China causing our inflation?

Dual economy's double bind
August 02, 2008

"We are, of course, fully aware of the possibility that people may fear that this temporary period of high inflation could, in fact, turn out to be persistent," ...

Australia is in the middle of its biggest export price boom since the Korean War, when the economy still rode the sheep's back and the price of wool jumped 140 per cent in nine months from mid-1950.

Such booms typically bust. And the inflation threat has been building for several years, obscured by cheap manufactured imports from China's low-cost factories, made even cheaper by a strengthening Australian dollar.

But a tipping point was reached last year and China switched from being a force for disinflation (through cheap manufactured imports) to a source of inflation (by pushing up global energy, steel and food prices). The Australian version of this global story contains an extra inflationary twist: the billions of dollars of national income from our commodity exports have pushed spending beyond the economy's supply capacity.

Now Stevens is deliberately squeezing the expendable domestic economy to make room for the unstoppable export-oriented resources boom to bring back demand within the economy's supply capacity. That shows up in the two-speed economy, with mining boom town Perth in the fast lane and Sydney's western suburbs' battler belt doing it tough. This week's figures showed that, while retail volumes have fallen during the year to June, export receipts are up nearly 30 per cent, producing a trade surplus. It's a volatile economic and political cocktail.

"There is a bit to be worried about," Treasury secretary and RBA board member Ken Henry warned just after the May federal budget in a speech devoted to defending the RBA's inflation target. "Present macro-economic circumstances are as testing as anything we've seen since the mid to late 1980s."

Everyone agrees with Henry that this is the biggest test yet of the inflation target regime, of which Australia was an early adopter and which now is the norm in most developed economies other than the US and Japan ...

While Hewson has been one vocal critic of Stevens's RBA, so has Peter Jonson, the RBA's head of economic research in the '80s, who writes under the pseudonym Henry Thornton. On Anzac Day, Jonson wrote in The Australian that "we may now be witnessing the death of inflation targeting", arguing that trying to keep overall inflation within or close to the 2 per cent to 3 per cent band in the face of surging oil and food prices from abroad would risk throwing the economy into an unnecessary recession ...

Pointing to "sky-high global oil prices", Swan says the Government can "deal (only) with those matters within our control". "It is certainly going to take a significant amount of time to deal with the inflationary pressures in the Australian economy that have been developing for a long period," he says.
Huh? If China's demand for oil and food is causing inflation here then can't we just slow China's growth by ceasing exports to them? So aren't these matters somewhat within our control? Can't we stuff the exports to China and go back to a one-speed economy? Aren't all the so-called gains of comparative advantage and economies-of-scale negated if we've hit the limits of supply of oil and food? Are pensioners struggling to afford food here because of our exports to China?

Forces conspire to lift grocery prices
July 26, 2008
But it is not only petrol that is jacking up the cost of everything from bricks to bagels.

Creeping interest rates, the drought, a global food shortage and upwardly mobile Asians hungry for Western foods and fads all are feeding into Australia's spiralling cost of living. Kevin Rudd chose three f-words to sum up the global inflation situation this week: food, fuel and finance.
Can't we help return these upwardly mobile Asians back to their peasant life by stopping exports of minerals and food to them? Ploise uxplain ...


Mr Nicholl said...

Okay, I'll explain.

The reason is that we must pursue a positive balance of trade. Why? Because our economy, like every other in the world, runs on escalating debt to financial institutions.

It is a fallacy that investment is financed through savings; in fact, the more individuals and firms save, the greater the deficit in effective demand, and the lower prices will be.

The deficit exists in any case, however, and prevents domestic markets from clearing. While classical economic theory denies this, it cannot but be the case, when savings, taxation, overhead production costs and bank charges are all taken into account as drains on purchasing power.

Furthermore, production is typically multi-stage, with a mark-up added at each stage (e.g. from wholesaler to retailer), but without any fresh purchasing power created in the same economic cycle to ensure equality between prices of consumer goods and wages/salaries.

Also, if production is multi-stage, it will not be the case that all incomes will have been saved and so be available to buy the finished product. Thus, either the product must go unsold (at home), or fresh purchasing power must be created in respect of further production.

Our debt-driven system must continually expand in each cycle in order to (1) distribute a prifitable amount of social product, and (2) service the mounting debt from previous cycles. Continual economic expansion is, as we know, inflationary, and this explains the tendency of prices to rise on aggregate over time.

It may also intesrest you to consider that expanding economies require a continual growth in the labour force, contributed in Australia by immigration.

The other method our debt-driven economiies have developed for dealing with the systemic shortage of purchasing power is, of course, production for export. Why else would we require a positive balance of trade?

Anonymous said...

"It may also intesrest you to consider that expanding economies require a continual growth in the labour force, contributed in Australia by immigration."

Hmmm, Japan's post-war economic miracle seems to contradict that assertion.

As for Australia's anomalously large immigration intake, the Rudd Government's is simply using the mass importation of foreigners as a tool to achieve the same ends the Howard government was trying to achieve through Work Choices - lower wage growth.

It has become orthodoxy among the business community, politicians and some sections of the media that dampening wage growth through mass immigration is "good for the economy"—as if the the economy exists for its own sake as opposed to existing for the good of Australian citizens.

Of course, it will be interesting to see how this mantra will be defended if unemployment continues to rise and our economy does slip into recession, as some economists are predicting.