Tag: money

The Greedflation hypothesis – EP186

Post author By Alec Krishna
Post date May 6, 2023
No Comments on 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

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.

Female speaker 20:34

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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

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.

Tags covid-19, fed, greed, greedflation, inflation, monetary policy, money, qe, rba, stimulus

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 Podcasts, Apple Podcasts, Spotify, 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

Gene Tunny 00:06

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.

Female speaker 16:56

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

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Tags fiat money, gold, inflation, money

Podcast episode

Odd way to fix housing crisis proposed by Aus. Gov’t: invest in stocks first w/ Dr Cameron Murray, Sydney Uni.

Post author By Alec Krishna
Post date March 31, 2023
No Comments on Odd way to fix housing crisis proposed by Aus. Gov’t: invest in stocks first w/ Dr Cameron Murray, Sydney Uni.

The Australian Government has been having trouble getting its proposed Housing Australia Future Fund (HAFF) passed by the Senate. The policy looks odd. With some justification, the Australian Greens have commented: “In its current form the Housing Australia Future Fund (HAFF) legislation will see the housing crisis get worse. We can’t fix the housing crisis by gambling money on the stock market and not guaranteeing a single cent will be spent on housing.” In their dissenting report on the bill, the Greens’ cited the views of this episode’s guest, Dr Cameron Murray. Cameron is a Post-Doctoral Researcher at the Henry Halloran Trust at the University of Sydney.

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 Podcasts, Apple Podcasts, Spotify, and Stitcher.

About Dr Cameron Murray

Dr Cameron Murray is Post-Doctoral Researcher at Henry Halloran Trust, The University of Sydney. He is an economist specialising in property and urban development, environmental economics, rent-seeking and corruption.

Book: Rigged: How networks of powerful mates rip off everyday Australians

Website: https://fresheconomicthinking.substack.com/

Twitter: @drcameronmurray

What’s covered in this bonus episode

Cameron’s submission to the Senate Inquiry into the Housing Australia Future Fund Bill [2:39]
What’s going on with the Housing Australia Future Fund [5:02]
The only reason you can make a premium is if you take risk [8:57]
Why you need to separate the funding and the spending [10:36]
Why doesn’t the Future Fund just directly invest in new houses? [14:21]
How governments are increasingly doing financially tricky things that don’t make sense [19:23]
Cameron’s thoughts on the impact of the bill on the level of investment in housing [23:14]
What’s going on behind the scenes at Parliament House [26:18]

Links relevant to the conversation

Cameron’s submission to the inquiry into the Housing Australia Future Fund:

https://fresheconomicthinking.substack.com/p/australias-housing-future-fund-my

Direct link to Senate Committee inquiry report:

https://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/HousingPackageofBills/Report

HAFF inquiry home page:

https://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/HousingPackageofBills

Transcript: Odd way to fix housing crisis proposed by Aus. Gov’t: invest in stocks first w/ Dr Cameron Murray, Sydney Uni.

Gene Tunny 00:06

Cameron Murray 02:39

Thanks for having me again, Gene.

Gene Tunny 02:40

Oh, it’s a pleasure, Cameron, I read with much interest your latest post on fresh economic thinking. And it’s about your submission to the Senate inquiry into the housing Australia Future Fund Bill 2023 and other bills. Could you tell us a bit about what that involves? So you’ve written a submission to this inquiry? And you’ve also presented to the inquiry you gave testimony? Did you?

Cameron Murray 03:07

Yeah, that’s right. So this bill was passed their house, the lower house, and now the Senate is reviewing it. And what they’ve done is held this inquiry asked for public submissions, and had people who made submissions come in for a day of expert testimony so that their senators can ask specific people, you know, technical questions, what do you think about this? What about this design element? And so I was part of that on on Wednesday, this week. And yeah, so the bill itself is called the housing Australia future funding bill. And the basic idea is the government has decided to address Australia’s current housing problems. We’ve seen rents rise, we’ve seen rising homelessness, we’ve seen longer queues in public housing waiting lists, they’ve decided the best thing for them to do is take $10 billion from the Treasury and give it to the Future Fund, which is a sort of publicly managed investment fund, and cross their fingers and hope that that fund makes a return that’s higher than their opportunity cost, you know, the cost of the government’s dead and use that margin on the risk to fund something in the future, some unspecified, granting in relation to what in the text of the bill is called supporting housing need. So that’s what it was all about. And, and yeah, I gave some testimony on Wednesday.

Gene Tunny 04:35

So the federal government’s claiming that this is going to help them build I think 30,000 social housing dwellings over the next five years or so. So that’s their that’s the plan. But I think what I like about your submission is it essentially talks about how this is a rather roundabout way of going about it, which doesn’t actually guarantee you’re going to deliver it to you As in,

Cameron Murray 05:00

this is the mad thing. And this is. So let me start by saying, to be clear what they’re doing to build houses is taking $10 billion and buying all sorts of assets in the future funds that are not houses. Right? So that’s what they’re trying to do. And it’s really funny because there’s an actually an episode of Utopia, you know, the comedy show about the bureaucracy in Australia, where Rob switches character, who’s the sane one, amongst the insanity is explaining to a political staffer who says to him, What about an infrastructure? Future Fund? Yeah, don’t you get it, it’s about the future, he says. But spending the money on infrastructure today solves the future, we don’t need a fund. We don’t need a new office, we don’t need these fund managers. And you know, when we watch utopia, we all laugh and think we’re the same guy in the room. But what happened at the Senate inquiry is that I was the only guy and everybody else who laughed at Utopia when they watched it was the crazy guy who thinks that spending money on not houses is the best way to spend money on houses. And so there was this really perverse political slogan that kept creeping in, which was, this is going to secure funding for the future and insulated from future political decisions. And I just sat there going, I don’t, I’ve read this bill, because this funding is riskier, because you’re investing in a risky asset and the current Future Fund loss $2.4 billion last year, and spent half a billion dollars on fund managers to achieve that outcome. So we almost lost $3 billion last year. So it’s possible that we put 10 billion in this fund and have 9 billion next year. And then that’s the way we’re securing the future funding. The legislation is also written such that the future Minister has the discretion of how much from the fund to spend, and on what projects. And it also introduces a cap of 500 million per year that a future minister can withdraw from the fund. So what you’re actually doing is providing a great excuse for a future minister to spend less than 500 million. And in fact, zero if the fund is losing money. So there’s this weird disconnect between the political slogan of securing long term funding insulating it from politics and the reality, which is adding risk to a fund compared to just having 10 billion in the bank or at the Treasury where it is, and not insulating at all, and just still relying on future ministers discretion with no commitments. So that 30,000 dwellings you said, is not enough. There’s no, it’s not written in their rules. It’s written in the guideline as a hypothetical of how much, you know, if all went according to plan, and we would expect this, and I’m like, but there’s like, like many housing strategies and plans that the federal government and state governments have had in the past, there is nothing holding them to account on those promises. So yeah, it’s, it’s a really, really strange one. And I felt like there are about 20 or 30 witnesses or experts at the hearing. Now, only two or three of us actually calling this out the majority of the industry. And the researchers had really, I don’t know, bought the line that this is something that it’s not.

Gene Tunny 08:16

Yeah. So what’s going on, it appears to me is they’re essentially that borrowing, they’re going to be borrowing this money, or it’s going to increase the borrowing requirement by $10 billion, because we’re currently we have been running budget deficits. So it’s going to increase that, that borrowing requirement, we’re going to put that into this the future funds, so we’re essentially borrowing money to then invest in the share market or Enron’s Yeah, well,

Cameron Murray 08:45

if we’ve invested in bonds, we’re borrowing money to buy the bond back off ourselves. If this fund, if this fund is like eight or seven or 8%, government, Australian government treasury, that’s just pure accounting. Yeah, you know, trickery, you know, and that shows it but the whole thing is accounting trickery, right? Because, you know, you’re just recycling the money via the current shareholders of BHP into Telstra and Commonwealth Bank, right, by buying the shares off them and then later selling it back to them. And the only reason you can make a premium with this fund over the over not borrowing it, right, because you still gotta pay interest on the Treasury borrowing. The only reason you can make a premium is if you take risk. Yeah, if you’re taking risk, then it’s not a secure, long term funding thing. You’re just adding risk unnecessarily, and delaying spending money on building houses. And, you know, it took a little bit of explaining to get that through at the hearing. But ultimately, I had, for example, John Corrigan, you know, back me up on that argument, and I think Brendan Coates from the Grattan Institute who is a big supporter, the policy sort of had to concede that Yeah, at the end of the day, you’re adding risk in the hope of increasing the funding. But risk is real, right? We just can’t count on winning In the next few years,

Gene Tunny 10:02

right, so Brennan was buying the government’s line that this is about getting a secure funding source. He, I mean, I know you can’t speak for Brendan, I’m just wondering where he was coming from?

Cameron Murray 10:13

Well, actually, the idea is actually from one of our Grattan Institute report, and they proposed a $20 billion social housing fund. And, and, and, you know, I’m not averse to the government sort of diversifying the capital side, right on its balance sheet. Yeah. And and owning some high risk assets? I don’t, I’m not averse to that, in principle, right. But you’ve got to separate the funding and the spending idea. So the way I try to tell people, if the government’s saying we don’t have the money for it, it means we don’t want to do it. Because look at the submarines look at every other big look at the Olympics, right, no one’s has gotten the Olympic Future Fund, no one’s got a submarine future fun. We spend on what we want. And if someone’s saying where’s the budget, or where’s the funding, you sort of missing the idea, but but even more fundamentally, you know, if you go and raise money in the share market, from new investors for your business, each investor doesn’t say, I’ll give you this money, but you can only spend this money on, you know, cleaning your office and and the other shareholder says, no, no, but I only want you to earmark my money for doing this, right. What we do is we pool that money together and spend it the best way we can on the operations we need to do and it’s the same for the government, you need to separate Well, we’re gonna raise money, the best way we know how, whether that’s different types of taxes or borrowing, and we’re going to spend money the best way we know how and tying two things together is bad. Operationally, it’s just like, it’s bad for my business to promise one shareholder that their money goes to one type of spending, and another shareholder that I’ll only spend yours on new trucks. You know, it doesn’t really make sense it and it’s very hard to break through this kind of weird, I don’t know, budget illusion that we’ve all got that, you know, we must do this. For this, we must raise money in this way for this spending.

Gene Tunny 12:06

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

Female speaker 12:12

Gene Tunny 12:41

Now back to the show. I liked how you wrote about this off balance sheet trick or the off balance sheet tricks, the basic idea of the half. So that’s the housing Australia Future Fund is to create an off balance sheet accounting trick whereby the debt associated with the fund and the assets in the fund are considered as a bundle and hence not counted in measures of public debt. So I mean, I haven’t seen exactly how they’ll what the accounting treatment of this will be in the budget, it seems to me what they’re doing is they’re setting this up as a, it’s an SPV, or some sort of public Financial Corporation so they can get it outside of the traditional balance sheet measures. They put in the budget, which is for they have it for general government, but then they also have public non financial corporations, but they don’t have public Financial Corporation. So I’m wondering if that’s what they’re going to categorise it as

Cameron Murray 13:34

I think, yeah, that’s part of the intention. And we actually see those types of budget tricks a lot, I think, New South Wales rail, you know, they tried to shift things off balance sheet, but at the end of the day, you know, we as economists should be looking through that, right. Oh, yeah. And saying, Look, you know, debts debt, but, you know, these are all assets, we can bundle them all together, you know, doesn’t matter where you’ve accounted for them. And the way we’re going to assess whether that debt was, you know, justified or efficient or productive is what, you know, what the investments made in general are, so whether it was on budget or off, you know, it should be the same, right, and you’re borrowing money to buy these assets. Doesn’t matter how you account for it. And that’s the that’s what sort of leads me to my other point is that houses are assets. Yeah. Australia’s property market is the hottest market every property every investor wants to own some. Yeah. So why doesn’t the Future Fund build new houses to expand this pool of property assets in the process, that equity can be on its balance sheet, but instead of, you know, bumping up the prices of BHP shares that you’re going to buy, you actually expand the housing stock in the process, and you can still have your off balance sheet tricks. I actually looked historically and since the Future Fund started in 2006, that’s the current investment fund Australia hands. They’ve made 7.8% average return annually, the average Australian dwelling increased in value by 7.7% per year since 2006. So just the capital value increase of owning a representative sample of Australian property would have got you the same returns as the Future Fund. So it’s not clear to me why we’re recycling this money via other assets, before we build housing assets, we can look at the balance sheets of state, public housing managers. Yeah. And when they value their land and their property portfolios every year, they got to bump it up, you know, 5 million billion. So here 10 billion here, because all this portfolio of properties they own, you know, it’s a valuable asset that rises in value. So So I’ve proposed quietly to a lot of people involved that if you want to have your financial trick and your Future Fund, get the border of the future find to only spend the money, building new dwellings, and then put the equity that you have, yeah, into the fund, you can keep your financial track, but at least you’re you know, keeping the housing construction going. And you’re immediately accumulating a pool of houses that you can allocate to the people who need it at a cheap price.

Gene Tunny 16:13

Yeah. And so is this been driven by the State of the Commonwealth budget, they, they want to make sure that they think they’re gonna get some earnings from this housing Australia Future Fund that can then offset the spending that they’ll have to make on public housing. So they want to get that they’re hoping they can get that. Because if they just go ahead and start building public housing, then they don’t have that revenue to offset that. Is that what they’re thinking?

Cameron Murray 16:39

I think you’re right, I think that’s what the thinking is. But at the end of the day, you know, having those houses supplied to people at a cheap price offsets are the spending on those people already. So the benefit is there, either in the form of the rental, or in the form of the income from the other assets. So, if I was to put on my cynical, political economist hat, I would say the reason this programme has gained so much traction and is probably going to be the law few months, is because it doesn’t change the housing market, it’s going to pass because it doesn’t achieve anything. And that’s what is truly desired. By, you know, the political parties involved is that they want to look like they’re doing something without actually doing it. I’ve had conversations with politicians who’ve told me what’s wrong with the housing market? You know, prices went up, because we dropped the interest rate, that’s good. And rents went up, because incomes went up. That’s good. There’s no market failure here. government shouldn’t do anything. So if that’s what they say to me, how is it then that they passed this bill that’s meant to do something, the only coherent story there is that this bill is to look like you’re doing something, but not doing something because you genuinely think the property market is doing what it’s doing? Well? Yeah, that’s my super cynical. Political Economy hat.

Gene Tunny 18:08

Yeah, you may well be right. I mean, it’s the Sir Humphrey Appleby type of approach where people actually don’t care about whether a problem solved, they just want it look as if something’s being done.

Cameron Murray 18:21

I’ve had a lot of people message me since my testimony to tell me their experiences of this. And I don’t know what I’m going to call this pattern, you know, does it have a name? I’ve tried to call it something like pre compromising. Where you take a good idea, you turn it into a bad idea, but it’s still got the same words in the bill. While so it looks like you’re still doing something. Yeah, you push that. And you’ve totally compromised the content, or the effectiveness, just so you can keep the name because the name is what people will talk about. And it looks like you’re doing something. It’s a what’s it called housing Australia Future Fund? Yeah. Sounds like something important is being done. Right. Yeah. And the more that gets in press headlines, the more we give credibility to the current government, who is trying to, of course tread this line of keeping prices up for people who own property, and pretending they want to keep prices down and rents down to people who don’t own property. And that’s a real interesting political tightrope. That happens a lot in this country.

Gene Tunny 19:23

Yeah, I really liked your submission, Cameron, because I thought it. I mean, it highlights our governments are increasingly doing these sorts of things. And they don’t really make a lot of sense when you think about it, because I remember when I was in Treasury, we had to set up these buildings Australia fund education investment fund, that’s I forget the name of the other one. And it didn’t really make a lot of sense because you’re just taking money and we ended up I think we ended up having to borrow money to put into them, because of the time you know, but the original idea was that there was Yeah, and they were gonna stick them in these funds, but then by the time On had to transfer the money, it was the financial crisis. So the timing wasn’t very good. And then they we see they constrain your ability to get cash. I mean, because you’re saying, Okay, we’re going to lock up all of this money in these funds, even though we don’t need it at the moment. So it can it can constrain your budget flexibility. So I don’t like them for that reason. And the other point that you’re making is your your, if you end up having to borrow to invest in it, well, you’re, you’re borrowing money just invested in the share market. And it’s not necessarily achieving the public policy objectives that you that you want to achieve. So yeah,

Cameron Murray 20:43

that’s exactly the way to put it, you’re gonna borrow 10 million to build houses for people and give it to them below market? Why do you need to recycle that money through the share market? Why don’t you put it through the pokies, there’s also a chance of making more money there, you know, it’s high risk. Why don’t you just take your half million, that half billion that you want to spend each year and spend it for the next 20 years, and just start a construction programme? Like, the really bizarre thing? To me, I read this bill. And in Part Seven H or whatever it is, it says, The Treasury will credit the housing Future Fund with $10 billion. It just doesn’t. And I just think to myself, How does where’s this 10 billion coming from? Aren’t we having this fund to get the money that we don’t have a now you’re saying we have 10 billion? If we have 10 billion? We don’t need the fund? Right? Yeah. And, you know, no one else seems to pick up on that, oh, we just credit with 10 billion. I’m like, why don’t you just build houses, credit them? Credit, the builders is 10 billion. Yeah.

Gene Tunny 21:45

So this is where they’re hoping that by doing it, you know, essentially gambling or well investing with borrowed money, they can get enough of a return on that, to then help fund this additional expenditure. And that’s going to lessen the budgetary impact. So that’s essentially what’s going on. And I just think it’s interesting, because it’s an interesting example of one of these. These things, these clever financial vehicles, the Polly’s and the advisors, I think, in particular, they love it, they think they’re geniuses, but it’s not really solving the problem.

Cameron Murray 22:20

Yeah. And let me just talk you through what I think is the best case scenario. They put money in this fund, sometime in the middle of this year, after we’ve had a big asset market correction, and they they’re near the bottom. In the next 12 months, there’s a real big boom. And in 12 months time, the ministers say, Oh, look, we’ve been making all this money. I’m gonna make this happen. Yeah, that’s the best case. The worst case is, you know, we’ve just seen a bank collapse in the United States, and you know, Swiss government bailout the Credit Suisse bank, the worst case scenario is they put $10 billion into the Future Fund, start accumulating assets in the next six months. And then come September, October, you know, popular time for financial market crashes, the fund loses 10% of its value. And next year, the minister says, oh, we can’t spend anything on public housing, because we just lost a billion dollars on the share market. Yeah, that’s, I don’t know which one’s more probable, but both are potential outcomes. And if the second one happens, you know, I hope the public and the press hold the government to account and say, Hey, this is what you wanted. You were told this is the risk you’re taking. And you still did it anyway. I really hope that opens people’s eyes. If that happens.

Gene Tunny 23:34

Yeah, that’s a good. That’s a good point. So you’re saying that the the level of investment in public housing could end up being dependent upon the returns on this fund

Cameron Murray 23:46

highly likely, implicitly, tells the minister only spend what you make, you know, for funds doing well spend money, if it’s not don’t spend money, the way it sort of described, and it’s got this cap in it as well. I would say there’s a sort of, you know, a built in excuse, yeah. Whereas you kind of want the opposite incentive. You want more public spending on housing during a downturn in the markets, right? You want to smooth out construction cycles. Yeah. Whereas I sort of feel this builds in the opposite political incentive. But the you know, the next 12 months are going to be very interesting if this bill is finally passed. And you know, the markets are very volatile at the moment. And the Future Fund, of course, lost a couple of percent last year, you went down the existing funds. So if that happens again, yeah. Who knows? Yeah.

Gene Tunny 24:40

Just before we wrap up, Cameron, can I ask you what was it like presenting to the committee? I mean, did anyone get it? Did any bells rang? Or what’s the expression? I mean, I imagined some of the Imagine that. There must have been, some of them must be sceptical, or I hope some of the people on this committee worse sceptical. But yeah. What was your impression?

Cameron Murray 25:05

My impression is that this process is a little bit of a charade. So that each political party in the crossbenches can get their sort of own experts on to provide excuses for the political bargain that they want out of this in the Senate. So I think most of the action is happening behind the scenes. And this is just each, each person in the Senate had a chance to call forth their own experts. And so that was done. My impression is that your committee is loaded based on the political party of the day, right. You know, I was cut off from my introduction, when I was saying, you get a few minutes to make introductory remarks. And I was explaining how I can’t believe you’re trying to describe this as a low risk secure, politically insulated funding stream when it seems the exact opposite. Yeah. And they’re like, oh, you know, we only allowed two minutes for these opening remarks get. And, of course, if you if you go and check the footage, everyone bloody rambled for five minutes. So you can sort of see that and, and, you know, I’ve spoken to a variety of Senators offices, as well. And they’ve obviously taken on board what I’ve said, but you don’t see minds being changed. Live during this process. That’s not where it happens. It’s all happening with phone calls and meetings and negotiations amongst each party and independents are

Gene Tunny 26:36

all behind the scenes. Okay. Because I was just wondering, I imagine that the, the greens would probably be pushing the for the government just to build public housing. Right. Yeah. Well, that must be in there. That’s right. So

Cameron Murray 26:50

I think it’s Nick McKim is the green senator from Tassie. And he was, you know, onboard when I started my opening remarks by saying, you realise there’s a scene in the comedy show utopia, right? We started today. That is exactly what you’re doing. But you all laughed with the other side of the joke. And now you’re you are the joke. And so he got a few chuckles But you know, the other the other people didn’t really like it. So yeah, the greens are definitely not keen on these off balance sheet financial tricks at all, which is really puzzling, right? It’s really puzzling to me. I don’t know what the Liberals should be sort of have a similar mind being a bit more honest financially and say, let’s focus on what’s a waste of money and what’s not. Let’s not focus on where you record it in the accounts. So I don’t I don’t know what their views are. But my impression is the Labour Party, you know, they’ve almost got this superannuation brain, or this Future Fund brain like this sort of, yeah, it’s inhibited their ability to go, you know, this is not magic. It’s not a Magic Pudding. It’s just buying different assets.

Gene Tunny 27:57

Yeah, yeah, exactly. So I’ll put a link to your submission in the show notes. I think it’s really good. And you make a good point about how, yeah, I didn’t realise the fees paid by the Future Fund for funds management was so high, but I guess it makes sense, given the amount of funds under

Cameron Murray 28:13

point 2% of the funds under management. That is still half a billion dollars a year, which is of course, again, the maximum that this Future Fund for housing can actually spend on housing subsidies or housing construction. Yeah. So the maximum they can spend is roughly what the average management fee is for the existing Future Fund. Yeah, just to get your orders of magnitude straight of what’s involved.

Gene Tunny 28:40

Okay. And, yes, it has been passed by the lower house, it’s going to it’s being considered by the Senate at the moment, and it’ll probably be passed, I imagine, based on what you were saying,

Cameron Murray 28:51

my understanding is the cross bench has a lot of power in the Senate here to get things changed. My suspicion is that if there are key crossbenchers that take my argument seriously and a couple of other of the submitters as well, they may, for example, put in the legislation a minimum amount of spending out of the fund instead of a maximum to sort of guarantee it. And they may, you know, and that might just be a way of diverting instead of buying bhp shares and Commonwealth Bank, you know, build houses with it and own the equity of those houses with your public housing developer or however you account for that. So that that that may be a realistic change. I don’t think it’s gonna get thrown out or go back to the drawing board.

Gene Tunny 29:38

Right. Okay. Well, again, well done, Cameron. Yeah, excellent submission, lots of very sound, economics and public finance in there. Any final words before we wrap up?

Cameron Murray 29:49

No, I just want to, you know, cross my fingers that the best case scenario turns out if this fun gets passed.

Gene Tunny 29:55

Very good. Okay. Cameron Murray, thanks so much for appearing on the show.

Cameron Murray 29:59

Thanks for having me, Gene.

Gene Tunny 30:02

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.

Cameron Murray 30:49

Thank you for listening. We hope you enjoyed the episode. For more content like this or to begin your own podcasting journey. Head on over to obsidian-productions.com

Credits

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

Tags assets, australia, balance sheet, bill, borrowing, buying, economics, fund, future, government, houses, housing, market, money, people, public housing, spend, submission, treasury

Podcast episode

SVB & Credit Suisse | Bank runs & Moral hazard – Bonus episode

Post author By Alec Krishna
Post date March 23, 2023
No Comments on SVB & Credit Suisse | Bank runs & Moral hazard – Bonus episode

Silicon Valley Bank (SVB) has collapsed and now Credit Suisse is in trouble. Should we be worried about Global Financial Crisis 2.0? Have the policy responses been sensible? Economics Explored host Gene Tunny provides his initial thoughts.

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 Podcasts, Apple Podcasts, Spotify, and Stitcher.

Links relevant to the conversation

Chris Joye’s article on SVB:

https://www.livewiremarkets.com/wires/why-silicon-valley-bank-died-updated-2

NPR Indicator episode:

https://www.npr.org/2023/03/13/1163157993/silicon-valley-banks-three-fatal-flaws

Sebastian Merkel’s paper on narrow banking:

https://scholar.princeton.edu/sites/default/files/merkel/files/narrow_banking.pdf

World Bank paper on Bank Runs and Moral Hazard:

https://documents1.worldbank.org/curated/en/548031537377082747/pdf/WPS8589.pdf

Bloomberg article on policy response:

https://www.bloomberg.com/news/articles/2023-03-12/us-moves-to-help-depositors-offer-bank-backstop-in-wake-of-svb?leadSource=uverify%20wall

Breaking Points video SECRET Fed BAILOUT Pumps BILLIONS Into Banks

https://youtu.be/Lj5BE951aP8

Transcript: SVB & Credit Suisse | Bank runs & Moral hazard – Bonus episode

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, welcome to this bonus episode of economics explored. The failure of Silicon Valley Bank happened after I recorded my last episode on central banks and banking and I didn’t get any time to add any reflections on that collapse in In my last episode. So I thought I’d better do that now. This bonus episode is even more timely given. It now appears Credit Suisse is in trouble. Because things are happening so fast, I’d better clarify that I’m recording this Thursday morning, Australian time on the 16th of March 2023. While I’m not panicking at this point, I do acknowledge that there’s an elevated level of risk in the US and global financial systems. So I’m not going to make any definitive predictions, I think it’s just too hard to tell what’s going to happen. Instead, I want to talk about the underlying economic issue an issue which has been challenging us for centuries. This is the mismatch in maturities between the assets and the liabilities of banks. So colloquially banks, they borrow short, they borrow money from depositors, for example, and those depositors may want to withdraw their money at short notice. And banks lend long, so borrow short lend long, they lend money to homebuyers, for example, to buy houses, and those home buyers repay the bank over many years. If you’ve seen the classic film from the 40s, It’s a Wonderful Life. You’ll recall how Jimmy Stewart’s character, George Bailey, he explains to his worried bank customers how their money was invested in the houses of their neighbours, it’s there, he just can’t get it right away. Banks don’t have the cash on hand to pay out all of their depositors, if all the depositors come in to withdraw their money at any one time. They’ve got some cash on hand, but not enough. This is the concept of fractional reserve banking that Darren Nelson and I discussed last episode. In normal times, there’s nothing wrong with this because most people are happy to leave their money in the bank. And deposits and withdrawals are predictable. It’s something that the bank can manage, they can manage the level of cash, they know what they need to be able to, to satisfy the customers at any one time. But when the financial health of the bank comes into question, a panic or a bank run can happen. And there can be this contagion, there can be a panic across the economy. And it’s not just that bank that there’s a run on there could be a run on all banks as people worry about the stability of the whole system. That’s why central banks and regulators are so concerned when banks get into trouble and and we’ve seen just how quickly they’ve responded to what happened with SPV. And now what’s happening with Credit Suisse. SBB got into trouble because there was concerned about the state of its balance sheet, it had a heavy investment in long term treasury bonds. And if these were not held to maturity, and they were sold in the current market, that would result in the bank losing money. And that’s because of what’s happened with interest rates. So because the interest rate and the price of a bond vary inversely as interest rates have increased, bond prices have fallen. The story is that words spread fast in the venture capitalist community in California that they should encourage all the startups they invested in to pull their money out of sVv. Fast. So once they saw the state of the balance sheet word got around quickly, there was a classic bank run, and SVB collapsed. Incidentally, the concentration of SBBs business in Silicon Valley was a contributing factor to its vulnerability. It’s a well connected community. So the panic spread fast. I’ll link to a great article by Chris joy of Coolibar capital, which explains in detail what happened and also to an excellent episode of NPR as the indicator podcast, which also explains the problems faced by SVB. In his article, I think it’s on Livewire markets, Chris joy, he’s shocked that SVB didn’t hedge against the interest rate risk faced on its holdings of long term bonds. He suggests that this would have been standard practice for banks, meaning SBBs financial risk management was was suspect. According to Chris SVB, had exploited a regulatory change that was made during the Trump administration. It’s a change that SBB had lobbied for several years ago. And it meant that the bank could engage in more risky behaviour, so check out Chris’s article for the full details of that. A note that bank runs have happened periodically throughout history. Fans of the BBC TV show Poldark set in the time of the Napoleonic wars will recall how the scheming George Will Ligon brought about a run on Pascal’s bank in Cornwall. And the show’s hero Ross Poldark had to step in as an investor to help save it by restoring public confidence by making people confident that it had plenty of money after after Ross had invested in it. does this all mean? We shouldn’t have fractional reserve banking? Should we move instead toward full reserve banking or so called narrow banking, whereby banks have to ensure they can access enough money to 100% back all deposits. Historically, this was recommended by eminent us economists, as part of the Chicago Plan in 1933, during the Great Depression. This was in the wake of the collapse of the US financial system earlier that year. To me, narrow banking would not make sense. So rather I can’t see how we could move to this system without being without it being massively disruptive and costly. To pause deposits are one source of funding for banks, they they help reduce the cost of capital and they mean banks can lend more money. This is good for private sector investment and economic growth. I found an intriguing working paper by a former Princeton Postdoctoral Fellow and now University of Exeter lecturer, Sebastian Merkle on the macro economic implications of narrow banking and I’ll link to it in the show notes. He’s developed a macro economic model, which predicts that real productive investment and economic growth would be lower in a case of narrow banking. That said his model predicts the near elimination of banking crises with under narrow banking and in his model, people are better off overall because of that. So, look, there is there are pros and cons of fractional reserve banking versus narrow banking. I’ve got the feeling that narrow banking would be just very difficult practically, and I’m not sure we’d be better off. That said, I think there’s an important debate to be had there, and I’ll try to come back to it in the future. The relevant question to me is whether we can get the right regulations in place to maintain public confidence in the banking system. Can we do this in a cost effective way which doesn’t lead to future problems or unintended consequences. various mechanisms exist to help guarantee confidence in banks and to prevent panics and bank runs. These include regulations regarding the amount of liquid assets that banks should hold the central bank’s lender of last resort function, and deposit insurance regarding the lender of last resort function, the US Federal Reserve has been lending money to the US banking system in the wake of the SVB and Signature Bank collapses I’ll link to a Bloomberg article with some of the details. And now we see Credit Suisse turning to the Swiss central bank for emergency support. I think most people expect Credit Suisse will be supported as it’s probably too big to fail. It’s been plagued by scandals, and it’s lost money in recent years, but I expect it will be saved. Indeed, I’ve just noticed the Financial Times has reported Swiss central bank offers Credit Suisse liquidity backstop after share plunge okay, just as we would expect. I should note here that the lender of last resort function is not meant to save every failing bank. Only those which are facing a temporary cash shortage and whose underlying balance sheets are okay. It’s meant to allow good banks to get ready access to cash so they won’t run out of money in the short term, which is something that could spark a panic and a run on banks across the economy. It’s designed to try and stop that panic as summarised by British bankers or Paul Tucker. Walter Badgett famous dictum is that, to avert panic, central banks should lend early and freely that is without limit to solvent firms against good collateral and at high rates. That is, it shouldn’t be a bailout of badly performing banks, and borrowing rates should be high enough that banks only seek this assistance in genuine emergencies. We need to be careful to avoid moral hazard a concept which is also relevant to deposit insurance which we’ll talk about in a moment. Regrettably, it looks like the US Fed hasn’t been operating strictly according to badgers dictum and its new financing facility for US banks appears concessional. There’s a great story from saga and jetty and crystal ball at breaking points on this, which I’ll link to in the show notes. So please check that out. Alas, the Federal Reserve is arguably contributing to moral hazard in the financial system and to future financial instability. Regarding deposit insurance, given what’s happened with SVB, the US Federal Government has now effectively guaranteed all bank deposits, it’s gone well beyond the defined level of insurance of $250,000. As John Humphries and I discussed on the Australian taxpayers Alliance, econ chat live stream the other night, this could create a big moral hazard. Depositors might not care too much, or they might not look closely enough at the banks that they’re putting their money in. And they might be solely attracted by what interest rate they they earn on those deposits. Banks might figure that their depositors won’t care much, and they’ll take more risks to try and earn higher rates of return. So they can pay their depositors more and they can earn more profits. This could be a recipe for future instability. If the US government is going to do this, it will need to charge higher premiums for deposit insurance to ensure the costs of the insurance are explicit and not burdensome for taxpayers. And banks that have riskier balance sheets should pay higher premiums for deposit insurance. We need to avoid or minimise any moral hazard that comes from deposit insurance. There’s a great 2018 World Bank working paper that I’ll link to in the show notes that’s relevant here. It’s titled bank runs and moral hazard. I’ll read a paragraph from it because I think this paragraph nicely summarises the relevant policy issues. It’s now well established in the empirical literature that overall deposit insurance may ensure depositor confidence and prevent bank runs. But it also comes with an unintended consequence of encouraging banks to take on excessive risk. The empirical evidence points out the importance of design features, and shows that poorly designed schemes can increase the likelihood that a country will experience a banking crisis. It is important for deposit insurance schemes to incorporate features to help internalise risk taking by banks, in addition to specific design features deposit insurance that is complemented by more stringent capital regulations and a system in which supervisors are empowered to take prompt corrective action tend to function more effectively in practice. I think that’s that’s a really good summary. In a future episode, we might have to have a closer look at this deposit insurance scheme in the states and what these latest developments mean for that and what it all means for the the incentives facing banks the potential moral hazard. Honestly, I’m concerned that The US government would bail out all the depositors in SVB. I’m not sure it made sense, particularly given that those depositors or many of them should have known better than to have left so much money sitting in one bank. We’re talking about highly successful companies, such as Canva. I was truly stunned by the revelation regarding just how much money some of these tech firms had in SVB. Citadel hedge fund founder billionaire Ken Gryphon argue that with the government fully bailing out depositors, US capitalism is breaking down before our eyes. As he was quoted by the Financial Times, he would have preferred no bailout. The FT went on to quote him as saying, it would have been a great lesson in moral hazard. losses to deposit depositors would have been immaterial, and it would have driven home the point that risk management is essential. Gryphon highlighted that it appears the relevant regulator, the California Department of Financial Protection and innovation was asleep at the wheel. Apparently there were warning signs that should have been picked up. The Shanter clear columnist in the Australian Financial Review has suggested that the regulator might have been too focused on promoting innovation and startups, rather than focused on what should have been its core mission of promoting financial stability. What lessons should we learn from all of this? Well, bank runs will unfortunately occur from time to time in a capitalist economy. We just hope they’re not when they’re not too frequent. That it seems that we haven’t found a way to prevent them from happening entirely. We get a lot of benefits from the capitalist system in terms of innovation and higher living standards. But there’s no doubt the system can be unstable from time to time. It may be that the US needs to impose tougher regulations tougher capital requirements on banks so that they have better balance sheets, and they’re much less susceptible to bank runs. That is they’ll need to be required to hold a higher amount of quality liquid assets which can be converted into cash quickly. One of the reasons for confidence in Australia’s banking system is apparently stricter bank regulations overseen by the Australian Prudential Regulation Authority APRA, which is currently headed by my old Treasury colleague, John Lonsdale. The financial review has reported that APRA had resisted lobbying by local banks to loosen capital requirements on banks. Given what’s happening in the US at the moment, Apple is looking pretty smart right now. It’s hard to know how to compare what we’re seeing today with the past. SVB is the second largest bank failure in US history. But I don’t think it’s the start of GFC 2.0. Or rather, I hope it’s not the start of that. The GFC the global financial crisis, financial crisis of 2008 that involved financial institutions, which were household names, and much closer to the centre of the financial system. Of course, if Credit Suisse ends up collapsing that the story could be much different. My general inclination is not to worry too much over the latest developments as many things turn out to be unimportant. In hindsight, that said, you never know. Okay, that’s how I see things at the moment. It’s still early days, so my thinking may change over coming weeks. I’ll provide any updates to my thinking in future episodes. What do you think about what’s happening with US banks? And now with Credit Suisse? How concerned are you? Please let me know by emailing me at contact at economicsexplored.com. I’d love to hear from you. Thanks for listening.

Credits

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

Tags australian, banking, banking crises, banks, cash, collapse, credit suisse, deposit insurance, depositors, deposits, fractional reserve banking, money, regulations, swiss central bank

Podcast episode

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

Post author By Alec Krishna
Post date March 21, 2023
No Comments on 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 Podcasts, Apple Podcasts, Spotify, 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

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

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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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Tags austrian economics, central banks, fed, fiat money, gold standard, inflation, monetary policy, money, rba

Podcast episode

Understandable Economics w/ Howard Yaruss, NYU – EP168

Post author By Alec Krishna
Post date December 5, 2022
No Comments on Understandable Economics w/ Howard Yaruss, NYU – EP168

In his new book, Understandable Economics, Howard Yaruss from NYU argues “Understanding Our Economy Is Easier Than You Think and More Important Than You Know.” Howard is an Adjunct Instructor in economics and business at NYU. Previously, he was Executive Vice President and General Counsel of Radian Group, a mortgage insurance company. Howard lives in Manhattan and serves on his local community board.

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.

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Links relevant to the conversation

Where you can buy Understandable Economics:

https://amzn.to/3VCsxMV

Howard Yaruss’s website:

https://howardyaruss.com/

EP159 with Romina Boccia from the Cato Institute on the future U.S. fiscal crisis:

https://economicsexplored.com/2022/10/03/the-future-us-fiscal-crisis-and-how-to-avert-it-w-romina-boccia-cato-institute-ep159/

Transcript: Understandable Economics w/ Howard Yaruss, NYU – EP168

Gene Tunny 00:00

Coming up on Economics Explored.

Howard Yaruss 00:03

I saw reason survey that the majority of young people don’t trust capitalism. That’s a catastrophe as far as I’m concerned. And I think what we need to do is give them a reason to have more faith in the system that has created more wealth than any system in the history of humankind.

Gene Tunny 00:23

Welcome to the Economics Cxplored podcast a frank and fearless exploration of important economic issues. I’m your host, Gene Tunny broadcasting from Brisbane, Australia. This is episode 168. It’s on a new book I’ve been reading called Understandable Economics, because understanding our economy is easier than you think and more important than you know, the author is Howard Yaruss, and he joins me to talk about his new book this episode. Howard is an adjunct instructor in economics in business at NYU. Previously, he was Executive Vice President and General Counsel of Radian Group, a mortgage insurance company. Howard lives in Manhattan, and he serves on his local community board. I’m grateful he came onto the show to share his thoughts on how a proper understanding of economics can help people argue for better public policies. Please check out the show notes, relevant links and information and the details of how you can get in touch with any questions or comments. Let me know what you think about what either Howard or I have to say in this episode. I’d love to hear from you. Right now from my conversation with Howard Yaruss on understandable economics. Thanks to my audio engineer Josh Crotts for his assistance in producing this episode. I hope you enjoy it. Howard Yaruss, welcome to the programme.

Howard Yaruss 01:38

Thank you, Gene. It’s great to be here.

Gene Tunny 01:40

Excellent. Good to be chatting with you. Howard, I’m keen to chat with you about your new book, Understanding economics, because understanding our economy is easier than you think. And more important than you know. So how would I like to ask you? Why do you think that understanding our economy is easier than you think? Can we begin with that, please?

Howard Yaruss 02:10

Yes, I think a lot of people are intimidated by economics. Virtually anyone who’s taking a course, taking a course in economics, has been confronted with a bewildering array of formulas, graphs, jargon, those of the people who’ve taken a course the people who haven’t taken a course, understandably, don’t know much don’t know much about it at all. So I think there’s a lot of misunderstanding about economics, but what is economics about? It’s about how society allocates scarce resources. And that’s not a science, like physics or biology, you could just plug some numbers into a formula and get an answer. There are value judgments involved in how we allocate our resources. Our resources involves value judgments. And so it’s, it’s a different type of discipline than a bit different from what most people think it is. And I think what it really is how human beings interact, is easier to understand than the typical economics course, leads people to believe.

Gene Tunny 03:18

Right? What do you think is wrong with a typical economics course, Howard.

Howard Yaruss 03:22

That they begin with a whole bunch of formulas and jargon and graphs. And what we’re talking about is human behaviour. It’s like if you went to a psychiatrist, and they said, Let me plug everything into my formula. The world just doesn’t work that way. There’s, as I as I say, in the book, there’s a reason why a downturn in the economy a severe downturn in the economy, is has the same word is called by the same word as a severe downturn, a psychological downturn for human being or depression. These are psychological phenomenon, they quickly have real world consequences. But again, you can test the industrial capacity of a country right before, lets say, something we’re more accustomed to a recession rather than depression. Fortunately, we’ve had very few depressions, you can test the industrial capacity of a country right before a recession starts. And right after it’s the same, you can test the skill level of the workers right before a recession begins. And right after it’s the same, what’s changed? Outlook. It’s an infectious gloom that takes over. So I think understanding economics requires thinking about human behaviour. And it’s somewhat different from what’s often taught in economics courses.

Gene Tunny 04:43

Rod, okay, we might delve into that a bit later. The other part of your the subtitle is it’s it’s more important than you think. Why do you think that is the case are more important than, you know? Understanding economics

Howard Yaruss 05:00

I was going to rewrite that part of the title, I’d say much more important than, you know, simply because people are told all sorts of things by politicians who have self-serving motives for making certain claims. And I think, because most people don’t take a course in economics, and those who do are, again, faced with a bewildering array of graphs and formulas, so they don’t really get a sense of it. I think people can easily be misled by claims of politicians and other people who have motives to support a particular policy that they want to see enacted. I think it’s essential for people to understand how the economy works a bit better, so that they cannot be as easily fooled, and so that they would support better policies that would make our economy better and more productive.

Gene Tunny 05:53

Okay. So what do you think they’re being fooled about Howard?

Howard Yaruss 05:57

Well I can give you a few examples, this one went off the top of my head. There are a lot of politicians in the US who claimed for years that giving tax cuts to wealthy individuals would increase employment and improve the economy. And if you think about it, why does a business expand not because there are more investors with money, it’s because they’re more consumers wanting to buy their product or service. So if you put more money into the pockets of middle and lower income people, they’re going to spend on goods and services, and businesses are going to be forced to expand and hire new workers to produce those goods and services. If you merely give it to wealthy people who tend not to spend as much of their money, they have a lower propensity to consume, the businesses are not going to expand because they don’t have the additional demand for their product. So that’s an example of something that’s that’s said, by politicians that often misleads people. And it’s not something you need complicated formulas, or very, very specific kind of knowledge to figure that out. You just have to not be intimidated and use your good common sense.

Gene Tunny 07:14

Yeah. Okay. Now, you’re saying that you think there are some issues with the way economics is typically presented? Is it just not presented in in an intuitive enough fashion? Because when I read your book, I saw a lot of good economics in there. I don’t, I just want to, I just want to understand where you’re coming from with this book. Is it that you’re you’re not saying that a lot of economics is bad, it’s just not well presented? What’s your actual position here? How could I ask you that, Please?

Howard Yaruss 07:49

I think you said it very well. It’s not taught very well. First of all, let’s start at the beginning. Most people, at least in the United States, don’t learn economics, it’s not required in secondary school here. What is required is trigonometry. Which to me seems to use a technical term crazy. And I have a lot of respect for math, I was a math major. So the fact that we require something like trigonometry, and don’t require economics is shocking, to say the least, when it is taken at the college level, it there are all these assumptions made perfect information, everyone’s rational 100% of the time, and the real world doesn’t work that way. I live on the Upper West Side of Manhattan, which is a fairly affluent neighbourhood, about 40% of the retail spaces are empty. Many retail spaces have been empty for decades, that, according to economist shouldn’t, just shouldn’t be. Why why are people greedy? We always assume landlords are greedy. Why? Why are greedy landlords seeking zero income? There’s a disconnect there. And I think a lot of people are confused by this phenomenon. And the answer is that the real world doesn’t work perfectly. According to these models with all of these assumptions, I know economic the economics profession, is trying to there’s behavioural economics now. But the point is, people people, it’s people should be able to make some of these judgments on their own, they should be able to understand some of this on their own, because if they, if they don’t, they can easily be manipulated or misled by people who have ulterior motives.

Gene Tunny 09:33

Right. Okay. Now, I saw in your conclusion that originally this book was titled, economics for activists it was its focus was the people who were troubled by our economic system, yet optimistic enough to engage in activism in the belief that change was not only possible, but also that they could play a role in making it happen. Okay, what sort of activists are you talking about here? Howard, are we talking About the Occupy Wall Street? Are we talking about, I mean, who exactly is this pitch at, this book?

Howard Yaruss 10:08

oh, all activists and what and what I had in mind is people who are fed up with the current system and those include Occupy Wall Street, the Donald Trump voters, the Tea Party, and I know Australia has has their equivalent of these groups, there are a lot of people frustrated with the way our economy is going I call it the winner take all economy in the book, that the people who are doing well are doing better than ever, and the people who are not doing well are stagnating at best. And these kinds of actions is exactly what I’m talking about. What happened to Occupy Wall Street, Donald Trump, the Tea Party, they haven’t made life better for anyone. And my hope is that by understanding how the economy works, people would support more constructive policies that would make life better. What originally was he title of the book was understandable economics, because you can’t improve a system you don’t understand. If people don’t understand something, they can’t work to improve it, or if they try working to improve it, if they become an activist that their efforts may be for not. So the goal is to arm readers with the tools to understand what in fact, would improve the economy. And what on the other hand is a false medicine, is a false cure for the economic ills we are suffering.

Gene Tunny 11:30

Okay. Can I ask you about the fact that you grouped tea party with Occupy Wall Street? So is it your view that they’re both coming from the same frustration that and but they’re both got different, those two groups have different prescriptions or different recommendations. I mean, they’re both after different things, aren’t they? But are you saying they’re both motivated by the same? The same concerns?

Howard Yaruss 12:02

Why is it said there are some similarities between the two groups and some differences? What are the similarities, they’re frustrated with our current system, they both clearly have that in common. And at the risk of sounding cynical, they both didn’t achieve very much. I think what they were different is Occupy Wall Street had a specific flaw in that they did not recognise that it’s the political system, that effects change. That’s the system we live in. Unless there’s a revolution and there hasn’t been one. That’s the system we live in. So they were particularly ineffective in that they did not have a mechanism for getting people who had views similar to theirs into the legislature to effect change. They basically shot themselves in the foot by not doing that. On the other hand, the Tea Party was extremely successful, getting people into the legislature, the problem is just cutting the government without giving thought to what is the government what the government does is use, what useful things the government does. And what non useful things the government does is not really helpful to the average person either. The point I make in the book is how I use highways as an analogy. Cars are great for getting people from one place to another. But if there were no rules on the highway, people could drive on either whatever side they wanted, if eight year olds could drive, drunk drivers could drive, if there were no speed limits, and people could do whatever they wanted on the road, the road would not work. There have to be clear rules. Obviously, rules that are overly burdensome, shouldn’t be there. But the highway just cannot function without rules. It’s the same thing with a market economy. If there aren’t clear rules, it can function.

Gene Tunny 13:54

Yeah, yeah. Can I ask you about this, this point you made before that, to be able to affect change, and to be able to, to really participate? You need to understand how the economy works. What do you think of the key principles? Do you set this out in your book? Could you What do you think are the big things that we should understand in terms of how the economy works?

Howard Yaruss 14:23

I read a survey and it was an international survey so I’m sure it included Australia, of economic students, and they asked them where new money came from, and the majority couldn’t answer it. How could you talk about resources or equality and not know where money comes from? Again, if you want to improve a system, you have to have some understanding of it. So I think what I tried to do in the book is give some foundational knowledge about how the economy works, how trade works, how the central bank in the United States, the Federal Reserve System, affects the economy and how they create new money. So people have a basic understanding of the foundational components of the economy. And then I talk about different aspects of the economy. And I hope readers reach their own conclusion as to what makes sense, but at least they do it in an informed and intelligent way. As opposed to, we’re talking about the people who supported Donald Trump or Occupy Wall Street, they’re expressing their frustration, but they’re not pointing people in the direction of something that would improve the lives of the average life for the average person.

Gene Tunny 15:40

I think it’d be good how, if you give a just a rundown of how you explain that, or just take us through that, that where money comes from, I think that would be really useful. I’d recommend. If you’re listening in the audience, I would recommend this book, I think there’s a lot of really good stuff in there. And I really loved your chapter on trade. I loved your chapter on industry policy, your, your criticism of the bailouts, and maybe we can chat about that later. But to start with, if you can explain, Well, how do you how do you explain to people where money comes from, I think that would be really useful?

Howard Yaruss 16:20

Yes, well, I have the quote in the book, that all money, all new money is loaned into existence. And again, the average economics student didn’t know that. And in the book, I tried, I tried in the book to make it very user friendly. To write with a sort of basic style, it’s supposed to read like, readable narrative nonfiction, but how money is loaned into existence is, as you know, is not the easiest thing to explain. Basically, when a bank lends money to someone, they’re not grabbing the cash from someone’s account, this is not like, I have to make a very contemporary joke. FTX, they take people’s cryptocurrency and do with it what they want, the bank merely creates new money, it’s totally created brand new money. That’s what a licenced bank does, in virtually every country in the world. So that’s how new money is created, it’s created through bank lending. And the money can go away, when the when the loan is repaid, it disappears. So it’s how critical it is to understand that I’m not sure what people’s particular frustrations are or what their particular interests are. But to understand where money comes from and how it’s created, it’s basically important to anyone who wants to get more involved in these kinds of issues, to understand them better. And ideally, to have an impact on policy, you have to understand the basics before you can go ahead and get involved in, in assessing policy.

Gene Tunny 17:59

Right, okay. And it’s certainly important for macro economic policy we’ve had, because of how our monetary policy has pushed down borrowing costs, and then there’s been a huge explosion in credit for housing here in Australia. And that’s pushed up property prices and and that’s also help keep the boom going. We’ve had this incredible post COVID Boom, that I think will probably end.

Howard Yaruss 18:28

We’ve had this here too. I think the whole developed world is having inflation, eight, nine 10%. It’s an important issue for people understand, I also talked in the book about hyperinflation. Inflation is a problem, clearly a problem that needs to be dealt with. But it’s not a civilization ending kind of problem like hyperinflation, hyperinflation almost always results in nation collapse and death, which is fundamentally different from just eight or 9%. Inflation. It’s, it’s again, it’s not a good thing. But people have to separate the two and, and they make it very, very clear point in the book that I don’t think there’s any advanced nations, certainly not the United States or Australia, that’s risking hyperinflation, which is a whole level, a problem on a whole nother level. We do have inflation, which is a problem, but it’s you need to separate it from the kind of hyperinflation inflation that for instance, brought us nuts, Nazi Germany.

Gene Tunny 19:25

And what do you say about the Fed? How do you say anything about their quantitative easing policies that they’ve had over the last decade and a half?

Howard Yaruss 19:35

Well, we see inflation. So I think that speaks a lot more loudly than anything I can say. If, if their policies were more effective, we wouldn’t be having inflation. So the suggestion is or the inference is that they were hit the accelerator a little too heavily. Yeah, yeah. Yeah, for sure. And now they’re slamming on the brakes. A lot of people claim they may be slamming the brake too heavily, because there’s, as you know, there’s this very significant lag between them hitting the brakes and the car coming to a stop. And it’s very hard to know how hard to tap the brakes as the car slowing down, but it may not be slowing down enough. My own personal opinion is that we’re going to see a assuming, again, there’s so many assumptions here, that the war in Ukraine doesn’t doesn’t escalate, that the supply chains get sorted out that there isn’t another problem that arises on the horizon, we’ll probably see the effects of all the central banks, their attempt to rein in inflation to start having some success.

Gene Tunny 20:44

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

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Gene Tunny 21:22

Now back to the show. Okay, can I ask you about what you see as the false solutions? I think you suggested before that economics helps us understand how the economy works, what sound policy responses would be. And then also, what are some of the dead ends to go down or false solutions? What would some of those be?

Howard Yaruss 21:49

Well, I already mentioned one in the tax cuts for the wealthy to spur the economy. We see in England that in a period of inflation, the government proposed tax cuts for the wealthy, which is just throwing more money out there, creating more inflation. So that’s definitely a false solution. I’m not sure what the problem was. But it’s definitely a bad policy idea. That seems to be in response to I don’t know what. So that’s one example of something in the United States, we’ve had a debate about Social Security, pensions for older people. And there’s always this talk of the government running out of money, Social Security going bankrupt. And as Alan Greenspan, the former chair of the Federal Reserve System, once said, It can’t run out of money. The United States government can always create money. What it is, it’s a question of will and will not, it’s a question of politics and not economics. It’s a decision as to whether we, as a society wants to devote our resources to these things. And that takes us back to what we just discussing at the very beginning. It’s not like physics, where you plug certain variables into a formula and outcomes an answer. It’s a value judgement about how we, as a society want to use our resources. Do we want to help people in their old age and obviously tax workers to do that or not? And again, there’s no formula that will give you an objectively right answer on that. What, what we need to do is have people understand the trade off, and then make an informed decision as to what they want. And I want to give one example, I serve on my local community board here in New York City. And we talk about different projects, like a bathroom in a park, or an elevator in a subway station. And these all sound great, but then I look at the price of these things. And a bathroom in a park is $4 million to put in. To make one subway station handicap accessible, which involves in all fairness, putting in multiple elevators. Yeah, it’s $70 million. That seven, zero million. And so again, people need to be cognizant of these economic issues because it all comes down in that case to a cost benefit analysis. And all of these things are good, Social Security is good. But there is no formula that’s going to give you the right answer to that. Although I think even if there were a formula it would tell you the $4 million bathroom doesn’t make sense. But the point is, this is a value judgement. It’s something that people shouldn’t rely on economic experts because there’s no objectively right answer for that. It’s something that people have to get an understanding of how it works, and then apply their own values to that issue and make the decision for themselves.

Gene Tunny 24:55

Yeah, I think that’s, that’s right. This is one of the points I’ve been trying to make on this. show over the years as I’ve been, as I’ve been doing it is that, you know, we economists need to be honest or need to be. Yeah, we need to realise that there are in decision making value judgments come into play. And often the best thing economists can do is outline what are the trade offs and, and what we expect will happen. And then it’s up to any decision typically involves a value judgement. Yeah, I’m just saying, Yeah, essentially, I agree with you. I agree with you there with Social Security. I’ve had a guest on the show, Romina Boccia, she was at Cato I forget, I’ll put it in the show notes. I think it was Cato or Heritage. But she’s very concerned about Social Security. And look, if you project it out, and you don’t, it is going to add to the deficit. And, like, you can think about that two ways. And I guess that’s what you’re saying, it depends on your values, you could, if you, you could try and limit that spending, you could reduce the entitlement or constrain it. Or you could just raise taxes to address the deficit. And making that choice, to an extent, depends on values. But I think what economists should be saying is that if you do make the choice to fund the higher social security, then you need higher taxes, and there are efficiency costs associated with that. And I mean, that’s the way how I’d be trying to frame it. What what do you think about that, Howard?

Howard Yaruss 26:41

Well, it’s again, it’s a trade off, I think we, in a democracy, should decide how society uses resources. And we shouldn’t make the decision in that context. It’s running out of money, you need to cut it with your personal finances, you have a job, that’s an issue, it’s finite, with a nation, there are all sorts of trade offs that can be made. And people need to understand this is not a crisis situation. There’s in the United States, the $22 trillion of goods and services created every year. And if we are committed to certain programmes we have, we have the ability to support them. It’s it’s not something that there’s a finite amount of money there that can only be used, I will go back to the first President George Bush, when he was talking about education, which I think is the most important investment of society could make it to keep itself wealthy, and not only wealthy but happy and secure. Again, I’d make the point in the book, you could look at places like Congo, and Venezuela and to a large extent Russia, which have enormous resources, natural resources, and yet they’re relatively poor countries. And you could look at Germany or Switzerland or Israel, which really don’t have any or Japan or any resources, and they become quite wealthy. What’s the difference? Human capital. And so the original, the first President Bush said, with regard to education, we have the will to fund it, but not the wallet. Well, I think he had it totally backwards, we’re a very rich country. And it’s there’s the question of just allocation of resources, which is, again, something that I think people who haven’t studied economics don’t understand the concept of opportunity cost that, that you can have, if you if some, if you prioritise something enough, you can have it, but you just have to realise that you’re not going to you’re going to have less of something else.

Gene Tunny 28:38

Yeah, absolutely. I think that’s an important concept. And you talk about how what we’ve got in this in advanced economies, we have a mixed economy, and, and in different countries, they make different judgments about the scale of government versus the private sector. And, and, you know, us is one where it’s, I mean, there’s still obviously, government plays a very substantial, significant role in the economy, but not as much as say, in Scandinavian countries or in France or, or Germany. So I think that’s a good point.

Howard Yaruss 29:14

All along a spectrum. Yeah. Yeah. I think it’s easy to fall into that trap of, are you capitalist or are you socialist? We’re all basically the same. It’s just that some countries are a little further on the spectrum of government spending, and some countries are a little less on the spectrum of government spending. We all basically have free markets that are regulated by the government. It’s not a question of socialism that they throw around the word socialism in the United States all the time. The textbook definition is where the government controls the means of production. I don’t think that’s what anyone’s talking about. And I make the point in the book pretty emphatically that all these isms can sometimes warp understanding of what’s going on in the economy, the way to understand what’s going on in the economy is to actually look at what’s going on. And that get involved in all this esoteric theoretical discussion of different types of economic systems.

Gene Tunny 30:11

Yeah. A lot of people are interested in crypto currencies. What does your book say about cryptocurrencies, Howard?

Howard Yaruss 30:19

Well, I make the analogy that it actually is, in a certain way, very similar to the US dollar or the Australian currency. It’s something that’s created totally out of thin air. The big difference is who creates, I don’t know, who creates Bitcoin, or Dogecoin, for that matter, but I know exactly who creates the US dollar. It’s the Federal Reserve System. I know exactly who the people are. I know exactly what the rules they operate under. I know exactly who to turn to if there’s a problem. When it comes to cryptocurrencies, we don’t know any of that. If you have a problem, we’ve all had problems with our checking account. And we know how frustrating it is to call customer service. But could you imagine if your quote unquote bank didn’t even exist, there doesn’t have any employees and doesn’t even have a customer service number to begin with? And I think we’re going to see more problems with cryptocurrencies because it’s just something created out of thin air by people. We don’t know operating under rules they claim they have but how do we know we have them in Bitcoin suddenly doubled the number of tokens out there? Who would we sue? What recourse would anyone have?

Gene Tunny 31:30

Yeah, exactly. And I mean, you mentioned what’s happening with the news around FTX. Is it and Sam Bankman-friedand here what we’ve seen in the news recently, yeah, yeah. Yeah.

Howard Yaruss 31:45

As I’m concerned, he was supposedly FTX was supposedly a place people could use to store their cryptocurrency. Well, if it’s not there, it was stolen. It was misappropriated. So I think it’s this is something that the prosecutors need take a look at.

Gene Tunny 32:04

Yeah, it’s all very confusing. I mean, I thought the great benefit of crypto was this decentralisation. And then suddenly, people are losing all this money, because they’re involved with this exchange.

Howard Yaruss 32:19

It’s decentralised. But the question is, what we were discussing before, there need to be rules, there are literally no rules with regard to this. So it’s like going to a highway driving on a highway where there are literally no rules. People could drive at any speed on any side, and do anything they want. If eventually there’s going to be a crash. If enough people come to that highway, you guaranteed a crash.

Gene Tunny 32:44

Yeah, yeah, for sure. What I liked about your chapter on money, was that you talked about how a lot of the value or the value of the US dollar is that you can pay bills in it right? Or you can, you can, people will accept it. It’s widely accepted. And it’s a fiction that everyone believes in. So I think that was a little something along those lines, I’m trying to remember the exact words used, but that’s essentially what Milton Friedman, how he described it. I mean, all money is fiction. So I thought that was, that was good. Okay. Now, what about modern monetary theory, which is another popular topic? What are your few things to say about modern monetary theory in your book? Could you take us through that Howard?

Howard Yaruss 33:39

Well, the most amusing thing I say about it is that it’s not particularly modern. It’s not a theory. And yes, it has to do with money. So I’ll give it that. Basically, they’re saying that the government can create as much money as it wants, as long as it doesn’t create inflation. That’s, I don’t understand why that’s anything new. Everyone knows that the government has printing presses and they could create as much money as they want. What I think is interesting about what they say is that the government should not be constrained by a balanced budget, that we all know it can produce as much money as they want. The modern monetary theorists say they should be able to create as much money as they want, as long as they don’t cause inflation. And arguably, that’s right. They if they’re printing money, and it’s not causing inflation, that really is a free lunch, if if you create an extra $10 and magically, an extra sandwich appears. That’s that’s literally a free lunch. The problem is, you need some constraint. And that’s why we have the central banking system we have today. Because if politicians could just rev up the printing presses, and print money for whatever They want tax cuts for their donors, giant spending programmes, you have the catastrophic problem we discussed before hyperinflation. And yes, if politicians could show adequate constraint, restraint rather. Yeah, I guess it makes sense. I think there are lost opportunities when the Fed is a little parsimonious with the money, and the economy could be more robust. But I think the downside risk of the politicians running amok and printing too much money and having the lose, lose control over that risk is too great, because that’s, again, a nation ending kind of risk. So I agree with what they say. I just don’t agree with their conclusion that we should turn trust, trust our politicians to show proper restraint. If we gave them the right to rev up the printing presses and print whatever they needed or wanted.

Gene Tunny 35:59

Yeah. Exactly. Okay. Do you say anything about climate change in the book, Howard, the solutions to climate change, or if that’s really to worry about?

Howard Yaruss 36:13

Not really, included in the book is the fact that if we want change, if people want change, then they have to assert themselves, it doesn’t happen on its own. If, if company if there’s a company that is doing something that people don’t like they need to, to promote policies that would rein in that behaviour. And it’s the same with climate change, that people need to be clear that this is something that is important to them, and that they want, because that’s how our political system works. Again, economics is not like physics, you don’t put things into a formula and outcomes and answer, it’s, it’s, it’s what you can get people to agree to do. And the more people understand, and this is a perfect example, the more people understand the harm we’re doing to our climate, the more they’re likely to support regulations that would rein in climate change. Ignorance is a threat to good policy. And that’s the whole point of the book. It’s to get people to think about it more, to understand it more. And I make it very clear in the epilogue, I passionately believe we would have better public policy if people had a better understanding of what’s going on, not only in the economy, but in with regard to climate change as well.

Gene Tunny 37:34

Okay. In terms of better public policy, one thing I liked in your book was your analysis of bailout. So you were highly critical of the bailouts that occurred, or the all of the assistance that went to was it to airlines in the States and other companies? Airlines as an example? Yeah, yeah. You were highly critical of that during the, during the pandemic. Could you explain your logic there, please, Howard?

Howard Yaruss 38:03

Oh, certainly, we gave billions of dollars to the airlines. But what did we get for it? Were the planes going to disappear? The planes are there, they were grounded, because there was a pandemic going on. But they don’t, they wouldn’t fall into the earth. So by giving money to the airlines, we were just saving the management of the airlines and the shareholders of the airlines. What what a lot of European countries did is they actually funded the wages of workers, which would have made a lot more sense and would have been a lot cheaper. Instead, we threw enormous amounts of cash at the airlines. And I think I don’t remember the exact figure in the book, I think it came out to about $750,000 per employee, we could have saved a lot of money by just paying the wages of the employees saving the employees. And the airplanes would save themselves, they’re not disappearing. So they’d sit there on the tarmac, the shareholders would get hit very hard, which is unfortunate. But given that there are finite resources, I don’t think they’re at the front of the queue in terms of warranting a handout. And when the economy came back there, the airplanes can be put back into service. So the point I’m making in the book is bailouts help management and shareholders as opposed to what Europe did, helping individual employees or or not offering assistance at all, and the assets would stay there and be acquired presumably by another company.

Gene Tunny 39:36

Yeah, yeah. I think that’s, that’s a good point. And remember, during the pandemic, there was a Silicon Valley, one of the billionaires in Silicon Valley who was making that point on or a similar point on CNBC and I thought, you know, that’s a that’s a that’s a good way of looking at it. And yeah, I think, you know, the way you go through it in your book is great. So I’d recommend your book for that. on that issue. It’s a key issue in industry policy. So I think that’s great.

Howard Yaruss 40:09

Okay, I’m just gonna add that that’s, that’s another great example of how people are misled that the hotels are going to go away, the airplanes and the airlines are going to go away if we don’t offer them a bailout, the hotels are there. There’s bricks and mortar, if they don’t get the bail, if they don’t collapse, the planes are there. The executives, if they lose their jobs, don’t get to fly them off and take them wherever they want to take them, then there, it’s just the management and the shareholders that are the risks. Now, not the actual wealth of the country, the actual infrastructure, the hotels, the air, the aeroplanes, they’re, they’re not going to go anywhere, whether or not there’s a bailout.

Gene Tunny 40:49

Yeah, yeah. Good point. Okay. I just want to go back over, go back to this winner takes all economy, you mentioned that early on, is that what you see is one of the big challenges in advanced economies at the moment? And what exactly brought this about? I think, if you could take us through that I think your book does a good job of explaining how we’ve ended up with what you call a winner takes all economy, or at least an economy where, at least in the US in, in Australia, it’s we haven’t had the same increase. And it’s a bit of an argument about whether we’ve had an increase in income inequality, certainly in wealth inequality. But could you explain what you know, what’s led to this winner takes all economy, please. And what in your view, economics suggests is a way we could get out of it. Or your logic suggests there’s a way we could get out of it.

Howard Yaruss 41:48

I teach this subject and I love one word answers. And I can give you a one word answer to that. And they’ll give you a more expensive answer the one word answer the internet, basically, the cost free platform that enables Jeff Bezos, or any of these big companies to do their business, internationally with no costs, has enabled the best providers to have economies of scale that have been able have enabled them to grow much larger than any company was able to grow before, before the internet era. For instance, in 1950, if you were selling clothing in New York, and wanted to sell clothing in somewhere in Australia, that was incredibly difficult. Just the phone calls alone wouldn’t cost a fortune. And now, it’s cost free. It’s frictionless. They’re the ultimate economies of scale. So Jeff Bezos can do his business, internationally, and basically take all so technology actually, it’s not just the internet, it’s technology in general, has facilitated this winner take all in the book, I use the example of musicals before 100 years ago, every city of any size, have a musical where people want to hear live music, and now he’s just flicking it on your computer. There are a few major international stars who provide the music. And I’ll add that not only do they provide the music, but they provide their performance in infinite number of times whenever you’re interested in hearing it, based upon one performance. That wasn’t the case 100 years ago. So yes, the best performers in New York City 100 years ago, probably or definitely earned more than the mediocre performers somewhere in Indiana. But the point is that many people earn livings in connection with that business. And now there are just a much smaller number of people. And the earnings are much more concentrated among the most popular performers.

Gene Tunny 43:52

Raw. Yeah, yeah. And what about the role of there’s obviously the role of monopolies or market power in this?

Howard Yaruss 44:01

Absolutely. Because with this, these economies of scale, we’re natural monopolies what economists would call natural monopolies develop. And you see this in ride sharing with Uber. I mentioned Amazon, information Google, social, social networking with Facebook, there are many more natural monopolies because of these economies of scale. And it’s a problem. Why is it a problem? Your Facebook’s free. Why is that a problem? Because you lose, you lose innovation when there’s a monopoly there’s no incentive to innovate. And as they really consolidate the monopoly, it’s, it’s it reduces opportunity for workers. And this is again fueling the winner take all phenomenon that the average worker has fewer options for potential places to work. Certainly entrepreneurship is foreclosed, you can’t go up against these behemoths. And so there’s a shift of resources from labour to capital, when you have these kinds, when business gains more power in this way.

Gene Tunny 45:16

Yeah, yeah. And so what in your view is the is a way to address this winner takes all economy? If you? I mean, I’m assuming you think it’s, it needs to be addressed. It’s not something that we need to spur innovation. I mean, it’s not actually I think probably most people agree that there’s a problem with big tech so far across the political spectrum. So, or across the economics profession to.

Howard Yaruss 45:45

This is a perfect example of what we were talking before about regulation. Here’s a question. I’m a lawyer that Facebook has had hate speech or a speech that motivated people to commit all sorts of crimes on its site throughout the world. Why isn’t there a potential liability there, and in the United States, they’re exempted from liability. But because they claim to be like a town square, but they’re not a town square, they prioritise certain speech over others. For instance, on Twitter, I tweet something it’s going to get, it’s going to be replicated many fewer times. And if someone else tweets something, so they are curating, they are involved in amplifying certain speech. So I don’t know why they’re exempt from free speech, from the laws governing libel and slander. So that’s one thing we were not we’re sort of asleep at the wheel in a way, we are not regulating these companies the way we need to regulate them. Every monopoly is different, or companies get monopolies for all sorts of reasons. And the government needs to look at them, it has the tools, it just needs to employ them to make sure they’re not abusing their market power. Because ultimately, if they do that, it’s not good for the economy. And it’s not good for workers.

Gene Tunny 47:09

Right? So would you break up any of these big tech companies?

Howard Yaruss 47:15

Well, there are such incredible economies of scale with a social networking site, you don’t want to go to a social networking site that only has a few people. So I think the government is going to have to look at, for instance, I talked before a moment ago about legal liability, to the extent they promote certain speech, and it causes harm, maybe they should be on the hook for that. And maybe they would be more equitable, and more fair, in running their business, if that were the case. So I think that, again, every monopoly is different. I think the government needs to look at them, and make sure we’re getting the best social benefit from them. Because again, they are natural monopolies in my opinion, if I wanted to set up a social networking site, I could set it up. But Facebook has 3 billion users, I’d have one, none’s going to it. I think, I think given that the government needs to, to impose some fair rules so that society gets the maximum benefit out of it.

Gene Tunny 48:15

Right? And what about inequality? How do you propose dealing with that? How would you see that as a substantial problem? Do you and how would you deal with it?

Howard Yaruss 48:26

Yeah, as we have more of a winner take all economy, there’s more of a gap between the people who are doing well, and the people who are not doing well. And that’s a great failing of a society as as our economy grows, on average, most people should do better. And that’s what was so great about America and Australia for so many years, people bought into the system. And to the extent that people are alienated by the system, I saw a recent survey that the majority of young people don’t trust capitalism. That’s a catastrophe as far as I’m concerned. And I think what we need to do is give them a reason to have more faith in the system that has created more wealth than any system in the history of humankind. I make the point in the book that since roughly 1800, we evolved from a society where the vast majority of people were food insecure to a society where the average person does quite well. And so we have to keep that, that we have to continue that to make sure that people buy into the system and we continue to grow.

Gene Tunny 49:31

Right, and what measures in your view would be required to do that? Are we talking but yeah, exactly what measures would be needed?

Howard Yaruss 49:41

Well, in the United States, there was a lot of talk a few years ago about a universal basic income that we may get so efficient. John Maynard Keynes talked about this. There was a writer I think his name was Edward Bellamy in the in the late 1800s, who talked about this how’s this It got so wealthy, that people, many people just didn’t have to work. And we could just have an income and benefit from automation. And the fact that society would be so efficient, we haven’t reached that point yet, in my opinion, I don’t think we’ve reached that point in anyone’s opinion. So that’s not going to work. But what can work is, is to have a more progressive tax system. And let me be clear what I’m talking about. In the United States, hedge fund managers pay a lower tax rate than teachers and firemen. That’s ridiculous. Again, to use a technical term, that we people need a better understanding of exactly what the 10s of 1000s of pages in the tax code are doing, and try to have a more reasonable, a more equitable approach to the way we allocate society’s resources. So off the top of my head, I would say that better funding for education to give people opportunity, certainly increase the tax rate on hedge fund managers. So it’s at least as great as teachers and fire man. Warren Buffett always says that he pays a lower tax rate than his secretary, that makes no sense. So that’s one easy place I would start to have a to provide more opportunity to the average person, I would I would have higher taxes for the people who who’ve enormously benefited from this winner take all economy and provide more resources to, for instance, for education, so as to maximise the chances that children growing up today can participate in contribute to this kind of economy.

Gene Tunny 51:40

Right. Yeah, I think certainly there’s some issues with the tax code in the States, I did an episode with Steve Rosenthal, from Urban Institute, do must have been toward the end of last year, just on the rules that you’re talking about, so I think is it carried interest?

Howard Yaruss 52:03

There’s a rule of carried interest exactly the provision that allows hedge fund and venture capital executives to basically have their income taxed at capital gains rates, which rates are lower than personal income rates. But I’ll raise a bigger issue, why should investment income be taxed at a lower rate than working income? I think that’s something that should be changed. And not only is it equitable, but by having the two types of taxation, you make the whole tax code so much more complicated, you introduce all sorts of distortions that people go through, so as to re-characterise their earned income, as investment income, it throws friction into the economy. And so that’s something that I think needs to be corrected. Again, to make it more equitable and more efficient. There are companies that have meetings in Bermuda, to leave the United States, because of tax reasons, that literally makes no sense. That’s a lost opportunity for the American hospitality industry, and just a colossal waste of resources. That’s something that needs to be looked at. And, frankly, when the tax code is 10s of 1000s of pages, I think the Internal Revenue Service is going to be out manned, by the whole army of lawyers and accountants that businesses and wealthy individuals have, it has to be simplified.

Gene Tunny 53:30

Yeah, I have a lot of issues with tax. I’ll have to come back to them in a future. Just interested in your thoughts on how to deal with that. Okay. Now, how would we better start wrapping up. I’ve been really grateful for your time. I mean, this has been this has been terrific talking about your new book, which I think yeah, I certainly recommend reading it. There’s a lot of good stuff in there. I’m probably more concerned about debt, you’re suggesting in your book that, you know, the federal debts. It’s not a huge concern, I guess it depends on how you characterise it. And your point is that it’s something that you can manage over time. But I should ask you about that. I mean, what is your view on the US federal debt and the fact that the US is running, you’re running a structural budget deficit, aren’t you, which is quite substantial, you’re not? You’re not raising enough revenue to pay for the spending. Do you see that, do you see that as something that has to be fixed up? I mean, you do have to be ultimately concerned to some extent about the debt and will you want to try and stabilise the percent of GDP, what’s your exact view on the debt, please in the States?

Howard Yaruss 54:51

This is such an important issue. It’s like the allocation of society’s resources that I tried to give people the foundational knowledge so that they in turn can reach an informed conclusion on their own. What I do in the book 20 trillion – 30 trillion. I don’t know about you, I can’t get my head around it. So what I do in the book is divide the national debt by the 330 million Americans and I come up with a national debt of roughly six to $8,000 per person with an annual interest payment of roughly $1,045 a person. And so there’s the question, Is that sustainable? Is that an existential threat to the United States? And I make the point that virtually everyone who went to medical school or started a business has bought a home for that matter has a debt hanging over their heads greater than that. The question is to just step back and offer some insight, try to offer some insight is that if the debt is growing faster than the economy, there could be a problem. Yeah, I mean, yet grow at the rate of the economy. It’s like, you owe a certain amount of money. If your income doubled, and your debt coverage doubled. It’s not a problem. It’s only when the debt is growing faster than the economy are issues raised. And yes, our debt has been growing faster than the economy, not significantly faster. The past fiscal year in the United States, the deficit was half of what it was in the preceding year. And so well, we have to watch it. But the question is, do people feel comfortable with this level of debt, I also make the point that when you say it’s a crisis, this debt is being paid, we have to pay it. But to whom is it being paid, two thirds of the payment goes to other Americans. So this is merely a transfer of money, from taxpayers to bondholders, which quite frankly, overlap enormously. Wealthy people tend to pay higher taxes, and wealthy people tend to own more bonds, poor people tend to pay lower taxes, poor people tend to own fewer bonds. So it’s really just moving most, two thirds of it is literally moving money from one pocket of the left pocket of a American to the right pocket of American, it doesn’t necessarily do any harm. A third of the interest payment, roughly 300, and some odd dollars here does go abroad. And you know, there are questions about that. But the question is, is $300 a year, per American in a $22 trillion economy? An existential nation bankrupting kind of issue? And personally, I don’t think it is, but you might reach the conclusion as that it is, and and vote and promote policies accordingly.

Gene Tunny 57:43

Right oh well, look out I think your book does, yeah, it makes a contribution. I think it’s got a place. It’s in this emerging genre of economics for everybody. I chatted with some people from the UK early this year, they had a book, what is the economy? I think it fits nicely in that, in that genre. To finish with, what do you think is different? Or what’s special about your book? Or what are the main? What do you think should be the major takeaway, or if there’s anything else, any other thoughts you’d like to make? Before we wrap up, please, that’d be great.

Howard Yaruss 58:21

I appreciate your asking that. And I think my book is, is is special, or I’ll go as far as saying it’s unique, in that it does, it tries not to have a political perspective, it tries to be fair, it tries to give the foundational knowledge to people so that they can reach their own conclusions as to what makes sense for the economy. Or there are points at which I do say something, but I make it very clear that it’s my opinion. And I make it clear why I’m saying so I think the book is accessible. It’s one of the only books on economics that has no formulas, their jargon, no graphs, it’s supposed to read like narrative nonfiction. And I hope it can reach an audience that ordinarily would would not learn about economics, but would pick up the book, read it, become more informed, more able to understand what’s going on in the economy, and hopefully, support better policies that would benefit not only their lives, but yours in mind, frankly,

Gene Tunny 59:20

That’s terrific. I just thought when you said about no equations. There’s a joke that John Kenneth Galbraith used to make in some of his books where he said that his publisher told him that every time there’s an equation in the book, it cuts sales in half. That’s what he heard you didn’t want to have any equations because it’s bad for sales. Okay. Howard Yaruss from NYU that’s been terrific. I really enjoyed the conversation. Thanks so much.

Howard Yaruss 59:51

Yeah, I really enjoyed it. Thank you.

Gene Tunny 59:55

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.

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.

Tags climate change, debt, economics, mmt, money, tax, trickle down economics

Podcast episode

Hyperinflation: what causes it and what to do about it – EP158

Post author By Alec Krishna
Post date September 27, 2022
No Comments on Hyperinflation: what causes it and what to do about it – EP158

What causes hyperinflation and how can it be avoided in the first place or stopped if it occurs? What characterizes countries which fall victim to hyperinflation? A conversation between show host Gene Tunny and his colleague Arturo Espinoza which explores the economic theory and evidence around hyperinflation, and discusses peculiarities which can arise in hyperinflation-afflicted economies – e.g. pensions denominated in cows in Zimbabwe.

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 Podcasts, Apple Podcasts, Spotify, and Stitcher.

Links relevant to the conversation

Current inflation rates around the world (Trading Economics)

What is hyperinflation and should we be worried? (WEF article from June 2022)

Wikipedia entry for Alberto Fujimori

Why a Zimbabwean firm offers pensions denominated in cows | The Economist

The Modern Hyperinflation Cycle: Some New Empirical Regularities (IMF Working paper from 2018)

Chris Edmond’s note on Cagan’s model of hyperinflation

Alberto Alesina and Lawrence H. Summers’ paper Central Bank Independence and Macroeconomic Performance: Some Comparative Evidence

Bitcoin Could Solve Zimbabwe’s Hyperinflation Problem—Instead, The Country Is Telling Impoverished Citizens To ‘Just Buy Gold’ (Forbes article)

Inflation is spiking in Zimbabwe (again). Why high interest rates aren’t the answer (Conversation article by Jonathan Munemo):

Transcript: Hyperinflation: what causes it and what to do about it – EP158

Gene Tunny 00:00

Coming up on economics explored.

Arturo Espinoza Bocangel 00:01

That, of course, affected or negatively affected people’s economic decisions, because my parents are all the people who live at the moment who are subject to new higher prices every day.

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. I’m a professional economist based in Brisbane, Australia and I’m a former Australian Treasury official. This is episode 158 on hyper inflation, what causes it and what to do about it? In this episode, I chat about hyperinflation with my Adept Cconomics colleague, Arturo Espinoza. Please stick around until the end of the episode for some additional thoughts from me on hyperinflation. I’ll be interested in your thoughts on this episode. So please get in touch and let me know what you think. In the show notes, you can find my contact details along with relevant links, info and clarifications. Please note that alas, I made some Clangers by miss speaking at a couple of points in my conversation with Arturo, the Weimar Republic in Germany came after World War One obviously, rather than World War Two, and the so called Fuji shock happened in Peru rather than Japan. Silly me for misspeaking. Righto. Now for my conversation with Arturo about hyperinflation thanks to my audio engineer Josh Crotts for his assistance in producing this episode. I hope you enjoy it. Joining me today is my adept economics colleague, Arturo Espinosa, Arturo, good to be chatting with you.

Arturo Espinoza Bocangel 01:40

Hi, Gene it’s my pleasure to be here.

Gene Tunny 01:44

Excellent. Arturo. So one of the things we’ve been chatting about a lot lately is inflation. And we’ve been looking at inflation and unemployment. And that’s for a project that we’ve been working on. And back a few months ago, we did chat about stagflation, a particular type of it’s a nasty combination of unemployment and inflation. That was episode 143. And I thought, based on what we’ve been looking at, and you showed me, or you alerted me to some data from Peru, in the 1990s, about a hyperinflation they had, I thought it’d be good to chat about hyperinflation is one of those economic calamities, because there are, well, it’s fascinating. It’s not something that happens a lot. And it’s, it’s awful when it happens. And it’s good to know, well, what are the things that lead to hyperinflation? What are the circumstances? How can we avoid it? And if it starts, how can we stop it? So I think it’s an important thing for us to talk about on the show. So yeah, if you’re happy to chat about hyperinflation, I think we should we should get into it. So. Yes. Yep. Let’s start. Okay. Very good. Right. So I guess where this started, was, we had a look at. But what prompted me to do this episode was I forget how it came up. But we were talking about high rates of inflation. You mentioned that in Peru in the early 90s, you had this hyperinflation and caused all sorts of all sorts of problems. And when I looked at the data on macro bond, it had an inflation rate in one year, I think it was over 10,000%. It was huge. It was it was massive. I don’t know the exact rate, I’ll have to put that in the show notes. I can’t recall it off the top of my head, but very high inflation rate. And then that reminded me Okay, well, this is something that happens from time to time, it’s hyperinflation. At the moment in advanced economies, we’ve got inflation rates of, you know, five to 10% or so. So Australia through the year, a bit over 6%, US eight to 9%. And we’re not in that sort of hyperinflation and territory, the way that they typically define Hyperinflation is where you have a monthly inflation rate. And this is prices, on average, increasing by 50% a month. So that’s a standard definition of a hyperinflation. I think that comes from an article by us economist, Phillip Kagan, I think in the 50s on hyperinflations. But there’s no commonly or there’s no widely accepted definition. As far as I can tell, I mean, there’s no official definition and Dornbusch and Fischer, so Stanley Fischer and Rudiger Dornbusch, who wrote this great macro economics textbook, back in the 80s. And, and, I used it in the 90s when I was studying, they defined it as a, an annual inflation rate of 1,000%. So whether it’s 50% Monthly, which if you looked at that on a yearly basis, that it’d be nearly 13,000%, or whether it’s 1,000%. Annual, it’s still really bad. So 1,000% annual inflation rate, where prices go up, basically 10x, isn’t it? I mean, that’s, that’s a huge. That’s a huge, impressive inflation rate. So you’re challenging for people to, to deal with? And, yeah, so I’ve got some data on the what inflation rates that we’ve seen at the moment, and it looks like, while in recent history, we have had some hyperinflations in places like Zimbabwe and Venezuela, which we’ll talk about in a moment. When I look at the trading economics websites, I’ll put a link in the show notes to this, we look at inflation rates around the world, the highest at the moment. So in annual terms, it looks like we’ve got well Zimbabwe coming in at looks like 285%. Lebanon 168%. So the very high inflation rates, but not in the hyper inflation range just yet. Okay. But it had they have had that sort of experience in the past. And we might cover that in a moment. So I thought this would be good to talk about, because, I mean, it’s something that people are aware of this can happen. And we all know that there are concerns about government, money printing and all of that. And it’s, if you’re a member of the public, and yet perhaps you haven’t studied economics, it may not be obvious what leads to these hyperinflations I mean, is this a risk for countries such as Australia, or the United States or, or Britain? And you know, what would lead to this eventuality of hyperinflation? And so what what I want to do in this episode, Arturo is just articulate. What are those conditions that lead to hyperinflation and when should we worry about it? There was an interesting article on the World Economic Forum website, what is hyperinflation? And should we be worried? I’ll put a link in the show notes to that I think that provides some interesting stories about inflation, I might kick off by talking about hyperinflation, I might kick off by reading from that. So it notes that it’s, it’s readily accepted that France and you are the world’s first recorded instance of hyperinflation during the French Revolution in the late 18th century, when monthly inflation topped 143%. Okay, so recall, at the moment in advanced economies, were concerned about inflation rates of between well between five and 10%, over through the year over a year, whereas when you’re in hyperinflation, you’re getting monthly inflation of could be 143% in France in the late 18th century. They go on to say that nevertheless perhaps the most well known example of hyperinflation incurred in the night occurred in the 1920s, when following World War One and crippled by reparation debt, Weimar, Germany saw its monthly inflation rate reached 29,500% in 1923, according to the Cato Institute, more recently, Zimbabwe was bound by hyperinflation, recording a staggering monthly inflation rate of about 70,000,000,000, 79,000,000,000% in november, that’s just insane. So I guess what those examples illustrate is that you’re dealing with countries where there’s an underlying problem, there’s some sort of deep crisis and or there’s a big disruption that occurs. So French Revolution, obviously, the end of the ancient regime, the new revolutionary government, executions, people getting detained, the end of the old regime, and huge disruption. And then following World War Two, we’ve got the Weimar Republic. And I mean, there was that you’re familiar with that the peace deal at Versailles that they struck, which was very hard on Germany at the time. So the reparations debt so the the victors the the allies, so well, outside or Britain and Australia and the US. We imposed a very tough, yes. Yeah. And so it meant that they really struggled. The Germans really struggled to pay that back and that meant that, you know, they’ve put a lot of pressure on their budget. And, well, this is where the problem comes from, essentially, your budget is in such dire straits, your deficits are so large, you have to resort to the printing press, you have to basically, well monetize your deficit, you have to create the new money yourself to be able to, to pay the bills. And that’s where you end up with, with really well, really high inflation and hyperinflation when things get out of control. And in the public, don’t trust the government anymore. They don’t want to hold the currency and the government keeps having to print more and more to try to get enough currency to pay the bills. And it just all ends really badly, you end up with these very high rate well hyperinflation 1000% plus inflation rate per annum. And you need to take really drastic measures to to get that under control. Right. So what causes it? And I think we’ve, we’ve alluded to that it’s the, it’s the fact that there is this, this printing of money to finance deficits that, for some reason or another, the government of the day can’t raise the money it needs via taxation, or it can’t borrow the money from the bond market, it can’t borrow the money from the private sector. So one of the reasons that a country like Australia or the US or Britain, why they don’t usually have to worry about inflation, or why we haven’t had a sorry, a hyperinflation. And why we haven’t had a hyperinflation here is because, well, we generally don’t resort to the printing press to finance deficits at times in the past, we have to a significant extent, but now what we do is we sell bonds into the market, the government sells the bonds, and it gets the money it needs that way. And we also don’t have the big disruption that tends to lead to hyperinflation. So what you have to have really is this combination of, well, you’ve got the there’s the money print ing going on, but that’s, that’s going on, because there’s some underlying disruption, that means that the government can’t get the money it needs, or it’s in some sort of crisis. And it needs to spend a lot of money, such as what the Germans faced in the aftermath of World War One when they had these heavy reparations payments to make. Okay, so what we see Dornbusch and Fisher note in their textbook, that classic hyperinflations took place in the aftermath of of wars. So that’s one thing we know there’s this disruption. And that’s going to affect the government’s ability to to raise money. And one thing that Dornbusch and Fischer noting, in their textbook is that hyperinflationary economies all suffered from large deficits in many cases, that was because of the war, you ended up with this large national debt. And if you end up with a lot of debt, then you’ve got the interest payments associated with that. And also, it just wrecked the country’s ability to raise taxes. Okay, because, you know, it’s destroyed businesses, for example, or perhaps it’s wrecked your, your tax collection capacity. You don’t, you don’t have the, the administrative capacity anymore to be able to collect the tax. So it’s, it ends up being a two way interaction, as they describe it. They talk about how large deficits lead to rapid inflation by causing governments to print money to finance the deficit, and then high inflation then increases the deficit. And that’s because there are two things going on. The nominal interest rates are increasing, because there’s higher inflation expected. And also because if your taxes if you’re calculating them based on what’s happened over the last 12 months or so, and prices have risen since then, then you’re going to lose out in real terms. So there’s this lag in both the calculation and then, the, the collection of the taxes and this is called the Tanzi-Oliveira Effect. So Tanzi, after a famous economist who was at the IMF, Vito Tanzi, okay, so what you have is that you’ve got this two way interaction. You’ve got, you’ve got large budget deficits that have to be monetized. And that ends up being inflationary. But then you have inflation, increasing the deficit that you’ve got, and this thing becomes a vicious circle, or it’s or it’s reinforcing. And this inflation gets a momentum, it gets a life of its own, and you can end up if you’re not careful. And if things get really bad, you can end up in this hyper inflationary situation. Right. And, I mean, the amazing thing is, I mean, we talked about, we talked about Germany, and then that’s the classic, or the infamous case of hyperinflation. And the stories that come out of these periods are just, they’re unbelievable, and they just illustrate the the hardship that’s occurred by people in these in these hyper inflationary periods, which is why we need to really guard against it and why we, we need to ensure that our monetary and fiscal policies are as sound as possible, because this is a this is a pathology, that you get this is a problem you get when you’ve got both bad monetary and fiscal policy, isn’t it? Because you’ve got the fiscal policy, which is there’s a budget deficit. And there’s also the monetary policy, which, which is financing the budget deficit by money printing. So you need the monetary authority, the central bank, or, well, perhaps it’s the Treasury, you need to have this hyperinflation go on, you need them to be doing the wrong thing there, as well as running the budget deficit, you need them to be monetizing it. So there are a lot of things that have to go wrong before you get into this hyperinflationary situation. And what happens is, you end up with massive hardship. And one thing I find I find extraordinary, there’s that story about the hyperinflation in Austria, after World War One. When, and this was a story that Keynes told, and it’s recounted in Dornbusch, and Fischers textbook. And he, they noted that people would order two beers at a time because they grew stale at a slower rate than the price was rising. So you’d go to a bar and you’d order two beers. Because the next time he went to the bar, the price would, would be high. Prices were rising. So fast, I mean, just terrible. Absolutely extraordinary stories like that. And there’s another story from Zimbabwe, we might tell in the moment, but what I thought would be good to do is we might consider some examples of some hyper inflation’s throughout the world. And because this conversation was motivated, partly by what you’re telling me about what happened in Peru, could you tell me a bit a bit about what happened in Peru in the it was it late 80s, early 90s. And then and then how that was resolved, please,

Arturo Espinoza Bocangel 18:08

In Peru, in my case, my parents, they live through that harsh time, in terms of in terms of economics and social. So basically, in the case of Peru is a particular case where some components, social, economic, and all models converge to this economic result or economic event that you have mentioned about hyperinflation. Let me give you a little bit of context about the Peruvian economy in the decade of 1980s or last decade in Peru, basically was, as I mentioned, marked by hyperstar stagflation, where is the son of hyper inflation plus recession. During those years. In Peru, the government took bad decisions. They started to spend a lot of money printing money, particularly the government of Ireland, Garcia, the first government between 1985 to the end of 80s, 90s.

Gene Tunny 19:31

Was this a socialist government?

Arturo Espinoza Bocangel 19:33

Yes, it was a leftist government. But at that moment, the political decision were the words, they they wanted to do the best. The the results told something different. But during that moment, the Peruvian Economy experience for our unfavourable terms of trade wars credit conditions for public debt and also some work condition, which caused floods, also many economic loss in during that time. So all these factors contributed towards in real economic growth.

Gene Tunny 20:23

Right. So you had this triple whammy, didn’t you? You had the declines in commodity prices, I suppose. So lower commodity prices, which affected your terms of trade, and then you said worse credit conditions for, for debt. So, higher interest rates was it at higher borrowing costs. And then you had the bad weather so, okay, yeah, pretty awful.

Arturo Espinoza Bocangel 20:47

And also is the government of Ireland, Garcia decided not to pay those public depths. So Peru also had some consequences doing that. So in response to that, the Peruvian government implemented a group of heterodox measures. So including the use of price controls, or multiple exchange rates to reduce inflation. So during that decade, Peru faced period of high inflation, so between 20% to 50% K per year, but the wars are pure in September 1988, when Peru faced its first episode of hyperinflation, the second episode of hyperinflation occur between July to August in 1990. So that, of course, affected or negatively affected people’s economic decisions. Because my parents or all the people who live at that moment, were subjected to new higher prices every day. Yeah. So imagine that. So as you mentioned about the viewers, if you want to buy milk, when milk, a jar of milk one day, the next day is, the price is higher also. So imagine that effect. So basically, those relatively poor people were the most affected. Because some of the Peruvians, they started to buy dollars, American dollars in order to avoid all the negative effects of inflationary pressures. Yeah, yeah. So that was the context. Yeah, what happened in Peru.

Gene Tunny 22:48

Um, I might just give you a break there Arturo, because I’ve just found the relevant table in the Dornbusch and Fisher textbook, my old university textbook, and then the estimates they have of the inflation rate in Peru. So if you look at 1985, I mean, it was it would have been higher from our perspective, 163%. And then it got down a little bit in 86, and 87, to 78.86%, in 98 82.5%, 1989 3,399%, 1999 7,482%, before dropping to 410% in 1991, and 88% in 1992. So, you know, just awful numbers would have been difficult for people to plan anything. And if you’re, if you’re holding your wealth in the local currency, I mean, it’s just wiped out. It’s just, you’re just losing all of that, that wealth or if you’re holding government bonds, you’re right. Yeah. You’re in deep trouble. Yeah. Yeah. And so what happened? I mean, the, there was, was there a new government and it implemented new policies.

Arturo Espinoza Bocangel 24:06

Yes, these new governments implemented heterodox policies like they wanted to control prices. And also they implemented multiple exchange rates. And I remember that impor for example, you want to import something at that moment they were restricted so import was controled as well. It was was a very dark moment in Peru.

Gene Tunny 24:36

Right. Okay, and that so that didn’t go well, that period that the initial that their response was not really the best way to tackle this was

Arturo Espinoza Bocangel 24:45

They wanted to do the best, but they think, they didn’t follow the correct prescription. Yeah, for that moment. Yeah.

Gene Tunny 24:53

And so what happens is a is it Fujimori comes in and then he’s got a different way of resolving it.

Arturo Espinoza Bocangel 24:59

At the beginning of 90s, with a new government for the Fujimori government implemented policies to stabilise the economy. So, basically, that kind of package or general economic package in order to combat the, those economic problems also social problems rely in two pillars. The first was related to cut inflationary fiscal financing. Also, the Peruvian central bank became autonomous in 1993. So there was a good hit for tackling inflation. And the second pillar was related to enhance free market conditions to liberalise the Peruvian market.

Gene Tunny 25:54

Yeah, yeah. So that they’re important, aren’t they? Because, let’s, let’s look at it. So there’s the commitment to cut inflationary fiscal financing. So we’re no longer monetizing the deficits. And I’m not sure exactly the relationship between the finance ministry or the Treasury and the central bank there. The way that deficits are monetized, is going to be different in different countries. But I mean, having this autonomy, having this autonomous Central Bank as well as important because one of the ways that deficits are monetized is that the central bank just buys the bonds from the government issues and just credits them with the money in the government’s bank account of the central bank that’s necessary to that the government wants to pay the bills. So the central bank is important in getting rid of this monetization with the central bank is often part of the monetization. So having an autonomous central bank is important because an autonomous central bank is going to tell the government no, we’re not going to buy your, your bonds, you’ve got to sell into the private market, or you need to borrow from another lender and international lender, for example. And, you know, we’re not going to be part of this money printing and monetization of the, of the deficit. So yeah, that’s incredibly important. And there’s evidence to that this autonomy, or this independence of the central bank, that is correlated with better inflation outcomes. And I mean, that’s, that’s across the whole spectrum of, of inflationary outcomes, right? So it’s going to help you prevent hyperinflation. And even if you’re a country with lower levels of inflation, you don’t have hyperinflations, such as Australia, New Zealand, Britain, US, etc. Having a more independent central bank, you’re going to get better inflation outcomes there. And I think there’s evidence by from Alberto Alesina, that’s a commonly cited study from the late 80s. I’ll put a link about that in the show notes. Okay. Now, this was called the Fuji shock. Is that right?

Arturo Espinoza Bocangel 28:11

Yes. Yes, absolutely. Yeah. The combat. hyperinflation. Yeah.

Gene Tunny 28:18

And so what was it? It was a, like they cut the they, cut the deficit, where the harsh fiscal measures. And this is, this is where it gets really bad. This is why you don’t you want to avoid getting into a hyperinflationary situation in the first place. Because the medicine is harsh. It’s harsh medicine, isn’t it? I mean, really, because you’ve got to just cut that deficit. You can’t monetize it, you’ve got to, you’ve got to either raise the taxes domestically, or you’ve got to borrow domestically. But what if people don’t want to lend to you what if your own citizens don’t want to lend to you or they don’t have the capacity to lend enough money to you then then you might have to go to an international lender, or you might have to borrow from overseas and what we find I think, in stopping a lot of these hyperinflations it’s a it’s a combination of this fiscal austerity or getting your budget under control, not monetizing your deficits are getting better monetary policy and independent central bank, but also often it’s getting a loan getting some foreign investment or getting a borrowing from overseas to to help stabilise your exchange rate, for example, that can be part of the solution.

Arturo Espinoza Bocangel 29:41

To facilitate internationally in foreign investment.

Gene Tunny 29:45

Yeah, because there was a paper that you found where you pulled out inflation and the cost of stabilisation, historical and recent experiences and policy lessons by Andre Solimano. World bank research observer in July 1990. And, and in that paper, the author writes that the experiences of stopping hyperinflation provide examples of both rapid disinflation achieved through restrictive monetary and fiscal policies. Yep. So getting your money supply under control by not monetizing deficits, getting your fiscal policy under control. And then he goes on to say, and the key role played by stabilisation of the exchange rate in successful stabilisation. So you need to get your exchange rate stabilised so that you’re not getting inflation through the exchange rate. So if your exchange rate is deteriorating, and then the cost of imports is rising, that’s contributing to inflation, so you need to get that under control. Last but not least, the history of economic stabilisation has amply shown that the availability of adequate foreign financing as a support to the stabilisation effort is a crucial ingredient in the success of stabilisation plan. So I thought that was really fascinating on and that’s an important finding, right? So it just goes to show what you need to get in place to correct a hyperinflation if it if it occurs if you’re in that unhappy situation. Right. And it looks like Peru ended up getting some it ended up borrowing from overseas as part of that if I if I recall, there was a or the IMF ended up guaranteeing loan funding for Peru according to the Wikipedia entry on Fujimori. Fujimori, is it? Yeah, I’ll put it. I’ll put a link in the show notes. And what’s fascinating about him. So he’s, he has Japanese ancestry, and he became President of Peru. But he’s a controversial figure in the end, wasn’t he? There’s a story there’s

Arturo Espinoza Bocangel 31:54

a story about the birth certificate. Well, because in order to be a Peruvian President, you need to be born in Peru. But apparently he will. He was born in Japan, but something strange okay with her with his birth certificate. Yep.

Gene Tunny 32:15

Right. Yes. I mean, he got they seem to have got it under control. But I should know that he was accused of corruption wasn’t a Oh, yes, yes. Yeah,

Arturo Espinoza Bocangel 32:28

there is. He’s considered one of the wards, precedent or corrupted precedent in the world. Yeah.

Gene Tunny 32:38

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

Female speaker 32:43

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Gene Tunny 33:13

Now back to the show. So I think we’ve talked a bit about how you stop hyperinflation. It’s, it’s harsh medicine, it’s austerity, and that’s going to deliver pain, getting your monetary policy under control. And also stabilising your exchange rate, possibly through some foreign borrowing. Okay. The other example I wanted to talk about was, was Zimbabwe, because that’s an example of D monetization, isn’t it? So one of the one of the points that you made I remember when we were preparing for this conversation is that one thing you see in Hyperinflation is that people start avoiding the currency don’t they try not to use the currency, they might switch to US dollars, for example, if they’re available, they don’t want to use the local currency. or, in extreme cases, they might even use us commodities as as items at those units of account. So this is this this bizarre story. This is from the Economist magazine, I’ll put a link to it in the show notes and this was from earlier this year, and so may 14 2022. And the headline was wire Zimbabwe and firm offers pensions denominated in cows, okay. And there’s this this actuary, Mr. Chimp, Chairman, Norway, and an actuary trained in Britain started a company, the hacker life insurance, so apologies of mangled those pronunciations instead Out of this company to sell inflation proof pensions to Zimbabweans. The Pensions are not denominated in Zimbabwe dollars, since they quickly evaporate nor in American dollars since many Zimbabweans are struggling to obtain any. Instead, they are denominated in cows, which the government can’t print. This is what I love about the economist. I love these really clever, witty, witty lines in there. That’s great, isn’t it? So say there’s typically wage earners such as teachers, they chip in cash, which NACA immediately turns into cattle. So he, okay, the the assets grow by breeding, when a policy matures, clients can demand payment in cows or the cash equivalent, right? So, look, this is a sort of quirky thing that happens when you’ve got this really disruptive hyperinflation, you see people ordering multiple beers at the bar to avoid having to pay higher prices later. And you see things like this where you’ve got contracts denominated in capital. So it’s just an extraordinarily disruptive economic phenomenon that you really need to avoid, if you can, well, it can end up being incredibly costly to get under control, but you need to do it or otherwise you just end up with? Well, societal breakdown. Really. I mean, Hyperinflation is not something that that you can you can live with, you’ve got to get it under control. Okay. So there are a few other papers I just wanted or a few other studies I wanted to mention, before we wrap up, because I think they help illustrate what sort of economies end up in, in hyperinflation. And, you know, what are those characteristics? And why? When we consider that we start thinking, Well, okay, we’re probably not there yet. It’s not yet a concern for countries like Australia, or the US, or the UK. I mean, we’ve got, we certainly have issues in our countries, but it’s, we’re nowhere near the situation where you could end up in some sort of hyperinflation, you need to have some sort of massive political turmoil, a government that just loses control of things and starts turning on the printing press to finance this deficit. So if we think about mid 80s, Bolivia, this is an example that Dorn bush and Fisher Fisher given their textbook, they had a budget deficit of 26.5% of GDP in 1984 10.8%, and 85. And inflation in those years was 1,282%, and 11,750%, in 84, and 85. So you’ve got very large deficits, like crazily high deficits, and then there’s money growth associated with that, because you’re financing it by the printing press. And you end up with the high inflation, too much money chasing too few goods. Right? Oh, they do give an example of how the sharp cut in the deficit, the fiscal austerity can stop the hyperinflation, but at a high costs, so Dornbusch and Fischer go on, they talk about how, as a result of austerity, and and poor export prices, again, in economics is multiple factors at any one time, you can you can’t run control experiments. If you listen to the show regularly, you’re aware of that Bolivian per capita income in 1992 was 30%, less than it had been 10 years earlier. So they really suffered, again, the lesson is avoid hyperinflation in the first place. have made sure you don’t have that societal disruption and, and you avoid the political turmoil that could lead to a government that, you know, enacts policies that are well, not good and need to be financed with, with money printing, right? So yeah. Okay, so there was a study that was done by the IMF. It’s an IMF working paper from 2018, the modern hyperinflation cycles and new empirical regularities. And I thought this was an interesting study, they looked at multiple countries, they had a data set 62 variables, 496 countries over 57 years, they were looking at what are the characteristics of countries that ended up having hyperinflation, and the three big ones were depressed economic freedoms, deteriorated socio economic conditions and rule of law as well as high levels of debt. aesthetic conflict tivity and government instability. Okay. So it’s when you’ve got lots of political turmoil really and, and that’s why it’s, it’s more common or it has been more common in the last well over the last 50 years or so in either Latin American countries, or in some sub Saharan African countries where there’s just been more political strife for various reasons, whereas countries that have been more fortunate countries where there’s there’s been more established democratic norms, and we haven’t had populist governments generally that on either side, I mean, I guess there have been some But largely, we’ve avoided the the extremes in particularly in Australia. And I suppose in US and UK. What’s that? What that has meant is that we haven’t ended up in a situation where we’d have to worry about hyperinflation. But again, something to be conscious of, we want to guard against it, we want to make sure we know the lessons of history and know the lessons of economics. Right. Finally, I’ll also link to a paper by Well, it’s a note on Kagan’s model of hyperinflation. It’s a note by Chris Edmund, who’s a Queenslander who I went to UQ with really bright guy ended up getting a Fulbright scholarship studied at UCLA then worked at the NYU Stern School of Business, he wrote a paper while he was at stern Kagan’s model of hyperinflation, and he talks about the conditions under which you end up with a hyperinflation. So he goes into the maths behind inflation. And its relationship with the amount of money that that people in the economy want to hold. So it’s very technical paper. But a good one, it’s worth reading, if you can, if you can get through the all of the math there, I’d recommend it. And what he, what he concludes is that one of the important messages that economists take away from Kagan’s paper, so this is the famous paper which introduced the concept of hyperinflation, or defined it in the 50s. Or maybe it was early 60s, I’ll link to it in the show notes. One of the important messages that economists take away from Kagan’s paper is the need one for fiscal discipline, and or an independent central bank to prevent monetize deficits that can allow a hyperinflation to get started, and to the need for individuals inflation expectations to be anchored, and thereby relative Lee unlikely to lead to a momentum driven inflation breakout. Okay, so what Chris is driving out here is that when things get really bad, and no one wants to hold the local currency, no one trust the government, the government just keeps printing more and more currency to try to buy the goods and services it needs. And that leads to more and more inflation. And that leads to higher expectations of inflation. And you just end up with this vicious circle, that just reinforces itself, things get out of control, it gets explosive. Okay, so that’s what he’s driving out there. And then he concludes, of course, part of the trick to anchoring inflation expectations is for government policy to be credibly anti inflation, right. So and this is often why you need a change of regime, you need a new government that comes in a new broom sweeps clean, big shock, Fuji shock, for example, in Japan, it’s tough medicine, but sometimes it has to be done to get hyperinflation. Well to to get rid of it to reduce that inflation over over the coming years. And, look, there’s a bit of a debate in economics. I don’t think we’ll have time to cover it today. But it’s about how quickly you can stop these hyperinflations. And there was a famous paper by Thomas Sargent the end, the end of for big inflation’s, or the ends of for big inflation’s, I think it is Yep. And he argues that you can actually stop these hyperinflations relatively quickly. So it’s not it doesn’t have to be a drawn out process over over several years, where you’re losing all this GDP, you can stop it quickly, if you do have a very sharp and credible change in the policy regime. So there must be an abrupt change in the continuing government policy or strategy for setting deficits now and in the future that is sufficiently binding us to be widely believed. And this is related to his rational expectations theory. So if people believe that the There’s a new credible policy, then there are expectations of future inflation can drop massively, very quickly. And that therefore, that means inflation itself drops very quickly. And you save yourself a lot of pain by having to have a slower economy and higher unemployment for several years to get rid of it. Okay. Anything else? Arturo I know, we might have to wrap up soon.

Arturo Espinoza Bocangel 45:28

I think the these topical Hyperinflation is very complex. But you have provided a good summary. I think my final message is any government around the world must be aware of that it’s important to monitor inflation to target the inflation because that putting these this or that potential economic event would bring a lot of suffer, especially for poor people. Absolutely.

Gene Tunny 46:10

Okay. Tara, it’s been great chatting with you about hyperinflation. So thanks so much for your time.

Arturo Espinoza Bocangel 46:17

Thank you, Jim. Thank you for having me.

Gene Tunny 46:21

Okay, I hope you found the conversation about hyperinflation interesting and useful. As with many of the episodes I record, I feel I could explore this topic a lot more, and I hope to come back to it in the future, it may be useful to do a deep dive on some specific instances of hyperinflation, possibly the 1920s, German hyperinflation or more recent hyperinflations in Venezuela or Zimbabwe. I’d like to delve into exactly what went wrong in the first place. How did these countries end up with big government budget deficits that needed to be monetized in the first place? Please let me know if there’s a specific hyperinflation that you’d like to learn more about, and I’ll see what I can do. I should note that one point I think I could have covered better in this episode relates to D monetization. One way a hyperinflation can end is if the government abandons the currency and replaces it with a currency that people trust such as the US dollar. When this occurs, not only is there D monetization that is declaring that a currency is no longer legal tender, but there is so called dollarization as well. This happened in Zimbabwe in 2009. Eventually, the Zimbabwe government tried to reintroduce a new local currency in 2018 19. And hyperinflation started again. Governments of course, would prefer to have their own currency as it means they can partly finance themselves via the printing press A found a good article on what happened in Zimbabwe on the conversation website, and I’ll put a link to it in the show notes so you can check that out. One other issue I would have liked to have covered in this conversation is whether hyperinflation affected economies could abandon their currencies and adopt a cryptocurrency such as Bitcoin. There was an intriguing Forbes article in July titled Bitcoin could solve Zimbabwe’s hyperinflation problem. I’ll link to it in the show notes. If you’re a regular listener, you’ll know that I’m sceptical about the potential for cryptocurrencies to replace traditional currencies, particularly given the huge degrees of volatility in their values. But I will acknowledge that crypto advocates are right about the potential for fiat currencies to be debauched. Hyperinflation is the outcome of the most extreme divorcement of currencies. As always, I’m trying to be open minded and plan to come back to cryptocurrency and other crypto assets such as non fungible tokens in a future episode. I’m also keen to have a closer look at the concept of smart contracts which are enabled by Aetherium. Right, I better finish up now. I’d love it. If you could join me again next week for some more explorations in economics. Ciao. 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 writing on your podcast app. If you have any comments, questions, suggestions, you can feel free to send them to contact at economics explore.com And we’ll aim to address them in a future episode. Thanks for listening. Till next week, goodbye.

Credits

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

Tags budget deficits, central bank, economics, hyperinflation, money

Podcast episode

Global economic outlook + Aussie inflation & house prices – EP150

Post author By Alec Krishna
Post date August 2, 2022
No Comments on 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

Gene Tunny 00:21

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.

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.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.

Tags australia, central bank, economics, inflation, interest rates, monetary policy, money, rba, stagflation, united states

Podcast episode

Reserve Bank of Australia being reviewed after big mistakes w/ Peter Tulip – EP149

Post author By Alec Krishna
Post date July 26, 2022
No Comments on Reserve Bank of Australia being reviewed after big mistakes w/ Peter Tulip – EP149

The Reserve Bank of Australia has allegedly made some bad calls in recent years and now the Australian Treasurer has commissioned a major review. This episode’s guest, Dr Peter Tulip of the Centre for Independent Studies, has long pushed for a review of the RBA. Peter, a former RBA and US Fed economist, thinks the RBA can learn from other central banks such as the Fed and Sweden’s Riksbank, and it can avoid future bad policy decisions which cost hundreds of thousands of jobs.

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

Here’s a video clip of Peter’s conversation with show host Gene Tunny to give you a flavour of what is covered in the episode.

About this episode’s guests – Dr Peter Tulip

Peter Tulip is the Chief Economist at the Centre for Independent Studies, a leading Australian think tank. Peter has previously worked in the Research Department of the Reserve Bank of Australia and, before that, at the US Federal Reserve Board of Governors. He has a PhD from the University of Pennsylvania.

Peter’s twitter handle: @peter_tulip

Links relevant to the conversation

Peter’s previous appearance on Economics Explored: https://economicsexplored.com/2022/04/11/the-high-cost-of-housing-and-what-to-do-about-it-w-peter-tulip-cis-ep134/

Australian Treasurer’s 20 July 2022 announcement of RBA review:

https://ministers.treasury.gov.au/ministers/jim-chalmers-2022/media-releases/review-reserve-bank

Peter’s CIS paper on the RBA: https://www.cis.org.au/publication/structural-reform-of-the-reserve-bank-of-australia/

Kevin Warsh’s review of the Bank of England Monetary Policy Committee: https://www.hoover.org/sites/default/files/transparency_and_the_bank_of_englands_monetary_policy_committee.pdf

This is the 2010 Statement on the Conduct of Monetary Policy that Peter refers to at the end of the episode:

https://www.rba.gov.au/monetary-policy/framework/stmt-conduct-mp-5-30092010.html

This is the most recent statement:

https://www.rba.gov.au/monetary-policy/framework/stmt-conduct-mp-7-2016-09-19.html

Transcript: Reserve Bank of Australia being reviewed after big mistakes w/ Peter Tulip – EP149

Peter Tulip 00:01

Coming up on Economics Explored. Many of us, including me, think that the Reserve Bank has been making big mistakes and is in need of structural reform.

Gene Tunny 00:15

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 149 on the review of Australia’s Central Bank, the Reserve Bank of Australia, or RBA. This review was announced by Australia’s new Labour government on the 20th of July, 2022.

My guest this episode, is Dr. Peter Tulip. Peter has long pushed for a review of the RBA, and he’s been extensively quoted in local media on what needs to change. Peter thinks that the RBA has made some big mistakes in the past, and it could learn from other central banks, such as the US Federal Reserve, and the Bank of England, as he explains in this episode.

Currently, Peter is the Chief Economist at the Centre for Independent Studies. And before that, he’s worked at the RBA, and at the US Federal Reserve Board of Governors. So, he knows how central banks work on the inside, and his perspective is a valuable one.

This is Peter’s second appearance on the show. He previously appeared in Episode 134 on the high cost of housing. So, if you haven’t listened to that yet, please listen to it after this episode; it’s great.

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. I’d love to hear from you.

Righto. Now for my conversation with Peter Tulip on the review of the Reserve Bank of Australia. Thanks to my audio engineer Josh Crotts for his assistance in producing this episode. I hope you enjoy it.

Peter Tulip, Chief Economist at the Centre for independent studies, welcome back to the program.

Peter Tulip 02:01

Good, Gene, how are you?

Gene Tunny 02:03

Good. Thanks, Peter. It’s great to be chatting with you again. I’m keen to speak with you about the review of the Reserve Bank of Australia that was announced earlier this week by the treasurer, Jim Chalmers. One of our colleagues, Steven Kirschner; Stephen has been on the show before too. He wrote that the RBA review is; he wrote about it that everything is on the table, and that’s good. So, it is a very expansive review. The only thing it looks like they’ve left off the table to me, is that they’re not reconsidering the split in responsibilities between the Reserve Bank and the Australian Prudential Regulation Authority. They obviously still see a role for that as a separate entity, rather than rolling, prudential regulation back into the RBA. But other than that, it seems like a very broad ranging review. Are you generally happy with what’s been announced?

Peter Tulip 03:02

I’m delighted. Many of us have been calling for something like this for a long time. And the terms of reference are fairly deep and broad. The people running the review, first class, and there’s a good mix of people too. I mean, they’ve got a central banker, an academic and central bureaucrat. And any substantial reform, the RBA is going to require integrating those three perspectives. So, that’s useful also.

Gene Tunny 03:41

Right, okay. So, we’ve got an international expert, someone who’s been on the committee, the Monetary Policy Committee in the UK;

Peter Tulip 03:49

The Financial Policy Committee, slightly different. That’s financial stability rather than monetary policy.

Gene Tunny 03:55

All right. Okay. But she’s had a senior position in the Canadian Central bank, is that right? Caroline Wilkins?

Peter Tulip

Yeah, sure.

Gene Tunny

And also, Renee A. Fry-McKibbin, who is an academic at the Australian National University, so highly regarded macro Economist, and also Gordon Brewer, who I worked with in the Treasury many years ago. And I mean, I think Gordon’s an excellent choice for that. So, yeah, it looks like;

Peter Tulip 04:24

And before that, Gordon worked at the RBA, so it’s good to have some internal experience.

Gene Tunny 04:31

Right, okay. But it wasn’t exactly what the RBA wanted, was it? Even though it looks like the RBA has had some role in shaping the terms of reference, I saw an interview with Jim Chalmers on, was either Coffee show or the Today show here in Australia. And he was saying that the RBA said some input in the terms of reference, but originally, they just wanted to review themselves, didn’t they? Which would have been a great idea if you think about it.

Peter Tulip 04:58

To be credible, it needs to be external and independent. They’ll have a secretariat, which will be largely staffed, I think, from Treasury and the RBA. So, they’ll be able to call on the resources of the bank, and it’ll be informed by the bank by insiders, but the ultimate judgments will be independent and external, which I think they need to be.

Gene Tunny 05:26

Well certainly will, particularly if they’ve got Rene on the review committee. So, Rene is the editor of the Economic Record here in Australia, which is the top Economics journal here, and she’s well known in the economics profession and her husband, Warwick McKibbin, is actually a former board member, isn’t he? I mean, she’s obviously a separate person to Warwick. But I mean, I’m wondering if this is a way that Warwick’s views are actually getting inputted into the review in some way, even though obviously, she’s her own individual.

Peter Tulip 06:03

Yeah. His views will clearly get a lot of weight. But Rene is an expert in her own right. Yes.

Gene Tunny 06:09

Yeah, along with other economics colleagues. So, it’s not going to be something that the Reserve bank is going to necessarily get its way on, which is good. There’s going to be input from a broad range of sources, including yourself, I mean, I’m guessing you’ll be making a submission to the review.

Peter Tulip 06:26

I’ve already written my submission. I mean, so I did a big paper calling for reform of the RBA, just a few months ago. In the context that this review has been called for. And I set forward my views on what I was hoping the review would look at and what it would conclude. So, I’ve done my bit, and now it’s up to them.

Gene Tunny 06:48

Great., I mean, you’ve certainly been one of the most influential people in in this discussion so far. And you wrote a fascinating AFR piece earlier this year, which was titled Reserve Bank must be made accountable for inflation mistakes. So, might chat about that in the moment. But to begin with Peter, could you tell us why do you think this review was necessary in the first place? Is it because of those inflation mistakes?

Peter Tulip 07:14

Can I give a long answer to that? So, there are three levels of an answer in increasing areas of being controversial. The first and simplest answer is that, it’s just good practice to regularly review your monetary framework every few years, in the light of new research and new experience. People are writing about these frameworks all the time, and you need to, every now and then have a stock take of that. And this is what all of our foreign, not all, most other Central banks do. It’s standard amongst foreign central banks to have regular reviews. And the format of those varies, and we’ll talk a bit about that. Some of them are external, some of them are internal. Some of them have a heavy academic focus. Some of them are on; the Bank of Canada does is on a regular five years schedule. Others are more ad hoc. So, that’s one thing. It’s just regular practice.

The second bigger argument is that the Reserve Bank has been missing its targets that prior to the pandemic, the inflation rate was well below the target of 2 to 3%. And the unemployment rate for an even longer period was well above estimates of its sustainable or full employment level. And so, particularly with the inflation rate, which is the reserve bank itself describes as a key performance indicator, when you’re persistently failing to hit your targets, there is there has to be a presumption that a review is necessary that otherwise there’s just no accountability at all.

And then the third layer of arguments I gave, which is more controversial, is that many of us, I mean, including me, think that the Reserve Bank has been making big mistakes, and is in need of structural reform. And it’s great to have a chance to hear those views. And these are arguments that part of them are related to the composition of the board that these are decisions for the government and parliament often, rather than for the bank itself. And so, you need some kind of external review to evaluate this widespread argument.

Gene Tunny 09:53

Yeah, I think they’re good points. Peter, can ask you about that inflation target of 2 to 3%. Now, there could be two possibilities couldn’t there? It could be that either the 2 to 3% target doesn’t make sense, or we should review that target; we should, maybe we could downgrade it or just set it at 2% or have it at 1 to 2%? Or another possibility is the Reserve Bank; I mean, it was derelicting its duty. So, is that right? There are two possibilities there, there could be; and this is why a review would be desirable because you’d either look at the appropriateness of the target, and also whether the Reserve Bank is actually doing what it would need to do to achieve that target.

Peter Tulip 10:36

Correct. So, the reviews that other Central banks have had, often have had a strong focus on the specification of the targets. And that should be part of this review. And there are many people that would prefer a different target to the 3%. There are some people who think the inflation target should be lower, there are some people who think it should be higher. There are respectable arguments for both that the review should be considering. And that should be an important part. In my view, those arguments are really secondary, oh sorry, I should also say, there are other people who want to target a different objective completely, such as nominal income. And we’ll talk about that later on.

In my view, those arguments are really secondary. That for most of the past decade, the bank has not been hitting its targets, it hasn’t even been trying to hit them. So, it’s a bit pointless specifying worrying about how you exactly define the target. If the bank isn’t just going to ignore. The most important question is governance, and how can we change the incentives of the RBA so that it actually does hit the targets it’s given? And you need to get that right before you worry about what that target actually is.

Gene Tunny 12:04

Okay, a bit of follow up on that. Peter, you’re saying that it hasn’t even been trying to achieve those targets?

Peter Tulip 12:11

Sorry, I’m wording that too strongly. You’re right.

Gene Tunny 12:13

I think I understand the point you’re making. I want to just explore that a bit.

Peter Tulip 12:18

Can I give you an example?

Gene Tunny

Yes, please.

Peter Tulip

So, in November 2019, just before the pandemic came along, the Reserve Bank issued a set of forecasts, and it had underlying inflation staying outside the target range for the whole horizon. And it had unemployment exceeding the bank system, it’s a full employment for the whole horizon.

Gene Tunny

So, inflation was below 2%?

Peter Tulip

Yeah. Unemployment was I think, being forecasted 5% or higher, varying depending on the horizon. And despite what you would think is an obviously unsatisfactory outlook. The Reserve Bank didn’t change interest rates, either at that November meeting or subsequent meetings until the pandemic came along. And it did so because it was worrying about other things, in particular, financial stability. So, there was a disregard, or at least down weighting the bank statutory responsibilities in the legislation that says, the objectives stability of the currency, which we interpret is 2 to 3% inflation, and full employment, which we would interpret now as the preferred terming, that other Central banks uses, maximum sustainable employment, which were estimated about four and a half percent. So, there was a down weighting of those objectives in favor of this new objective that the bank invented about indebtedness, and we’ll talk about that later on too.

Gene Tunny 14:01

Okay, so shouldn’t central bank be concerned about indebtedness and the related issue of financial stability? I mean, that’s ultimately what they’re concerned about, isn’t it that if they’re worried that monetary policy, if it’s too loose, if it’s too accommodative, then households could take on too much debt and then get into trouble at a later date and that could have adverse economic consequences.

Peter Tulip 14:28

Sure. So, we know from the global financial crisis, that if your banks start failing, then it’s catastrophic for the economy. Australia had a similar experience in; when was it? In the early 1990s. When several of our small banks failed and some of our big banks came close. And again, that that was one of the worst recessions Australia’s had in living memory. So, yes, financial stability matters a huge amount. The question is how you deal with that? And what’s the appropriate instrument for that? And there’s a very large volume of research saying that it’s not interest rates or monetary policy, it’s prudential policy. And they were in particular, about the capital requirements that banks are required to have. And the way to avoid a repetition of the GFC is not to put 270,000 people unemployed, is to raise your capital requirements. So that if in the event of losses, banks making losses on their loans, banks have sufficient equity to cover that. And so, the important objective is, yes, we do very much want to avoid a repetition of the GFC. The way to do that is with high capital requirements.

Gene Tunny 16:04

This 270,000 jobs number Peter, is this from an analysis by, is it Andrew Lee and?

Peter Tulip 16:15

And Isaac Gross. So, Andrew Lee is now an assistant Treasurer, he’s a government minister. And Isaac Gross is an academician at Monash University of Economists. And they, just recently, published a paper in the economic record, which you were referring to before. That’s the journal that Renee A. Fry-McKibben edits. Where they found that, yes, the reserve bank kept interest rates too high, between 2016 and 2019. And because of these worries about debt, and because of that, unemployment was 270,000, higher than it should have been.

Gene Tunny 17:08

Yeah, it’s interesting. I mean, I’ll take the point there about; if you do run that simulation, and I think they use the Reserve Bank’s own macro-economic model Martin, I think they’d call it. And so, look, yeah, good point. I mean, if I were on the board, I’m probably one of those who wouldn’t have minded them having kept the rates where they are. I probably wouldn’t have supported cutting them, as that model would suggest, given that I would have those concerns about financial stability. But I do recognize that there are a variety of views. And I’ve been interested to learn about that literature that you’ve written about, and also Steve Kirschner talked about when I spoke with him on nominal GDP targeting. And I want to have a closer look at that.

Peter Tulip 18:00

I’m happy to argue the merits of that particular argument further if you want, but what’s maybe a more important point to make here is that the process was bad. Yes, the bank never really explained or defended its position in public, that there seems to have been a real lack of scrutiny of the decision. So, there are people such as yourself, who were sympathetic to what the bank did. But those arguments, I would say, the large majority of expert opinion is on the other side, which is that you should regulate these considerations with prudential policy, not with monetary policy, that the most direct instrument is almost always the most efficient, and involves the least collateral damage? Yeah.

And even though, a majority of expert opinion in a majority of other central banks were explicitly opposed to the bank, there was no real defense of that position in the bank’s documentation. Beyond a few brief sentences. The bank never quantified its concerns, was never actually very precise, even about whether it was really worried about the level or the growth rate of indebtedness. It didn’t even say what; no discussion of what’s the best way to measure this, no real clear discussion of the consequences of this. But maybe even more important, even though most expert opinion was against the bank, there was no; counter arguments were never addressed.

So, in the paper I wrote that earlier this year, I mentioned another half a dozen arguments against the bank’s focus on indebtedness, any one of which I think would be fatal. And none of these were publicly addressed. Just to give one, a lot of research studies find that low interest rates don’t actually have almost negligible effect on indebtedness, that the debt to GDP ratio has a numerator and a denominator. And low interest rates will encourage both. And a lot of research says that actually, you have a bigger effect on GDP than you do on the debt. So, low interest rates have a greater effect on the capacity to repay, or to bear a burden than on the actual burden itself. Insofar as what the bank was doing, it was counterproductive. And there are more arguments and people; rather than going through succession of arguments on it. Yeah, actually, this is the paper. It’s called structural reform of the Reserve Bank of Australia. I mentioned a lot of further reasons as to why the bank was wrong in targeting indebtedness at the expense of its core objectives.

Gene Tunny 21:35

Yeah. I’ll put a link in the show notes to that paper for sure. Peter, in fact, I’ve got it in front of me, it’s a Centre for Independent Studies analysis paper, 36, April 2022. And in that paper, I mean, you, I mean, it’s Frank and fearless for sure. You’re someone who used to work at the bank. And you’ve probably still got a lot of friends there at the bank. But you mentioned or you talked about their poor communication and poor process. Now, I mean, you’re talking about that before. What do they need to do better? How do we improve it? I’m guessing this would be one of your hopes for what the review recommends. But how do we improve the process in the communication?

Peter Tulip 22:27

So, let’s start with this particular issue, the bank needs to fully explain itself, that it needs to outline the pros and cons of its arguments and address obvious counter arguments. And preferably, if something is important, you need to say what’s the evidence, both consistent with the bank’s position and how do we address evidence that people think weakens the position? And some kind of quantification of these effects is, well, I mean, some of these things can be measured, and there is substantial research on aspects of this question. And that really needs to be discussed and its relevance to policy explained.

So, that’s dealing with one specific error, and why that’s important, is, unless you do that, mistakes will happen. And so, regardless of your position, on this particular question of indebtedness, the process was clearly flawed. That if you keep making big decisions that slip hundreds of thousands of people out of work, without a full, open public discussion, sometimes you’re going to make mistakes. And when you make mistakes, they will persist. An open discussion is the best antidote to making serious mistakes. Because this was not just a one off, the bank has a record of very controversial decisions that run counter to mainstream economics. For example, Warwick McKibbin, we mentioned earlier, was pushed out of the bank when he objected to its policy. This is back in the late 80s, early 90s of targeting the current account deficit. The bank had interest rates far too high, because it was worried about the current account deficit. Warwick McKibbin said that that was wrong. And essentially, he was told he wasn’t welcome. So, he left.

So, this is a cultural problem within the bank, its resistance to criticism and to scrutiny, even internal scrutiny.

Gene Tunny 25:09

Peter, can I just ask what are they doing now? So, at the moment, they do publish; there’s a decision, there’s a monetary policy decision every month regarding what they do with the cash rate, there’s a page or so of, you know, discussion of where the economy’s at and some sort of; all they make clear what their decision is, you’d like to think there’s some logical connection with their analysis of the economy in that decision. The governor does make himself available to give speeches, he appears that I mean, parliamentary committees, from time to time. So, what more needs to be done? And are there any examples around the world of how it’s done better?

Peter Tulip 25:54

Yeah, I think most Central banks are clearer and more transparent than the RBA. Where it matters most is in reasons better decision. So, where transparency, I think is most necessary is for the banks to say why it made a decision, and why its choice was preferable to alternatives. So, for example, at the moment, the bank with the rising rates, the market expects to be going up about 50 basis points a month, the next few months. It would be very useful, in fact, I think it’s necessary for the bank to say, what would be the consequences of alternative choices? Suppose interest rates were to rise slower, and interest rates could rise higher, and what would be the unemployment and inflation consequences of those alternatives? My guess is that a faster path of increases would give us lower inflation and higher unemployment, in both cases, bringing those variables closer to the bank’s targets.

So, why is that not the preferred choice? That strikes me as the central requirement for transparency, explaining why you’re not doing something different, and the bank doesn’t really do that. It certainly doesn’t quantify it. But other central banks do. The Federal Reserve, the Risk bank are prominent examples. I mean, all it takes is just a little four panel chart to show; again, this is the Goldilocks path in the middle, and this is too high and this is too low. And these are the consequences and we pick the path, the Goldilocks path with the best outcomes. Other central banks do that as a matter of routine, so should the RBA.

Gene Tunny 28:05

Right, so you’re talking about the Federal Reserve and the Bank of England? Okay.

Peter Tulip 28:09

The Bank of England does it in a slightly different way with scenario analysis. That would not be my preferred model. Either the Riksbank or the Fed approaches, or just very clearly convey the central issues in the monetary policy position.

Gene Tunny 28:27

Yeah. In preparing for our chat, Peter, one thing I noticed was a review that was done of the Bank of England’s Monetary Policy Committee by Kevin Walsh, 2014. Actually, I may have learned about that from you. I’m trying to, I can’t remember exactly, but I thought that was very good. If I’m reading one of his tables correctly, it does suggest that we have very low transparency here in Australia relative to those other countries. I think that’s.

Peter Tulip 28:57

So, about Kevin Walsh, he used to be a governor of the Federal Reserve and went to the Bank of England. This is an example of the kind of external reviews we were talking about, specifically to review their processes for transparency and openness. And it ended and it’s a very good thoughtful report, and anyone interested in that issue, I strongly recommend it. As part of his review, he looked up the Central bank practices and then yeah, the RBA was terrible. And the RBA is partly rectified. It as been more opened since that report was done. And in particular one, one of his glaring findings was that Australia was the only country he looked at where the Central bank didn’t give regular press conferences and and other countries find that a very useful way of explaining that as decision, and in particular, having important decisions challenged and defended. But since then, Philip Lowe has started getting press conferences, so, that’s a great thing. I’d still like them to be more frequent. He only does them occasionally, I would think you should do them, at least quarterly.,

Gene Tunny 30:34

Yeah. They certainly need to improve their communication. I’ll have to think myself about what that would best look like. I quite like the idea of having scenarios or having different, you know, looking at what different policy parts could mean for inflation and unemployment, but also being honest about what’s the uncertainty around that. And I mean, one of the things that our Governor, Philip Lowe has got into trouble for in the last few months is just the fact that their forecasts appear to have been just so bad. Perhaps, if they’re more honest about just how unreliable economic forecasts can be, given that the economy is hit by shocks all the time, and I mean, we’re not even sure we’re properly modelling the underlying mechanisms. Perhaps that would have; he would be held in high regard now. But everyone’s mad at him because he was, people were taking his word for it, that interest rates would stay where they were until 2024. And so, he’s in a heap of trouble now.

Peter Tulip 31:37

If I can comment on that. So, I think people exaggerate how bad these forecast errors were, and in particular, their relevance to the review. You have to remember that Jim Chalmers came out in support of a review of the RBA, over a year ago. So, before inflation took off, in fact, back a year ago, inflation was below the target. So, what’s happened? There are these unusually large forecast errors, but they’re not the reason we’re having a review. And forecasting is difficult, and in particular, if you’re forecasting in the middle of a pandemic that you’ve never been through before, you’ve got no historical experience to go by. And as it turned out, vaccines came on stream very much quicker than expected. And they worked much better than they’re expected. And the RBA got that wrong. You know what, no one can forecast accurately. I’ll be impressed with criticisms about the bank’s forecast record from people who actually do forecasts better than the bank. Hearing a lot of criticisms that we’re forecasting for people that don’t actually present forecasts themselves makes me roll my eyes a bit. Yeah, fair point. And the bank will always make forecast errors. And it has processes to improve its forecast performance and it does reviews of its models and this and the databases and things like that. The review will probably look at that. I’ve actually been involved in that process. I don’t see great scope for change or even questioning what the bank is doing there.

Gene Tunny 33:48

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

Female speaker 33:53

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Gene Tunny 34:22

Now back to the show.

Okay, can I ask you about this transparency, like how we improve that? One of the suggestions that came from a panel member at the conference of economists last week when we’re in Hobart, you were there? I can’t remember. Sorry, Peter, were you in that session? You were in that session, weren’t you? There was that recommendation that I forgot who made it. But that part of members of the board of the Reserve Bank that their deliberations or their decisions are published or someone’s got a dissenting opinion that’s published. So, we get more communication from the board members. And so, we understand that there is a difference of views and that could help the public understand the deliberations and realise that the Reserve Bank isn’t this all-seeing, all-knowing entity that’s fully in command, or maybe that’s the wrong way of putting it. But maybe that would make people realise that they’re human, and mistakes can be made. And so, when we have a governor who says, oh, interest rates will remain this, at this level until 2024, we should realise, well, he’s talking about based on these assumptions. I mean, you can never guarantee anything. But what do you think about that idea of having more information about what different board members are thinking?

Peter Tulip 35:51

I think that’s a great idea, partly to improve the incentives have individual board members, that individual board members should be accountable for their decisions. And at the moment, there isn’t any individual accountability, these decisions are presented as decisions of the board. And so, I think there’s no incentive for a board member to say, I think this decision is wrong. The research says opposite. We need to pursue an alternative course of action. So, partly, there’s inadequate challenge within the board process, as and as a result, less need for the bank to defend itself. But also, it means the public is not brought into these highly consequential debates and decisions. And that would improve things. And where a board is divided on a particular course of action or a particular piece of analysis, this is where external research and external opinions are most valuable. But no one knows that. So, people talk about monetary policy, including you and me, but we’ve got no idea whether we’re talking about something that the board regards has completely settled, or as a 50-50 decision. And so, a lot of what we say is not relevant. And there are big questions on which further evidence would be useful. That we don’t know about.

Gene Tunny 37:30

Right. On the members of the board, you’ve been quite prominent in the media recently, and in the commentary on this RBA review, you’ve made the point that the level of expertise of board members is not really where it should be. I mean, obviously, there are some that have the expertise. But are you arguing for more economists on the board rather than business people? Is that correct?

Peter Tulip 38:01

Yes. And to be precise, more monetary policy experts. And this would be my number one recommendation for reform of the RBA. We talked earlier about the bank making mistakes, the first place that they should be caught and challenged is at the board level. But at the moment, the board seems to be operating as a rubber stamp for the governor, and that’s not good. I mean, so Phil Lowe is a very talented economist who gets lots of things right. But he is human and he’s just one person and he makes mistakes. You’ll have you will have fewer mistakes, if the decisions were instead, made by a committee of experts.

Gene Tunny 39:04

And is that what they’ve got in the States or in England or in or in the UK?

Peter Tulip 39:09

Yeah. So, I mean, that’s an interesting comparison. So, in 1959, when the RBA board was being set up, it was actually common to have non economists making monetary policy decisions. But since then, other Central banks have decided these are technical questions on which research is relevant and needs to be apply. So, they’ve moved to monetary policy committees, overwhelming, really comprised with monetary policy experts. Actually, it’s not just experts, but they have some of the leading economists in the world on monetary policy, sitting on their monetary policy committee. These the people that wrote the textbooks I learned my monetary policy from are often on the FOMC, or the Monetary Policy Committee of the Bank of England. So, whereas other countries have stars making their monetary policy decisions, we have part-time amateurs.

Gene Tunny 40:19

Yeah. Well look at who’s been the Federal Reserve Bank Governor in the US. You’ve had Ben Bernanke. You’ve had, I mean, he’s made huge contributions to macroeconomics. Janet Yellen.

Peter Tulip 40:33

The deputy of Stanley Fischer.

Gene Tunny 40:35

Right. And he’s the person who wrote the textbook;

Peter Tulip 40:39

And Bernanke and Frederick Michigan. Yeah, they’ve written textbooks on how to do monetary policy.

Gene Tunny 40:48

Okay. Yeah, good point. That’s a very good point,

Peter Tulip 40:52

Let’s say a bit more about the composition of the board. So, there are two parts of it, you would get better decisions with more experts on the board. And it’s just like, any other technical decision being made by a government bodies on immunisation or building a bridge or whatever you want. You don’t want business leaders making these decisions, you want experts in the field. Within that, you want a diversity of views. So, you want a mix of hawks and doves, for example, some empirical people, some theoretical people. Instead of that diversity of expertise, sorry, that diversity of views, we have a diversity of expertise, that there are some members of the board that are capable of challenging the governor, but most are not. And that results in groupthink and status quo bias and other flaws in decision making that we see in our monetary policy decision.

Gene Tunny 41:59

Yeah. So, look, I agree with you on that, Peter. And I think the government will find it, I mean, I don’t think that I’ll accept a recommendation along those lines, unfortunately. They’ll probably want to have a trade union member on the board. I think there’s going to be a push for that. Some people pushing for, let’s have a regional representative on the board. I mean, I don’t necessarily think we should be selecting people for the board for that reason. But what you’re going to have is, you’re going to have; there are people who are sceptical of experts, because there’s this general view out there now in western economies, that look, experts have led us down. And you know, people are upset about things that happened during the pandemic, and even before then. So, there’s a larger scepticism about experts. And there’s this issue of democracy, isn’t there? I mean, so, there could be an objection. Well, we don’t want all these technocrats running things. We think there should be some democratic element there. But then I think the issue there is that if you don’t have an independent Central bank, then you get worse inflation outcomes.

Peter Tulip 43:15

See, you’re raising several issues there, Gene. So, think about the other big important decisions that have been made in the news lately. I’m going to say public health. Do you want doctors and Epidemiologists making decisions on whether vaccines are approved? Or do you want business leaders?

Gene Tunny 43:36

I want the doctors and the Epidemiologists for sure.

Peter Tulip 43:41

If a bridge is being built, you want that decision to be made by engineers or by business people? I mean, so in other areas, government policy, we rely exclusively on people that prompt eminent experts with technical expertise, and monetary policy is the same. It used to be that the values of monetary policy and even the objectives were vague and not clearly decided. And so, the board had a lot of discretion as to why monetary policy should be set but that’s no longer the case. Central bank has moved to a world of clearly defined objectives, essentially set by the government by the elected representatives. So, they decide that the objectives of the RBA are full employment and inflation of 2% to 3%. And it then becomes a technical question as to how to best achieve that, and that’s the decision that should be made in the national interest. It should not be made by representatives of sectional interests. Excellent point. And this interacts with the other recommendation we’re talking before about public votes.

So, if you have a representative of say, the mining industry or the agricultural industry; industries that are heavily exposed to the exchange rate, do you want them making decisions that affect the exchange rate for the national interest or that will affect their sectional interests? I mean, if it’s the sectional interest one, they’ll always be voting for lower interest rates, and a depreciation of the exchange rate, and their constituencies will be expecting and demanding that. So, if you do have so called sectional interests, but you want the vote to be a national interest, you would need to keep the votes private. And this is an unusual way of dealing with a conflict of interest. Normally, we think conflicts of interest are best dealt with by transparency, not by secrecy.

Gene Tunny 45:58

Okay, what about the banks themselves, the staff on the banks themselves? Do you have views on how our reserve bank, how it compares with its peers with the Federal Reserve or Bank of England in terms of its ability to analyse the economy and to provide the advice to the board?

Peter Tulip 46:20

Yes. So, as background to that, before I worked at the Reserve Bank, I worked with the Federal Reserve Board of Governors, I was on the staff there for 11 years. I also worked at the OECD, on monetary policy, going on around the world talking to Central bankers about how they were sitting, making their decisions. And so it’s interesting, I mean, that background shows real differences in character and culture between different Central banks. I mean, have you noticed that just in government departments, different cultures, but even with Central banks, where they’re technically doing the same decision from different countries, they vary enormously. The RBA tends to be much less interested in research, and much less interested in technical modelling than other Central banks. And most clearly, with the Fed where the Fed has 400 PhDs on his staff, essentially putting together its forecast. The RBA has a very different human capital model, where academic qualifications and less important promotion and research is not ending, external research is not expected of most staff. And again, that is something that the review could look at a lot of people. I mean, there are differences on views as to whether that’s appropriate, and reflects lots of reasons that I mean, culture and history is a lot of it.

Gene Tunny 48:08

Yeah. So, your big recommendations for this review, or what you hope to get out of this review, improvements in transparency and communication.

Peter Tulip 48:18

Can I list them in order? Yes, please.

Number one, we want more monetary policy experts on the board.

Number two, we want those members to be individually accountable. That means public votes and public explanations of decisions.

And third, the bank needs to be more open and transparent. And in particular, needs to do clear reasons for its decisions, and why alternatives are not taken. They would be my three main recommendations.

Gene Tunny 48:53

Okay. So, no changes to the inflation targeting regime, this flexible inflation targeting regime they talk about?

Peter Tulip 49:00

That’s why I have views on that. But as I said before, I think they’re secondary. So, the main changes I would make is, first of all, every time there’s a change in government or change in governor, there’s a new agreement between the bank and the government called the agreement on the statement of conduct of monetary policy. And that is where the target is specified in detail, which I think is appropriate. Currently, that says the main objective of the bank is inflation 2 to 3%. In my view, it should also specify full employment, or to be precise, maximum sustainable employment as an objective of equal status to the inflation rate. So, in legislation, the bank has a dual mandate that’s not reflected in the agreement on the statement of conduct and I think that causes a lot of confusion. People think that when people read the bank’s explanations of what it does, they often think that the bank is an inflation nutter. Which it’s not, it takes its unemployment objective very seriously. And it does it in this vague way, because flexible, inflation targeting, which should be specific about what flexibility is required and what isn’t. There would be other changes, but that would be the main one I would make.

Gene Tunny 50:31

Do you think there’ll be any changes to that framework? There seems to be a view from the RBA, and I guess from others that the inflation targeting approach seems to have worked pretty well in keeping inflation low over the last few decades, I mean, you mentioned, there is that issue of the times it might have meant we had higher unemployment than otherwise.

Peter Tulip 50:56

No, that was because they abandoned their inflation target. They had inflation too low, accompanied by excess unemployment, you would have sold both of those problems with lower interest rates. It didn’t do that, because it did invent this other objective of indebtedness that it should not have done. And it certainly shouldn’t have done it without a more open, transparent and accountable process. So, I think the main proposal for a change in the framework is for nominal income targeting, which Warwick McKibbin and Steve Kirschner and numerous other monetary policy experts think would be preferable. I think that’s a minority position. And I think you’re right, that the consensus of informed opinion doesn’t think that the framework needs to change much. I mean, I think there are some minor tweaks that shouldn’t be implemented.

Nominal income targeting is not popular, partly because no other Central bank does it. So, there’s no example to show that it works. And the RBA is not a pace setter in these things. It’s a follower, not a leader, which is useful in a lot of ways. But also, the American literature on nominal GDP targeting some phrases in terms of nominal GDP targeting, which would just be inappropriate for Australia, because we have such volatile terms of trade. And we don’t want monetary policy being jerked around to target the coal price. Which just would mean big dislocations for most households. Not much apparent benefit.

Gene Tunny 53:02

Yeah. There seem to be some recognition of that in that panel discussion in;

Peter Tulip 53:08

So, Warwick McKibbin has said, you would target a slightly different variable, maybe some measure of nominal income. And that makes more sense. Warwick keeps contrasting his arguments for nominal income targeting with inflation targeting, which is what the bank says it is that it’s not what the bank is, in practice. In practice, the bank has a dual mandate. And we’re its main argument, as I take it is that inflation targeting is wrong, because activity is an appropriate objective of the Central bank and being explicit about the dual mandate would avoid that confusion.

Gene Tunny 53:50

Yeah. Okay. I’m just thinking about the tweaks; one tweak that seems clear to me that needs to be made is clarification on this point about what do you do about indebtedness? So, one way or the other, make that clear. Is the bank targeting financial stability or not?

Peter Tulip 54:09

And in my view, I mean, it’s the bank as an institution needs to worry about financial stability, but primarily, it should be dealt with, with prudential policy, not monetary policy.

Gene Tunny 54:23

And by that, you mean the Prudential Regulation Authority, which is looking at the banks and, you know, in looking at their balance sheets and making sure that they don’t make a bunch of risky loans.

Peter Tulip 54:34

Well, the nature of banking is you make risky loans. The big question is whether you’ve got an equity buffer to deal with those risky loans in the event that they all go sour at once. I mean, there are arguments about lending controls. That’s another controversial argument. But for this review, what’s going to be relevant is the status of financial stability within monetary policy. And in my view, I liked the wording. I think it was the 2009 agreement that the government had with the RBA, which said financial stability is an objective of the RBA, but it’s secondary, it’s subordinate to the core objectives. Or it should be said to be subordinate to the core objectives of full employment and stable inflation.

Gene Tunny 55:39

Okay. I’ll look that up and put in the show notes. Right, Peter, that’s been great. I mean, there are so many other aspects of this, I guess we could explore but we’ll probably have to wrap up because you’ve been generous with your time so far. Any final thoughts before we go? Anything we missed that you think is important to convey?

Peter Tulip 55:58

Oh no. I think it’s been good discussion of the key points. People who do want more, again, a lot of it is in my earlier paper.

Gene Tunny 56:11

Yes. You’ve been incredibly influential on this, Peter. So, well done. I saw you on ABC the other day, and it’s terrific that you’ve had this impact. And let’s say we get a really high-quality review with some recommendations that improve monetary policy in the future.

Peter Tulip 56:34

Thanks for that, Gene. That’s great.

Gene Tunny 56:35

Pleasure. Thanks, Peter.

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 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.

Tags australia, bank, central bank, economics, government, inflation, money, rba, Reserve Bank of Australia, review

Podcast episode

The Pirate Party’s economic policy platform w/ John August – EP138 + transcript

Post author By Gene Tunny
Post date May 11, 2022
No Comments on The Pirate Party’s economic policy platform w/ John August – EP138 + transcript

What does the economic policy platform of a Pirate Party look like? What does it say about intellectual property protection (i.e. copyright and patents), the Right to Repair, UBI, taxation, and business support? And what type of pirates are Pirate Parties inspired by exactly: Captain Jack Sparrow or Kim Dotcom? Pirate Party Australia Treasurer John August answers these questions in a conversation with Economics Explored host Gene Tunny in Episode 138 of the show.

You can listen to the conversation using the embedded player below or via Google Podcasts, Apple Podcasts, Spotify, and Stitcher, among other podcast apps. A transcript and relevant links are also available below.

Here’s a clip from the video recording of the conversation in which John talks about the Pirate Party’s views on intellectual property.

About this episode’s guest – John August

John August is the Treasurer of the Pirate Party Australia and a Fusion Party candidate for the electorate of Bennelong in the 2022 Australia federal election. John does computer support work in retail and shareholder communication. He is passionate about justice and ethics in our world, particularly as it plays out in law generally and intellectual property in particular. He has stood on behalf of the Pirate Party in the Federal seat of Bennelong and also as a Councillor for Ryde City Council.

Along with technology and law John is also interested in spoken word and poetry. He broadcasts on community radio and hosts the program “Roving Spotlight” on Tuesdays from noon-2pm on Radio Skid Row Marrickville Sydney, and writes about his ideas on the website www.johnaugust.com.au. You can keep up to date with what John is up to via his Facebook page.

Links relevant to the conversation

https://pirateparty.org.au/

https://www.fusionparty.org.au/

Land Value Uplift from Light Rail by Cameron Murray

On the persistence of the China shock by David Autor, David Dorn, and Gordon Hanson

Termites in the Trading System by Jagdish Bhagwati

Transcript of EP138: The Pirate Party’s economic policy platform w/ John August

Gene Tunny 00:01

Coming up on Economics Explored.

John August 00:04

And there is the whole thing of, you know, patent trolls who have a bunch of patents sitting on the shelf, and all they do is run around with a mallet and whack people on the head who try to make that. And to my way of thinking that’s a complete abuse of what a patent should be.

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. I’m a professional economist based in Brisbane, Australia, and I’m a former Australian Treasury official. This is Episode 138, on the economic policy platform of the Pirate Party, Australia, one of several Pirate Parties around the world. I’m joined this episode by John August, treasurer of the Pirate Party Australia, which is part of the Fusion Party Coalition. The Fusion Party brings together the Pirate, Secular, Science, and Climate Emergency parties. This episode was recorded in late April 2022 in the lead up to the 2022 Australian federal election. John is running as a Fusion Party candidate for the Sydney-based electorate of Bennelong. Please check out the show notes for relevant links, any clarifications and for details of how you can get in touch with any comments or suggestions. I’d love to hear from you. Righto. Now for my conversation with John August on the economic and policy platform of the Pirate Party. Thanks to my audio engineer, Josh Crotts, for his assistance in producing this episode. I hope you enjoy it. John August from the Pirate Party of Australia, welcome to the programme.

John August 01:35

Well, thank you, Gene. Great to be here.

Gene Tunny 01:38

Yes. Good to have you on the show. I’m keen to learn about the economic policy platform of the Pirate Party. So I’ve recently had some discussions with some members of the Pirate Party regarding UBI. I had one member reach out to me after they listened to my episode with Ben Phillips. And so I’ve been speaking with him about that. And I’d just like to make sure I understand this where the Pirate Party is coming from because you hear pirate party and instantly you think of Long John Silver, but I mean, that’s not quite the case is it? So I’d like to understand then where’s the Pirate Party coming from? So if you could take us through that, please, that’d be great.

John August 02:24

Okay, well, I guess you’ve got the right thing that if you actually look at our policies, you’ll find that we’re very much into individual freedom, at the same time as we’re also into social concern. And one of the things, I think this will come out in this discussion, is that every party claims to get that balance or claims to sort of put some effort into it. But you know, obviously, I’m not just saying this. Hopefully, it’ll come out in the discussion. But I think the Pirate Party does a better job of realising that duality than I think any other political party.

And you know, one of the things, yes, there’s this stuff about pirates, they have to understand that way back when, I guess computer games were in fact copying software and other things. And the industry was calling them pirates. And so they thought, well, hang on, if you’re going to call us pirates, we should embrace that and run with it. And along the way, I guess the pirate movement, you might say, they started to appreciate how business was actually flexing its muscles and abusing its position. And then you also had a certain concern about government. So the Pirate Party is, I guess, both concerned about corporate overreach, and also government overreach and government censorship. And we also believe in individual freedom.

But the thing is, along the way, you’re starting to think, look, we believe in individual freedom, we believe in personal initiative, and drive and enterprise and so on. But what does the good drive, the good initiative really look like? And I guess we saw in business, a lot of businesses abusing the situation, you know, rent seeking, abusing intellectual property, and similar. And I guess there’s also, you know, land ownership, you know, the Georges do actually talk about the land ownership monopoly. And we’re certainly informed by those sentiments. So we came from a point of view of saying, we want to celebrate real economic initiative, at the same time as we want to be compassionate and care for people and enable them. And again, no political party runs into government claiming they’re not going to do that and that the devil is in the details.

But like when it comes to social welfare, we do actually believe in the pirate universal basic income, which you might say, I guess it’s more a guaranteed minimum income because not everybody gets it. The idea being that if you make the nominal amount you neither pay tax, nor do you get a top up, but if you make less than that, you get A bit of a top up until finally at zero, you get a certain amount of money regardless. And that means that you provide people with the incentive to apply themselves, you save on bureaucracy, and obviously at the top end, I have to be careful, they’ll call it an incremental rate of taxation. Because obviously, in one sense, it’s a flat rate, but it’s not a flat rate, because it doesn’t, you know, intersect the origin. But certainly, if you are, I guess reasonably well off, you make a bit of money, and you will get a relatively fixed portion of that. Obviously, it’s mathematical, it’s, you know, the offset plus the gradient and this sort of thing.

So I suppose I guess you’re sort of more concerned about economic policy, but we certainly cherish individual freedom, freedom of speech, freedom from government intervention. And look, it’s not economic, but we’re certainly concerned about Witness K and Bernard Collaery and Julian Assange, and I guess the government surveillance laws to sort of eavesdrop on our mobile phones and make fiddles and change, it’s with them. And I guess you also have, you know, the corporations who are basically pulling large amounts of data and taking advantage of it.

So we basically are concerned about government and corporations in equal measure. But we do believe in freedom of speech, and we do believe in individual initiative. And as I say, No, I don’t think any political party claims to not believe in enterprise, or these various things. But I think our particular combination, is a result of this being targeted by both government and corporations. And that’s where we’ve ended up. And I think, as a result of the journey we’ve taken to get here, we actually have a, as I say, a much better point of like mixing the celebration of individuality and also looking after people as well.

Gene Tunny 06:58

Yeah. Okay. So is the Pirate Party explicitly Georgist? You mentioned Georgism, or the philosophy of the American economist Henry George from the 19th century. And I mean, you’re probably better placed to explain what his philosophy was. But I guess he was in favour of taxing land, wasn’t he? He talked a lot about the unearned rent from land, is that right?

John August 07:28

That is correct. Now, of our policy platform, if you look at it, we do say, look, land value taxation is a good thing, it would be good to sort of re-emphasise our tax system to do that. And like when you have the universal basic income, I guess there’s lots of people will chuck moral rocks at it, but one of the things we do try to do is say, look, how do we actually cost this in such a way we don’t need print money to actually give people this basic income. And okay, I’m going off on a bit of a tangent. But you know, one of the principles is, once you give people that basic income, without constraints, we reasonably expect, a lot of people will just work a few hours a week, because they don’t fall off a cliff and lose all their benefits. So you will immediately sort of enable that initiative.

But getting back to Henry George, yes, let’s just say I suppose one way of capturing this duality is that if you have a property, and the government does something that lowers the value of your land, you wouldn’t believe you know, the hew and cry, the number of letters to the editor, you know…to the local member. But let’s assume the government sets up a rail station, not so close that it’s polluting noise and making life inconvenient, but actually makes life very convenient for you. And the value of your land just shoots upwards. And I have yet to see a queue of guilt-ridden people at the tax office saying, wow, you’ve increased the property of my land enormously. I’ve got to give you some of that money back. So that’s sort of capturing what Georgism is about.

Now, the speculators will say, oh, by buying and selling land, we sort of contribute to the proper operation of the economy and society and so on. And okay, that’s its own rabbit hole. And I, broadly speaking, say that, to the extent that’s true, people are getting overly remunerated for that. But yeah, the thing is land is in scarce supply. And, you know, if you actually tax land, it’s a much better way of doing things, let’s say, going off on a bit of a tangent, but I think whether you want to have a right wing or left wing inclination, you know, everyone says you should get rid of payroll tax, and yet there was this idea we deal with GST, where supposedly the tax states were going to get rid of payroll tax and it didn’t happen. But the point is, if you actually tax on land, on the one hand, it’s fairer, and another hand it’s actually progressive in its way because if you’re wealthy, you’re more likely to own land. But the other thing is as society changes, and business can be conducted here or overseas, and people can telecommute, and so on, taxing labour when labour is so mobile, you know, I think it makes more sense to say, here’s a business, a business is set up in this location, and we tax it based on the operation there.

But yeah, the idea of the unearned increment, I mean, that is one of the things. With a lot of economic perspectives, I guess we all draw the difference between genuine work that yields an income and basically just sitting back and raking it in. And that’s, I guess, a moral distinction. And I think most, where there might be a hybrid of economic and other perspectives, they demarcate the good economic effort from the dodgy economic effort. And we do actually celebrate innovation, not Silicon Valley style innovation. But like, you sort of say, hey, you know, there could be a green grocer here, maybe I should set up a green grocer. That’s being creative. And that’s what we consider to be the real, worthwhile creativity of economics. But sitting back and speculating, we don’t see that as being so useful. And we think there’s an over-return for it.

So bringing it back to Georgism, taxing land makes a lot of sense. And, of course, the word tax has, you know, all these negative connotations. Some people get neurotic about tax. You could say, the charge on land is paying for the privilege that you have that monopoly. And I guess I’m going off on… You’re prompting me with other tangents. But if you’re aware, there’s some Georgists in Melbourne that actually did some analysis of apartment blocks, based on the water usage. And they figured out that a lot of these apartment blocks were actually owned, but vacant and unused. And I know, I’ve actually heard some commentators on your programme talking about supply and demand of housing. And believe it or not, in a limited sort of way, I do actually endorse the idea of supply being a factor, but what we identify is that people are doing land banking, rather than actually either living at their property themselves, or renting it or otherwise putting it into the market. And the incentives we have is such that it makes sense to just sit on property. But widening it out, we sort of say, if the economy was more based on actual innovation, and real economic activity, then people would have… Shall we say, the non-speculative part of the economy would be stronger, land would be easier to afford, and it’s a win-win situation. You know, basically, accommodation is cheaper, but the non-land non-speculative part of the economy is also more dynamic and stronger.

So but I think that story of the railway station setting up next your place, and the value shoots through the roof, and you know, just everyone just swallows up that and just sort of, oh, this is lovely, I think that captures a lot of what Georgism is about, the idea that maybe there’s some speculation, maybe there’s some useful speculation that lubricates the economy. But really, a lot of it is people, I guess, having unearned income. And that’s ethically problematic. But yet the Georgist perspective does actually fix that. Now, I emphasise, the Pirate Party is informed by Georgism, we emphasise land value taxation. But if you look at our policies, our economic policies, everything, it is a part of what we’re about.

Gene Tunny 13:43

Yeah. Did he advocate for a single tax on land? Was that correct?

John August 13:49

That is correct. I don’t think we would go so far as to say a single tax on land. You know, we are believing in this negative income tax. And we also believe in fiddling around with the other parts of the tax system in order that that guaranteed minimum income and negative tax of that package can be sustainable. And you can basically give people who earn no income a moderate amount of money, without breaking the bank, so to speak, and part of the picture to sort of beef up our tax intake would be landowner taxation. But equally as I say, as our economy changes as a global economy changes, I think it will actually make less sense to emphasise income as a source of taxation.

Gene Tunny 14:36

You mentioned the rail line and boosting property values. You may have seen it already but there was a good study that was done by a fellow Queenslander who’s attached to University of Sydney, Cameron Murray. I don’t know if you saw Cameron’s study of the Gold Coast Light Rail, and he estimated some percentage value uplift for land within, you know, several hundred metres of the Gold Coast Light Rail. So I’ll put a link to that in the show notes. I don’t know if you’ve seen that. But you may be interested in that study.

John August 15:08

I haven’t seen that. But I will sort of stick my oar in and say, we have actually had Cameron Murray in on a more general discussion of housing, within the auspices of the Pirate Party. And Cameron Murray has also written that book Game of Mates, which I’ve had a read of. And that Game of Mates book, I think that one of the origins of that was actually a paper, where he was talking about how there are all these increases in land value. And surprise, surprise, it seemed like the recipients of those improvements were often relatives or in some way related to people at Council. And that, you know, I guess, let’s say we don’t want to point fingers at anyone in particular, or name anyone, but call that grey corruption, and his sort of thing that he was talking about, was a taxation of the uplift. So if you have a zone change, and that increases the value of your property, then that improvement is taxed. I think it’s called a betterment tax was what it was called originally. And that’s one of the things that Cameron Murray is talking about. Now, obviously, a zoning change is obviously a windfall in its own way.

I guess, my story I started with was the railway station within moderate proximity to you. And that’s not really a zoning change, apart from I guess the fact that maybe they had to change the zoning in order to have a rail line there and a station there or whatever. But yeah, there’s different ways of increasing your property value. And one of them is, you know, the railway station. Another one is actually the shopping centre nearby, you know, or the swimming pool or whatever. And, you know, one argument is that if you’re just living there, and the world just changed around you, and it was your choice to live there, and that’s a bonus, well, fair enough. But if you’re essentially buying and selling and you’re actively in the market, and someone else does something, and you get the financial benefit from that, you can wonder how fair that is. But, you know, one of the things about economics, there’s all this hand wringing about what’s fair and unfair, and I recognise that’s part of the picture.

Gene Tunny 17:17

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

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Gene Tunny 17:55

Now back to the show. You mentioned this negative income tax, so then a guaranteed minimum income, so you’re not necessarily going for a UBI. Is that right? You’ve got something –

John August 18:08

That’s right. Okay, yeah, I guess there’s a terminological issue here. I call it a pirate UBI. Technically, it’s a guaranteed minimum income. Now, your universal basic income is a wad of cash that you get regardless. I think in Alaska, they have this thing where they’ve re-allocated the money from them, their oil or their mineral reserves there. And everyone just gets a plunk of money every year, but in a sense, that is sharing the real wealth that’s created. So that’s fair enough, I guess. But yeah, your pirate UBI, or the guaranteed minimum income we are talking about, if you make the neutral amount of money, you pay no tax, nor do you get a top up. If you make less than that, you get a bit of a top up, so the government gives you a bit of money. And finally, if you’re making no money, then you get a wad of cash, which is our guaranteed minimum income. And notice, in a sense, it’s means tested. We’re not just giving people lots of money regardless, so we are trying to avoid the inflationary risk. And in fact, really do our best to make sure that the budget actually balances and we’re not actually printing money to pull this thing off.

If you there is a criticism of some forms of universal basic income, we’d say. If you just give everybody you know a wad of cash each year, regardless, that’s going to be inflationary risk. And we agree that our guaranteed minimum income is targeted. If you’re not making income by other means, you get this wad of cash. And if you’re making a little bit of money, you get a top up. And the thing about that whole slow incline is that you don’t have a poverty trap. You rarely will have a disincentive to sort of work or just work a little bit extra. Who knows there might be some benefits, some concessions or so on that you might lose. And that’s going to be a little bit of a disincentive, but not falling off the cliff like you do at the moment.

Gene Tunny 20:09

Right. And so it’s a negative income tax because below a certain amount of income, the tax office is actually giving you money. When you get up to that level of income, you start paying positive income tax. Okay.

John August 20:25

That’s correct. Yes. Yes, that’s right.

Gene Tunny 20:27

Good one. Okay. I think I chatted about that with Ben Phillips. I think he mentioned that was one of the models, because, you know, UBI, in practice, you know, that’s one of the ways you could do it. And, you know, there are all these sort of terminological issues about what’s UBI.

John August 20:45

I suppose with terminology, you have this broad thing called UBI, which is like the general, you know, we’re giving people some money. But UBI is universal basic income, is we give everybody a certain wad of cash, regardless. The guaranteed minimum income is that it’s to some degree means tested, we give people money, if they need it is a bit of a leg up.

Gene Tunny 21:08

Yeah. Okay. So what I found interesting, so far, and I didn’t realise was that influence from Henry George, I mean, he’s a major figure in economics. At different times he’s been very influential. I mean, there are a lot of, you know, still followers of Henry George. And, you know, he always gets written up in the histories of economic thought. And there’s also the thinking or the philosophy of the people in IT, in the tech sector. And it’s an interesting blend of that. I know that labels can be… They may not be suitable. But is it possible to describe the Pirate Party as a left Libertarian Party? Or am I on the wrong track there?

John August 21:57

I think left libertarian would be a good way of describing it. And we have had some limited overlap with I guess you’re right libertarian parties. I think one was the Liberty and Democracy Party. Some time ago, this is quite separate to economic policy. But they articulated a position about the civil marriage versus religious marriage. And what he had to say, yeah, you guys are on the mark there, you actually expressed it better than we could, though, certainly those right libertarian parties, they don’t believe in Medicare, public health. We actually believe in expanding public health to include dental care, and expanded support for mental health, you know, supporting the NDIS. But all the time, we want to be, I guess, financially responsible about doing that.

I mean, so much of social welfare, I think… Look, there are financial constraints, but the way it rolls out, it really does feel very penny pinching to the recipients. And I know some people who, yes, they got their NDIS, but the amount of reports and you know, turning up to doctors and, and getting XYZ certified, you know, you listen to their stories and go, well, alright, maybe one doctor to say, tick the box and say you really do have that condition, but there seems to be this overload of bureaucracy there. And like with the universal basic income, I mean, obviously, yes, we want to, we want the books to balance, but you do have a saving in bureaucracy, because at the moment, whole government departments have to figure out whether you really are unemployed, whether you have been trying to look for work, all these sorts of things, and you would get rid of those sorts of overheads in administering the system.

Gene Tunny 23:45

Yeah. Can I just ask about NDIS? So National Disability Insurance Scheme, if you’re listening internationally, this is a scheme we have in Australia to assist people and their families or their carers if they have a disability. And yeah, I mean, John, you rightly mentioned that for recipients, they see that it can be bureaucratic, and it can be hard to get the support that they need. At the same time, there is an incredible amount of money being spent on it. I mean, what is it? Is it going up to 30 to 40 billion or something, or there are projections of that? And it’s going to overtake Medicare. So our single payer health care system here in Australia, we’re going to be spending more on NDIS than that. And yeah, I mean, so what are your thoughts on that? I mean, how do we control that cost? Or how do we pay for that?

John August 24:44

Well, there are the various broad changes. We’ve been talking to the tax system, you know. I did mention you know, land value taxation. Another one is to properly tax religion. Now I’m going off on a bit of a tangent here, but I know they were some people who analysed the value, I think it was Catholic church property in Victoria, and said it was comparable to the Westfield property holdings. And then there was a council in Bondi. This goes back to the 1980s. But they said that they had to double their rates to cover the cost of garbage collection, because they couldn’t charge the churches for garbage collection. So again, that’s the thing where sometimes the tax is a tax in the more pejorative sense. And sometimes it’s more a payment for services. And you know, those church properties get away without that.

But let’s see, then another one we’re talking about doing is doing capital gains tax if you use an asset to secure a loan. So there’s a whole gamut of tax changes we can make. And look, I acknowledge the thing about NDIS is you want to properly support things, but at the same time, you want to control the cost, and you want to have it that at least it doesn’t feel markedly bureaucratic to those participating in it. And let me just acknowledge that that is still a work in progress.

I’ll be a little bit political here and say, if you look at the current government, you know, lifters and leaners, the age and entitlement is over, all this sort of rhetoric, and, you know, sort of suddenly saying that, you know, the unemployed aren’t working hard. And, you know, if you look at, say, the Illawarra, that’s a region to the south of Sydney, that over five or 10 years, their rate of unemployment suddenly shot up. And it doesn’t make any sense to say that suddenly, over five or 10 years, all these people suddenly became lazy and couldn’t be bothered working. And yet, that’s sort of the rhetoric of the government going around. So I would say, look, who knows, maybe occasionally, the government does actually have some good ideas that are, shall we say, morally neutral or morally good. But it’s in the context of then having form in terms of saying all these narky petty things, and implementing all these narky petty things, like say, there’s Robodebt. I guess I’m being a bit political there. But what I’m saying is, look, you can have good ideas for economic reform. But if the rest of your story is dodgy, no one will believe you. Now somehow, John Howard managed to implement GST and get away with it, which was a bold thing in its way, but for a government to credibly make grand changes, and do it credibly, and be believable, you know, I think that’s hard.

But anyway, getting back, I’ve gone off on a bit of a sidetrack, but let’s just say, Yes, coping with NDIS and not having the cost blowout, while trying to sustain it, and not have it heavily bureaucratic in the rollout, that is one thing there. But the other thing I would try to… I mean, I haven’t looked into in detail, but I would like to think that if you can run NDIS properly, support people properly, you will then give them the opportunity to participate in the economy. And as it were, bring some of that investment back. And, you know, people, I guess maybe that’s happening already, and we haven’t really identified that benefit. Or maybe we need to target our schemes better. You know, there may be ways of trying to reduce, shall we say the overall financial impact of NDIS while still will be money coming out of the government at some level. So anyway, I’m not sure I’ve answered your question properly. But let’s just say yes, it is a challenge…

Gene Tunny 28:32

Yeah. Yeah. Just occurred to me when you mentioned NDIS, so that I/d bring that up, on the taxation of religion, it’d be good to see some of religious organisations, which are largely, I think that they’re exempt from tax, aren’t they? It’d be good to see some estimates of that, what that could bring in. I haven’t seen them. But yeah, it could be it could be substantial.

One thing I was surprised by, and you probably know this already, but I went to a friend’s birthday party, they held it at the Presbyterian Church, their head office here in Brisbane city, on Ann Street. And I never realised but back in the 19th century, the state governments of the day granted land to the various churches. There was some authority under a New South Wales Act of Parliament, to provide grants of land to churches, and so Catholic Church and the Anglican Church and Presbyterian Church and various others. And so in part, that’s why they have these inner city properties. So that’s why they’ve held on to them, I guess, and they had some extra land that was surplus to requirements and they’ve redeveloped that land. So, you know, that’s helped them out immensely. It’s related to an initial grant of land they had from state governments back in the day, which I found quite interesting. I don’t know if you’re aware of that at all, John.

John August 29:59

In Sydney there’s a suburb called Glebe. And it’s called Glebe because it was originally attached to a church. And I think over time, you know, the church only had its only tiny little part of Glebe. But Glebe is called Glebe because it was originally a church allotment. So I’m sort of aware of that.

But yeah, it is the broader issue that churches have a lot of privilege. And they excuse it, because of the good things they do. But at the same time, it’s not very transparent, and you just have to take their word for it. And I think also, our government in the past has like, basically thrown a lot of money at churches for services that I don’t think were efficiently thought through or efficiently allocated. So I guess it is pointing a finger at the church and saying that they are the equivalent of a feather bedded monopoly, I suppose, you know, would be one way of looking at it.

Now, sure, the churches do have some community stuff to do. But you know, that community stuff should be supported by the people in it. I mean, you could say, look, there’s only a certain number of people who are Catholics, but taxpayers at large pay for that privilege. You know, so there’s some things that are really out of whack there. But I know, there’s the book The Purple Economy, was written quite some time ago.

And, look, it’s great that you’re asking these questions. The sad thing is, I was a bit more up on these things 10 or 15 years ago, and it has been a topic of debate on the fringes, but it’s never really hit the mainstream. And, you know, look, if the government is struggling to pay for, you know, XYZ, you know, they play silly buggers, they screw over us with taxation, councils are obliged to jack up their parking fines rather than charge the council’s rates. But, you know, the government never thinks laterally and says, Well, hang on, let’s take a good look at this religious privilege, and maybe we can reform things and basically get a bit of extra money to spend on these things we want to do. But like, I just see just how creative government is at sort of shaking trees and finding money in high logs, but they never look in that direction though.

Gene Tunny 32:12

Just with the taxation of religion, you mentioned, it was something you were more up on 10 or 15 years ago. And you’re right, it hasn’t really been a prominent issue. The only time I remember it becoming an issue in say the last 10 years was when Jim Sorley, the former Lord Mayor of Brisbane, who was a preacher at one stage in his life, he brought it up and suggested that given that, you know, many religious organisations are doing very well, they probably should, or they’ve got substantial assets. I don’t know how well they’re doing day to day. Then, you know, they could actually pay some or make a greater contribution, or they could make a taxation contribution. So I thought that was interesting.

John August 32:55

Makes a lot of sense, because occasionally, you do get your secular religious types. And, you know, obviously New South Wales, and one of the contrasts I make is that Gillard was an atheist, but she had to be dragged kicking and screaming to do, you know, inquiry into churches and child abuse. Kristina Keneally was an Australian Catholic, and in New South Wales, she was the premier that oversaw the introduction of ethics education in schools, of non-religious education in schools. But yeah, at times, you get religious people who really are quite considerate. And if you look at a lot of elements of the Uniting Church are actually quite secular in the way that they relate to things. Obviously, yes, they get a bit of religious privilege, but it’s not something they covet, if you know what I mean. And at times, they will even push back against it. So you know, it does vary. And obviously there was this particular person you’re saying that was was sort of saying, hang on, maybe the churches should pay tax.

Now, if you go back far enough way, way back in the depths of time, before there were the Greens, before there was the Democrats, there was actually a political movement called defence of government schools. And they were very concerned about the way the government was feeding so much money into religious schools and was trying to say that it was against the Constitution. Now, I’m no constitutional lawyer. But I’ve read the commentaries, when people were writing the constitution of Australia. And I think based on what they were saying about the Constitution at the time, we never really should have given all this money to religious schools. Obviously, yes, I’m not a lawyer, and it was the High Court judges who get to make these calls. But yeah, if you go back decades, there was the defence of government schools movement. It was such a strident political force before the Greens or the Democrats. And it really had a lot of energy to it before my time, and I read about and think, wow, this is amazing. And the sad thing is, that was decided in the High Court when it was in Melbourne. So then the High Court moved to Canberra and it basically fell off the radar of the High Court because the High Court loves to sort of parade all the controversial decisions that were made within its halls, even if the public didn’t like them, or the controversial or whatever. They couldn’t get [inaudible] decisions made in Melbourne before they moved to Canberra. There you go.

Gene Tunny 35:20

Right. Okay, I’ll have to look into that. I mean, it’s a big issue, the division between church and state and therefore, what governments can do to assist religious organisations or schools. I mean, I guess the issue in Australia was that, at the time, didn’t we have some Catholic schools that were struggling financially because they charged relatively low fees, and they couldn’t afford to install the science blocks. This was during the Cold War, and there was a push to educate people in maths and science. And so therefore, you could argue there was some public policy rationale for it.

John August 35:57

There was a bunch of schools in Canberra, Catholic schools that went on strike because they weren’t getting the money together for that. And details of that story are not sort of close to hand. But I do know, during the Cold War, even though the US was very religious, and you even had some fist-waving creationists, when the Russians put Sputnik into orbit, they all thought, oh, shit, we better roll out the science education in our schools. And, you know, that’s my understanding, that that was why creationism took a backseat until the Cold War sort of thawed out, and there was no longer that pressure. So I do believe that’s not got a lot to do with economics, of course, but I do believe that’s some of the history there.

And look, it’s not at my fingertips, but there has been this whole thing of charities and the definition of charities. And I certainly would say that churches have a lot of privilege when it comes to charities, but my narky observation about the government is they really want to reduce the charitable status of any group that might criticise government. And, you know, of course, you know, there’s the whole freedom of speech thing, yada yada yada, but yeah. Let’s say yes, historically, this whole thing of what is a charity, we should have a charities commission and so on, that was bubbling away at the side. And again, I was more familiar with this 10 or 15 years ago, and then I got serenaded by intellectual property and the Pirate Party, I suppose.

Gene Tunny 37:25

Okay, well, yeah, we want to get on to IP, because that’s fascinating too. Just with religion for listeners internationally, I should know that when I mentioned Jim Sorley, he was a former Lord Mayor of Brisbane here, so well-known figure in one of the political parties, in the Labour Party. And yes, he was also at one time a Catholic priest. So that’s why it made news when he came out and said that the churches should pay tax.

John August 37:52

Yes, well, it is one of the things that a secular Australia I should say, that the minority seat of secular Australia do actually say that Gough Whitlam made a deal with the Catholics to get into power. So that’s the one narky thing that secularists will actually say increased criticism of Gough Whitlam. I don’t want to get embroiled in the whole bog mire of Gough Whitlam. That’s one observation I’d make.

Gene Tunny 38:17

Okay. Okay. Well, we might move on to IP and then we’ll finish off with a discussion of business support or crony capitalism, or however you want to describe it. The Game of Mates, you might like to describe it. You mentioned Cameron and Paul Frijters’s book before. What’s your position on IP? I mean, is it complete no protection of IP, something extreme like that? Or is there some protection to encourage innovation?

John August 38:46

We do believe in some protection for IP. But there’s a whole heap of reforms and changes. Like, as far as copyright’s concerned, we’d have a whole heap of like, what is it, fair use exemptions. Now, one of the things we get into is like, the right to repair, say. It is actually bubbling. And I think it’s sort of starting to get to the mainstream. But you know, the cliche is, you’ve got this farmer in Western Australia. They’re so damn far from civilization. They’ve got this farming equipment. Their harvest season runs a few weeks, and if one of their bits of equipment is out of action, and they’ve got to wait a few weeks for some guy from Perth to travel all the bloody way. Oh, okay, we need this spare part ordered. That will be a week away. That sort of makes no sense. And, you know, there is the idea of the right to repair.

And this is another thing about individual freedom. There’s some people who run repair cafes, they talk about the dignity of risk, okay, and you know, it is one of those things that I guess a slightly libertarian sense is, you know, cotton wool drawers and that sort of thing. And, you know, my own personal view is look, companies have a legitimate concern that, you know, you don’t mess with their thing, injure yourself and get sued. Okay? We do think there needs to be some sort of way of saying, look, I’m going to mess with this. I’m taking the responsibility onto myself. If I injure myself, it’s my own problem. But I do think a lot of firms run around saying, oh, we can’t let the consumers do blah, blah, blah, because they might hurt themselves. And that’s actually an excuse for them to flex their muscles in terms of intellectual property.

Gene Tunny 40:39

Yeah. So John, just for clarity, what do they do that prevents you from repairing it? They void the warranty? They say the warranty is voided if you do any work on it, if you actually open it up?

John August 40:49

There’s a few things. One is the warranty is voided. The other one is software that basically logs the fact that you’ve opened the case or tried to tamper with it. And worst case, you have software that basically self destructs if you meddle with something. That’s getting even more serious. I mean, there was a story of I think, Sony put a dodgy thing on CDs, that actually put a programme in your laptop that stops you from doing further copying of CDs. That caused quite a kerfuffle in the IT world. Whether it got to the outside world, I don’t know. But there’s some dodgy stuff that goes on there.

But anyway, so fair use exemptions for copyright. Okay. And obviously, that sort of spilled into the copyright of bits and pieces and of right to repair rather. And certainly, I think the Australian Government does have something that if you sold a car and you stopped selling it, you gotta keep selling the fit spares five or 10 years. Well, we also think that once a car is no longer really properly supported, it should be a free for all for people to make knockoffs and you know, run their 3D printers, bananas, whatever. So I think they should be thresholds where, okay, until this point, people could can claim a bit of copyright and this sort of thing. But beyond this point, come on, let people rip in.

But as far as patents go, for sure, our view is a few things. One is that that basically patents should only be used to protect stuff that’s actually being bought and sold in the market. And if you go back far enough, in our patent legislation, but there was a previous thing saying that if you have a patent, you have to serve the market. There was actually an obligation in legislation. In other words, it was saying, if you’ve got a patent, you should be making stuff and flogging it. Our position is that if you have a patent, then you should be making it. You shouldn’t be using that patent defensively and stopping others from doing it. And there is the whole thing of you know, patent trolls who have a bunch of patents sitting on the shelf, and all they do is run around with a mallet and whack people on the head to try to make that. To my way of thinking, that’s a complete abuse of what a patent should be. And we also have actual schemes where you actually declare the value of your patent. And if you’re not declaring it properly, someone can just put up their hand and buy the patent off you. So you have to value it publicly in a way that that sort of is sustainable.

And I suppose there is a whole thing of copyright that it shouldn’t be, you know, death of the author plus 50 years or 70 years, which is ridiculous. Now, the US kept trying to extend the copyright of Mickey Mouse to keep them. And so that was to my way of thinking, clear abuse of the patent process. So you’ve got patent trolls. You’ve got so-called evergreening of patents where a medicine is used for one use, and then they figure out an alternate use and get an extended patent on it. But it still gets a bit grey as to whether you could use it for the use to sort of run out a patent.

And I suppose a broader thing would be, it would be lovely, my vision is that, you know, an arm of the UN farms out grants the universities for basic research. And if some particular university then comes up with a idea, then the free market can get that idea for a nominal licence fee, and then rip in and sell it. And that’s re-pivoting the whole way corporations relate to medical patents. So notice we’re not totally against patents for medicine, but you know, these medical firms, I think there’s something like, oh, look, they spend a bucketload on R&D, and they spend even more on marketing. I think that’s telling us look, there’s something wrong with this picture.

And there was a story goes back… Unfortunately, I’m not up on these things recently. But going back about 10 or 20 years ago, there was a bunch of researchers in the UK that made this variant on interferon and that actually evaded the then existing patents and then they hired some Indian chemical firms to crank this stuff out. And it was what you might call an open-source pharmaceutical metaphorically. Those sorts of models I think are much better. But then there’s the fact that in the US, like me clicking on a button, software patents, to my way of thinking…

Look, this is going into the technical details of patent law. But I know a lot of commentators who said that like, way back when 100 years ago, in the UK, a patent was something that you basically bribe someone to do good things in the community, for the general good of society. In other words, yes, you were making a profit. But it should be articulated that not only were you making a profit, but society as a whole was benefiting. And that was the way the Brits articulated patent law 100-odd years ago. And it’s my view that that got morphed into the US, and the US much more was worried about coveting assets, you know, people own this, and we’ve got to protect the people who own it. And then the lawyers got in and defined all these things around it. So the emphasis changed. And along the way, the idea of the inventive step got watered down. And it used to be that was a very strong thing. This had to be really creative, you’ve done something big here. And then that’s been diluted in US patent law to think, oh, you’ve run this algorithm that anyone could have dreamed up, you clicked over here, oh yeah, we’ll give you a patent for that.

And, again, going back in patent law, there was, I think, a manufacturer of, goodness me ,of airline engines, of engines for aircraft, and they actually came up with this way, you can operate this engine in a certain way and reduce noise, and they wanted to get a patent on it. And the judge at the time said, look, these people piloting these planes responsible for hundreds of lives. And you want to add to their cognitive load that they can have to actually figure out whether they’re licenced to operate this bit of equipment in this way, or not, based on how they’re licenced. And that particular judge said, go away, that’s nonsense. And then, you know, there’s obviously the more recent excesses like the EpiPen. Someone was sort of making a gadget to check for COVID. And someone else wanted to do a patent injunction against them. I mean, even if they have a bit of a case, the best that the legal system should do is say, this is something of merit for society. Let’s let these people make the COVID equipment. And you can do a court case and extract profits from them after the event if it really is relevant. But so there’s a whole lot of messiness to do with intellectual property.

And what’s a few other things I can point out? That like, with Hollywood, I don’t know if you’ve heard the term Hollywood accounting, there was a guy who wrote the novel… Goodness me, what was it called? Forrest Gump, I think it was. And the first movie didn’t make a profit and they wanted to make a sequel. And he’s saying, Why the hell do you want to make a sequel if the first movie didn’t make any money? And so I think there’s this moral duplicity, where Hollywood gets very resentful about people copying their movies, but has no problem with dibbling their creative partner partners on their end of the fence. So there’s some dodgy stuff going on in the copyright industry there.

And there’s various cases of, you know, bands in Australia getting done by overseas copyright claims on music in their tracks and, you know, I think the band Men at Work was dragged through the courts. So there’s a whole lot of dodgy shit going on with intellectual property. What’s another story? I think Mattel had the Barbie doll and they had a copyright on the Barbie doll. And someone wanted to do a book on anorexia that had Barbie in the title. They said, no, you can’t do that. So again, copyright, trademarks, defamation, you had all these things into mix. Sure, you shouldn’t be able to sell a knockoff doll and call it Barbie and make money out of it. Okay, maybe. But, you know, protecting your trademark and stopping people from doing derivative creative works. I mean, come on.

Oh, yes. Okay. There’s one more thing I will say, which is, I think, a bit of a sideline to do with Trump. Now, you might remember, Trump was pushing back against the Trans-Pacific Partnership, and he obviously managed to win an election. And it’s my suspicion that a lot of people in the Rust Belt saw all of these trade treaties, and what those trade treaties meant was that, you know, overseas countries would sell stuff in the US, in exchange for them recognising US intellectual property laws.

And look, let’s just say, look, you’re the economist, and I’m sure we will agree that on paper, you have international trade and parties benefit, and the net wealth is increased. But under the hood, what happened in the US was there was a net transfer of wealth from people who made stuff with their hands to people who owned ideas. And it’s my suspicion that that might have been one of the factors in the Rust Belt of people going, hang on, there’s all these lovely trade treaties, which are supposed to be so beneficial, and we see ourselves losing our jobs. So that’s sort of, I guess, less to do with intellectual property directly. But I think it’s one of the things going on in in global trade and global politics. Look, I can I can say more about intellectual property. You got me started, but maybe I’ll leave it at that for the moment.

Gene Tunny 50:54

I’ll make a few comments on that. John, very good points. With the Rust Belt, look, yep, absolutely. And economists have studied that. And they have concluded that there certainly has been an impact on some of those regions. Some regions have been disadvantaged, jobs have been lost, and they haven’t come back. Metropolitan areas have prospered. They’ve done well. Their consumers are getting cheaper products. But then there are some Americans in some states, in rural areas or in the Rust Belt, as you call it, that have been disadvantaged. I’m trying to remember the study. It might have been by David Autor. I can put a link in the show notes. He looked at I think he called it the China shock.

That point about trade agreements, there is actually a debate in economics about these preferential trade agreements, free trade agreements. They’re not necessarily welfare enhancing for countries. I mean, the best thing you can do is actually to lower tariffs for all countries selling to you. So there are issues with these preferential trade agreements. In particular, if we sign up to some of these IP provisions that mean that we have to pay the American producers more, as you mentioned.

What’s the other point? Oh, I think you’re on strong ground on the IP stuff, because, yeah, economists generally think that… At least my impression is that economists are very much against just this, you know, these excessive IP, these copyright terms. So you know, what is it, 70 years you mentioned. And I remember when I was in Treasury, in Canberra, we had a visit once from David Levine, I think it’s Levine, from Berkeley. He’s a professor of economics at University of California, Berkeley. And he was arguing that, look, I mean, that as an economist, what you want is you want people to be incentivized to innovate, and to create new works. But you actually don’t need a lot of copyright protection to do that, right? I mean, you might need 5, 10, 20 years at the most. Beyond that, that would discount any sort of benefits beyond that practically to zero. And I mean, they’re not really going to care what their heirs… I mean, maybe some of them do, but they’re not really going to care about what their grandchildren are going to be earning from their creative works. That is not what is motivating them to be innovative. And I thought that was a good argument. So I don’t know if you’re aware of his work.

John August 53:29

Certainly, I mean, the echo there is, a long time ago, Walt Disney came up with the Mickey Mouse character. Did he think, wow, this is lovely, 70 years after my death, my estate will still be making money from this. So this is a bloody good move on my part to come up with this lovely looking mouse. And that’s sort of echoing your sentiment. And I suppose further to the point that we’re making before is that I think particularly in the US, they are artificially by legal means extending the life of assets to benefit the person who owns that asset, but not in any meaningful way contributing to the economy at large. And, as I say, my feeling is that in the US, they really got behind, oh, you own that thing, oh, we need to protect you. And that sort of just went a bit crazy in the US as compared to the origins of intellectual property in the UK, which were a bit more restrained and sensible.

Gene Tunny 54:26

So on the trade agreements, I might put a link in the show notes, there’s a book that I’ve read recently that I can highly recommend, Termites in the Trading System, by Jagdish Bhagwati, one of the great Indian American economists. He’s based at Columbia. He’s a professor there. So very good book and he’s been very critical of all of these trade agreements, for reasons including what we’ve talked about there, that they’re not necessarily welfare enhancing, just the way that they’re rolled out. Okay. Finally, John, it’d be good to chat about business support. Do you have a blanket ban? Or are you against business support? So all of the subsidies, the what you might call crony capitalism, what’s your position on that?

John August 55:21

Well, in broad terms, yes, I’m very much against crony capitalism, against support for business. Now, look, there are some exceptions for very well-defined social outcomes. Now, this is going off on quite a tangent, but you know, the whole thing of like, childcare, and like, you know, subsidies to consumers of childcare. And, you know, I guess it’s more a personal position that’s informed by other, not that I’m an economist, but other economists in the Pirate Party. And we talk about subsidising supply. So it may make sense to have grants to businesses to either establish childcare facilities, expand childcare facilities, and maybe have a hex discount for people who are trying to qualify themselves to work in childcare. And notice, that would be a corporate subsidy for a very well-defined social need that needs to be properly articulated and costed, and yada yada yada yada.

But in broad terms, I think a lot of the subsidies we get, like, I guess the whole cliche is, you know, the government expands this port, spends bucketloads of money on it, then these firms sort of ship the gas off overseas, and we end up paying more for the gas as a result of the cabinet investing in the port works, you know what I mean. There’s a lot of dodgy stuff like that, that you can point to. So certainly against that. And I suppose we have a broader position against bureaucracy and rent seeking broadly defined. So that’s certainly the case. But to get into the nuts and bolts of that, I have to admit, I’m going to struggle to get into…

Gene Tunny 57:00

That’s okay. Well, I mean, it’s probably a good time to wrap up. I’ve had you for nearly an hour, and we’ve had a really good discussion of IP and before that on Georgism. I thought that was really interesting. Also the negative income and the taxation of churches. So something that I’ve been interested in in the past, particularly when –

John August 57:21

I can but say, yes, go back 10 or 15 years ago. And look, there are a moderate number of like, shall we say, economically qualified people on the secular side of the fence, who are all going, look, look, look, and no one’s paying attention. So in a sense, it’s lovely that your programme, which you might say, as it’s starting to approach the mainstream is actually putting a bit of light on this sort of issue. And that is actually quite wonderful, I have to say.

Gene Tunny 57:45

Yeah, well, I’m trying to be frank and fearless. And as someone who was in, I worked in the treasury, and I’ve worked in around policy, I think we really should approach these issues rationally, and not have these… I guess a lot of people probably think, oh, we can’t do that, or we’ll upset these people. And if you look at these things rationally, that a lot more policies become, or changes become, you know, something that should be discussed and debated. So that’s what I’m trying to do with this show.

John August 58:16

Well, I will put in a bit of a plug for the Pirate Party. Look, I’m not saying we’re not were the only innovative party out there. But as a small party, we can actually talk some very creative and innovative things. And as I say, look, who knows, maybe the Liberal Party will have the odd good idea. But for them to do it, and have people believe that they’re honest and honestly inclined, you know, they have such a track record, where a party who can say, look, there’s some economic realities we should consider here and let’s think about XYZ. And if the Liberal Party did something like that, people would just shake their heads and go, Yeah, another one, you know. So there are some opportunities that small parties have to put innovative ideas out there.

And yeah, as I say, I won’t claim that pirate party is the… I should say Fusion. Oops, I think we’re finally got to this point, I should emphasise the Pirate Party is a part of the Fusion amalgam. And so that does actually include the Science Party, the Secular Party, the Pirate Party, and Climate Emergency. So they are the different branches of Fusion. And while what you were saying, certainly, there are degrees of development of policy within the Pirate Party, and like we have our basic original form of the Pirate UBI that you can look at, and that’s all very good, and we’re continuing to develop our ideas, and obviously, that’s within the Pirate realm or the Pirate branch of Fusion. And obviously, the Fusion has sort of more universal policies that everybody adopts. But you know that that’s a limited subset of what we’ve been talking about.

Gene Tunny 59:59

Yeah. Okay. John, this has been great. I’ll put links to your social media channels. And you’ve got your own radio show. Is that right?

John August 1:00:11

Yes, I have a radio show broadcasting out of Marrickville in Sydney on Radio Skid Row. So there’s some links to that. You can check out some old episodes. There’s also my own website, johnaugust.com.au. But, you know, hopefully, you’ll put that amongst the links there. And I will also mention, there’s a gentleman, Quinton Fernandez, Professor Quinton Fernandez of University of New South Wales. And he’s actually been saying that, like, the UK was abusing the free trade situation when they were the top dogs. And he’s also got his own views on intellectual property, like value global value chains, and just how much intellectual property is a part of the fact that like, things are a token amount coming out of Taiwan. And then the price goes up by 10 times because of, you know, intellectual property and branding. And it’s quite staggering when you listen to the picture that he paints.

Gene Tunny 1:01:11

Okay, I’ll, I’ll have a look at his work and might see if I can get him on the show sometime in the future. Okay, John August, thanks so much for your time. I really appreciated learning about the Pirate Party platform, and just the discussion of the economic issues because you raised some very good ones there. And it was great to be reminded of the work of Henry George, because it’s one of those fascinating ideas that economics has come up with over the centuries. I remember what I learned about him in the history of economic thought, I thought, that’s a fascinating perspective. Yeah. So very good. So, again, thanks so much for your time.

John August 1:01:58

Well, there is a lot of merit in what Henry George says, but I don’t believe in the single tax. And I do think that his philosophy was 90% correct. There will be some little sort of rejoinders I’ll make to what you said, but you know, it’s certainly 90% got the full picture.

Gene Tunny 1:02:15

Yeah, that’s an important thing to note. I might try and find a guest to cover Henry George in a future episode, just to go through some of the intricacies of it. Righto. Okay. John, thanks so much for your time, and all the best. And, yeah, hopefully I’ll chat with you again soon. Thank you.

John August 1:02:39

Oh, well, I do look forward to that. Thank you very much for the opportunity. I think the Pirate Party has been saying some interesting stuff. It would be lovely for that to be more broadly recognised, and it’s lovely that you’ve obviously taken the interest in interviewing me, so very much appreciate that.

Gene Tunny 1:02:54

Okay. Very good. Thanks, John.

John August 1:02:56

Okay, thanks, Gene. Bye.

Gene Tunny 1:02:59 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

Big thanks to EP138 guest John August and to the show’s audio engineer Josh Crotts for his assistance in producing the 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. Economics Explored is available via Apple Podcasts, Google Podcast, and other podcasting platforms.

Tags churches, government, intellectualproperty, ip, land, money, ndis, patent, pirateparty

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