Monetary Policy School by the Suburban Accountant

Don’t you just love it. Ross Gittins pontificating on economic. With his broad brush, he accuses all economist of thinking the same way and daring to disagree with him.

If you did a Google search for the Dunning-Kruger effect, in an ideal world, would come up Rosco’s image.

I like to read Gittens’ columns - it helps me understanding the thinking in Canberra that has contributed to Australia’s slow moving economic train wreck. And today, in captain simpleton’s column, appeared another gem of nonsense:

The way “monetary policy” – the Reserve’s manipulation of interest rates – normally works is that, when the rate of price inflation gets too high, it raises interest rates to discourage borrowing and spending. Then, when the demand for goods and services has weakened and the rate of inflation has started slowing, the Reserve starts cutting interest rates back to their normal level.

Isn’t monetary policy just so simple. If only the RBA just listened an obeyed the suburban accountant.

I won’t go into the actual operations of the RBA in money market and the role of APRA in macro-prudential regulation and other important bits and pieces. But will focus on 2 things Gittens conveniently assumes away.

1 - “back to their normal level” he writes. Well Ross, what is the normal level for interest rates? Care to answer that one oh nitt of twit.

The current official rate is 4.1%. The current rate of (trimmed mean) inflation is 3.2%. This implies a real interest rate of 0.9% - sub 1%. Is that an appropriate cost of capital? How does that sit relative to the historical real rate of interest. I might suggest that it is well below, but never let a good Gittens waffle get in the way of an SMH editorial deadline.

2 - “when the demand for goods and services has weakened and the rate of inflation has started slowing” he also writes. Well then, what happens as now, when demand for goods and services has not slowed sufficiently for inflation to slow. As now.

How does that fit into your simple, or is that simpleton, mental model?

What happens when inflation is not being caused by too much demand but rather constricted supply as a result of government policy? Energy policy, regulatory policy, industrial relations policy. You know, when it is government policy to shut down business and to make imports expensive. What is your monetary magic for that one.

The problem with central planners is that they need to assume away economic complexity and diversity for the world to fit into their model. And the problem with central planner accountants is that they need lots of extra assumptions to make the debts total the credits.

It should be remembered that Gittens has been writing his column for over 50 years. You know about the time Whitlam was Prime Minister.

If this is what passes for economic analysis it better explains what passes for economic policy in Australia.

God help us all.