Posted by: graemebird | June 7, 2008

The Reserve Bank Of Australia/ What Is Going Through Their Moronic Little Minds?

If you actually understand what is going on it can be mystifying as to why other people are acting in blindly destructive ways. In the case of monetary economics the people who disagree don’t tend to throw a lot of light as to what is going on in their heads. The just tend to lie, make things up, and say incredibly stupid things. And that can make it hard to understand the wrong-headed and ignorant position they are coming from. I can only go on certain things that you hear treasur and Reserve Bank people saying.

There has been a lot of talk about “inflationary expectations.” This harks back to simplified explanations as to why it is that there is a big lag time between changes in the money supply and changes in Gross Domestic Product and Consumer Price Inflation.

Well the real reason why there is a big lag time between changes in money supply and Gross Domestic Product is that measuring changes to Gross Domestic Product in the short run is no measure of changes in economic activity.

And the reason why it takes so long for changes in the money supply to affect consumer prices is that a lot of consumer prices are determined overseas and/or by how much consumers want to spend here. And this also in no way reflects economic activity until such time as people are so very distressed that they are unable to maintain anything like their former standard of living.

It is not good policy to reduce consumer price inflation by bludgeoning the economy so people are put into great hardship. The way to do it instead is to have stable growth in nominal productive expenditure so that real output of goods and services winds up exceeding the growth in nominal business spending over time. To try and combat consumer price inflation by destroying that production makes no sense at all.

Now the inflationary expectations theory of this lag time is barking up the wrong tree entirely. It was invented without recourse to the right metrics. It was invented as a sort of ad hoc explanation without the information that was needed.

This explanation involves what now seems a bizzare segway into the labour market. As if the labour market alone affected the price level. It involves all this indirect talk about the expectations of employers and the expectations of unemployed people. Its understandable how and why it was invented as it came about as a way of countering extremely idiotic Keynesian notions to do with the Phillips Curve.

Milton Friedman was a great economist. But he always tried to stay within a coo-ee of the “respectable” mainstream. Hence he was forced into trying to reason with totally unreasonable people. And because of this circumstance he had to act as a sort of front-line warrior attempting to talk with idiots in ways they could understand.

It was back in the 1960’s and he was trying to show to these morons that the Phillips Curve clearly wasn’t a forever thing. And the inflationary policies that his colleagues favoured were short-sighted. So now we seem to be stuck in this time-warp where the reserve bank is judging things in relation to this theory put together on-the-fly.

In reality if you are looking at business activity, and the level of business-to-business spending, there is not going to be much of a time delay between a collapse in the money supply and a collapse in business activity.

When the money supply collapses consumer spending will hold up at first. And long-term investment plans will be carried through with, if they possible can be carried through with. Nobody likes to stop a major investment project right in the middle. Government thieving (ie government spending) will also be maintained. These bludgers aren’t going to stop spending our money just because of a little thing like a collapse in private business activity. And exports are likely to do pretty well. 

With that in mind lets look at GDP again.

 

GDP= C+I+G+X-M

 

We said that C,I,G and X are likely to hold up. So of course the collapse of GROSS INVESTMENT (ie Productive expenditure aka business-to-business spending) isn’t likely to show up in changes to GDP anytime soon.

Now I wish I could retrieve the PRODUCTIVE EXPENDITURE figures to find out and show others just how badly the economy is tanking. But the insular stupid bastards don’t even compile this most critical of all measures, and are not likely to start. The economy could have, and probably has,  collapsed by upwards of ten per cent already and the fact of it wouldn’t make any of these taxeaters radar screens.

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