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

  1. They see a non-problem (falling prices)
  2. They accurately connect the inane responses of central banks (lowering interest rates) to asset bubbles
  3. 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.

  1. My article Deflation Bonanza! (And the Fool’s Mission to Stop It) has a good synopsis.
  2. 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?

Related Articles

  1. “Idiosyncratic and Transitory Factors” Holding Down Inflation: New Definition of Transitory
  2. War on Cash Proposals in Australia: Microchip Expiring $100 Bills, Forcing People to Keep Receipts
  3. Secular Disinflationary Trend Hits New Highs: Deflation on Deck? What’s That Mean for Gold?
  4. Steen Jakobsen on the Next 30 Years: “Everything is Deflationary”
  5. 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