Deflation Down Under, RBA Kanagroos Kick For Lower Rates!

“Australia saw deflation for the first time in seven years in the first quarter, as falling petrol, food, and clothing prices drove down the cost of a basket of goods and services.” (Mulligan, 2016) The Reserve Bank of Australia having prolonged deflation through low interest rates to the point of almost zero, market participants are demanding through market coordination that it is time they want lower asset prices. Deflation being a lowering of asset prices and a returning of factors of production to best satisfy consumer’s urgent needs. “Landlords are bracing for lower rents and have been locking in new leases without consumer price indexed adjustments because of the prospect of deflation in Australia.” (Cranston & Harley, 2016)

However, it will be a different matter if the RBA decides they want higher asset prices and decide on a rate cut. “It may see the Reserve Bank cut the official cash rate for the first time in a year on Tuesday, just hours before Mr Morrison delivers the budget.” (Brinsd, 2016) Effecting the expenditure side of governments, this will see a creative effect on the outcome on the budget statistics.

Credit inflation is a distortion of what actually is available to support current production and consumption levels and cause weary booms, while busts even though are inevitable, should not be prolonged to delay market correction on grounds of devaluing currency and hurting savings. “The boom squanders through malinvestment scarce factors of production and reduces the stock available through overconsumption; its alleged blessings are paid for by impoverishment.” (Mises, 1949)

A worst case scenario would be to follow other countries and have zero or negative interest rates. However, the radical and numerous schemes to lower or abolish interest by means of a banking reform have been teased, as a zero originary interest rate implies no action always being pushed into ones infinite future period of provision, and a negative originary interest rate implies one could undo action. Though, not rejected or refuted, in fact, it is now found necessary to find additional policy stimulus through cutting the gross market interest rate lower to the point of a zero gross market interest rate. Now, lenders/savers receive no discount of future goods relative to lending/saving present goods.

Deflation, SMH

Source: (Mulligan, 2016).

Reference List

Mulligan, M. (2016). Australia sees deflation for first time in seven years. The Sydney Morning Herald. Retrieved [29/04/16] from <http://www.smh.com.au/business/the-economy/australia-sees-deflation-for-first-time-in-seven-years-20160427-gofuws.html>.

Brinsd, C. (2016). Deflation risk looms as budget takes shape. The Australian. Retrieved [29/04/16] from <http://www.theaustralian.com.au/news/latest-news/deflation-risk-looms-as-budget-takes-shape/news-story/0fdc20f0c9b7d81c3bd99d0280753ef0>.

Cranston, M. & Harley, R. (2016). Deflation has landlords rethinking CPI rents and leases. Australian Financial Review. Retrieved [29/04/16] from <http://www.afr.com/real-estate/deflation-has-landlords-rethinking-cpi-rents-and-leases-20160426-gofm1e>.

Mises, M. 1949 (2010). Human Action, (Scholar’s ed.). United States: Yale University Press, Ludwig von Mises Institute.

Featured image supplied from Unsplash (edited).

Copyright © 2016 Zoë-Marie Beesley

Creative Commons License Licensed under a Creative Commons Attribution 4.0 International License.

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