A permanent state of crisis

Cost-of-living is the latest ‘crisis’ confronting the nation.

We have allowed ourselves to be seduced by a narrative of continuing crisis that deepened with the pandemic and has now morphed into the cost-of-living crisis. By Nick Cater.

It was worrying enough that our then alternative prime minister didn’t know the cash rate when he was questioned in April. More troubling still was the indifference of voters who plainly didn’t care. They were prepared to accept that the central bank’s overnight lending rate was an obscure detail of interest only to policy wonks, remote from everyday concerns such as rising prices.

The arrival of the $12 lettuce is just the start of the price we are about to pay for 14 years of ultra-cheap money that set the conditions for rising inflation. Along the way it has widened the gap between the asset-rich and the asset-poor, changing the dynamics of politics and providing a breeding ground for a new third force.

As far as grand theories of everything go, the Reserve Bank of Australia’s cash rate is not a bad place to start unravelling the strangeness of our times. After the taming of inflation in the early 1990s, the cash rate hovered in a tight band between 5 and 7.5 per cent until 2008, when the great loosening began. In May 2016, it fell below 2 per cent and then sat on 0.1 per cent for 16 months until the RBA began tightening in April.

The rule book discarded during the global financial crisis of 2008 has barely been glanced at since. We have allowed ourselves to be seduced by a narrative of continuing crisis that deepened with the great pandemic and has now morphed into the cost-of-living crisis.

The dark theme running through every page is the greatest conceivable catastrophe of all, the climate crisis that has now officially been declared an emergency in at least one Australian jurisdiction, a threat to our existence at which we must throw everything and then borrow from the future to throw some more.

Meanwhile, the cost-of-living crisis has been visited upon us by forces beyond our control, or so we are led to believe. Politicians and popular commentators conjure up an image of the perfect storm in which a faltering supply chain and the madness of a Russian dictator collide to send inflation down from the sky.

Yet the truth is that inflation is not an international problem, since floating interest rates were meant to stop it at our borders. It may be a global problem, but that is because sovereign governments have made similarly poor short-term decisions in an atmosphere of perpetual crisis.

Milton Friedman’s theory that inflation is always and everywhere caused by cheap money has yet to be disproved. The latest bout of inflation might have been triggered by specific events constraining supply, but the underlying cause is the same: governments that spend too much money and central banks that collude by printing more.

The consequences of the RBA’s decision to lower cash rates in August 2008 and then drive them lower still until the cost of money was effectively zero were eminently predictable. Chief among them were rising asset prices, which have widened the intergenerational wealth gap. They have driven a wedge between the asset-rich and asset-poor defined by both demography and geography. The winners are the Gen-Xers and baby boomers, particularly those in favoured suburbs made wealthy by rising property prices, a healthy stockmarket and the compounding benefits of superannuation. The losers are the under-35s, notably those who spent their 20s at university accumulating debts for the first decade of their working life instead of gaining skills and earning their keep.

That economic divide is now the underlying cause of the new political divide that led to the rise of the teals and the growing influence of their cousins, the Greens. The teals tap two voting markets. One is the asset-rich, conspicuously moral cognoscenti in suburbs such as Camberwell in the seat of Kooyong. They are too wealthy to have to worry about inflation or the cost of their favoured policies and too conscience-ridden to ignore the plight of the planet. The other market consists of asset-poor, university-educated, under-35 professionals living in rented condominiums along Canterbury Road, Hawthorn. They are frustrated by property prices, which in turn are delaying the formation of families. They enjoy confidence neither in the justness of the economic system nor the motives of mainstream politicians. The imperative of real action on climate change, which neither the markets nor politicians appear to share, feeds their conviction that the old system is broken and must be replaced with something fresh.

When historians look for the source of the decline in Australia’s fortunes in the early 2020s, it is likely that Covid-19 will present as a symptom rather than a cause. They might marvel at a rich and fortunate nation that was prepared to spend so much to stop an illness that posed almost no threat to the young and healthy but failed to stop the pandemic of inflation that was about to rip through the economy, placing a burden on future generations.

They may wonder at the primitive thinking that educated, civilised people were prepared to embrace, drawing evidence from the transcripts of ABC broadcasts hailing Modern Monetary Theory as the next big thing.

“We may be on the cusp of a revolution,” ABC business reporter Gareth Hutchens wrote in May 2020. “What if everything we thought we knew about public finance over the past 40 years has been wrong?”

To understand the conditions under which such delusions grow, they might consider the rising promiscuity in the use of the word crisis, which once meant a temporary predicament that might justify short-term action but would quickly pass. A crisis might require a commitment to go to war, for example, as Margaret Thatcher did in 1982 to repel the Argentinian invaders from the Falklands.

“It is exciting to have a real crisis on your hands,” she told the Conservative Party conference that year, “when you have spent half your political life dealing with humdrum issues like the environment.”

Today the tables have turned, upgrading the environment to an object of impending catastrophe and fiscal and monetary management to the realm of the mundane. The economic lessons of the Thatcher, Reagan and Keating years seem entirely forgotten.