Published: 18 July 2022

Inflation has become the new bogey man, paraded at every opportunity to scare the general public, writes Ruth Forrest.

With confusing and conflicting messages in challenging times, does anyone else get the feeling some economists make it up as they go?

For years we were bombarded with scare mongering about debt and deficits.

Now it's the scourge of inflation that's about to bring us undone.

The only way to tackle the curse, we are told, is to jack up interest rates.

The purported causes for looming inflation, such as supply-chain disruptions due to Putin's war, Covid and floods pre-empts an obvious question: How will higher interest rates be a solution?

Then we hear that there has been a large build-up in household savings caused by overspending by governments and underspending by consumers during the pandemic, which when eventually spent will fuel even more inflation.

And heaven forbid if wage earners get more than a few extra crumbs to help them survive. Inflation will explode.

There are a few chapters missing from the narrative, so it's little wonder it comes across as just another dodgy story.

The large pile of household savings is not evenly spread.

Half the population don't have any.

Most of the savings sloshing around the economy haven't come from government spending. Some did, the JobKeeper overpayments for instance, but most didn't. Most came from money created by private banks for housing.

Record household debt means there's record amounts on the other side of the ledger.

Money doesn't disappear from the system. Some is lost to tax payments, a fraction may be hidden under beds, but the rest is intact, mostly in the hands of those who need it least.

Overspending by governments is the proposition we are being asked to accept.

This comes as governments are falling even further behind with service delivery, despite front-line workers working harder than ever.

That's why interest rates must rise. How it will fix the problem is not explained.

Most overspending has come from banks relentlessly creating funds for housing, widening the gap between the haves and have-nots in our lopsided, unbalanced economy.

Private banks have been granted the extraordinary privilege to be able to make government-guaranteed loans.

As the balance of outstanding loans inexorably grows, so does the build-up in savings held by the already wealthy.

Banks and bond-holders would prefer if governments didn't create too much money of their own and borrowed from them instead.

The pandemic, however, caused a seismic change. Our bank, the Reserve Bank, started buying bonds from banks and bond-holders. Over the past two years the RBA has, in total, bought federal and state government bonds equal to the amount of new debt issued by all governments.

The extra debt is owed to our bank, the RBA. We owe money to ourselves.

Government net debt didn't change. Even though some received handouts they didn't need, some others such as job seekers had their incomes raised towards the poverty line, and much-needed government spending, particularly in health, helped the country stagger through the crisis.

It was a real-time experiment that worked.

RBA governor Philip Lowe was at pains to point out it was part of policy to manage interest rates and it didn't mean we'd found a new way to finance government spending.

Just because it looked like a duck and walked like a duck, he didn't want anyone thinking it may, in fact, be a duck.

The RBA ownership of government bonds creates the real possibility that at any stage they can be written off via a painless book entry.

Never lost for words, economists respond by trying to tell us that might sound OK but it would be inflationary.

Maybe that's the basis for the joke about economists' standard response to a proposal: "It might work in practice, but does it work in theory?" Even though the debt write-off may occur years after the actual spending, there would still be an inflation risk.

That's what we're told.

The current theory of inflation is about as believable as the Easter Bunny.

Inflation has become the new bogey man, paraded at every opportunity. It's cited as the reason wage increases must be resisted, even if they're less than inflation caused by other factors.

However, it's the dwindling share of the national pie going to wages that has created most of our problems, not least of which is growing inequality and a failure to deliver services to those who need it. The increased share of the pie accruing to capital and profits, which has doubled in my lifetime, hasn't had the promised trickle-down effects.

It's not small businesses who are to blame. They're suffering as much as wage earners.

It's the large monopolies and others with pricing power who are grabbing most of the spoils.

All we hear about is the wage-price spiral, but never do we hear about a profit-price spiral. It's always wages that are seen as the problem.

It's beyond time for a more honest discussion.

The Mercury, Monday 18 July 2022
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