remove money creation powers from commercial banks. Commercial banks should not simply create money for their loans but instead source it first from retained earnings, investors, lenders. Banks should act as intermediaries between savers and investors not originators of money directing how the economy should be structured.
“They are definitely a financial asset. They are an asset if I hold them and they are financial in nature. I cant believe you continue to insist that money needs to be debt based. ”
Money is debt backed. This applies regardless of the classification of ordinary shares.
At times e.g. wars money might still have value on the expectation that they new ruler will act in a certain way. But today talk of debt free money is based on ignorance of what money is nothing more.
“What Im saying is that the solution to this is that the central bank conduct monetary policy directly”
And how exactly would this happen. Give me the detailed transactions and the detailed journal entries for all parties for all transactions.
And not confusing models that no one can understand but
-Simple transactions to achieve what you want to achieve say for one person and the central bank and
-The simple double entry journal entries for these transaction for the central bank, treasury and this one person (and commercial bank if they one is involved)
“Remove money creation powers from commercial banks. Commercial banks should not simply create money for their loans but instead source it first from retained earnings, investors, lenders.”
And if you do the above I can then address this recommendation.
RJ
“And how exactly would this happen. Give me the detailed transactions and the detailed journal entries for all parties for all transactions.
And not confusing models that no one can understand but
-Simple transactions to achieve what you want to achieve say for one person and the central bank and
-The simple double entry journal entries for these transaction for the central bank, treasury and this one person (and commercial bank if they one is involved)”
At the point new money is created by the central bank the transaction is identical to or similar to when an organisation issues common shares.
Say 100 million dollars are created (each new unit is an equity financial asset). From the point of view of the central bank 100 million units of new equity on the books. From the point of view of citizen recipients 100 million new assets. Say a nation of 1 million citizens receive 100 units each.
So are you suggesting as a starting point that everyone in say the UK opens an account at the BoE?
And then the BoE simple credits this account with nothing whatsover backing it up. So the BoE makes a £100 million loss????
Or does the Govt back this debt?? Which means the Govt debt increases
And who decides who gets all this money
RJ
“So are you suggesting as a starting point that everyone in say the UK opens an account at the BoE?”
Yes all adult citizens could have a monetary policy account. This is a way of creating a monetary policy system that is participatory.
“And then the BoE simple credits this account with nothing whatsover backing it up.”
THE CB needs to keep an eye on the inflation mandate to maintain confidence in the monetary system. The system is backed by the efficient and balanced mangement of the currency which instills faith in the currency.
“So the BoE makes a £100 million loss????”
Not a loss just an expansion of the medium of exchange.
“Or does the Govt back this debt?? Which means the Govt debt increases
And who decides who gets all this money”
The money doesn’t need to be backed. Just as long as if when stimulus is needed it isn’t expanded at an excessive pace inducing excessive inflation (beyond 3%). No one decides who gets all the money. When money is expanded under stimulatory policy it will only be expanded into citizens accounts in equal amounts across the whole citizenry.
Danny, RJ
There are two sides to any bank’s balance sheet. There is the matter and the anti-matter – the assets and the liabilities.
Equity is a liability and debt is a liability. What you call a particular liability is merely a matter of accounting policy.
But both of them are backed by the bank’s assets, which using the Bank of England terminology are simply ‘other assets’.
The liabilities are the tokens that have their ownership tags changed. The asset part stays in the ownership of the bank itself and remains there until a corresponding liability is brought under the same ownership. Then they annihilate each other just like matter and anti-matter brought together.
The issue is not what you call these liabilities. It is how the ownership and distribution of them is determined.
money does not have value just because
This idea of debt free money is a hoax. Sounds great but its a impossible dream.