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 David Lawson

-Worked as a real estate agent in 2009, have since left the industry because I now see that it is all fuelled by euphoric expections and debt -Started to become concerned about the global debt bubble after reading 'The Credit Crunch' by Graham Turner about a year ago and have since followed Steve Keens debtwatch blog -Competed a Bachelor of economics in 2004 specalising in iternational trade and finance -Lived in the USA for 5 years of my life, have witnessed first hand there frivolous spending patterns and watched our country become the same over the course of last 10 years
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62 Responses to Inflation or Noflation?

  1. TruthIsThereIsNoTruth says:

    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.

  2. TruthIsThereIsNoTruth says:

    nice ad by the way, appar­ently Stephanie is only 2.8 miles from me and wants to meet me. It is walk­ing distance…

  3. aspro says:

    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

  4. Endless says:

    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.

  5. Steve Hummel says:

    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.

  6. mahaish says:

    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.

  7. RickW says:

    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.”

  8. Dannyb2b says:

    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.

  9. RJ says:

    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.

  10. RJ says:

    mahaish
    April 29, 2012 at 10:37 am | #

    hi aspro,

    that arti­cle ,

    a total load of aus­trian gold stan­dard crap,

    Agree. Its igno­rant nonsense.

  11. Dannyb2b says:

    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.

  12. Steve Hummel says:

    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.

  13. RJ says:

    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.

  14. RJ says:

    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

  15. RJ says:

    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.

  16. RJ says:

    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.

  17. Dannyb2b says:

    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.

  18. RJ says:

    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.

  19. RJ says:

    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)

  20. RJ says:

    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.

  21. Dannyb2b says:

    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.

  22. RJ says:

    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

  23. Dannyb2b says:

    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.

  24. NeilW says:

    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.

  25. RJ says:

    money does not have value just because

    This idea of debt free money is a hoax. Sounds great but its a impos­si­ble dream.

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