The economic theories arising out of Australia are both amusing and frightening. In the latest bit of madness, an economist pleads for more inflation, blaming cheap overseas retailers for Australia’s housing bubble.
For mocking purposes only, please consider How Cheap Overseas Retailers are Pushing Up House Prices in Australia.
“DOWN Down! Prices are Down!” It’s a jingle that is practically our national anthem. But ever-cheaper retail — and the waves of foreign retailers competing on price — could seriously unbalance Australia.
“Down, Down” might be the only place our economy has left to go if we can’t solve the imbalance between crazy low retail prices and crazy high house prices.
Australia needs a little bit of inflation. Without it, our economy is stuck with low interest rates and all the issues they create. But inflation is turning out to be very hard to generate.
The world’s discount retailers have discovered Australia. Aldi, Costco and Uniqlo were wave one of the discount invasion. Wave two is coming in 2017 and mostly involves Amazon. Every retailer already here is working hard to be able to compete.
Prices keep falling and the RBA is finding life difficult. Its job is to keep inflation in line. It should be between two and three per cent per year. But for a while now inflation has been below that range.
You can almost imagine RBA governor Philip Lowe stomping round his office, muttering “bloody foreigners! Coming over here! Making our retail goods cheaper!”
Having low inflation is a problem. While of course we love low prices, overall the economy runs best with consistent predictable inflation. That’s what the RBA is supposed do. It is pledged to makes sure inflation is predictable: between two and three per cent.
The Think Engine
That bit of economic nonsense was courtesy of economist Jason Murphy. He publishes the blog Thomas The Thinkengine. You can follow Jason on Twitter @Jasemurphy.
Murphy provides lots of charts, coupled with complete nonsense to support his view. He blames Amazon, Aldi, Walmart, and other low-cost providers for lack of inflation.
His tie to real estate is the Reserve Bank of Australia (RBA) was forced to cut rates to spur inflation and that fueled the housing bubble.
Rather than viewing rate cuts as the problem Murphy blames consumers for wanting low prices and Amazon, Walmart, and Aldi for providing them.
How Economic Twisted Minds Function
- They see a non-problem (falling prices)
- They accurately connect the inane responses of central banks (lowering interest rates) to asset bubbles
- Rather than blame central banks for asset bubbles, they blame the alleged lack of inflation.
I challenge Murphy to respond to things I have written, and things the Bank of International Settlement (BIS) has stated.
Economic Challenge to Keynesians
Of all the widely believed but patently false economic beliefs is the absurd notion that falling consumer prices are bad for the economy and something must be done about them.
I have commented on this many times and have been vindicated not only by sound economic theory but also by actual historical examples.
- My article Deflation Bonanza! (And the Fool’s Mission to Stop It) has a good synopsis.
- My Challenge to Keynesians “Prove Rising Prices Provide an Overall Economic Benefit” has gone unanswered.
There is no answer because history and logic both show that concerns over consumer price deflation are seriously misplaced.
BIS Deflation Study
The BIS did a historical study and found routine deflation was not any problem at all.
“Deflation may actually boost output. Lower prices increase real incomes and wealth. And they may also make export goods more competitive,” stated the study.
It’s asset bubble deflation that is damaging. When asset bubbles burst, debt deflation results.
Central banks’ seriously misguided attempts to defeat routine consumer price deflation is what fuels the destructive asset bubbles that eventually collapse.
For a discussion of the BIS study, please see Historical Perspective on CPI Deflations: How Damaging are They?
- “Idiosyncratic and Transitory Factors” Holding Down Inflation: New Definition of Transitory
- War on Cash Proposals in Australia: Microchip Expiring $100 Bills, Forcing People to Keep Receipts
- Secular Disinflationary Trend Hits New Highs: Deflation on Deck? What’s That Mean for Gold?
- Steen Jakobsen on the Next 30 Years: “Everything is Deflationary”
- Bogus Fed Research Claim: “Gold Standard Didn’t Really Tame Inflation”
Finally, please consider my 38 slide powerpoint Venture Alliance Presentation on trends in sentiment, asset bubbles, and gold.
Mike “Mish” Shedlock
The one thing that is common among economists led by Bernanke (“Mad Hatter” as Hussman describes him in his latest post – correctly if I may say so) is pure idiocy.
But I think the bigger issue right now is that central banksters are now terrified out of their wits. As Charles says (http://charleshughsmith.blogspot.in/2017/08/why-were-so-risk-averse-we-cant-take.html)
“The Fed is clearly fearful that even a mild recession will cascade into something much worse–and something beyond their control.”
I have a question here.
If you feel the US banks are safe as houses now, why is the Fed still behaving like after Lehman (the Fed has given indications it does the the asset bubble it seems to be seeing). Is it because even if safe, a EU bank can make it wobble and the whole edifice (financial system) might still be brought down.
My feeling is they fear that acting against an overheated asset market may get a Lehman or bigger moment.
Would you like to hazard a guess? It is evident that the Fed wants to get out of the hole (asset bubble) it is in (due to its own work) but it is scared of what could happen.
The two reasons why banks and governments love inflation are:
1) Inflation is caused by banks creating money faster than the economy is growing, which means that banks are artificially increasing their share of the economy by what amounts to legalized counterfeiting. They simply print what they want, when they want. That’s why the Swiss central bank owns billions of dollars worth of stock – they can just print money and buy a billion dollars worth of Apple stock whenever they damn well please.
If any other person or group does this they are arrested, because making funny money is the only unique power that central bankers possess, and they they guard it jealously. Digital currencies threaten them, and they will respond by imprisoning any person they can find who creates one.
If there is a crash, the central banks may become the majority owners of every asset class, so they would have effective control over every thing that is listed on an exchange. They will own us all in the end.
2) Inflation artificially decreases the debts that governments have issued to pay for their past profligacy, and if inflation ceases then they would be forced to pay their debts with money that has purchasing power equal to what has been spent. They would lose their ability to pay bondholders with depreciated currency, and that would leave them with less to spend on bribing voters before the next election.
This in turn gives central bankers effective control over elected officials, because the politicos dare not shut down the creation of excess money. They would lose the next election, and a new set of more pliable officials would then resume inflating the currency.
Larry Szabo said:
Yep, large RE companies use leverage to exist and expand. Deflation makes their funny money equity become less. If it continues their equity will disappear and they could loss their properties. Trump uses leverage in his RE business that maybe why he may be why Yellen is safe.
Nowadays, most money is created by banks, not the government.
Only a lunatic central bankster or a mentally deficient economist would thing robbing savers of 2-3% or their earnings annually would be a “good” thing.
Medex Man said:
Much as though I don’t like Jeff Bezos’ capitalism for him, socialism for everyone else politics, and I despise him taking handouts from the US Post Office — I doubt the man actually pays attention to the products flying out the door. He gets paid by tax payer subsidies and by vendor payments, not by sales (which continue to lose money).
The prices at amazon are low, but the quality is in free fall. Counterfeit products are prevalent, and in a failed attempt to fight them off, the “real” producers are in effect selling low quality knock-offs of their own products.
Consumers, especially the snow-flake millenials, were educated in safe spaces and violent political resistance and they got participation trophies. Most of them can not tell a knock-off from a high quality good. Tell them its Tiffany’s and give them K-Mart, they are too miss-educated to know. And that is Amazon’s target customer.
Too many governments cut corners on education — placating teacher unions (really administrators more than teachers), encouraging purchasing fraud, encouraging extremist left-wing indoctrination, giving participation trophies and ignoring the three R’s or critical thinking. Cults especially don’t tolerate critical thinking.
A well educated voter base is critical to a functioning democracy. A failed education system is the start of a failed democracy. G7 countries have so focused on political correctness and union labor that they have destroyed their own tax base.
Government run education is failing. Short term, that helped government unions, but long term it decimates the government’s tax base.
Its easier to see the problem “over there” (in Australia or Europe), just like it is easier for them to see the problem “over here” in the USA. But its a systemic problem all over the G7
Super article Mish, and hit it on the head comment MedexMan, sadly this sunshine and rainbows is supremely evident up here in canada as well, even in the supposedly most entrepreneurial places like Alberta people so devoid and reiality, it is a little concerning where this is going when these folks get to position of control and decion making that shape socity
Is this a lost generation?
I’m with you, six figure sums for anyone not old and white.
Your campaign site?
Medex Man said:
@chrysangle — his campaign site is run out of berkley and paid for by George Soros
No one else would get away with that level of racism
I consider how a person earns his income more important than how much money they receive.
Medex Man said:
The blatant racism in @John Smith’s comment says more about him than his alleged income or claimed education
The prices at Amazon are NOT low, they are similar to most other retailer’s prices. The low prices you might find on Amazon’s website are usually coming from other retailers using Amazon as a billing and fulfillment conduit. I have bought several items VIA Amazon over the last twelve months but NONE of them were SOLD by Amazon. Amazon made a few percent on the transaction but other retailers made most of the money.
For example, I looked at an item on clearance from a small internet retailer. The SAME item from the SAME retailer was also available for purchase via Amazon at the same price. I chose to purchase through Amazon because I was a Prime member at the time so the shipping was much faster and cost me nothing extra. But the small internet retailer got the bulk of that sale. Amazon also sells the item directly, but the price was much higher.
Medex Man said:
My experience with Amazon is that prices are low (but often not the lowest)… however the products on Amazon are cheap knock-offs.
Even when the product is made by the same manufacturer as the good product, Amazon’s version is plastic throw away quality, while the local merchant has a solid steel / brass version that will last many many years. And the local merchant’s made-to-last product has the same price as the cheap plastic cr!p Amazon sells and ships with a US Post Office subsidy.
When you add up the billions in taxpayer subsidies to the Post Office (passed along to Amazon for some reason?), and the added landfill costs because the cheap plastic doesn’t last — Amazon’s price is really high
But snowflakes only look at the number, they don’t know quality. They only see the low low low monthly payment their credit card company gives them (at 21% interest if they are lucky).
Amazon isn’t the *cheapest* by a long shot.
But as I’ve been in the process of re-building the front end of my ’82 CJ7, I’ve found them to be a fantastic source for materials and parts that I either can’t find elsewhere or can’t find cheap enough elsewhere – especially locally. Anyone who might have the part I need within fifty miles of my location usually believes it is made of gold – or at least gold-plated.
And as a Prime member, I typically get my parts within two days and I have yet to make a return that they haven’t honored and issued a refund for.
Sometimes, NAPA gets a better or cheaper version and sometimes AutoZone or even a different online store like RockAuto. You just have to look around… It’s called “shopping” and it’s what my parents used to do only they had to drive between K-Mart, JC Penny’s, and Sears to find the best deal.
I can usually do it without leaving my desk.
One of the greatest tragedies to play out in our time (outside of the pointless wars that have been fought over the past 100 yrs or more) is that countless economic (mainly Keynesian) fallacies have been printed over and over by the mainstream media and ordinary, educated, people have adopted these fallacies as God’s truth.
I read blogs and have conversations with people where evidence of this is legion. How do you tell people that what they believe is BS? How do you tell them they’ve been duped and we’ll all suffer the consequences of this one day? (probably fairly soon)
All I ask is that the flaws of Keynesianism and Monetarism are laid bare when the next big crisis blows in — with any luck the cowardly politicians will hang the central bankers (and economics establishment) out to dry when they’re forced to deliver their mea culpas to the citizens.
Diogenes of Sinope said:
“How do you tell people that what they believe is BS?”
I ask them if the task at hand was to solve the JFK assassination, would they like to examine the Zapruder film?
Then, with a momentary pause before they lose patience, I ask them if they think the Russian election interference might be solved by examining the DNC’s computer server.
The thinking above is just some liberal economist unwilling to point to the Black Hole that is excessive debt and say “there’s the problem” lets stop the music, turn on the lights and clear up the mess.
Anything to avoid the inevitable credit clearing event.
If US rates continue to rise the pin will meet the balloon.
The Russians did it.
Raise the mortgage, business lending, and personal lending to 6 percent and watch asset prices collapse to a level that actually reflects real value. Oh wait, we can’t do that, assets are the new ATMs from which we get our money.
It will get there when the Bond bubble bursts.
Iraq just launched $1Bn at 6.2% and massively over-subscribed.
They are still fighting there so consider that – people queuing to buy.
If Fed do keep a raising cycle going for a while and a few balloons will pop.
The Lege said:
Except that Iraq is now a de facto protectorate of the U.S. so 6.2% seems a bargain.
Jon Sellers said:
I was thinking that the other day. It is almost like it was planned. I’m guessing somewhere around the ’70’s, TPTB decided that the average Joe had too much of the nation’s money so they needed to break the unions. So they offshored manufacturing.
Now, the question becomes, how do people get hope (so they don’t revolt), without ever getting a big paycheck? Asset inflation! And asset inflation that keeps them in perennially in debt and taking bigger and bigger risks. And we can tell them that they’re really entrepreneurs!
Central banks cut rates because retail prices are falling? What an idiot. Regardless of what they say, CBs don’t care about retail prices. The only thing they care about is preventing bubbles from popping.
Medex Man said:
Central banks cut interest rates because their unproven academic theories tell them lower interest rates is the answer to every question and every problem.
As the Fed’s own “studies” have discovered, the Fed has never forecast a recession. Not even once. Their theories and models are complete nonsense
Money answers all things, but all things have a price.
BoE keeping rate at 0.25% and reduced growth expectations, partly Brexit related.
Expects some tightening within the next 3 years, they haven’t forecast well so far so who knows.
Old Guy said:
Economics is not a science as so many tout and believe it is. Australia is just following the Fed’s lead when one of our regional reps blame all of this on the consumer. You must go out and spend, spend, spend. They forget people only have so much disposable income and the federal take over of healthcare in this country pretty much destroyed most people’s disposable income to spend.
Governments at the local love outrageous housing prices. They get more tax money and could care less about affordable housing. Every millennial I speak with in large metropolitan areas have no desire to own a home. Even the ones that have good paying jobs. Many tell me the price will drop sooner or later and many saw their parent/s go underwater owning a home.
Where this ends seems to me like nothing good for all but the governments of the world.
My experience is that owning a home, as in being largely dependent on it, allows forms of leverage against a person, both from being able to locate someone regularly, through to being able to menace the ability to use that home or leverage kinds of payments. Don’t ask, but it is the anti thesis of what government purports to represent put into action, once all other means have been raided, the most visible result being open war.
At Uni. in Australia I remember an official bank advert in the local magazine. It had a couple of happy looking teens drawn running towards, on a blank background, but for a house somewhere I think. In bold across the top was written ” Kill your parents and take all their money”, and that was it but for the name of the bank. I guess the generation that wrote the advert are now old, so I don’t put it past them emptying the accounts of those younger as an extension to the philosophy.
pater eusebius tenebrarum said:
Economics is a science – it is just not a natural science, but a social science. It veered off course between the 1920s and 1940s. Today’s orthodox economists treat it as if it were similar to the natural sciences, as thought there were things that can be “measured” and “predicted”, which is complete nonsense. Economic laws do exist, but they cannot be proved or disproved by “empirical evidence” or statistics. They are based on logic, to be precise, the logic of human action.
Reblogged this on John Barleycorn and commented:
Yeah, low inflation is the problem. Australian housing prices have nothing to do with the low interest rates and up to 95% Loan to Value Ratio being offered by lenders.
Mike Bravo said:
Yeah, low inflation is the problem. Australian housing prices have nothing to do with the low interest rates and up to 95% Loan to Value Ratio being offered by lenders.
Maybe I am in bubble but as a self funded retiree I don’t see it anywhere except in bank interest 🙂 My cost of living in Australia has skyrocketed and so has Government costs of doing business as their employment and wage inflation is way beyond their statistical analysis of actual inflation. Of those costs that affect me only food inflation is moderate. Government charges are up well over inflation, Local rates this year are up 9%, electrical +20%, gas is a disaster with Japan paying less than one half of what I have to pay for Australian gas (this doubled in 3 years), road related charges 5to6% pa, private health cost over 6% pa, and housing locally up 15-20% pa which is reflected in rent. Can somebody tell me how inflation is running at less than 2% – its a joke.
It is less than 2% when an official reason is needed to increase money supply or make policy changes.
As the Fed’s own studies have discovered, the Fed has never forecast a recession. Not even once. Their theories and models are complete nonsense.,
“Their theories and models are complete nonsense.”
But they remain “in charge” because:
1. What they do results in massive income transfer to those who, through the legal bribes called “campaign donations”, actually own “our” governments.
2. Pols can continue to promise more than tax receipts can fund via the associated myth “you can forever borrow your way to prosperity”.
I see no way out of that dynamic other than complete economic collapse. Their garbage theory and models should have been publicly discredited long ago, but Joe and Jane Sixpack only see the superficial result of their “saving the economy” via a VAST increase in national and personal debt.
Australian journalists are a joke to be honest.
If you want more economic insanity, http://www.abc.net.au/news/2017-08-02/how-holden-closure-will-help-ease-energy-demand/8765828 . What they are saying there is that it is a good thing a major car manufacturer has ceased operating in Australia because it will reduce demand for electricity. This is in the context of blackouts last summer (six months ago) due to coal power plants having closed due to their being made uneconomic by wind and solar subsidies. But as the article says, the problem of blackouts can be solved by eliminating manufacturing rather than having coal power plants. Keep in mind that the above link goes to the ABC website, a publicly funded entity (to the tune of AU$1.1 billion a year), which according to their charter should be impartial but which has become captured by leftists and relentlessly pushes that agenda.
Name one publicly funded media outlet in the West that’s not leftist, with an agenda.
Stuki Moi said:
Heck, I can’t even name one right wing political party of any size in the West, that is not leftist…….
Ron J said:
“Australia needs a little bit of inflation. Without it, our economy is stuck with low interest rates and all the issues they create. But inflation is turning out to be very hard to generate.”
There has been tremendous inflation. Global debt to GDP is now some 325%. A debt bubble has been inflated. After inflation, comes deflation, to complete the cycle.
mission accomplished said:
I think nobody gets it. This guy sure doesn’t.
“…demanding their natural right to earn good returns even if the resource they control isn’t actually scarce anymore.”
You can’t print capital. All you can print is bad information about the current state of what really is capital and bad information about how to deploy it.
The rentiers looked after the commons. Now it’s planetary tragedy of the commons for all.
Time will tell
Economic theories usually reflect self interest not many people can shed the prejudices that come with the milk of their mothers.
Joseph Constable said:
Economics sub-departments are under the broad social sciences department at colleges. Economics is social science. Like all social scientists they want to force changes in society they think are better. It is that forcing that is the problem.
Ron J said:
“Having low inflation is a problem. While of course we love low prices, overall the economy runs best with consistent predictable inflation.”
There is no consistent predictable inflation. Inflation rises and falls. It is cyclical. Unemployment rises and falls. It is cyclical.
Fighting cycles is a waste of energy. It causes distortions. Distortions in one direction result in distortions in the opposite direction. Creating a stock bubble, resulted in a stock market collapse. Creating a housing bubble resulted in a housing market collapse.
Tony Bennett said:
“and crazy high house prices.”
and, yet, Murphy’s rant does not address this … oh, that’s right, in ‘expert’s’ thinking “crazy high” asset prices are A-OK.
Tony Bennett said:
“overall the economy runs best with consistent predictable inflation.”
Really, Murph? Says who? YOU?
The economy runs best with consistent predictable JOB / WAGE / INCOME gains for the masses.
Not your idiotic asset bubbles that turbo charge wealth inequality that you seem to be a proponent.
Governments and banks are joined at the hip. Where one goes the other follows. Banks cannot fail without governments collapsing as well. Thus banks are as safe a place as any since when governments fail everything else goes with it.
Andrew Anderson said:
They see a non-problem (falling prices) Mish
Even if falling prices were ethically produced (e.g. via ethically financed productivity increases), falling prices are problematical:
Falling prices encourage money hoarding. But progress requires using money, not hoarding* it. But using money is risky and involves the possibility of losing it. Why then should people risk their money if they can receive a risk-free reward (increased purchasing power) for doing nothing with it?
So even ethically** produced falling prices are anti-human progress and thus a problem in themselves***.
Besides, what is more to the point is REAL INCOME. Why, for example, should a person complain about a 3% increase in his costs if his income increases by, say, 5%? Is he not still better off in real terms by 2%? Or should he desire 0% or even negative increases in his costs at the risk of even smaller increases in his income? For a net decrease in real income?
*Defined here as saving beyond legitimate initial capital formation and liquidity requirements.
** Unethically produced falling prices are even less to be desired, of course.
***Easily and ethically solved with equal fiat distributions to all citizens, one would think. (Austrians might think of it as a gentle rain of gold dust upon every citizen equally. What’s not to like?)
Austrians would think you are nuts – and you are
By the way the whole notion of “hoarding” money as a bad thing is ludicrous
Fiat is the exact opposite of ethical.
Andrew Anderson said:
Inexpensive fiat is the ONLY ethical money form for government use else the taxation authority and power of government are misused/wasted to benefit special interests such as gold owners. Or is the government buying $700 hammers also ok?
Also please note that the DEMAND for fiat is artificially low in that the citizens may not even use fiat except for physical fiat, aka “cash”. We should fix that by allowing all citizens to have accounts at the central bank and by abolishing government-provided deposit insurance and other privileges for the banks.
Then, with fiat in full use by the citizens (= increased DEMAND), there would be less concern about increases in the SUPPLY of fiat reducing its value.
Medex Man you are getting irritating. I do not read comments quickly if they go into moderation. I have other things to do, like write posts and research things. If you have a complaint about a post make it.,
I told you to email me to go over what may be happening to your comments going into moderation. Yiu refuse to do so. Until you do. Stop whining.
I remove the John Smith comment
If anyone finds a comment is offensive – flag it and email me
Reblogged this on World4Justice : NOW! Lobby Forum..
– Agrre. Falling prices are good for consumers. But falling prices are BAD for producers. Because it can lead to (Credit) Deflation and that’s bad for consumers as well (think: falling employment). In that regard falling prices and deflation is EXTREMELY bad for the economy (and production). and that’s what the BIS & Mish are overlooking.
If prices are falling then the prices are falling for the inputs to the manufacturers as well.
So we are not overlooking anything. You are.
The problem is debt. Central banks created that problem and of course Nixon had a huge role as explained.
– Agree and Disagree. Some input costs will – indeed – go down when prices fall, but NOT all costs will fall. Think of things like wages (go down with a lag), Insurance, costs for heating/cooling a factory/hotel/restaurant/etc., council rates, payments on debts (interest & principal), maintenance (costs).
– The “Deflation is good” folks overlook another thing. Falling prices do NOT automatically mean that consumers will buy more stuff. Why buy a second TV, second house, second car, second bicycle, second vacuum cleaner, second iPad etc. when one already has got one or more these things ? In other words, in terms of turnover (sales prices x Sales volume) it’s highly doubtfull that increased demand (sales volume) will make up for falling (sales) prices.
– Steve Keen did some excellent work on this topic in one of his videos published on YouTube.
– On the relationship between Nixon closing the gold window and the growth of debts: the debt to GDP ratio already was growing BEFORE 1971 and the US was then still on a gold Standard. Same story of what happened in the 1920s. the US was still on a gold standard but in spite of that the debt to GDP ratio kept rising.
– Steve Keen has shown that since say 1850 the US debt to GDP ratio kept rising and rising.
Keen is wrong about many things – notably his proposals for fixing things.
– Keen is perhaps wrong about one or two things but the Austrian School followers (like one “Mish”) are wrong about MANY MORE things.
– Is that the reason why you removed the links to Steve Keen’s website ? He was offending your braincells too much ?
I generally delete comments from trolls but I will allpw your comment to mock your ignorance.
I removed all external feeds for a while, in the change from GEA to mishtalk. I put back Acting man. I told Steve Keen, who is a friend by the way, that I cannot stand Forbes. It has a 4-second intro that is nauseating and it breaks posts into multiple pieces even if one has the exact link to the article. Seeking SAlpha does the same damn thing. This is not the same with my website which is more like the WSJ or Financial Times. Steen agrees.
I would debate Keen any time over his proposed solution, but he has taught me a lot.
Does my answer offend your brain cells or do you have any?
– Central Banks generally FOLLOW what a person called “Mr. Market” determines what interest rates should be.
– During the crash of 1873 short term rates wnet down to almost zero. And that happened in spite of NOT having a Federal Reserve. The FED opened its doors only in 1913.
Well the fools could just include rents/property in inflation stats, problem solved, 15% inflation. If they remove EVERYTHING that has higher than 2% inflation from the stats wtf do they expect?
Retail isn’t cheap! I buy everything except food from USA/China bcos it’s cheaper!
The REAL reason NON essential goods aren’t inflating out stratosphere is bcos we’re all maxed out paying for the essentials.