21 May 2024
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Do we need to help the RBA create a recession?

Peter Switzer
2 May 2024

A finance academic has suggested that Australians help the Reserve Bank to beat inflation to reduce interest rates by cutting spending and creating a “DIY recession”! This has shocked the Telegraph’s Ben Graham but all that Rand Low (an Associate Professor of Quantitative Finance at Bond University) is doing is articulating for those Aussies, who don’t understand economics, what the RBA wants and is needed.

Low says we’re too committed and dependent on

“…Netflix, flat-whites, movies and eating out” and it’s time we re-embraced free-to-air TV, instant coffee, and backyard barbies!
His argument has more relevance with inflation not falling fast enough for some economists, and with the fact that wars such as those in the Ukraine and the Middle East mean more government spending, which doesn’t help inflation fall.

Low wants a self-generated recession, which would be a short one to avoid the RBA raising rates again, which would then create a ‘fair dinkum’ recession.

While Low has a good argument, he’s wrong using the words that “everyday Australians need to cut back on discretionary spending”, because those with big home loan debts (after 13 rate rises) are already cutting back that spending.

It's the two-thirds of Aussies without debt and not being screwed by rising rents that are living the life of Riley, unless they’re pensioners battling with high power bills, supermarket slugs and petrol prices. And much of these price hikes are linked to war and higher oil prices, which consumers can’t do much about.

He also argues that recent wage rises unrelated to productivity aren’t helping bring down inflation, so if consumers cut back on spending thereby creating a recession, it will lift the unemployment rate, which lowers inflation.

Low has tried for every economic scare tactic in the book, even telling the Daily Telegraph that stagflation could be a related threat. Stagflation is when you get rising inflation and unemployment at the same time.

Overnight, US central bank boss Jerome Powell was asked if the US was in stagflation mode, to which he replied: I Don’t See The Stag Or The Flation”.

Low’s call comes as more economists are caving into calls for another rate rise, with CBA’s head of Australian economics Gareth Aird, who had cuts coming in September, now not so certain.

As the Tele’s Ben Graham reported, Aird “said on Tuesday that not only were further rate rises now a ‘near‑term risk’, but any cuts will also come slower than previously expected.”

I cheered when Jerome Powell resisted the turncoats and whimps who are giving into fears that a rate rise or two is needed. Yep, the same fears are alive in the US and Powell rejected their calls or expectations that interest rates had to rise. Even though he wasn’t as confident about inflation falling to 2%, than he was months ago, he didn’t cave in, telling the press conference: “I think it's unlikely that the next policy rate move will be a hike”.
I hope our RBA boss Michele Bullock has the steely guts to tell economists that it’s too early to start talking rate rises. On second thoughts, maybe she should play along with the “fools in the shower” and talk tough on possible rises, so she can scare overspending Aussies into believing that rates will rise, and the big spenders could soon lose their job.

“Fools in the shower?” Legendary US monetarist economist Milton Friedman once said economists who doubt the power of interest rate rises, can sometimes be like a fool in a shower, who fails to allow enough time for the water to cool down or heat up, not understanding there’s a lag between turning on the tap and feeling a change in temperature. So, he’s foolishly copping a shower that’s too hot and then too cold!
By the way, Aird didn’t rule out Cup Day in November being the time for the first possible rate cut, but economic data will have to show that inflation continues to fall for that to happen.

The latest inflation data hasn’t helped the case for a rate cut and he blames strong population growth, driven by net overseas immigration. Understandably, this isn’t news that the Albanese Government wants to become common knowledge.

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