The RBA, The Middle East And Taylor Swift… Just The Obvious Connections!
The recent problems in the Middle East have led a number of commentators to speculate that this may lead to higher fuel prices which will undoubtedly lead to higher inflation. Higher inflation will put pressure on the Reserve Bank to raise interest rates with a view to controlling inflation.
Now I know what some of you are thinking… how will raising interest rates help the situation in the Middle East?
Well, the simple answer is that it won’t but – as was pointed out many times when the Ukraine situation led to higher prices – when you only have a hammer then all you can do is hit things and pretend that people with a mortgage are a nail.
Part of the problem with economics is that people don’t understand how it works and the reason for that is: it doesn’t. Or to put it another way, there are many economic theories that are beautiful in their simplicity and they explain quite well the way that things would work in an ideal world that didn’t have other economists or people to stuff up the theory.
Let’s start with the simple idea of supply and demand. In theory, prices move toward a point where demand equals supply. For example, if I’m standing outside a Taylor Swift concert selling autographed photos and I only have ten, I’d be silly to charge $2 for them because I’m pretty sure that I could get more. On the other hand, I’ll have a very long evening if I try to charge $1000 for them. So – according to economic theory – I should be adjusting my price until I find the price at which demand equals supply.
There are only two things wrong here. If I’d started with a price that was too low, then I may have sold them all before they hit the top price I could get for them. On the other hand, if I started at a $1000, I may not care that I’ve only sold one and I’m happy to go home content that I haven’t had to waste a lot of time trying to work out that magical spot where demand meets supply.
Of course, when it comes to Taylor Swift we need to understand that phenomena of inelasticity of demand. Surprising as this may be to all those fans who said that they’d pay anything for a ticket, going to a Taylor Swift concert comes under the heading of discretionary spending which means that you can choose not to go… Yes, this may be a shock to a number of people, but I assure you that even people who aren’t economists will back me on that.
Various other items aren’t discretionary. For example, you can’t say to your landlord that you’re a bit short of money so you’ll only sleep in your home six out of seven nights and you expect your rent to reflect this. You only have a choice of paying your rent in full or moving into your car which is pretty tough choice, particularly for those who don’t own a car. As Joe Hockey famously told us: “Poor people don’t drive!”
So when the RBA puts interest rates up, it’s trying to reduce demand. The only problem is that when the factors pushing interest rates up are items that people don’t have a lot of choice about such as mortgage repayments, petrol, rent, energy and food then the increase in interest rates will drive down discretionary items but overall demand for rest will be relatively unchanged.
Or to put it as simply as I can: putting less petrol in your car won’t change the overall world demand for oil and it won’t drive the price down, so an interest rate hike won’t solve inflation in fuel prices. It may, however, put people out of work in other areas such as hospitality and retail which means that they don’t have to worry about the cost of fuel as they have no job to go to.
If this all sounds a little insensitive it’s because I’m talking about economics and if there’s one thing I’ve learned while reading The Australian Financial Review it’s that there’s only one thing to consider when talking about economics and that’s whether there’s money to be made. It’s one paper that tries to give you good information about what’s actually happening because unlike the rest of the media, people who lose money because they were given incorrect information get far more upset than when politicians tell you that there’ll be no cuts to the ABC, education or health. Of course, you do have to ignore the fact that many of the writers are the sorts of people who’d try to keep their parents out of aged care. Not because of concerns about the welfare of their parents but because they’d have to sell their home and the market should be making a strong recovery next year and their inheritance would be considerably more…
Anyway, the basic problem is that Australia’s inflation problem won’t be solved by the Reserve Bank. In fact, the only thing that we can really do is rely on the federal government to come up with creative solutions to the problems that inflation causes. And, of course, any creative solution will be attacked by the Liberals and the media without coming up with any other solution. It’s only a matter of time before the old “Look at the debt!” resurfaces.
I intend to address the issue of government debt at some future date and to explain how it only matters when they promise to give every zoo in Australia a giant panda, but I’ll save that for another time…
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6 comments
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New England Cocky -
Rossleigh -
Terence Mills -
Phil Pryor -
Clakka -
wam
Return to home pageThe wisdom of Rossleigh should be included in all school economics texts: “Part of the problem with economics is that people don’t understand how it works and the reason for that is: it doesn’t. Or to put it another way, there are many economic theories that are beautiful in their simplicity and they explain quite well the way that things would work in an ideal world that didn’t have other economists or people to stuff up the theory.”
However, expecting the feral government to come up with creative solutions is a bit much. After all, the solution for the residential rental crisis is straight forward but rejected by the electorate – restrict negative gearing to one rental property with established portfolios grandfathered out of existence. However, this was rejected in 2019 feral elections.
Funny thing is that the introduction of Capital Gains Tax in 1985 had the grandfathering strategy and nobody appears unnecessarily out-of-pocket today because of this strategy.
In a capitalist society it seems ridiculous for capitalists to rely upon government handouts to create a profit which is the strategy for negative gearing of residential real estate.
Yes, NEC, I frequently wonder why the past is rarely looked at when it comes to working out whether certain things were a good idea or not. While Labor’s proposals for negative gearing that were taken to the 2019 election wouldn’t have solved the current rental shortage, it would have undoubtedly led to a few more properties being built.
Similarly, very few people look back and go, “Wow, how far-sighted of the Whitlam government to allow the purchase of ‘Blue Poles’ for a mere $1.3 million given what it’s worth today…”
We tend to leave the past alone and just allow the impression of the time to be the accepted wisdom, so we end up thinking that the Cain/Kirner governments left the sort of debt that would take generations to repay and completely overlook the fact that it was repaid by the Kennett government inside of two terms of government even though it was supposed to be so bad that it’d be our grandchildren repaying it.
Ah ! Joe Hockey the Treasurer who inspired a generation.
Remember, it was Joe who urged first home buyers to get “a good job that pays good money” if they want to enter the property market. You can’t fault that logic.
Or, when asked at a press conference if residential property in Australia’s biggest city was out of the reach of many, Hockey said: “If housing were unaffordable in Sydney, no one would be buying it.”
Of course they then made him our Ambassador to the US : he has much in common with Donald Trump.
What smelt worse, a sty floor bottom of overcrowded pigs after a week, or Joe Hockey’s intellect and reputation??
Ahhh Freedom! Ahhh Democracy! Welcome to the paradise that is Oz, the land of the unfettered.
Freedom to come & go …. Nah. Freedom of speech …. Nah. Freedom of assembly …. Nah. Freedom in trade …. Nah. Freedom to own land …. Nah. Freedom in equity …. Nah. Freedom to have wellbeing …. Nah.
But that’s OK, as we have democracy.
All must vote. All must accept the people’s choice of government. All must accept the laws made by parliament. All must accept administration by the government. All must accept the government’s running of the economy. All must accept policing by the government. All must accept national defence by the government. All must accept the government’s deals and interactions with the governments of other countries. All must accept the government definition of ‘other’. All must accept the wisdom of government and the executive.
Albeit one can whinge, if one can afford it.
Whinge to an MP. Raise a petition. Appeal to tribunals. Appeal to the courts. Whinge in a church. Say a prayer to one’s God. Make a fuss via the mass media. Publish a book. Do a work of art.
Then again, one can wait every three years to reconsider one’s vote.
However.
Political parties oppose one another. Political parties can obtain donations from vested-interests. Political parties constrain the free vote of their MPs. Politicians can mislead and do not have to tell the truth to the public. Governments can decide what to conceal or reveal. Governments can ignore whinging. Governments can commission inquiries and control terms of reference and timeousness. Governments can accept or reject recommendations from inquiries. Lawyers by their ethics must represent the interests of their clients (including governments). Governments appoint members of tribunals. Governments can contract or appoint advisors of their choosing. Government appointees, contractors and consultants must know what side their bread is buttered on. Public servants are constrained from promulgating anything regarding their work. Government controls the prudential matters of all banks. Mass media corporations are mostly politically aligned. Of course there is parliamentary supremacy, and then there’s economists.
Ahhh, the swings and roundabouts, or probably see-saws, per chance every three years – not much time to affect anything really, but blather. Seems there is a freedom, a freedom to exhaustively research, be across all things and divine the truth and reality, or risk being perennially stupid. Politicians know and design that perhaps a majority opt for the latter.
So it goes in Oz. Seems one can’t be a Groucho Marxist – one is bound to nominate a club.
Ooops, I forgot the purity of the Constitution (ha haar), and of referendum, to be sponsored only by government.
There is a litany of terrible decisions by LNP government over my lifetime but labor has made little capital out of them.
Preferring to allow the bullshit conservatives to label Gough and Gillard as historical failures.
When Turnbull gave a company of 4 people $440m with no tender, no plans and no there was a minor attempt by the media but no push from little Billy or torpid Tanya.
Even now @1% they have $5.5m each in interest and no idea what has happened to the principal??