Never Mind the White Powder

I was going to write about white powder and whether people have been jumping to conclusions in the case of King Carey. But another rate rises this week and promises of more to have turned my attention to the dark art of economics.

The sleepy old Reserve Bank of Australia has been thrust into the spotlight by the rapid about-face in predictions from “lower for longer” to “Houston, we’ve got a problem”. From “inflation is transitory from the effects of COVID”, Philip Lowe has gone to “we will do whatever it takes to stop inflation”, … but they only have the interest rate lever in their kit bag, so “up she goes” by the sounds of things.

“THE only function of economic forecasting is to make astrology look respectable,” John Kenneth Galbraith, an irreverent economist, once said.

What do economists actually study to become an economist? What makes a good one? Do they ever look back at last year’s predictions and see how far off the mark they were? Do they care anyway? What are the KPIs? Do they live in a bunker far underground in Canberra and only get let out for Christmas? Do they ever smile? Do they stick steadfastly to their mandate of getting inflation within the 2-3% band, come hell or high water? Who do they report to anyway? How do you stop a renegade reserve banker who goes off the rails like Michael Douglas from the movie Falling Down?

Now nobody wants inflation, not least the Lizard King. But can rapidly increasing interest rates solve the problem? Interest rate rises have the effect of leaving less in the family kitty at the end of every month, and hence less to spend on discretionary items. It also leads to higher business loan servicing, curtailing investment and growth plans. Eventually, this reduces demand-side inflation.

But what about energy costs? Mostly energy costs are non-negotiable – heating, cooking, lighting, work etc. What if high energy costs are the main culprit for inflation? Take Europe, for example. The Ukraine war is impacting there, and the poor rank and file euro family is currently copping it in the collective neck. Winter is on its way, and frankly, it is looking bleak.

One of my fellow lizards passed on some anecdotal energy facts from a source in the UK. One pub owner has seen his energy bill rise from GBP 70k to over GBP 460K in a year. A larger bakery/café business’s energy bill has gone from GBP2m to over GBP9m in a year. This is seriously frightening. The situation in Germany is worse – scheizenhausen! This is supply-side inflation, and there is nothing the Bank of England, the US Fed or economist in Canberra can do about it.

Climate change policy and green politics have consistently forced the closure of European baseload systems. Coal and nuclear are on the nose, whilst solar and wind are in. Governments have fully subsidised and underwritten investments in green infrastructure and renewables but have reduced efficiency and forced up costs. The recent very hot summer has exacerbated the issue, forcing brownouts and rolling blackouts. The drought has meant less flow to run hydroelectric generators.

With Comrade Putin digging in and cutting off gas, this will be a long-term problem and, in the short and medium terms, quite devastating for the economy. Newly appointed UK PM Liz Truss needs tax cuts and lower interest rates – not economists trying to tame inflation their way.

As we look to career down the carbon-neutral path on the back of renewables, we should have a good long hard look at the effects of wholesale dumping of baseload power with subsidised renewables. This course of action has led Europe to much higher power prices and left them wholly exposed to their Energy duds being unceremoniously ripped off by comrade Putin.

To my mind, nuclear is the only option. David Cameron was the one who made disparaging remarks about nuclear but agreed “to look at nuclear if the renewables don’t work”. Now that comment 10 years on is looking a bit silly. You can’t rustle up a nuclear plant at short notice, but they need one now by crikey. Australia has lots of uranium, and the discussion on nuclear as part of the energy mix needs to start now, not once the renewables are ineffective baseload power.

Time to control our future more and not give all the power to economists and green politicians!

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