https://www.businessinsider.com.au/rba-holds-cash-rate-at-0-…
RBA have recently announced that they are “prepared to be patient” and to keep pouring gasoline on the red-hot economy while looking past extremely high inflation figures (that many would call under-reported). Now this loose RBA’s stance on inflation poses a hard question for YOU (as a citizen and taxpayer): are you prepared to be patient as well? In other words, should you fear the new (and much higher) inflation targets that our central bank has announced?
For those folks who don’t want to read the whole text, the short answer is “YES, you should be sh@tting bricks by now given the speed and velocity of inflation expectations”. If you feel like you have been royally screwed and keep running on a hamster wheel while getting a little bit poorer every day – keep reading, you will find your answers below.
The longer answer below has what no government official will tell you and the key-words are “financial repression”, “currency de-basement” and “rising wealth inequality”. Put simply, governments have taken a political decision to decrease the purchasing power of your hard-earned dollar (not only current but also all future earnings as well) which equals to robing you off in a clear daylight, and the most affected would be the ones who could afford it the least.
Why would any government want to do it? Few reasons but the most obvious are few: they need to inflate away the massive government and private companies’ debt (that was a result of complete incompetence and mismanaging the pandemic and the decade prior), to inflate the nominal economy growth rate through pushing up the prices of goods and services higher which in turn should entice business to keep investing and consumers spending. In essence, our government have made a political decision to kick the can down the road and to pretend that population’s wealth is growing, provide you with incentives to spend more at the margins and to get you more and more indebted while motivating all kinds of “zombie” business to keep expanding their operations at any cost to the taxpayers (which will ultimately fail in a spectacular way at some point in the future, but it will be on someone else watch).
Does this explanation smell like a “conspiracy theory” to you?
Well, if it does then let me break-down just two of the many tools that our government used to spur nominal growth and get all of us (as a nation) into a MASSIVE debt.
Do you remember that “Jobkeeper payment” that was touted by the Treasurer as “best 70 billion spent to support the life of ordinary Australians”? While it provided a few of us with another hundred of AUDs per week, a bunch of enterprises have booked a few extra billions in profits from it while maintaining the business operations and keeping the windfall of Jobkeeper’s money. Next, after all those profits were exposed, instead of demanding to pay back the mismanaged taxpayers’ money our government decided to look the other way and let them keep the profits. The ATO boss was even summoned before Senate as they did not want to name the largest beneficiaries from the massive waste of taxpayers’ money called JobKeeper.
Why did they do that? Because of the fear that it will hurt business confidence (read profits), and businesses would be less prone to take more taxpayers money down the road to have for re-investment, hiring and developing. There is, however, one serious flaw with this lamest reasoning from the most wealth-supporting government - businesses do NOT invest based on the PAST performance, they do so based on the FUTURE projections. It does not matter what kind of profits were made in the past quarter – these profits have already been booked and distributed, what makes or breaks any investment decision revolves around what the future holds. And the future does not look bright with already high and higher inflation coming, with rising wages and pledges to keep interest rates low for longer which will ultimately create even more inflation (and that is exactly what RBA counts on, as they said).
Low interest rates and Yield Curve Control (bond buying program from RBA where they come with a massive bag of money to purchase bonds in the open market in order to lower the yields of those bonds). We were told that this would lower the cost of money for the businesses that will need to grow in this challenging environment. In reality, this provided a few savvy fund managers with an exciting opportunity to front run the massive amount of taxpayer’s money coming into the market and walk away even richer than they already were (don’t blame the fund managers - they were just doing their job, but ask the government and RBA why they would even want to contemplate manipulating the supposedly “free market”?)
Also, this massive inflow of liquidity was destined to inflate the asset prices which we all are very aware of (financial markets and house prices). But do you really think that this price appreciation is sustainable unless the RBA will continue pumping more money into the system? I do not think so and, moreover, RBA will need to increase the “dose” every quarter to just keep them growing the same pace. And if they do continue to pump, this will again push the inflation figures even higher and this will be the END of business confidence and business investment which is exactly the OPPOSITE of what RBA said they want to achieve with low interest rates and YCC.
Just think about it - as a business owner, in this highly inflationary environment, you would NOT want to invest into anything long-term because you cannot project your future cost due to rampant price increase on all commodities and bottle-necks created by the government shut-downs. You would NOT want to hire more people due to rising wages and people leaving workforce en-masse because the government made it much more profitable for an individual to stay on a well-paid jobkeeper/jobseeker payment or become a shut-down business (with a windfall of money for doing nothing). You would NOT want to invest into producing more goods and services when you know that your customers will soon have to CUT on consumption due to rising prices because this is when you will need to lower the prices (because now you have more goods on your hands than you can sell) and then you are royally screwed because your suppliers and employees will still want their inflated paychecks. And this is where STAGFLATION is born, and every savvy businessman knows that and will NOT invest more in the face of looming inflationary pressure. Moreover, lower interest rates incentivize business to NOT rush with investments decisions and be on a loose end of money management as there is NO pressure to deliver growth, to deliver returns that pay down debt and interest.
Contrary to the popular opinion (pushed down your throat via government owned mass-media), it is the higher interest rate that pressures business to keep growing and yield better return on a capital because there is a cost to procrastination and opportunity-waste. As a bonus, business would want to invest in the areas with the most potential which in turn removes those zombie-companies that are simply not able to survive in higher interest environment.
It is NOT the higher interest-rates that demote investment, but it is UNCERTAINTY that kills business activity and growth, and you get plenty of uncertainty in the environment with high inflation and low incentives for real growth in the most needed areas. Contrary to what the RBA wants you to believe, lose capital sloshing around and low interest rates incentivize speculation and chasing “momentum” which will result in bottle-necks in some areas and over-allocation in others (which is exactly the definition of capital misallocation).
And, in case you might have thought that Jobkeeper, low interest rates and YCC were the only smart things that this government has come up with. Hell NO, there were:
- TFF (Term Funding Facility) by RBA who literally printed 200 billion overnight from thin air (literally as you don’t even need a money printer anymore)
- JobKeeper payment ~100 billion AUD over 2 years
- Business cash flow boost ~32 billion AUD over 2 years
- Coronavirus supplement ~18 billion AUD over 2 years
- Economic support payments ~11 billion AUD over 2 years
- Different kinds of tax benefits, cut-offs, extra claims and write-offs would give you another ~60-70 billion AUD over 2 years
See the proof of figures here (official resource) https://www.aph.gov.au/About_Parliament/Parliamentary_Depart…
Overall, through extremely loose monetary and fiscal policies, this government has injected close to 400 billion extra dollars into economy while maintaining almost zero level interest rates. If this is not a recipe for a 1970s like stagflation disaster, then I do not know what is.
What does all of this mean for you?
Now YOU (as a taxpayer) will have to pay many times over for the higher inflation targets – through your taxes you will have to pay for all government subsidies (given that government debt is soon expected to be in TRILLIONS, you will need a few decades/centuries to pay it off) and through paying more for your everyday necessities with prices going higher and higher to accommodate for RBA’s higher inflation plans (this is indefinitely, and for the rest of your life).
As a result, the low and middle class will keep getting less and less for their hard-earned dollar while “zombie” businesses will thrive in government-subsidized incentives. But hang on, it is not the government officials who pay for all those subsidies, it is YOU (the taxpayer) who will have to pay. Your hard-earned dollar will lose its value (meaning that it will buy less and less goods and services with every day passing by) with prices on everyday necessities rising much faster than your wages. Also, in case you did not know that, you have already become a proud co-owner of nation’s growing debt burden (feel free to send a thank you note to ScoMo and Co).
What can you do about this?
Call for and vote for higher interest rates and tighter monetary and fiscal policies!
It might seem counter to what the press and officials want you to believe but that is the ONLY way to save the purchasing power of your hard-earned dollar (not only your current savings but also all your FUTURE earnings) and drive the business growth in areas with the most potential. Low interest rates and government subsidies incentivize capital misallocation and higher inflation. High interest rates incentivize proper capital management and ensure that growth is sustainable.
Next, think about your choices in the looming federal election – I will vote for those who call for a tighter monetary and fiscal policies and proper incentives for business growth. Remember those “zombie” companies that I talked about before? If we do not STOP mismanaging the capital through improper subsidies, YCC, different kinds of grants designed to only inflate asset prices and low interest rates, then we will become a “zombie” nation – a country that cannot earn enough to even pay the interest on its debt.
Finally, I would like you to understand that we are already way past all economic signals for tighter monetary policy and other developed countries have either already raised interest rates or announced tapering of stimulus and plans to raise interest rates (countries like New Zealand, UK, Canada, US). It is only Australian politicians who keep kicking the can down the road and it will be the political pressure that will push them to do the right thing and raise the rates.
Keep that pressure on!
P.S. Want to see how it will end when extremely easy monetary policy gets matched up with a stubborn political decision of “rates must be lower for longer” then look at Turkey – their “head of Central Bank HR” has delivered a few rate-cuts against all economic reasons to tighten monetary policy and hike rates. The result: a former high-growing economy with stable currency and low unemployment that targeted to get accepted into the EU block got into a spiral of hyper-inflation that led to stagflation and a complete collapse of every business system in the country with ridiculously high unemployment figures, rock-bottom low business confidence, absolutely no investment into the future growth and decimated currency.
Thanks for reading this and Happy New Year.
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