While often ignored, much of the global response to the pandemic was driven by decades of ezy-money. From the infamous Greenspan to a decade of money printing and negative interest rates after 2008, by the time COVID-19 came around in 2020 governments were literally addicted to buying off voters.
This was largely a result of cognitive bias (or put another way, most people have very short memories). Since former Federal Reserve chairman Paul Volker lifted interest rates in 1981 to 20% to tame runaway inflation, governments and their central banker partners around the world took the collective hallucination that inflation was somehow dead. They studied 10 years of history, rather than a century. This was always going to end badly.
Two weeks ago, the US recorded an inflation rate of 8.5% — that’s the highest in 40 years. And yesterday, the US Federal Reserve announced it would shortly hike rates by 0.50%. There are multiple reasons for inflation skyrocketing, but the main one is simple: too much money chasing, too few goods. The other reasons, like Ukraine or stretched supply chains, are at best minor, and at worst a deception.
Governments used the pandemic and the health emergency (much of which was exacerbated by the government response) to justify unprecedented peacetime discretionary fiscal spending.
In Australia, a supposedly conservative (but at best, cronyist) government created JobKeeper to ostensibly help low paid workers — in reality it was a direct transfer of wealth to business owners. JobKeeper was far from the only fiscal handout — in NSW alone there is literally a page detailing a selection of government handouts — from the First Lap Learn to Swim vouchers to the Alfresco Restart Rebate and the Sydney Friday CBD Voucher Scheme.
Egregiously, many businesses were gleefully receiving government handouts while recording revenue and profit increases. At the same time the fiscal explosion was occurring, the blundering RBA was effectively printing money through quantitative easing and maintaining record low interest rates, adding unprecedented monetary stimulus to the fiscal party.
While Australian inflation hasn’t reached us (yet), the dubiously calculated CPI hit 3.5% in December. This rate conveniently ignores the cost of dwellings, which rose by 22% (rents are also skyrocketing). So according to the ABS, the cost of living apparently didn’t rise much, so long as you don’t mind being homeless.
This columnist has repeatedly warned of the dangers of excessive demand creation, noting way back in April 2020 (a month after the pandemic hit Australia):
The immediate costs of the government’s various stimuli (and it isn’t just JobKeeper) is more than $130 billion. This is around a quarter of our annual GDP. There are two ways the government could force Australians to pay for this.An increase in revenue through higher taxes/levies (or similarly a reduction in exemptions) for the next few years, or it can essentially print money to pay for higher debt/interest payments. This makes everyone poorer but they don’t realise it.
The government, unsurprisingly, took the latter approach — massive government deficits amidst record low interest rates (which appallingly, remain at emergency low rates, despite a raging global inflation crisis).
Since 2002, government prolificacy materialised in inflation centered largely around assets prices, in particular, property (residential, commercial and industrial). Because in Australia, where ever-increasing house prices is politically considered a good thing (baby boomers win, younger generations and the lower working classes lose), this was actively encouraged.
Finally, and inevitably, the rampant demand creation is showing up in consumer prices both in Australia and around the world. Tragically, the developing world is also witnessing widespread inflation — food prices in India rose 5.9% last month, this sort inflation leads to people literally starving to death.
Closing economies, stopping freedom of movement and running massive deficits to fund it all was the ultimate kicking of the can down the road. The only way to stop the onset of inflation is to dramatically increase interest rates (some countries, like the UK and New Zealand have already realised this, the US is moving but more slowly — Australia is still sleepwalking into disaster). This is not a 1-2% increase, but hiking rates 2-3% above inflation, like the legendary Volker did back in 1983. In our case, that means interest rates approaching 10% or higher.
Australia has spent a decade racking up credit card bills while buying hotted up Commodores and McMansions. It’s about time to pay those bills.
Adam is the co-founder of The Lux Group and author of Pigs at the Trough: Lessons from Australia’s decade of corporate greed. He is also a member of the SmartCompany Brains Trust, a former Private Media board member and former corporate lawyer.
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