Australia raises rates; Deflation threat? What deflation threat?

Posted on October 6, 2009 by stacyherbert| 36 Comments

Stacy Summary:  Will be interesting to see what happens in Australia . . .

The governor of the central bank, Glenn Stevens, said that the move was “prudent” after recent economic data suggested that “the risk of serious economic contraction” had passed.

I think it is likely that the RBA will achieve far more than it intends. The last time the RBA put rates up to attempt to control an asset price bubble that was already out of hand was back in 1989. That exacerbated the economic downturn that was already in train as the debt bubble of the 1980s started to collapse. I expect the outcome of this rate rise will be similar: a downturn that is already in train as a debt bubble bursts will be made worse by this increase in rates at a time of greatly heightened financial fragility.

The problem this time is I believe far worse than 1990. Then the household sector had a relatively low level of debt–the mortgage debt to GDP ratio was a comparatively trivial 18 percent, compared to its now record level of 87.5%. It was therefore possible for the financial sector to lend willy-nilly to households, something neoclassical economists facilitated by their enthusiastic deregulation of the financial sector.

The deflation “recognition phase” has finally arrived. Kroger foods, Costco, and Walmart are blaming deflation for a drop in earnings. Moreover, many high profile names are discussing deflation, something most thought could never happen.

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36 Responses to Australia raises rates; Deflation threat? What deflation threat?

  1. Majestic | October 7, 2009 at 2:32 pm |

    I’m a philosopher (by degree major) and not an economist; but as a thoughtful Australian, I think Steve’s views are going to be 90% ‘on the money’.
    Eeeek!

  2. Mary | October 6, 2009 at 11:38 pm |

    “Do you find it perplexing that the same people and institutions that told us that there was nothing to worry about, that the financial fundamentals were fine, and that there was no reason to be concerned about an economic crisis are the same people who are saying the worst is over, the recession has ended, and that their solutions to the crisis have worked?” (http://www.thedeflationtimes.com)

    I do.

    I also believe that deflation is a threat that goes beyond what those in power will do to try to stop it. Deflation can lead to a depression and given the scope of this financial crisis we’ll be there soon.

    Ouch!

  3. Ilya Kuryakin | October 6, 2009 at 4:56 pm |

    Furthermore, if one were to take Mish’s argument to it’s logical conclusion, then if oil was priced in USD @ $100 TRILLION per barrel, Zimbabwe-style, the USD would STILL be the “reserve currency”.

    Sorry, but that is just fucking insane on it’s face.

  4. Ilya Kuryakin | October 6, 2009 at 4:50 pm |

    Mish’s argument boils down to this: because oil, in the west, has a $ sign preceding it, therefore means the dollar is not going down.

    I sure hope I don’t need to explain how stupid that is.

  5. Gerry Bell | October 6, 2009 at 4:26 pm |

    For everyone else it’s more a question of damned if they do, damned if they don’t. They can run up enormous debt through low rates or let the entire economy collapse promptly with ‘reasonable’ rates.

    Oz is obviously more worried by the long-term peril, happy to let it’s little cartel of ‘local’ banks struggle in the short-term. But as I say, their wanking situation not as over-stretched as elsewhere.

  6. Nic Abbott | October 6, 2009 at 6:51 am |

    Just to state the bleedin’ obvious, isn’t Oz doing exactly what everyone should be doing, raising interest rates and to hell with those who borrowed to much?

  7. Gerry | October 6, 2009 at 6:34 am |

    Oz is a special case. Its banking regulations much stricter than the UK or US. Its housing bubble, less prominent or potent. Its economy stands or falls on its ore exports, mainly to China. These remain solid….

    However its second biggest trade partner is Japan (lotta farm produce goes there) and this has nose-dived. Higher interest rates/stronger Oz dollar gonna hurt even more there.

    But the Oz Treasury has stayed on message with its superiors in the northern hemisphere with a hefty stimulus package to the wanking and finance sector and now seeks to forestall a housing or property bubble (just when China is getting VERY bullish about anything equity).

    Sure they can claim ‘the worst is past’ ‘back to business’ if they look no further than their own backyard, but they know this is really burying their head in the sand.

    Not even China can four-wall on this one. When ‘demand’ falls, someone is left holding the baby. And before too long that hurts.

  8. larry | October 6, 2009 at 6:16 am |

    Glenn Stevens , Governor of the Reserve Bank of Australia is a buffoon who couldn’t run a bath , let alone a reserve bank, he totally failed to foresee t or forewarn anyone of the most significant economic events of the last 50 years yet he is listened to by the media who fail to question him about his most obvious failing, sadly,woody allen was right 90 % of life is about turning up. ..

  9. Youri Carma | October 6, 2009 at 6:03 am |

    Commodities markets have more surprises to unwrap http://tinyurl.com/yhvgb7d

    Commodity Markets On a Non-Stop Rebound http://tinyurl.com/y8phmup

    Commodities Sectors Go Their Own Way http://tinyurl.com/yag7gex

  10. Youri Carma | October 6, 2009 at 5:51 am |

    IMF same exact four-step program:

    1 Privatization ‘Briberization.’

    2 IMF/World Bank capital market deregulation allows investment capital to flow in and out the “Hot Money” cycle.

    3 Market-Based Pricing, a fancy term for raising prices on food, water and cooking gas

    4 IMF and World Bank call their “poverty reduction strategy”: Free Trade- “The IMF riot.”

    JOE STIGLITZ: IMF same exact four-step program http://tinyurl.com/5rdqkl

  11. Youri Carma | October 6, 2009 at 5:48 am |

    Worldbank – IMF – BIS Warnings for Future Crises http://tinyurl.com/ydc7n6z

  12. Youri Carma | October 6, 2009 at 5:42 am |

    UK industry weakest since 1987: Manufacturing output collapsed in August http://bit.ly/1DXuBu

  13. Mongo | October 6, 2009 at 5:27 am |

    Look at gold.. we have an inflation in pixels for that goldchart!!!

  14. Adam Gibson | October 6, 2009 at 5:23 am |

    sure, Stacy, does it matter where from?
    I can do it from the UK or China…

  15. Mongo | October 6, 2009 at 5:18 am |

    @Nic Abbott, sorry.. laserprinter.. I guess carbon cartridge will suffice?

  16. stacyherbert | October 6, 2009 at 5:18 am |

    Can someone take a screenshot of http://321gold.com/ for me?

    Email it to stacy at maxkeiser dot com

    Thanks!

  17. Mongo | October 6, 2009 at 5:17 am |

    “The dollar fell after a media report, later denied, that Gulf Arab states were in talks to abandon the dollar in oil trade in favor of a currency basket.”

    http://www.cnbc.com/id/33188819

    Denial is the first sign of commitment!

  18. Youri Carma | October 6, 2009 at 5:15 am |

    Three Government Reports Point to Fiscal Doomsday http://tinyurl.com/ydn2vzo

  19. Nic Abbott | October 6, 2009 at 5:04 am |

    Mish is wrong about oil, because he says “oil is priced in dollars”, but actually he should say “oil is traded in dollars”. “oil is traded in dollars” in not a red herring. “oil is priced in dollars” would be a red herring, but isn’t becuase it isn’t the whole story. I liked M’s water analogy, make sense to me. As countries change to trading in other currencies then, of course, that will affect the dollar.

  20. Nic Abbott | October 6, 2009 at 4:59 am |

    @ Mongo I’ve got paper, you got ink?

  21. Phil | October 6, 2009 at 4:58 am |

    @Frank .. ” falling dollar and that the stock market is expected to open higher. How can that be?”

    Expected !
    Whenthey say the “stock market opens higher”, they mean the DJIndex .. which is not representative of the whole market.
    The BlueChip stocks operate (usually) internationally, thus a falling US$ will mean bigger revenues ( from th Rest of World ) !
    Take Intel as an example, their US revenues make up maybe 20% of total.

  22. stacyherbert | October 6, 2009 at 4:57 am |

    Related to this . . . gold just soared through old high; now at 1026.50

  23. Frank Hope | October 6, 2009 at 4:55 am |

    I would have thought that the falling dollar would cause inflation instead of deflation. All the junk we import will suddenly be more expensive. The lowered cost of goods imported from China was something that was masking inflation in the past. But now those higher prices will be like a tsunami hitting the prices of crap on the store shelves of Walmart.

    The problem that China faces is that by destroying the dollar, they will also destroy themselves. And China is no where near as advanced economically (or militarily) as most people have been led to believe it is. It will be rocked by economic tsunami waves itself and all the displaced workers from shuttered factories will be an enormous destabilizing force.

    Japan is already seeing the effect of a lower dollar – just look at recent comments from Japan’s auto manufacturers. What happens when the “consumer of last resort” (the US) no longer steps up to the checkout counter – MasterCard in hand? Who’s going to absorb all that excess capacity dedicated to producing gratuitous junk at razor thin profit margins. In a JIT (just in time) economy the dominoes will fall at the speed of a canceled electronic order.

    And yet this morning I woke up and saw contradictory headlines that Gold is at $1025 because of the falling dollar and that the stock market is expected to open higher. How can that be?

  24. Mongo | October 6, 2009 at 4:43 am |

    I have a printer.. but no paper

  25. M | October 6, 2009 at 4:42 am |

    Should the worl bank run out there will not be a problem. The IMF will print more SDRs, ore someone else will print.

    Printing will not be problem for anyone I guess.

  26. Phil | October 6, 2009 at 4:34 am |

    More JJ Shock & Awe !
    ;-)

    World Bank may run out of money by mid-2010

    …The World Bank appealed on Monday for more funds as it sees a second straight year of record lending amid the global economic crisis, warning it may have to ration aid to only the poorest countries….

    http://business.rediff.com/report/2009/oct/06/world-bank-may-run-out-of-money-by-mid-2010.htm

  27. Mike2liverpool | October 6, 2009 at 4:33 am |

    I think, the “TOB” will appear soon ish.
    Mike

  28. Fibon11235 | October 6, 2009 at 4:31 am |

    @ Phil Afternoon another Ex -bXanker! with rocketing interest rates in the land on OZ lol I think Iv got the answer to Browns Bottom, Gold, and Bonds on this one Jibber Jabber lol
    http://www.youtube.com/watch?v=x1xqdiDNPrY

  30. M | October 6, 2009 at 3:57 am |

    http://globaleconomicanalysis.blogspot.com/2007/11/oil-pricing-unit-red-herring.html

    Some OPEC members have said they will consider increasing transactions in euros. The dollar has fallen almost 15 percent against the euro in the past 12 months.

    My Comment: The key word in that sentence is “increase”. There is the smoking gun I have been waiting for a long time.

  31. M | October 6, 2009 at 3:57 am |

    http://globaleconomicanalysis.blogspot.com/2007/11/oil-pricing-unit-red-herring.html

    [i] Some OPEC members have said they will consider increasing transactions in euros. The dollar has fallen almost 15 percent against the euro in the past 12 months.

    My Comment: The key word in that sentence is “increase”. There is the smoking gun I have been waiting for a long time.[/i]

  32. M | October 6, 2009 at 3:55 am |

    Well, Mish certainly is not always right. However, his arguments do seem to hold some water.

    The one thing he ignores is the water in the pipelines. The financial system can be compared to a tube water system. The reservoirs represent the currency reserves of various countries, and they can be switched instantly.
    However as long as dollar trade continues, the tubes will be filled with dollars. Refilling those tubes with another currency will effect currency balances indeed. The question is: by how much?

  33. Mongo | October 6, 2009 at 3:50 am |

    @M, I think (for once) Mish is wrong. pricing in dollars is an important part of the “structure” for dollar hegemony.

  35. Mongo | October 6, 2009 at 3:17 am |

    this failure is going to be so epic I am already putting aside some cash for the popcorn (besides buying silver like crazy)

  36. Phil | October 6, 2009 at 3:08 am |

    Jibber Jabber ? –> U.S. Senate candidate: Martial law needed in Chicago

    …2009-09-30 10:13:42 – Andy Martin says emergency measures are needed to stem the tide of violence in Chicago.

    U. S. Senate candidate Andy Martin calls for the imposition of martial law in Chicago

    Martin says Mayor Daley and Barack Obama look stupid campaigning for the Olympics when they lack the resources to protect the city’s existing residents…

    http://www.pr-inside.com/u-s-senate-candidate-martial-law-needed-r1504502.htm