Be Prepared For Steady High Inflation

 

A lot of people are not aware of this, but there are few who are.

The RBA seeks to fight inflation by one broad strategy: creating higher unemployment. That is a core reason it raises rates. Higher rates are designed to curb spending both for individuals and for business.

Why does it do this? Because neo-classical economic theory says that full employment is bad and will cause increased pressure on inflation, because too many people have jobs and money to spend. Hence, they seek to increase the unemployment rate to fight inflation. Their hope is that this will 1) mean less people have solid work, and 2) those with solid work will be more hesitant to spend because they see jobs are becoming scarcer. 

It is a fundamentally flawed concept, an overly simplistic one.

It is a concept that is designed to hinge the whole weight of fighting inflation on the families with mortgages, individuals with credit card debt, and businesses with business loans. Which just happens to be most people between 25 and 55. The section of the economy you should put the least amount of burdens on, as they are the most productive and because they are the less financially secure. Comparatively speaking.

It is also an economically flawed idea, as inflation often is not caused by personal spending, it is caused by:

Badly spent government money.

Energy policy.

Supply chains dependent on overseas products.

Global conflicts.

Foreign trade policies (like tariffs).

Tech spending (currently driving DRAM and VRAM increasingly out of people's reach, tech which exists in many household products, not just computers).

And more.

You will notice something about all these things, no one in our country between the ages of 25 and 55 with credit debt or a mortgage has any control, say, or influence over any of these foreign influences on inflation. None, zero, zip. Well, none, except the government ministers who could institute energy policies and resource policies which would provide us with much cheaper energy. But they are ideologically committed to energy dependence suicide because of false climate ideology. So, don't expect the ones who can do anything about this to do anything; they are literally committed to policies that exacerbate our situation.

The other problem is that for many over 55 who are out of debt, which is not all in that age bracket I know, but still more people in that bracket are more likely to be out of debt, for these people rate increases make them richer, so they can spend more. If someone has a significant stock portfolio or cash in their bank account, a rate rise might mean they get a little interest bump that pays for another weekend away, a new motorbike, a nicer computer, or something else. Hence, when rate rises increase those with the most wealth already tend to spend more, as they are being gifted more money. This directly counteracts the suppression of spending placed on the younger cohorts.

What is worse is that as we have an aging population, and immigrants tend to earn less on average compared to Aussies. So we then have a situation where the group of the population least disadvantaged by rate rises is getting measurably larger and therefore their spending power is increasing not just by age, but by proportion of the population. Hence, the out of date, always poorly conceived, policy of simply raising rates to fight inflation will become increasingly counterproductive in coming years. There is simply now too many people in the category of people who benefit from just such a policy.   

Add in deliberate government policy to increase bad spending (by that I mean not spending on infrastructure which is good spending, but on welfare, ideological issues, pork barrelling, etc, etc) and also government policies deliberately raising energy costs for ideological reasons to push people to choose falsely labelled “green alternatives” and I believe we are heading into a long term period of higher inflation and much higher interests rates. This will likely be the case because these higher rates can't stop the inflation, as they have the effect of putting more money into the hands of those with the most money to spend, and every motivation to spend it; as their time is running out in this world.

This has already been observed in recent years. Inflation is incredibly sticky, and past policy approaches are showing to be far less effective in curbing it. I expect this to continue, especially because all of this is being driven by the various ideologies of the institutions in power.

The people who could turn this around are the very people in power who believe they have a moral responsibility to do the things which cause many of the problems. We are watching the convergence of bad ideologies all at once, and we are stuck in the middle.