Some of you may remember a photo of Scott Morrison building a cubby house for his teenage daughters. While most of the social media comments centred on how they were too big for a cubby, followed by people attacking them for body shaming, followed by people explaining that the “too big” comments were about age, following by abusive comments, one person – who clearly was a bit of a handyman – pointed out that most absurd thing about the photo was that Morrison was holding a hammer while the cubby was being put together with screws.
I was reminded of this photo by the RBA decision to lift interest rates yet again. Phil Lowe, it seems to me, is using a hammer to belt in the screws and when anyone points out that a screwdriver would be better, the response is that a hammer is the only tool that he has.
Of course, this is an interesting way of looking at things. There are all sorts of decisions which can be justified with this simple logic. For example, “I didn’t do the dishes because I didn’t have any detergent so instead I let the dog lick them clean” or “We don’t have any anaesthetic, we’re just going to knock you unconscious with this brick”.
Now I do know that Phil the Inflation-slayer is pretty single-minded when it comes to getting things in the 2-3% target range. I mean we all understand that it would be the end of civilisation as we know it if the figure didn’t come down before September when Mr Lowe is looking more and more likely to be without a job. However, I’m yet to hear an explanation for why this figure is so much more important than an unemployment rate of under five percent or why we need to cause a recession in order to take it down so quickly. Would it really destroy the economy if it were, say 3.83% next year? And when I say destroy the economy, I mean would it lead to things like mass unemployment and slow growth and… You know – all those things that seem preferable to an inflation rate outside the Reserve Bank’s target range.
While I lack the economic expertise of economists who manage to accurately predict what the Reserve Bank will do each month on at least two or three occasions out of fourteen (to be fair, it IS a lot harder now they’ve stopped leaving them on hold every month!), it seems to me that we have a number of factors driving inflation:
- A problem with supply chains due to Covid, floods and associated problems. Interest rate rises may send some firms with loans out of business, exacerbating supply problems. I think we can all agree that rising interest rates will not fix these problems, although a hammer might be useful if that’s the tool that you haven’t been able to access due to a breakdown in the supply chain.
- Energy prices. Apart from the war in Ukraine, the lack of replacement for some of the aging coal-fired power stations which are being shut down before they break down is causing some spikes and this is another problem that will only be partially solved by rising interest rates. Once more of us are homeless and having to move in with others, houses will be so crowded that we’ll all be toasty warm, just from the human bodies all crowded into the same bed… Although this may be a problem in summer.
- Petrol prices. Some minimal relief when people lose their job and don’t have to travel to work, although this probably won’t be enough to bring inflation into that magic number of 2-3%.
- Housing supply. Of course, if interest rates go up, less people can afford to build and developers are less inclined to build new houses. This worsens the housing supply rather than improves it.
And, just to be fair, I did hear Michaelia Cash on the radio a couple of days ago telling us that it was important to get real wages moving but not at a rate faster than inflation because if you did that, you’d just get more inflation and Tony Burke is insulting employers by suggesting that some of them use labour-hire companies to pay people less and Labor’s proposal of equal pay would push up inflation because they’d have to pay people the same rate. Or something like that. I find it very hard to understand what she’s saying a lot of the time. Something to do with pitch and the human ear.
Like I said, I’m no economist. So if you can get a professional to explain the flaws in my logic, they’d be most welcome to write me a simple thesis on how this can all be blamed on a refusal to accept whatever economic theory they’ve been espousing for years. And when I say “a refusal to accept”, I don’t mean by governments. No, it’s often that reality stubbornly refuses to accept the wisdom of excellent economic theory.
Even if the Reserve Bank is using a hammer, the fact is that it’s really only those with mortgages and loans that are being screwed.
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