The RBA is Whacking the Wrong Mole — You

Central bankers are focusing on wages in their fight against inflation. But what if that’s the wrong mole to whack? A debt crisis is popping up behind them…

Imagine a game of whack-a-mole where the moles can whack back. It sounds like some sort of Japanese game show. But it’s actually what central bankers at the Reserve Bank of Australia are playing at.

The latest round of the steadily escalating game began when COVID struck. With inflation, GDP, the financial system and unemployment all chugging along reasonably well, our central bank suddenly faced a real ugly threat in the form of the pandemic.

‘COVID is coming, look busy’ was the mantra of public institutions everywhere…except schools, which got busy not looking busy. Central bankers sprung into action in all sorts of weird and wonderful ways to ensure the economy, financial system and government all had enough money to deal with the crisis.

The result was, of course, inflation. Because that is what happens when you inflate the money supply. Only this time, the inflation showed up in consumer prices too, not just the stock market, property market and bond market like usual.

That is the point of whack-a-mole, after all. Every time you solve one problem, another one pops up.

And so the RBA grabbed its interest hammer, if a bit slowly, and slammed inflation on the head.

Of course, the RBA wasn’t the only one playing the game. In much of the Western world, inflation reached double digits before getting a hammering.

Central bankers initially denied its existence for a dangerously long time and almost lost the game completely as a result. Then they pivoted to denying they were responsible for the inflation, but could solve it by hiking interest rates nevertheless.

This should give you pause for thought in and of itself. I mean, if too Lowe interest rates are not responsible for the inflation we got, as many central bankers still maintain, then how could hiking rates reign it in?

Anyway, having successfully beaten inflation back down…to some extent…with record interest rate hikes, central bankers are now facing a new mole that has popped up to replace it.

This mole is about 50 years old and unusually grizzly looking to central bankers because it pulled their pants down when it first made its appearance back in the 70s. We’re talking about the dreaded wage-price spiral.

When you hear central bankers say rather unusual things, such as the need to inflict pain on you, the need to admit we are poorer, and the need to avoid pay increases despite inflation, what they are referring to is the wage-price spiral. They want to prevent it from popping out of its hole in the first place, because it’s unusually difficult to whack back down.

The wage-price spiral story, which is a load of rubbish by the way, goes a little something like this: Inflation is driven by wages. If wages go up, prices go up. Simple, right?

The one-armed economists who came up with this idea forgot that, while wages and therefore spending power is going up on the one hand, on the other hand this implies more is being produced. More stuff and more money combined doesn’t mean prices will go up.

Unless, of course, wages are merely going up to keep up with prices that are rising. Which is obviously what’s going on today. But, if there’s one thing I learned at university, it’s ‘don’t let reality butt in when you’re trying to explain theory’.

Instead of seeing that wages are merely rising to keep pace with inflation, central bankers are worried that rising wages will force or cause companies to raise prices. Facing such higher prices, workers will demand more pay. And this will only bid up prices even more. The result is a self-reinforcing spiral of inflation fuelled by higher wages.

Again, this is flawed because things cannot get out of hand in this way when the amount of money in the economy isn’t surging out of control. The money to pay for all this must, after all, come from somewhere.

Indeed, this was the key flaw in the RBA’s initial promise not to raise interest rates until wages rose. They simply presumed that wages were behind inflation, instead of…well…inflation off the money supply causing inflation.

But that’s not my point. Central bankers are busily trying to whack the wage-price spiral to stop it from even popping its head out. And, right now, they think they’re failing.

In the UK, wages recently rose by an all-time record amount. Japan’s wages recently jumped by the most in 26 years. Last year, US wage growth soared to record highs on measures going back to the 90s. Various measures for Australian wages are also taking off…in nominal terms, meaning before you adjust for inflation, that is.

This is of course just wages catching up to prices. Inflation has soared more than wages if you expand the time horizon on the analysis to a few years. But the central bankers don’t see it that way. They think the wage-price spiral mole is popping up to make them look even more stupid.

While claiming that the inflation they caused came out of the blue, they are seeking to solve it by address its symptom. If only central bankers could be sued for economic malpractice.

But let’s finally get to what I really want to take about today. The mole which really has popped out of its hole and is about to whack the central bankers of this world on the head, hard.

I’m talking about a debt crisis — the other thing which central bankers are hired to prevent, despite being their most prominent cause.

You see, the idea that the financial and economic system can handle today’s interest rates is absurd. There is just too much debt in the system. That’s why debt defaults, business failures and all sorts of other debt distress measures are rising across so many different economies.

However, higher interest rates take a long time to actually start causing chaos. According to Michael Lebowitz of, recessions only appear, on average, 11 months after the final rate hike in a cycle. ‘The last Fed hike was in July 2023. Assuming that was the Fed’s final rate increase for this cycle, it may not be until June 2024 before a recession occurs.’

Why the delay? Well, those worst impacted by the higher interest rates are recent borrowers who come off their fixed rate mortgage period. But it takes time for people to roll onto the new rates. Similarly, corporate borrowers borrow at fixed rates for fixed time periods. It takes time for them to need to refinance onto higher rates. The same for governments.

Eventually, all of this amounts to less spending to keep the economy growing. Because they eventually all have to tick over to the higher rates.

Now recessions are just one form of the consequences of hiking rates too much. The financial panic can begin well before that. Especially when debt is too high and rates are hiked too fast…

The debt crisis mole is winding up for a whack.


Nick Hubble Signature

Nickolai Hubble,
Editor, The Daily Reckoning Australia Weekend

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All advice is general advice and has not taken into account your personal circumstances. Please seek independent financial advice regarding your own situation, or if in doubt about the suitability of an investment.

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