Low Inflation? Are they Insane?

So, the RBA cut the official cash rate for the first time in nearly three years. It now sits at 1.25%.

The reason for the cut? Apparently, inflation isn’t high enough. The purchasing power of your money is not being eroded at a pace fast enough for the guardians of the nation’s currency.

Clearly, that is a rubbish excuse. Gold in Aussie dollars hit an all-time high of just over $1900 an ounce yesterday. The purchasing power of our currency in relation to the most stable barometer of wealth humanity has ever known — gold — is in the toilet.

But our unelected monetary bureaucrats are telling us otherwise.

Inflation comes in many different forms. It’s not simply the change in the price of a ‘basket of goods and services’.  It’s also the change in price of big ticket items, like a house or a stock market index.

But in the world of monetary mandarins, asset price inflation is irrelevant. It’s the price of eggs, bread and an iPhone that they seek to change. Which just goes to show you the absurdity of domestic interest rate settings in a global world.

How exactly does lowering the cost of money in Australia push prices higher? And why is that a good thing, anyway?

Well, in the RBA’s warped mind, lower interest rates leads to more borrowing. This newly created credit translates into more demand in the economy. This, in turn, leads to an increase in employment and upward pressure on wages, and more demand for goods and services.

Hopefully, the supply of goods and services won’t increase too. Because if it doesn’t, the RBA will get some inflation as a result.

I don’t know what world these people are living in, but when your spending revolves around kids, you see inflation everywhere. True, it’s not the inflation that shows up in empty shelves at the supermarket. But it shows up in increasing prices for this thing or that, this lesson or that event.

Same service, more money: That’s inflation.

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We need more inflation

But apparently it’s not enough. We need more inflation!

The absurdity of this policy pursuit is made clear in the following chart. It shows ‘Tradable and Non-tradable Inflation’. Put simply, tradable inflation is the change in prices where goods and services are exposed to international competition, or where the goods are simply imported.

It effectively represents prices that the RBA has no control over. Non-tradable inflation is domestic inflation, which the RBA has a little more control over.

Tradable and Non-tradable Inflation 05-06-19

Source: RBA Chart Pack

[Click to open in a new window]

Now as you can see from the chart, over the past few years (until very recently), we have been importing deflation, while domestic inflation has been above the RBA’s target of around 2.5%.

Only recently has that situation changed. That is, imported inflation is back above 0% (thanks to a decline in the dollar) and domestic inflation is back around 2%.

So the inflation rate that the RBA can control is not far from its target, yet apparently, interest rates need to fall more!

How is it that we’ve got to a point where making your citizens pay more for their goods and services is the road to economic recovery? And how is it that this prevailing economic wisdom is widely accepted and not ridiculed by the business media?

I have no idea.

Once again, I point to the gold price. Having reached an all-time high in Aussie dollars this week, gold is clearly ridiculing this advanced economic thinking.

The beauty of gold is that it doesn’t have an opinion. It just sits there, inert, quietly observing the chaos around it. Although it may seem like ‘it’s rising in value’, that’s not the case at all.

It’s the Aussie dollar that’s falling in relation to this indifferent monetary metal. An ounce of gold is an ounce of gold. Its weight and characteristics haven’t changed throughout history.

The game is rigged

The Aussie dollar, on the other hand, is a human construct. In the hands of politicised humans, it’s bound to be mismanaged.

The chart below shows you just how bad this mismanagement is. It shows the Aussie dollar/US dollar exchange rate in relation to the Aussie dollar gold price. Since 2009, the value of the dollar has halved.

1 Day Division Spread - AUDUSD, XAUAUD + 05-06-19

Source: Optuma

[Click to open in a new window]

Yes, you read that correctly. In the past decade, the Aussie dollar has lost half of its value against the most impartial financial barometer there is.

But no, there is never any mention of that in the business media. And the RBA certainly won’t utter of a word of it. Instead, they tell you there is no inflation, and we need to cut rates even more to produce it!

The game is rigged, dear reader.

But, as I tell my kids: life isn’t fair, so don’t complain about it. If you understand that the system is rigged, you can get started on trying to rig it in your favour.

More on this theme in the weeks ahead…


Greg Canavan,
Editor, The Rum Rebellion

PS: Click here to watch the full video interview with The Rum Rebellion’s Greg Canavan and Richard Hayes, CEO of The Perth Mint. 

Greg Canavan approaches the investment world with an ‘ignorance is bliss’ philosophy. In a world where all the information is just a click away at all times, Greg believes we ingest too much of it. As a result, we forget how to think for ourselves, and let other people’s thoughts cloud our own.

Or worse, we only seek out the voices who are confirming our biases and narrowminded views of the truth. Either situation is not ideal. With regards to investing, this makes us follow the masses rather than our own gut instincts.

At The Rum Rebellion, fake news and unethical political persuasion are not in the least bit tolerated. It denounces the heavy amount of government influence which the public accommodates.

Greg will help The Rum Rebellion readers block out all the nonsense and encourage personal responsibility…both in the financial and political world.

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