Your editor is always – yes, always – amused at the fawning, unbridled confidence that analysts and commentators have in the words of central bankers.
Most of the ‘expert’ economists at the major banks appear to see Reserve Bank of Australia (RBA) governor Glenn Stevens and Federal Reserve chairman Ben Bernanke as a modern day Nostradamus. It seems they haven’t yet figured out that Nostradamus didn’t really predict anything at all.
The same goes for Stevens and Bernanke. They’ve singularly failed to predict anything important either.
Take Jarrod Kerr, interest rate strategist at the Commonwealth Bank. He says:
“One important point I noted [in the Fed's statement] is that they said inflation would remain subdued for some time. So the fact that the market has got rate hikes priced in at the end of this year is incorrect, is emotive, and is just plain wrong.”
Note the tone and words. He’s not saying that he thinks the market is wrong, he’s saying the market is wrong because the Fed have said so.
To take any central bank at its word on inflation really does fly in the face of the facts. But Kerr isn’t the only ‘expert’ to pour water on the inflation flames. Take Macquarie Group interest rate strategist, Rory Robertson. He’s quoted saying:
“There isn’t any inflation and there isn’t going to be any inflation.”
We can only assume neither Kerr or Robertson have paid a visit to the Fed and RBA websites recently to take a peak at the money supply numbers.
Take your pick on whether you consider Currency, M1, M3 or Broad Money to be the most reliable indicator of inflation. They have all increased. And they have all increased much higher than the 2% inflation rate the Australian Bureau of Statistics (ABS) tries to convince us is the rate of inflation.
According to the ABS, prices have increased by 2.1% between March 2008 and March 2009. To put it another way, the value of the dollar in your pocket is worth about 2.1% less than it was a year ago.
The real picture comes if you look at the “Money Aggregate” numbers. They tell a truer picture of how much your dollar has been devalued by during the same period.
| In billions | Currency | M1 | M3 | Broad Money |
| March 2007 | $37.2 | $208.9 | $826.9 | $922.8 |
| March 2008 | $39.6 | $223.2 | $1,002.1 | $1,088.9 |
| March 2009 | $44.3 | $249.2 | $1,152.4 | $1,232.8 |
| April 2009 | $45.4 | $247.6 | $1,165.2 | $1,241.6 |
| % increase from March 2008 to April 2009 | 14.6% | 10.9% | 16.2% | 14% |
There’s quite a difference there between what the ABS tells us inflation is and what the real rate of inflation is.
So while Kerr and Robertson try to tell you the market is “just plain wrong,” and “there isn’t any inflation and there isn’t going to be any inflation,” they’ve clearly not bothered to look at the numbers.
Because if the amount of money in the system has increased it devalues any money already in circulation. The very act of increasing the money supply is inflation. It’s already with us.
Not only is Robertson happy to bang on the ‘no-inflation’ drum, but he’s bashing furiously at the deflation drum as well:
“I think the Fed has done extraordinary and unprecedented things and chairman Bernanke essentially saved the world from systemic economic collapse late last year. The main risk still remains disinflation and potentially deflation, not inflation.”
Sure Bernanke has done some “extraordinary” things, including a massive increase in the US money stock by 16.2% or 9% whichever measure you prefer to choose.
|
Percent change at seasonally adjusted annual rate |
M1 |
M2 |
|
3 Months from Feb 2009 TO May 2009 |
9.4 |
4.2 |
|
6 Months from Nov 2008 TO May 2009 |
9.5 |
9.5 |
|
12 Months from May 2008 TO May 2009 |
16.2 |
9.0 |
But by now we shouldn’t expect anything less from the analysts and economists at any bank. It’s hard for them to criticize the central bankers, when without them they would be toast.
Maybe Kerr and Robertson really do believe in what they tell their clients. But unfortunately it flies in the face of logic.
The market is clearly trying to push interest rates higher as investors factor in a glut of government debt plus inflation. Yet central bankers and mainstream economist appear blind to it.
Even now there is still the real possibility that the RBA will try and manipulate interest rates further by cutting the cash rate to try and encourage the banks from increasing mortgage rates.
As per usual, policy action is distorting the market and building the pressure for further disruptions over the coming months.
You’d think it’s about time that someone made a bit more noise on the disastrous policy actions being taken on the economy, interest rates, housing and superannuation. Well, that’s exactly what Money Morning and Daily Reckoning are looking to do.
Nothing has been finalized yet, but look-out for more information in the next few weeks on a planned event we’ll be holding in Melbourne.
Other Stuff on the Markets
The S&P/ASX200 gained 1.29% yesterday, while there was even better news overnight on Wall Street with the Dow Jones Industrial Average adding 172 points. In Europe the FTSE100 fell 0.64%, while the CAC40 dropped by 0.68%.
The price of gold in Australian dollars is trading at $1,169.32, while in US Dollars it trading at $938.85.
The Aussie dollar strengthened versus the US dollar and Japanese Yen, trading at USD$0.8032, and JPY77.18.
Further strength for Crude oil overnight, closing at USD$70.34.
For the biggest movers on the market yesterday click here…
Cheers.
Kris.
{ 7 comments… read them below or add one }
Thanks for my daily dose of reality. I am sick and tired regulatory fan boys (& girls) in the mainstream media. However I do think that most of it predicated by government spin and the inability of the press to any proper analysis.
I have some news for you, the rate of increase in money supply is NOT inflation. Inflation is simply an increase in the price of a basket of goods – inflation can be caused by increasing money supply, but increasing the money supply does not always increase inflation.
It would be nice if you could explain to your readers how an increasing money supply is inflationary when we are at the same time experiencing a massive deleveraging of both business and households. Yes it’s probable that the monetary authorities will lose control of inflation some time in the future when they misjudge/mistime when to start tightening, but that is certainly not occurring at the moment. And to claim “Because if the amount of money in the system has increased it devalues any money already in circulation” is simply laughable – money’s value is derived from its purchasing power. Increasing the amount of money does not necessarily mean a fall in the purchasing power of money. Economics 101 guys.
real inflation is about what the median family can spend on living . I am tired of opposing views on inflation/deflation. It is all theoretical, not practical. What it comes down to is what do you do if there is inflation or deflation – for those with thousands and those with tens of thousands. HOW TO SURVIVE. what is chosen is my choice, all i ask is some lucid choice
No money supply is not inflation.
It can put pressure on inflation but
inflation is a product of supply and demand
while consumer confidence remains week all this money is going to be saved not spent.
Justin, you must have been asleep at economics 101 because what you are saying isn’t even economics for dummies.
“Inflation is Always
and Everywhere
a Monetary Phenomenon”
A famous quote by the Nobel Prize winning monetary economist Milton Friedman.
If you dont know what a monetary phenomenon means its an increase in the money supply. You might want to actually know even a little about economics before you make this kind of silly comment.
Buy your ‘basket’ of goodies is changing, look at what Mars, Cadbury etc are doing with their chocolates, reducing the size but keeping the price the same.
Then look at how they measure CPI as well, including substitution and more importantly everyday costs that regularly increase but never get counted
How about that for a topic?
PS: What will tuesdays lotto numbers be and where are fixed & variable interest rates going over the next 1-3 years, If you happen to glance at the crystal ball :0)
Inflation comes about from an increase in the money supply. That new money has to become available to consumers to trigger inflation.
To date little new money is getting into the hands of consumers from what I can see. For example, in the US the bailout money given to banks resides where it came from , at the Fed. Its possibly being kept there to soak up the next round of balance sheet issues to be caused by mortgage defaults. Its hard then to see how high inflation or hyperinflation could start there right now.
In my town in Queensland inflation in consumeables is still very alive while property has been copping discounts for some time, though nothing drastic yet.
I see higher inflation as being likely in the future because of what governments and central banks have done in the past. Recently they have shown intentions towards playing with fire on a grander scale to prevent financial sector failure (eg cash handouts around Christmas in Aust., monetisation of debt in USA)
It seems for the time being the world is in limbo waiting for the next and imminent crash in everything. I suppose this inflation/deflation debate will go on and on throughout until we either get increasing money or credit in hand or we dont. Hopefully not.
Leave a Comment
Comment moderation policy: Port Phillip Publishing supports free speech and frank and open conversation. But we reserve the right to modify or delete your comments if we consider them to be offensive or in violation of any laws, including Australia's anti-discrimination laws