Should we lower the lunatic RBA’s inflation target?

The state of debate in this country is appalling. The latest? The lunatic RBA has misread the economy for seven years, failed to deliver its inflation and employment mandate, helped trash five straight prime ministers by embedding a permanent income recession and what is the answer? Change the goal posts to protect it. Via the AFR:

…Former Reserve Bank of Australia board member Warwick McKibbin has already called for the RBA to move away from the inflation target band, while local economists BetaShares’ David Bassanese and UTS’s Warren Hogan have also suggested the target should be adjusted.

…AMP chief economist Shane Oliver said the current situation was the inverse of 2008 when inflation was too high and economists called for change to the band then.

Westpac chief economist Bill Evans also said changing the inflation band would send a terrible signal on future inflation expectations, which are a key guide to interest rate decisions.

ANZ chief economist Richard Yetsenga said…”What is needed is a fuller understanding of why what we thought of as norms for economic growth and inflation no longer seem to be working, and why the policy process is taking so long to ask these uncomfortable medium-term questions,” he said. ”We can’t keep just waiting for ‘normal’ to return.”

Actually, in theory, I am not opposed to dropping the target to 2%. We’ve spent a long time inflating the real exchange rate with a higher target than most. But timing is everything and now is not it.

The time to lower the target was when inflation was high not low. We’ve got a major and worsening deflation problem amid sky high household debt, sinking asset prices, and record low wage growth. How exactly does anyone expect the private sector to deleverage out of these circumstances by slamming inflation, and expectations of such, even lower?

This is straight-up depression era liquidationism and is completely barking mad.

The RBA’s dual mandate of balancing inflation versus full employment should be changed. But it needs to be shifted on the employment not inflation side. The former should be shifted to include targeting excessive underemployment, which is what we have and what is preventing any lift in inflation. I mean, it’s not like I’m making this up:

The RBA has failed to grasp our lowfaltion environment from the very beginning:

  • over-tightening during the mining boom, embedding deflation;
  • then letting the housing bubble rip too far when chasing inflation as an offset and resisting macroprudential far too long;
  • then totally misjudging the depth of the housing bust, further embedding underemployment and deflation;
  • throughout it has made it much worse by mindlessly endorsing mass immigration into an oversupplied labour market, further embedding underemployment and deflation;
  • and every single time it opens its mouth it sends the AUD up.

Should we lower the RBA’s target band to protect these compulsive failures? Fuck no.

Sack the RBA executive for gross negligence. Slam is back together with APRA. And make Greame Wheeler an offer he can’t refuse to come in and clean the place up.

David Llewellyn-Smith
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