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John Cochrane on Free Markets & Economic Growth and the Fiscal Theory of the Price Level – EP214

Professor John Cochrane of the Hoover Institution discusses the importance of free markets for economic growth and highlights stagnating growth as the biggest economic issue of our time. John talks about what may be his next book, “Free to Grow,” which aims to update Milton and Rose Friedman’s “Free to Choose” for today’s world. After John speaks, show host Gene Tunny interviews him about his views on growth and his controversial Fiscal Theory of the Price Level. This is a recording of a live event at the Centre for Independent Studies in Sydney on 26 September 2023. 

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About Professor John Cochrane

John H. Cochrane is the Rose-Marie and Jack Anderson Senior Fellow at the Hoover Institution. He is also a research associate of the National Bureau of Economic Research and an adjunct scholar of the CATO Institute. 

Before joining Hoover, Cochrane was a Professor of Finance at the University of Chicago’s Booth School of Business, and earlier at its Economics Department. Cochrane earned a bachelor’s degree in physics at MIT and his PhD in economics at the University of California at Berkeley. He was a junior staff economist on the Council of Economic Advisers (1982–83).

For more on John, check out his bio here:

https://www.hoover.org/profiles/john-h-cochrane

What’s covered in EP214

  • 00:03:36 Importance of economic growth.
  • 00:16:06 Incentives drive productivity and growth.
  • 00:17:12 Regulation hinders economic growth.
  • 00:22:59 Fixing problems requires better solutions.
  • 00:28:53 Fixing social programs by embracing free markets.
  • 00:39:28 Regulatory state causing innovation slowdown.
  • 00:46:24 Free market healthcare benefits the poor in John’s view.
  • 00:48:47 Fiscal Theory of the Price Level: Inflation caused by government debt.
  • 00:53:56 Avoid old left-right division.
  • 01:05:21 Government debt may lead to a sovereign debt crisis.

Links relevant to the conversation

Video of the Free to Grow event on YouTube:

CIS web post about the Free to Grow event:

https://www.cis.org.au/event/free-to-grow-unlocking-economic-prosperity/

Transcript: John Cochrane on Free Markets & Economic Growth and the Fiscal Theory of the Price Level – EP214

N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It was then looked at by a human, Tim Hughes from Adept Economics, who did his best to decipher some tricky dialogue that otters understandably missed. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.

Gene Tunny  00:03

Yeah, John has written this immense book. It’s fascinating. I’ve picked it up but then I discovered I had to buy three more books to be able to, to interpret it. But it’s it is it’s, it’s terrific.

John Cochrane  00:17

Get past, past, just ignore the chapters to the equations and get to the fun stuff…

Gene Tunny  00:26

I’m getting through it!

Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host Gene Tunny. I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory, evidence and by hearing a wide range of views. I’m delighted that you can join me for this episode, please check out the show notes for relevant information. Now on to the show.

Hello, thanks for tuning in to the show. In late September, renowned US economist Professor John Cochrane spoke at the Centre for Independent Studies in Sydney. I’m an adjunct Fellow at CIS and I was lucky enough to interview John after his talk, and I also moderated the Q&A session. John is usually based at the Hoover Institution at Stanford, but he was visiting Australia and New Zealand to attend conferences held by the central banks of both countries. The theme of the event that CIS held was “Free to Grow”. John emphasised the importance of free markets for economic growth, and how stagnating growth is the big issue of our time in his view. After his talk, which I’m replaying entirely because it’s so good, I asked John about his views on economic growth and about his controversial fiscal theory of the price level. So stay listening to hear what he says about that. If you’d like to watch the video version of the CIS event, it’s available on YouTube. And I’ll put a link to it in the show notes. I’ve edited the audio so it’s a bit shorter. But if you’d like to hear the whole thing, including a great introduction of John by the CEO of CIS Tom Switzer, then check out the video, I’d be interested in what you think about what either John or I have to say in this episode. So please get in touch. Contact details are in the show notes. Okay, let’s get into the episode. I hope you enjoy it.

John Cochrane  02:24

Thank you. Thanks, it truly is a pleasure to be here. You may ask why, why do I visit central banks rather than just coming to talk to you? The answer is because central banks pay business class, you know, you know who pay, who prints the money. So I want to tell you a little bit about a project that I’m on. I call it Free To Grow. I hope it’s the next book, you’ll notice the allusion to Free To Choose. But Free to Choose was nearly 50 years ago. And it’s time to update it for today’s world and today’s problems. And it really amounts to I’ve been blogging and writing op eds, and so forth for about 15 years now. It’s time to put all that together in one place, which I discovered is not as simple as copy paste. Because you copy paste and you get immense amounts, it means copy, paste and boil down. And that’s much much harder than I thought. So part of that process is to come to talk to people like you where I have to boil it down, because after half an hour, you’re gonna fall asleep. And we can’t go on and on too far. So thank you for coming. What is the most important economic issue of, you know, facing us or the globe or anyone else? Is it climate change, inequality, unemployment, recession? The answer is none of the above, long term growth, the one that nobody talks about now, to get you to think about growth, why it’s a problem and why we need to do something about it. Let me ask you another quiz question. When was the best economy ever? Now a lot of my left wing friends, they’ll point ah the 1950s were just wonderful because, you know, the economy was growing and middle class jobs and so forth. 1950 the average American income was $15,000 in real terms, today it is $60,000. 15 versus 60. Which do you want? It’s not even close. The absolute best economy ever, in all of human history is right now. by a long shot, unless you want 15 versus 60. Now gee, this is GDP per capita and it evokes yawns, but I want to get you excited about it. GDP per capita is not just about more stuff. It’s about first of all better stuff. That household in the 1950 at a tiny house badly insulated, terrible cars that rusted immediately. One maybe black and white TV, health care. You know, they they all smoke. But you know most things you know if you got cancer in 1950 well, they you know, it’s cheap and then they’ll send in the priest. GDP per capita is health, environment, education, culture, defence, social programmes or any hope of repaying government debt, GDP per capita, that people look down on it, but it correlates with everything else. I’m trying to appeal to the progressives in the audience, which might be a few, but we nonetheless, we have to listen. You want to eliminate extreme, you know, extreme poverty, health, child mortality, clean water, all of those things are just collapsing the number of people who live in extreme poverty around the globe is is fallen dramatically. Child mortality what our ancestors even 100 150 years ago, many of their children died. And as a father and grandfather, I cannot imagine that heartbreak that’s just practically unknown, that comes from GDP that comes from economic growth that comes from it’s all part of it. Even you know, things like parks and a clean environment that that all cool, you have to be able to avoid that stuff. One of the things I find most shocking is the new degrowth movement. A lot of the climate movement will admit that it’s really not about the climate, it’s about an excuse to stop growth, and go back to some idea of the farm. These people have never been on an actual farm, say in India, and had to go get the water by hand first thing every morning. It’s just and it’s also annoys me because how much how much does the world economy have to grow before everyone can enjoy the standard of living of say, a social justice activist who likes to fly private jets to Davos we got along great growth before that, for that can happen. GDP is actually a vast undercount. People say, Oh, it doesn’t include, you know, parks and so forth. But it’s a vast undercount of how much better off we are now than than in the past. Among other things, it’s you know, it’s at market prices, it doesn’t count willingness to pay. If you remember, your your economics, the willingness to pay is always much greater than the market price, we get Google Maps for free, that’s worth a lot GDP counts it as nothing, and no medicines, medicines may be expensive. But if you’re about to die, you’d be willing to pay a whole lot more than that $10,000 it costs. A lot of our progressive friends worry about, oh, you know, we’ll run we can’t keep growing forever. That’s wrong. GDP is not just more stuff. First of all, we keep forecasting the end of resources, and it keeps not happening. But where we’re going GDP is the value of things, it’s producing valuable things for your fellow citizens. You know, it’s it’s funny, they say, oh, it’s immoral to go make a profit, you should go do social justice, the most moral thing you can do is to get up in the morning work hard for your fellow citizens. And and and they pay you for it, which shows you how valuable it is to them. But what we are doing, you know, where we’re going is the services economy, the economy of the future, the GDP of the future, will be for example, health, it will be the ability to to live longer and to conquer diseases and to live happier that that doesn’t take a lot of materials. Now I emphasised across time 15,000 in … from like 1,000 in the 1800s 15,0oo in the 1950s, 60,000 today, this is just an enormous increase in prosperity. Let’s look across countries. What’s the economic problem for India? Should they worry about recession? Should they worry about inequality? Well, their income is 2000. Our income is 60,000. The number one question for India is how to be more like us. That’s just orders of magnitude more important. Even China’s only only 20,000. This swamps these kinds of numbers 15 to 60, 2,000 to 60,000, that swamps every other economic issue. A recession is maybe a fall of 2 to 5%. We’re talking orders of magnitude. Climate is as you know, in the news, let’s just take the IPCC reports that say this will cost us 5% of GDP in 100 years, 5% of GDP versus, you know, doubling tripling, quadrupling, the process of growth. India $2,000 plus or minus 5%, or $2,000 to $60,000. And this is just the swamps, that that kind of issue. Now the question is, will this continue? As long as we’re thinking climate change and the economy of 100 years from now, instead of 5%? better off, will growth continue at say 2% a year? Well, then it’s 200% better in 100 years or three times better than today? If it was 4%, we would be five times better than today. That’s Those are big numbers two times better than today four times better than today or just like today that the the end of growth. So the question I see for Western society is will that continue? And the danger is the creeping stagnation, but it may not continue. The US from 1950 to 2000 grew per capita three and a half percent a year. Since 2000. It’s been 2%. We’re cutting the growth rate nearly in half. And the US as much as I will bemoan it is doing better than everywhere else, except maybe Australia, you guys are catching up. But Italy, my favourite country to go visit stopped growing in in 20, in 2010, just a disaster, Europe, Europe is falling behind, the UK, mother country to us both the UK is half as well off as the US in GDP per capita. And it’s just it’s stagnating and going nowhere, you know, half again, I’m going to I’m going to pick on climate, not because climate isn’t important, but just to get a sense of proportionality of what’s important relative to other things, the crisis of climate change 5% of GDP in 100 years, relative to doubling the UK GDP per capita, if they could just be like the US, you know, so climate change is, you know, that UK versus us is 10 times worse than the damage of climate change, we should be paying attention to long term growth and that and that convergence. So for us, the issue is is stagnating growth, and if it keeps going whether our children and grandchildren will experience what we did relative to our grandparents, of course, for for India, for China, for Africa, the ability to live lives like we do in 100 years, rather than be stuck in grinding poverty forever. That is the most important issue. So where does growth come from? Productivity. In the end, it’s all about what can each person produce per hour. It’s about supply. It’s about efficiency. It’s not about stimulus demand, central banks sending money out. It’s not about it’s not about unions. So why are why are we all wealthy? Because our grant, say your grandfather likely worked in a mine. And it’s 1890 and kaboom with a pick? Did Did we get richer because unions made the profits of the mine go to the worker, and now he gets, you know, 50 cents an hour rather than 25 cents an hour at the pick? No, it’s because now the mine is run with some enormous machine. And everybody else moved to the city and got nice jobs like we have. It’s about productivity. In turn, it’s actually, something is really stuck in our in our policy discussion. It’s always 1933. It’s jobs. It’s stimulus. No, Keynes is dead. We’re stuck with the long run. And the long run is about growth and supply. Where does productivity come from? In the end ideas, ideas, not just products and inventions, the you know, the iPhone, we all we all understand that’s an idea. But the little ideas of how to run businesses better. My my favourites is I spent a lot of time Southwest Airlines if you ever travel in the US, they figured out how to board an aeroplane in 10 minutes, United still takes us 30 minutes because we’re all going there fighting for the overhead bins then you swim upstream to check your bags. That is productivity growth. 10 minutes to board a plane versus 30 minutes to board a plane. Every little thing, you know old fashioned businesses like steel, steel I just found out in the US is is cut by at least in half how many man hours it takes to make us a tonne of steel, the yields on boring things like wheat, are just boom, boom, boom up every year. That’s the slow improvements in how do we do things. So it’s ideas. And ideas are very tricky, economically the crucial event and I’m gonna say something that you probably won’t like. The crucial thing about an idea is that it’s what we call non rival, its intellectual property. iPhone property, real property if you use, take my iPhone, I can’t use it anymore. If you take my wonderful recipe for spaghetti alla Puttanesca I can still use it. It doesn’t hurt me at all for you as you use it. Now, why are we all upset about intellectual property? Intellectual property, Once created, should be used by everybody immediately and then we’re all more productively. Why are we so upset about intellectual property? Well, you do need the incentive to create it. But you only need the incentive to create it. It’s it’s tricky that way. Universities you know, my business is creating intellectual property and giving it away for free. That is the good thing. Now that leads you to say, well, we should subsidise research. We should subsidise new ideas. No, no, no, don’t jump to that fact many of my growth theory economist jumped to you know, subsidised research. That’s the answer to producing new ideas. The problem is and let me tell you for sure because I work in a university. It is very easy to subsidise terrible ideas. You know in In the past, there used to be theology departments, whatever, I don’t know what you think religiously, but that doesn’t improve productivity. Now, it’s called departments of intersectional studies, which is the same thing. But it does not lead to productivity gains is what what matters with us whether you want, it is easy to fill academic journals with BS. So we need ideas. And for us, we need new ideas and better ideas. It’s much easier for China, India and Africa, because the ideas are there, they just need to copy. The only reason, the only reason India is not as productive as the US is they don’t do things the way the US does. Their technology, their productivity is not as high, which is a whole bunch of things, education, legal system, management, all the rest of it, but they don’t have to invent anything new. They just have to copy ideas, and it’s not going to hurt us, for them them to copy them. Ideas need to be embodied. So ideas, not just ideas, lots of inventions that are that they need to be embodied, usually a new products, new businesses, new ways of doing things. So they need incentives. And that is, I don’t really call it free market economy, economics, I call it incentive economics. That is the one thing we have to offer. Nobody else pays attention to incentives. Our job is to pay you need the incentives to take those ideas and implement them in new products, new businesses, and every step is hard. We think of growth as 2%. For years just gonna happen. No, every one of those 2% is is is is hard work to do things a little better, and to upset the established order. The problem is, every step is disruptive. So think about Uber and taxis. Easy example, Uber comes in, obviously better, right? We get cheaper rides, cars get used, people get employment opportunities, part time work, and who hates it? The taxi companies. Now I don’t know what happened here. But what happened in the US is just an unholy mess. The taxi companies had been protected forever. They, they they don’t like it. Nobody, don’t count on businesses to be for free markets, businesses hate free markets. Businesses want protection from competition and an easy life. And that’s the problem. This process of productivity enhancement has to be embodied in new businesses that disrupt the existing order. So all of regulation is designed to stop growth. Think of economic regulation, what does economic regulation do? By and large, it says I protect you from competition from him in order to keep the existing way of things going. A lot of it is about transfers, I’m going to take money from you and give to him but we’re going to do it very inefficiently by making you charge by forcing you to charge a higher prices. This regulation is designed to stop growth, not to get it going to preserve jobs, businesses always of doing things. Why? Because we live in democracies. Democracies are responsive to the needs of their citizens. And when the citizens come come screaming to stop competition and preserve my way of life. Democracies give them what they want good and hard as HL Mencken used to say, My ancestor I have an ancestor who came from Germany to the US and he came to the US. They hated Germans at the time, he went to New York, didn’t speak English. He wrote back come to America, the streets are paved with gold. Why? They were in a business they they made furniture and they wanted to move into pianos. But the guilds in Germany didn’t like this. There’s no damn guilds here stopping us from doing what we want to do. That’s what it needs. So why how do we how do we get around that? Well, we have property rights. We have rule of law, the institutions that protect our ability to innovate and and to and to cause problems for the existing people. So why are we stagnating? In my view, the answer is simple. We got people we got ideas, we’ve got entrepreneurial spirit, we have abundant investment capital, we just can’t get the permits. Now my notes say US regulatory nightmare insert horror stories. And you can we have all heard horror stories of regulation gumming up the works of doing things. Good ideas include public institutions. Now I’m I’m a good libertarian with lots of adjectives in front and one is a rule of law in libertarian. Property lights a rule of law and efficient legal system, that the the prep protections against depredation against the ability of your neighbours to go and demand competition that’s really important. And we see that good institutions are one of the most important things to get into growth, that’s why. So how can we get going growth again? Well, let’s we gotta fix the all the sand in the gears that’s getting in the wing. Can this help? There is a strain of thought and economics that says we have just run out of ideas. That’s the end of that, you know, growth is bound to end. I don’t think that’s true. But let’s let’s fix what we can, we can look and see lots of sand in the gears and we can certainly improve the level and, and I think we can do an enormous amount. When you look across countries, the GDP per capita from the Central African Republic, which is about 200, to India, 2000, China, about 20,000. UK about 40,000 US 60,000. There’s a very strong correlation between our incomes and ease of doing business index rule of law index, those kinds of institutional indices, so we know what’s good. What’s amazing is is how big the effect is, from 200 to 60,000, is really just institutions that my favourite is the my colleague, Chad Jones has a textbook on growth theory. And the cover is is a picture of Korea from a satellite, North Korea dark South Korea light. Now, now the good Lord has given us a controlled experiment, I’m sorry for the people of North Korea, but you want same background, same culture, same language, same everything. In fact, North Korea was the wealthier part in before the for the war, you want a controlled experiment on what government can do, it’s just amazing that it can do so much damage. But But there it is, for you, well, continue that regression line, the ease of doing business index puts the US at 82, 100 is possible. 100 just means the best observable everywhere, as I run that regression line out that puts the US 400% higher than it is today. Well, that seems possible that that is I think, a struggle. So how do we do? Erm fixed regulation sounds, you know, like pie in the sky. And the bulk of what I have to offer is, you know, concrete ideas of how we do it. The problem is, here’s there’s a political problem, stimulus is so attractive, stimulus is, ah, I the great politician will give you money and this will float all around, say yay give me, write me a check. Fixing things is a reform effort. And every market is screwed up in its own way with a bunch of vested interests, I call it what we need is the Marie Kondo approach to our public life. You can’t just stimulus, you can’t just go down and buy a lot of containers. You got to fix the sock drawer, and then the underwear drawer and my god the garage is waiting for us the tax code?.Well, that’s the way it is, you know, you have to know where you’re going and and, and start that reform effort. So I want to give you some examples. You’re not going to get in the next 10 minutes programme for everything, but it is the Marie Kondo approach. How can we get out though of the debate, you can see there’s sort of stuck. And I, what I’ve been thinking about mostly is I don’t want to call it out of the box, because that’s so trite, but a way beyond sort of the standard left right dilemma. And I think that’s right, I think there is an answer to air, to most of our problems, that is not just one or the other side more of this. What do you have to do first? Many regulations actually have some reason to them. So understand why, but then do a better job of what they’re doing. One important exercise is what’s the question? As you look at policies, most are answers in search of a question. My favourite being like tax the rich, it’s always tax the rich, but why keeps changing over the time? Well, let’s get the question. And then we can find a better answer. Regulation, regulation is not more versus less. Regulation is better, worse versus worse, well crafted versus not well crafted, full of unintended consequences and bad incentives or not. The the game is to fix, not just more or less, that’s harder. Another important principle, think of the overall incentives, the overall system, not just parts in isolation. And above all, think about the incentives. No one else is thinking about the incentives. It’s politics is just about taking from you giving to him. Nobody’s thinking about the incentives. If you think about the incentives, you’re away from the political wrangling about about who gets what. So for example, let’s think about let me start with an easy one, taxes. What should we do about taxes? Well, what’s the question? If the question is raise revenue for the government with minimal damage to the economy? I said the question once you say the question, the answer is very simple. That the answer to that question is eliminate income taxes, corporate taxes, state taxes, taxes on rates of return, basically just a flat sales tax on absolutely everything. That raises the most revenue for the government with with least cost and and now the objection what’s what’s wrong with that? First objection is, wait a minute, that’s gonna be like a 50% tax rate. Yeah. If GDP if if The government spending 50% of GDP, the tax rate average tax rate is going to be 50%. And if you don’t like that, you need to spend less. The it’s the same tax rate now it’s just raised in a different way. What we do now is we, we put it in lots of different places, so people don’t know. But the idea is simple. What about inequality? Well, number one, get the rich at the Porsche dealer. If you have a flat sales tax, you’re gonna get them you’re just gonna get them at the Porsche dealer, not when when they make the money, and it’s vastly simple. But what about inequality? Oh, you mean that wasn’t the question? The problem with our tax code is it’s trying to do and this is the US, by the way, I should say, I don’t know anything about Australia, and I hate Americans who wander around the world telling other people what they should do. So but I’m gonna seem parochial as a result, because all my stories about America, we’re trying to do 15 things. We’re trying to raise revenue, we’re trying to transfer income, we’re trying to subsidise all sorts of stuff, like my neighbour in Palo Alto lives in a $5 million house got 7500 bucks from the government for his new Tesla. That’s nice. We’re trying to and we’re trying to subsidise all sorts of things off budget without actually, you know, we’re taxing and spending without taxing spending? Well, you’re trying to do too many things. No wonder you get a mess. Let’s separate these. So the way I’d like to do it is let’s put all of that stuff on budget as expenditures. The flat taxes said, Oh, it’s not progressive. But what is the taxes don’t matter. What matters is the whole system. If we raise money efficiently with a flat tax, and then spend checks to whoever you want to spend, the whole system can be as progressive as you want. And as progressive as the voters will like, or as less progressive as you want. But it doesn’t matter. There’s this focus on each one individually, no, look at the whole system. And that can be as progressive as you want. And that you know, but if you put it on budget, then it’s up to the voters. I’m gonna follow principle, I got nothing to say about transfers, all I got to say about is incentives. And I want the lowest possible marginal rates, with the highest possible revenue for the government, that fixes the incentives, how high those rates are? up to you how much you want to spend, how much gets transferred up to the voters? how much they’re happy to do. Let me talk about social programmes. We are in the US at least, we’re running 5 to 7% of GDP structural deficits. And here come the retirement of the baby boomers. That’s our that’s our debt problem. Well, here’s a classic of left versus right. Right, oh, we gotta cut social programmes, we’re gonna go bankrupt. Left, you heartless whatever, you’re gonna throw grandma from the back of the train, how can you do that? How can we break out of this one? Let’s look at incentives. What’s the real problem with American social programmes. The real problem is not how much money we spend. The real problem is the disastrous incentives and it’s incentives that the programmes all put together. You take the average American between zero and $60,000. They if they earn an extra dollar in legal income, they lose $1 of benefits. And that’s on average, there’s many cliffs where you earn $1 And you lose all your health insurance. Make sure not to earn that extra dollar. If you have, if you have affordable housing with an income limit, earn an extra dollar, you lose your house, people are very smart, they respond to incentives. The other problem we have is that low income Americans basically don’t work. The labour force participation is just catastrophically low. Well, duh, why don’t they work? Because if they earn extra, do you want to cheer after me? If you earn an extra dollar, you lose $1 of benefits. So why don’t we work on fixing the disincentives of social programmes? What will happen then, what will happen is more people work, so they won’t need so much social programmes just save money, you’ll help people who actually need help much more effectively. And you reduce the cycle of poverty and dysfunction in a lot of our neighbourhoods. How can we do that? Well, one of the most important ways is that the problem comes from all programmes together. It’s the the food stamps you it’s only like a 50% implicit tax rate. But if you add the food stamps, the Social Security, the low the earned income tax credit, the the low income bus pass, that actually exists, I mean, all the things that are income limited, you put those together, so why don’t we put those all together instead of having 15, 150 actually different different programmes, remove the cliffs. One of the most crazy things in the US if you get another dollar of income, we lower your benefits. If you go get out and get another programme that gives you another dollar of transfers. We don’t lower your benefits. Well we can fix these things. Control the disincentives. Banking, oh boy. banking regulations. This is a classic one of disincentives. And there’s we have we’re in we’ve just done this again. We’re in this cycle of, the crisis comes, bail everybody out, promised to fix it. It doesn’t work. Great. Run comes again, bail everybody out. Again, this is a ne.., this is an important one because there’s remember the little old lady who swallowed the fly, just swallowed the spider to catch the fly and so on and so forth. This is when you think about how things got bad is not just dumb people. It’s smart people patching up a dumb system. And that’s what happened a run happens. What do you do? You got to bail out the creditors to stop the runs. Now you have moral hazard. A bailout deposit insurance is like giving your uncle Luigi your credit card on his way to Las Vegas. That’s what we economists call moral hazard. So we write rules, okay, no double down on 16. No spinning double black or whatever. Luigi figures out, I have an Italian family so I get to use this. Luigi figures out and goes to the craps table and next thing you know you got another crisis. We have the answer. It’s it’s a sensible thing. But now it’s it’s it’s falling apart we have the answer, which is was put in place 1992 but it requires tearing the whole system down and starting from scratch. And that’s the hard part, the answer, by the way is banks should get their money by issuing stock. And then deposits should just flow into flow into trade. It’s called narrow banking. It’s been around since the 1930s. There’s a lot of money people making money in the current system. Housing, you have a housing problem, we have a housing problem, let them build. And I’m only beginning, health, oh boy, healthcare. This one always causes me problems. But I got to tell you so healthcare in the US is one of the most dysfunctional things around. It’s actually possibly worse than socialised health care. Fully private health care can work. Now here and in 30 seconds, I’m not gonna give you the programme. But health is a complex personal service. It’s like lawyering, accounting, architecture, construction, aeroplane pilots, car repair. It’s a complex personal service, all of those we leave to the free market, there is no reason that healthcare can’t be left to the free market as well. And then a brutally competitive market can give us better service and lower prices. Oh my goodness, I haven’t even gotten to horrible publication, public education, labour laws, occupational licencing laws, immigration restrictions, regulatory barriers, lawsuits, prevailing wage, domestic content rolls, the sand in the productivity gears. What are we gonna do? Well, that’s it, those are all out there. But you can see the general principle can, can be used to fix all those if we want to, you know, free, free markets is still a vital way to fix today’s problems. And that’s just today’s economy. Well, you know, new ideas are also the the sand in the gears is there too. You know, there’s a possibility of factory built mini nuclear power plants. Why don’t we have those in the US? Because the Nuclear Regulatory Commission has not licenced a single new plant since 1975. AI, we live in a moment of a spectacular technological advance. It’s like Gutenberg. It’s potentially like like Gutenberg’s movable press. And immediately what do people want to do? Run to Washington to regulate it. And where’s this, it’s not just coming from fear the robots will take over. There’s a strong demand to regulate it because this is information. We are we’re living at the outbreak of the technical censor the censorship state, and boy, oh boy who has control over ChatGPT3, has control over politics, especially biology I see great advances in biology, better health, longevity, that what we’re learning about about the fundamentals of life is fantastic. But good luck getting FDA approval, or increasingly politicised research funding. So let me summarise here we can’t just bemoan, there’s a tendency among us free marketers to have a beer and just say, Oh, how dumb Why are their zoning zoning laws are so dumb, they’re stopping that. But if you understand where they came from, and what the disincentives are, I think you have a better chance of fixing you have to understand where they came from. That patchwork the old lady and the fly, how to how to ask the right questions, to get the answer. You have to examine the whole system, you have to examine the incentives. And you have to make your opponents state the question. And then often there’s a very simple answer. And then they go duh, that wasn’t the question I asked. It’s okay, now we’ll have a better conversation. There’s a way to do this. Economists are quite a bit at fault, my fellow economists. What you’re taught in economics school, is how to look at every problem, diagnose some failure of the hypothetical totally free market, and then advocate new rules that the benevolent omniscient planner will do to fix the problem. But we don’t live in a free market. When you see a problem. Look first, not at a hypothetical failure of some free market look for the regulation that caused the problem, as you can see with zoning and housing, it’s not a failure of the market, it’s regulatory. Now I have to close on a optimistic note. You know, people often tell me, Oh, if only we could get leaders who will listen, They all believe in democracy. How does this happen? Things things will get better when the average person understands how it works and votes for sensible policy. I know a lot of politicians, they, by and large, understand perfectly well how things work. And they understand they won’t get voted in office for it. So when the average person sees, you know, when the average person sees too high house prices, and says, Well, why don’t we let people build more houses, you’ll get politicians who understand that. So really, the way things work is there’s leaders, there’s the chattering classes around them, and there’s the vast amount of sensible voters around that. If you operate in the world of ideas, then the politics will follow. And that’s why institutions like this one exist, we exist to help the ideas that then will make their way into policy. The idea that you can just whisper into the into the great emperors ear, that’s not how a democracy works. And thank goodness, that’s the way our society works. Okay, thank you.

Gene Tunny  36:19

Okay, we’ll take a short break here for a word from our sponsor.

Female speaker  36:24

If you need to crunch the numbers, then get in touch with Adept Economics. We offer you frank and fearless economic analysis and advice. We can help you with funding submissions, cost benefit analysis studies and economic modelling of all sorts. Our head office is in Brisbane, Australia, but we work all over the world. You can get in touch via our website, http://www.adepteconomics.com.au. We’d love to hear from you.

Gene Tunny  36:54

Now back to the show.

36:59

John, thank you. And now it’s time for our Q&A session with our friend and colleague leading proceedings, Gene Tunny is director of Adept Economics in Brisbane. And he’s the author of a recent CIS publication that I’d encourage you to read, Debunking Degrowth. Gene Tunny, over to you Gene.

Gene Tunny  37:17

Thanks, Tom. And thank you, John, for that excellent lecture. That was terrific. John, I’d like to start with this idea of the age of stagnation or the risk of stagnation. And it seems like you’re attributing that to government, I’d like to understand what evidence there is behind that. So we’ve, if you believe the people on the left, we’ve had an age of neoliberalism, we had the reforms of Thatcher and Reagan and in this country, we had Hawke and Keating and then Howard. And there’s an argument that we’ve deregulated too much. But you would push back on that, could you tell us a bit more about why you’re so confident, it’s it’s government regulation that is driving that slowdown?

John Cochrane  37:55

You got an alternative for me? I mean, just look out the window, and you know, try to run a business and and see how hard it is to get anything done. So Reagan and Thatcher were great, but they just scratched the surface. They sort of talked about deregulation, but you know, how many federal agencies did Reagan actually get rid of? You know? So there was a little bit of a pause. But the regulatory state just kept adding more and more. And I see it’s a larger issue, not just of the size of regulation, but the nature of it, our public institutions in the US are fraying. I actually am a free marketer, I look back with nostalgia at the era of regulation. And by which I mean, when our regulatory agencies had rules and cost benefit analysis and public comment and proper procedures. Now, it’s just an executive order and a Dear Colleague letter, you know, and so that that’s in many ways worse as an example. Also, it’s getting more and more politicised. I was shocked. So you may or may not know what’s going on. There was a case, Missouri v Biden that revealed what was happening the censorship of the internet during the COVID era, and went unremarked. The Biden administration was simply threatening businesses like Twitter, we’ll close you down. We’ll send the EEOC, the NLRB, the EPA, you know, this alphabet soup of agents, we’ll send them after you. But by saying that, you know, you see right there, it’s taken for granted. This isn’t rules. This isn’t law. This is just we arbitrary power to close things down. So I see the regulatory state getting bigger, the the legal system in the US, you know, you can’t get anything built because you’re gonna get years of environmental suits. And it’s part of sort of the scorched earth politics. That may not be the answer to the question you wanted, but that’s what I see.

Gene Tunny  39:45

No that’s okay, I just wanted to ask because the the alternative view is that there has been that slowdown in the rate of innovation that you mentioned the the Robert Gordon thesis of the rise and fall of American growth. I think it’s, yeah to me, it seems like a difficult thing to be able to prove one way or another,

John Cochrane  40:02

It is no, what you’re asking me is not just my view but what I think of those views. Yeah. So these views, we got to take this seriously. Gordon basically said, our growth was an SJ thing, it was a one time thing, we learned to use fossil fuels. And that’s over, just, you know, that the possibilities are over. And there is evidence, you know, it’s taking more and more in resource, find an invention. But in part, that’s always been the case. So there’s a great study of the steam engine, steam engines invented, it wasn’t, you know, 18, if you’ve been to the museum’s, it wasn’t like the final steam engines 100 years of making it better and better, and it gets harder and harder to harder to make it better. And we’re kind of running out of ways to make steam engines better. And then someone invents the diesel engine, and then someone invents the aeroplane. So I think we’ve been in a period of sort of, there was a new invention, we kind of work and all that, and you’re waiting for the next new thing to come, which I think is potentially biology or AI. So just wait. But who knows, you know that that’s a possibility. We but we also know, the regulatory state is causing tremendous problems. So you know, maybe we can only raise GDP by a factor of four, before we run in, run out of ideas, factor four will be pretty good. And to let India and Africa have our way, know how to do things the way that will be pretty good, too. And if 200 years from now, that’s where we plateau. Okay, we’re done.

Gene Tunny  41:20

What do you think the risks are with? With AI? I mean, there’s a lot of potential there with biotech is that is the risk that we’re going to be too timid, that we’re going to over regulate, because of the precautionary principle, for example, how do you see that? And what alternative would you offer? What, would you have a principle that you could apply for there?

John Cochrane  41:38

The last big thing on the internet was was, you know, social media sorts of things and Google, and then they’ve been kind of looking for what, I live in Silicon Valley, they’ve been looking for what to do for 10 years. And I talked, everybody wanted crypto for a while that was kind of going nowhere. Not that kind of hard. But the old tech companies have turned into regulatory regulated utilities with remarkable speed. And I worry that this, this is really a demand for the new stuff to do that I don’t, the idea of the robots will take over. They’ve been worrying about that since 1850. I think just technically, that’s silly is just complete sentences, it completes your sentences. Don’t worry about that taking over. I think the demand for regulation is the demand to control the flow of information that we get, and we’re worried about tech is there’s no monopoly that doesn’t get enforced by the government that lasts very long. People say tech’s a monopoly? Oh, yeah, Netscape, AOL, Yahoo, they got that one wrapped up, don’t they? And the same thing is happening to the big tech tech companies now. So the demand I think, really is the danger is the danger of the surveillance state. And, and so, you know, there’s you can see the political demand for regulation, and people like to keep their profits up. So that’s the demand for regulation. Not that the robots are gonna come get us.

Gene Tunny  42:57

Okay. I’d like to ask, again about, well about government. And you mentioned the, the Marie Kondo approach to fixing government and if I remember Marie Kondo correctly, it’s you pick up an item and if it doesn’t bring you joy, you toss it out. Are there parts of the government that don’t bring you joy, that you would toss out?

John Cochrane  43:16

I think the converse of that question is going to be harder or easier to answer. Yes. What what do I like about the government? I think the US is vastly underfunded the legal system, that it takes years to get to get something through the courts is just a shame. That’s part of public infrastructure. You know, where roads, bridges and efficient courts. So that’s why as much as I hate lawyers, and environmental suits and all the rest of it, nonetheless, that’s, you know, that’s a part of the work that we can have some public infrastructure there. Is there anything else that we actually like? What do we like in the government?

Gene Tunny  43:54

That’s okay.

John Cochrane  43:56

Sorry? Yeah, National Defence. That’s a big inefficiency that we put up with. Thank you. It is remarkable. I’m a good libertarian and free marketer, that the military is so efficient at what it does. I mean, it’s a big inefficient waste, but that it actually wins wars is pretty amazing. You know, given given the structure that they’re really amazing people.

Gene Tunny  44:17

Okay. John I’d like to ask about health care, for example, and you’re a proponent of free market, in health care. A lot of the other advanced economies or most of them would have large public health care systems. And the concern is that if you have the free market in health care, there’d be some people that would miss out, they’d be left behind, there’d be people who couldn’t afford it, people who wouldn’t be insured. How do you deal with that objection given, if you look at the US system, US life expectancy is significantly lower than other advanced economies. How would you cope with that objection? How do you, I know it’s difficult to unscramble from where we are and you do have regulation intervention already, but how would you deal with that, that objection?

John Cochrane  45:01

Yeah the US already has a public health system that’s just a remarkably inefficient one. So most of the population is on some sort of government thing, whether it’s Obamacare or federal employees, and the US, you know, in other countries they say, You’re we’re paying taxes, you’re gonna pay some taxes to pay for his health care. In the US, the government says, well, we don’t want to tax and spend instead you business are going to provide her health care, and is that any different than taxing and spending? But then we have this horrible system of cross subsidies, which is what kills the competition? You know what, so government doesn’t want to pay that much. So we say, well, you hospital, you have to provide free health care, and the hospital says fine where are we making up the difference? Well, we’ll let you overcharge everybody else. Okay, but now you can’t have any competition. That’s where the whole homeless comes from. Now, now the left behind issue. So US life expectancy is lower. That’s because we shoot each other. And we and we do a lot of bad drugs. But US life expectancy, if you have cancer, it’s a whole lot better than anywhere else in the world. So it’s horrendously expensive, but but not that bad. You know, the poor people have cars and houses and lots of things, they don’t get great health care, by the way, anywhere in the world. Everywhere in the world, rich people have ways of getting really good quality health care, and we sort of have a fig leaf that that everybody else is, is getting great stuff. So I don’t see that free market health care, because it’s going to be so much more competitive, so much more cost effective. I think it’s gonna serve poor people, poor people, you know, have money just like anybody else. They’ll they’ll buy health insurance and it’ll be cost effective. And, and I don’t mind subsidising it. So you want a subsidy, so we can have transfers, I said, do you know all the transfers you want? I just I’m gonna give you a voucher, you can have a voucher for 5000 bucks, 10,000 bucks here, I don’t care what it is. Go buy your health care on a brutally competitive insurance and healthcare market. You’re going to come great because you got a $10,000 voucher.

Gene Tunny  47:00

Okay, okay. Might be good to ask, go to the audience soon. ButI’ve got one more question…

John Cochrane  47:04

I’ll try to shorten up my answers. Stop asking such good questions.

Gene Tunny  47:08

No, I’ve got one more question about your fiscal theory the price level, which is, yeah John’s written this immense book. It’s fascinating. I’ve picked it up. But then I discovered I had to buy three more books to be able to, to interpret it. But it’s it is it’s, it’s it’s terrific…

John Cochrane  47:27

Get past the, past, just ignore the chapters of the equations and get to the fun stuff…

Gene Tunny  47:31

I’m getting through it. But John, how do you distinguish this from, say, the Milton Friedman view that inflation is always and everywhere a monetary phenomenon, you’ve got a fiscal theory of the price level. We look at what happened during the pandemic, when we had this massive monetary expansion in the Western world and in Australia and the United States, UK. And then we see the inflation following that. And we think, Well, this is what Milton Friedman was telling us. But you’ve got a theory of inflation that is different. You’re saying it’s to do with fiscal policy with government debt? What do you say about Friedman’s theory and how is yours different how does yours add to it or reject Friedman?

John Cochrane  48:08

That’s not a question that’s gonna get you a short answer. 600 page book in 30 seconds, here we come! The fiscal theory of the price level says that where does inflation come from fundamentally? It comes from more government debt than people think can be repaid by future taxes. Government debts and assets just like stocks and bonds. If you think the stock doesn’t have is not doesn’t have any dividends coming, what do you do you try to sell the stock the price goes down. If you hold government debt, and you think, you know, these guys are never gonna pay this off. What do you do? You try to get rid of the government debt? How do you do that? You try to buy stuff to try to sell the government debt, but we can’t all sell it. The only the you know, what is if we try to sell the government debt, we buy stuff, prices go up. That’s where inflation comes from. Now, what about Milton Friedman? I love Milton Friedman. Milton Friedman was 99% right. Wrong about one little thing. So Friedman, he said money causes inflation, not total government debt. Now, how do we agree and disagree? Suppose you take $5 trillion of money and hand it out from helicopters, as Milton said, that’s gonna cause inflation. I agree, because money is one form of government debt. And when you drop money from helicopters, you’re telling people here’s debt, we have no intention of paying this off with future taxes. So we agree that is, it’s an expansion of government debt is money that finances a deficit. But suppose the government drops $5 trillion of money from helicopters. And simultaneously the government burglars come and take $5 trillion of treasury bills out of your safe, you have no more wealth, you have lots more money, but we took away your treasury bills. Now monetarism would say that causes exactly the same inflation as just giving you the debt. And I say ah ah ah, what counts is overall amount of government liabilities and as proof, yes, in the pandemic, the government did drop a lot of money and debt on everyone and got inflation. It was financing huge deficits. That was a fiscal expansion. The government also did $5 trillion of giving you money and taking back debt. That was called quantitative easing. And what did that do? Nothing. So 5 trillion in quantitative easing designed to increase inflation, absolutely no effect whatsoever. 5 trillion of deficits, which could have been money could have been debt, 5 trillion deficits, we got inflation. That’s actually Episode One for the fiscal theory.

Gene Tunny  50:27

Okay. Thanks, John. That explains it better to me for sure.

John Cochrane  50:31

And Milton was great. Now many not that many episodes of money causing inflation, and they were almost all governments printing money to, to cover deficits. So we agree on all those episodes.

Gene Tunny  50:43

Very good. Okay, Tom, should we open up to the floor for questions? And question I’m going to enforce the questions must be questions rule. Gigi Foster?

John Cochrane  50:54

I welcome speeches. Short speeches.

Gigi Foster  50:56

I’m Gigi Foster. I’m a professor of economics at UNSW, one of our local universities. And thank you so much for your lovely talk, which I will be trying to get somehow for my students, hopefully CIS will make that possible. So I really agree with you know, 99%, of what you said. But towards the end, I thought maybe your optimism about being able to fix this through democratic processes may be a little bit overstated. And my worry is that what we have now is this sclerotic mess in not just in government, but in organisations as well, including universities. And it is sustained by poor incentives on the part of the people in the state and the bureaucracies that are not accountable, and the politicians themselves who are career incentives. And what we face is a situation similar to what Kafka saw, similar to what we had in the USSR before it fell. And we know that how those bureaucracies end is they they either have wars that defeat them, or they come crashing down under the weight of their own inefficiency. And right now, our democratic mechanisms are not very strong. A few elections, sometimes, to me, it’s just not a strong enough force. So I’ve been advocating for a lot of direct democratic revival in the resistance and restoration movement here in Australia. And I wanted to know what you thought about the need for that. And if we don’t think it’s necessary, how is this going to come to pass?

John Cochrane  52:08

In the past, democracies, especially actually, small countries, who seem better able to do it than the US are capable of reform. Even the US we’ve had a social security reform, we had a tax reform there, you know, historically, we’ve been able to fix things. I worry as you do, that the institutions are fraying that we are we are in the US having, the government is so powerful, that it’s worth scorched earth tactics, to destroy the institutions to grab power for the next round, because then you get control of the Justice Department, the surveillance state, the taxes and all the rest of it. There is a limited government allows you to lose elections and go lick your wounds and try again. So and I, I’ll be a little political here. I think our big, one of our biggest challenges is we face a political religious movement on the far progressive left, that is understood the march through the institutions. It’s a small fraction of popular opinion, but they know they grabbed the educational institutions, they grabbed the bureaucracies they grabbed the philanthropies, they have the universities, they have the institutions of civil society in their grasp. And they are profoundly undemocratic. They they are, they call themselves save our democracy, but they are Maoist in their in their policies and that and with the fraying of institutions, and the rise of a technical surveillance state, that, you know, that is a genuine threat to democracy and growth. So I was trying to close optimistically, I’m making your point. I am, you know, very worried about that, and our freedom to have events like this.

Gene Tunny  53:47

Righto, Peter Tulip, at the back and then over here… Thank you, Chief Economist at CIS, yes.

Peter Tulip  53:54

Thank you. I’d like to ask about you’re talking about avoiding the left right division, that a lot of the regulations you want to get rid of have a strong constituency within the economics profession. But that’s not true of all of them. There are some views and in particular, free trade, or housing policy, you mentioned where left wing economists, like Jason Furman or Paul Krugman, have almost exactly the same agenda, as you do. But the general public is on a different planet. And part of that is that the public just doesn’t trust market forces. I was wondering if you have views, how do we prosecute those other issues where economists across the spectrum agree, and we’re against the general public?

John Cochrane  54:43

Boy, that’s a hard one, by the way, Econ profession is in many cases very interested also. You know, how do you get consult like health economists, you know, they live to consult for the for the big health either, they’re not gonna say free market. They live to provide advice and benevolent dictators, they tend to be pro regulation as well. How do we get, boy, basic education on basic things that support the institute? I get to think about that one and come back after another question, but because those are fairly straightforward, and of course, the far left doesn’t believe in the far right doesn’t either. You know, Trump has 25% tariffs on everybody. In fact, I was so disappointed in California. There’s a there’s now a yimby movement where progressive lefties they’re saying, You know what, I get it. The only way to bring down housing prices is let people build housing and market rate housing, not just government subsidised housing. And instantly the Republican Party said, no, no, no, no, we must have zoning control and local local. Don’t Don’t count on the right to be free market either.

Gene Tunny  55:56

Over here, and then we’ll go over here. Yes, if you could just…

Michael Potter 55:59

Yes, Michael Potter. So I just wanted to ask about you mentioned I think a when you were talking about health care that the US system is actually worse than a socialised system was just wondering if you could expand or develop on that idea. Why is the system which is sort of partly free market and partly regulated or socialised, why is that actually worse than a fully socialised system?

John Cochrane  56:23

Well in part I was making a joke. But you know, what, there’s a couple of original sins in US healthcare, and one of them is this idea that we’re going to do, we’re not going to tax and spend, we’re going to do it by forced cross subsidies. Because if you tax and spend, you can still have a competitive system. When you do it by forced cross subsidies, you you have to stop competition, and then just the price just explodes. So, you know, we have better health care than most places, but we pay we have twice as good health care at five times the price. And actually, you know, there is this issue, what do you do about poor people? And I said, vouchers is one way to do it another way is, let’s just, if you want it, you know, deal with the homeless people shouldn’t die in the gutter, why don’t we pass some taxes and give them whatever health care you think is a compassionate society deserves the least fortunate. And then the rest of us can be left to the mercies of the free market. And one of the crazy things is that my health care insurance has to be so screwed up, just because to provide health care to the bottom 5% of the homeless person in the gutter, that’s silly. You know, we, we need, you know, I can still go to a private hotel. And we don’t, you know, we don’t we don’t try to socialise that in order to solve the homeless problem. So there is, you know, I assume a government provided system all one in is pretty horrendously inefficient. But a system a crony capitalist system can be as efficient as a, as a well run, government provided system. And I’ll say it I would be for taxing and spending, you know, one way to, you know, tax and provide a a community hospital for the poor, and then we get the free market.

Gene Tunny  58:07

Okay, with some questions over here. And then we’ll go to you, we’ll go to this gentleman. Thank you. Thank you. Thanks.

David Tregenza 58:14

Hello, my name is David Tregenza. I was just wondering, when you talked about development economics. I’ve read arguments from maybe more progressive that the reason America has such all those ideas booming is from their large spend on military, which then leaks to entrepreneurs. And that’s where computers, internet, rockets, satellites, and all that come from? What do you say to that?

John Cochrane  58:38

Well like, China seems pretty good at taking our military ideas and implementing them. You know, those ideas are available for anyone. Now, to what extent was, you know, to what extent the idea is that the most efficient way to produce new ideas, you know, Apollo programme was 1% of GDP, we got Tang and Teflon, you know, maybe we could have gotten that cheaper from from other ways. So some of the basic ideas did come from the military. But the hard work is not the basic idea. The hard work is the implementing it and starting the new company, you know, famously, Xerox, created the mouse and didn’t know what to do with it. Steve Jobs saw the mouse and boom, that, you know, he knew what to do with it. So I’m not sure that we have a dearth of basic ideas. We have as the dearth of is the ability to take new ideas and implement them in new companies, which then challenge the profits and ways of doing things of the old companies.

Gene Tunny  59:36

Nicholas Moore is it? Has the microphone.

Nicholas Moore 59:37

Thanks, thanks for the presentation. It’s been terrific. I’m, of course a subscriber to to, as you say, 99% of these views, using a natural experiment US versus the UK I think is a good test. But I always used to get confused when I looked at France and the UK because the French obviously wouldn’t embrace the sort of ideas we’re talking about, whereas the UK, typically would have, and again, looking at the US, you know, the contrast between California who arguably embrace all the wrong ideas. And when we talk about AI, you know, Where’s that coming from? So, so there does, you know, the natural experiments throw up a bit of challenge don’t they in terms of where GDP per capita ends up where ideas come from?

John Cochrane  1:00:23

I don’t know are France, France and the UK that different in terms of overall level of so…

Nicholas Moore 1:00:28

That’s a point so their GDP is per capita is the same, one’s more open and one’s more closed

John Cochrane 1:00:33

France spends 55% of GDP the UK spends 50% of GDP on on government stuff. There’s sort of this de industrialised, the UK is a financial centre and then tourist de industrialised wasteland, France has a certain efficient technocracy. So they they may be socialist, but they kind of they send people to the Ecole Polytechnique, and then they build nuclear power plants and we don’t kind of let you I don’t know what it’s like in the US. There’s kind of anything we want to build in the US there’s just this chaos of regulatory nightmare. And, you know, can you get stuff built in the in the UK the way it can, you know, you get the technocrats in France to build something they build something you know, they can build a high speed train, the US can’t build a high speed train. SNC, I don’t know if I told this story SNCF bailed out of the contract to build the California High Speed Trains. They said you guys are crazy. Not even socialist France works like this. I don’t see a great. I wish the UK had taken Brexit and become Singapore on Thames. But they don’t seem heading that direction.

Gene Tunny  1:01:44

Very good. Michael Brennan is it Michael?

Michael Brennan 1:01:46

Thanks yeah, Michael Brennan, used to be the chair of the Productivity Commission in Australia up until a couple of weeks ago, I wanted to ask about the economics profession, and where you see the role that it has played. I mean, I hate to indulge in nostalgia, but it does feel as though in your country and ours the economics profession had and played a much stronger role in the economic policy debate but had a much stronger feel for markets, institutions, the broad sweep. We feel it feels to me as though a lot of economists have gone down different rabbit holes, either very abstract, or ultra empirical, but involved in very narrow questions rather than the sorts of big questions that that you’re posing and answering.

John Cochrane  1:02:31

You know, to the extent that economists want to waste their time on technical stuff, they’re not harming anybody. So enjoy it. The economics profession has actually always been quite left wing and statist and, and serve and view their job as sort of advancing progressive goals. The American Economic Association was was founded that way, there’s kind of a, you’re thinking Milton Friedman, University of Chicago, but that was a very small number of people for a very short window of time. And now mostly, they’re in their advancing progressive agendas. You know, you can’t even you can’t publish a paper that says raising raising minimum wages, lowers employment anymore, so it’s kind of going a way of the other sciences as well. So we’re really the danger I see is that it is becoming part of the ideology production machine for the progressive narrative, and becoming less open to critical empirical work that challenges that that narrative, and you know, well, when you work for the government’s guess what you tend to say that the government’s good things?

Gene Tunny  1:03:36

Okay. There’s one question over here.

David Murray 1:03:39

Yeah. David Murray. How do you help people understand these concepts of corporate social responsibility and social licence?

John Cochrane  1:03:47

Do I want them to understand those concepts? With Friedman, your job is to to make profits for your shareholders. Unfortunately, right now, the way you make profits for your shareholders is to keep the regulator’s out of your hair. And the way you do that is to echo whatever political blather is in the regulator’s minds these days. So never count on big businesses to challenge the regulatory state or argue for free markets. They’re in business to get good regulatory treatment, and maybe you can protect us from your markets, and that means they go along with whatever nonsense is coming out of Washington.

Gene Tunny  1:04:21

Okay John, I might ask one more question. I’ve had a gentleman on my podcast who produces these things called Goldbacks. So there, there are a lot of people maybe, still, maybe, I don’t know, it’s under 10% of the population. But there are a significant number of people who are worried about the future of the US and the future of the global economy. And, you know, worry about fiat money. Is fiat money a problem? Do we need to go back to something like a gold standard or goldback currency? What’s your view on that before we wrap up?

John Cochrane  1:04:51

Fiat money is now a share in federal government. It is not, fiat money means money that’s backed by nothing but our money is backed our money is backed by the willingness of our government to raise taxes to soak up the money if necessary, I’m giving you fiscal theory the price level. So it’s a great system, so long as our governments maintain the fiscal space to always back their money with taxpayer, that’s a good system, so long as governments are fiscally solvent, I think the danger of the of the current, not fiat money, so the current system of money backed by the present value of fiscal surpluses is that it might not be backed anymore. And that therefore I do see a possibility of a of a sovereign, a grand sovereign debt crisis. When do you get a crisis? Nobody ever sees a crisis coming, right? Because if you knew the crisis was going to happen tomorrow, then it would have already happened today, you’d run and get your money out. What is the one cl.., and crises always happen when there’s money that can’t be paid back, shady accounting and nobody doubts that this is good stuff yet. Have I just described government debt? So I think, you know, in the next crisis, there is a possibility that our, we reveal our governments to have debts that they have no way of repaying and you could have a global inflation a default on you know, Italy, in some of the EU states, basically, a run on sovereign debt is possible. I don’t, we’re not there yet. But that’s kind of where the end of Western civilization goes. And then you got a problem because our monetary system is all built on the idea that government debt is sacrosanct. Now really any idea of history and you think government debt is the safest assets since the since the Henry the Henry the Third, I think defaulted on the Petruzzi government debt has been the riskiest asset around. And so we live in this kind of golden age. So to your question. I think if that happens, not, I mean, we’re in smoking financial ruins, but you might want some monetary system that doesn’t depend on the value of the government. And, you know, we all have our free market fantasies about that’s the one one place I’ve kind of stuck with the government we have a decent system of short term government debt is long, you know, it works okay. In free market fantasyland. And, you know, after we’ve had our third drink, we should talk about private monetary systems for the moment I kind of put it in, you know, airline pilots. Yeah, pilot licences should be privatised. Okay. Maybe that’s not the first thing we want to do. It’s kind of thing you talk about at the third rank of the Cato. So the same thing? Now gold is not the answer. So a gold standard is a government promise to deliver gold. So you haven’t gotten rid of the government. And a gold standard is a fiscal commitment. No government’s ever had enough gold to back their currency. So what is the gold standard, a gold standard, the government says I promised all these notes. One for one with gold, I know that the gold so what keeps that afloat? What keeps that afloat is the Government’s commitment, that if you start coming to ask for gold, I will raise taxes, and I or enough to get or borrow the gold to give you it’s a commitment to running the fiscal theory the price level. And it’s a bad one because the relative price of gold and other stuff fluctuates, it just would not work in a modern economy, because we don’t use gold coins. So So gold isn’t the answer. And gold doesn’t obviate the problem of if the government’s are bankrupt, they’re not going to be able to give you a gold standard. Is there something in the Bitcoin space that could maybe do it? We need to Yeah, I believe money has to be backed. So you need to find a security that’s backed by real assets that has a steady real value that there’s a lot of it, and that in and that people could use, we could devise such a system but you know, why don’t we just have our governments not default and have to build this from the smoking ruins anyway.

Gene Tunny  1:08:46

Very good Professor John Cochrane. Terrific, thank you. John’s gonna move a vote of thanks. Very good.

Righto, thanks for listening to this episode of Economics Explored. If you have any questions, comments or suggestions, please get in touch. I’d love to hear from you. You can send me an email via contact@economicsexplored.com Or a voicemail via SpeakPipe. You can find the link in the show notes. If you’ve enjoyed the show, I’d be grateful if you could tell anyone you think would be interested about it. Word of mouth is one of the main ways that people learn about the show. Finally, if your podcasting outlets you then please write a review and leave a rating. Thanks for listening. I hope you can join me again next week.

56:06

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Credits

Thanks to Obsidian Productions for mixing the episode and to the show’s sponsor, Gene’s consultancy business www.adepteconomics.com.au. Full transcripts are available a few days after the episode is first published at www.economicsexplored.com. Economics Explored is available via Apple PodcastsGoogle Podcast, and other podcasting platforms.

Categories
Podcast episode

How to improve housing affordability and why the Greedflation thesis is wrong w/ Simon Cowan, CIS – EP203

Host Gene Tunny and Simon Cowan from the Centre for Independent Studies discuss housing affordability and greedflation in the CIS’s Sydney HQ. They delve into recent articles written by Simon on these topics and explore the factors contributing to unaffordable housing (e.g. zoning and other supply restrictions) and why the greedflation thesis is wrong. 

Please get in touch with any questions, comments and suggestions by emailing us at contact@economicsexplored.com or sending a voice message via https://www.speakpipe.com/economicsexplored

You can listen to the episode via the embedded player below or via podcasting apps including Google PodcastsApple Podcasts and Spotify.

About this episode’s guest: Simon Cowan

Simon Cowan is Research Director at the CIS. He is a leading commentator on policy and politics, with a regular column in the Canberra Times newspaper, frequent interviews on Sky and the ABC, and multiple appearances before parliamentary committees discussing the budget, citizenship, taxation and health policy. He has written extensively on government spending and fiscal policy, with a specific focus on welfare and superannuation policy. He earlier work focused on government industry policy, defence and regulation.

His latest work includes Attitudes to a post-Covid Australia and Millennials and Super: the case for voluntary superannuation. Some of his other works include a co-authored report on pensions, a deep dive into the Universal Basic Income, and a 2012 piece arguing that Australia should acquire nuclear submarines from the Americans.

What’s covered in EP203

  • The problem with housing affordability. (4:56)
  • High property prices and housing affordability. (10:02)
  • Should we cap migration to improve housing affordability? (14:24)
  • The role of public/social housing. (19:12)
  • Shared equity schemes. (24:15)
  • Home ownership as a key milestone on the way to retirement. (29:09)
  • Local government regulations and housing affordability. (35:06)
  • The Greedflation hypothesis and why it’s wrong. (39:04)

Links relevant to the conversation

Simon’s Canberra Times articles on housing affordability and greedflation:

The Coalition can create generational voting change by tackling housing affordability – The Centre for Independent Studies 

‘Greedflation’ myth hides real causes of inflation – The Centre for Independent Studies 

Images from the Bill Leak room including a poem from Sir Les Patterson (i.e. Barry Humphries):

Sir Les with Bill Leak.jpg 

Sir Les’s poem about Bill Leak part 1.jpg 

Sir Les’s poem about Bill Leak part 2.jpg 

Past Economics Explored episode discussing wage-price spiral mentioned by Gene:

https://economicsexplored.com/2022/06/14/stagflation-be-alert-not-alarmed-ep143-transcript/

Transcript of Q&A session following Phil Lowe’s speech in Brisbane in July 2023 during which Gene asked the RBA Governor about Greedflation:

https://www.rba.gov.au/speeches/2023/sp-gov-2023-07-12-q-and-a-transcript.html

Transcript: How to improve housing affordability and why the Greedflation thesis is wrong w/ Simon Cowan, CIS – EP203

N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. This was then looked at by a human, Tim Hughes from Adept Economics, to pick up the bits otters might have misheard. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.

Gene Tunny  00:06

Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host Gene Tunny. I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory, evidence and by hearing a wide range of views. I’m delighted that you can join me for this episode, please check out the show notes for relevant information. Now on to the show.

Thanks for tuning into the show. Today, I have the pleasure of catching up with my colleague at the Centre for Independent Studies, Simon Cowan. We’re in the CIS offices on Macquarie Street in Sydney. And we’re going to be chatting about some recent work that Simon’s done on housing affordability and greedflation, Simon, so good to catch up with you.

Simon Cowan  01:06

Yeah. Welcome to the Bill Leak Room here at the CIS, our little office here in Macquarie Street. It’s fantastic to have you here in our facilities with our totally real plants and our wall of photos.

Gene Tunny  01:19

Yeah, well, it’s great this room. So Bill Leak was a famous Australian cartoonist, and there’s a there’s actually a poem about Bill Leak from Les Patterson, one of Barry Humphries characters. Yeah, just it’s terrific. So I might put a link in the show notes. I’ll make sure I take a photo of that before I go. But yes, Simon, you’ve written some great pieces recently, they were both published in Canberra Times on housing affordability and greedflation both topical issues and I thought I’d be good if we could chat about those.

Simon Cowan 01:40

Yeah, for sure.

Gene Tunny 01:43

Your piece on housing affordability was in the Canberra Times on third of July 2023. “The Coalition can create generational voting change by tackling housing affordability.” I’d like to start off by asking you about the context of that piece because CIS Centre for Independent Studies, it’s a non-partisan Think Tank. The way it’s pitched, it’s pitched as how the Coalition can create generational voting change. Now I know this is this relates to some recent research. Could you tell us a bit about the context of that piece, please?

Simon Cowan  02:29

Yeah, sure. So one of my other colleagues, a man by the name of Matt Taylor who’s actually working out of our Canberra facilities, we’re stretching our tentacles across the country with Brisbane and Canberra and Sydney. He did some work that looked at the prevalence of centre right voting patterns amongst younger people, in particular, millennials and Gen Z. And right. And now in Australian politics, the Coalition vote is a proxy for for the centre right. And, you know, to the extent that the Coalition embodies what you might describe as classical Liberal values and policies, then they’re, you know a proxy of some sorts for classical Liberal voting patterns amongst younger people. And the concern that we had as an organisation and I think it’s been heightened by Matt’s research, is that it’s not just that we’re seeing, you know, that traditional voting pattern of younger voters voting left and older voters voting, right, but that each generation that comes into the electorate is more likely to vote for left wing parties, so not just Labour, but increasingly, the Greens. And for Gen Z, in particular, what we’re seeing is, they’re actually moving further left, compared to the average voter as they get older, which is an unusual pattern, both in Australia and globally. So millennials are moving to the right, they’re doing so at a much slower rate than previous generations. They’re starting from further left, Gen Z started from way further left than the millennials and are becoming more left wing. So the end result of this is that we’re seeing a roughly 65% of that younger cohort is voting for left wing parties, roughly equally Labour and the Greens and that the centre right is attracting for Gen Z in particular, as little as sort of 10% of the vote. Now, our issue isn’t so much for the Coalition’s political fortunes, I’m sure that that’s a concern for them. But for us, it’s to the extent that the Coalition is more likely to implement classical Liberal reforms than the Labour Party, which I think is a reasonable deduction. To the extent that’s true. The fact that young people have no interest in centre right politics and therefore classical Liberal ideas is a real concern of ours.

Gene Tunny  04:56

Okay. So is part of the reason that Gen Z has these left wing views to the extent they do, is that related in part to this issue of housing affordability, the fact that younger people aren’t able to purchase their own homes, to the same extent that previous generations, particularly baby boomers, and to a lesser extent, Gen. Gen X, were able to, is that part of the story?

Simon Cowan  05:24

I think that’s a very big part of the story and Matt’s now working on some more research that will look into that issue more, more specifically around what the actual triggers of that, that are. But I think there’s definitely a problem with millennials and Gen Z, in particular, around housing affordability. The issue isn’t just, and this is, it’s a very important issue. It’s not just that they can’t afford to buy a home, it’s that the prospects of them ever being able to afford to buy a home, and ever being able to move out of that cycle that that sort of rental cycles seems very remote to them. So, you know, they’re not just moving into the market later than their parents, for example, there’s a real fear amongst Gen Z in particular, that they won’t ever get into that point, that they’ll be basically trapped as renters for the rest of their lives. And a number of people have sort of made this observation in the past. If you’ve got nothing to conserve, there’s no reason to vote conservative.

Gene Tunny  06:19

Yeah. And what do you think of that concern Simon, do you think that’s a legitimate concern on their part?

Simon Cowan  06:23

I think in part, it certainly is. There are some people who will be rentals forever, probably more so than was true in previous generations. I mean, if you look at the sort of Baby Boomer and then the previous generation to them as well, almost 95% of that generation ended up buying home at some point during their their lifecycle, once you get into retirement, you see that almost everyone, there’s sort of a core of 10 to 15% of people who who don’t own a home, in retirement, most of the current cycle of retirees own their home, the vast majority of them own it without a mortgage. So far the trend is increasingly people coming into retirement with mortgages, rather than having paid off that during their working life, I think we’ll also see, though, a generation of people, a larger percentage of them will be renting for far longer. And the issue there is, at least in part around the enormous difficulty of saving enough money to get into that first rung of the housing market. And also, you know, those affordable entry level houses are now, so much further away from the CBD of the city, that if you’re someone who works in, you know, if you’re working in the city, it’s very difficult for you to have a young family and commute from two and a half hours away each day. And that option, like if you’re gonna buy a home, you have to, you know, you’re now looking at that two hour commute each way, that becomes a very difficult prospect for a lot of people.

Gene Tunny  07:53

So you’re talking about in Sydney, there’ll be people who are doing that in Sydney.

Simon Cowan  07:57

Yeah, absolutely, so if you go back a couple generations a long commute was was sort of from what is now the sort of almost not necessarily the inner ring of suburbs, but there was a sort of middle density ring of suburbs around, you know, the Canterburys, the Bankstowns, etc, that were all, you know, still 30 or 40 minutes commute from the city, but the prices in those suburbs are now well beyond the entry level, you’ve got to go another 20 kilometres from the CBD before you start to get to places where people can afford to buy houses in that entry level of, you know, even as far as sort of Blacktown and places like that you’re seeing median house price is well over a million dollars. So that becomes very difficult and you end up with a situation like we’ve seen in London, for example and other places, too, as far as I’m aware, people who do essential jobs that are not particularly well paid, you know, your teachers and your nurses in inner city areas can’t afford to live within commuting distance of the places where they work. And that then becomes a real problem for society. If you can’t get teachers for your school, because they can’t live within two hours of your school, you’ve got no teachers.

Gene Tunny  09:10

Yeah, this is the key worker problem isn’t it that they talk about, you know, the key workers can’t find affordable places to live…

Simon Cowan  09:18

There’s always a slight risk that some of this is overstated, right? It’s not it’s not an absolute catastrophe. But things have changed enough that it’s having a significant impact on voting patterns and that’s probably where we’re at now. If things continue to get worse, if the trends that we’re seeing of you know, systemic underdevelopment, particularly in the parts of Sydney where people want to live. If those trends continue, then things will definitely get far worse. Right now we’ve got a problem, not a catastrophe. But there’s a real problem and it’s not yet clear to me that particularly the centre right, there’s been a sufficient level of engagement with this problem, that they’re willing to look at solutions that might actually work.

Gene Tunny  10:02

Okay, okay. Australia does have high property prices relative to median income, we must be one of the highest in the world are we are, you know, particularly for Sydney and Melbourne that I’ve seen some of those ratios, I might dig them up and put them in the show notes. But yeah…

Simon Cowan  10:19

Yeah we’re top, so regularly, so Sydney, Melbourne in particular have been regularly in the top 10 least affordable cities in the world, at various points other Australian cities have snuck in there. So I think at one point, Perth managed to make its way in at the height of the mining boom that it was, you know, one of the most unaffordable cities, so New Zealand has a similar problem, as well, around that, that issue of affordability comparable to us. And then I mean, you’ve got a lot of American cities, and then your Tokyos and Londons as well.

Gene Tunny  10:49

Yeah. But what’s extraordinary is like, based on what you were just saying then, it’s not just, you know, there are some exclusive suburbs in Sydney here say out at Double Bay or out in the Eastern suburbs, and you’ve got places worth 10s of millions of dollars, but this is, you’re paying a lot of money just for property in, in what was traditionally a working class area. I mean, over a million dollars, whatever your…

Simon Cowan  11:12

Yeah, absolutely and places like you know, the Northern Beaches, suburbs, which are a fair way from Sydney. And, and we’re never I mean, they’re not they weren’t poor areas, by any means, right. But they weren’t, they weren’t the areas that the elite and rich of Sydney lived in. But now, many of the homes in that area are way outside the price range for a young family, particularly if you’re in a situation where one of your partners isn’t able to work full time. Or if someone’s in a job where you know, they’re not in a professional capacity and being paid six figure salary, it’s really hard for them. And the thing that becomes even harder, it’s largely about getting over that that initial hurdle of having to save, you know, you need 20% deposit for a million dollar home, you got to save $200,000 of after tax income. When you know we’ve got cost of living spiralling out of control at the moment, we’ve got, you know, 11% of your income’s being diverted into retirement savings. And you’ve got to somehow find $200,000 plus of post tax income. It’s yeah, I mean, it’s a real challenge.

Gene Tunny  12:13

Yeah, yeah. And what do you think’s caused this housing affordability problem we have in Australia Simon?

Simon Cowan  12:19

So the evidence on this is actually really clear, despite the fact that a lot of people really didn’t want to accept that this was true. It is abundantly clear from the work that my colleague Peter Tulip, and others have done that the issue is overwhelmingly restrictions on supply. So people want to say that it’s about demand, it’s about immigrants, it’s about negative gearing, capital gains, they have very minor impacts on price what’s having by far the biggest impact on price is the restrictions on bringing new properties to market, on redeveloping existing properties, it’s zoning and taxes and government restrictions that are aimed to stop people developing, and in Sydney, in particular, and a number of suburbs around the city. But also on the major arterial train lines, you’ve got councils that are simply refusing to allow development. And my colleague has highlighted some of them have massively undershot housing targets. But we see time and time again, things like heritage restrictions and zoning restrictions. And, and you know, even you can’t build high density housing around train lines. If you can’t build high density train on train lines, where are you going to build it? And the answer is, well, for them, at least build it way out in Western Sydney, don’t put it anywhere near where I live. And that attitude is pervasive in the eastern suburbs, in inner West and where I’m currently based in the North Shore, some of the councils out there are actively and very hostile to development of any kind.

Gene Tunny  13:52

Right. Okay. On immigration, do you think that what doesn’t have a major impact on housing affordability? Because that’s one of the things that people are concerned about, because we’ve had a record level of net overseas migration in Australia of 400,000. And there are concerns that, like, it’s just, we should be slowing that down while we let the housing stock catch up, on infrastructure catch up. Do you have any thoughts on that level of immigration we have at the moment?

Simon Cowan  14:24

Yes so my take on this, and I’ll be the first to admit there is, there are differing views on classical liberal amounts of immigration, but for me, personally, I would have almost uncapped skilled migration, I would be happy to take as many skilled migrants as we can get, because I think the economic benefits of skilled migration outweigh the costs. Now, the flip side of that is that we have to provide sufficient infrastructure and build sufficient houses to have those people, give those people somewhere to live. But I think you go, you’ve got it completely backwards if your approach is we’re going to stop migration because we can’t build fast enough when we could build faster, the roadblock, the handbrake on house prices is coming from that refusal to allow development, trying to take some of the pressure off so that councils don’t have to fix their obvious contribution to this seems like just the wrong way to go about it to me, I’d rather have more great migrants and way more housing, and I think you can do it that way. And the economic benefits of doing that way outweigh the costs of it. One of my other colleagues a few years ago, did some work around the sort of, what are the outcomes for skilled migrants in Australia? On average skilled migrants are they earn a slightly higher income, they pay higher taxes, they’re more likely to own a home, they’re more likely to be married, they’re more likely to have kids than the average person. So there’s a there’s a benefit to society beyond just the economic benefit of having more skilled migrants. There’s an issue around housing supply, I would fix the issue around housing supply rather than trying to create alternatives to remove some of that pressure.

Gene Tunny  16:02

Yeah, gotcha. Okay. In your article in the Canberra Times, you wrote that Labour’s signature housing affordability policies have huge problems. So Labour being the federal Labour government led by Anthony Albanese, the Prime Minister, first locking future generations into renting their homes from union-controlled super funds. What’s going on there, Simon? What’s, how to, how would the labour government’s policies lead to that outcome? And what’s the, what’s your concern there?

Simon Cowan  16:40

Yeah, so for long time, Labour was convinced that the issue was, was greedy landlords and negative gearing and capital gains. And Gene, you did some fantastic work for us on that issue, in fact, I think you did a an analysis, not necessarily for CIS, but previously that looked at the impact that those capital gains and negative gearing policies had on housing affordability and found it was what like 4%, almost nothing. Yeah. So for a long time, Labour believed that that was the issue, and then started to come around to thinking about this as a supply side problem. But the solutions that they have, they have two main supply side initiatives. And there’s been some more movement more recently. So this is at least as positive, but their main initiatives were: one they were going to encourage institutional superannuation investors to build residential properties for rent. So that meant in practice, I think it meant that they would incentivize the large super funds, which are overwhelmingly controlled, they’re overwhelmingly industry super funds, which have a 50% union 50% Business control. But overwhelmingly, those funds would be then encouraged, incentivized, to invest in and build rental properties for lease. And the other policy was around building a whole bunch more public and social housing. So rather than allowing, having, they’ve identified the right market block, but instead of removing that block and allowing the market to function, their solution is how do we use government incentives and government money to build additional supply? It just seems extraordinary to me that you would create a situation where individuals couldn’t use their own superannuation money to build their own home, but their super fund could use their super money to build a home for them to rent. And that just I mean, one of the reasons why this policy, I think, has been dis-emphasised by Labour is that there’s almost no one who actually wants that outcome. Super funds don’t want to do it, because they’re seeing the the noises around rent controls and increasing tenant rights and think this is a bad investment for my Super fund. And people are like, well why would I want to rent from my super fund with my money? Why can’t I just use my money to buy my own home? So I think that that policy has just got so many flaws to it, that even Labour’s now started to sort of move away from that.

Gene Tunny  19:07

Ok so they’ve moved away from that, but they’ve, they’re investing more in social housing and it sounds like well, reading your article, you’ve got concerns about social housing as the solution, would you be able to go into that please?

Simon Cowan  19:21

Yeah, you’re gonna get me started on talking about social housing. So look, there is a role for public and social housing, but it’s not the role that the government keeps pushing for it, right. So social housing is very important for people who are temporarily homeless, particularly people say who are fleeing domestic violence, they need emergency accommodation in the short term, and they don’t necessarily have access to funds that would allow them to rent a property go through, you know, the hoops that you need to go through to get a rental property. So you’ve got, you know, people who are in, fleeing violence you’ve got people say, who have, you know, sort of sickness or mental illness issues that need accommodation, you’ve got disability support accommodation, those, those are completely appropriate uses of social and public housing. Now, the difference between social and public housing, public housing is government funded social housing is funded by not for profits. What the government is talking about, though, is providing long term government funded accommodation to people. Basically, along the sort of a line you’re seeing in Britain, where you have a council house for decades, and that’s your home and you don’t own it, you are given it by the government. The problem with that is that it’s a terribly inefficient way of providing support for people who need rental accommodation and are on low income. So when you compare, providing a government house to providing, say, rent assistance through Social Security, it’s way more efficient to provide social security. And it’s way more equitable. Because what you have with government housing, as we have here, there’s a 10 year waiting list. And often, people don’t move on that waiting list at all. So you have people who get they spend years on a waiting list, waiting for free housing, they’re disincentivized to take actions that would get them off that list, especially if they’ve got to the top because if they go back on the list, they go at the bottom, you have people who are living in these public houses who are disincentivized, from getting out of public housing, because if they again, if they you know, they take a job that makes them eligible for public housing, and they lose that job in six months, they go to the bottom of the 10 year waiting list. So and then you also have the the way that rent is structured in public housing, where it’s a percentage of income rather than a fixed amount. So the more money you earn, it’s an effective marginal tax rate of 25%, you lose 25 cents of each dollar extra dollar you earn to your public house rent, rather than the rent being a certain fixed amount a month.

Gene Tunny  21:59

I did not know that. Is that how they do it in New South Wales?

Simon Cowan 22:02

Yeah, yeah, well look I…

Gene Tunny 22:03

I’ll have to check what they do in Queensland, other states…

Simon Cowan  22:06

Social housing again I mean it’s all different, but one of our recommendations, we looked at this when they were putting up the last sort of big round of public housing. And one of the things is that, and it’s designed to make it more affordable, it’s 20% of whatever 25% of whatever your income is. So if you’re on, you know, if you’re on Newstart, then 25% of that’s very low. But the problem is when you then start working and earning money, you’ve got an another marginal tax rate from your accommodation.

Gene Tunny  22:32

Yeah. And without, I don’t want to stig, stigmatise or be critical of anyone who’s who’s living in social housing, but because, you know, obviously, there are people are doing it tough and they’re trying to do the best they can. There are a lot of social problems with social housing is that right?

Simon Cowan  22:49

Yeah especially in the, and again, this has experienced the United Kingdom in particular, that social housing estates, particularly where a lot of public housing is clustered together, you tend to find a lot of antisocial behaviour, you find a lot of other problems, there’s a higher rate of crime. And so what you have is a situation where it’s not particularly pleasant for, for people living in social housing but it’s also, you know, a big disincentive for people to live near social housing. And then you have the effect where if there is a cluster of public housing in a particular place that affects property values that people who live around that by so no one wants, public housing, especially not clusters of public housing, anywhere in their suburb. Yet again, you know, we have this disincentive for development, people want the public housing somewhere else. And then in Sydney, we had a particular issue where, and this is largely a legacy issue, we had public housing that was worth just an extraordinary amount of money by virtue of where it was, you know, in The Rocks, which it’s in the, right in the centre of Sydney with views of the harbour. There’s public housing that had been there for 100 and something years, and each of those houses was worth millions of dollars. So you know, you had this this issue of well, do we, we’re giving away this public housing to someone for basically no money, why don’t we sell their public housing and build, you know, a lot more with with the money that it came from? So you’ve got a whole bunch of problems. I mean, fundamentally, I think the issue with this is if, if the issue that you’re looking at is housing affordability, rather than the need for temporary accommodation or something else, if the issue is housing affordability, you’re always going to be better off allowing the market to develop property than trying to do it by government. And there’s, and there’s a filtering effect of adding supply at any point in the market reduces prices of at every point in the market. Because if you think about this logically, even if you put the supply right at the very top end, the people who are buying those $10 million apartments are selling their $8 million apartments and the the effect of that sort of filters down all the way through the market, so adding supply anywhere, increases supply everywhere.

Gene Tunny  25:06

Okay, we’ll take a short break here for a word from our sponsor.

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Gene Tunny  25:41

Now back to the show.

And what about this this idea of Shared Equity? Labour or the government has a scheme a Shared Equity scheme, there’s concerns about how wide a coverage it is? I mean, it seems like small numbers relative to the total, total need out there. But what do you think of these Shared Equity schemes where the government effectively owns part of your property don’t they? Would you be able to take us through that, please?

Simon Cowan  26:09

Yeah so, there’s a I mean, so part of the problem with a lot of these schemes is that they’re designed to be so small, they can’t have an impact in the sort of aggregate level, because the number of caps are limited. And whenever you see a government policy like this, and it’s, it’s limited to a small number of people, you know, that it’s not a good deal for the taxpayers as a general rule. But so you do have that situation where the government would, in some instances, it’d be providing a portion of the deposit. So that the individual who meets a certain criteria jumps through the right hoops in order to be eligible for the scheme can can apply for a loan and basically buy a property with as little as sort of 5% equity. Shared Equity schemes don’t have a fantastic hit track record in Australia. And it’s not so much around the issue of the deposits. But one of the things that we looked at at the other end of the market was was how you could get into equity release schemes for pensioners. So you’ve got an issue with a percentage about sort of one in five people in the age pension are very, very cash poor and very, very asset rich, and most of them, the main asset they have is property. So when we looked at this 5% or so of people who were on the full rate of the aged pension had more than one and a half million dollars in home equity. But what they didn’t have was an ability to release any of that equity in order to fund their lifestyle. So my interest in in Shared Equity comes much more. And again, there’s, there’s a much bigger tradition of this in the UK, where banks and financial institutions will take over a portion of equity for your home and use that to provide an income or a lump sum to people. So it’s not that Shared Equity itself is a bad idea, where it becomes a bad idea where you’ve got government effectively taking the risk for marginal borrowers. And, you know, people who can’t actually afford to borrow the loans that they’re taking, not just they can’t afford the deposit, but they can’t actually afford the loan. And what we saw in America in the lead up to the financial crisis was exactly these sorts of schemes, schemes where the government tried to manipulate the criteria for eligibility for home loans to effectively give a certain group of people a greater chance of buying a home. And the end result of any of that sort of manipulation around loans was the potential for government to bear, the government to bear losses in relation to home equity. So, you know, it’s a small scheme, it won’t have a big impact for that reason, but it does expose the government to risk of default, which seems like a bad way of doing things.

Gene Tunny  28:52

One thing I should ask Simon is, we’re presuming that the ideal is that people end up in their own home by the time that they’ve retired, would you be able to expand on why that is such an important thing? Or why that’s such a desirable policy goal, please?

Simon Cowan  29:09

Yeah, sure. I’d bring it forward in time. I actually think that, you know, there’s some sort of key milestones in people’s lives, you get married, and then you have kids and buying a home’s one of those milestones and ideally, you know, the ideal situation, I think, is you want to be having that in the middle of those two things. So you know, you you get married and you buy a home together and you have kids and you raise kids in your own home. And that’s sort of the sort of model of of family life that was exceptionally prevalent in Australia and I think it’s, it’s one of those sort of, again, you know, talk about conservatives and for a second, but you know, when you’re, you’re married with kids in your own home, you’ve got something to conserve, you’ve got a stake in society, you’ve got, you know, roots and values there. From a retirement perspective, though, it’s, it’s even more important because Australia’s retirements system was built around a couple of specific ideas. And so one of those is voluntary savings, which is or involuntary savings, superannuation, but another, another one is the age pension, obviously government funded income. But the biggest one in Australia in particular was around the idea that you would own your own home. So the Australian retirement system is actually modelled around people owning a home in retirement without a mortgage. And that takes care of a lot of their basic needs. And what we’ve seen consistently and you know, what we see now in particular, the group of people who are struggling the most in retirement, are overwhelmingly people who don’t have voluntary savings, they don’t have any superannuation left, but they also don’t own their home. And they’re the people who are most risk of genuine poverty in retirement, it’s if you don’t own your home, and you’re dependent on the age pension, and you’re renting in old age, overwhelmingly, that’s a group of people who are right at the bottom in terms of income and living standards. And so, you know, whatever our retirement system is built around this idea that you’re going to own your own home in retirement and own it without a mortgage, then the system has to actually facilitate people being able to do that. And right now we’re starting to see that disconnect happening. More and more people are entering retirement with mortgages. Over time, you’ll see more and more people entering retirement who don’t have a home at all.

Gene Tunny  31:22

Yeah. And what’s really worrying is you’ve got all of these people who are then at risk of homelessness. And you know, people living living in cars or worst case…

Simon Cowan  31:34

Yeah, so one of the biggest, one of the biggest demographics of homelessness, and aside from, and this is sort of the broader definition of homelessness, right like because the the you think traditionally people who live on the streets, are far more likely to be sort of middle aged men, but one of the biggest groups of the biggest demographics of homelessness is actually older single women. And overwhelmingly, that’s the issue. It’s really, you know, they’re dependent on unemployment benefits or pensions, but they don’t own a home. They may have been married, their husbands died, they don’t own their home, they’ve got no income. That’s the group that’s most at risk of poverty and homelessness, was one of them at least. And it’s a big issue.

Gene Tunny  32:12

Yeah, yeah. Okay. What about tapping into your own Super? I think you were alluding to this before. What are your thoughts on that, Simon?

Simon Cowan  32:21

So one of my colleagues that sort of looks at that issue, and his view is that what you should use super for is guaranteeing a loan, rather than necessarily being able to tap into it. One of the issues with allowing people to take money from Super is that it is effectively just increasing demand. So you do have a, you do have a slight demographic shift, in terms of who is able to buy properties, if you can, you know, you can withdraw from Super to buy your own home, but you can’t withdraw from Super for an investment property, you do slightly shift who owns property at that point, just in terms of the simple should you be able to take money on your super to buy own home? Yes, because it’s your money. It’s your money, it’s your savings, you’d be better off in retirement, if you could do it, will it solve the problem that it’s trying to solve? Probably not without something else attached to it. And that really has to be around sort of that supply side reform. And, and it doesn’t have to be, I mean talk about supply side reform, it doesn’t have to be the cratering of house prices, what it needs to be is more flexibility in what people can do with their own property. And when you increase flexibility for owners, and you increase flexibility for people who want to buy, you have a more dynamic and more effective and more efficient market, and that’s better for everyone. It’s not just the case that one group has to win and one group has to lose.

Gene Tunny  33:43

Yeah. Now with, with what the federal government is proposing to do is one positive thing that they’re proposing around targets for, or they’re trying to incentivize the states to encourage development, is that, am I geting that right?

Simon Cowan  33:59

Yes, so this is one of our recommendations, it’s been picked up. And it’s it’s got a, you know, it’s a policy tradition that’s been around for a long time, which is the federal government has all the money, but not necessarily all the levers. So they incentivize states to make good policy by, you know, giving them either withholding grants from them, if they don’t do the right thing, or giving them extra money, if they do, and in this instance, they’re talking about, you know, states that meet housing targets should be able to access additional government money. And that makes sense, right? If you’re building more houses, more money for infrastructure is probably right. But if there’s a challenge, it’s that a lot of the levers and the need for incentive isn’t even necessarily at the state government level. It’s actually the local government level. And so, you know, we’ve seen a number of states, I think, both in Victoria and New South Wales that appreciate the issue around supply and housing affordability, but they’ve been unwilling to impose the requirements on local government level, where all the incentives work the other way. So, we think it’s a good policy. We think it’s something that we’ve recommended, but it won’t be as straightforward perhaps as it seems.

Gene Tunny  35:06

Yeah, you’re right about that. I mean, a lot of the problems are at that local government level. So in Queensland where I’m from, some of the places where we’ve been able to get the high density, where we’ve been able to get more people in, it’s, it’s areas that the state government zone priority development areas, so formerly light industrial areas around West End or, or Newstead so the state government’s been trying to do its best but the Brisbane City Council goes and bans town, townhouses in you know, a lot of suburbs, there’s all these character, all these character protection, and anytime someone…

Simon Cowan  35:39

Yeah, well heritage is increasingly become, basically an anti development scam, unfortunately. And you can look on Twitter and you can find fantastic examples of things that are heritage listed. Like there was a, there’s a heritage listed electrical substations and heritage listed broken fences, and it’s like, rusting machinery, heritage listed car parks, I mean, there’s not actually any historical value in a lot of this stuff. What it is, though, it’s a valuable as a foil or as a stop to development.

Gene Tunny  36:11

And it seems to be a lot of grounds for people to oppose developments, whether it’s, ah there’s, there won’t be enough car parking, there won’t, you know, it’ll affect local traffic and there’s all sorts of grounds for objection. So yeah, absolutely. agree there.

Simon Cowan  36:24

I tell you what’s interesting, just to leave this point, I think is in New Zealand, what we saw was that they basically changed the zoning rules that allowed you to have medium density as a right, so that you didn’t actually need Council permission to go up to sort of three or four storeys from, from a freestanding dwelling. And that resulted in a massive increase in, in the sort of developments that would be allowed that council used to say no to, and a reduction in relative prices in Auckland compared to Christchurch and elsewhere. I am reliably informed, however, that, that initiatives towards housing affordability in New Zealand are now trending in the other way, in the same way they are here, unfortunately. But it was a really good example of a sort of natural experiment. What happens if you change the zoning rules? So it turns out more supply, lower prices.

Gene Tunny  37:11

Okay, yeah. But I’d be mean to have a closer look at that. Because I know there are some, there’s a bit of debate about those data, but I’m just not familiar with them enough. But I want to come back to that. I’ve read about that in the past and mentioned it. I just know that the like everything there ends up being a debate on it. But I agree. I think that would be what I expected. If they did that. I would expect to see that. And if it didn’t happen, then something else must have happened to have stopped that. I guess Simon I think we’ve had a great chat about your article on housing affordability. Was there anything else in that article or any other thoughts you had on housing affordable?

Simon Cowan  37:49

I’ve got a lot of thoughts on housing affordability, but, but I have a lot of thoughts on a lot of things.

Gene Tunny  37:54

Okay, well, maybe I’ll ask you, in the last 10 minutes or so about greedflation.

Simon Cowan

Yes greedflation!

Gene Tunny

So yeah, this became, you know, this has been topical because of our friends at The Australia Institute have been very prominent promoting this view that inflation is due to greedy corporations. And I ended up asking Phil Lowe, about this, I asked our Reserve Bank governor about this at the lunch he he spoke at in Brisbane, and I asked, well, what’s your, what are your thoughts on this? And, and Phil Lowe said, well we looked at it and we don’t really think it’s a it’s really a reasonable hypothesis. And you’ve written something similar, or two, on greedflation, you’ve, you’ve said if, well, this is in an article in Canberra Times 12th of August 2023, “Greedflation myth hides real causes of inflation.” So Simon, could I ask you, what are those real causes and why do you think this greedflation hypothesis, it’s a myth?

Simon Cowan  39:00

Yeah sure, so let’s, let’s start with what greedflation is. Greedflation is the idea that the cause of our current cost of living crisis across the western world, is that corporations, collectively, and spontaneously decided to increase profit margins, and take additional money from, from consumers somehow. You know, the best explanation that I’ve seen for this, the best explanation, the only actual causality that I’ve ever seen someone try and say is, oh, there was supply side shocks as a result of the pandemic and that gave companies the ability to change the prices and so they push the prices up massively. Now, internally, I don’t think that’s actually consistent as an argument because if, support, if the cost of supply went up, then profit margins would go down, not up. But I don’t think any of this is actually about what causes inflation because what caused the bout of inflation is actually really clear. During the pandemic, particularly during 2021, across the western world, governments and central banks massively over stimulated the economy. In Australia, we saw an enormous increase in government spending in the tune of hundreds of billions of dollars, we saw a massive stimulus from the RBI in terms of basically creating money, we saw that across the western world, huge deficits, massive stimulus. Now, in 2020, you could argue that that stimulus was needed. And there was this significant shock as a result of the pandemic and significant uncertainty. By the second half of 2021, though, we had most of those variables under control, and governments kept spending and Reserve Banks kept printing money. And the result of that, as it has been, every time this has happened across history, was a massive surge in demand and as a result of that a surge in inflation. Now, the idea of greedflation, greedflation is actually measuring a real thing, there was an uptick in corporate profits, that came from, it wasn’t the cause of, it came from that stimulus, that massive increase in demand. It’s a simple supply and demand issue. There was a massive stimulus in demand, supply is limited to a certain extent, maximum capacity of the economy is certain amount once you go past that, it’s inflation, and that’s what happened. That’s what happened in Australia and Britain and America and Europe, over that period of time, massive increase in demand. And the reason why, you know it’s an increase in demand, and not an increase in costs of supply, is the corporate profits went up. And what we’ve seen in recent times is corporate profits have gone down, as inflation has come down. Why? Because across the western world, governments have been tightening budgets and reserve banks have been increasing interest rates, in other words, reducing demand.

Gene Tunny  41:58

Yeah, yeah. I think that’s, that’s, yeah that’s good. Simon. I mean, I, I largely agree. And I think when I looked at this in a previous episode, I, I talked about a study from Chris Murphy. So Chris, has done modelling of this and he came to that view that it’s because of the huge stimulus…

Simon Cowan  42:18

Yeah I think he predicted it was sort of six or 7% inflation and got pretty close to where it actually landed in Australia for that survey looked pretty good. But I mean, the bigger picture issue here, there’s two really important points coming from this greedflation thing. One of the reasons why the greedflation hypothesis is is so popular or being pushed so hard, is connected to this idea of of wages, and who should be responsible for paying for the cost of bringing inflation under control. So if you can argue truthfully, or realistically or correctly or not, that it’s not workers, and it’s not, you know, ordinary people who are responsible for inflation, therefore, you can’t restrict wages, and your government should be providing cost of living support through their budgets, what you’re trying to do is actually shift the incidence of who has to pay for the cost of getting inflation under control. But it’s such a dangerous thing to do. Because what we know is that the thing that will make inflation enduring, and the thing that will cause the biggest problems if inflation is translated into wage expectations, it creates a cycle that makes it exceptionally hard to break. And the unions and to an extent the government are trying as hard as they can to put in put forward this idea that wages should at a minimum keep pace with inflation. And ultimately, that’s a very dangerous sentiment, in my view.

Gene Tunny  43:49

This is the concern about the wage price spiral. So yeah, yeah, I’ve looked at that in a previous episode. So I might, I might link to that. Yes. So you’ve written in your article on greedflation. “The dissidents seek to de emphasise monetary policy, especially the role of monetary of managing inflation in favour of a greater role for fiscal policy and an equal focus on maintaining full employment.” So you, you see this, this greedflation view, you’re, you’re worried about it because it could lead to really bad policy outcomes in your view?

Simon Cowan  44:31

Yeah I think we’re seeing a shift already. And it’s been coming for a little while, I think, you know, we had a period of time where there was a fairly clear settlement, particularly Australia and macro economic management stability issues were almost exclusively a domain of of monetary policy, and then micro-economic efficiency issues and supply side concerns were the domain of fiscal policy. And the problem with that is that that doesn’t really allow a progressive government that wants to, to, you know, put its finger on the scales in various places to use macro economic measures as a rationale for changing government spending priorities. And so there’s this shift. You can see in America, it’s not just, just here, but away from monetary policy being mechanism for micro, macro economic stability towards fiscal policy being responsible for for huge components of economic well being. And it fits very clearly, I think into what the treasurer has been saying about the role or the return of government to more central position in in determining the direction of economic forces and so greedflation, if you take it away from that over stimulus point and bring it back towards a discussion about employment and wages. It allows you to centralise government in that decision making process again. And it was so hard for us to get past that first time.

Gene Tunny  45:58

Yeah. What are the greedflation, people arguing for greedflation, what are they actually, what would they be suggesting price controls or something? Who really…

Simon Cowan  46:07

Yeah, price controls and tax increases and ,there’s a was a retribution component in some respects. But it’s also this idea that, you know, workers weren’t responsible for this. Therefore, they shouldn’t have to bear the costs of it. And I mean, from a, from a moral perspective, that that sounds right. I mean, it’s not it’s not instinctively wrong, the problem is from an economic perspective, the argument they’re basing that on doesn’t make any sense.

Gene Tunny  46:37

Yeah. Yeah. And particularly, and this is the point Phil Lowe made in response to my question, I might, I’ll put a link in the show notes regarding that, because I had a look at some of the data he was talking about. You don’t see this big spike in the profit share of national income other than in mining, you see it in mining because they’ve had a big terms of trade boom. But you don’t really see it elsewhere in the economy. There’s a little bit but it’s not huge. So it’s hard to see how it supports his greedflation hypothesis. I think that’s a fair point. And I like your point about the lack of a causal mechanism, because, you know, people like the Australian Institute people, what they’ve done is that they’ve shown or they can demonstrate they do some decomposition of the GDP deflator. And they argue that it’s largely associated with, with profits rather than wages. Now, that’s a nice statistical calculation, but it’s just they’re showing a correlation. They’re not necessarily proving any causation, which I think’s your point. Yeah,

Simon Cowan  47:40

Yeah, cool, but far more fundamentally, right? What is inflation? Inflation is an increase in prices. If, and it can only come from from two places, right? It either comes from an increase in costs, or it comes from an increase in in profit share. Now, either it’s come from an increase in costs. That’s a supply side driven inflation. And we’ve seen some of that during the pandemic, particularly around the energy costs. But what they’ve effectively triumphantly discovered is that inflation is an increase in prices, doesn’t say anything about what causes that increase in prices. And you often see, I mean, because unions, I think, unions think this way, because this is how unions work in the sense that everyone gets together and they make a sort of centralised decision. And that then flows outwards, they assume that their opposition works the same way. There is no business or collective sort of companies that can decide what the profit level is like they can’t, there is no mechanism by which you can actually do that. So what we’re seeing is that that sort of accumulation of literally 10s of 1000s of individual decisions in individual markets by individual companies, there’s no, there’s no overarching sort of business sector that makes decisions. It’s just a reflection of what’s happening in the market. And that’s why I mean, it’s the biggest reason why this doesn’t work. Like if, if you wanted companies to reduce profits to cut inflation. How would you actually go about doing that?

Gene Tunny  49:15

Yeah, I largely agree. Now, you’re not saying that, I mean, would you recognise that there are some areas of the economy where there may be excessive concentration or or we do need to be conscious of abuses of market power. Do you have any thoughts on that? Like so…

Simon Cowan  49:31

Yeah, I mean, I have some thoughts on that. I do have a lot of fairly uncharitable thoughts about competition policy for what that’s worth. I do think there are issues around efficiency within markets, and that is a problem. But it’s not at all clear to me that any of the people who are pushing the greedflation agenda, have any idea how to make markets more efficient. And none of their solutions would make markets more efficient or resolve any of those issues. So I I’m less convinced that that’s a solution to this problem. But what we have seen, I think, is over the last sort of 30 or 40 years, as you know, international trade has increased enormously as the sort of tyranny of distance, you know, internet, the ability of markets to sort of reflect international trends, competition has become enormously increased in a number of different markets. So the fact that it’s not immediately visible in Australia, because you can only see the Australian companies doesn’t mean that there’s not a whole bunch of potential competition that could arise there. So, but I mean, I think competition is important, and it’s not as efficient as it could be. But and I’d be very much in favour of making it more efficient. But I don’t know you make competition better or more efficient with more government?

Gene Tunny  50:47

Yeah. Oh, yeah. Yeah, we might have to come back to that in a future episode. I just thought of it because I know there’s a lot of talk lately about Qantas. And how close Qantas is to the government. And the government is making decisions in favour of Qantas like not letting Qatar Airways take a route into Australia. And at the same time, we’ve got Qantas coming out in favour of a policy position advanced by the government on the Voice, and it’s given Anthony Albanese, some chairmanship lounge membership.

Simon Cowan  51:17

Yeah well so I actually looked at this issue in the past too, and this is a really important thing, it’s what it comes down to is what the future direction of the economy is. So there’s, there’s a view where you say, you know, it’s big business and big union and big government, they all get together, and they do what they think is in the best interest of the country. Or there’s a model where you say, consumers should be sovereign, and they should make choices and the market reflects whatever people decide to buy with their money. And what we’re seeing is so many more people coming out in favour of that first view, the idea that, you know, the benevolent elites will come and decide what’s best for everyone and that Qantas and, you know, the ACTU and Jim Chalmers can get together in a room and decide what the priorities for the economy should be. And I mean, I fundamentally reject that view. But I think more importantly, my vision is not a business-centric one, it’s a consumer-centric one. Markets are consumer democracy. It’s not about what’s best for business. It’s what about what’s best for people and consumers?

Gene Tunny  52:17

Absolutely. I fully agree. Simon Cowan it’s been terrific. I’m so glad to have caught up with you here in Sydney at CIS’s offices. So thanks again for your thoughts and for your hospitality today.

Simon Cowan  52:30

Appreciate it. Thanks for your time.

Gene Tunny  52:33

Righto, thanks for listening to this episode of Economics Explored. If you have any questions, comments or suggestions, please get in touch. I’d love to hear from you. You can send me an email via contact@economicsexplored.com or a voicemail via SpeakPipe. You can find the link in the show notes. If you’ve enjoyed the show, I’d be grateful if you could tell anyone you think would be interested about it. Word of mouth is one of the main ways that people learn about the show. Finally, if your podcasting app lets you then please write a review and leave a rating. Thanks for listening. I hope you can join me again next week.

53:20

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Credits

Thanks to Obsidian Productions for mixing the episode and to the show’s sponsor, Gene’s consultancy business www.adepteconomics.com.au. Full transcripts are available a few days after the episode is first published at www.economicsexplored.com. Economics Explored is available via Apple PodcastsGoogle Podcast, and other podcasting platforms.

Categories
Podcast episode

Exploring the US Banking Crisis with Addison Wiggin – EP192

Economics Explored host Gene Tunny interviews Addison Wiggin, a New York Times bestselling author and market economist, about the US banking crisis. Addison shares insights into the origins and impacts of the crisis, and discusses the future of the US economy and financial markets. Listeners can download Addison’s recent report “Anatomy of a Bust: Winners and Losers in the Banking Crisis of 2023” for free via a link in the show notes. 

Please get in touch with any questions, comments and suggestions by emailing us at contact@economicsexplored.com or sending a voice message via https://www.speakpipe.com/economicsexplored

You can listen to the episode via the embedded player below or via podcasting apps including Google PodcastsApple PodcastsSpotify, and Stitcher.

About Addison Wiggin

Three-time New York Times best-selling author, Addison Wiggin, is a 30-year market economist with a passion for the real-world impact of financial markets on our lives.

Addison is the author and host of The Wiggin Sessions, a podcast that connects key thinkers and industry experts for a deep dive into history, politics, and economics. Some of his most accomplished works as a writer, publisher, and filmmaker include the New York Times Best Seller The Demise Of The Dollar and the documentary I.O.U.S.A, an exposé on the national debt crisis in America.

What’s covered in EP192

  • Addison’s background and how he came to the conclusion that the US financial system is in danger of collapse. (1:53)
  • Will the Reserve Bank of Australia increase rates again? (10:46)
  • The uncertain lender of last resort: The Federal Reserve. (17:11)
  • The Fed’s job is to make sure fewer people have jobs. (21:52)
  • Banking crisis and the failure of regulation. (26:21)
  • FDIC and confidence. (32:00)
  • Why it’s important to understand how booms and busts even take place. (37:07)
  • Cryptocurrency as part of the story. (41:47)
  • What has happened to the dollar since 1913, when the US Federal Reserve was established. (46:41)

Links relevant to the conversation

Special download link to Anatomy of a Bust for Economics Explored listeners:

https://jointhesessions.com/ee/

Presentation by Addison that Gene mentions early in the episode:

Anatomy of A Bust: Banks Go First | Special Presentation by Addison Wiggin 

Transcript:
Exploring the US Banking Crisis with Addison Wiggin – EP192

N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.

Gene Tunny  00:06

Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host Gene Tunny. I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory evidence and by hearing a wide range of views. I’m delighted that you can join me for this episode, please check out the show notes for relevant information. Now on to the show. Hello, thanks for tuning into the show. In this episode, I chat about the US banking crisis with Addison Wiggin. He’s a New York Times bestselling author and market economist and commentator with three decades of experience. Allison has his own podcast the Wigan sessions, in which he talks to key thinkers and industry experts for a deep dive in history, politics and economics is the author of the best selling the demise of the dollar, and one of the writers of the 2008 documentary I O USA. Thanks to Addison for providing economics explore listeners with a free copy of his recent report, anatomy of a bust winners and losers in the banking crisis of 2023. I’ve included a link in the show notes so you can download it as well as sign up for Addison’s content if you’d like to read and hear more from him. Personally, I think Addison, someone with following if you’re interested in the US economy and financial markets, and if you’re listening to this show you probably okay, let’s get into the episode. I hope you enjoy my conversation with Addison Wiggin on the US banking crisis. Addison Wiggin, thanks for joining me.

Addison Wiggin  01:53

Yeah, no worries, I’m happy to actually meet you. As I was saying before, I’ve been forwarded some of your material in the past. So I know your name. And I feel like it’s a good opportunity for us to banter a bit about economics.

Gene Tunny  02:07

Absolutely. Thanks, Addison. And I’ve, yeah, I’ve seen the very know your research. And you’ve, you’ve been doing a lot of deep analysis of what’s been happening in banking and what’s been happening in financial markets. And you’re very keen to chat with you about that. In particular, I’ve come across a recent presentation, you’ve given anatomy of a bust, banks go first. And in that presentation, you make the argument that, well, we’re in a panic of the panic of 2023. America’s financial system is in danger of collapse. We’re here to protect ourselves. Would you be able to take us through what leads you to this conclusion? Addison, please. And also, perhaps maybe to begin with, what a bit about your background? How’d you? I mean, you’ve had, as I mentioned, you’ve had deep experience of this, it sounds like you’d be looking at these issues for decades. Can you tell us a bit about your story and how you come to this conclusion, this threat of collapse, please?

Addison Wiggin  03:17

Yeah, absolutely. I’ve been studying booms and busts for a long time. Since the mid 90s. This is literally the only work I’ve done in my adult life. And just to do a shameless plug right at the beginning, I just published a book called The demise of the dollar, which looks at booms and busts as they pertain to fiat currencies in the world. And US dollar is deeply connected to the Aussie dollar. And I addressed some of that, and also, the dollar is a reserve currency of the world. So like even the Aussie banks or New Zealand or Japan or European banks, US and China as well, which is a big part of the story, use the dollar to store their wealth in. So there’s, there’s a symbiotic international connection between my currency and yours. And that’s what that’s what I’ve been interested in for this particular book. But I’ve also been studying booms and busts going all the way back to the famous ones like the tulip bubble and the Mississippi scheme from John La, back in the early 1700s. And then the South Sea bubble which the bankers from from London just ripped off John Maas idea and then they went bust too. So booms and busts are pretty common in the financial cycle of of our lives. And we’re we have just gone through one and that’s what anatomy of a bust. It’s just a special report we put out because it was interesting to have our very own movement boss how Ben right in front of our faces, it starts really in 2018, where a lot of people were using low interest rates that the Fed was fed had kept interest rates low to recover from the 2008 bus for such a long period of time, that there’s like a whole group of traders who grew up in a world where interest rates were at zero or less than that. And so money was free, and they were speculating on all kinds of things. And one of the things they speculated on was cryptocurrencies in 2018. We had this massive bubble in, in cryptocurrencies and a lot of the banks that started failing in March of 2023, which we’re still I maintain, we’re still in that crunch. And I’ll explain why I think we’re still in it, and why we don’t talk about it that much anymore. But a lot of the banks like Silicon Valley Bank grabbed the headlines when they went bust in 48 hours, because they had invested all of the money they were getting from tech entrepreneurs. They had invested it in treasuries, and then the Fed started trying to battle interest rates. And they didn’t account they didn’t either believe the Fed would they didn’t have any risks. There actually was no risk officer on the payroll at Silicon Valley Bank at the time. And they didn’t realise what the impact of an aggressive rate rate hike policy by the Fed was going to be. And that was happening simultaneously with the collapse of X FTX, which was the crypto currency trading firm that a lot of tech startups had their money, had their money. So when they when FTX went bust, they had to pull their money out as fast as they could, or they just lost their money. And in the meantime, the startups were being also financed by Silicon Valley Bank, notably, and they needed their money back to keep their their startups going. So the conflicts of different trends follow the theme of booms and busts that we’ve seen throughout history. So when when it was happening, I was like, Oh, my God, this is our very own like we could write about, it’s actually happening right in front of us. So it’s, that’s what the special report is about is like how that actually happened. And when Silicon Valley Bank collapsed, it collapsed in 48 hours, because all these people wanted to take their money out to cover their own losses in crypto, that was technically what was robbing and they were just yanking their money out. And even though as you know, as credible bankers, we would look at the way that Silicon Valley had put their assets, more than 50% of their assets were in treasuries, which are meant to be, you know, the risk free asset that banks should hold anyway. But they didn’t calculate for the rising interest rates from the Fed to combat inflation. And then when there was a run on the bank, that’s what we call it. It wasn’t I mean, it’s a modern day, extraction of digits really. But when people started taking their money out, Silicon Valley Bank had to sell their treasuries at a loss. And it it happened very quickly. No one thought that with the FDIC, which is the Federal Deposit Insurance Corporation that was set up by the Treasury to like help small banks, stay solvent help, depositors stay solvent, nobody thought that can actually happen anymore. The FDIC was set up in the 30s, to combat some of the forces that were going on in Great Depression. And then the Treasury itself gets together they get all the Wall Street banks together, and they then they construct these bailout plans like what they did for first republic. So those, all of those things happen, and they were grabbing the headlines from March until like the beginning of May. But then our debt, what we call the debt ceiling debate. I prefer to call it the debt default debate over the dancin, and nobody’s really paying attention to the banks anymore, but the underlying issues of the Fed fighting inflation and over capitalization in treasuries. There’s 36 banks in the US that are still under FDIC protection, watch conservatorship, whatever you call it. And then there’s a bunch of other banks that are borderline if what happened in March where people started pulling their money out of banks as a sector in on Wall Street than those banks are going to be in trouble too. There’s a couple others that I’ve been keeping an eye on that that have the word PacWest was one of them. And they’re just banks that are lending to more risky clients. And then depending on the depending on treasuries to rule out there, or to keep their their investments safe. And depending on how long the Fed keeps raising rates, which I think they’re going to raise them again, because inflation is not under control. It’s not only under control here in the US, it’s not under control. In Australia, I think Australia was getting really aggressive recently. Why don’t they? Well,

Gene Tunny  10:46

they increased rates more than people expected. There was a surprise rate hike. And now the the question is whether they will increase again, we’ve got a Reserve Bank meeting next week, there’s it’s a bit unclear, there’s a lot of debate about what the bank will do. Everyone expects that they’re going to have to increase at least one more time by the end of the year, possibly two. It all depends on what’s happening with inflation, we’ve got a monthly indicator that on through the year terms has, has increased or as worsen. But there’s a debate about well, what it’s it’s very noisy month to month. So it’s difficult to read much into that we need to see what happens with a quarterly figure. They’ll be watching services, inflation, so goods inflation has been coming down but services inflation is has been rising. So that’s and now we’ve got a minimum wage hike of six to 8% or something, depending on the actual, whether you’re right on the minimum or if you’re on an award. So yeah, there are, there are concerns about the future of inflation.

Addison Wiggin  11:52

I’d like to ask you a question. I spent some time in Australia. And also we had an office there for a while. So we were trying to manage our own finances there. And it might just be a myopic point of view of my own, because I am an American and the Federal Reserve is what it is. But when the Fed makes moves, often the Ozzie bank or like Japan or EU will follow, like a month later, if to you to think that that’s true. I don’t want to sound like an arrogant American, which I probably am, but But it always feels like the Fed is sort of like the central banks of the world.

Gene Tunny  12:30

Yeah, that’s true. It’s not automatic. It doesn’t always happen. But certainly one of the things that our central bank is conscious of is what’s happening with the exchange rate. And if if we keep our interest rates too low, then that leads to a depreciation of the the Australian dollar. And that’s bad for inflation. So we start importing inflation. So that’s something that they are conscious of. And when the Fed started lifting, was it last March or March?

Addison Wiggin  13:04

A little over a year ago? Yeah. Yeah. And

Gene Tunny  13:07

so the first few rate moves increases by our central bank, we’re pretty much in line with what the Fed was doing. And I mean, my take on an Earth in Michael Knox, who’s a commentator here, and he’s, he’s Morgan’s financial chief economist. I think he’s one of the best market economists in Australia. That was his view on it that, you know, by essentially copying the Fed that they had, the Fed was moving. So our, our guys had to I mean, we read our, our central bank, really, I don’t know if asleep at the wheels the right way to phrase it. But our first rate increase didn’t happen until I think it was May last year. And so it was a couple of months after the Fed, the Bank of England had gone earlier. I think Reserve Bank of New Zealand really got on to it early. But yeah, I think our central bank just wasn’t concerned enough about the risk of inflation. They were too much in that secular stagnation paradigm that they had, prior to the pandemic and those that decade or so they thought, Oh, well, we’re in this world of permanently lower interest rates, and there’s no no concern about inflation. We don’t have to worry about that anymore. For various reasons.

Addison Wiggin  14:23

I mean, that’s literally what thought some of these regional banks, asleep at the wheel was the Fed got really aggressive picket quickly, and even in the books that I’ve been writing? So I have this one, but I’m also looking at another one that’s kind of like the political analysis of how we got to a position where we have 31 trillion in debt, which is just ridiculous, right? Looking at the trajectory of Fed policy from really from 1987 When, when there was a stock market crash and Alan green The internet just become our Fed chair, he dropped rates as a response so that people could get free money in and prop up their balance sheets. That has been the response since 1987. Until now, and no one I like they caught a lot of banks sleeping, when they started raising rates as aggressively as they did, and they were afraid of 1980 81 scenario where inflation would just get out of control. There’s no anchor to the dollar. And everything is based on the dollar index, which is a basket of currencies and including the Aussie dollar that determines what the value is. There is a tone. It’s just astounding to me, actually, with all the history that we have with banking, and even the Federal Reserve since 1913. Like there could be backers who still have jobs. what was gonna happen? Yes. Well,

Gene Tunny  16:04

I mean, it’s an but they play an important role in the economy. But yes, there’s a lot of monetary mischief with a lot of mistakes that a an aid for sure. Absolutely. I like to ask Allison about. You mentioned that this started in? Was it 2018? So you think this started before the pandemic? Is that right? And then the pandemic, all the policies during the pandemic made it worse or contributed to the instability?

Addison Wiggin  16:30

Yeah, well, I would say, though, is that there were separate events, I think that the policies really started in about 2012, when we were seeing QE two, meeting that the Fed was still buying bonds in the market, or in even actually buying up mortgage backed securities in response to what the federal what the, what caused the crash in 2008, which was a global event also, because all the big pension funds and hedge funds, they’re all interconnected globally. So when when we ran into our housing crisis in 2008, it affected everyone. And we saw the ripple effect really quickly. And what the Fed did to head that off, was they dropped the interest rates, we had zero to negative interest rate real interest rates for a number of years between 2012 and 2018. But they were also buying up assets in the market, they were buying bonds in the treasury market to support bonds, because they needed to fund the government. And then they were also buying, they were actually buying assets on Wall Street, which is like, that’s an extreme measure. The bank is not supposed to be buying assets to prop up the market. But anyway, so there was a period of time where we had zero, I mean, money was free. And there was the like, I like to phrase the, the uncertain lender of last resort, that’s what they call the Federal Reserve, you never know what they’re going to do. But in the end, they’ll come in and bail out, you know, they, if they had to, they bail out, gee, JP Morgan, which has literally the fifth largest GDP of any economy of the world, and it’s a private bank. So they would come in and bail them out. That’s just thinking

Gene Tunny  18:25

that on that point about had this, what was it the unexpected lender of last resort?

Addison Wiggin  18:32

Charles Charles, my book I forgot his last name, but he wrote us. Yeah, he wrote an entire book about there needs to be a lender of last resort, but it has to be uncertain. You can’t count on them. You just have to know that they’re there in case the shit hits the fan. And yeah, and that’s what the Fed has been trying to do. But what they’ve been telegraphing what they telegraphed from 2012 until 2018, was we’re gonna keep rates low, and we’re gonna keep buying assets to keep the market propped up. And the beneficiaries of that policy are Wall Street banks, big ones, you know, yeah, Oregon, Citigroup, Bank of America, those companies, those those corporations are beneficiaries of just an extended period of ridiculous monetary policy. And a whole generation of bankers grew up in that in the environment where they believed that the money was just going to be free forever. So when the Fed turn, turned around and started trying to combat inflation, then we started having a serious problem. And the first people that got taken out, were the regional banks who weren’t paying attention to risk policy at all. So that’s why I say it started in in 2018, because there was a big boom in cryptocurrencies stable coins. We’re coming out. Bitcoin had already like fluctuated up to 60,000 and then dropped and like it was already an object of speculation and Aetherium was sort of like its step cousin, you know, it was doing its thing. But there was a lot of money getting pushed into the market because of low interest rates, that tech firms and Wall Street banks the like, and new new banks, like the FTX exchange that that was built, that was only founded in 2017. Like it became one of the largest traders have actual money, dollars to crypto currency in like, under two years, there was a lot of money flowing into the system. And that’s when if you follow Austrian economics, like I do, but a lot of other people do, too. I’m not making any kind of claim to it. But all the mistakes that are made get, they happen in the blue, when there’s money, that’s cheap credit, and people are spending money on things that they don’t understand. That’s exactly what tech entrepreneurs especially were doing, because they were excited about this new money that we could trade. It wasn’t traceable. And then banks grew up around it, that silver gate was one Silicon Valley Bank was another first republic was another pack glass was involved. And so when the tech entrepreneurs started getting nervous about their, their investments, or even their own companies, they wanted to remove the money from banks, and was sort of targeting Silicon Valley Banks specifically because they were getting a lot of deposits. And they didn’t have to loan out money to make money. So they were buying treasuries. And then when the Fed started tackling inflation, which itself, inflation itself was a result of 10 years of, of low interest rates, like we had, of course, we had the pandemic, and then we had the war in Ukraine, which cut off some supply chain, so it created like pain points. But at the same time, there was so much money flowing around in the system, that the natural outcome just in economic terms of that much money flowing into the system is that prices go up. The amount of money chasing goods is more than what the goods have, in what I would call intrinsic value. So it just costs more if you want gas, it cost more if you want eggs, eggs were a big deal. In the US. They were in, in Australia, but they were a big deal for like two years, because they went from like, I don’t know, an average of three bucks for 12 eggs to something like seven bucks. And people were like, What the hell, you know, I need an egg a day. And now it costs Yeah, three times as much. So that’s that’s the way that people feel inflation, but the cause of inflation, inflation is rising prices, but the cause of it is money supply money going in to the system. And they did that in reaction to the 2008 housing crisis, they were pouring money into the system and making it cheap for years to a degree where people just started thinking that was the new norm. But when Powell got in place, and he started raising rates, there was a lot of bankers, especially who were like, Oh, he’s not going to do that. Because this is the new norm. And it wasn’t the new norm, because there’s they still don’t have inflation controlled. So my guess is they’re going to raise another quarter point and they meet again. And then that’s going to ripple out to banks in Australia, in Japan. And mostly, those are the three that I looked at Australia, Japan and EU. Yeah,

Gene Tunny  24:14

it’s quite quite possible. I saw that the US had a good was a good jobs figure was was that what I saw? Yeah. And so that they’re saying the economy is more robust than they expected. And so yeah, they’re doing isn’t it? conundrum a little bit that the feds job is just to make sure that less people have jobs. Yeah, well, that’s the Yeah, that’s the Elizabeth Warren take. And then she was trying to pin it really gets stuck in a jay Powell over that, I think in the in Congress, wasn’t she? Oh, I’m trying to remember. Was it Powell or was it she was given?

Addison Wiggin  24:53

That was a couple of weeks ago, she was giving a speech in front of Congress, but she was taking Jay Powell to test. So he wasn’t actually even talking to him. Right. But that’s just a weird thing that that the feds job has suddenly become too slow the economy down, make sure that more people are unemployed, so that the government can then take care of them. It’s like, it’s, it’s not a free economy, like we like to think that America runs a free economy, we don’t run a free economy at all. And their goal right now is to slow everything down. And then we got the jobs report that you’re talking about. It was, I believe, is yesterday or the day before, it was more robust than what they were expecting. So they’re saying, oh, yeah, the economy is still growing, we gotta raise rates more to slow it down. Like, if we got a jobs report that wasn’t as positive as it was, then the stock market would have actually rallied. But when the draw four came out, down because people were like, Oh, that means they’re gonna raise rates again, we can’t borrow money cheaply again. It’s like, yeah, Pretzel Logic to me. But it’s kind of fun in a way to follow it, because it’s like, it doesn’t really make that much sense.

Gene Tunny  26:19

Yeah, yeah. I better get back on to banking, because I want to ask you about where we’re going there. And this banking crisis. There are a couple of things I just wanted to just quick things a good to get your views on. So you mentioned that this SBB didn’t have a Risk Officer. Is that right? Which I find extraordinary. Is that a failure of regulation? Yeah, I

Addison Wiggin  26:42

only found it in passing. So there were two kind of oversight errors that took place. They didn’t have a Risk Officer evaluating what the impact of rapidly rising interest rates would be on their the holdings that were like the core of the bank. That was one thing. And I think it was just in transition or some of the there wasn’t somebody in that position at the bank for like a year. And that was the year that the Fed started aggressively raising interest rates. And at the same time, no, nobody in the bank thought that the Fed actually pretty much nobody in the economy, though did Wall Street banks didn’t think that they would do it either raise interest rates as aggressively as they did. So even while it was happening, we were like, Oh, they’re going to stop. So there was a lot of speculation of when they were going to pause or when they were going to pivot. I remember back in even before the banking crisis started, the big phrase in the headlines was, when is the Fed going to pivot, meaning they’re going to stop raising and they’re going to turn around and start dropping among regional banks anyway, the first ones to get under stress. They didn’t have people that were taking the Fed seriously at their word, the Fed was saying we’re going to we’re going to fight inflation until it’s done, which is a tough battle. And nobody believed that. So when the cost of treasuries went down, and the interest rates went up, it was harder for a bank, like I just use Silicon Valley Bank, because it was so pronounced. It was harder for them to raise the capital to pay back their depositors when they wanted their money back. And a lot of those depositors had just lost money in the collapse of fts. So it was just sort of an act of boom and bust, you know, a line of love crumbs from what was going on in the crypto market to what happened to the regional banks. And then you saw the entire banking sector get whacked in the market, like, there were other banks that were reasonably sound that were getting taken down because everyone was trying to get out of the banking sector. So when their stocks get are getting punished by institutional investors and by pension funds, then that messes with their balance sheets, as well. And the only reason we haven’t been hearing about it in since I actually tried to pinpoint it was May 18, that the debt ceiling debate sort of took over the headlines. All the issues with the banks still exist. And that was really just a speculation on my part. But if they didn’t, for some stupid reason, come to a political agreement. On the debt ceiling, we would have seen a massive wipe out of bets because Treasuries are supposed to be risk free ish. I mean, they’re about as risk free of an investment you can make other than maybe gold or precious metals, and banks had piled into treasuries for so long because it was cheap. And it was easy and it was risk free. If we had a debt ceiling debate, I mean, that the vault if that debate failed, and we had a default, then treasuries would have been become an object of speculation, like other assets in the market, people would be like, I’m betting they’re going to do this, I’m going to bet that they’re going to do that, and the risk free part of that, where you store your money would have disappeared, that would have been a nightmare for a lot of smaller banks. And then the thing that is kind of a nightmare too, would be that JP Morgan, Citibank, Bank of America, the big Wall Street firms would have just gobbled up all of the, those assets at pennies on the dollar, which is exactly what they did with SBB. And with first republic, they just went in and just took all the assets for like, it was three cents on the dollar.

Gene Tunny  31:04

Okay, we’ll take a short break here for a word from our sponsor.

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Gene Tunny  31:39

Now back to the show. So can I ask Allison, where are we going? Now? I mean, over the next six months or a year or so will we see more banks fail? Will we see a contagion? Or will we see impacts on the broader economy? Where do you think this is all going?

Addison Wiggin  32:00

Well, I’ll answer that in two ways. There is a certain level of confidence in the FDIC to like bank to back individual depositors. So like the fear of bank runs is probably abated a bit. Because the FDIC and Janet Yellen to the Secretary of Treasury, she has been going out saying no, we’re not gonna bail everyone out. But if it gets bad, we’ll bail some people out like she’s being that lender of last resort. So I think that the crisis part has abated. But that hasn’t fixed any of the the challenges that banks are facing right now with rising interest rates, and the battle against inflation in the uncertainty of of how committed the Powell Fed is going to be to that. So it would. So that’s why I say I’m going to answer in two ways. One, I detailed all of this special report that we were talking about anatomy of the anatomy of a bust, this is exactly how it happens. And I actually got that phrase from Garrett Garrett, who was writing about how all the banks failed from 1932. Until about they were still failing into the 50s. So they failed for a long time. But the three banks that failed in march into the early part of May, were larger in capital by percentage than all 25 banks that failed in 1932. So like, that doesn’t happen by mistake. And that also doesn’t happen without repercussions. And I expect that that we’re going to be talking about banking places like three years from now, because it hasn’t worked itself out yet. And they’re still trying to fight inflation. So so I don’t know if we’ll have a panic or a crisis period like we had between the beginning of March and mid May. But I think the tension is still there. And it’s definitely something that we want to pay attention to. Because the banking system is the the bedrock for all of the other stuff that we get, like when we buy and sell stocks, when we get mortgages, when we buy cars, send our kids to school and stuff like that that system needs to be. We need to have confidence in that system. And I don’t think it’s there yet. Brought we get a paper version of the confidence from speeches from Janet Yellen. And we forgot her name already, but that was the woman who runs the FDIC. But it’s just a fact the FDIC has like 300. Now they have $37 billion to support $17 trillion worth of deposits like it’s It’s, it’s absurd. Other than me and I’ve written this to this is it’s a competence game. Like, just like the way people, you know, take advantage of retirees because they gain their competence and competence gain is what it is. It’s a it’s a sham. Yeah. Yeah, right now the government is running a competence, that literally people have confidence that the government will figure this out. And so they’re they’re just biding their time. And what are they going to do next? My, my guess is they’re going to drop interest rates. As soon as there’s like a real crisis, they’ll drop interest rates, and now get another speculative boom going on Wall Street. And usually what happens when, when that happens is that mutates into bubbles in other markets, too, like Australia always benefits from booms in the commodities market. And China always benefits from new tech development and the Europeans benefit from new speculation in travel and tourism. Like it’s it’s almost predictable. What’s going to happen next,

Gene Tunny  36:11

abroad. Okay, so this is your report anatomy of a bar stock and put a link in the show notes to that. Can I add in just trying to think about what the risks are? I mean, you make the case that more banks are probably going to fail. What do you think the chances of something like 2008 happening again, or something worse than that? What would you put the probability of that ad in the next couple of years

Addison Wiggin  36:36

right now, I’d say it’s pretty low. Because one of the things that happens is like human beings that the people who run the government also learn. And they did what they thought they had to do in 2008, I’ve written about this many times, the Paulson, delivered a three page memorandum to Congress and said it at like midnight, and said, You have to bail out these banks, otherwise, the entire global economy is going to fall apart. There’s three pages, and they just followed it. So I think they’ve learned that through monetary policy, and also working in concert with other federal, like the Federal Reserve system of the world, that they can mitigate crises. But that doesn’t mean the problems aren’t still there. So that’s why it’s important to understand how booms and busts even take place, you can’t keep interest rates at zero for 10 years, and then expect that no inflation is going to pop up. But it is ridiculous. But it’s worth understanding the mechanisms behind the banks and whatnot, because that’s the that’s where the money flows, if that’s how the markets work. That’s how, you know, they determine interest rates for all kinds of things, credit cards, and student loans, and banks and cars and all that kind of stuff. The economy functions on credit. And banks are the source of that credit. And they’re all connected to the Federal Reserve System. So it’s worth paying attention to what they say. And I hate that. I don’t like politics. And I don’t like the banking system. But I warn people that they ignore those things at their peril. Because when you need to do something financially in your lives, you’re sort of dependent on decisions made by people who live far away from you, and don’t have your interests in mind.

Gene Tunny  38:45

Yeah, yeah, I just want to try to understand what this all means. So does this mean that, like, we’re in a situation where the Federal Reserve and the government is going to have to continuously? Well, maybe not continuously, but every now and then bail out the banks? And, you know, we’re gonna keep trying keep interest rates low, keep the flow of credit going? And therefore, ultimately, this is inflationary? Are we back in? Because we had a period of very low inflation? Are we going to be in a period of higher inflation for for longer than we expect? Is that one of the arguments was that a conclusion?

Addison Wiggin  39:22

Yeah, my conclusion is that we would, it’s not a conclusion because it’s an ongoing story. But we’re going to be in a period of inflation longer than, you know, the headline news tells us like, you can’t just stop inflation. And once it starts, it’s very hard to stop. And I actually got that quote, I, I interviewed, I did a documentary about 15 years ago, and I interviewed Paul Volcker, who was famously the inflation fighter of the early 1980s. He was the Fed chair at the time. And when he said to me, he said two things that have stuck with me he said a lot of other things and I published all buddy But, but he said a couple other things that are two things that have really stuck with me one he’s like, actually, I’m going to set the stage. So this is after walking past a couple of cartoon pictures of him that he had framed in his office of him like turning off the inflation spigot. And then another one where he was like wielding a sword and a shield, and he was like fighting inflation. So he was kind of like a caricature of that time. And that was the worst inflation that the world had seen in since the late 1800s, since the panic of 1893. And the reason was, we had gotten off the Bretton Woods, dollar peg to gold that there was a lot of reasons why it happened. But when I spoke to him, and this is on camera, and in the interviews that I’ve published, he’s, well, first of all, once inflation gets started, it’s very hard to stop. Because it, it creates, like a psychosis in people where they start thinking, if I don’t spend my money for that refrigerator, in June, by September, it’s going to be 30, Luxmore, or something like that. And they start thinking like they have to spend their money now. And that creates inflation, psychosis of sorts where people are just spending more money more quickly, because they think it’s going to be worth less later. And you’d like if the Feds goal is to slow down the economy, that inflation psychosis works against any Fed policy that they can put together.

Gene Tunny  41:43

Okay, just a couple of things. Because yeah, it’s great conversation quickly. What about crypto? You mentioned crypto as part of the story?

Addison Wiggin  41:51

Well, I have a theory about crypto. And it’s the same thing that it’s the same philosophy I have about the internet itself is that we had in 2001, we had a big boom in Internet stocks, like even Toronto, like right now. But the company that makes insulation for houses was doing fibre optic and they dropped the.com on the end of their name. They weren’t even a tech company. And they they exploded in value. Yeah. What’s the pink insulation that we all use? But I don’t even know why I’m drawing a blank on the net. But it’s because it’s a big installation. The point I’m trying to make is that during the.com, boom, there were just ridiculous investment being made. Yeah, all kinds of things. And then they busted. But we were, in the end, after all, the detritus fell to the floor, and people sort of like woke up from their hangovers. We ended up with internet and things like zoom, like I’m talking to you from Australia. Right now. I’m in Baltimore. And these things are possible because of that massive innovation and the investment that went into that period. Like that it even with a Gora, the company I’ve been working with for a number of years. We exploded when we went online, and we benefited greatly from the innovation of email, or changed our lives. So I have the same sort of perspective on crypto, is that I think it’s speculative. And I think there’s booms and busts and we saw that 2018 was crazy. Yeah. And then we saw another spike in in different like Bitcoin and Aetherium. And some of the stable coins in like 2021. Last year was a nightmare. We called it crypto winter, because the underpinning actually doesn’t part of the story I’m telling to is that two of the stable coins that FTX and Alameda research were investing in the traders that were supposed to be pegged to the US dollar, but the traders on pegged them without telling anyone and that started the FTX. So I think you’re gonna continue to see that kind of speculative nature in crypto. And we’ve got this spectre of central bank digital currencies coming up. We don’t know where that’s gonna go. Suppose there’s going to be a vote in the US in July, on whether the Federal Reserve should adopt one or not. But they keep saying that to that story is going to be ongoing, I think the real benefit of the the innovation and the spikes in the highs and lows and, and, you know, the turbulent market that Kryptos has gone through up to this point will ultimately be beneficial because we’ll we’ll end up with Blockchain as a more efficient way to to conduct transactions in the financial markets. So you can make money you can lose money in crypto. I’m not a crypto evangelist. Like I believe that it’s going to be a substitute to the US dollar or the world banking system. But I do believe it efficiencies that are brought to transactions are going to be beneficial to everyone. And that’s kind of how I look at it even from an investment standpoint, I’m like, oh, bitcoins at 15,000, neither should buy some, and then it’s at 27. And then it’s at nine. And it’s like, no, I’m not getting somebody tried to buy some property from a couple years ago, I think it was in 2021. And but they would only do the exchange and in Bitcoin and I’m like, I don’t know if my property is going to be worth less or more if I take your Bitcoin, but I do know what the value of the property is. Yeah. So I think the speculative nature of it is, it’s too early to, to like I prefer gold and silver to Bitcoin or Aetherium. At the moment, maybe there’s a time when, when it makes sense to like use it as a banking tool, but not right now. too speculative for me, and, but I do think that the benefits of blockchain are going to be like email to us a couple years from now, where everyone’s going to be using Blockchain for efficiency, which I think is great. In the boom, bust cycle, that’s what happens, people invest a lot of money quickly into innovative projects, and a lot of people get burnt, a lot of people get rich. And then what we end up with is the core technology that benefits humanity as a whole. I love technology.

Gene Tunny  46:31

Yeah. One thing I wanted to cover too, is this demise of the dollar you talk about? So is that a this is this is a long run concern of yours about where the US dollars going. And I mean, this is related to the point you’re making about.

Addison Wiggin  46:43

Yeah, the thing is, like, I mean, I could slip through the book is that one great chart that shows what has happened to the dollar, I’m not going to be able to find it and make it make sense to your viewers. But since the Federal Reserve was founded in 1913, the original goal of the central bank was to stabilise the currency, and maintain its purchasing power in the economy, for payment, currency users like me, like it’s supposed to be able to, I’m supposed to be able to figure out what my dollar can buy and for how long. But it’s lost more than 97% of its purchasing power since 1913. And it’s, it’s a steady slope downwards, the more money they pour into the system, the like every dollar that you print becomes worth less than the one that was printed last. And the entire banking system of the world is dependent on the dollar as a reserve currency. And at the same time, we’re losing the value of its purchasing power, every debt, and it’s been going on for more than a century. There, their main task was to preserve the purchasing power of the currency that we use in the payment system in the economy. And they have done anything but that it’s, it could be its historic fiat currencies never worked. It accelerated after 1971, with the Bretton Woods system fell apart, the only thing you can do is understand it and then try to move your money around into assets that accumulate value over time. That’s why I like gold and silver, because yeah, there’s a little bit more speculative, but gold when I was younger, and first trying to understand how these things correlate. Gold was trading at like 253 bucks an ounce in 1999, I think and now it’s trading on average, a little bit above 2000. Over that time, he has to be 500. It’s outpaced the s&p 500, which is a broadest measure of big stocks. It’s just been a better investment over time. And that’s that’s just generally what I think is it’s a reverse correlation to the dollar, which is supposed to be managed by the bankers who keep sort of forgetting about risk and inflation and those kinds of things.

Gene Tunny  49:20

I might have to come back to fiat currencies. Yeah, it’s a big, big topic, but another time, because I’ve really picked your brain and it’s been I don’t mind it. We’re very good. That’s great. And yeah, maybe if you if you wanted to sum up your the broadly, the anatomy of a bust. Would you like to summarise it? Or is there anything else you’d like to say before we wrap up?

Addison Wiggin  49:43

No. I mean, I would just say that it’s it was my attempt when, when I was already following the story of FTX and I knew there would be a knock on effect, and I had starting in about December of 2022. So like six months ago, I was like this story is not going to go away. And there’s going to be a knock on effect in other parts of the market that we’re not aware of right now. And that was in December. And then by March, we started having banks fail, which nobody thought was even possible anymore. With the Federal Reserve System and the FDIC backing out small depositors, like nobody thought we would have bank runs ever again. And and then we had the three largest ones within a six week period. So I had already been kind of following the story, and trying to just try and understand how it would even be possible. So that’s what’s in the report is like, here’s what happened, here’s why it happens. Here’s what you need to pay attention to. And here’s how it fits into the historical perspective of booms and busts, the credit cycle is a real thing, even if the government is trying to mitigate it. It does exist and impacts everyone. Because you need a bank, to save your money to borrow to do things that we want it to, to run your business you need, you need a bank that works with you. And if they’re making dumb choices with the assets that they have, it’s better to know that in advance. So that’s what the report is about. And then there’s a couple of recommendations on investment investments you can make. Once you understand what’s going on. We actually recommend bank.

Gene Tunny  51:31

Yeah, yes, it’s for US banks, a lot of to have a lot of have to have this conversation. I don’t know if you look at Australian banks, if I don’t, I

Addison Wiggin  51:40

haven’t looked at Australian banks, except for in a macro sense, where I’m aware that the Federal Reserve decisions that move rates also has a knock on effect in Australia, New Zealand, China, and Japan and Europe. Those are like the big ones. Russia was at two until they decided to destroy their neighbours. Yeah, the

Gene Tunny  52:09

general view here is that our our banks are in a much better position than

Addison Wiggin  52:14

it could be. I haven’t studied them closely enough to know, I think their requirements are different in Australia than in the US too.

Gene Tunny  52:23

Yeah, there. There are definitely differences. So you might have to I’ll have a close look at that myself. But look at us. And it’s been terrific. Yeah, probably more time than you might have expected, delving into it. Because I think what’s great is you you do deep research, and you make a big calls, I suppose what you make you make you really let us know what you think. And I think it’s great. And yeah, it’s it makes me think about what’s going on so much more. So really appreciate all the work you do. And I’ll put links in the show notes to your work. And, and thanks for making that. That report available for listeners. That’s terrific. Yeah.

Addison Wiggin  53:03

It’s information that I like, I would just caution people that I’m learning about it as fast as I can. But I’m also passionate about it. That’s why I do it. This whole project that I have the Wigan sessions is a passion project. I like talking about this stuff. And then it makes me think just like you’re saying, it makes me think. And I want to give away the report just to spread what I’ve learned, because I think it’s important stuff for, especially if you’re trying to manage your own money, it’s really important for you to understand the bigger trends. And, you know, I have a philosophy degree and I studied literature in school and stuff. So I’m interested in the stories of what’s going on. It’s late sound perverse, but I was actually excited when we started having our own banking crisis. It’s happening right in front of my face. I just have to read the news.

Gene Tunny  53:59

Yeah,

Addison Wiggin  54:01

get the report. It’s it’s interesting. And it’s helpful to like, make sense of what’s happening in the news, too.

Gene Tunny  54:07

Yeah, certainly, I guess it could be exciting, stressful. I remember being in Treasury. And here in Australia during the world of financial crisis. We didn’t have it as bad as it was in the States. But it was still quite, quite stressful at a time when we started seeing the drop in government revenues. And yeah, borrow lots more money. And yeah, well, my

Addison Wiggin  54:28

biggest concern, and I put this in the report to but my biggest concern right now is, we were talking about the savings rate during the pandemic. I think the same thing happened in Australia to the savings high because there was a lot of government stimulus, like direct payments to citizens. So the savings rate and then nobody could go anywhere. So the savings rate went really high. It actually peaked above consumer credit for like a, you know, like, a month, and then as the economy started opening up and people started travelling and Like making decisions I, oh, we’re free, we can go to one, the savings rate plummeted. And then the consumer credit rate for all of the things that I’m only talking about the US, but I’m sure it’s mimicked in other Western economies, the consumer credit rate, skyrocket skyrocketed before the Fed started raising rates. So like, all these people are taking on adjustable rate, credit cards and loans and mortgages and things. And then suddenly, the the debt service that they have to pay on those rates went through the roof, it’s tripled. So you had a plummeting savings rate, and at the same time that you have a service to debt ratio going through the roof. It’s not a good scenario. And we haven’t even really seen that impact on, like earnings in the s&p 500, the big retailers and stuff like that. We haven’t seen what that impact is going to look like yet. So that’s not kind of like, I guess, yeah. So other than the banks themselves, because they do it for there’s two points there that I’m keeping an eye on.

Gene Tunny  56:09

Yeah, fair point. We’ll definitely I’ll keep an eye on it, too. I think they’re really good points. Okay, Addison, we’re gonna thanks so much for your time. I really enjoyed that. That was terrific. Good luck to you, man. Very good. Thanks, Addison rato thanks for listening to this episode of economics explored. If you have any questions, comments or suggestions, please get in touch. I’d love to hear from you. You can send me an email via contact at economics explore.com Or a voicemail via SpeakPipe. You can find the link in the show notes. If you’ve enjoyed the show, I’d be grateful if you could tell anyone you think would be interested about it. Word of mouth is one of the main ways that people learn about the show. Finally, if you’re podcasting outlets you then please write a review and leave a rating. Thanks for listening. I hope you can join me again next week.

57:10

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Credits

Thanks to Obsidian Productions for mixing the episode and to the show’s sponsor, Gene’s consultancy business www.adepteconomics.com.au

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Categories
Podcast episode

The Greedflation hypothesis – EP186

Economics Explored host Gene Tunny talks about the “greedflation” (greed + inflation) hypothesis with his colleague Arturo Espinosa from Adept Economics. They discuss whether greedy corporations might be responsible for high inflation rates in advanced economies such as Australia and the United States. Gene talks about how the excessive fiscal and monetary stimulus during the pandemic has been a major contributor to higher inflation. 

Please get in touch with any questions, comments and suggestions by emailing us at contact@economicsexplored.com or sending a voice message via https://www.speakpipe.com/economicsexplored

What’s covered in EP186

  • [00:01:28] Australia’s high inflation rate.
  • [00:06:57] UK windfall tax on oil and gas companies. 
  • [00:10:27] Greed inflation hypothesis. 
  • [00:13:29] Markups as a contributor to inflation. 
  • [00:16:20] Industry concentration and inflationary pressure. 
  • [00:21:11] Inflation outbreak and COVID stimulus relationship. 
  • [00:25:45] Problems with Covid stimulus. 
  • [00:27:58] Excessive stimulus and inflation. 
  • [00:32:35] Corporate power and antitrust.

Links relevant to the conversation

Greedflation articles:

Blaming inflation on greedy business is a populist cop out

Profits and Inflation in Mining and Non-Mining Sectors | The Australia Institute’s Centre for Future Work 

Underlying Australia’s inflation problem is a historic shift of income from workers to corporate profits

Corporate profits have contributed disproportionately to inflation. How should policymakers respond? | Economic Policy Institute

‘Greedflation’ is the European Central Bank’s latest headache amid fears it’s the key culprit for 

price hikes 

How Much Have Record Corporate Profits Contributed to Recent Inflation? – Federal Reserve Bank of Kansas City 

Cost-Price Relationships in a Concentrated Economy – Federal Reserve Bank of Boston 

Inflation is being amplified by firms with market power  

Chris Murphy’s economic modeling on stimulus and inflation in Australia:

https://onlinelibrary.wiley.com/doi/full/10.1111/1759-3441.12382

UK windfall profits tax:

What is the windfall tax on oil and gas companies? – BBC News

Energy Profits Levy Factsheet – 26 May 2022 – GOV.UK

RBA on sources of inflation in Australia:

Box C: Supply and Demand Drivers of Inflation in Australia | Statement on Monetary Policy – February 2023 | RBA

Charts:

Australian bank deposits

Australian money supply (M3)

Transcript:
The Greedflation hypothesis – EP186

N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.

Gene Tunny  00:00

Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host Gene Tunny. I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory evidence and by hearing a wide range of views. I’m delighted that you could join me for this episode, please check out the show notes for relevant information. Now on to the show. Thanks for tuning into the show. In this episode, I chat with my colleague Arturo Espinosa from adept economics about the greed inflation hypothesis, our greedy corporations to blame for the high inflation that we’ve been living through. After you listen to the episode, please let me know what you think about the greed inflation hypothesis. You can email me at contact@economicsexplored.com. I’d love to hear from you. Okay, let’s get into the episode. I hope you enjoy it. Arturo, good to have you back on the programme.

Arturo Espinoza Bocangel  01:12

I’m very happy to be here.

Gene Tunny  01:14

Excellent. Arturo. So it’s at the end of the week, it’s Friday the 28th of April 2023. Earlier this week, we had the March quarter inflation number for Australia. It came in at 7%. So it was lower than at its peak of 7.8%. The quarter before but it’s still it’s still high. And mean, there’s still concerns about cost of living in Australia for sure. I mean, that’s something we’ve all been noticing as we go to the supermarket and other stores. So for sure inflation is still high. One of the things I think is interesting, and I must admit I’ve come to this issue late. Is this issue or this accusation of greed, deflation? Have you heard about this concept of greed, deflation? Arturo?

Arturo Espinoza Bocangel  02:05

Well, lately, yes. But when I was student in Peru, I haven’t heard that

Gene Tunny  02:11

nine. I think it’s a it’s a new term that that’s been thrown around. There’s this accusation that a lot of the inflation we’re seeing is due to profiteering it’s due to greedy corporations. So obviously, we do need to be concerned about big business and monopoly power. There’s, that’s a legitimate thing to be concerned about. But there is this question of, to what extent can we explain the inflation that we’ve seen by greedy corporations? So is it greed, flotation. And this has been quite prominent in the media. So there’s a think tank here in Australia, the Australian Institute, and it’s put out a paper in which they’re saying that this is a big part of the inflation problem. So we might talk about that in a moment. And it’s an accusation that’s been thrown around in other countries, too, in the States. And also in Europe, there was an article in Fortune magazine earlier this week. Greed flash deflation is the European Central Bank’s latest headache amid fears it’s the key culprit for price hikes. And I mean, what we see in whether it’s in Europe, or whether it’s in the States, or whether it’s here in Australia or the UK, if you just look at the data, if you look at data on inflation, you look at data on corporate profits and wages, and you look at data on other input costs. It is the case that profits have been have been high and they have grown in this post pandemic period. And this has led some people to argue that, well, they’re just profiteering they’re putting prices up more than can be justified. Now, I think this is a difficult hypothesis to prove it been thinking about it a bit and how you might demonstrate whether it’s the case or not that this is true, or whether you can whether we can rule it out, or or is it something that is it is a legitimate possibility. We do know that certainly profits for oil and gas companies and also coal mining companies here in Australia. They’ve been, they’ve been very high and also profits in other sectors to have been, have been higher. So in banks and, and in other sectors, and that’s what The Australia Institute argues. One of the challenges I see however, is that in economics as in other sciences, you need to be careful to distinguish should join correlation and causation. I think what Institute’s such as research, researchers think tanks, such as The Australia Institute have found I think they’ve found a correlation isn’t causation I think that’s a lot harder to establish and might go into, into why that’s the case. So I want to talk about correlation versus causation, how might you prove whether there’s green inflation is, is a legitimate thing or not? And we’ve also got to think about here, what’s the what’s the scientific way to look at this and to come to a conclusion now, The Australia Institute is a think tank, and it has a particular agenda. It has a progressive or a left wing bias. And so this type of hypothesis of green inflation appeals to it. So we need to keep that in mind. And we should think rigorously about whether it makes sense or not. Okay, so that’s, that’s a bit of an intro to this idea of greed, inflation. Or one of the other things I just wanted to mention in the intro is that there have been calls for a windfall tax on oil and gas companies in, in many countries, and they did impose one in the UK, I don’t know if you saw the news about the that windfall tax that they imposed on oil and gas, know, what will happen are they put on a, an energy profits Levy, because arguably, a lot of the the excess profits that the oil and gas companies were making, that was due to the higher prices associated with the war in Ukraine. And if you think about it, from an economic perspective, they really didn’t need those profits to have been motivated to invest in the first place. So you could argue that they were, they were x supernormal profits. And so therefore, you could make a case for a some sort of excess profits. Levy. And so that’s what they did in the UK, they put on a an energy profits levy a 25% surcharge on extraordinary profits, the oil and gas sector is making and, and that’s we saw a similar thing here in Australia wheeling, Queensland with the higher royalty rates on coal. So they put in a new, a couple of new tiers in their royalty rates. I think they had a 40%. There’s now a 40. What is it a $40 a tonne royalty rate, once the coal price gets above a certain, certain level? And I mean, this, this is something that’s controversial, because then companies say, Well, there’s a sovereign risk that oh, there’s a risk of that, that we didn’t anticipate before. Now, we have to really think about whether we invest in your state or your country. So there’s that that to consider. But that’s just to say that why this is relevant is because if you think that this green inflation is a problem, then you might be more inclined to to advance policy measures like that, like a windfall profits tax or higher, higher company tax or something like that. So I think that’s a that’s one of the issues in the policy debate I thought I’d mentioned. Okay, Arturo, any thoughts on ADD or green inflation? So far,

Arturo Espinoza Bocangel  08:26

it seemed that probably these inflation can be caused by these corporate big multinational corporation that wants to maximise the profits. Without taking into account what happening in the White House household level, the pressure of these inflation particularly is on the household Australian households, that they need to pay higher prices in energy, fuel, my grocery staff, so that is, that is painful.

Gene Tunny  09:04

Yeah. How plausible Do you think there’s greed inflation hypothesis is so basically it’s saying that the corporations are taking advantage of this concern over inflation? Or that they see that? Okay, so prices have started to rise and corporations think, okay, let’s just keep increasing prices, because we’re, we’ve got the cover to do. So now. We’re, it’s, we can get away with it, essentially. Now, what’s the problem with that argument? So we’re thinking like economists would say that the problem with that argument is that if one company decides to do that, and they’re doing it illegitimately that their costs of production really haven’t increased. Wouldn’t another company try and undercut them or try to they just, they wouldn’t raise their prices as much and then they could steal some market share from them. Yeah, the third point? Yep. So it requires some time. coordination among the companies, doesn’t it some sort of implicit collusion. And I think this is where some of these models, there are some theoretical models that appears which are trying to lend support to this greed inflation hypothesis. Did I think you found a study, didn’t you, Arturo, that said that this or that? Was that an empirical study you found that said that where there’s market power, it looks like there is some tendency to have

Arturo Espinoza Bocangel  10:25

there’s a few of them, the the those paper have found positive correlation between higher concentration higher inflationary pressure,

Gene Tunny  10:36

really? Okay. And do you think they’re good studies, though they published in good journals, do we what do we know?

Arturo Espinoza Bocangel  10:42

Those are probably most of them are publishing good journals. And also in economy, we know that the mythologies bar are different. And also each metal he has his pros and cons. So we need to, to consider that and analyse in detail what is.

Gene Tunny  11:05

So probably too much for us to do in this episode. But we’ll put links in the show notes. So if you’re in the audience, and you’re interested in having a look at those studies, you can check them out, and I might have a closer look at them after this. I know that there are studies like that, and that would lend support to this greed inflation hypothesis. And so maybe we can’t completely rule it out. There’s a paper by John Quiggin and Flavio ministers, and John and Flavio, their professors at University of Queensland and economics. I know both of them. Well. And John’s actually been on the show before. And they wrote a piece in the conversation. I think they had a working paper to back it up and inflation has been amplified by firms with market power. And so their argument is that where one or more firms is big enough to have market power for any given quantity sold, prices will be higher. Yep, and increasingly higher as demand for the product climbs, okay. This means that after a boost to demand such as the one that followed the COVID stimulus, in the end of the lockdowns, firms with market power amplify the resulting inflationary shock. Okay, so they’ve got a model where they come to a conclusion that having market power means that you’re more likely to be able to take advantage or to put your prices up if there’s this, this demand shock, okay. Possibly. I mean, my feeling is that if there is a level of competition in the market, then that should constrain that. But look, if there is market power, maybe that’s an interesting, interesting hypothesis. And there are studies from the States did you see this isn’t just something in Australia, there are studies from the US as well as a Kansas City Fed study from 2021 There’s a really interesting point they make in this that I think it’s worth thinking about in this whole green inflation conversation. So I think Andrew Glover Jose, I think you know how to pronounce his name. Yeah, cuz Sam was traded veal. Okay, that’s great. And Alice Vaughn and Rebecca they present evidence that markup growth so markups on products sold. So for the to get the profit. So the markup growth was a major contributor to inflation in 2021 markups grew by 3.4% over the year, whereas inflation as measured by the price index for personal consumption expenditures was 5.8%. Suggesting markups could account for more than half of 2021 inflation. This is what I think’s fascinating. They note that the timing and cross industry patterns of markups growth of markup growth are more consistent with firms raising prices in anticipation of future cost increases rather than an increase in monopoly power or higher demand. I think that’s a really critical point. So look, it might be the case that if you look at the data, at the moment, that it looks like the businesses are doing incredibly well. So they’ve got high profits. And they’ve they’ve increased their prices, but it could be that they’ve increased their prices in anticipation of future cost increases. Now to some extent, you have seen those future cost increases will in fuel I mean fuel prices were higher for I think they’re starting to come down. But energy prices here in Australia are still going up. Costs of other inputs are increasing labour costs. Labour hasn’t responded as much as some people have been forecasting for years. So wages growth is still It hasn’t really been that spectacular. But look, I mean, there’s something to that that could be the case that what we’re seeing is businesses. It’s not as if they’re being greedy. They’re just concerned about their own costs rising and they’re increasing their profits. Another thing to keep in mind, of course, is that that profits are procyclical. And this inflation has occurred at a time of a booming economy, the economy post COVID boomed. And as we came out of the pandemic, and that’s a time when you’d naturally expect to see higher profits. And we’ve also seen high inflation, unfortunately. So it could be correlation rather than causation. Again, look, lots of there’s a lot going on. There are lots of aspects of the economy. And I think that Kansas City Fed study, and I’ll link to that in the show notes that makes a good point about how you need to consider expectations in assessing what companies are doing. Okay. There was also a study by the Boston Fed that you found wasn’t there. So this is one of the other Federal Reserve Banks. So what was that cost price relationships in a concentrated? Economy? Was this a study you were talking about before?

Arturo Espinoza Bocangel  16:15

Exactly if the concentration, right,

Gene Tunny  16:19

okay. So the US economy is at least 50% more concentrated today than it was in 2005. So they, their findings suggest the increase in industry concentration over the past few decades, could be amplifying the inflationary pressure from current supply chain disruptions in a tight labour market? Okay, so this was a paper from 2000, until I’ll put a link in the show notes. Right. So that’s, that’s supporting that greed foundation thesis. Look, there’s there’s a whole bunch of you know, there’s studies that support it to an extent and then there’s others that question it, or there’s commentary that questions that. And one of the things you found Arturo, which I think was fascinating was that the so the Reserve Bank of Australia, so as central bank, and here in Australia, it doesn’t really give any credence it doesn’t really think much of this whole green inflation idea, does it or it hasn’t hasn’t raised it or doesn’t talk about it as a possible explanation does

Arturo Espinoza Bocangel  17:20

exactly here that RBA pointed out that there’s a place I fuck towards accounting for around half of the increase in inflation over the year to September 2022. But they didn’t mention anything about really corporations.

Gene Tunny  17:35

Right. Okay. So what I’ll do is so I can be to be objective and to be to be fair, on both sides of the argument, I’ll put links to, to, to what the RBA has been saying to both of those fed studies and also to what The Australia Institute has been, has been saying, I mean, they’re been the most vocal about about this. I mean, their analysis to them suggests this is an analysis of national accounts data. Again, it’s it’s an analysis of correlations of data that’s that they seen these things happening at the same time and drawing a conclusion based on that now, can you make the conclusion that this is due to greedy corporations, or corporations being more greedy than normal? Okay, I mean, we live in a capitalist economy. Okay. So businesses are going to maximise profits. There’s no doubt about that. But look, that’s the system we’re in. But is this something that in times of inflation, does it amplify the inflation or lead to, to more inflation than you you’d otherwise expect? I think that’s the hypothesis, The Australia Institute, based on their correlation, all analysis I call it says just looking at correlations, they would argue that it does. So their analysis suggests to them that 69% of excess inflation, so above the, the Reserve Bank’s target of two and a half percent, since the end of 2019, came from higher unit corporate profit margins, while only 18% of the student labour costs. Right. Okay. And they go on in that report to say that, look, it’s not just the profits in the mining sector, because it was just profits in the mining sector. And whereby, okay, the miners are really profitable. And so there’s a lot more profit in the Australian economy that’s on that’s because of all these export earnings. Right? So it’s not as if they’re making all of these profits by exploiting people in the domestic economy. So that’s where that argument of theirs would fall down. But then they do go on to point out it’s not just mining, that where there’s these excess profits in their view, there’s, you know, higher profits in it. in financial services and banking and in other sectors, so, yeah, check that out. And I think they ask a good question. And it’s good that they’ve made this contribution to the debate, because it forces us to think rigorously about what’s been driving inflation and what’s the cause of inflation. And we’ll get on to that again, in a moment. Okay, we’ll take a short break here for a word from our sponsor.

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Gene Tunny  21:03

Now back to the show. One of my old Treasury colleagues, John to in the financial review, John has written an opinion piece, which is very good. John’s good writer. Blaming inflation on greedy business is a populist cop out. And I think what John is saying here, I think this is where a lot of the economists in the Reserve Bank or the Treasury, I think they would agree with John, I think I largely agree with John, and I’ll go into into why in a moment. And John’s main message is that it was the spillover of public sector stimulus that lasted for too long, not price gouging by companies that fueled the inflation outbreak. Did you have a look at that? That article by John?

Arturo Espinoza Bocangel  21:55

Yeah, yes, I rebuilt the conclusion. Yes. He made a good point.

Gene Tunny  22:00

Yeah. And he relied on a study by Chris Murphy, who’s a former Treasury model. I actually work with Chris’s daughter in Treasury, Carol, I believe, if I remember correctly. So Chris, is a well known Australian macro, economist. And he was at KPMG e contact for a while. Now he’s a visiting fellow at ASU. And he’s done something a bit more advanced than what The Australia Institute did. The Australian Institute just looked at the national accounts and inflation data and tried to draw conclusions from that from just basic data analysis. Now, I think the problem in economics is, you can only go so far doing that, if we’re talking about testing hypotheses, what’s the scientific approach to do that, you probably need something a bit more than just the basic data analysis. Now, one of the problems we have in economics, of course, is that you can’t run controlled experiments as you can in the lab. So we’re always trying to come up with clever ways to, to analyse the data, to do econometric modelling of some kind, to work out whether these hypotheses can be maintained, or whether they’re, they’re rejected. That’s what I’d say on that. And what Chris Murphy does is he runs a simulation. He’s got this macro economic model, this econometric model of the Australian economy based on a broad range of macro economic data, and relationships that have some basis in economic theory. And what he does is he simulates the economy, if it was subject to COVID. But there wasn’t all of the arguably excessive monetary and fiscal policy response there was the there was some contraction in GDP. I mean, there’s a quite a substantial contraction in GDP still in that first quarter of COVID. Because people just would have naturally socially distanced anyway, right, even in the absence of policy measures. And we did say that in in some economies, that there was no, there was no way of avoiding the the economic shock from COVID entirely. But if you didn’t have the, all of that stimulus than by his estimates, you would have avoided a lot of the inflation. And I think this is really, really interesting, really interesting modelling. And Chris Murphy has a paper in the economic papers journal, which is a journal that’s actually published by the Queensland branch of the Economic Society was aranea, which I was once the secretary of. No longer though, but you can get that online, I’ll put a link in the show notes, fiscal policy in the COVID, 19. Euro. Really good paper. And what he does in this paper, which I think is excellent, is he just highlights how massively generous the COVID stimulus was, the stimulus during COVID was particularly job keeper, which was just incredibly generous, and he ended up because of the eligibility rules, there are all these people who are they were only employed part time, but they effectively get compensated as if they were full time workers. So there are a lot of people getting access excess money. And there’s an argument that that stopped some of those people from searching for a new job, if they were if they are on job keeper, or if they’ve been supported by job keeper. So, yeah, lots of problems with that, that stimulus and I think we’re, if we had another pandemic, I mean, let’s hope we don’t, I mean, still getting recovering from that last one. I mean, it was just the excessive response was just at it, and just, yeah, incredible. But if we do have it, I think we would have a much better, or a hope, whatever much better economic policy response. But what Chris Murphy found was that the fifth and this is in Australia, the fiscal response to compensate for income losses. In services industries meant that unemployment was around two percentage points lower for three years than otherwise, than it otherwise would have been. And there was over compensation for every $1 of income, the private sector lost under COVID, fiscal policy provided $2 of compensation. And then there was of course, the ultra low interest rates, point 1% cash rate, the hundreds of billions of dollars of monetary stimulus via quantitative easing, all of this additional money in bank accounts, I’ve got some charts that I’ll put in the show notes. So just show how much the Australian money supply is grown. I think since 2020, the amount of money so the stock of money in Australia has increased by nearly a third or around a third or something like that. And think about that. This is part of this whole. And this is something that what I’ve been saying on this show for the last couple of years, I mean, what we’ve got is too, too much money chasing too few goods, if you looked at what happened during the pandemic, and within the fiscal policy and monetary policy, what we saw with the inflation now, no doubt, significant part of it was due to the invasion of Ukraine. But what we end up seeing with inflation is what you would have expected based on the the massive stimulus and particularly the massive monetary growth that we saw. And so therefore, you don’t need this green inflation hypothesis. You can explain a lot of it by the excessive stimulus. And this is what Chris Murphy shows in that paper. Germany thoughts on that, Arturo?

Arturo Espinoza Bocangel  28:09

Whoa, this point, you the last point that you have mentioned is very clear. It made me think, okay, yes. The these re the cooperation argument is not 100%? Sure, shall we, whether if some academics, or you know, researchers will try to understand the drivers behind inflation. When I mentioned, drivers, of course, we include these government expenditure in increments. And also lit, we can include another factors at fame level, like, for example, to, to use markups in order to maximise profits. So that kind of thing is,

Gene Tunny  29:03

yeah, I think you made a good point before. I mean, we really want to have a look at what’s been happening in specific firms. I think we’ll have to wait for studies that really examined what’s happened at that firm level, maybe using that business longitudinal database data? I don’t know. But yeah, clearly, this is a it’s a big issue. And I think it’s one that we need more evidence to resolve. But I guess what I would say is that we shouldn’t jump to the conclusion. I mean, I’m pretty confident that we shouldn’t jump to the conclusion that it’s greed flesh, and that is just because a greedy corporations, I think there’s there’s a lot more. I’m not even sure to what extent that’s a significant factor. In fact, the corporations more greedy than normal. I mean, it’s this idea that it could amplify a shock that is inflationary, possibly, but I’d like to see, yeah, I have to sort of think deeply about what that means. It’ll is and what that mechanism is, I mean, my view is that you don’t need that great inflation hypothesis to explain what’s happened because it’s perfectly understandable if you just think about the the massive, the massive shock that we saw now. So think Chris Murphy, what he found was that if you didn’t have the stimulus, if you just had COVID, then then by the end of 2022, you’d have inflation at around 4.2%. So you would have ended up with some inflation as the economy bounced back after COVID. But what ended up happening, of course, is that inflation went far beyond 4.2%. In Australia, we ended up with 7.8% in Australia. And what Chris Murphy’s modelling shows is that, in his scenario, his his actual forecast scenario, he’s worked out that the excessive macro stimulus drives inflation, three percentage points higher, so three percentage points higher to a peak of 7.2%. Okay, which is in the wall ballpark of where it did get. So in his model, he can you explain it with the stimulus. Now, of course, it’s a macro model and models that we all know the problems of trying to forecast the economy and modelling the, the actual path of the economy with an econometric model with with equations. We’ve got parameters estimated, statistically or using econometric methods there. They have their limitations. But to me what, what Chris Murphy does is, is a better way to think about this sort of try and answer this question than just this basic correlation analysis that’s done, where we go, oh, well, profits are up. inflation’s up. wages aren’t up by much. It looks like it must all be inflation’s. At the same time as we’re having inflation companies are making more money. Therefore, it’s greedy, greedy corporations, I think I don’t really think that’s, that’s the right way to think about it. Having said that, I mean, it’s worth having the conversation and forces us all to think more rigorously about the causes of inflation and what we should do about it. And he thought cetera? No, I think that’s pretty much all I wanted to go over. I’ll put links in the show notes, to all these various papers and reports we talked about. The RBA has put something out on inflation drivers where they look at the different factors and they don’t seem to think much of this whole green inflation, explanation. But look, I think it’s worth covering. I know that, you know, we do have to be mindful of corporate power we have to be mindful of, of monopolies or oligopolies that exploit their market power. There’s no doubt about that. I mean, then that’s why we have things like the a triple C, the Australian Competition and Consumer Commission, or we have the we have the antitrust statutes in the US. And we have whatever the equivalent is in the UK. Did you see in the in the they’re quite muscular in the UK? Did you see the they’re blocking that? Microsoft’s acquisition of Activision Blizzard? Oh, I haven’t seen that. Oh, yeah. That’s quite interesting, because one of the things I’ve covered on this show is this issue of big tech and to what extent we should be concerned about big tech, so might have to come back to that in a in a future episode. I thought that was a really interesting development, because they’re concerned about Microsoft’s already a behemoth, right. Concerned about Microsoft getting getting even more market power in games. Okay, well, thanks so much for your time and for helping me think about this issue of greed, inflation, it’s helpful to talk about these issues with with colleagues. So I can think about really clarify how I’m thinking about it. Am I on the right track? Am I being biassed? Am I too sceptical of this hypothesis, which might actually have some merit. But yeah, I think my view is that we can probably explain inflation most, if not all of the inflation by the excessive fiscal and monetary stimulus. We don’t need this great inflation hypothesis that said, Look, if they can provide convincing evidence that it is a thing then sure let’s let’s look at it a bit more closely. So think that’s where all I’ll end up. Tomorrow. Thanks so much for your time.

Arturo Espinoza Bocangel  34:37

Thank you for having me, as well was my pleasure. Very good.

Gene Tunny  34:43

rato thanks for listening to this episode of economics explored. If you have any questions, comments or suggestions, please get in touch. I’d love to hear from you. You can send me an email via contact@economicsexplored.com Or a voicemail via SpeakPipe. You can find the link in the show notes If you’ve enjoyed the show, I’d be grateful if you could tell anyone you think would be interested about it. Word of mouth is one of the main ways that people learn about the show. Finally, if your podcasting app lets you then please write a review and leave a rating. Thanks for listening. I hope you can join me again next week.

35:30

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Credits

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Categories
Podcast episode

What are Goldbacks and who’s buying them – e.g. preppers, libertarians, collectors?  w/ Goldback Founder Jeremy Cordon – EP183

The Goldback is a local commodity currency operating in several US states, including Nevada and Utah. The Goldback is described as “the world’s first physical, interchangeable, gold money that is designed to accommodate even small transactions”. Each Goldback is embedded with 1/1,000th of a Troy Oz of 24 karat gold. Show host Gene Tunny is joined in this episode by the Founder and CEO of the Goldback company, Jeremy Cordon. According to Jeremy, “Gold is money.  Everything else is credit.” Among other things, Gene asks Jeremy who’s buying Goldbacks and how widely are they being used? 

Please get in touch with any questions, comments and suggestions by emailing us at contact@economicsexplored.com or sending a voice message via https://www.speakpipe.com/economicsexplored

You can listen to the episode via the embedded player below or via podcasting apps including Google PodcastsApple PodcastsSpotify, and Stitcher.

What’s covered in EP183

  • What is a Goldback? [1:36]
  • The USD value of a Goldback relative to the value of Gold in it [5:20]
  • How can you create your own local currency in the US? Is it legal? [6:44]
  • What are the different types of gold buyers? Why Goldbacks are popular with preppers [11:30]
  • What’s the acceptance of Goldbacks by local businesses? [14:12]
  • Why are Goldbacks better than the old gold standard? [20:56]

Links relevant to the conversation

Goldbacks website:

https://www.goldback.com/

Jeremy’s bio:

https://www.goldback.com/meet-the-team

Related previous podcast episode:

Why fiat money means higher inflation & why a radical Reserve Bank review is needed w/ Darren Brady Nelson – EP179

Transcript:
What are Goldbacks and who’s buying them – e.g. preppers, libertarians, collectors?  w/ Goldback Founder Jeremy Cordon – EP183

N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.

Gene Tunny  00:06

Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host Gene Tunny. I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory evidence and by hearing a wide range of views. I’m delighted that you can join me for this episode, please check out the show notes for relevant information. Now on to the show. Hello, thanks for tuning into the show. This is Episode 181 on goldbacks. A local commodity currency operating in several US states including Nevada and Utah. The gold back is described as the world’s first physical interchangeable gold money that is designed to accommodate even small transactions. Each goldback is embedded with 1/1000 of a troy ounce of 24 karat gold. At the end of March 2023, they could be exchanged for a bit over four US dollars. I’m delighted to say that I’m joined this episode by the founder and president of the gold back company, Jeremy Cordon. According to Jeremy, gold is money, everything else is credit. Okay, let’s get into the episode. I hope you enjoy my conversation with Jeremy. Jeremy Corbyn, president of gold back, welcome to the programme. Thanks

Jeremy Cordon  01:36

for having me.

Gene Tunny  01:37

It’s a pleasure, Jeremy, I’m keen to chat with you about gold backs. One of the issues we cover on this show is the fiat money and the issues associated with that. And I did a show a few weeks back on fee it versus commodity standards for money. And I mean, what’s fascinating is that you’ve introduced your own commodity money, it appears with gold back, could you tell me a bit about gold back, please?

Jeremy Cordon  02:04

Sure. Well, just like you said, it is a commodity money. And it might be one of the most successful commodity money’s out there right now. You know, we produced maybe $50 million worth of gold backs that are circulating. And that was true up until the end of 2022. You know, last month, I want to say that we’ve sold between six and $7 million worth of gold backs. So we’re seeing this huge amount of interest and growth. And people that are looking for kind of these inflation proof commodity monies. Yeah, if you haven’t seen one a gold back, it looks about the shape and size of $1 Bill, there’s gold encased in it, it kind of gives it like a like a Willy Wonka ticket look. And they go down from 1000th ounce of gold. So you know, it’s like a $4 Gold product, and they go all the way up to a 50, which has 50 times the amount of gold, it’s a 20th of an ounce. And those are worth about $200 a piece. So people carry these around like bills spend is just like cash, but the gold is in them. And that’s that’s what gives them you know, a lot of their value there.

Gene Tunny  03:12

So in terms of what they’re worth, or what that exchange for in US dollars, is it broadly equivalent with the value of the gold within the notes? Within the goldbacks?

Jeremy Cordon  03:25

Yeah, I’d say that’s about that’s about half the value. You know, because if you melted them down, you know, if you had a giant pile of gold backs, you melted the whole thing down, you got to realise that we’re splitting an ounce of gold into 1000 pieces. And that cost money, right? If you destroy all that, you know, craftsmanship and labour and effort to do that effectively, you know, you’re only going to recover about, you know, half of that value and melt, which is still really good. It used to be far more expensive to break gold down at that level. The other half of the value is just the utility value of having a money that works well and maintains its value, which you know, for fiat currencies, 100% of the value is utility value.

Gene Tunny  04:06

Yeah, yeah. And so where are these being used in exchange.

Jeremy Cordon  04:11

Now when we launched goldbacks, it was about four years ago is 2019. And we started in Utah. Utah’s a very special law that recognises gold and silver as legal tender. And, you know, we figured we couldn’t find a more hospitable, legal environment anywhere in the Western world. Right. So we started in Utah, and I was thinking that the Utah gold back would be a it would be a Utah specific project, and that we probably wouldn’t do any more gold back projects anywhere else. And what we found really quickly is that 90% of goldbacks for Utah were selling outside of the state of Utah. And then I started getting stories, you know, these kind of anecdotal stories not just from all over the US but all over the world, that people were bartering and trading with gold backs for things because go figure the value of a gold back. Is it just because it says Utah, It’s, you know, it’s because the fixed amount of gold. It’s a known quantity. It’s a known value and it’s very usable and bearable, anywhere in the world because gold has value everywhere in the world.

Gene Tunny  05:20

Yeah, exactly. I suppose I guess one thing I’m most interested in is that the value of the gold is about half of the value of the note you were saying so. And that’s how you’ve made like all the goldback company makes the money because you’re selling these notes for more than the cost of production, which makes sense. I mean, obviously, you’ve got to make money out of it. Yeah. So that makes sense.

Jeremy Cordon  05:46

We don’t make half. It’s not like, you know, I mean, the profit margin isn’t as rich as you think.

Gene Tunny  05:51

Yeah, I wasn’t suggesting that. But yeah.

Jeremy Cordon  05:53

Some people think that’s the case like that the one denomination, which is the 1,000th of an ounce, that’s actually manufactured in the loss. It costs more than we can even sell it for to make.

Gene Tunny  06:04

Right, right. Okay. So, Utah, it’s got a special law, and I saw that there are other there are other states where they’re being used. Is that right? Is it New Hampshire, that I read that correct?

Jeremy Cordon  06:16

Yeah, we got New Hampshire and Nevada. Wyoming just came out. We got South Dakota coming out this year.

Gene Tunny  06:23

And the year of relying on specific state laws, because I remember there’s an episode of Riverdale, that Netflix show where Veronica Lodge tries to create her own Riverdale currency. I don’t know if you’ve seen that episode at all. And her father who’s the crime lord of Riverdale, Hiram Lodgy, he has it shut down by the US Treasury, he says, And he said, You can’t do this. You can’t create your own local currency. But you’ve managed to create a local currency here. How can you do that? If the US dollar is legal tender in the US? What does the Treasury say about this?

Jeremy Cordon  06:56

You know, you’re right. There’s federal law that prohibits you from making your own currency in the United States, unless otherwise authorised by state law. So if you don’t have a state law to support your currency project, then you can’t do it. It’s illegal. So you know, Utah was a very obvious first choice for us. We went in there and we said, Okay, we got a state law recognising gold and silver as legal tender, this is gold. So we’re under this umbrella of state law. So you know, because otherwise, if this is a federal project, it’d be illegal. And sure enough, you know, we support a huge network of businesses in the states that you mentioned, that advertise themselves as preferring to take gold back. So these do function and circulate as local currencies within the states. There’s businesses outside of these states that also do it. We don’t include them as part of any of our either they’re not like a supportive business. You know, people happen to barter with these things outside of the states, but it’s not, you know, that’s more because it’s a commodity money or a novelty, or, you know, they’re trying it out, you know, most of the economic activity per capita is happening inside the states, right, where you’ll see 10 times as much activity in Utah, per capita than than Colorado, you know, because Utah has its own series. So now, as far as the state laws, Utah, it’s kind of obvious, you know, it’s the legal tender act for Gold and silver. But when we went to New Hampshire or Nevada, you have to start to question that. So who doesn’t have to have a special law? You know, or does Nevada have a special law. So we actually took a really unique legal approach with the gold back. Now, if you’ve ever used and I’m going to an American law here, not federal but state level, if you’ve ever used a coupon or a gift card, if Walmart makes his own gift cards, you know, they can’t make their own local currency either. Right. If you make a coupon, you can be accused of making a local currency. The law that businesses use when they make you know, these kinds of you know, products is called the Uniform Commercial Code. The Uniform Commercial Code gives you you know, you have to put a cash value on the note or the unit and then it can have a separate value. And every state adopted that law. So gold backs we also plug into that law. And the way it works for us is the US Mint. I think Australia does this as well. They mint a one ounce gold coin, and it stamped with a $50 face value. Right? So we say okay, 1000 gold backs contain one ounce of gold will allow you to redeem 1000 Gold backs for a $50 one ounce gold coin it’s a promise that we can always keep you know, there’s never a question of can I can recover the gold because you can always trade it for another form of gold. You know, and we’ve got 10s of millions of dollars with a gold coins that are part of a contract where you know, if just about every gold back came in today, we could turn them all into gold coins. So at that point, the gold back becomes assumes a coupon for a gold coin that’s made out of gold.

Gene Tunny  10:05

Yeah.

Jeremy Cordon  10:06

Because the gold coin is federal us minted legal tender. You know, it falls neatly under the Uniform Commercial Code, which allows it to circulate and be used as money in any state in the country.

Gene Tunny  10:21

Right, so do you have a background in the law Jeremy has had this sounds like you have to have some legal knowledge to be able to figure this all out and get it up and running.

Jeremy Cordon  10:32

I was a paralegal but my main partner in gold back drafted the Utah legal tender act in 2011. He’s a little older, he’s got more grey hair, you know, he’s in his 60s. And, you know, he ended up being a very important partner to have in gold back. Because, you know, to your point, you’re right, I mean, you know, if you make something like this, you need to have all of your ducks in a row legally, because I didn’t I didn’t do this to you know, get in trouble or go to jail. We wanted to do this 100% right.

Gene Tunny  10:59

Yeah, yeah, absolutely. And who’s buying the gold back? So who’s using it? Is this because you mentioned this 50 million and, okay, I mean, that’s a good start. I mean, the US money supply is, what is it? 30 trillion or something?

Jeremy Cordon  11:14

For sure, yeah, no, it’s it’s a drop in the bucket. Yeah, it’s, it’s a it’s a mosquito compared to a blue whale, right? I mean, it’s not, it’s not very big.

Gene Tunny  11:23

Yeah, I’m not meaning to diss it. I’ll just say it’s at the early stages. So who are the early adopters of it? At the moment? What are their characteristics? Are they libertarians?

Jeremy Cordon  11:33

Yeah. Some of them, you know, I have a few different groups, you know, there’s not one single type. But you know, I mean, you have your true believers, right? You know, they look at Gold backs, they say, my goodness, you fixed money. And this is amazing. And I want to be part of it. And I want to have these, and I want to have in my wallet. And I want to try to spend them, I want to show everybody, but I’d say that that group is a minority of people that own gold backs, you also have people that are, you know, professionals. You know, they’re very, you know, average people and they look at Gold backs, they say, Hey, this is so cool, these are so pretty, the artwork is so incredible, I’d love to just own a set, and they’ll you know, they’ll drop, you know, 400 bucks, and they’ll buy a set of gold backs. And we’ll frame it and stick it on their wall. And they’ll show people because they’re the really gorgeous to look at. And it’s novel, you know, so they’ll go out and they’ll buy a set. And what happens with that second group is, you know, something will happen, like this banking crisis. And they’ll remember, Oh, hey, you know, like, maybe I should have some more of those gold backs, you know, maybe just in case or something, you know, and, you know, we’ll get conversions there or, you know, just stays as a novelty thing. I also get preppers that are, you know, they want to be prepared. And it’s like, okay, you’ve got, you know, your your toilet paper and your, your EMP proof, whatever, and your food storage. And, you know, pretty soon you run out of space for your food storage, you think, Okay, well, you know, all your dollar bills in the event of a hyperinflationary event aren’t worth much. Do you really think you’re going to be bartering with your one ounce gold coins? And can you imagine trying to banter with a one ounce gold coin? I mean, you mean counterfeits, we get off China. You know, it’s like, if you found someone that liked gold and had something worth 2000 bucks, you’d have to convince them it was a real gold coin. You know, so a lot of these folks, a lot of these kind of more preparedness minded individuals, they’re taking gold that they had stashed away for a kind of a just in case scenario. And they’re turning them into piles of gold backs, we’re starting to see more six figure and seven figure purchases of gold backs, as people buy larger orders and get more comfortable with it. So we have that group too. And then the final group is just people that, you know, they’re small buyers, they’re young people, and you know, they just want to buy a few they want to get their toes wet and precious metals, maybe they got one as a tip at a restaurant. Someone told them about it. And so cool, I’m gonna buy a five and a few ones. And they’re just, you know, I’d say that’s the majority of people that are in gold backs are people that are brand new to precious metals, you know, they’re between the ages of 23 and 45. And, you know, for whatever reason, this generation is just really excited about the gold back.

Gene Tunny  14:11

Yeah, that’s good. And where do you manufacture them? Are they made in the USA?

Jeremy Cordon  14:17

They’re all made in the USA.

Gene Tunny  14:18

Right? Very good. Okay. What’s the acceptance of gold backed by local businesses? So if I’m in say, Salt Lake City, and someone, someone gives me a tip in or they pay me and a gold back, can I then take that to the local Starbucks and buy a latte or, I mean, how, how widespread is its acceptance?

Jeremy Cordon  14:39

You know, it’s a lot more than you would think. When we started, I was hoping that I could get maybe 5% or 10% of business owners on board. I think there’s got to be some libertarian business owners that would support this and want to do this. If I could just make a list of them. Because the first question you get is okay, well, that’s cute, and that’s great. You made a commodity currency, but who takes it It like, that’s where the rubber hits the road. Is it a money? Or is it you know, something that belongs on my wall. So, you know, I went out, and I started signing up businesses. And like I said, I was hoping for five to 10%, what I found is that about 30 to 50%, of small business owners were willing to take gold as payment. And that really surprised me, I’m still surprised by it, that number has actually gotten higher now, especially in Utah, since the gold backs been out for four years, it’s a lot more common to have people already know about it. You know, it’s just yeah, how prevalent is.

Gene Tunny  15:36

I guess, you get good word of mouth. And then you must get a lot of shares on social media, if someone gets a gold back as a tip, or payment.

Jeremy Cordon  15:45

they’re, they’re fun to show off, you know, millions of people have seen him. Let’s say you’re in Australia, you know, it’s like, Okay, how many businesses in Australia? Maybe I can’t find the business. You know, like, what am I going to do with these? And like, well, you know, people give them as gifts, you know, they stick them in an envelope for their kids, you know, they use them as allowance, you know, and, you know, garage sales, they have about an 80% success rate for spending gold packs. And then you’re educating people, you’re saying, Hey, this is what commodity money looks like, did you know that our money is not commodity money? You know, it’s, it’s, you know, kind of faith and trust and hopes and dreams. And, you know, I mean, hopefully, that’ll work out for us. But, you know, can you imagine if we did have a commodity money, then we wouldn’t have to, you know, have 10% inflation every year or, you know, I’m gonna, I’m gonna pay you a piece of gold a real piece of 24 karat gold in exchange for that use birdcage. Yeah, 80% of the time. It’s, that sounds amazing. And I love that piece of gold. Because that’s what you’re doing is, you know, you’re you’re trading and spending gold, you know, that this rate of gold is high.

Gene Tunny  16:50

Okay, we’ll take a short break here for a word from our sponsor.

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Gene Tunny  17:25

Now back to the show. So I’d like to ask some questions, Jeremy about how scalable This is? And what growth trajectory you see for it, what competitors there are, I mean, how growth trajectory Do you see at the moment for gold backs?

Jeremy Cordon  17:43

We are on track this year to sell between 50 and $60 million, wroth of gold backs, that would be more gold backs that were produced from 2019 to 2022. The next year, so 2024, we’re looking at doing about 100 million. So that’s twice as many gold, you know, that’s, that’s about equal to all the gold backs produce all the previous years. So you’re kind of seeing this doubling, you know, the further you go into the future, the harder it is to predict. You know, I think we’re looking at a doubling for 2023. Also 2024, it gets a little bit more grey after that, because a lot of it depends on, you know, being able to scale up and seeing how the markets responding and everything else. But that’s, that’s what we’re looking at for growth.

Gene Tunny  18:29

Okay, and what about competitors? Is there anyone else doing something similar?

Jeremy Cordon  18:35

We want there to be so you know, we’re doing this as a private projects, you know, gold backs are starting to sell all over the world, you know, I mean, you can buy them in Europe and Australia, and but what we’re really interested in is foreign central banks. You know, you look at, you know, Zimbabwe, and they are making tiny gold coins for circulation in Zimbabwe. Because at the end of the day, the goal of a central bank is to make a money that people will actually use. That’s what they have to do otherwise your society is going to pull the collapse. There are about a half a dozen foreign central banks right now that are actively have projects designed to get people to circulate gold in their country. You know, one of them is us, Uzbekistan, they’ve been circulating gold there for about a decade. So going into these, you know, we have to build up our manufacturing capacity. But then the goal is to go into these countries and say, Hey, rather than using these tiny little coins are these tiny little bars, that you know, a tiny little bar could be worth 20, 30, 40 bucks. You know, what if you can get it down to $2 worth of gold. And it looks like a bill and you’re not going to lose it in your pocket. And all the gold is recoverable. And it’s serialised by the way, you know, I think there’s a real future for this technology, you know, first with, you know, foreign central banks that have these kind of hyper inflationary environments, but we can use that as a stepping stone to really build up the capacity, so it can become an option for any central bank. And that could be that could be a great solution for humanity and a decade from now, you know, we could be looking at a decade from now and it’s like, okay, well, if nobody trusts the currency, because the currency is falling apart, Oh, guess what? Central banks don’t half of the of the world’s gold reserves. Yeah. Maybe we could put those into circulation because maybe nobody trusts them to, you know, back, you know, $1 with gold, you know, they want to hold the gold, the trust is broken. You know, but this could, ironically, the something that ends up saving central banks in the end. And that’s, and that’s the the company, this is a technology company. You know, we’re really trying to develop a technology that makes gold a better money than it’s ever been. Because, you know, I mean, if, if I were to put on my libertarian hat, you know, libertarians have been saying this for 50 years. Oh, we need to go back to the gold standard. That will excuse me, Mr. Libertarian, you realise that the gold standard was 100 copper pennies to silver dollar and 20 silver dollars to a gold piece? Well, what do you do when 100% of your copper is used in industry? Are you going to take all of your copper out of your power lines and melt them down so you can wear them out as pennies in your pocket? Are you going to take all your silver out of your solar panels, you know, 80% of silver is used in industry, you’re going to you’re going to take all the silver out of your electronics, so you can wear them out as coins in your pocket, are you going to have the government force peg three industrial metals together to Fixed Ratio under penalty of death. Because gold has never been small enough to circulate by itself. That’s been 2600 years, we’ve always had to have tiny little bronze, the widow’s mite. And the Bible, I was a bronze coin, tiny little bronze point. So you’ve always had kind of this copper bronze silver gold system. And the gold back is so revolutionary as a technology. Gold has never been able to be this small. If you had to go back 100 years ago, in the US, it would have the equivalent purchasing power of for wheat pennies. It’s not just replacing silver, it’s replacing copper is a monetary metal.

Gene Tunny  22:12

Okay, so you’re saying if you had this technology, so there have been there are technological improvements in the production that you’re taking advantage of? Is that, is that what you’re saying?

Jeremy Cordon  22:22

No, I’m saying that as a as a money. You know, we’ve never had the technology to me. Gold as a precious metals small enough to buy coffee. You had to use copper or silver, you could never use gold directly as a commodity money to buy coffee. Not a cup of coffee, maybe like a you know, a barge of coffee.

Gene Tunny  22:42

Right what because we couldn’t get it into a form to trade. To exchange?

Jeremy Cordon  22:51

You couldn’t get gold small enough. There wasn’t a, it’s called the small coin problem. You couldn’t have a small enough gold coin to buy little things.

Gene Tunny  22:56

Yeah, gotcha. Yeah, that makes sense. And you’re talking about foreign central banks. And I was interested in the the acceptance of gold backed by the financial system, to what extent will local banks recognise gold backs? Will they recognise or financial institutions? Would they recognise them as collateral? For example, if you wanted to borrow US dollars, for example? You know, there’s

Jeremy Cordon  23:22

private organisations, that’ll they’ll recognise them as collateral, you know, but you’re looking like faulting institutions, right? You know, this is kind of more of the precious metal space in the United States. Yeah, you couldn’t walk into a credit union with a bunch of Walmart gift cards to get alone? You know, it’s not, it’s not really their thing. You know, and it might not be for a long time. You know, I’m hoping that, you know, maybe in 20 years from now, we could see a future where a lot of the cash that we have is replaced with the same technology. You know, maybe they’re not called Gold backs. But you know, if you’re a cash if you’re Australian dollars, you know, we’re made out of gold using the same technology, and we wouldn’t have to worry about inflation anymore. In fact, there’s enough gold now, you talk about scalability, there’s enough gold now owned by central banks today, to replace all of the cash in the world with a technology like gold back, and they could still have fractional reserve deposits and lending and you know, it would, it wouldn’t necessarily, it wouldn’t necessarily break anything.

Gene Tunny  24:26

Do you have a sense of how much of the demand for gold backs is related to transactions? How much is speculative? How much is an investment?

Jeremy Cordon  24:35

It’s a great question. It’s hard to know, because because of the private nature of it, if I pay somebody as a gold back, nobody else knows about it. Right? So it’s not reported to me. It’s not on a blockchain. You know, unless the two people that were parties to the transaction talk about it. It’s unknowable. That said, my guess is that I don’t think they move as fast dollars. You know, and there certainly are a lot lot of buyers that buy and save, you know, which is a valid use of money. But there’s there’s a decent amount of anecdotal evidence out there that, you know, I was at a restaurant the other day that it takes callbacks to have a sticker, you know, outside their restaurant, hey, we accept the gold back. I asked them, I said, you know, how often you actually got how often you guys actually get these? You know, I’m the girl working there says, Well, you know, maybe once a day. So you know, I mean, you’re looking at several 100 transactions a year, where people are spending gold backs in the local community. Now, it’s not a lot. I’m sure it’s less than 1% for them, but it shows that it’s not only being used as a savings or as a novelty item.

Gene Tunny  25:41

Yeah, that’s interesting. So you’ve sold some to Australians? I want to check with some libertarian friends, whether they’ve they’ve bought any do they have any. I think I saw on the website, how that what they look like, are they stamped with? Does it have Utah or the state that it’s the name of the state on the the gold back?

Jeremy Cordon  26:02

Yep. Yeah, we got we got a lot of great images on gold pack.com. You know, you can see them there. And like I said, they’re, they’re very gold, right? You know, it’s like, I don’t know what the currency looks like in Australia. But it’s the background colour of the whole thing is gold. And what you’re actually seeing is the 24 karat gold. So raw, yeah, the way the technology works is you have a piece of polymer, like a giant sheet. And it goes through what’s called a vacuum deposition chamber. You know, some people think a gold back is made out of foil. Really, it’s the same technology that puts gold in microchips in Taiwan, in diabetic test strips, or, or in a layer of a golden sunglasses, right? So the polymer goes to the machine, the machine hits in a vacuum chamber, a target of gold was a laser, the gold falls down onto the polymer, and then it gets sandwiched in with another layer of polymer. So all the gold is contained inside the gold back. And we know exactly how much gold is in it. That’s the idea there.

Gene Tunny  27:06

Okay. Okay. And finally, the value of gold backs in terms of the exchange rate with the US dollar does that is that linked to the gold price does that move? It’s very highly correlated with the gold price?

Jeremy Cordon  27:23

Yes, but we’ve seen it jump a few times. So I’m getting an example. For any commodity for any thing out there. The price is determined by supply and demand. And the gold back as a unit is a little bit separate than the rest of gold in general. Because gold backs are easy to spend and uses money. So I’ll give you an example in 2020. In March, when when COVID really kind of hit the US, every gold back sold out. Every gold back and every store, they were gone in a matter of days. And the only place to buy one was on eBay. And they were $50 a piece. Because you know, supply and demand didn’t happen to all the products out there. It happened to gold backs because I think that people were concerned that the bottom could fall out of the currency and they wanted to have a currency with value.

Gene Tunny  28:14

So you mentioned $50 What were they trading at before COVID?

Jeremy Cordon  28:25

Like $3. So it was quite the spike. And it really surprised me, you know, this is, you know, people are really serious about this. It’s, well, it’s like, you know, you have the best lifeboat on the Titanic. It’s got the motor and then the heated seats. And you know, GPS is the nicest one on the whole Titanic. But you’ve only got 16 spots on it. Yeah, not that hard to throw up the lifeboat but when it’s time to get on the lifeboats, you know, it’s like that the value of those spots goes up because all the other lifeboats you know, if it’s gold coins, you’re bartering with the $2,000 gold coin. That’s your money now like that might sucks. Okay, you know so people you know, we’re starting to see people again that are preppers that have been buying gold for a long time. There’s kind of this gestation period where they find gold back they discover it I think about it, they have it they buy some more and then you know, something clicks in their mind or they say hey, you know what, I own $200,000 worth of gold for a just in case scenario. The only gold that’s useful in my house for a just in case scenario are these gold backs. You know, no, you know, the building one of our retailers they’ll ship and all their gold clients and they’ll trade for gold backs. And you know, blacks they’ve they’ve doubled in price since 2019. And gold bullion gold coins, hasn’t, you know, it’s gone up maybe you know, 60-70% gold backs has actually been outperforming gold bullion and gold coins. And that’s that’s what surprised everybody including myself.

Gene Tunny  29:56

Yeah, yeah. Okay. Any other points you think are important about gold backs, Jeremy? I’m, I’m happy with the responses. So far. I’ve learned a lot. And I think it’s fascinating. Fascinating to have a commodity money out there. So yeah. Any other points that would be good to get across?

Jeremy Cordon  30:16

Yeah, I’ll give you a couple of data points. I’ll let you go. Because I find talking about callbacks all day. But we don’t want to do a five hour podcast, right? I mean, but I’ll tell you this in 2023, we think that gold back is going to produce more individual callbacks, more units of gold than any other producer of gold in the world, including the Perth Mint, including the US Mint, we think there’s going to be more total individual gold backs out there than any other product. So that’s, that’s what we’re looking at for growth. You know, when I say that, it sounds extraordinary. But you know, I tease people like, Do you know who the biggest manufacturer of tires is? In the world? Care to guess?

Gene Tunny  30:58

Oh, is it? I don’t know. Is it Bridgestone? Or is Lego? Lego? Oh, of course, with their with the toys you say is that? Well, they’re tiny?

Jeremy Cordon  31:12

Yeah, it’s not it’s not that different for gold back? Yeah. I mean, you know, if I have a one 1000th of a ounce product, yeah. It doesn’t take me that long to catch up to the big boys in terms of total production numbers. But, you know, I mean, we are taking a bigger piece of the gold market, you know, right now, we’re about a third of 1% of the value of all the gold sales in the US, which is not bad. You know, we’re probably the number one for hyper fractional. And, you know, gold back is also the number one for most successful local currencies in the United States. If you added up all the value of all the other legal local currencies in the United States, the gold back collectively the four different hold back states, it’s bigger. So that’s, that’s exciting, too.

Gene Tunny  31:59

Yeah, I was just trying to do the numbers in my head. So if you’re going to be, you mentioned that 50 to 60 million of gold backs that you could be producing and therefore, and half of the value is the gold. So that’s 30. Say 30 million, and the price of gold, what is it nearly 2000 an ounce or something. So he was just trying to do the numbers, and they had to figure out how much how many ounces of gold, you must be using a year, do, I could put it in the show notes. But is that something you disclose? I’m just interested in that.

Jeremy Cordon  32:32

But we do have a graph on our website that we put out. We update every quarter showing backs are out there. I think last update shows 11.8 million gold backs. Yeah. You know, and if you figure they’re worth about four bucks apiece, you know, you’re looking at right around $50 million worth. Yeah. But like I said in the month of March alone, yeah, we might have done more than 10% of that in one month. And just march, you know, we’ve we’ve seen a huge spike in interest, with all the banking turmoil out there as people are looking for safer places to put their money.

Gene Tunny  33:07

Yeah, yeah. Understandable. Okay. Jeremy Cordon this has been fascinating. I’m gonna look more into it. And yeah, it looks like you’re you could be at the start of something really big. I mean, I guess it’s, you know, you’re doing well, already. If you think about where you are, and I mean, the potential for it. I mean, it’s, you know, it’s even much bigger than that. It’s huge.

Jeremy Cordon  33:30

It’s very early days, right. It’s very early days, you know, and, you know, I really hope that we see greater adoption of the technology, there’s, you know, possibly a global demand, you know, stable inflation proof commodity currency. And, you know, the future I think a lot of it depends on, you know, how are central banks gonna react, how our governments gonna react, you know, people tend to really like them, but, you know, you have these established kind of powers. And I’m hoping they look at this as, you know, technology and an opportunity, as opposed to, you know, an antagonistic competitor, you know, because really, who owns all the gold? It’s not me, you know, it’s that, you know, and if I can make more useful, maybe there’s something there.

Gene Tunny  34:13

Yeah, yeah. Yeah, exactly. Okay. Jeremy Cordon, president of Goldback, thanks so much for appearing on the show are really found that fascinating, and it’s, it’s good to see practical examples of commodity money in the modern world. So it’s terrific. So thanks so much for your time.

Jeremy Cordon  34:35

Yeah, no, I think I think you’ll be really pleased with it. I’ll just send you some Goldbacks. Standalone and then pass them around. Please do you know

Gene Tunny  34:43

Excellent. Okay. Thank you, Jeremy. You have a have a great day. Thank you. Take care. Okay, I hope you found that informative and enjoyable. Jeremy is super passionate about gold backs. And I must say I was impressed by the rate of growth of gold backs in circulation. And I enjoyed learning about the different types of people who have been buying them. And I must say I was surprised that it appears many local businesses have been accepting them as payment. Certainly, it’s an interesting experiment, and one I’ll keep an eye on in coming years. The one reservation I have about gold backs is that you have to pay substantially for the privilege of having gold back money. Given only half the value of a gold back is due to the gold content. One gold back costs over four US dollars and it contains 1/1000 of a troy ounce of gold. Currently, a troy ounce of gold is worth nearly 2000 US dollars, that is around $2 for 1/1000 of an ounce. Of course, if you’re worried about a future hyperinflation or societal collapse, paying $4 for each gold back could be a good deal. As Jeremy has argued, in that scenario, gold backs could end up serving as a widely accepted currency. I don’t think we’re headed for that scenario, but I’m less sure about that than I have been in the past and hence, I can understand why some people may see gold backs as a useful thing to buy. Furthermore, I admit they do look impressive, and there would be some novelty or show of value in owning some gold backs. And yes, I’m I’m actually looking forward to getting my hands on some. Of course, none of this is financial or investment advice. Okay, I’d be interested in your thoughts on gold backs. Do you see value in them? How widespread Do you think the use of gold backs could become? Please send me an email with your thoughts. You can reach me via contact@economicsexplored.com. Thanks for listening. Righto, Thanks for listening to this episode of economics explored. If you have any questions, comments or suggestions, please get in touch. I’d love to hear from you. You can send me an email via contact@economicsexplored.com Or a voicemail via SpeakPipe. You can find the link in the show notes. If you’ve enjoyed the show, I’d be grateful if you could tell anyone you think would be interested about it. Word of mouth is one of the main ways that people learn about the show. Finally, if your podcasting app lets you then please write a review and leave a rating. Thanks for listening. I hope you can join me again next week.

37:36

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Credits

Thanks to Obsidian Productions for mixing the episode and to the show’s sponsor, Gene’s consultancy business www.adepteconomics.com.au

Full transcripts are available a few days after the episode is first published at www.economicsexplored.com. Economics Explored is available via Apple Podcasts, Google Podcast, and other podcasting platforms.

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Podcast episode

Why fiat money means higher inflation & why a radical Reserve Bank review is needed w/ Darren Brady Nelson – EP179

In his recent Spectator Australia article, Darren Brady Nelson argues for a radical, not a reserved review of Australia’s central bank, the Reserve Bank of Australia (RBA), which he describes as reckless. In Economics Explored episode 179, Darren provides an Austrian economics perspective on central banks, fiat money, and inflation. Show host Gene Tunny wraps up the episode with a discussion of the historical evidence on different monetary systems and inflation, evidence which confirms economies with fiat money are much more inflation prone. Gene then discusses whether a return to the gold standard would be desirable. 

Please get in touch with any questions, comments and suggestions by emailing us at contact@economicsexplored.com or sending a voice message via https://www.speakpipe.com/economicsexplored

You can listen to the episode via the embedded player below or via podcasting apps including Google PodcastsApple PodcastsSpotify, and Stitcher.

What’s covered in EP179

  • Darren’s thoughts on the current review of the Reserve Bank of Australia [1:46]
  • How the RBA interprets the stability of the currency objective [6:54]
  • What is the Austrian School? [10:19]
  • Would the Austrians recommend abolishing the central bank? [21:08]
  • The Bank of England’s report on modern banking [25:54]
  • The need for a broader review of the Reserve Bank of Australia [30:35]
  • Fiat money systems are much more prone to inflation than commodity money systems [34:20]

Links relevant to the conversation

Darren’s bio on the Economics Explored website:

https://economicsexplored.com/regular-guests/

Darren’s opinion piece on the Spectator Australia website:

The RBA (reckless bank of Australia) needs a radical, not reserved, review

Bank of England paper on money creation:

Money creation in the modern economy | Bank of England  

Minneapolis Fed paper on fiat money, commodity money, and inflation:

Money, Inflation, and Output Under Fiat and Commodity Standards | Federal Reserve Bank of Minneapolis

US Gold Commission Report 

Minority report of the Gold Commission, co-authored by Ron Paul:

The Case for Gold: Minority Report of the US Gold Commission 1982  

Alan Greenspan’s autobiography discusses his advice to President Reagan regarding gold:

The Age of Turbulence

Another great book on Greenspan which discusses Friedman’s views too:

The Man who Knew: The LIfe & Times of Alan Greenspan

*You can help support the show by buying a copy of either book via the links above. 

Transcript: Why fiat money means higher inflation & why a radical Reserve Bank review is needed w/ Darren Brady Nelson – EP179

N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.

Gene Tunny  00:06

Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host gene Tunny. I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory evidence and by hearing a wide range of views. I’m delighted that you can join me for this episode, please check out the show notes for relevant information. Now on to the show. Hello, thanks for tuning in to the show. This is episode 179. In this episode, I chat with my old friend Darren Brady Nelson about his recent spectator Australia opinion piece on the Reserve Bank of Australia. Darren’s piece is titled The RBA reckless Bank of Australia needs a radical not reserved for review. Although Darren’s article focuses on Australia’s Central Bank, the issue is considered irrelevant to central banks around the world such as the US Federal Reserve and the Bank of England. Before we get into it, I should note that Darren is coming from a non mainstream school of thought known as Austrian economics. While it’s outside of mainstream economic thinking, I think the Austrian perspective is valuable. Nonetheless, it’s forced me to confront some of the things I take for granted about the modern mixed economy, such as fiat money and the existence of a central bank at all. I’ve had to think more deeply about whether they make sense. Please stick around to the end for some additional thoughts from me. Okay, let’s get into the episode. Darren Brady Nelson, welcome back to the show.

Darren Brady Nelson  01:46

Thank you. Thank you. It’s been a while now actually.

Gene Tunny  01:48

It has Yes, I’ve given you a breakdown. And I’ve tried to get here a broad range of guests on the show. But yes, sir. Good to have you back on the show to chat about some recent work that you’ve done. So work in both public finance or fiscal policy, you could say, and monetary policy. Darren, so we’ve got a monetary policy review in Australia at the moment, and you’ve written a piece on the monetary policy review. And could you just tell us what your thoughts are on that review, please?

Darren Brady Nelson  02:21

Well, look, just to step back slightly from that, you know, I’ve kind of been disappointed over, you know, probably the course of a decade or something like that, that, you know, obviously, it’s good to have a variety of different takes on things like the Reserve Bank are obviously, you know, this review, that’s, you know, nearing the end, I believe the reporting to government next month. But, you know, there’s, there’s this never been, you know, look, I’d love to see kind of more of an Austrian take on things, at least once in a while in the Australian media, or even in Australian think tanks. To tell you the truth, I’d settle for a bit of a Chicago take on things and you just don’t get really neither of those takes for the most part, certainly not in the media. You know, look, I’ve never had a chance to read our friend, Tony, Megan’s take on the Reserve Bank. I know, he wrote an article for spectator, just like the article I’ve just written is meant to be published soon by the spectator, Australia. So I’m not sure his his exact take, and maybe you can tell me if you’ve read his article, I’m not sure, Gene, if you can give a little bit of overview of what how he viewed things, but so I just wanted to kind of bring a little bit of a, you know, an Austrian, take two things, in terms of, you know, linking sort of, you know, the Reserve Bank, the money supply and inflation, in a nutshell. And also, I found that people often didn’t kind of step back. And they, they vaguely mentioned what the Reserve Bank is supposed to do, and kind of leave it at that just kind of go into in to have a very different take than what I wanted to give. So, as not only an economist, but also a former law student, I also wanted to kind of start out and go, Hey, this is, you know, this is what, you know, the legislation says, for instance, about the Reserve Bank, and what they’re doing what they’re supposed to do, and then kind of jump in to, you know, like I said, sort of an Austrian economics take on things and, and also kind of stir the hornet’s nest a little bit, you know, by using a little bit of satire at the beginning and at the end of the article.

Gene Tunny  04:29

Right, okay, so yeah, we might get into a few of those things. So what does the law say? What, what does the what was your analysis of the, of the legal underpinnings or what they’re supposed to do under the is it the Reserve Bank act?

Darren Brady Nelson  04:45

Yeah, I mean, some people really just don’t understand what it is, you know, exactly, you know, sort of made that clear this, this is a central bank, you know, they, they basically have a monopoly control over currency in Australia. And you know, people kind of vaguely maybe understand that, but just to make that kind of really clear, you know, this is what it is. It has some other roles, of course, it has, you know, kind of these other banking, regulatory functions, but they really, you know, those are really to support the main goal, which is, obviously, Reserve Bank’s not unusual, it’s a central bank, very similar to the other central banks around the world, like the Bank of England or the Federal Reserve. But just to remind people, Hey, this is, you know, this is a government entity, it has a monopoly on on money, essentially, but at the same time, it’s required to do, you know, in that context, it’s, it has, you know, some of these broader sort of things, it’s three main things, you know, where it goes under Section 10, A, the stability of the currency, the maintenance of full employment, very, you know, 1940s 50s sort of thing that was thrown in, because the, you know, the Reserve Bank act is from 1959. So, you know, very Keynesian sort of thing there. And the other one kind of, you know, somewhat more vaguely, but, you know, still important, obviously, the economic prosperity and welfare, the people of Australia. Now, you know, look, there’s only so much you can say, in an in an article, even though my article is a bit longer than your average op ed, if you like, but there’s even within that there’s so much you could say, and I couldn’t say, but, you know, obviously like to say the audience, I think they got some issues, because these things conflict, or, you know, you can interpret these things and quite different ways. You know, clearly, I think, you know, I would argue, and I do to some extent, at least I think in my piece is, you know, certainly printing the sort of amounts of money that they have, and not just not just recently, and not just since COVID, but actually over a much longer period of time. is, you know, quick, you know, I would question that that really helps the stability of the currency. You know, that seems to me to be at least something questionable. I think it harms the stability of the currency, but I think it’s at least questionable. It also argued that it actually helps out the other two, I don’t think it may help with statistical, full employment. But does it really help with economically efficient, full employment, much less, you know, actual economic prosperity and welfare? Yeah, sorry. Go ahead.

Gene Tunny  07:19

I was just thinking it was an interesting point you made about stability, the currency. And you don’t think that the growth of the money supply we’ve seen that the RBA has overseen is consistent with stability of the currency, they have essentially redefined stability of the currency, they now we now define stability, the currency is not zero inflation, we define it as a two to 3% inflation on average over the economic cycle. So we’ve accepted a certain, a small well – I won’t make any judgement a lower than average historical average rate of inflation as the target. That’s what they’re going for. And over the last 30 years, they would argue that they’ve achieved that. And it’s much better than the performance in the post war period prior to that. So they would argue that they’ve done a good job at achieving stability of the currency in that regard. But yeah, it just occurred to me that when you said that that’s in the Reserve Bank act, that they’ve redefined what stability actually means, in turn, using that inflation target.

Darren Brady Nelson  08:24

Yeah, look, I mean, it’s fairly easy to pull up what, for instance, CPI looks like, and it’s an, even though CPI is only accounting for, you know, something like 40% of the economy, and we, you know, it’s a big chunk of the economy, but people have this impression that accounts for 100% of the economy or something like that. So even in that context, it’s not a pretty picture, you know, and we’re not talking about just like, oh, for a quarter or two, or for a year or two, we’re talking over, you know, quite long, you know, timeframes, you know, we’re talking from the basically the 1970s, with some flattening out, I would argue, do some pretty good counter reforms, if you like more that counter reforms that, you know, reforms that, you know, would counter some of the bad effects of, of just, you know, kind of having fairly loose monetary policy. And that not equally loose throughout that whole period of time. But, you know, it’s really, really hasn’t had a Volcker, for instance, you know, that I’m aware of, in the same sort of timeframe that, you know, since Volcker appeared on the scene in the late 70s, and has since left it. So putting aside, you know, again, my pieces and obviously, to go, so, do some technical thing to go like, Well, did they meet their own sort of technical requirements, and then just criticise them that way? Because there’s plenty of articles like that. You know, my aim was to point to the broader thing that just looks money like this. And if you look, I mean, CPI doesn’t look good over time. But if you start looking at money supply, whichever one you want to pick, it’s not a pretty picture.

Gene Tunny  10:00

right. Okay, so can I ask what do you mean by an Austrian Economics take?

Darren Brady Nelson  10:05

Yeah, look at that. So for those who don’t know, Austrian Economics is, I mean, I mean, a lot of people even economist for some reason don’t fully are aware that there’s actually different schools of thought, quite a few different schools of thought. And one of them is the Austrian School. It started with Karl Menger, in the sort of mid to late 1800s. He’s also, you know, attributed along with a couple other economists is kind of starting the marginal revolution as well. In the end, they call it Austrian School, basically, because he is actually from Austria. And then some of the other sort of people who followed him like Bomba Virk, Mises, Hayek, etc, they were also literally from the country of Austria. So I guess that stuck, obviously, is the name of the school of thought. I mean, I mean, the very free market, I argue that the there’s certainly the most free market oriented, I’d argue that they’re not the most free market oriented because they have an ideological stance. So you can always say that, you know, certainly, like someone like Mises, certainly, you know, went to great pains to go like, this is what I think the logic and even the data, even though they’re not sort of like the, they’re not, they use data, they’re not they don’t think data, without theory tells you anything, but they would argue that, you know, they take a scientific approach to things like, you know, like other schools of thought would also argue, and, you know, they have very, they, they have the most comprehensive take on understanding money, basically, including, you know, I mentioned Bomba Virg actually Menger even before that, that even from the start Menger Bomba, Varick and Mises were, were and still are kind of, you know, the greatest thinkers on money. Some may argue that you could put Keynes in that category, you know, that was one of his, you know, one of his big sort of focuses prior to him writing the general theory. But, you know, the Austrians certainly have a lot to say, and I think, a lot of credible things to say, with the, you know, you ultimately agree with them or not, you know, I just want to get those kinds of ideas, you know, out there in the Australian public.

Gene Tunny  12:20

Okay, and what are those ideas, Darren, and how are they relevant to the RBI review?

Darren Brady Nelson  12:25

Well, look, I mean, in a nutshell, and, you know, I’ve used this quote, a million times, it seems, you know, using Milton Friedman, who’s not Austrian, but Chicago School, who him and Anna Schwartz, you know, sort of took a an empirical approach if you like, I mean, I don’t think you’re setting out to, if you, like, test the theories of Mises, and people like that as such, but they confirm that, you know, inflation, it’s a monetary phenomenon. And it’s always in, at least in practice, you know, you know, maybe the Chicago school don’t necessarily agree that in theory, things like central banks, are really the root cause of inflation. They certainly agree that in practice, that’s what actually happened in history. So but the Austrians, like I said, they go, they go one step further, they go in great detail, to set out the case of why central banks are at the centre of, of why we have ongoing inflation. And the only way you’ll ever solve the inflation problem is to do something about central banks, and they would argue you have to do something stronger than just holding them within certain bounds. As you know, the Chicago school would argue,

Gene Tunny  13:38

Rod, okay, and I mean, fiat money is relevant to isn’t it? So you’re yes, you’re saying the the issue is that you’ve got a central bank that has the monopoly on fiat money, the monopoly control of the currency, which is fiat money, and they can just print it, they can create it out of thin air. And we saw that during the pandemic in Australia, when they finally the RBA, finally engaged in quantitative easing, the Federal Reserve had done it previously, the Bank of Japan and Bank of England and ECB, but we hadn’t actually gone that we hadn’t taken that step yet. But we did during the pandemic,

Darren Brady Nelson  14:15

well, the Austrians were there to drag, you know, central banks always are involved in a process and printing money out of nothing. Now, quantitative easing, took it to new levels, makes the new mechanisms, new levels, and then obviously, modern monetary theory sort of opens the floodgates to go further than, you know, quantitative easing, but if you like allow within that sort of framework of thinking, and we may get onto this later on, but, you know, the Bank of England produced a couple, you know, excellent papers that an Austrian or a neoclassical or a Keynesian or Chicago can all appreciate. It takes something out of just like, you know, just clearly setting out how does the central bank work, but also You know, just as importantly, how does the banking system more broadly, in cooperation, if you like, with the central banks operate, you know, How is money created? I mean, I think the, the title of the paper is money creation in the modern economy, you know, that sets it out quite nicely, they have a different view of that, the course they don’t think that’s an issue as such, you know, it provided obviously, or you stay within certain bounds and all that type of thing. But it does set out the fact that, you know, money is being created from nothing, which is quite a different system, to what, you know, say, for instance, the gold standard, you know, the classical gold standard with all its whatever foibles it had, because Austrians would argue that there could have been a better gold standard, but fine, there was a gold standard, and even central banks. Were part of that system previously, if you like, and the Bank of England also nicely sets that out that history as well. Yeah. So basically, again, coming back, you know, the Reserve Bank’s not any different from the Bank of England Federal Reserve, largely speaking, I mean, there are differences, you know, obviously, you know, the Federal Reserve, obviously, they’re different sized economies, different sides, sizes of the Australian dollar, the US dollar being traded around the world, obviously, the US dollar is special in the sense that it’s still the reserve currency for the world. So you know, their, their prolific money printing, they can get away with it a lot better than, you know, a smaller economy or economies, it’s not the reserve currency of the world, you can get away with Australia being does punch above its weight, and its currency is traded a lot more than you would expect for a small country. Because of you know, obviously, Australia is a big player in commodities, for instance. And that kind of part of the reason is, Australia, punches above its weight if you like.

Gene Tunny  16:45

Okay, we’ll take a short break here for a word from our sponsor.

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Gene Tunny  17:20

Now back to the show. Now I’m just on the what the RBA review is doing it’s it has rather than a narrower terms of reference is looking at the monetary policy framework inflation targeting is looking at the governance the board, whether we have a separate Monetary Policy Committee, I think that’ll end up being one of the recommendations. And the way that John Humphrys described it to me on his Australian taxpayers Alliance live stream, he just said, Well, look, there’s an Overton window of what it’s going to look at, right? I mean, there’s things that are in the Overton Window, there’s things that are outside, and I think you are advocating that they should they should go outside of that window, they should go outside of what’s conventional and actually think about the role of the the RBA as a central bank, is that the type of thing we need? Is that working for us? Or Are there alternative approaches? Is that what you’re you’re arguing? Darren?

Darren Brady Nelson  18:18

Yeah, look, I think I’ve I pull out some recommendations I did. When for Liberty works at the request of Senator Malcolm Roberts, you know, did a submission to his rural banking inquiry, because he wanted to get on the record. And so did I just kind of some of these broader issues of monetary policy and how they do impact the kind of the more narrow review that he was doing at the time. And, yeah, basically suggests, you know, kind of a three pronged approach, you know, sort of, in a shorter term, doing something, you know, a bit broader than what this current review is doing, but nothing, you know, something that might still be within the Overton Window, as you say, and then, you know, what I’m suggesting over the medium term in the longer term are certainly things that, you know, I guess the average policy person, monetary policy person would think, would be outside the Overton Window, like, you know, the Overton window. It’s a good thing to understand in terms of what is, but it can be a very big obstacle to what should be, but because, because I can point to, you know, the reforms, the Hocking Kingdom reforms of the 19, mid 1980s were, you know, not particularly within the Overton Window, national competition policy when it came along in the early 1990s. Not quite in the Overton window. There’s been a lot of good reforms that that are not in the Overton window. Obviously, you know, there’s obviously a politics involved and making sure that even though it’s not quite the Overton window that you know, you don’t scare the horses too much. And people who who’ve been pushing things In the direction of more and more government interference in the economy, including if you like the more draconian stuff, you know, the the over the top lockdowns, the the censorship, all these sorts of things. Putting aside the fact that no a lot of censorship are done by private companies, but they’re done by the best of government, they’re done by the best of government, if you don’t do it, you know, there’ll be trouble for you, private company. So, you know, it’s it’s certainly not, I don’t think, you know, the libertarians have suggested that, so it’s private property, so doesn’t matter. That’s not right. So, you know, people on the left, in a nutshell, don’t care, a rat’s butt about the Overton window for the most part. They keep on plugging away. And they are largely winning. So which is why I wanted to point out some of these reforms, if you like, went more in the direction of the right centre, right, for instance, including, you know, a Labour Government and including, you know, some liberal governments in the past, things can be done. So the Overton window, you got to be aware of it, you got to understand it. And it’s something you need to deal with, but it shouldn’t be something that just stops you from doing

Gene Tunny  21:08

something. Right. And so what would, what would the Austrians recommend abolition of the central bank? I mean, what would happen? What would you recommend?

Darren Brady Nelson  21:18

But look, you know, look, the Austrians there’s quite a variety of views, even within the look, you know, there’s sort of a high IQ, sort of, like competing currency approach, there’s the Roth bar, it’s more, let’s do a new and improved version of the gold standard, if you like, obviously, these things are digitised. No one’s ever suggesting that, you know, that we carry hunks of gold. That’s fine. If you want to carry hunks of gold with you. You know, it’s probably not going to be a huge market for that. That’s going to be but I mean, they recognise that centuries ago anyway. So like, you know, the gold standard, really, there were people running around with bits of gold with them all the time that that was never the case. You know, because the goldsmith’s figured it out before the official gold standard came around today, certificates, it seemed to be a little bit more convenient, you know, which that’s where actually money came from your paper money, I should say, sorry, paper came from from those certificates. So have John freeze. It, he always has a bee in his bonnet about Murray Rothbard. In particular, his argument that he considers, you know, today’s system of fractional reserve banking to be fraud. You know, from a, from a common law perspective, you know, is that Rothbard is arguing literally, in the laws on the books, that it’s actually fraud. He’s saying, under common law, this would be considered fraud. Yeah, okay, maybe, maybe not. But certainly the market would allow a whole lot of fractional reserve banking, I’m sure there won’t be like a one to one alignment all the time, you know, between, you know, reserves and loans and all that sort of stuff, that’s fine. But there wouldn’t be such a huge disconnect that we have, you know, we’re talking 90% and above disconnect between, you know, safe savings and what’s being lent out, getting back to sort of Rothbard is not given sort of credit for being more practical than he was. Yeah, he goes like, here’s the ideal I want. Yeah, you get rid of central banks, and fractional reserve banking. But any little step in that direction, could be pain. How about is a start? What’s just what’s just audit this thing? And, you know, like they talked about in the US sometimes, so let’s just audit the Federal Reserve. Yeah. What are they up to? How do they do things, but the public know, this is what it is, you know, are you happy with this? Is this make sense? You know, yeah. Do you? Are you happy with the consequent the inflationary consequences? Are you happy with the fact that I mean, this thing is very inexorable. You know, like, it causes the booms and busts as well, at least from an Austrian perspective, because inflation and bubbles, it’s the same thing. Inflation doesn’t uniformly happen. It goes, it ends up in asset bubbles, it goes over here, it goes over there. Some people can make a killing out of really not being very good at what they do. They just, they’re just in the right place at the right time. Now, we’re not talking about discouraging proper entrepreneurialism, sometimes, you know, this is kind of like, you know, sort of not very good, sloppy, property oriented sort of entrepreneurialism. And there’s a lot of it, there’s a lot just, it’s a lot of just kind of transfers from, from the poor to the rich. I mean, let’s just get that all out there and report, I’ll be happy with multiple views, you know, red versus blue type of project, Hey, what are the Keynesian think of this, you know, what are the Austrians think of this, whether neoclassical think of this, you know, you know, get it all out there. And, you know, just make it more transparent would be a great start, rather than this kind of, you know, tweaking at the edges. There’s basically a lot of people in political and business power, who, who obviously liked the system as it is,

Gene Tunny  24:55

or they or they don’t want to, I mean, yeah, they haven’t really thought too deeply about Got it? Yeah, they don’t want to rock the boat too much, perhaps. I think we might have to come back to Rothbard views. That sounds interesting. And because it’s probably we probably don’t have enough time to go into it now. That yeah, I think it’d be worth coming back to that. Because yeah, I’m all for a more wider ranging review. I think it’d be fascinating. I think we chatted about this last time we caught up, but we hadn’t seen the terms of reference yet to the review. And I think you’ve predicted that it’d be quite narrow. And it’d be very, you’d get standard sort of mainstream economists on it as we ended up doing, as we ended up doing. I’m not critical of any of them. I think. But yeah, they could have had a broader terms of reference. For sure.

Darren Brady Nelson  25:44

Just one thing to say that the Rothbard you know, some people go look here, you’re kind of in your libertarian utopia, you don’t understand how the system works. He wrote the very best book on how banking works. modern banking, what’s the book called modern banking, is it? No, it’s called the mystery of banking, the mystery of banking. Okay. It’s in great detail exactly how so it’s basically the Bank of England, you know, they they don’t refer to the mystery of banking, they, but they did a very good job of doing something smaller. Got some really good graphics, you know, in the Bank of England report bits, they’re very much aligned. They just have different conclusions. You know, obviously, they don’t come to the same conclusion that Rothbard does.

Gene Tunny  26:26

Right. Yeah. I mean, that’s the article where they describe how the banks essentially, they’re at the vanguard of creating money, or they’re the, the money supply is endogenous to an extent, because the banks are extending credit. And when they’re extending more new loans and paid back then that’s an expansion of the monetary money supply. Now, the central banks involved, the central bank can influence the money supply. But the banks are heavily in the private banks are heavily involved in it. And I think that’s what they’re arguing with they it’s that endogenous view of the money supply. And yeah, I think it is worth reading. What What was the main takeaway for you out of it, Darren, what the Bank of England wrote, I’m just trying to remember what they what was in those articles.

Darren Brady Nelson  27:16

The main takeaway wasn’t like, wow, I’m surprised. This is how they do it. My main takeaway was, Wow, I’m surprised he said it. And I guess another WoW is Wow, thank you. That’s, you know, they explained it really well. It was a really clear, I mean, rock bards. Book mystery. bankings really big, you know. So, you know, it’s, it’s a tome, it’s huge. So, you know, the Bank of England’s report has both an introduction, if you don’t want to redeem read the more detailed report, but even the more detailed report is nowhere near the size of the mystery of banking, but they’re all saying the same thing in terms of like, describing the process, right. You know, you know, what is central banks do what do the commercial banks to? I mean, so basically, the thing, you know, when right away when someone gets gets a loan, that’s money already. So you’ve just increased the money supply right there. Yeah. They don’t need things to happen. It’s right there. They whack it in your bank account. Obviously, people do all sorts of different things with that. Yeah. But yeah, the right there. So there is one thing I must admit, I figured, you know, fractional reserve banking, or those banks creating money, I knew that I was, you know, over time, I was trying to understand that they were actually printing most of the money. It wasn’t the central banks themselves. But when I saw when I saw the Bank of England, I didn’t realise the percentage was quite as big as it is. They said, 97% 97% of all money. Yeah, in the UK. And it wouldn’t be very different from you know, going to any Western country, it’s probably all gonna be the 90s to some extent, was this, you know,

Gene Tunny  28:54

they actually used the term fountain pen money. Yeah. Okay. So I guess I was even surprised at the size. Right. Yeah. Okay. And so you see that as a, as a confession or just acknowledgement of the Bank of England by the Bank of England of, of how the money supply can grow. And in you’re taking from that, that the system that we have naturally leads to expansion of the money supply into inflation. Is that what you’re inferring? From that, Darren?

Darren Brady Nelson  29:27

Yeah, but basically, it’s, it’s that it’s even more than that. It is literally inflation. But, but obviously, there’s certain levels of inflation, the other can be vary quite a bit. I think it incentivizes, you know, high inflation or certainly, it’s certainly incentivize booms and busts. Yeah, I wouldn’t say necessarily there was a confession or anything like that, but they do actually, early on in the report. Take the method that I certainly read in my economic textbooks, you know, that basically banks are just purely these intermediaries who get savings and then lend them out. Obviously take a little bit of a cut. Okay, fine. That’s, that’s, that’s fine. I don’t have a problem with that as a business. Yeah. They basically knock that on the head. Yeah. But interestingly enough, they don’t do it in a way that they say this is bad. But for me, I read it and go, you know, because of my kind of Austrian take on things I go, Well, that’s not good. You know, they’re just kind of, they’re just saying, This is what it is basically, it’s not this. They’re not just simply intermediaries. This is what these banks are. And this is how we, as a central bank, interact with those banks. Again, I think any any economist of any school of thought would find it, you know, an informative paper.

Gene Tunny  30:42

Oh, absolutely. I’ve talked about it on the show before I’ll put some links in the show notes. I think it’s good paper. And yeah, I’ll link to your spectator article. Once it’s out. Gee, Darren, there’s so much to talk about. Really appreciate your time, we dealt with some big issues, and we’ve still got more to talk about. Certainly, I want to come back to Rothbard. Yeah, that’s, uh, I’ll have to have a read of his of his book, and mystery of banking. And, yeah, I really appreciate your time. So thanks once more for coming on to the show.

Darren Brady Nelson  31:15

Thank you for having me.

Gene Tunny  31:26

Okay, I hope you found that informative, and enjoyable. I welcome Darren’s call for a broader review of the Reserve Bank of Australia. Given the importance of the Reserve Bank in the economy, we should be thinking about what presuppositions were making about the bank, and we should subject them to critical thought. The current review of the bank appears to take for granted that the reserve bank should continue as an entity and it should retain its extensive powers under the Reserve Bank Act. The review focuses on the appropriateness of the inflation targeting regime and the governance of the bank, but it should be much broader. The reviews Terms of Reference noted explicitly that the review will exclude the RBS payments, financial infrastructure, banking and bank note functions. Arguably, it would have been desirable to review even these functions of the RBA. So I think Darren is on the right track here. Even if I disagree with him over what a broader review would recommend. There are at least two big related questions that a wider review would consider. First, do we need a central bank? That is Do we need a government owned or authorised bank which acts as a bank for other banks and is ultimately responsible for the currency. Secondly, would commodity backed money where money is convertible to gold at a fixed rate? Would that be preferable to fiat money, where money is decreed to be the legal tender of the land by the government and the money supply is the responsibility of the central bank. In a Wi Fi at money presupposes a central bank or an arm of government such as the Treasury which effectively acts as a bank. But a central bank can exist in a commodity money system too, and indeed several such as the Bank of England and US Federal Reserve. They did exist during the years in which the gold standard was in place or some of the years in which the gold standard was in place. A central bank can perform an important role regardless of the monetary standard in place. As the 19th century British polymath Walter Badgett illustrated in Lombard Street, a central bank and perform an important role by acting as a lender of last resort. That is lending to banks when they temporarily get into trouble. And, you know, saving those banks from collapsing and causing lots of hardship. My view is that a central bank is an indispensable part and an unavoidable part of a modern economy. Regarding the second big question, I wouldn’t recommend a return to commodity money by say reintroducing the gold standard. But I will concede that advocates of a gold standard have some good arguments on their side. These arguments are even more appealing in times of high inflation such as the time we’re now living in. Most importantly, in my view, it is clear that fiat money systems are much more prone to inflation, then commodity money systems. A 1998 study by economists at the Minneapolis Fed found that the average inflation rate for the Fed standard observations so this is observations and the data set they’re analysing the average inflation rate for the Fed standard observations is 9.17% per year. The average inflation rate for the commodity standard observations is 1.75%. That’s a big difference. The data set they use contain data on 15 countries including In the US, UK, France, Italy, Germany, Spain, Argentina and Brazil, among others. Every country in the data set had a higher rate of inflation under a feared standard than a commodity standard. What’s going on is that obviously, there are physical constraints on the amount of commodity money available. It’s limited by the rate at which it can be discovered dug up and produced. Under a feared standard, new money is virtually costless to produce. As Darren and I discussed, the central bank and commercial banks are both involved in new money creation. And it’s possible for the money supply to expand faster than the productive capacity of the economy, leading to inflation, there can be too much money chasing too few goods. This is not to say that you can’t have inflation in a commodity money system. For example, there was prolonged inflation in Spain in in the UK in the 16th and 17th centuries, due to new silver mining and Mexico and Peru following European conquest. Still, as the Minneapolis Fed economists point out the average inflation rates over the period in these countries, it was only around one to 1.2% over 100 to 150 years. That’s one to 1.2% per annum. I’ll link to that study in the show notes so you can check it out. To me, it really clearly shows that fiat money systems are much more prone to inflation and you end up with inflation at higher rates than under a commodity money system. While a commodity standard would yield better inflation outcomes and a feared standard, it would be very difficult to return to say the gold standard. US President Reagan appointed a Gold Commission in 1981. To consider whether the US should return to the gold standard. The majority of the commission rejected such a move, and prominent economists such as Milton Friedman and Alan Greenspan, they advised Reagan against the return to gold. GREENSPAN did, however, suggest issuing some US Treasury bonds backed by gold, something which would provide some fiscal disciplined. He did not, however, advocate a full return to the gold standard. GREENSPAN thought that a return to the gold standard would be impractical given the nature of the modern economy with a large role for government and a welfare state. A gold standard requires fiscal discipline for several reasons, which I might have to cover in a bonus episode. One of these reasons is that under a gold standard, a government can’t rely on future inflation to erode the real value of the debt it owes. In his 2007 autobiography, The Age of turbulence, Greenspan wrote the following. I have always harboured a nostalgia for the gold standards inherent price stability, a stable currency was its primary goal. But I’ve long since acquiesced in the fact that the gold standard does not readily accommodate the widely accepted current view of the appropriate functions of government. In particular, the need for government to provide a social safety net. The propensity of Congress to create benefits for constituents without specifying the means by which they are to be funded, has led to deficit spending in every fiscal year since 1970. With the exception of the surpluses of 1998 to 2001, generated by the stock market boom. The shifting of real resources required to perform such functions has imparted a bias toward inflation. In the political arena, the pressure to make low interest rate credit generally available, and to use fiscal measures to boost employment and to avoid the unpleasantness of downward adjustments in nominal wages and prices has become nearly impossible to resist. For the most part, the American people have tolerated the inflation bias as an acceptable cost of the modern welfare state. There is no support for the gold standard today, and I see no likelihood of its return. Austrian economists would say that Greenspan gave into big government into inflation, and there may be some truth in that. But Greenspan’s position is entirely pragmatic. I’ll put some links in the show notes so you can learn more about this fascinating episode of the Gold Commission, and about Friedman’s and Greenspan’s advice to Reagan. I’ll also add a link to the minority report of the Commission which recommended a return to the gold standard. It was co authored by Ron Paul, the noted libertarian politician. I’ll leave it there for now, but I recognise there are several aspects of monetary economics that I need to explore and explain some more. I think the process of money creation and how the central bank can influence the money supply would be good to go over in some depth, as it’s challenging to understand. My conversation with Darren also reminded me that it would be good to look at how we ended up with inflation. targeting in the first place? Why do we think it’s sensible to have a two to 3% inflation target rather than a zero target? I hope you’ll forgive me if I leave these questions to a future episode. Among other topics in coming episodes, I’ll have a closer look at the growing US China tensions and the rise of authoritarianism around the world. geopolitics obviously can have a big impact on economy, so I think it’s important that I cover it on this show. If there are topics you’d like me to cover in future episodes, please let me know. As always, feel free to email me at contact at economics explored.com Thanks for listening. rato thanks for listening to this episode of economics explored. If you have any questions, comments or suggestions, please get in touch. I’d love to hear from you. You can send me an email via contact at economicsexplored.com or a voicemail via SpeakPipe. You can find the link in the show notes. If you’ve enjoyed the show, I’d be grateful if you could tell anyone you think would be interested about it. Word of mouth is one of the main ways that people learn about the show. Finally, if your podcasting app lets you then please write a review and leave a rating. Thanks for listening. I hope you can join me again next week.

41:26

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Credits

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Categories
Podcast episode

Normalization of interest rates & monetary policy – EP173

Last year we saw the beginning of the normalization of interest rates and monetary policy, as central banks responded to accelerating inflation. Show host Gene Tunny talks about the current tightening cycle and when it might end with his colleague Arturo Espinoza. Among other things, Gene and Arturo discuss what history tells us about typical interest rates and returns on capital, referencing UK bank rate since 1694, interest rates on UK government consols, and returns on land written about by Jane Austen and Honoré de Balzac. They also consider whether we might see 17-18 percent interest rates again in Australia, rates which were last seen in 1989-90. 

Please get in touch with any questions, comments and suggestions by emailing us at contact@economicsexplored.com or sending a voice message via https://www.speakpipe.com/economicsexplored

You can listen to the episode via the embedded player below or via podcasting apps including Google PodcastsApple PodcastsSpotify, and Stitcher.

What’s covered in EP173

  • What’s been happening with interest rates? [3:00]
  • What is monetary policy normalization? [6:00]
  • How many more interest rate increases will be needed? [11:11]
  • Will we have a recession this year? [19:12]
  • Is there a risk that we could get back to the crazily high interest rates seen in 1989-90 in Australia? [24:00]
  • What is the equilibrium rate of interest? What is the real interest rate? [26:54]
  • The main takeaway from this episode: monetary policy is still in a tightening cycle because inflation is too high [38:43]

Links relevant to the conversation

Data released since the episode was recorded

Australian retail trade fell 3.9% in December, suggesting interest rate increases are starting to bite, meaning the RBA faces an even more difficult challenge in deciding how many more interest rate increases to make:

https://www.abs.gov.au/statistics/industry/retail-and-wholesale-trade/retail-trade-australia/dec-2022

CBC article “U.S. inflation and consumer spending eased in December, new numbers show”:

https://www.cbc.ca/news/business/us-consumer-spending-holidays-1.6728173

Nine News story “Inflation in Australia rises to higher-than-expected 7.8 per cent”:

https://www.9news.com.au/finance/australia-inflation-consumer-price-index-december-quarter/9ef0ed13-e606-4c9e-b7db-feaccfae39fb

Inflation targets

US: 2%; see https://research.stlouisfed.org/publications/economic-synopses/2022/09/02/inflation-part-3-what-is-the-feds-current-goal-has-the-fed-met-its-inflation-mandate

Australia: 2-3%; see https://www.rba.gov.au/inflation/inflation-target.html

UK: 2%; see https://www.bankofengland.co.uk/monetary-policy

Bank of Finland article on monetary policy normalisation:

https://www.bofbulletin.fi/en/2022/3/what-is-monetary-policy-normalisation/

Chatham Financial article on US tightening cycles:

https://www.chathamfinancial.com/insights/historical-interest-rate-tightening-cycles

Jo Masters, Barrenjoey Chief Economist on how “Everything must go right for Australia to dodge a recession”

https://www.afr.com/markets/debt-markets/australia-will-dodge-close-call-recession-20221216-p5c71b

Chart on historical UK bank rate:

https://drive.google.com/file/d/1NDH7WjQBY0ZjWDWgY430qZdrrIf017_4/view?usp=share_link

Chart on central bank policy interest rates since 1960:

https://drive.google.com/file/d/1Mrzre-ijAKAvrU0j4YeQt71FkTr-gzob/view?usp=share_link

Chart on inflation in the US, UK and Australia:

https://drive.google.com/file/d/11lp880Wwb9bk_GI5wJ0EQ975h-ZkAuDK/view?usp=share_link

Wikipedia article on the Fisher equation:

https://en.wikipedia.org/wiki/Fisher_equation

Wikipedia article on UK consols:

https://en.wikipedia.org/wiki/Consol_(bond)

Guardian article on “UK bonds that financed first world war to be redeemed 100 years later”:

https://www.theguardian.com/business/2014/oct/31/uk-first-world-war-bonds-redeemed

What Jane Austen can tell us about historical rates of return:

https://janeaustensworld.com/2008/02/10/the-economics-of-pride-and-prejudice-or-why-a-single-man-with-a-fortune-of-4000-per-year-is-a-desirable-husband/

Transcript: Normalization of interest rates & monetary policy – EP173

N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.

Gene Tunny  00:00

Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host Gene Tunny. I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory evidence and by hearing a wide range of views. I’m delighted that you can join me for this episode, please check out the show notes for relevant information. Now on to the show. Hello, thanks for tuning into the show. This episode I talk about the normalisation of interest rates and monetary policy with my colleague Arturo Espinoza. Please note, the episode was recorded on the 11th of January 2023. Now, obviously, we weren’t able to cover any new economic data released after that date. So I’ve added some info into the show notes about important developments since then. One of the most important bits of data was the December US inflation rate. It came in at 6.5% yearly down from 7.1% in November. This figure was interpreted by economists as supporting the view that the US Fed will slow the pace of interest rate hikes in 2023. No longer increasing the federal funds rate in increments of half a percentage point or three quarters of a percentage point. Interest rates still need to increase because inflation is still too high and well above the 2% target. On the first of February, the Fed will probably increase its federal funds rate target by a quarter percentage point from the 4.25 to 4.5% range to the 4.5 to 4.75% range. If it doesn’t do this, I’ll release a short bonus episode looking at what’s going on. Economists expect there’ll be at least another interest rate rise in 2023. Beyond the quarter percentage point increase on the first of February, a view supported by the stronger than expected fourth quarter 2022 GDP figure that came out on the 26th of January. Unlike in the states in Australia, our latest inflation figures surprised on the upside coming in at 7.8% over 2022. I must say I was stunned yesterday when I noticed a 560 gram jar of Vegemite now cost $9 at Woolworths. The Reserve Bank of Australia really has no choice but to continue with its interest rate increases until it sees inflation falling or the economy crashing. As I noted my conversation with Arturo so much depends on how rapidly the economy slows down over 2023. Okay, let’s get into the episode. Please stick around to the end because I have additional thoughts after my conversation with Arturo. Okay, this is episode 173 on the normalisation of monetary policy. So, I’m joined by Arturo, my colleague at Adapt Economics. Arturo, good to have you with me today.

Arturo Espinoza Bocangel  02:58

Hi Gene, it’s my pleasure to be here.

Gene Tunny  03:01

Excellent. Arturo. So I thought for our first episode of the year, it would be good to talk about interest rates. So one of the big developments last year was the, you know, the increases in the interest rates by central banks, their policy interest rates. So the cash rate here in Australia, the federal funds rate, we had some rather unexpected increases in interest rates, all unexpected by many people in response to the high inflation rates that we’ve been experiencing. And so this did catch quite a few people by surprise, and our RBA governor here in Australia, Philip Lowe, as late as I think November 2021, he was saying that, he thought they’d probably be able to keep their cash rate at 0.1% until 2024. So that was his central case scenario, as he was calling it. But it turns out that inflation was ended up being higher than the Reserve Bank expected. And you know, perhaps they should have seen it coming because you would seen inflation accelerating in 2021 in the US and the UK. And so maybe the central bank should have seen it coming, but they didn’t. And we ended up going from a 0.1% cash rate. And now it’s at 3.1%. And that was over a period of from May 2022 to December 2022. And they had the last cash rate increase. So the same three percentage points over seven months or so. So just an extraordinary rate of increase. And similarly in the US, we had high rate of increase. And what we’re seeing is that interest rates are responding to the high inflation. And one thing I thought it’d be good to talk about is, well, where do we think these interest rates are going? Is there any guidance historically, or is there any guidance from theory regarding what’s a normal level of interest rates? So that’s one question we could ask. And how I came to think about this is that I saw increasingly these references to normalisation, so normalisation of monetary policy, normalisation of interest rates, and, and it got me thinking, Okay, well, what’s normal? So I thought that’d be good to explore. Do you have any thoughts on that, Arturo? Does that sound like a reasonable thing to talk about?

Arturo Espinoza Bocangel  05:51

Yeah exactly, that is gonna be an interesting topic, to know, what will be the normal interest rate?

Gene Tunny  05:59

Yes, well, this is a bit of a spoiler, but I think the key message will be that there really isn’t any normal interest rate that we can say that the interest rates are adjusting to that’s one of the challenges it’s it just depends on a whole range of factors, variables that we’ll talk about in this conversation. So to begin with a lot I’d read this article I found from the Bank of Finland, this was back in October and I thought this was really quite a neat way of talking about this normalisation. So they talk about the articles called what is monetary policy normalisation. And so they’re written in monetary policy normalisation, key interest rates or policy rates are once again becoming key instruments of monetary policy. At the same time, the central bank is gradually withdrawing from asset purchases and other unconventional measures. Monetary policy normalisation may also involve adjustments to forward guidance, normalisation leads to a tightening of financial conditions, helping the central bank reduce the inflationary pressures in the economy. Okay. So what they’re talking about there is that during the pandemic, when all of those policy interest rates were effectively cut to zero, our cash rate here in Australia got cut to 0.1%. Right, so it’s effectively zero. That’s what economists call the zero lower bound. So there’s nowhere else for the that policy rate to go, then what central banks what the Australian Central Bank did for the first time. So this has been done previously by the US, and the ECB and Bank of Japan, in response to the financial crisis back in the late 2000s. But we hadn’t done this yet. We did the quantitative easing, what they call quantitative easing, which is printing money. well printing money electronically, and then using that to buy bonds or other financial assets to drive down yields to drive down borrowing costs, with the idea of stimulating the economy that way. So that’s unconventional monetary policy. So what the Bank of Finland saying is that part of this normalisation story is yes, increasing that policy rate getting it away from that zero, lower bound, and moving away from the unconventional monetary policy. Yeah, that’s essentially what they’re saying in that passage there. Okay. And then they go on to talk about where are interest rates going to settle in the future. And this is where this is where they’re essentially saying that will no one, no one really knows, it’s very difficult to forecast that. They’re saying that the normalisation of monetary policy does not mean that the central bank is attempting to restore its balance sheet and interest rates to a past levels such as that preceding the 2008 global financial crisis. Okay, so what they’re saying is don’t necessarily look to what interest rates have been in the past, rather than the aim of monetary policy normalisation is that the inflation rate should accord with the price stability objective. In the absence of further economic shocks, interest rates should in the longer term settle at a level where economic resources are in full use and inflation is at its target, ie at the equilibrium real interest rate, also known as the natural rate of interest. However, the level of the equilibrium real interest rate is affected by a number of factors unrelated to monetary policy. Okay, so, gee, there’s a lot going on that passage there that I’ve just read. The way I interpret this is that essentially, we’ve got to get to an interest rate. So what the central bank is trying to do, its increasing interest rates to get inflation under control. And after it gets inflation under control, the interest rate is going to settle at a rate whereby it’s consistent with keeping inflation in the target band. So in Australia, that’s two to 3%. On average, other countries have similar target rates for inflation and that sort of 2%.

Arturo Espinoza Bocangel  10:28

Between two and 3%. Yeah,

Gene Tunny  10:31

yeah, yeah. So just, I’ll just put some links in the show notes, clarifying that what they are for all other economies. So we’ll end up with an interest rate where it’s consistent with that. And it’s also consistent with a reasonable level of economic activity. So a stable, well, a sustainable rate of economic growth. And I mean, you could call it full employment, but I’d probably say unemployment at what you’d say is the natural rate of unemployment rather than full employment, which is, I think, a difficult concept to actually to define in practice. So, I mean, what would that be? I mean, it’s hard to know, because it depends on how the economy will first we’ve got to find out how the economy responds to the current interest rate increases, and just how far the central bank has to increase the rates from here. So I think there’s generally agree that well, there’s quite a bit of agreement among commentators among the market economists, that interest rates will have to increase a bit more from where they are now. Because we’ve still got inflation in Australia over 7% Us 7% over 7%, we’ve still got these high rates of inflation or higher rates than we’ve experienced for a long time. We’ve pushed the policy interest rates up to 3.1% in Australia, 4.25 to 4.5%. In the US, I think, is the current target band for the federal funds rate. There seems to be a view that there’s still scope for them to push those up further. So in Australia, we could have another maybe two up to two cash rate increases. That seems to be you know, that’s a possibility depends on what your outlook is for the state of the economy. Some people are thinking that might be too much given that, you know, these interest rate increases are really starting to bite already is having a big impact on house prices. We’re seeing that already. So house prices are really coming off. If I look at the ASX this thing called the ASX 30 Day interbank cash rate futures implied yield curve. So this is based on market pricing for financial market products. So this is this What is it 30 Day interbank cash rate future. So, essentially you can bet on what the cash rate is going to be in the future. And from this, it’s showing that the markets essentially expecting that the cash rate will peak at a bit over 3.8% later this year, and then it starts coming off from a peak around I think that’s October, and then it’s slightly falling. And then by June 2024, it’s down around 3.6%. So the market here in Australia is expecting two to three additional increases in the cash rate it appears of around 25 basis points or a quarter of a percentage point. So the markets expecting two to three more increases. I think other economists would be but there’s debate about just how many and the current state of the economy and how the economy will react to that. That’s one of the great unknowns, how will households react to these higher interest rates. And that’s one of the unknowns too in other countries in the States. It looks like there’s probably there will probably be another, at least one more increase in the federal funds rate in the States. There was a report in the Financial Times yesterday regarding some comments from one of the Federal Reserve officials, Mary Daly think she’s from San Francisco fed and the FT reported that Mary Daly became the latest Federal Reserve official to raise the prospect of the US central bank slowing the pace of its interest rate increases to a quarter point rise next month, even as policymakers backed the benchmark rates surpassing 5% Okay, so if you, I think in the Federal Reserve in their publication when they publish their decisions, they have these charts, which show what the Federal Open Markets Committee members, what they forecasting for future federal funds rate, which is a really interesting way to do it. And it gives you some insight and into how the members are thinking and where federal funds rate could be going. It’s really quite a clever thing to do and possibly something the Australian reserve bank could think about doing. And I don’t know whether this is an issue that they’re considering in their manage their review of the reserve bank that’s going on at the moment, I might have to look into that. But it looks like yep, so. So members are the people who are responsible for monetary policy, and the states are expecting a couple more increases in that federal funds rate. So they expect it’ll end up getting beyond 5%. They’re currently targeting 4.25 to 4.5%. But what this is saying is based on recent data in the States, which suggests that the economy might be losing some of the some steam, its inflation may not be as much of a problem as previously, based on that. They’re saying, well, the Federal Reserve can slow down the rate of interest rate increases. So that’s what’s going on there. Okay, so the general expectation that we’d have is that there will still be a few more interest rate increases this year in the US and the in Australia, maybe two, maybe three? I don’t know, it’s so difficult. Everything depends on how the economy reacts. New data. It’s just very difficult to forecast. But one thing I think we can say is that there will be additional interest rate increases. Do you have any thoughts on that? Arturo?

Arturo Espinoza Bocangel  17:01

I have a question about, at what point those heights interest rates will cause a slowdown in the economy. What do you think about that? We will face a slowdown or not?

Gene Tunny  17:21

Yeah, yeah, I think that’s starting to occur. All in Australia, I think households are really starting to feel those interest rate increases and, and more households will this year, because we’re seeing mortgages that were taken out. So the home purchases, they borrowed at fixed rates, and that was for a fixed term, a couple of years, or whatever it was. And then after that, these fixed rates reset to another level. And so that’s going to happen increasingly over this year, we’re going to see more people who borrowed at a fixed rate, they will end up facing a higher interest rate. So those rates that they’re paying reset at a higher level based on current rates, and the current variable rate based on that, and they will therefore have, they will have to pay more to service their mortgage. So there are various estimates of what it means it depends on the type of loan you’ve got, it depends on the amount you’ve got outstanding on your home loan, but for many households, the interest rate rises, we’ve seen it could mean an extra thing is $1,000 a month or something that they have to pay in mortgage

Arturo Espinoza Bocangel  18:43

and depending on what loan.

Gene Tunny  18:46

Yeah, it depends on a whole range of things. It depends on what was the deal you got originally and how much you borrowed, how much is outstanding still in, in what you owe and the principal that you are? So look, it’s going to depend, but there’s no doubt that it will be a substantial hit to the budgets of many households. And we should start seeing consumption spending slow. But look, I mean, the last year the Australian economy performed, I think extraordinarily well. And unemployment got down to under three and a half percent, which is just incredible. Yeah, but I think definitely will go we shouldn’t see, nothing’s definite in economics in macro economics. Yeah. Things could judge. You just don’t know what’s around the corner sometimes. But look, I mean, my guess would be that we will start to see the economy slow this year. Will we have a recession? Well, I hope not. I think I’ve seen some forecasts from some of the bank economists might have been Jo Masters, or I’ll have to dig it up. But basically, they, they’ll say, oh, look, we think it’s more likely than not we won’t have a recession. But the probability of a recession is, I don’t know is 30% or something or 40%. I don’t know, I have to look that up. But I know that there are some people saying, Look, yes, it is possible that there could be a recession here, and also in the States. In fact, there were some people last year saying, Oh, the US had already had a risk that it was in recession last year, because they were two negative quarters of GDP. But it turns out that that was a bit of a statistical anomaly or just a freak result, and really didn’t signal that an economy then in recession. So yeah, look, it’s possible, we could see some recessions. But I mean, as always, I mean, I think, given the complexity of the economy, and all of the moving parts and all of the shocks that could occur, it’s just so hard to actually forecast that sort of thing. I mean, I remember when I was in Treasury, and right up until 2008, we were saying, and most macro economic forecasters, were saying, Oh, we’re in this new era of the Great Moderation, and we didn’t have to worry about the business cycle anymore. And then, I mean, then we have the financial crisis, and it’s the worst, worst crisis since the Great Depression. So things can change the I’m always reluctant to to provide any, any forecasts. Okay. So yeah, those are my thoughts. I mean, what do you think, Arturo, do you have any thoughts on it?

Arturo Espinoza Bocangel  21:42

Well, I think that we are under a period of higher certainty than other times after the global financial crisis. Of course, there are a lot of Australians that are suffering with these higher tax rates. Mortgages, as you have mentioned, I think we need to be cautious about this period.

Gene Tunny  22:07

Yeah, exactly. I found that that article by that mentions, recession forecasts by Jo  masters, she’s with think it’s a bank or some sort of investment being Baron Joey, is it. So masters thinks Australia will avoid a recession, but it will be a very close call. So this is an article in the financial review January 3, this year, so we’re recording this on the 11th of January, everything must go right for Australia to dodge a recession. Okay. So she’s one of the people who is concerned that because of these higher interest rates, then yeah, it’s going to have a significant impact on consumption, then she’s saying that offsetting that is the fact that we’re getting all of these international students coming back into Australia. So that’s one thing that’s going to add to demand. Okay. I’ll put a link in the show notes to this article by that mentions, Jo masters, predictions. Okay. So that’s, that’s where to from here. Okay, we’ll take a short break here for a word from our sponsor.

Female speaker  23:31

If you need to crunch the numbers, then get in touch with Adept Economics. We offer you Frank and fearless economic analysis and advice. We can help you with funding submissions, cost benefit analysis, studies, and economic modelling of all sorts. Our head office is in Brisbane, Australia, but we work all over the world. You can get in touch via our website, http://www.adepteconomics.com.au. We’d love to hear from you.

Gene Tunny  24:00

Now back to the show. One thing that is concerned some people is wondering, Well, is there a risk that we could get back to some of the crazily high interest rates that have been seen in past periods? So in Australia, for example, we had interest rates at 17 to 18%. At one time, back in the late 80s, early 90s, we had really high interest rates, but that was also at a point in time. When we had inflation of around 8% We had money supply growth of 20% plus. So we had a big boom in the late 80s. This was the age of the entrepreneurs a lot of lending a lot of property, lots of speculation, and I would say that it’s probably unlikely I can’t see interest rates getting back to anywhere near that sort of crazy heights. Given that the macro economic conditions are different today, there was much more entrenched inflation, people expected high inflation. I think if you look one year ahead, some market economists are expecting inflation of over 4% or something like that. But it’s not as if every year we’re expecting inflation of 8% or something like that. So monetary policy doesn’t have to be as restrictive to get inflation under control to to get all of the money creation, all the credit creation that’s leading to the growth in the money supply, it doesn’t need to be as aggressive to get that under control. So my expectation is that we don’t have to, we wouldn’t see that, again, just because inflation is not at those Well, it’s not entrenched at those rates. So we’ve got high inflation at the moment at 7%. If it turns out that the RBA can’t get inflation down, then they will have to increase, keep increasing the cash rate. But I would expect they wouldn’t have to increase it anywhere near some of those really high interest rates that they have in the past, because it seems like your households are already they’re going to start suffering even with the interest rate increases that we’ve seen. So if they increase the interest rates a bit more, say another half a percent, then the hope is that that will start you know slowing the economy taking the heat out of the economy enough that we can get inflation under control. So yeah, we won’t get back to those, those crazy interest rates that have been seen in the past, just because the nature of the economy is different. We haven’t had sustained inflation over such a long period as we had back then over several years. And then having that inflation, getting expected having these entrenched inflation expectations which the central banks have to then act aggressively against. I’ll put some links to some charts on on inflation and interest rates and what we’ve seen in the past, and just so people can see if you’re in the audience, you’re interested, you can have a look at what what these things have been in the past. They what strikes me is when I look at, well, interest rates, which is what we’re talking about today, you look at interest rates historically, and they’ve been all over the place. This is why when we’re talking about normalisation when we’re talking about normalisation to some, what do they call it some equilibrium rate of interest where we’ve got the economy balanced, we’ve got inflation at Target, we’ve got the economy going along smoothly. We don’t know there’s no one interest rate over history, that’s it’s not going to be the same interest rate, it’s going to depend on the macro economic circumstances at the time. There was an estimate that the Reserve Bank put out of what the equilibrium real interest rate is. And the central estimate they came up with, I think it averaged at 1%. Now, that’s a real interest rate. And then if we think about what would the nominal interest rate be, this is something I may not have defined yet, Arturo. But we’ve got to think about, one of the reasons you end up with a 17% or 18% interest rate is because inflation is expected to be about 8% or something, or whatever it is. So the interest rate at least has to compensate for the inflation that’s expected. And then you’ve got the real component of the interest rate, the so called real interest rate. And the inflation gets added to that to get the nominal interest rate. So when this is one of the tricky things with interest rates, it needs to be appreciated. There’s a there’s a nominal interest rate and all of these, these rates that we’ve been talking about the policy, the cash rate, the RBA cash rate, or the federal funds rate, that’s a nominal interest rate. That’s not the real interest rate that has been paid. Because one thing that inflation does, it erodes the real value of debts. So if you’re only earning, I mean, you’d be earning more than the cash rate, if you’ve invested if you’ve bought a you know, an asset of some kind of financial asset. But let’s just say you, the cash rates 3.1% at the moment, the inflation rate 7.1%. Now, you could argue or looking backwards, this is an ex post view of things. So after the fact, if you’re only earning 3.1% per year on your asset and inflation was 7.1% then you’ve gone backwards 4% hit right. Yeah. Now that’s an ex post calculation another way, well, what ends up happening is that the market is going to adjust these interest rates will adjust to incorporate expectations of future inflation. And so, therefore, the interest rate that you see at a point in time, should equal whatever people demand on the market determined real rate of interest, plus the expected rate of inflation, which I think is that’s the Fisher equation, I think, isn’t it? There’s a relationship between inflation and interest rates. That’s called the Fisher equation after Irving Fisher, that I’ll put it in the show notes. Yes. Okay. So that’s a that’s a bit of technical detail. I’ll put some links on all of that. Yeah. And what I find extraordinary is that just over recorded history, there are all these different types of interest rates that we’ve observed. And I always go back to this great passage from John Maynard Keynes, one of the great economists, obviously. And Keynes, in chapter 15 of the general theory, incentives to liquidity wrote that it might be more accurate, perhaps to say that the rate of interest is a highly conventional rather than a highly psychological phenomenon, for its actual value is largely governed by the prevailing view as to what its value is expected to be. Okay, I think that’s quite clever and observation. And, yeah, what he’s getting out there is that it ends up being conventional, in a way, it depends on what it’s expected to be. And I think that’s quite interesting, because for a long time, well, after the financial crisis, there was this expectation of low interest rates, and that was supported by the central bank’s pumping a lot of money into the economy. But now, I mean, who knows, I mean, the expectation could be of higher interest rates. So we’ll have to wait and see where things settle, and what expectations and being and what people, people think as an acceptable interest rate. Historically, we’ve seen interest rates and the ones I’m quoting, they’re going to be nominal interest rates of around three to 4%. On government bonds. And so this can be considered a risk free rate, this could be considered as similar to the the cash rate, although a bit higher due to the fact that there’s a yield curve that if you borrow for, for a longer period, you generally have to pay a higher interest rate. But if we look at what we see in the data, or what we’ve observed in history, these UK consoles, which are perpetual bonds, whereby the government, the UK government borrowed, say, I don’t know let’s say they borrow 100 pounds, and then you get this console, this note that says, The UK government will pay you three to 4% of that. So three pounds or four pounds every year, in perpetuity, on that, that console of 100 pounds. I don’t know if that was the  actual denomination, but this is just to explain it. So these were perpetual bonds that the government never repaid. It just paid an interest rate each year. And historically, that was three to 4%, depending on when they issued the console, and what they thought was necessary to attract the people to buy the console to lend money to the UK Government, it turns out I think was about seven or eight years ago, the UK actually bought back the final consoles that are on issue. So there were these consoles that were that have been on issue for decades or centuries, that were still owned by nothing to various investors in England in the UK that the HM Treasury bought back finally, so I’ll put a link in the show notes there. So if we look at the historical evidence, we see consoles, they were yielding three to 4%. And if we look at the history of what’s called bank rate in the UK, which is the last day, that overnight interest rate, the policy rate, that the Bank of England influences historically, it’s ranged from, if we look at, from when the Bank of England was set up, so in 1694, it was looks like it was 6% or so I’ll put a link in the show notes to the actual data, and then it dropped down to what’s that nearly 3%, around 3%. Then for a long period from 1720 to 1820 it was about it was 5%. And then it fluctuates a bit more, I’ve got a chart that I’ve pulled off macro bond that I think that’s a great chart, I’ll put a link in the show notes. And then in the 19th century, it fluctuates quite a bit. And at times, it gets up to 10%. This must be related to the UK trying to maintain the gold value of sterling. So this is related. I think this is related to the gold standard, and having to maintain that and adjusting bank rate to do that. But I think what’s fascinating about that is for a very long time, so for about 100 years, it had the interest rate it at 5%. And that’s their policy rate. Okay, so we’ve been talking about interest rates, and these are interest rates related to financial securities. And other bit of evidence that is, that is interesting is the evidence, or the data points that you’ll see in novels by Jane Austen or Balzac? So Jane Austen, obviously, right Pride and Prejudice, Sense and Sensibility, etc. Balzac wrote old man glorioso, his French writer, this is something Thomas Piketty pointed out in his book on capital in the 21st century that if you read these novels, you’ll see that it was generally understood that the rate of return on land was about four to 5%. That’s a rate of return on an investment that’s different from the interest rate. But it gives you an idea of what was people were expecting to earn from investments in assets, and there’s some risk associated with land, or owning anything. So it’s not going to be a risk free interest rate. But I think it gives you gives you some idea of what rates of return were so right rate of return on land, historically, 4 to 5%. And it was taken for granted, that land yields 5% is what picket is writing. So the value is equal to roughly 20 years of annual rent. So I think that’s, that’s a really interesting data point. So what we’re getting is that, but another thing to consider is that that’s probably in a time when, historically there wasn’t a lot of inflation. I mean, there was during war time. But generally, until we had this, we adopted fiat currency in the 20th century, inflation wasn’t usually a problem, although you could have episodes of inflation, if there was a crisis of some kind. But I think you could probably interpret that as those is real rates, real rates of return almost. What we could conclude is that, yeah, I mean, interest rates are normalising historically, we’ve seen a range of interest rates, rates of three to 4%, four, or 5%. For risk free rates. That’s something you might expect, where current interest rates and up, it’s difficult to say it’s going to depend on the state of the economy, or how the economy reacts to those rate rises. I mean, this is something we’ll we’ll keep tracking we’ll keep following this year, and provide some more commentary, some more analysis on the future. Arturo, anything else you think we should cover?

Arturo Espinoza Bocangel  38:33

I think you have to cover most of the important things. So that was a good conclusion for this episode of the books.

Gene Tunny  38:43

Okay. Very good. Okay. All right. Thanks so much for your time.

Arturo Espinoza Bocangel  38:47

Thank you for having me.

Gene Tunny  38:50

Okay, have you found that informative and enjoyable. In my view, the main takeaway is that monetary policy is still in what’s called a tightening cycle. Interest rates will have to increase some more because inflation is still too high. It’s hard to know when the tightening will stop. The US experience suggests tightening cycles last a bit under two years on average, according to an informative note from Chatham financial, which I’ll link to in the show notes. The US Fed started tightening in March last year, and the Reserve Bank of Australia started last May, suggesting we could still have many months to go. Of course, this tightening cycle doesn’t necessarily have to conform to the average. Much depends on how the economy responds. In Australia, we’re hopeful we won’t need many more interest rate increases to sufficiently slow demand and get inflation under control. Even though the cash rate hasn’t been pushed up to a very high level in historical terms, the rate increases that we’ve seen could still be effective because of the heavy load of household debt that people have incurred to buy high priced properties. How much will the economy slow down? Will it just be a slowdown a reduction in the GDP growth rate or a contraction in which GDP falls? And we have negative growth for a couple of quarters at least that is a recession. Recessions in both Australia and the US are definitely possible. Indeed, recessions often occur after central banks tighten monetary policy. The 2009, New York Fed paper noted 11 and 14 monetary tightening cycles since 1955, were followed by increases in unemployment. That is, it’s very difficult for central banks to bring about a so-called soft landing. That was me speaking rather than the Fed. I’d note that some economists are even speculating that because economies will slow down substantially, we’ll start seeing interest rate cuts toward the end of 2023. Honestly, I don’t know whether we’ll have soft landings or recessions, a lot depends on psychology, and just how entrenched expectations of high inflation have become, the more entrenched they are, the more interest rates have to keep on increasing. We need to wait and see just how effective the interest rate increases we’ve seen already have been and will be. Obviously, this is one of the big economic issues of the year. And I’ll continue to keep a close eye on it. And I’ll come back to you in a future episode this year. Thanks for listening. Alright, thanks for listening to this episode of Economics Explored. If you have any questions, comments or suggestions, please get in touch. I’d love to hear from you. You can send me an email via contact@economicsexplored.com Or a voicemail via SpeakPipe. You can find the link in the show notes. If you’ve enjoyed the show, I’d be grateful if you could tell anyone you think would be interested about it. Word of mouth is one of the main ways that people learn about the show. Finally, if your podcasting app lets you, then please write a review and leave a rating. Thanks for listening. I hope you can join me again next week.

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Podcast episode

Chokepoint Capitalism w/ Rebecca Giblin – EP169

Corporations such as Google, Amazon, and Live Nation are allegedly taking advantage of chokepoints in the economy, earning excessive profits. That’s the thesis of a new book, Chokepoint Capitalism: how big tech and big content captured creative labour markets, and how we’ll win them back. The authors are Uni. of Melbourne Law Professor Rebecca Giblin and writer and activist Cory Doctorow. Show host Gene Tunny speaks with Prof. Giblin about Chokepoint Capitalism in this episode. 

Please get in touch with any questions, comments and suggestions by emailing us at contact@economicsexplored.com or sending a voice message via https://www.speakpipe.com/economicsexplored

You can listen to the episode via the embedded player below or via podcasting apps including Google PodcastsApple PodcastsSpotify, and Stitcher.

About this episode’s guest: Rebecca Giblin

Rebecca Giblin is an ARC Future Fellow and Professor at Melbourne Law School, and the Director of the Intellectual Property Research Institute of Australia. Her work sits at the intersection of law and culture, focusing on creators’ rights, access to knowledge and culture, technology regulation and copyright. Using quantitative, qualitative, doctrinal and comparative methods, she leads interdisciplinary teams with expertise across data science, cultural economics, literary sociology, information research and law to better understand how law impacts the creation and dissemination of creative works.

You can follow Rebecca on Twitter: 

https://twitter.com/rgibli

Links relevant to the conversation

Where you can buy Chokepoint Capitalism:

https://amzn.to/3HohDFV

Website about the book:

https://chokepointcapitalism.com/

Transcript: Chokepoint Capitalism w/ Rebecca Giblin – EP169

N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.

Gene Tunny  00:00

Coming up on Economics Explored.

Rebecca Giblin  00:03

We’re sharing less and less in the value that’s that’s created by our work. And that’s happening because we’ve got these increasingly powerful corporations, creating choke points that allow them to extract more than their fair share.

Gene Tunny  00:18

Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host Gene Tunny broadcasting from Brisbane Australia. This is episode 169 on choke point capitalism. That’s the name of the new book from University of Melbourne law professor Rebecca Giblin and from writer and activist Cory Doctorow. Professor Giblin joins me this episode to discuss the book. Please check out the show notes, relevant links and information and for details where you can get in touch with any questions or comments. Let me know what you think about what either Rebecca I have to say in this episode. I’d love to hear from you. Right now. It’s my conversation with Rebecca Giblin on a new book with Cory Doctorow chokepoint capitalism, thanks to the publisher scribe for sending me a copy of the book. And finally, thanks to my audio engineer Josh Crotts for his assistance in producing this episode. I hope you enjoy it. Rebecca Gibson, welcome to the programme. 

Rebecca Giblin  01:00

Hi, Gene. 

Gene Tunny  01:01

Yes, good to have you on Rebecca keen to chat with you about your new book, Choke Point Capitalism: how big tech and big content captured creative labour markets and how we’ll win them back. So to begin with, Rebecca, could you explain what’s the meaning of a choke point? And why do you think capitalism can be labelled in this way? Or there’s a form of capitalism that is chokepoint capitalism?

Rebecca Giblin  01:40

Well, competition is supposed to be fundamental to capitalism. It is supposedly about the free exchange of goods and services. But you have this new orthodoxy that’s come out in the last 30 or 40 years. When you have Peter Thiel say competition is for losers. You have Warren Buffett salivating over companies that have what he calls wide, sustainable moats, which are barriers to competition that stop that, you know, lock in customers and lock in suppliers, and stop that free exchange. And once and this is now the orthodoxy that’s been taught in business schools, people are told that if you want to make a fortune, you don’t make something, don’t provide a service, but find a way to scrape off the value of other people’s labour. And these are the choke points. So it’s where you manage to lock people in. So you lock in customers, you lock in suppliers, you use, the power you get from that. And those increased margins you get from that to do a scorched earth approach where anybody in your kill zone gets eliminated so that there are fewer and fewer choices for those locked in customers and suppliers. And then ultimately, you shake everybody down for more than your fair share. And we see these choke pointed markets in throughout the culture industries in particular, that’s what we talk about in the book to demonstrate this problem. But they’re everywhere. We’ve started seeing the term getting used in the context of all different kinds of businesses. We’ve had people talking about on social media emailing us to tell us about it. One of the more interesting ones and somebody saying this is exactly what’s happening in the global ornamental plant industry is a big plant is a problem as well.

Gene Tunny  03:28

Ornamental what? Sorry?

Rebecca Giblin  03:30

Plants, Yes. Yeah, it’s a big problem in the plant market, we discovered. And, and what we’re really trying to demonstrate here is the danger of this. And the reason why so many of us are feeling squeezed right now. It’s not our imaginations, it’s that we are being and that we need to become really aware of it if we want to change the material conditions in which we live and work.

Gene Tunny  03:54

Okay, so by many of us, are you talking about creative professionals?

Rebecca Giblin  03:59

But it goes much beyond that as well. If you’re working, or if you’re a supplier to Coles and Woollies, for example, you are dealing with a similar kind of buyer power as what we talked about in the book. And so let me mention this. This book, we talk about monopoly a bit, which is, you know, we’re all familiar with that concept, because we got a board game for that one. It’s where you’ve got a seller, that’s really powerful. So Amazon, for example, is a really powerful seller. And its relationship with consumers because it controls so many consumer markets, including the market for books, but it’s also an incredibly powerful buyer. So if you’re a publisher or an author, you you you need to go through Amazon to reach those customers. And so it’s, it’s it’s got monopsony power as well, which is where you’ve got a powerful buyer. So if you’re a supplier to Coles and Woollies, you’re dealing with people. I have to say this word monopsony, it does turn a lot of people off. It did appear a lot more often in the book in the first draft and people begged us to take it out, but we do think we can make it sexy. Technically what we’re talking about here is oligopoly, which is probably even worse, which is where you’ve got a couple of very powerful buyers. But I’m going to use monopsony just for simplicity. But that’s what you’re dealing with if you’re a supplier to Coles and Woollies, in Australia or so many other companies that have increasingly come to control their markets. And the reason why we’ve got this increased corporate concentration throughout the world is largely due to the emergence of what we call Chicago School of Economics reasoning, this, it gets a little bit wonky at this point, but this consumer welfare theory, that suggests that we should only be concerned about corporate concentration, not just because it exists, but where it has the effect of, of harming consumer welfare, which is often treated as just looking at the prices people pay. There’s many problems with that standard. And we’ve seen them the consequences of that really starting to play out now. But one of the consequences is that it really ignores the fact that when you’ve got a powerful buyer, right, it may be that the prices that the consumer pays are not affected. But that buyer has its hand in the pockets of its workers and its suppliers. And you’re it’s a little bit of a stage magic, sleight of hand misdirection where you’re looking over there at the Consumer Price, and not noticing that you’ve got somebody picking your pocket on the other. And we think I mean, it’s exactly the same end result. If you’re if you’re having downward pressure on your wages, the salary that you bring, bring in the what you get paid for your goods and your services, it has the exact same end result as higher prices at the checkout, which is that you’ve got less and less capacity to pay for what you need. And what we’re really seeing now in the current environment. And a lot of these prices, we are seeing big price increases at the checkout. And partly those are inflationary pressures. But we are seeing as well, there’s a lot of evidence of companies, these powerful concentrated industries, hiking up their profit margins and using inflation as an excuse for that. So we’re seeing higher prices at one end, and also these companies having their hands in our pockets at the other. And so it’s no wonder that everybody’s feeling squeezed.

Gene Tunny  07:30

Right. Okay, so you mentioned a few things there. You talked about antitrust, and I’ve chatted with Danielle Wood from Gratton about this, this issue of you know, there was this consumer welfare standard. And that meant that there may be, there wasn’t as much antitrust enforcement. But now there’s been a change, you’ve mentioned, is it Lina Khan in the States? So there’s more of a, a willingness to look at antitrust as a tool. And can we, Rebecca can ask about what mean, what companies you’re talking about? I mean, are you talking, you mentioned. Well, it’s could, though, there could be companies in the sort of more traditional economy, but it’s, is it mainly big tech? Are they these are the companies that are exhibiting the characteristics of being a choke point, capitalist, what are some of these companies?

Rebecca Giblin  08:23

Okay, so the ones that we talk about in the context of the creative industries, they go all the way through the chain. So if we think about just music to begin with, musician has to deal with the big three record labels, who control almost 70% of global recorded music rights. They own the big three records, the big three music publishers, which control almost 60% of global song rights, they structure the deals in ways that benefit their executives and shareholders, and work to the detriment of these creative workers. Then the streaming industry, which is where most of the increasingly most of the money from recorded music is generated, the streaming we lots of people know that music streaming really doesn’t pay very well. But fewer people are aware that the reason that works, the way that it does is because this is the way those big three record labels, arranged things, the streaming platforms had to have to go through those records, those record companies in order to get permission to play the songs. And in order to clear those rights, they have to enter into these deals that again, favour those record labels, again, to the detriment of the artists, and that give those those those major labels who should be far less relevant and indeed are far less relevant today than they were 30 or 40 years ago because they no longer control all of the avenues to distribution, but because they’ve got these huge reservoirs of copyrights that they’ve acquired often through buying up distressed companies very, very cheaply, that’s given them outsized power to control the future of music. And so you can see that those, the copyrights themselves create a choke point, at one point, the incredible complexity of the licencing systems that we have in music, create other choke points, because it is only Spotify and the big tech music offerings that can afford to go through the, you know, these hoops to pay that what’s demanded by the record labels and also to comply with these complex regulatory rules and that keeps lots of other companies that that could be started by people who love music and want to support artists and passionately believe in alternative ways of getting music out there. It stops them from being able to start up any kind of meaningful competition. And then if you look, and you say, Well, that’s all right, people don’t really need to make money from recorded music. No one’s really made money from recorded music except a few outliers. People make money from touring. Well, then we start looking at Live Nation, which is the behemoth in that space. It controls nearly all of the world’s largest and most prestigious music venues. It also has a music management and promotion business. And it bought Ticketmaster a few years ago to, you know, in the face of many, many warnings that what has happened would happen, the Department of Justice in the United States still permitted this merger to go ahead. Now, just think about this for a moment. Imagine you are a company. So you’re a music venue, right? And you want to book acts, you will have Live Nation tell you well, if you don’t use us for your ticketing, you won’t be able to book our biggest acts that we control through our management, business and promotion business, or, or any other kind of incredible threat that they’ve made. In the book, we talk about this we are in, we looked in an incredible range of creative industries in our research for this book. And we always gave people the opportunity to be synonymous or anonymous if they wanted to. And I think nobody took us up on that. Even when they were talking about these other really big, really scary giants like Amazon, who’s also known for not playing fair, except the people we spoke to about Live Nation. Almost all of those said that they could not be named. And they were really genuinely terrified about what kind of retribution could come if it got out that they’d spoken to us about this company. But it has a voyeurs, voyeurs view at the businesses of all of its competitors, right? If you’ve got to use Ticketmaster or if you’re a venue, or you face all of these other consequences, all of these other things that you miss out on. But that gives Ticketmaster the ability to see, well, okay, so which other acts that you are hosting are doing well, who are the artists that look like based on the ticket sales, they’re about to break out, and maybe Ticketmaster, Live Nation can jump in with its promotion and management business and snag up those acts. Now, even though they didn’t do the early investment, they can just sneak in and grab them now that they’re about to start making lots of money. And, you know, all kinds of other, you know, extraordinary advantages this gives them and we’re really seeing this play out at the moment with anyone who’s listening. Is there is there much crossover? Do you think Gene in the economics explained audience and the people who are big fans of Taylor Swift, and been waiting in a queue for days in order to get tickets to her concert? You have

Gene Tunny  13:47

Look, I have no idea. I mean, I quite like Taylor Swift. I wouldn’t line up for days to get tickets. But yeah, who knows? Tell me more.

Rebecca Giblin  13:55

Look, the Department of Justice is investigating again, they did do an investigation a couple of years ago that we talked about in the book, where a bunch of venues who all had to be assured of anonymity in order to speak, we’re talking about Live Nation’s mob tactics and ways in which it was using its power to crush other people’s businesses. It got a fine that was just really a slap on the wrist and told really sternly not to do it again. But in this kind of context of fine is a price. The Live Nation is quite happy to pay that kind of fine in, you know, in order to get to continue its predatory behaviour. It will only be stopped if there is sort of meaningful enforcement. And the DOJ hadn’t done anything since until this Taylor Swift controversy came up. And and and we are seeing now there’s going to be another investigation. So hopefully, there’ll be some kind of more meaningful enforcement here and what we really need to see is Ticket Master broken up. That’s one of the main domain remedies were there. antitrust breaches. You can have structural remedies, which is where you break a company up or conduct remedies, which is where you sort of get them to pinky swear they won’t do anything bad. Now, unfortunately, those remedies are not particularly easy to enforce. Right. It took literally decades to break up AT&T In the United States. I was it was a Bell. I think it was Bell before it became AT&T. So there’s so many, the Bell System we concentrated. Yeah, concentrated firms the sometimes I get mixed up. And it can be incredibly expensive and lasts for decades to take these actions and we don’t have decades. And the other problem with those antitrust remedies or competition law remedies is that they work even less well when you’re dealing with monopsony rather than monopoly for various reasons. And so what we argue for in the book is remedies that we know do work in response to monopsony power. And that’s things like encouraging new entrants into the market, directly regulating excessive buyer power by limiting what they can do and by taking measures to build countervailing power in workers and suppliers.

Gene Tunny  16:21

Okay, well, I want to come back to that that point about the monopsony you said, it’s harder for antitrust act on monopsony if you meant I think you said that I’d be interested in that if you can explain why or, and also the, I guess, I’d like to ask about, I mean, is this really so bad? I mean, you mentioned that it’s, it’s captured creative labour markets. I mean, okay, I’m, I’m against a lot of the surveillance capitalism. And I think you know, where to the extent there are choke points, and they’re really bad business practices, or they’re they are, they’re relying on some. Yeah, I guess it’s IP, they’re relying on these relationships they have and they’re, they’re preventing competition from, from coming into the market. Yeah, I can see the problem with Ticketmaster. At the same time, I mean, I think a lot of these platforms have enabled a lot of people to make a living out of content creation, haven’t they? I mean, if you look at YouTube, and you look at all the podcasting platforms, I mean, there are many more people that are able to, you know, quit their jobs and become full time content creators, aren’t there. So, I mean, is there a risk that we, we, we undermine this system that has actually created a lot of benefits? I mean, how do you see it, Rebecca?

Rebecca Giblin  17:48

Let me answer that second part. The second part first, I think we are constantly being sold the idea that we can’t have the good things without the bad things, right. So Amazon is constantly telling us that we can’t have a good search engine without surveillance. But we can have a great search engine without surveillance. Google didn’t surveil us for the first several years of its existence, right. And it was a terrific search engine. We, with the access to digital technologies and the Internet, we absolutely can have global virtually instantaneous gloop at virtually costless, like zero marginal cost of distribution, supply of many kinds of creative work. So we’ve got this potential for the good things anyway, what we don’t have to have is the bad parts, the lock ins, right, these strategies that are used to create these hourglass shaped markets, so that you’ve got audiences at one end, and creators, the other and these predatory companies squatting at the NEC, were they using that power that they’ve artificially created by locking everybody in to extract more than their fair share? So that’s what I say in response to that. And getting, I’m so glad you asked me more about monopsony. Most people run away screaming from that pot. So some of the reasons suddenly tell you a couple of things about it. One reason why monopsony is so dangerous is that it accrues at far lower market concentrations than monopoly power does. So you know, when monopsony when when when a buyer controls even eight or 10% of the market, that already gives it quite outsized power over its suppliers. And that says that’s assuming that there’s no alternative buyer for that. And we saw that when Amazon started out one of its one of its as soon as it got power over the physical book market. It started exerting that to try and squeeze margin out of everybody else. And, you know, this is a famous Bezos aphorism. Your margin is my opportunity. He’s very clear about what he’s trying to do. But sometimes when you look at how the sausage gets made, it can be a little bit frightening. They created something called the gazelle project, which is exactly what it sounds like the way that a cheetah cuts out the weakest Gazelle from the herd, they went after the smaller and more vulnerable publishers to squeeze margin from them. One of them was Melville House, who lots of people have read books from. And the publisher they resisted, he said, look, if you I cannot, we cannot afford to give you what you’re asking for our business won’t be sustainable on that basis, we just won’t do it. And Amazon instantly retaliated by removing the buy buttons for all the Melville House books on its platform. Okay and now at that, at that time, I think Amazon only controlled about 8% of the market for those books. But nonetheless, Melville House was forced to instantly get virtually instantly given because without that, that eight or 10% of sales, it was just no longer sustainable. And so if you look at how much power Amazon had, when it had such a small market share relative to what it has got now, you can see how dangerous that’s become. And then if we look at other industries, in so many of them, you’ve only got, you know, one or two or three buyers that are available. And coincidentally, they often seem to have very, very similar policies and very, very similar abuses. And this is what this is what puts them in that position where they can extract so much from the people that they’re dealing with. Yeah, the other. The other thing about monopsony that I think is relevant here to why the remedies are not particularly effective, is that there’s real concern that when you regulate a powerful buyer, that maybe the reason why it’s so powerful is because it’s very efficient. And this is what Amazon argues it argues that it has this highly efficient structure, that it has these lower costs, which leads to attracts customers, which then attracts suppliers. And then there’s a better customer experience, which brings more in and sort of feeds this loop which Amazon calls its virtuous cycle, right. But what we see when we look at Amazon, and my co author, Cory Doctorow just did a terrific thread, or blog post on his pluralistic website about this a day or two ago, is Amazon increasingly is a shitty place to buy from, because most of it has been taken up by advertising. People, people know that Google and Facebook have big online advertising businesses, but not many people know that Amazon is a close third now. It shakes down the people that sell on it. For placement fees, and for the right to be shown first and for the right to be earlier in the search listings. And that means that you know, rather than getting the best search experience, the best customer experience, you’re just being inundated with ads all the time. They’re making billions upon billions of dollars from this. So the evidence is that in practice, it’s probably not from efficiency, but regulators are concerned that they might not be able to tell the difference. And that makes them hesitant, even more hesitant to intervene in cases of monopsony than monopoly.

Gene Tunny  23:24

And Rebecca, how do you respond to the argument that these companies are simply being rewarded for the innovation, they’re being compensated for the innovation, that they’ve undertaken to deliver new services to consumers, because a lot of these platforms are delivering value or consumer surplus to a lot of consumers. And, you know, providing opportunities for content creators. I’m just wondering how you respond to that argument, because as economists, I mean, we’re very much a lot of economists are sympathetic to that Schumpeterian idea of creative destruction, that wherever there are these, you know, the opportunities for profits that encourages innovation. And I mean, who knows? I mean, will these companies survive? Or will there be new innovative innovators who take over?

Rebecca Giblin  24:10

Let’s see, that’s the thing. This is another thing that we’re constantly being sold this idea, but look at Google, how much innovation does it actually manage? Alright, it made a great search engine, and a pretty good Hotmail clone, right? And nearly everything else that it’s ever provided that’s had any kind of success. It’s bought from other people who did actually innovate with its monopoly profits that it’s making on from these choke points. Right. And so, you know, Google tried really hard, and we talked about it in the book to create a Google video service, right? Absolutely failed with all of its resources and all of its smart people it could not, it’s almost ludicrous, how hard and how many ways it failed on that. And so it had to buy YouTube, right, which scrappy people above a pizza shop where they were actually doing innovation. And we see this time and time and time again, you know Facebook came to control the messaging market, and to control the way you communicate with your community and your family and your friends, not by innovating and creating the products that we want. But by buying up what’s happened Instagram for billions of dollars each when they had, you know, virtually no employees, because these tiny companies were the ones who actually doing the innovation, okay, so we don’t need not only do we not need these, these massive companies in their massive war chest to be innovating, they’re actually getting in the way of other people innovating. Because everybody knows what happens if you get in the kill zone, right? So it’s a risk, you either get bought up. And that’s like, that’s what many, many people are aiming to do. If they’re trying to innovate in this area, they know that the only exit is to get acquired by these companies, or crushed by them. And so it’s called the kill zone. And if you and venture capitalists know, we know that there is less VC investment in territories that are controlled by big tech and other powerful corporations, because of these kill zones. So Amazon, for example, burned, I think it was 200 million US dollars in a single month, undercutting and going directly up against diapers.com, in order to control the nappy market in the US. And that’s an extraordinary amount of money drove this innovative competitor absolutely under because it had access to these, these war chests from its monopoly profits and access to capital markets that this scrappy little innovator didn’t have. Now $200 million in a month to control the diaper market might sound like a lot of money. But it’s actually incredible value, because it didn’t just get rid of diapers.com it sent an incredibly clear signal to anyone else that was thinking of entering any space that Amazon has marked that you will be absolutely burnt out if you even attempt it.

Gene Tunny  27:04

Yeah, it’s a real gangster move, as they’d say, isn’t it? I mean, really?

Rebecca Giblin  27:08

Yeah, they would say no, no, it’s just it’s just it’s good, hard. It’s good fair competition. But it’s not is it? Right. And all of that. There’s extensive research on this, we see that there’s less investment, less innovation in areas where you’ve got choke points.

Gene Tunny  27:26

Okay. Rebecca, I think I should have booked you for longer. There’s been fascinating, and I’m enjoying the conversation. But yes, if, if there’s anything else? Yeah, I’d love to if you had any final points, you know, feel free to make them otherwise. We might have to, we can wrap up. And yeah, I’ll, I’ll try and connect with you sometime in the future. Because I’m sure there’ll be a lot of discussion about your book and this debate will continue on into the future.

Rebecca Giblin  27:55

Yeah, I guess the final thing I would say just to sort of sum up the ultimate message is that you know, creators, but also the rest of us are getting choked, that we’re sharing less and less than the value that’s that’s created by our work. And that’s happening because we’ve got these increasingly powerful corporations, creating choke points that allow them to extract more than their fair share. But we don’t have to put up with it. There’s lots of things that we can do to widen these choke points out once we see them for what they are.

Gene Tunny  28:25

Okay. Rebecca Giblin. Thanks so much for your time. I really enjoyed the conversation. Thank you so much.

Female speaker  28:33

If you need to crunch the numbers, then get in touch with Adept Economics. We offer you Frank and fearless economic analysis and advice. We can help you with funding submissions, cost benefit analysis studies, and economic modelling of all sorts. Our head office is in Brisbane, Australia, but we work all over the world. You can get in touch via our website, http://www.adepteconomics.com.au. We’d love to hear from you.

Gene Tunny  29:03

Okay, I hope you enjoyed that conversation I had with Rebecca. Overall, I think Choke Point Capitalism is a book worth reading, although I disagree with some of its assertions. Regrettably, I didn’t book Rebecca Long enough to ask her all the questions that occurred to me from reading the book, so I’ll aim to get her back on the show next year for another conversation. The book includes many compelling examples of dubious business practices by big companies. So I must admit I am somewhat sympathetic to the choke point capitalism thesis. And if you’re a regular listener, you will know that I’ve covered surveillance capitalism and problems with big tech in the past. There does appear to be scope for some antitrust action against some of the badly behaved big tech companies for sure. That said, one reservation that I have about the book is that it appears to have a wider ambition than simply acting against the market abuses of big tech. In parts, it reads like a polemic against capitalism in general. For instance, the book concludes, we’ve organised our societies to make rich people richer at everyone else’s expense. I think that sweeping statement goes too far. Like some other popular economics books I’ve read in recent years, choke point capitalism adopts to negative view of our economic system. Capitalism, after all, has lifted hundreds of millions of people out of extreme poverty in recent decades. And it has fostered a bewildering array of innovative new services that have benefited billions of people. And we still have progressive tax systems in which the wealthy generally pay much more tax than the less wealthy. Of course, many wealthy people avoid paying tax I know. But I think it’s broadly true that we still have a highly progressive tax system, at least in Australia and European countries, possibly less so in the US. Okay. Despite some reservations, I’d still recommend the book for its vivid examples of so called choke point capitalism. The book makes a useful and stimulating contribution to the important debate over the regulation of big tech. So I’ve included a link to the Amazon page for the book in the show notes, so please consider buying a copy. Thank you. Okay, that’s the end of this episode of Economics Explored. I hope you enjoyed it. If so, please tell your family and friends and leave a comment or give us a rating on your podcast app. If you have any comments, questions, suggestions, you can feel free to send them to contact@economicsexplored.com And we’ll aim to address them in a future episode. Thanks for listening. Until next week, goodbye.

Thanks to Josh Crotts for mixing the episode and to the show’s sponsor, Gene’s consultancy business www.adepteconomics.com.au

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Podcast episode

US recession, climate change & monetary policy w/ Darren Brady Nelson – EP151

US Treasury Secretary Janet Yellen claims the US economy is not in a recession,  despite two consecutive quarters of declining GDP. Economics Explored EP151 guest Darren Brady Nelson disagrees with the Treasury Secretary and argues she is taking a political position. Whether she’s being political or not, Janet Yellen has certainly taken a big risk, as Darren and Gene discuss. Darren and Gene also talk about the review of the Aussie central bank, the Reserve Bank of Australia, particularly how climate change could figure in that review. Darren argues the review team should have a broader range of views represented, including Monetarist and Austrian perspectives. 

You can listen to the episode via the embedded player below or via podcasting apps including Google PodcastsApple PodcastsSpotify, and Stitcher.

About this episode’s guest – Darren Brady Nelson

Darren is Chief Economist of the Australian think tank Liberty Works and he’s also an Economics Associate at the CO2 Coalition in Washington, DC. For Darren’s bio, check out the regular guests page.

Links relevant to the conversation

While it’s the NBER that declares whether the US economy is in recession, this CNBC report notes: “Since 1948, the economy has never seen consecutive quarterly growth declines without being in a recession.”

But many economists are skeptical about whether the US is in a recession, including recent podcast guests Stephen Kirchner and Michael Knox. 

Stephen Kirchner on the US recession question.

Michael Knox’s Economic Strategy: Fed hikes rates, but Fed says no recession (PDF).

Transcript: US recession, climate change & monetary policy w/ Darren Brady Nelson – EP151

N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.

Gene Tunny  00:01

Coming up on Economics Explored 

Darren Brady Nelson  00:05

like to see seemed to have sold or sold for political purposes as the head of Treasury in the US each year is a political appointee. So, that is, to some extent a political position.

Gene Tunny  00:19

Welcome to the economics explored podcast, a frank and fearless exploration of important economic issues. I’m your host, Gene Tunny. I’m a professional Economist based in Brisbane, Australia, and I’m a former Australian Treasury official. 

This is episode 151 on whether the US economy is in a recession. Joining me is returning guest, Darren Brady Nelson. 

Darren is Chief Economist of the Australian Think Tank Liberty Works. And he’s also an Economics Associate at the CO2 coalition in Washington DC. As well as chatting about the US economy. Darren and I discuss climate change and the review of the Reserve Bank of Australia. 

In the show notes, you can find relevant links and details of how you can get in touch. Please let me know your thoughts on what either Darren or I have to say. I’d love to hear from you. 

In the show notes. I’ll include links to some great commentary on whether the US actually is in a recession from two previous guests, Michael Knox and Steven Kirschner. So, make sure you check those links out. 

Right on, for my conversation with Darren. Thanks to my audio engineer, Josh Crotts, for his assistants in producing this episode. I hope you enjoyed it. 

Darren Brady Nelson, Chief Economist at Liberty works. Welcome back unto the program.

Darren Brady Nelson  01:35

Thank you. Good to see you. I guess it’s been a while since we last spoke about Work Capitalism, I think.

Gene Tunny  01:41

Yes, that’s right. That was a few months ago. So yes, it’s good to catch up again. This is a 151st episode, and this is your 11th appearance on the show if I’m counting correctly. So yeah, we get around to another chat every 15 episodes or so. So, it’s about time to catch up with you. So, it’s great to have you on the show again.

Darren Brady Nelson  02:06

Yeah, congratulation, because I’ve been so prolific. 151 That’s great.

Gene Tunny  02:11

Yeah, well, it’s just drip by drip, really. It’s one per week, and they mount up, yes. Thankfully, we’re out of the COVID period, although I had it recently. And I was in isolation, but we’re over all of that craziness which was dominating the conversation for a while, and now we’re getting on to other issues. 

Okay, so I thought we could chat now about the US GDP figures and we had some big news last week, in Australia. You’re still on Saturday there; I think Darren, there in the states in DC. And now we’ve got two consecutive negative quarters of GDP growth. So, GDP grew at an annualized rate or didn’t grow, it fell at an annualized rate of 0.9% in the June quarter, and that followed a decline of, I think it was 1.6% in the March quarter, that’s at an annualized rate. Okay, so there’s a big debate about whether the US is in recession or not. Darren, what do you think? Is the US in a recession at the moment?

Darren Brady Nelson  03:26

Well, yeah, I would say so. I must admit, in this conversation, certainly, you’re going to be more expertise than I. You’re a guru of sort of macro-economic indicators, and all that, particularly from your treasury background, but other things you’ve done, too. So, maybe I’ll be asking you some questions, too, and hoping to get some answers. But yeah, I’m not sure; maybe you know the answer to this, but, the entire time I’ve been, first studying economics and being an economist, putting aside the debates on whether two consecutive quarters is the greatest definition or not, it seems to have been the definition for a long time. And the most interesting thing I’ve seen recently, and I guess this would have been headlines, I imagined in Australia as well, was the Biden administration going. No, no, that’s not really the technical definition of a recession. 

I don’t think I recall an administration, democrat or republican ever; they may come up with excuses and say, it’s not well, it’s not our fault. It’s the previous administration and all that sort of stuff, or you know, external circumstances. But this is really the first time someone’s ever, including, some of the economists that the Biden administration has. On record, obviously, talking about in the past that yes, the recession. You know, the technical definition, if you like, is the two consecutive quarters of negative growth. So, it’s been very interesting times. Again, I guess in the 2020s, including a lot of media organizations and our favorite, sort of Neo Keynesian Economist, Krugman coming out and also defending that the Biden administration on oh, well, it’s not really a recession. So, it certainly fits the technical definition that, if you’d like I grew up with. And, that’s certainly my impression, just actually being in the US. Is it dire just yet? Yes. On the inflation front, yes. But unemployment, still is fairly low. And putting aside the fact that participation rate, that’s a little bit of a worry, but the unemployment rates not so bad at this stage. And usually, obviously, that’s, if you’d like a key secondary indicator, besides GDP itself, that people usually turn to right away, before they maybe dig into, what aspects of GDP have gone down, energy manufacturing, etc, etc.

Gene Tunny  06:02

Yeah. Okay. So, there are a few things you mentioned there, Darren, 

Darren Brady Nelson  06:09

So, yes. Not a strong yes. So, yeah, I’d say yes. Technical definition? Kind of weak, yes in a kind of more judgement point of view.

Gene Tunny  06:16

Yes. So, you referred to what the White House was saying, and what Janet Yellen in the Treasury was saying. So, I might just read that out. And then we can go from there. And I can let you know what I thought about that. 

So, what Janet Yellen said and this is reported by the Financial Times. “The White House has maintained that the US economy is not at present in a recession, with Treasury Secretary Janet Yellen saying earlier this week that she would be amazed if the NB declared it was okay.” So, what she’s talking about there is the National Bureau of Economic Research, which is I think it’s attached to; is it attached to Harvard or MIT or one of those East Coast universities? There’s this elite group.

Darren Brady Nelson  07:01

I think it’s independent. I mean, look, I don’t know, but I think it’s more independent than even being associated with one particular university, I think.

Gene Tunny  07:10

Yeah, I think you’re right. Yeah. But it’s an elite group of macro economists, some of the top people and you’ll have some of the leading lights of economics on it. And they will date the business cycles, they will declare whether the economy’s in recession or not. And generally, what they’re looking for is a sustained downturn that lasts several months, so more than one quarter. And they look at a broad range of indicators. So, it’s not just GDP. But that having said that, it looks like GDP is an important part of it, because it’s that comprehensive measure of economic activity. 

And one thing I noticed when I was preparing for our chat, is there was a report from CNBC, where it noted that I don’t think there’s ever been a recession that the NBR has called, which didn’t have two consecutive quarters of GDP growth, if that makes sense. So, where’s the actual passage? 

Darren Brady Nelson  08:21

I think that’s not correct. I think they call the recession, during the pandemic, and that wasn’t two quarters, I think. So, they do have a bit of leeway. But they tend to usually use the two quarters as part of the definition as a key component.

Gene Tunny  08:38

Okay, look, I’ll have to check that, I thought I read that earlier today. I had that somewhere here in my notes.

Okay. So, we might go back to what Janet Yellen, what she said here. She underscored the message at a press conference on Thursday, emphasizing that the economy remains resilient. Most economists and most Americans have a similar definition of recession, substantial job losses and mass layoffs, businesses shutting down, private sector activities slowing considerably, family budgets under immense strain. In some abroad-based, weakening of our economy. She said, that is not what we’re seeing now. 

Okay. It seems to me that’s a pretty risky call from her because she is running the risk that the NBA does eventually define this as a recession. And that’s going to be incredibly embarrassing for the administration. So, yeah, that would be my sense of it. I think it is a big call from Janet Yellen. And it may be too early to tell. But look, there are a lot of Economists out there who seem positive about the US economy. But that said, it does appear that I mean, is it the interest rates, is it what the Federal Reserve’s been doing that’s causing issues? Is it inflation that’s hitting Consumers? What do you think are the main forces affecting the US economy at the moment, Darren?

Darren Brady Nelson  10:06

Yeah, I think, you’ve definitely touched on two key components. But just to comment on Janet Yellen. But you know, Janet Yellen was totally wrong on inflation. So, that didn’t seem to impact her credibility within her circle that she goes around with, and the people who hire her; that didn’t seem to make any difference. So, probably when she’s proven wrong on recession, which I think she already has been. Yeah, I mean, that inflation is like, one of the key things; it’s the biggest problems in the US, and obviously, even the Federal Reserve, which has been; our Federal Reserve is part of the process of creating inflation. So, they’ve gotten spooked. Biden administration itself has not, which they, at least publicly, they keep on, they don’t seem to be, they acknowledged it a bit, but they don’t really kind of acknowledge it as bad as, even though the official statistics are showing. So, you have, like, I guess we’ve talked about this many times, but, you have kind of two things going on at once, the unprecedented levels of money printing, and the credit that goes with it, which, if you’d like, from a macro point of view, is hitting the demand side. And then on the supply side, they’re doing all sorts of, the Biden administration’s policies are just hurting supply, and hurting productivity and competition. 

So, that can sometimes, make up a lot for that money printing. The supply side can react to it, and really dampen what, it’s for the money to the demand side of things. So, energy is a classic one, they had a complete 180 on their energy policy. So, the US went from the number one energy producer in the world to not that anymore, and, record time, essentially?

Gene Tunny  12:08

And is that the Biden administration’s fault in your view?

Darren Brady Nelson  12:12

Well, exactly. It’s not just their fault, that is literally their policy. You know, they’re going for the green transition, if you like, come hell or hot water, right? So, which includes, not allowing oil companies to extract oil and all sorts of things. Oil, natural gas, coal, etc. And they’ve also hit agriculture with bad policies as well. You know, manufacturing; yeah, literally, if you want to destroy an economy, the Biden’s administration is basically ticking all the boxes with their policies. And, putting aside, you can argue whether that’s intentional or unintentional, but I think there’s not too many, if you like, remotely free, market friendly economists who think the Biden’s policies are particularly good.

Gene Tunny  13:10

Right, okay, I’ll have to have a closer look at some of the policies and come back to that. I just want to go back to that definition of recession; I think I might have missed or may not have communicated properly what that factoid in that CNBC report was. So, what they were saying was that, in fact, every time since 1948, the GDP has fallen for at least two straight quarters. So, they’re not saying that, there could be recessions if you don’t have this, and that’s what you were saying with the pandemic, that was, like you could call a recession, if you don’t have the two negative quarters. But what this point is, is that, in fact, every time since 1948, the GDP has fallen for at least two straight quarters. The NBER ultimately, has declared it a recession. So, you can have a recession, even if you don’t have the two quarters, but every time you’ve seen it in the data, the NBER has ultimately called it a recession. So, what Janet Yellen has done is, yeah, that’s a really big call on her part. And, I mean, Janet Yellen, someone with a distinguished academic reputation, and yep, so really, really big call and potentially, it will backfire on her. We have to wait and see about that. Yeah.

Darren Brady Nelson  14:38

Janet Yellen in not going to make, you know, like she’s she seemed to have sold or sold for political purposes. Not unusual that; it’s not like this has never been seen before. Most of her sort of, like topics when she gets into public is less focused on inflation and recessions and she’s talking about equity and diversity and inclusivity and all that sort of stuff. Well, I guess as the head of Treasury in the US, each year is a political appointee. So, I guess, that is, to some extent, a political position. Although, usually in the past, it’s been Department of Justice and Treasury have, usually been less partisan, if you like. The people regardless of whether it was democrat or republican in charge, but you know, things have changed quite a bit. Certainly, this century and certainly in the 2020s.

Gene Tunny  15:33

Yeah, exactly. Okay. So, you mentioned the supply side before, well, one thing we’ve had in Australia here is just the ongoing disruption to supply chains. And I mean, the random things just been unavailable in the supermarket’s. Quantas seems to have lost its mojo; can’t seem to run a flight on schedule any time anymore. And partly, that’s because they lost people during the pandemic. And now we’ve got people on isolation leave, like if you get COVID, you have to isolate for seven days, and that’s disruptive. Things just don’t seem to be working as they once did. Is that the same in the States? Have you noticed that in the US?

Darren Brady Nelson  16:21

Yeah. I think some extent, less. Although I understand aviation has been kind of bad here, too. But I haven’t actually been, I’m just going on to sort of news reports and talking to other people that, yeah, they’ve had, things. Well, what happened in the US probably, maybe more than Australia is a lot of pilots, either were, let go or just left because they didn’t want to get the vaccine, right? And the federal government has a bigger say in aviation than they do and other industries, for instance, particularly on employment. And so yeah, that’s all contributed, including also I understand, not just pilots, but other people in the aviation industry, various hubs, the people needed at the airports and the hubs as well, similar sort of circumstances. The supply chain disruption in general, I haven’t noticed it as much in terms of like at the grocery store, there was a period where there was a little bit of that. Not as bad, but certainly, there were issues as well, in the US, perhaps, maybe not as bad in terms of like, grocery stores and whatnot. 

So, the 2020s have been very weird times. And I don’t think it’s some sort of like natural market outcomes as such. Obviously, markets wrecked, and they impact, but I think there’s just the amount of, really over the top interventions and status sort of policies in the 2020s have taken me by surprise. We’ve been prepping backwards, if you like, towards bigger and bigger government, and I think, reaping the rewards. I don’t know why people, even people who; seasoned economists, who should kind of, know better, the more the government does stuff and interferes, the worse things get. It literally, is becoming, more and more like an Atlas Shrugged world. I don’t know if you’ve read Atlas Shrugged; probably familiar with the premise anyway. It’s like that. I’m like Atlas Shrugged there, but, there were places to escape to in that world, the fictional world of as many, as you can see, in this world, when, all the governments are, have uniform sort of policies on COVID and uniform policies of not tackling inflation, and all that. And maybe it will be interesting to see if the elbow government copies the Democrat lead, which I suspect they will, if Australia gets two quarters of negative growth, they’ll go that’s not really a recession, we’ll be interesting to see if they go down that road as well.

Gene Tunny  19:12

Yeah, one thing that we’ve traditionally relied on to keep the economy growing is migration, just the addition of people and that those consumption, and so that’s starting to pick up again. Possibly, that try and redefine it. I mean, I don’t think we’re at risk of that at the moment. Although having said that consumer confidence has dropped with the higher interest rates, so people are freaking out over just the increases in interest rates we’ve seen already, because it looks like they just borrow lots of money when interest rates were really low. The Reserve Bank, Governor, I couldn’t believe it. Last year, he was saying, oh, the interest rates will; our official cash rate will stay at 0.1 until 2024. And arguably, he misled people. And so, I mean, he really has a lot of questions to answer for. And there is the Reserve Bank of Australia review, which I’ve talked about in this program. I don’t know if you’ve had a look at that at all, Darren?

Darren Brady Nelson  20:22

No, no. Give me a synopsis of what drove that. And what’s happening? 

Gene Tunny  20:28

Well, the RBA has been under a lot of criticism in recent years for different reasons. There’s been one group of economists who’ve been critical of it, because they argue that they didn’t; that they had interest rates too high in the lead up to the pandemic. Now, whether that’s true or not, I think it’s debatable. But I’ve had people like Peter Tulip and Steve Kirschner on the show. I mean, they’re very good economists. I think it’s worth considering their view for sure. 

Their argument is that if you’re trying to achieve the inflation target of 2 to 3%; they were arguing that because inflation was actually lower than that, you had scope to have looser monetary policy, lower interest rates, to have more employment growth. And there was some modelling that was done by Andrew Lee, who’s a Labor Party MP and a former and new professor, and Isaac Gross, who’s an economist at University of Melbourne, I think. And they showed that if the RBA had met its inflation target, if it had lower interest rates and let the economy grow faster. You could have had; I think it was like 250 to 300,000 more jobs in the economy. So, there were a group of economists criticizing the RBA from that direction. And they were saying that the RBA was too concerned about households taking on too much debt. So, they didn’t want to put interest rates lower. 

I could see why the bank would be concerned about that. So, that’s why I’m not fully on board with that criticism of the bank. That said, I think it is good to review the Reserve Bank, because it is a bit of a; it’s not exactly transparent what they’re doing. So, I think there could be greater transparency. And since last year, when Phil Lowe was making those sorts of bold calls, that turned out to be wrong within months, right. It was obvious that we’re in the in the new year when we started getting those inflation numbers that the Reserve Bank would have to act. So, I think they lost a lot of credibility over that. 

So, it’s important now to have this review. And they’ve appointed Caroline Wilkins from, she’s a former Deputy Governor of the Canadian Central bank. They’ve got Gordon De Brouwer, who’s a former bureaucrat, I worked for him when he was in the treasury. And he was also at a new at times. He’s good. He’s good value. And Rene Fry McKibbin, who’s a professor of Economics at ANU. 

They’re going to review the board like there are issues to do with board composition, who’s on the board? There are issues to do with the inflation target; but I’m not sure they’ll do much about that. They might tweak some of the language. And then there’s issues to do with the transparency of the board’s decision making; what do they release to the public every month? So that’s essentially what the review is about and I think it’s, it’s a good thing that they’re doing that. So, yeah, that’s it. So, yeah, it’s worth definitely worth keeping an eye on. 

Okay, we’ll take a short break here for a word from our sponsor.

Female speaker  24:01

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Gene Tunny  24:30

Now back to the show.

Darren Brady Nelson  24:33

So, are they the reviewers? Are they sort of, left or center, for the most part, like a Keynesian and MMT and, something else or what? What’s the story there?

Gene Tunny  24:47

I’d say the typical mainstream macro economists. So, however you’d like to characterize that, they’re definitely not MMT. If you had to give them a label, maybe you give them a new Keynesian label, possibly. But yeah, they’re not I don’t think they’re radical in any particular direction. They’re nonpolitical appointees, which is a good thing. One of the big questions and something that I think the Prime Minister, Anthony Albanese, Albo, as we call him, one thing he will be, he’ll be getting pressured to put a trade union representative on the board. So, they’ve had one in the past, I think Bob Hawke, our former Prime Minister was on the board in the 70s, when he was the head of the ACTU. 

And then we’ve had various other ACTU secretaries on the Reserve Bank Board. There are some people pushing for a regional rep., but, one thing that Peter Tulip, who’s Chief Economist at Centre for Independent Studies has been pushing for is, he said that the problem is, we don’t have enough people who know about inflation and monetary policy on the board. And so, we need more of those people. We need more, it’d be better to have more economic experts or economists on the board.

Darren Brady Nelson  26:05

Yeah. And maybe, also further, how about a variety of use, and not just the one kind of, you say, mainstream, and but that’s still a worldview, it’s still a way of looking at things. And it’s not the only way of looking at things. The combination of, essentially New Keynesians, for the most part, with maybe a little, like 80-20 Keynesian monetarist; that’s maybe what, most mainstream sort of, macro folks, that’s kind of what they’ve learned and whatnot, be good to have somebody else. Have an Austrian point of view, have maybe a full on monetarist point of view, whatever; just something that’s not just the one point of view, , so it’s not just Tweedledee and Tweedledum, every time either on the board or this review.

I’m not saying these people aren’t smart, or anything like that; the three people you mentioned, but I suspect there’s not going to be a whole lot of push and shove between the three. 

Gene Tunny  27:04

So, I think the review in a way, presumes that there won’t be radical changes. The Reserve bank is going to continue as an institution, we’re still going to have Fiat money. Is that the sort of thing that you think should be up for review, that we should be looking at something more fundamental?

Darren Brady Nelson  27:25

Well, at least you have one person on there who can be the dissenting voice to say, something like that, but I’m saying, even if it was, say, one Keynesian, one monetarist, and one Austrian, I think you might get a pretty decent review out of that, with the monetarist if you like, in between the two, to some extent. 

So, you still have 2 – 1, want to keep a central bank going, but we just, good to kind of be realistic about, what a Central bank does and what inflation is, what monetary policy is, all that sort of stuff. That’s fine, if the board, I’m not saying, the board should be all full of economists, even if it was a mix of those types of economists, I think it’s fine to have some other, you know, depending on how big the board is, you know, there would be room, I guess, for a union and a business representatives and maybe some other stuff as well, that’s fine. 

And then they should also review, also the goals of the Reserve Bank; what’s legislation. There’s a lot of stuff in there besides inflation, maybe, just to look at it, and kind of whether all that needs to be in there, or whether there’s should be a better balance, or you should prioritize and go, inflation is number one, and then something, that type of thing. It’d be great. 

A lot of these reviews aren’t all that genuine, they already have a political goal. I mean, you say they’re not political, but it always is, you know, to some extent, they’re under certainly under pressure anyway, regardless of who they stick in there to review things. Now, in the past, some of these reviews have been a lot less political than others, there’s always a political element, like the competition policy review wasn’t particularly political, but there’s always a little bit of an aspect to it, of course, I’d be surprised if they’re not under, some fairly great political pressure to start going beyond and started looking at, kind of cultural war type stuff, too, that they want to ingrain, sort of, race and gender and all that other stuff. I’ll be I’ll be pleasantly surprised as if that isn’t going to be a part of the review.

Gene Tunny  29:37

So, as far as I’m aware, race and gender won’t be at this stage, I don’t think. But one thing that possibly will be, now whether there’s a culture war issue or not, I don’t know. I think I’m not sure it’s, I guess there are aspects of it that are part of the cultural war but the debate about the climate. So, Warwick McKibbin, who is he’s a Professor of Economics at ANU, and he’s actually the husband of one of the reviewers. But you know, she’s independent of; she’s her own person… Renee Fry McKibbin; she’s Warwick’s wife. 

Darren Brady Nelson  30:22

Actually, by definition, at least the old school definition marriages, you’re not, you’re one flesh. But anyway, I understand what you’re trying to say. 

Gene Tunny  30:29

Okay, yes. So, I don’t think she’ll necessarily go along with Warwick’s view. But Warwick was at the conference of Economists in Hobart two weeks ago, where I caught COVID. And, it was a good conference other than that, it was a great conference.

Darren Brady Nelson  30:46

And super spreader of it.

Gene Tunny  30:49

Yeah, that’s right. And Warwick was on the panel. And now we’re talking about the Reserve Bank review. And one of the points he made is that we may have to amend actually, I think he’s saying we will have to amend our inflation targeting settings or our goals or objectives. We’ll have to amend that to incorporate climate change, because we have to recognize that if we’re going to be responding to climate change, we’re going to introduce a carbon price and one that increases over time. So, that’s what you need to have that sort of lowest cost adjustment path. So, to minimize the cost of adjusting to climate change, you’ll need to have a carbon price that increases and so that’s going to be increasing prices. So, you’ll need to look through the inflation, you’ll have to ignore the inflation that comes from the carbon price. So, I think culture war issues won’t come into it. But I think the climate change will come into the RBA review.

Darren Brady Nelson  32:01

Okay, well, that’s good to know. It’s terrible news. But it’s not surprising though.

Gene Tunny  32:06

But doesn’t it make sense what Warwick is saying? I mean, if a government does introduce a carbon price, and you’re going to have increasing prices because of that, then that’s not really inflation that the Central bank should be concerned about. What do you think of that perspective?

Darren Brady Nelson  32:25

It still should be concerned about it, even if, you know; this is all about thinking about the costs and benefits. It sounds like, just assuming, okay, well look, we’re just not going to worry about the downside of our carbon tax and our climate policies, because it’s such a, unquestionable good to pursue this. That’s ideology, that’s not economics, that’s really bad economics. And it’s also bad constitutional law, like, to what enshrine you know, certainly a very long-standing fad, of the climate sort of industry. But, the concept of inflation is something that stands the test of time. You can disagree on various aspects of it, but it’s always going to be, to the extent you’re going to have monetary policy, inflation is going to be an important thing to be thinking about, right. Climate change, may not be. 

I’ve been following this debate since the mid-90s. And, I can tell you; well, just look at the polling, I can’t speak for Australia, but in the US, it’s something along the lines of; it’s well outside the top 10 of topics that people are concerned about in the US, for instance, then you want to start because, elites like him, are in a position to influence these things. They want to shove in the things that they care most about. And I think it’s just atrocious to think you can stick that into the Reserve Bank act. I assure you another government can come along and potentially change that if they want, if the electorate says, alright, you’ve been trying to convince us that the end of the world has been coming for 30 years, it hasn’t arrived, we no longer trust you. Sure, that might happen. And then, government could change things, but you know, so it’s a bit hard to change stuff in legislation, a lot of damage can be done in the meantime.

Gene Tunny  34:20

Okay. So, on where is where they’d make the change? It probably wouldn’t be in the act, they would have it in the agreement between the treasurer and the Reserve Bank. If I remember correctly, I think the general view on the Reserve Bank act from the late 50s was that, look, some of the language is a bit outdated. But you know, maybe leave that alone, you can do all you need you want to do within the agreement between the treasurer and the Reserve Bank. So, I think that’s where they would adopt something like that. 

Just on that Reserve Bank Act, I think what they talk about in that is that the Reserve Bank is supposed to set monetary policy to have a stable currency to achieve full employment and to promote the prosperity of Australians or something. Something broad like that. Yeah. So, they’ll probably leave that and they’ll do whatever they want to do with if they did want to put some wording in about climate change, it’ll probably be very vague, because it is all very vague. We don’t really, I mean, I’ve got no idea what’s going to happen here in Australia. Politically, it’s, it’s such a vexed issue. And you’re saying is not in the top 10 issues in the US, it’s certainly in the top 10. It’s top five; top 3 here in Australia. 

I mean, the previous government lost Blue Ribbon seats, seats that it’s held for decades, seats in affluent areas of Sydney and Melbourne. And it lost them because of climate change, because people in those seats are extremely concerned about it.

Darren Brady Nelson  36:07

Yeah, there’s a different point of view. Certainly, they did, but I wouldn’t extrapolate to say that means Australia as a whole has the same views as these inner-city suburbs, they’ve just changed the demographics and the ideological viewpoints of these people. That’s why they lost. Just like we’ve seen around the world, it’s the rich and upper-class professionals who gravitate towards status policies and status causes, like climate change. The working class, and in the middle, and lower middle classes do not. And electoral politics, isn’t just a straight representation of what the entire nation views necessarily. And putting aside the fact that the polling is often biased and bad and misleading and all that sort of stuff, but that decide. 

I’ve seen some other people who; intelligent Australian commentators, James Allen, and people like that. We’ve been having a bit of look at that, to see whether, that mainstream narrative is actually true. They certainly lost obviously, those seats, they were blue ribbon, but they’ve been changing and moving left for a while now. So, particularly in the US, how climate change is almost really a non-issue from a broad electorate point of view, not any specific electorates. 

Yet, that doesn’t stop the policies from carrying on and then you have all these perverse outcomes of like, I imagined Albanese will get more copy a lot of what the Biden administration so, the push for electric vehicles. Well, electric vehicles are still being produced by coal and natural gas, you know. So, you’re really in many ways, you actually might even be increasing carbon dioxide emissions through transitioning to electric vehicles from petrol vehicles. And the fact is, most of the world is actually increasing the use of coal, mostly India, China, Brazil, etc. And there’s even been a coal like I said, there’s been a coal comeback, even in Western countries as electric vehicle usage gets ramped up. So, these people don’t go, oh, no, we; the same people who say there’s an existential problem, keep on producing, keep on pushing electric vehicles, for instance. So, that their actions speak louder than their words that it isn’t really an existential crisis. Putting aside the fact obviously, all these elites tend to keep on buying beach side homes and all these sorts of stuff. I think just look at their actions, speak much louder than their words. 

So, we’re getting this system where we get a worse electrical system because they keep on showing throwing more and more unreliable and expensive renewable energies on top of it, yet, they’re not actually starting to take much of the load of electricity production, they’re just sitting there costing more money and hurting the rest of the system. Yet, we’re still relying, and we’re going to keep on relying on coal and natural gas and the only renewable energy we’re going to lie and it’s going to be, water – hydro. Putting aside the fact you know, allow many new hydro to be built, but it’s bloody reliable. In the US, if it wasn’t for Quebec, all the hipsters in New York would be having more blackouts because they’re running on water; hydro from Quebec coming down into the US.

Gene Tunny  39:55

Where is that is that near Niagara Falls, or is it is that up in that Region.,

Darren Brady Nelson  40:00

Yeah. Quebec is like, the king of hydro in that part of the world, not just for Canada. In fact, Quebec is mainly supplying electricity to the US, part of the population that’s bigger. And that sort of the northeast of the US. So, that’s kind of insulating on, they can shove on some more solar panels and wind, but that’s not really generating a lot of electricity. And we also have the perverse effect from the main thing that, besides all the kind of pollutants, actually the toxic sort of, chemicals, and all the stuff that it’s needed for electric vehicles, needed for solar panels, needed for wind turbines, which obviously have detrimental environmental effects. They need coal, natural gas, and hydro to make those things in the first place. Not just to be the ones that really, supplemented when the wind’s up blowing, and the sun’s not shining. But if it wasn’t for all the fossil fuels, it couldn’t even build this stuff in the first place. So, all you’re doing is shoving all this stuff, people making a lot of money. A lot of people are virtue signaling, sort of, they keep on crying wolf for what, like 30 years now. There’s, nothing; there’s no significant evidence that we have a problem. 

Gene Tunny  41:15

Well, I’ll push back and say we just had a 40-degree Celsius day in England that they’ve never had in their whole history. 

Darren Brady Nelson  41:23

That’s not true. You go back, and we look at the Paleo challenge. You look at the evidence. For instance, in the US, this damn out in the Colorado River is having; it’s because of climate changes is at its lowest level, lo behold, a study, two weeks prior to them making such statements show that they’ve had more levels on the Colorado River 2000 years ago. 

We’ve had warmer periods, we’ve had more carbon dioxide in the atmosphere in times. No, none of this is accurate. It’s all cherry picked to scare the poop out of people to accept these policies they want anyway. And you watch it when we’re old men, we’re going to be the people will go yeah, we’ll look okay, this thing didn’t happen. But I think it was the right thing to do anyway. 

You hear that a lot, even now. They go like it will even for wrong, it’s the right thing to do. How’s it the right thing to do to make people poor? And have people in Africa starve? How’s that the right thing to do?

Gene Tunny  42:22

Okay, so in a future episode, we’ll have to come back to this, Darren, and we’ll see where we are with the with the data.

Darren Brady Nelson  42:28

You want to see the green policies and action? Look at Sri Lanka.

Gene Tunny  42:31

Yeah. Look, I’m not advocating for these policies, necessarily. Yeah. But I do recognize;

Darren Brady Nelson  42:42

That’s not about you, that’s just kind of aim at whoever’s watching this. It’s like, you want to see the future? The potential future? That’s Sri Lanka. That’s the way Australia could look, if they’re not careful.

Gene Tunny  42:55

And what did they do? They actually required organic produce, did they? Did they ban the importation of some fertilizers or something?

Darren Brady Nelson  43:07

Yes, fertilizers. Fertilizer was the main thing using green organic things instead of actual fertilizer. This is what’s happened in countries like Sri Lanka and African countries is to get their aid money. They do the green agenda, essentially. And it’s just a disaster.

I’ll tell you the countries that won’t be, it won’t be China, it won’t be India; the bigger countries that don’t need the foreign aid. And there’s also strategic implications, obviously. Who controls the green energy market, ultimately? China – communist China.

Gene Tunny  43:51

They are producers of a lot of the solar panels. That’s correct. Yeah.

Darren Brady Nelson  43:54

They are almost a monopoly on this, and increasingly, all the support technology for it as well. So, in China, this is not a coincidence. It’s not like, oh, the market chose China, they were just the best people to do it. This is like, this is a plan. It’s a strategy by the Chinese government, and you can see it’s written down. There are books written on this by them to say, oh, this is what we’re going to be trying to do. That basically, it’s their mind calm. So, don’t be surprised, when some of this stuff comes true. 

They have a plan that the Chinese economy is not a free market economy by any stretch of the imagination. You know, it’s a government controlled run for the purposes of, for the benefit of the Communist Party and the strategic interests of China. It’s not like you’re dealing with the Netherlands, that sort of thing. So, that’s also a huge thing. Because they’re an aggressive military power. 

When the time’s right, they’re going to take action. Taiwan and whoever else, eventually over time gets in their way. So, to aid and abet this through these green policies that are aimed at a problem that doesn’t really exist or certainly not in the scale. And certainly, even if the problem doesn’t exist, too deep, to essentially decarbonize the economy is just like literally the worst solution for it. And to decarbonize it in a way that, benefits China immensely. These’re just terrible policies the whole way through and people hopefully one day will be held accountable for this.

Gene Tunny  45:46

Right, okay. We might go back to GDP just before we wrap up, and yeah, I think I agree. There’s a big debate to be had about those policies for sure. I mean, from Australia’s perspective, given that we’re such a small part of the world, doesn’t make sense for us at this stage to adopt those policies on a large scale. My view is we should try to cooperate internationally. But we need to ensure that other countries are following through with their commitments. And I’m not sure that that has always been the case, or it is the case. So, that my perspective on that. 

On GDP, I guess the view is that; my sort of thought is that, Janet Yellen certainly went too far. The US possibly could be in a recession, despite the fact that jobs growth has been strong, despite the fact that you’ve got unemployment at 3.6%, you could be going into; you could be in a downturn. The GDP figures, if you look at the composition of them, you had inventories falling, that was a big part of it. So, businesses were selling goods, but they weren’t replacing their inventories. So, that could be a signal that they’re not expecting; they’re worried about the future, about future sales. We had a drop in residential construction. That was one and that’s probably driven by the increase in interest rates. At the same time consumption spending was up. So, that’s why the summer economists are thinking it’s a bit of a mixed report. And we’re not entirely sure, but my take on it would be the GDP numbers are definitely something be concerned about and Yellen probably went too far when she said, we’re not in a recession. I think that certainly could come back and bite her. 

Darren, do you have any final thoughts on the GDP numbers? Or where the US economy is that?

Darren Brady Nelson  47:55

Pretty much agree with what you just said. And obviously, time is going to tell. I think the bad ministration policies are very bad. And that’s going to come home to roost. So, I think, it’s not going to be good times, economically for the US and if it’s not good times, economically, for the US, it’s not worth it. China is obviously a major player, but it’s not the engine of growth for the world just yet. The US still pretty much is. When the US sneezes, everybody catches a cold.

Gene Tunny  48:39

Yeah, that’s right. I remember that. That was a popular saying in Australia, at the Reserve Bank and Treasury. So, yeah, absolutely. 

Okay. Darren Brady Nelson. Thanks so much for your time. It’s great to catch up, yes. And I look forward to chatting with you again in the future.

Darren Brady Nelson  48:58

Always great to be on your show and see you, Gene, thank you.

Gene Tunny  49:02

Thank you. 

Okay, that’s the end of this episode of Economics Explored. I hope you enjoyed it. If so, please tell your family and friends and leave a comment or give us a rating on your podcast app. If you have any comments, questions, suggestions, you can feel free to send them to contact@economicsexplored.com and we’ll aim to address them in a future episode. Thanks for listening. Until next week, goodbye.

Credits

Thanks to this episode’s guest Darren for the great conversations, and to the show’s audio engineer Josh Crotts for his assistance in producing the episode and to the show’s sponsor, Gene’s consultancy business www.adepteconomics.com.au

Please consider signing up to receive our email updates and to access our e-book Top Ten Insights from Economics at www.economicsexplored.com. Also, please get in touch with any questions, comments and suggestions by emailing us at contact@economicsexplored.com or sending a voice message via https://www.speakpipe.com/economicsexplored. Economics Explored is available via Apple Podcasts, Google Podcast, and other podcasting platforms.

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Podcast episode

Global economic outlook + Aussie inflation & house prices – EP150

The message from the IMF July 2022 World Economic Outlook was that the outlook is “Gloomy and More Uncertain”. This week also saw the United States slide into a technical recession. Certainly there are big risks to the global outlook. It’s possible that central banks could tip many economies into recession as they hike interest rates to tame inflation. This episode considers the global economic outlook as well as the economic challenges facing Australia’s new federal government. It’s an abridged version of a conversation that show host Gene Tunny had with Decactivist host Randall Evans on his show. The conversation was recorded prior to the US GDP release, but Gene remarks on the data in his introduction to this episode.

You can listen to the episode via the embedded player below or via podcasting apps including Google Podcasts, Apple Podcasts, Spotify, and Stitcher.

Randall Evans’ Deactivist show:

https://www.youtube.com/c/Deactivist

IMF World Economic Outlook July 2022: Gloomy and More Uncertain:

https://www.imf.org/en/Publications/WEO/Issues/2022/07/26/world-economic-outlook-update-july-2022

US recession news from NPR:

https://www.npr.org/2022/07/28/1113649843/gdp-2q-economy-2022-recession-two-quarters

Transcript: Global economic outlook + Aussie inflation & house prices – EP150

Gene Tunny  00:01

Coming up on Economics Explored.

Randall Evans  00:04

I don’t know if you saw the lineup for Qantas, I think two days ago. But it was out the door all the way down the road for Qantas flights in Sydney, like all the way out there. Never seen it like that, it’s insane.

Gene Tunny  00:21

Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host, Gene Tunny. I’m a professional Economist based in Brisbane, Australia, and I’m a former Australian Treasury official. This is episode 150 on the Economic Outlook. 

We are at a risky point in the global economy. It’s possible that Central banks could tip economies into recession as they hike interest rates to tame inflation. Indeed, I’ve just seen the news that the US has experienced the second quarter of negative economic growth. So, according to the traditional definition, the US economy is in a recession. I’ll have to cover this in more depth in a future episode. But for now, I’ll know that there will be a big debate about this, given the jobs growth has been really good in the States, something noted by US Treasury Secretary, Janet Yellen, she’s claimed the two quarters of negative growth rule for a recession can be misleading. And you need to look at a broader range of indicators, as the National Bureau of Economic Research does when it calls recessions. There’s a lot to explore here, so I’ll leave it to a future episode. 

Okay, I should note that this current episode is an abridged version of a conversation that I had with fellow Australian podcaster, Randall Evans, on his Deactivators show earlier this week, on Wednesday, 27th, July 2022. I’ll put a link to Randall’s YouTube channel in the show notes. So, you can check out the full unedited chat, and Randle’s other videos. 

You may notice I’m short of breath at some points in this episode. That’s because I’m still recovering from COVID. I picked it up at the Conference of Economists in Hobart, two weeks ago. It was an awesome conference, but it was also a super spreader event. Alas. 

In the show notes, you can find relevant links and details of how you can get in touch with any questions, comments or suggestions. Please get in touch and let me know your thoughts on this episode. I’d love to hear from you. 

Right on, for my conversation with Randall on the Economic Outlook. I hope you enjoy it.

Randall Evans  02:38

Hello, everyone and welcome to the show. We’re here with Gene Tunny. Gene, how’re you doing?

Gene Tunny  02:42

Good. Thanks, Randall. How are you?

Randall Evans  02:44

I’m pretty well. For people who don’t know you, why don’t you give us a little background about yourself and what you do?

Gene Tunny  02:52

Okay, I’m an Economist. I’ve got my own consultancy business, Adept Economics. So, I do project work for different clients, private businesses, nonprofits, some government agencies, councils. So, often business cases for different projects or analysis of different policies or programs. So, I’ve been doing that for the last 10 years or so. Before that, I was in the Federal Treasury. So, we’ve got a broad background in Economics.

Randall Evans  03:27

And you’ve also got your podcast as well with over 130 old episodes I think, so far.

Gene Tunny  03:33

Yeah. Economics Explored. Yeah, that’s going well. I’m really happy with how that’s going. I mean, we’ve covered you know, a wide variety of issues on that, including housing and inflation and the RBA and the current review of the RBA. So, yeah, that’s going really well.

Randall Evans  03:55

What’s the current review of the RBA? Is to get rid of it? 

Gene Tunny  04:02

Some people might want that. There are some libertarians out there who are pushing for the abolition of Central banks and the abolition of fiat currency. But no, they’re not going to do that. I mean, they probably won’t do anything too radical, they might make some changes to the board composition, they might make some changes to the language around what the Reserve Bank is supposed to do in terms of targeting inflation. But yeah, there won’t be any radical changes, I’m afraid. Particularly if you look at the people who are who are going to be doing the review. They’ve got an academic Economist. They’ve got a former government bureaucrat, Gordon Brewer, and then they’ve got a deputy head of the Central Bank of Canada. So, you’ve got fairly mainstream people there. So, I don’t think we’ll see big changes. Having said that though, I mean, the Reserve Bank certainly needs reviewing, because there’s been a lot of concern that their policy settings have been wrong at different times. Phil Lowe’s, arguably misled people last year, and there are a lot of people who are concerned about that. His forecast, which was widely reported that interest rates wouldn’t be increasing until 2024. And he was saying that late last year, and now, they’ve already gone up from 0.1; this is the official cash rate, the overnight cash rate, which is lower than what people pay for home mortgages. Now it’s at 1.35. It’ll go up to 1.85 tomorrow, sorry, not tomorrow, on Tuesday, next week.

Randall Evans  06:02

Is that just people wishful thinking that believed that it wouldn’t go up till 2024? I mean, we had mass quantitative easing and the inflation followed, and then the logical step was; interest rates are going to go up. So, who was saying we can hold off till 2024?

Gene Tunny  06:22

Well, I guess there was this view that the economy had changed. And, I mean, there was quantitative easing, not in Australia, but in other countries during and after the financial crisis. So, starting around, 09, 0-10. And there were people forecasting, oh, this is going to lead to runaway inflation at the time, and that didn’t really happen. But what we’re seeing in the last was over the pandemic period, is that we’ve had, you know, more quantitative easing, and we’ve had big budget deficits to try to stimulate the economy as well. And I think the combination of that has meant that, you know, inflation has really soared. So, they were lucky last time, it didn’t happen. Last time, they got away with it. I think perhaps they thought that they might be able to get away with it again. Yeah, they were wrong.

Randall Evans  07:32

Imagine my shock that they might have. So, I guess first off, one of my first questions would be, as you see, is it all doom and gloom for Australia, or are we In a place we have to be? Where do you see us going over the next 12 to 18 months?

Gene Tunny  07:55

Well, I think it’s doom and gloom for Australia. I mean, really, things have been pretty good when you think about it. I mean, we’ve recovered very strongly from the pandemic. And unemployment is now at three and a half percent, right? This is extraordinary. And now there’s talk about sign-on bonuses. I don’t know how legit this report is. But there was a report in Perth now, that McDonalds in WA is paying sign-on bonuses of $1,000 due to the shortage of people; how difficult it is to get people. And the mining sector is paying $10,000 sign-on bonuses just to get people, there’s a shortage. Partly, that’s related to the fact that we haven’t had; I mean, immigration starting to increase now. But we had a year or so when we weren’t letting anyone in the country. So, I guess we’ll start to see that impacting wages. That could end up leading to inflation itself. I mean, one of the things we want to avoid is what they call a wage price spiral, where inflation just keeps feeding on itself. And prices and wages just sort of, go up in this; once leads to so high wages lead to higher prices, higher prices lead to higher wages, because people need to be compensated for that and they push for it in their wage bargaining. So, yeah, that’s the sort of thing that people are concerned about.

Randall Evans  09:35

The unemployment rate, typically, when there’s high inflation will be low. And I think that’s on the Phillips curve, if I’m not mistaken. Can you just explain that for the for the layman viewing?

Gene Tunny  09:52

I probably should finish the previous question, first. I will get on to that, Randall. I just realized you asked me about if it’s gloomy; I don’t want to be too positive, because, there certainly are risks in Australia, I better clarify that. Because of the rising interest rates, and it looks like, people probably; many households possibly overextended themselves, borrowed too much. There was that fear of missing out. And so therefore, as interest rates increase, even though they’re not going to get up to the really crazy levels that they got up to, in the late 80s, when they were up around 17, 18%. I mean, that won’t happen. But I mean, still many households could get into trouble. We’ve seen consumer’s confidence really plummet, and it’s at you would associate with before, like just before a downturn or a recession. So, there are levels that are almost recessionary. I think one of the bank economists, may have been the ANZ, economist, who said that. So, there’s certainly concerns about that.

On this point about unemployment and inflation. Yes, I mean, the traditional view, and this is a view that we learned was not correct. It broke down in the 70s was that, there is this tradeoff between unemployment and inflation; one story you can tell is if you have low unemployment, that means that workers have more bargaining power. Labor is scarce and so, workers are able to negotiate better with their bosses, and that pushes up wages. So, that’s the theory. 

So far, at least in the official data we’ve had up till March, we haven’t really seen a wages breakout in Australia, that’s why there’s was all their talk about declining real wages. And I think that cost Scott Morrison at the last election. That was really a strong attacking point that the then opposition, now government were able to make against the then government that you’ve got inflation running at the time was 5.1%. Now 6.1% yearly, and wages are only grown at 2½%  So, you’ve got a real wage decline of over 2 ½%. So, that was a bit of a worry. 

The traditional story was that, if you had low unemployment, you’d get high inflation. Conversely, you could, if you wanted to reduce inflation, you had to have high unemployment, because that would give workers less bargaining power. Okay, so there’s this tradeoff between unemployment and inflation. And this was based on a study by a New Zealand economist, Bill Phillips, who was actually an engineer, but he was an economist as well. And he might have been at LSE, in London, at the time. But that whole thing sort of, broke down in the 70s because what we noticed is that there wasn’t this stable tradeoff between inflation and unemployment. What there was, was the possibility that you could have both high unemployment and high inflation, and indeed, you could have unemployment increasing and inflation increasing, you could have what’s called stagflation. 

So, there’s no real trade off in the long run between unemployment and inflation. You can have high unemployment and high inflation at the same time, if people come to expect inflation, if there are, what you call inflationary expectations if they increase. So, that’s one of the concerns that people have about the global economy at the moment. The IMF, World Economic Outlook came out overnight. So, it came out Tuesday, in the US, and it’s gloomy; it’s talking about a gloomy outlook, globally. And I think it’s suggesting  we have very high inflation globally. Was it 6 or 7? It was it was a high rate. I’ll have to just check it. But there’s a lot of talk globally about stagflation, where they will end up in stagflation. And then there’s acknowledgement by international agencies that we could end up in a situation with high unemployment and high inflation down the track. I mean, it’s not likely at the moment. I mean, we are having global growth slowdown, because we’ve had this shock from the war in Ukraine, which has increased the oil price and petrol prices. So, one of the reasons you can have a stagflation is if you have this shock to the economy, such as higher oil prices, which push up the costs of production. And that means that it’s less profitable for businesses to produce what they were doing. And so that could lead to reductions in economic activity, and at the same time as costs of production is increasing, that’s passed on to consumers and increases prices. So, that’s one of the great concerns now.

That’s certainly something that, you know, people are concerned about, and you couldn’t rule it out as a possibility. I’d like to be a bit more optimistic than that, though. But so much depends on what happens with this war in Ukraine, and whether we can resolve that; the oil prices are coming down, but they’re still higher than they were a few years ago. So, a lot is going to depend on what happens there. Also the pandemic, which is causing all sorts of problems with the supply chain, it’s very disruptive. Things just don’t work now, as they did before. I mean, you’d see you see all the delays with Qantas and the disruptions that are occurring.

Randall Evans  17:04

I don’t know if you saw the lineup for Qantas, I think two days ago. But it was out the door all the way down the road for Qantas flights in Sydney, like all the way out there. Never seen it like that, it’s insane. I did want to ask you, and perhaps you should explain the theory first because the question from cue, which disappeared off the chat, was whether the RBA will actually increase interest rates enough to slow down inflation. But first of all, what is that theory though? How does that work? And then, what do we expect the right to probably go to?

Gene Tunny  17:46

Okay. Let’s begin with the fact that inflation is a monetary phenomenon. So, this is a famous quote from Milton Friedman. So, inflation is always in everywhere, a monetary phenomenon. In that, it’s associated with an expansion of the supply of money or the stock of money. So, this is currency that we have, but it’s largely; it’s mostly deposits sitting in the bank accounts of households and businesses. Okay, so, there’s the view that although the understanding that we end up with inflation, because the amount of money is expanding, and it’s expanding faster than the capacity of the economy. So, what we have is too much money chasing too few goods. 

So, inflation is a monetary phenomenon. The Central bank, the Reserve Bank is responsible for the money supply. And so therefore, it’s the RBA that has responsibility for dealing with inflation through monetary policy. So, the way they do that is by manipulating the overnight cash rate, this is the standard way of doing it, the official cash rate. This is what they call the cash market, which is a market in which banks and other market participants will borrow money overnight. And banks need money so that they can settle their accounts with each other at the RBA. The RBA controls this overnight interest rate. And what it’s trying to do is it’s trying to influence all the interest rates in the economy that are have a longer term. And so, what happens is as the cash rate increases, though the cost of borrowing money overnight increases, and that has a knock on effect to the cost of borrowing money for 30 days and six months and 12 months, etc. 

What they’re trying to do there is a few things and the RBA talks about different channels by which monetary policy works. Now, let’s think about what those channels are; one of those channels is through the amount of credit that’s created in the economy. One of the reasons we’ve had the big expansion in the money supply in the last couple of years during the pandemic, it’s not just because of the quantitative easing that the bank has engaged in, it’s not just because of their own money printing in their purchases of bonds. It’s also because with the very low interest rates that the bank has said, that’s meant that more people have borrowed money, or the bigger mortgages. So, we’ve had this expansion of Housing Credit. And the new credit, so the net additions the Housing Credit, that is expanding the money supply, I mean, there’s additional money in the economy. 

Okay, so one thing that the bank needs to do through increasing interest rates is reducing the amount of borrowing for housing and new credit creation. So, that’s one thing they’re trying to do. The other way it works is possibly more direct, or more immediate. It’s the fact that I mean, when they increase the cash rate, and that flows through to variable interest rates, mortgage rates, and eventually to fixed rates, when they reset, people have fixed rates for a few years, and then they reset at higher interest rates. What that means is households have less money to spend, they’re paying more to the bank, the bank gets the money, but the bank may not necessarily lend it to someone who’s going to spend it then. So, you have this subtraction from demand that way. So, that’s another channel by which monetary policy works, what the what the bank, what the Reserve Bank, what all Central banks are trying to do is they’re trying to take some of the heat, well, they’re trying to take the heat out of the economy, they want to have the economy go on this Goldilocks path, not too hot, not too cold. So, make sense? 

So, with the interest rate increases, the idea is you can pull some money out of the economy; will have the money supply, expand at a slower rate, or even contract, so that you can get inflation under control. And because you’ve got less, people don’t have as much to spend, that puts less pressure on the economy; it’s not overheating, there’s not as much demand out there. There’s not as much money chasing the few goods that we talked about before; too much money chasing too few goods. So, that’s the general idea. There are multiple channels, we know that if you do increase interest rates, it does eventually slow the economy. The great challenge is knowing how far you have to do that. And it’s not always obvious in advance how much you have to do that. And the problem in the 80s, the late 80s, in the lead up to the recession, is that they discovered that they really did have to increase those interest rates a lot to be able to slow the economy.

Randall Evans  24:18

Yeah. I was going to ask you a question, but then I was reading a comment.

Gene Tunny  24:28

Was the comment okay?

Randall Evans  24:31

Yeah, it was just should Australia be concerned with China’s financial issues that seem to be compounding? And also, these crazy images coming out of China of the tanks rolling in front of the banks not lending money out. What are your thoughts on what’s going on in China, and will it will impact us? I know, that’s kind of off topic to inflation and the housing market, but can we have your initial thoughts?

Gene Tunny  24:59

Clearly, we need to worry about what happens with China given that it has become such an important part of the global economy. And yes, if the Chinese economy did crash; it is slowing. So, we know that it has been slowing down. And the IMF is concerned about the outlook. I mean, there are risks from you know, that the property market, and construction sector, we know about Evergrande. Look, , it could be a could be a real concern for us, because so much of the commodities boom that we experienced, starting around 2003; we had the first phase of that over about 2003 through to 2013. And then, late to late last decade, commodity prices started rising again, then there was a bit of a downturn before; I think coal prices came down even before the pandemic. But since, end of last year, I think this started picking up with the global recovery, the global recovery was stronger than we thought. And then this year, commodity prices have gone absolutely nuts because of what’s happened in Ukraine. So, I guess, China is important. At the moment, it’s hard to forecast what would happen if we did have a downturn in China, because they’re probably, given all the disruptions that have occurred in the world and the fact that they need our; the world needs our coal, and coal prices are crazily high because of that. We probably would be okay in terms of coal. Iron ore would suffer because China has been a major purchaser of that. So, yeah, I mean, it certainly would be a problem. I mean, it’s hard to know what’s going on with China. Just a very difficult place to understand, really?

Randall Evans  27:33

Yeah. I did remember my other question relates to housing as well, you were talking about interest rates in the economy at different times, because a lot of people on mortgages might be on a fixed term mortgage, and that might go for X number of years. So, that flow-in effect might not hit them, and might not actually reflect in the numbers, two years down the track. So, what do we expect for the housing market, even though interest rates just going to keep going up?

Gene Tunny  28:09

Well housing prices are already coming down. I don’t know if you’ve seen those statistics. But Christopher Joy, who’s one of the top financial commentators in Australia, he writes for the Australian Financial Review. I’ve actually done some work for him in the past. He’s incredibly a bright guy. He’s got a company called Coolibar Capital Investment. And they’ve got billions of dollars of money under management. So, they’re really paying attention to this stuff. Look, you just look at the losses in or the reductions in housing prices since the first interest rate increase in May. And this is suggesting that, look, this is already impacting how sales was. I don’t know the exact breakdown; I should have looked it up before I got on. But I mean, there are a lot of households that are on variable rates. We see in the data that house prices are falling. I guess that will be, because as the interest rates increase, people won’t be able to borrow as much as they could have previously. And so that means they don’t have as much or they can’t go to the auction with the same expectations as they did before. Or maybe they’re more cautious about borrowing. They’re more concerned they’re less willing to bid at an auction because they are worried about the future. We know that consumer confidence has dropped. So, I think the interest rate increases have started to have an impact. So, there are obviously enough people worried about it. And it’s also impacting prices because it’s reducing the ability of people to the amounts that they can borrow. So, what was seen as Sydney’s fall and 5%, Melbourne, 3%, Brisbane, around 1%. That since May, since the first rate hike, capital cities overall, that minus 2 ½%. So, look here we prices are going down.

Randall Evans  30:35

I was just saying you’re recovering from COVID and I forgot to thank you for coming on.

Gene Tunny  30:43

Thank you. I usually think I’m okay. I thought I was okay, before I started. And then as I keep talking; should be okay. So, what Chris was writing was, if you look at Sydney, it’s declining at an annual rate of 22%. So, house prices are falling, and it looks like they’re falling at an accelerating rate.

Randall Evans  31:10

That’s a huge number to be dropping at 22%.

Gene Tunny  31:15

That’s if you take the rate it’s dropping out at the moment and annualize it. So, it may not last over the year. Although, it’s possible that it could; house prices soared during that pandemic period, even though many forecasters were expecting they might fall, it actually, surged because there was all this additional borrowing. There’s the fear of missing out. And, the market went nuts. And so, they’ll probably land above where they were at the start of the pandemic, but a lot of the gains will have been lost; it’s looking like that now. Because those interest rate increases are having more of an impact than was expected.

Randall Evans  32:11

Yeah, I couldn’t believe how much housing prices rose during the pandemic, it was just so counter to what I thought was going to happen. But it did, and I guess we’re going to see that correction. Probably not an overcorrection, though maybe, like you said, probably just above pre pandemic levels.

Gene Tunny  32:35

Yeah. And that’s what we’re seeing. It’s it started for sure. The big unknown is just how vulnerable households are to interest rate increases and whether you will start; they will massively cut back on their spending and that could then lead to a downturn. At the moment, the labor markets going ridiculously strongly, we’ve got 3 ½% unemployment, 300,000 vacancies, I think I saw someone report the other day.

Randall Evans  33:11

The unemployment figure that includes people actively looking for work, right. Yes. So, I’m not sure if that’s a great signal to our strength, if there’s a lot of vacancies and a lot of people looking for work, or am I missing something?

Gene Tunny  33:33

But that’s showing that there’s hardly anyone looking for work compared with before the pandemic. And there’s lots of vacancies. So, this is why we would expect wages to start increasing or perhaps we hope that they will. I think they probably are. We’re certainly seeing well, the sign- on bonuses that have been reported, there’s a story about McDonald’s. Possibly, who knows whether that’s true or not, it’s hard to know whether McDonald’s would be paying $1,000 sign-on bonuses, but that was the Perth Now report. I believe it in the mining sector though.

Randall Evans  34:12

Yeah, I could fly to Perth for like 400 bucks, have a job for a week and I’ll pay for my holiday.

Gene Tunny  34:20

You probably have to serve at some time. I’m sure they’ve got something or their agreement to cover that. So, I think the unknown is just how the economy will react as interest rates increase and just how much people will cut back their spending and whether you know, we had a boom and then we’ll have a burst. One of the challenges is going to be; and this is a big issue for the new government. You will recall that the previous government cut the fuel excise in half, so it’s down at about 22 cents a liter now, and what’s going to happen is that that’s going to go up to, it has to be 44 cents because they cut it in half, at the end of September. People will notice that unless petrol prices come down a bit more, they’ll really notice that and that’s going to come at a bad time, because we know interest rates are still going to go up. They’ll go up half a percentage point next week.

Randall Evans  35:38

What are your thoughts on how the Albanese government is going to shake up the economy? I guess some of the things that are promising, like, I guess the government backing certain home loans by 40%, and things like that. Does anything about his election promises stand out to you that will have a big impact?

Gene Tunny  36:06

Not really. They wouldn’t implement policies that I would probably implement at the moment to try to get inflation under control, they wouldn’t do that, they wouldn’t go that far. There was a discussion that we had? Well, I think we have to massively reduce his budget deficit we’ve got now. So, Jim Chalmers, the Treasurer, he’s talking about the need for savings. One of the reasons they’ve got to find savings; they need to get the debt under control – the trillion-dollar debt, but also because the government at the moment is contributing to the inflation problem we’ve got by running these large budget deficits. Still large, what you call a structural budget deficit. so that they’re still running these large structural deficits of 3 to 4% of GDP, if you look at the budget documents. So, what that means is that if you adjust for the state of the economy, you take into account the fact that the economy has been doing very well. At this point in time, the government should be running much smaller deficits or surpluses than they actually are, and they’re not. They’re still running reasonably sizable deficits. So, there’s this structural deficit, and that’s contributing to inflation. They’re adding to the demand in the economy, they’re contributing to the overheating. So, what this federal government has to do is to really cut back on their spending. Or, one alternative, I don’t know whether they’ll do it or not, because they promised that they would follow the stage three tax cuts. I think in stage three. There’s another tax cut coming through, that’s going to knock out one of the marginal tax brackets, if I remember correctly. And so, there are some people on the left who are arguing that the government shouldn’t go through with those, those tax cuts that are programmed in.That’s one possible thing they could do. To address that structural deficit. I’d probably prefer that they cut their spending, because they’ve got some big spending programs that are really getting out of control. So, NDIS, it’s well intentioned; I think a lot of people support the principle of it. But it’s growing, it’s tens of billions of dollars, or 30 billion, or whatever it’s going to overtake Medicare, in terms of the amount of money that’s spent on it over the budget estimates, over the next four years. 

So, that’s something they’ve really got to get under control, but that’s going to be difficult for them. I think it’s a well-intentioned program. The challenge is, where do you limit it? That’s the problem. There’s the desire to keep expanding it and to make it to provide as high level of service as possible and I think yeah, that’s just financially unsustainable at the moment, we need to really fix that up. 

That’s what I think needs to happen. There needs to be the expenditure restraint, or you know, the larger cuts than anything Jim Chalmers would be contemplating. I’m former Treasury, the Treasury would have provided some list of the things that should be cut. And knowing how these things work, Treasury have this huge book full of potential savings that could occur. And the government will probably pick a handful of them, because they look at most of the things Treasury’s proposing and they go, how could you ever contemplate cutting all of these things? Politically naive, so that that’s what will happen, that’ll be the reality. 

Randall Evans  40:38

Well, one of my questions is that, I know the RBA is supposed to be a separate entity, but allowing the RBA to increase interest rates to such a level that’s going to hurt your voter base. It’s almost political suicide. And I know they don’t really have a say, but, there was that kind of situation where I think it was Roosevelt who grabbed one of the members of the Federal Reserve by the scruff of his neck and was like, you’re destroying my presidency. So, is there a situation where the Australian Government can effectively halt the interest rate rise for political reasons? Or do we have enough kind of checks and balances to stop that happening?

Gene Tunny  41:31

Okay, they actually could, there’s, they have the power to do that. I’m trying to remember this is a point that Nick Growing often makes, I’m trying to remember correctly, I think there’s a provision in the Reserve Bank Act that the treasurer can table something in Parliament and tell the RBA what to do, right. So, the Treasurer could direct the RBA. And I don’t know if you remember, back in the 80s, we had a treasurer of Paul Keating, the Labor treasurer at the time, and he gave a famous or probably infamous speech. It was in the lead up to his challenge to Hawk when he said, I am like the Placido Domingo of Australian politics. And I’ve got the Treasury in this pocket, I’ve got the RBA in the other pocket. That was a great speech; it was not a modest man, it was a very coveted man. But yeah, Keating thought he ran the RBA. So, back in the day, the government had a lot more control over the RBA. The problem then is that, you don’t want monetary policy set by the government. Because for that reason, because the government’s going to want to have it more well, looser, they probably want to have the economy more prosperous in time for their reelection. And they’re not thinking longer term about what the inflationary consequences of that are. 

So, what economists have learned from that problem, the problem that if you have a Central bank politically influenced and you can get you can get higher inflation is we need to have Central banks independent of the government. So, we need to give them some independence. And so, what our governments have done is that they’ve struck an agreement with the Reserve Bank, there’s an agreement on the conduct of monetary policy. That was first, I think it was first formalized by Peter Costello, and in the fall, and in the 90s, in 96. And what that did was that codified in an agreement, the inflation targeting goal that we have now. So, the Central bank, the Reserve Bank, is targeting inflation between 2 to 3%, on average, over the economic cycle, so it’s of which means that they don’t have to be zealous or they don’t have to solely target inflation, if they’re going to crash the economy, they could ease up a little bit on interest rate increases, but ultimately, their goal is to get inflation under control, get it 2 to 3%. That’s what they’re accountable for. So, they’re going to be doing everything they can without crashing the economy to get inflation under control. But look, who knows? We hope we’re not in a situation that the Americans or that we were in the late 80s or the Americans were in the sort of early 80s and Britain too when you really had to increase interest rates a lot to get inflation under control because you had double digit inflation. Now we’re not there yet, hopefully we’ve moved in time to prevent that from occurring. But if you get to a situation where you’ve got double digit inflation, then you might have to increase interest rates much more than the economy can bear and then you end up in a crash. 

I’d like to think that we haven’t left it too late. And we’ll need to resort to those measures. But, let’s wait and see. So, I guess the answer is that, the government could direct the RBA. But then, the bad press they would get over that would be incredible. You’d have all the financial journalists around the country, criticizing them over compromising the independence of the RBA, Jim Chalmers wouldn’t be able to finish a press conference.

Randall Evans  45:52

You’re acting like they answer the presses questions. I think Anthony Albanese is the fondest to just brush off questions. But I understand completely what you’re saying. And I wasn’t suggesting; just for my viewers that the government should do that. I was just putting the thought out there. As a former Treasurer, what do you think the current government values most when it comes to the economy? Because everything seems to be a trade-off, right? It’s either we can get inflation under wraps, or we can have high job growth or, we can have housing affordability, so what do you think that they’re actually going to? Because you can’t have all of them or maybe you can? What do you think their focus should be, moving forward?

Gene Tunny  46:49

Well, I think the focus should be on the overall health of the economy. So, it should be about making sure that we’ve got the right tax policy settings or we’re spending on the right things, we’re not wasting money. We’re not contributing to the inflationary situation. We’re not enacting silly policies. 

One thing I have been encouraged by is the fact that they’re not doing really silly things, or they’ve knocked back this idea from the greens that we should have a moratorium on coal and gas projects, right? At a time when the coal price has been; well, that’s what Adam Danza saw, right. And at a time when the global coal prices being up at 500, or 400 US a ton for thermal coal, that’s extraordinary. 500 a ton for metallurgical coal, for coking coal. The idea that you’d actually wouldn’t develop any new coal mines when the world is crying out for it, because there’s no gas. We’ve got a global conflict and Europe’s worried about their gas supplies and whether they’ll have enough gas in the winter. Yeah, it’s a bit crazy. Full credit to the prime minister for knocking that back. 

I think there’ll be broadly sensible, but what you’ll see with a labor government is that they’ll be more aligned to what they perceive as the workers. Okay, and they won’t care as much about the costs they impose on business. Okay. And so, you’ve seen that recently. The problem we’ve got is that there are a lot of well-intentioned policies and so it’s hard to argue against a lot of these things, but they are costly to business. This government will probably do more things like this, we saw that there was that recent decision about from about, what is it? Paid leave for if you suffered domestic violence, or family violence? I can see what why that would be a good thing to have, at the same time, there is already paid leave available, you get four weeks if you’re a full-time employee. And this is an additional cost to employers. And you’d have to be a pretty nasty employer if you didn’t look after an employee of yours who was in that situation. I wonder why this sort of move is necessary from the government. Maybe they think it’s not going to have much of a cost because your employers would probably do the right thing, to begin with. 

I guess it’s a signal that this government is probably going to be more focused on the workers, it’s going to be less concerned about the impacts of its policies on employers. One thing that worried a lot of people, a lot of economists and financial commentators, John Keogh wrote a great column on this in the Finn review was when Anthony Albanese in the lead up to the election, talked about how the Fair Work Commission should just agree to wages going up at the rate of inflation. And there was a concern that, well okay, that’s a good thing that just leads to that wage price spiral where, if prices go up, oh, let’s increase wages by the same amount. And then that increases the cost to employers, they pass it on in prices. And then oh, let’s have wages go up again, prices go up again. And they just sort of gradually creep up a little, not gradually, they can increase, they can go up very quickly. And organizations such as the Bank for International Settlements and various other economic agencies around the world have warned about this wage price spiral, and one of the quickest ways to get there is to have automatic indexation of wages to inflation. 

So, there were people concerned about what the PM said there back in the election campaign. Ultimately, it was up to the Fair Work Commission, the Fair Work Commission recommended an increase that wasn’t complete. It was just a bit; I think it was a bit lower than the inflation rate. For non-minimum wage workers is about 4.6% or something, if I remember correctly.

So, that would be my take on it. I think they won’t do anything too crazy. They’ve resisted that crazy proposal from the greens, so, good on them for that. Sorry, go ahead.

Randall Evans  52:15

I follow a few greeny pages on Facebook just to see what they’re yapping on about. And I did see a lot of angry people today about that very thing you’re talking about. Saying, you can’t be for sustainability, but then allow coal mines to open. 

Gene Tunny  52:42

Yeah, well, just on that. it’s a real threat to labor. So, it was the coalition that got smashed on the climate change issue, last election, they ended up losing some of the blue-ribbon seats. But labor’s similarly threatened, right. Labor got what was it? 31% primary vote. So, labor was lucky to, it’s just the way that it played out in terms of the seats that were that were lost. And it managed to be able to form government, even though it ended up getting fewer votes than the coalition. But yeah, it’s in trouble from the greens as well.

All of these inner city seats are turning green. So, I’d be interested to see what happens in the future, whether Labor has to; how it survives, it’s under threat, as well as the coalition. So, I think that’s one thing that’s going to be fascinating to watch in the next few years.

Just on housing, the government’s policy isn’t going to do much for affordability because it was only going to apply to 10,000 people or so. It was it was limited in the amount of people that would apply to and it has to apply to hundreds of thousands of people to really make any sort of impact. The reality is there’s not much the federal government can do because the states are more relevant when it comes to housing because well, one, they’ve got responsibility for social housing. Now, my view is they’re just never going to be able to build enough of that. One of the problems with social housing is that they’re aiming to offer it at below market rent. The challenge there is you’re going to have a huge demand for your social housing because you’re offering something that’s cheaper than what the market is able to provide right? So, you’re never going to win there. You’re always going to be attracting more people, than you’re going to be able to build houses for. 

So, that’s probably not the answer. I think the answer is having a more liberal approach to development, allowing more development, particularly in the inner cities where we have heritage restrictions. There are all sorts of zoning rules around our capital cities. And even across the whole metro area here in Brisbane, for example, where I am, there’s a ban on townhouses in low density neighborhoods. And that’s just really silly. Because, that’s constraining the supply of housing. And there was research by Peter Tulip, at the Reserve Bank when he was there at the Reserve Bank, that showed that these zoning restrictions, they’re massively increasing the cost of housing, like 50, or 60%, something like that. So, that’s up to councils, but state governments, they possibly could do something like that with some of their planning legislation. But the commonwealth really can’t do much about housing. So, even though it’s an issue, it’s a big issue. I’m not sure they really can do much about that. 

The big issues the Commonwealth is facing; there’s the general economic management issue, what its budget deficit is doing for the economy, what its budget deficit means for the accumulation of debt and risk to the credit rating in the future and our ability to service that debt. And so therefore, that’s why Jim Chalmers is having to trim the budget where he can. He’s going to find it difficult though, just because that reason we discussed. Labor sees itself as the party of the workers, it also sees itself as more socially caring, more compassionate than the conservative side of politics. And so, it’s going to be very hard for them to make the substantial budget savings that are necessary.

Randall Evans  57:15

Well, we’ll touch base with you again, in a couple of months’ time and see where we’re at as a nation. And if people want to watch, we’ve had Gene on before, so you can just search for it in the little YouTube bar and watch that episode too. But apart from that, make sure you check out his website. It’s on the screen right now. If you want to have some more in-depth conversations.

Bye Gene. Thanks for your time. Thanks for being here.

Gene Tunny  57:42

Pleasure. Thanks. Thanks, Randall and thanks to everyone listening. Yeah, glad to be to be connecting with you. So, it’s been great. Thank you. 

Okay, that’s the end of this episode of Economics Explored. I hope you enjoyed it. If so, please tell your family and friends and leave a comment or give us a rating on your podcast app. If you have any comments, questions, suggestions, you can feel free to send them to contact@economicsexplored.com And we’ll aim to address them in a future episode. Thanks for listening. Until next week, goodbye.

Credits

Thanks to Randall Evans for letting us borrow the audio from his latest Deactivist show for this episode. Also, thanks to the show’s sponsor, Gene’s consultancy business www.adepteconomics.com.auPlease consider signing up to receive our email updates and to access our e-book Top Ten Insights from Economics at www.economicsexplored.com. Also, please get in touch with any questions, comments and suggestions by emailing us at contact@economicsexplored.com or sending a voice message via https://www.speakpipe.com/economicsexplored. Economics Explored is available via Apple PodcastsGoogle Podcast, and other podcasting platforms.

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