The biggest economic news in Australia last week was the handing down of the budget.
The budget confirmed the enormous debt that the federal government has racked up in the fight against coronavirus.
Before Covid, Australian Government debt was expected to hit $650 billion next financial year. Now it has almost doubled to over $1.2 trillion.
But those eye watering numbers were not even the biggest global economic news last week. US inflation came in at 4.2 per cent for the year, the biggest increase in US prices since the Global Financial Crisis. The high figure seemed to confirm the warnings of prominent economists in recent months.
The budget last week confirmed the stunning recovery of the Australian economy from the coronavirus. There are more people employed in Australia today than before the coronavirus, the only developed country in the world that has achieved that result.
There is no doubt that the Australian government’s policies of JobKeeper and JobSeeker have helped Australia’s economic recovery.
The Labor party’s recent calls for JobKeeper to be extended have proven to be way off the mark. Once again Labor shows that it is good at starting spending but not so good at stopping it.
Still, the Australian government continues to spend huge amounts of money. Australia has spent the fourth highest in response to the coronavirus of all developed countries, despite not experiencing widespread occurrence of the disease. By the end of it all, Australia’s debt as a share of our economic output will be the biggest it has been since the end of World War II.
The ending of most wars coincides with a breakout of inflation as economic confidence returns.
As respected economists Charles Goodhart and Manoj Pradhan, wrote in a book last year: “As in the aftermath of many wars, there will be a surge in inflation, quite likely more than 5 per cent, or even in the order of 10 per cent, in 2021.”
Their warnings of inflationary pressures have been echoed by Larry Summers, former Director of the National Economic Council for President Obama, Olivier Blanchard, former chief economist at the International Monetary Fund, and Martin Wolf, economics correspondent for the Financial Times.
Few are taking the risks of inflation here in Australia seriously but I am worried. As Milton Friedman said “inflation is always and everywhere a monetary phenomenon”. Australia’s money supply has grown by 13 per cent over the past year as the Reserve Bank has issued easy credit to our banks.
The RBA is in no hurry to reverse this growth even as the economy runs hot. They have claimed that they will keep interest rates at near zero levels for three more years almost regardless of the economic data that prevails. That gives the RBA little wriggle room to raise rates if we see inflation surge like it has in the US.
I would have more confidence if the RBA and Treasury showed more humility about their ability to fine tune the economy. They seem confident that inflation won’t be a problem before unemployment gets below 5 per cent. This misplaced certainty seems to ignore all the lessons of the 1970s when the relationship between inflation and unemployment broke down and we had stagflation - higher inflation and unemployment at the same time.
Another bit of extraordinary economic news last week was that the value of cryptocurrencies (bitcoin, dogecoin and the like) is now greater than all US currency outstanding. This may simply represent the growth in a new financial innovation, or it could represent the rapid deflation of the value of the US dollar.
Our post World War II economic system has been based on the centrality of the US dollar. If that breaks, the economic impact of coronavirus might seem a picnic compared to what is to come.