Australian Politics 2022-09-27 08:02:00

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Did the Reserve Bank's money printing cause inflation? The bank says it's complicated

This is a sophisticated article so it is good to see it in the public prints. It omits mention of two important facts.

1). The banks initially got the new money. So what did they do with it? No mystery. They almost gave it away as low interest housing loans -- which rocketed up real estate prices, including rents. So that was a HUGE blow to the cost of living.

2.) Due to the lockdowns, there was a HUGE loss of available goods and services. There were far fewer goods and services for ANY money to buy. There was a big new mismatch between demand and supply. So what was available came at an increased price. So that too greatly increased the cost of living.

So between those two things, The increased money supply WAS largely responsible for inflation. It was not the only factor. Bad weather and Mr Putin also played a part in their own way


Do you remember how the Reserve Bank printed a huge amount of money in the pandemic? Have you been wondering if it's responsible for the inflation we're seeing?

The RBA says it's a complicated question to answer, and it's trying to encourage people to think more deeply about money itself. Here's what that means.

The bond-buying program

In late 2020, the RBA began buying hundreds of billions of dollars worth of government bonds.

It was an emergency stimulus measure. The program ran from November 2020 to February 2022, and saw the RBA buy $281 billion of federal, state and territory government bonds.

Last week, the RBA published a review of the program which found it broadly helped to support economic activity during the crisis.

However, there were a few passages near the bottom of the review that were very interesting.

They had to do with money printing.

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See, the RBA's bond buying was an exercise of "money printing" because the bank was creating money to buy the bonds.

To be more precise, it was waiting for Treasury to sell the government bonds to authorised investors (ie institutional banks), then it would buy the bonds from those banks.

And when it bought the bonds, it would pay for them by simply electronically crediting the accounts that those banks had at the RBA.

For example, let's say the RBA bought $100 million worth of bonds from a particular bank.

It would say to that bank, 'Here you go, we've gone to the computer and added an extra $100 million to your exchange settlement account. Thanks for the bonds."

The RBA's act of money printing clearly increased the supply of money in Australia. But the RBA says it didn't have a significant impact on the overall supply of money. What does that mean?

Well, think of what qualifies as money.

Money comes in many different forms. It comes in the form of currency (notes and coins), and savings deposits, and term deposits, and a bunch of others.

Consider what happens when you withdraw currency from an ATM: the value of your currency holdings increases, and the value of your deposit holdings decreases, but the stock of "broad money" in the economy doesn't change.

So, when we talk about an increase in the supply of money, we need to be clear about what type of money is increasing, and how that's impacting the overall supply.

And we also need to know if the extra supply of money is actually being spent, or if it's being stashed in savings accounts or under peoples' beds where it won't be adding to inflation.

It won't add to inflation if it's not being used to buy anything. Which brings us back to the RBA's bond buying.

The Quantity Theory of Money

In the RBA's review of its bond purchase program (BPP), it's defended itself against accusations that its "money printing" is largely responsible for the inflation we're experiencing now.

It says some people have been drawing on a theory popularised by Milton Friedman that links inflation to the rate of growth of the money supply.

According to that theory, if you assume money circulates in the economy at a constant rate (ie a constant "velocity"), then a large increase in the money supply, owing to the bond-purchase program, would lead to a sharp increase in inflation.

But the RBA says the world's not that simple. Why? Because the "velocity" of money isn't stable, for one. It's been falling for decades in Australia, and it crashed in the pandemic when people couldn't leave their homes and there were fewer opportunities for money to circulate in the economy. That's why the RBA began buying bonds in the first place, to push more money into the system.

Now, you get the velocity of money by dividing nominal GDP by broad money.

Broad money, as the name implies, is the broadest measure of money that includes every type of money in the economy (I've produced a table below that shows the different types of money).

Eagle-eyed readers may notice that, according to the graph above, the velocity of money has actually picked up a little recently.

That suggests broad money has started circulating through the economy at a faster pace, after lockdowns ended.

Wouldn't it follow from that, with so much extra money in the economy and with people starting to spend that money more quickly, inflation would obviously be picking up?

Well, again, the RBA says it's not that simple. It says its bond purchase program only significantly increased a particular kind of money, and we need to understand how that type of money can be spent.

"While inflation has increased following the bond-purchase program, it is not clear that this can be explained by the Quantity Theory," the RBA review says.

"Different components of the money supply can move independently over time. "While the bond purchase program led to a sharp increase in exchange settlement (ES) balances and thus 'base' money, the increase in the broader money supply, which is relevant for nominal expenditure in the economy, was not as large," it says.

So, what exactly is "base" money?

The RBA makes a distinction between different kinds of money depending on how accessible the money is.

If you're able to get your hands on the money quickly to spend it, it's considered "liquid."

For example, the cash in your pocket is extremely liquid, but the money in your term deposit isn't as liquid because it can take time for you to gain access to it.

That's why central banks categorise money into different "monetary aggregates" to reveal what type of money is in an economy, and who has access to it.

That's the category of money that experienced a sharp increase in supply from the RBA's bond-buying program.

When the RBA bought the government bonds from banks in the secondary market, it credited the banks' ES accounts which are held at the RBA, and those balances, which are a form of money, fall into the category called "money base."

As you can see from the table above, the value of the entire supply of "money base" money was $550 billion in July.

In February 2020, it was worth $116.2 billion. So, the supply of that specific category of money has increased by $433.8 billion since the pandemic began. Meanwhile, the supply of broad money - which captures all money in the economy - has increased by $624.3 billion.

That means the increase in base money accounted for 70 per cent of the increase in the economy's entire money supply during the pandemic.

And crucially, that "base" money wasn't put into the deposit accounts of individuals who could freely spend it. It was initially put into the ES balances that large financial institutions held with the Reserve Bank.

It was up to those institutions how they spent it. They could try to lend it to other people, or they could try to invest it in other assets, or they could use it to buy their own bonds, or whatever.

And it's not like they can collectively rush out and spend it all at once, keeping other things equal, because they still have to satisfy their liquidity requirements with the regulator.

In other words, the financial system is complicated. According to the RBA, it's wrong to simply assume that its money printing was a big driver of this inflation.

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Our nation’s real crisis is our rental stress

It’s a reasonable question to pose: should we have had a summit on the rental crisis rather than a summit on jobs and training? After all, we are very close to full employment and most of the suggestions from that talkfest had already been decided or were unhelpful – multi-employer bargaining being an obvious example.

Let’s face it, hardly a day passes when there isn’t a story about a stressed family or individual unable to find affordable rental accommodation. Reliable tenants are turfed out of their rented house; renters make several applications, only to be knocked back each time; rents are increasing at alarming rates and gobbling up higher proportions of net incomes.

Given that affordable and safe shelter is one of our most basic needs, the rental crisis is an issue that should concern all levels of government. Let’s not forget here that around one-third of the population are renters and even though the proportion of the population who are homeowners appears to have levelled out in recent years, the absolute number of renters has risen quite sharply. When it comes to dealing with the rental crisis there is a great deal of woolly thinking, and initiatives are put forward (and sometimes implemented) that make matters worse.

There really is only one word you need to focus on when it comes to the policy challenge of ensuring adequate rental accommodation: supply.

Before we get to the core solutions, it’s worth painting a picture of rental accommodation in Australia. There are actually some differences across the states and territories; there are also some differences from other countries.

The vast majority of rental accommodation is provided by the private sector, with public housing accounting for a small proportion (around 4 to 5 per cent). There is relatively more public housing in South Australia and the ACT. Until recently, public housing has been declining proportionately as old stock is demolished and new building programs have been slow to get going.

The type of rental accommodation varies from stand-alone houses to apartments. There is some boarding house accommodation, but a lot of this is substandard. The proliferation of high-rise apartment buildings in several cities has led to higher proportions of renters living in apartments than was once the case.

In terms of who owns these rental properties, it’s very much a mum-and-dad affair in Australia, with 70 per cent of owners of rental housing owning just one investment property. Less than 2 per cent of investors have five or more properties. (Several parliamentarians own multiple investment properties.)

There is very little corporate ownership of long-term rental accommodation in Australia, which contrasts with several other countries. While there is a lot of discussion about a build-to-rent model, there are numerous impediments to the involvement of property trusts and superannuation funds, particularly related to tax. The fact is that the returns on investment in residential rental accommodation have been too low to attract large-scale investment.

In the meantime, there is a stereotype of the avaricious owner with multiple properties making huge claims against the taxpayer via negative gearing. This is highly misleading. In point of fact, the fiscal costs of negative gearing have fallen significantly – at least until recently – in line with falling interest rates.

According to the latest figures (2019-20), the cost of negative gearing to the budget was only $166.5m compared with more than $9bn in 2007-08.

Indeed, one of the factors explaining the rental crisis is the relative absence of investors in the residential real estate market.

Following on from the direction of the Australian Prudential Regulation Authority in 2016, loans to investors were rationed and by 2020 investors were selling more homes than they were buying. In addition, some owners of rental properties were switching from long-term rental arrangements to Airbnb. It’s not clear that the overall impact of the switch has affected long-term rental supply or prices significantly, but in particular markets it clearly has had an impact.

Some state governments also have decided to introduce legislative measures intended to give tenants a better deal on ending of leases, permission for pets and other measures. For the owners of properties, these laws have made their investments less attractive and potentially discourage new investment. Changes to land tax also have eroded the value of investment properties, with the recent proposed Queensland law (to include interstate properties in the determination of the rate to be levied) potentially driving down the returns for investors.

Unsurprisingly, governments have shown concern for the predicament facing so many renters.

One common response has been to support first-home buyers to enable renters to escape the rental treadmill. Examples include first-home buyer grants, exemptions of discounts on stamp duty and access to concessionary finance. Almost all of these increase the price of housing by acting on the demand side. There is also an incorrect assumption that most renters in distress are just one step away from home ownership. The reality is many renters are not close to home ownership nor is it on their radar.

Two new terms have entered the discussion: social housing and affordable homes. Social housing is just another term for public housing – in part to gloss over the many problems known to be associated with public housing.

All state governments have ambitious plans to fund the building of additional social housing but, given the waiting lists, the new accommodation will be filled quickly. With the low turnover of existing tenants, there will be a need for more supply.

Affordable housing refers to below-market rental accommodation for frontline workers close to places of work. Judged by the shambles of a previous attempt to establish such housing under Labor’s National Rental Affordability Scheme, it should not be assumed new initiatives will succeed.

Notwithstanding, the federal government is proposing to a $10bn Housing Australia Future Fund to build 30,000 new social and affordable housing properties across five years. This is a drop in the ocean and encroaches into a space that is the role of states.

The only real solution to the rental crisis is more rental properties. This solution is even more important given the federal government’s determination to drive up the number of migrant arrivals. Getting the corporate/superannuation sector involved would be helpful, but this is unlikely to deliver short-term gains given the impediments that need to be removed.

State governments should realise that putting their feet on the accelerator and the brake at the same time doesn’t work – they need to make it unambiguously more attractive for private investment in the rental market to relieve the extreme pressures we see and the hardship for families and individuals this entails

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Qld fishing being hijacked by Green extremist thinking

The fishing industry in Queensland has been hijacked by greenies and it’s sending professional anglers out of business.

The latest Palaszczuk Government decision has been masqueraded as some sort of “save the fish’’ campaign, suggesting unless fishing bans on Spanish mackerel stocks were made they wouldn’t survive.

Rubbish. Spanish mackerel stocks have been replenished spectacularly in recent years.

It’s a stitch up by a fisheries department that has been infiltrated by conservationists who’d rather eat salad than fish.

This move by Fisheries Minister Mark Furner is just another example of a government caving into the Green movement, which it is tied to at the hip.

Charter boat operator and Cairns Professional Game Fishing Association spokesman Dan McCarthy is furious but not surprised. “Minister Furner and the QLD Labor government seem to always back green extremist ideology over hardworking Queenslanders,’’ he said. “More small businesses are now looking at their life’s work and their futures being trashed to please urban greenies.

Mr Furner’s anti-fishing program has reduced recreational catch to close to zero at one fish per person or two per boat.

Mr McCarthy says it’s the dodgiest science he’s seen. “These include warnings from scientific experts who specialise in Spanish mackerel and fisheries management who have been very critical of the process,’’ he said.

“They’ve used a baseline biomass from 1911. You can’t make this stuff up.’

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Telstra consumer and small business calls are being answered in Australia

What a relief! Dealing with foreign accents over the phone can be difficult

Over the past months, we’ve hired around 2000 new team members across the country so we can answer consumer and small business calls in Australia. It’s another of many changes we’ve made to create a better customer experience.

Our team are your neighbours. They’re located in cities and towns across Australia, including regional hubs like Maryborough, Bunbury and Bathurst. Thanks to hybrid working, this means the person helping you could be in your state, suburb, town or – who knows – even your street. On any given day, nine out of 10 of our consumer and small business service team choose to work at home.

Answering your calls locally

We regularly ask you what you want to see from us. What we heard loud and clear was that you wanted a change in the way we answered our calls, so we did it. It’s a change that also deepens our local expertise.

For quick questions – like checking your bill summary, managing your services or even troubleshooting connection issues – we have the My Telstra app. But for more complex problems or a bit of extra help, you told us you want to speak to someone who gets you. Someone who understands your service history, and knows what you’re going through.

During the Queensland floods earlier this year, we had customers in Brisbane speaking to local team members who understood first-hand the challenges they were facing. Being there – locals helping locals – this motivates our team every day.

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Also see my other blogs. Main ones below:

http://dissectleft.blogspot.com (DISSECTING LEFTISM -- daily)

http://antigreen.blogspot.com (GREENIE WATCH)

http://pcwatch.blogspot.com (POLITICAL CORRECTNESS WATCH)

http://edwatch.blogspot.com (EDUCATION WATCH)

http://snorphty.blogspot.com/ (TONGUE-TIED)

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