The recent interventionist policy enacted by ACT chief Minister John Stanhope represents a gross misunderstanding of the nature of competition. It will result in nothing more than higher prices for consumers to protect a small minority of businesses. The only reason independent retailers fail to succeed is, quite simply, because they are not profitable enough to stay open. Whether this is because they are not efficient enough due to poor economies of scale, labour costs, or some other reason is irrelevant.

Funnily enough, "...the architect of the ACT policy is John Martin, who was a long time commissioner at the Australian Competition and Consumer Commission with special responsibility for small business." So a man with a vested interest in helping out a particular lobby group, small business, is using his coercive powers in government to impose legislation that consumers do not want. Why does this not surprise me? Apparently, "...Mr Stanhope is turning the ACT into a test bed for interventionist polices aimed at improving competition policy." In other words, he is using flawed logic of 'more firms = more competition = lower prices' to justify his intervention.

As long as the government stays out of the way, which also includes not providing favours to the big three retailers, a free market dominated by a few firms is not a bad thing. The cheaper prices provided by Woolworths, Coles and IGA provide everyone in the economy with additional income to spend elsewhere (the savings they now make they can use to acquire more goods than they could before). This savings will then be spent in other areas of the economy enabling everyone to gain additional products and will also create jobs in the process.

If people honestly wanted to support small retailers, they would vote with their wallets. The minister should remove the intervention and let the people speak through their own actions rather than using the strong arm of government to impose his views on others. The big three cannot charge monopoly prices without illegal coercion (bribes, intimidation, etc), government-created barriers to entry (regulation, etc) or other government involvement (political favours, subsidies, etc). The only way they can keep competition out and then maintain their position is by improving their products and/or narrowing their profit margin to the point that competitors cannot enter.

To me, that sounds like a win for everyone involved, unless of course you're a small business lobby group or a politician handing out and receiving favours.

An excellent question. though most would say ‘who cares’?  Let us examine the end result of each scenario:

INFLATION       The value of your money progressively decreases as central banks print enough money to prevent deflation (a contraction in the money and credit supply).  Anyone who has a debt will have no problems paying off the nominal value of the debt, as the nominal value of your wage increases over the nominal value of your debt.  Example: this year the price of bread is $1… next year the price of bread is $3.  I have covered this phenomena in some detail in previous posts, I encourage you to ask me questions if you still want some help understanding the concept of inflation.

DEFLATION      The value of your money progressively increases as central banks are unable to print enough money to prevent the contraction in the money and credit supply.  If you have a debt, it is almost impossible to pay off the debt as it’s real value increases (nominal value is unchanged) while the nominal value of your wage decreases.  Example: the price of bread decreases from $1 to 50 cents in one year.  The collapse of lending, increased number of loan defaults, all contribute to a contraction of the supply of money, which makes the individual value of money greater (think the polar opposite of inflation).

In short… INFLATION = good for people with debts.  DEFLATION = bad for people with debts.

Now “deflationists” will not contend with the assumption that INFLATION can occur, even hyperinflation like Zimbabwe, but they see it as highly unlikely as the level of money printing would be astronomically high.  Furthermore, any attempts to neutralize the effects of deflation with money print would hopelessly collapse as seen with the central bank of Japan in the Asian Financial Crisis.  Also, any money that is printed goes directly to creditors and doesn’t touch the local economy to raise the price of everything.  Post-Keynesian economists like Steven Keen, a man whom I deeply respect, also contend that there is evidence to suggests that the money print by the central bank precedes the increase in the money supply (M2 to be exact)…. which means that the central banks are printing money in response to bank insolvency.  Thus, the increase of $1-2 trillion in the Federal Reserve’s balance sheet was in response to the ‘bank runs’ which took place at the end of last year, rather than an effort to create new money to pump into the local economy.

Inflationists on the other hand say that the government is perfectly willing to go as far as to print our way to hyperinflation.  More importantly, that the government is currently pursuing a course that will inevitable lead to hyperinflation.  They contend that the government has a course of trading private debt with public debt, these are also known as bailouts and they continue to this day as the government is pursuing a relentless nationalization agenda.  This isn’t perceived to be so much of a problem as the price of the debt (i.e. the interest rate) is quite low, thanks to the majority of the debt financed by short terms T-bills (1-3 years bonds).  When these bonds are required to be paid off, the government rolls the debt over into new bonds… or simply put, it borrows money to pay off borrowed money.  This is somewhat manageable when the economy is in a boom phase, where there is predictable growth that can theoretically outpace the increase in debt.  The failure of neoclassical economics for both monetarists and Keynesians was that their models assumed the the economy would be in perpetual growth, which was found to be the case as gravity exists in the economics in the form of finite resources.  As the government increasingly swaps more private debt with public debt and simply rolls over the debt repayments, exponential functions take over and the debt servicing on the debt starts to become impossible.

Pretty soon, people who buy the debt (like China and Japan) start to realize that the US is not going to pay back that money with any real value and stop purchasing this debt (they already have btw).  This forces the US to start doing something called ‘quantitative easing’, which means that the central bank prints money and buys it’s own bonds.  As the money print continues, the government starts to pay creditors the freshly printed money.  These creditors want to dispose of this currency either through exchange into their own currency (as most of the creditors are foreigners) or they will spend it on raw materials or even US financial assets.  As more US money abounds, the value of this money begins to decrease, even outside the local US economy.  As the value of the dollar decreases, the US central bank will be in a trap: the only way to defend the value of the dollar is to raise interest rates, but this will increase the amount of debt the government as to go into to service the existing debt.  And, if the interest rates rise, all of a sudden the credit based economy grinds to a halt as no one can pay back their debts.  If the central bank chooses to ignore that the value of the money is decreasing and the prices of everything are increasing, entering into hyperinflation will occur more rapidly than anyone predicts as they will eventual ‘turn the corner’ on the exponential curve of the depreciation of the US dollar.

The Japanese example isn’t applicable, the inflationists say, as the nature and origin of Japan’s productive capacity and creditors are completely different to the US.  Also there is the tiny little fact that Japan is the largest creditor nation in the world, while the US is the largest debtor nation.  This is a striking point between the two schools… the PKs say that the scale of the debt black hole is too enormous for pure money printing to overcome.  The Austrians are saying that the money printing is being used to swap the private debt with the public debt, and if this process continues then the value of the currency will collapse.

So… which one is right?  The answer is, no one really knows.  Some people will say ‘I’m 100% sure this way or that way’, but in reality, we’re all just economic geeks watching the carnage unfold.  This is exciting to watch, but painful in reality to the people at the bottom of this gigantic pyramid scheme that we call money and banking.

Personally I’m not interested in the little esoteric arguments between the economic schools… and there are many.  I think there’s value in the analysis of the financial system from both schools and both possible scenarios make sense and are plausible.  We’ll just have to see what happens.  In any case, my advice is to horde faith in God and put your money in assets that will protect you from either scenario, which are precious metals (i.e. gold, silver, platinum).

God bless,

Dr Washo

PS   And if you’re a US citizen, support bills like H.R. 1207 ‘The Federal Reserve Transparency Act’ aka ‘Audit the Fed’

What's that, the first home buyers grant doesn't do anything except subsidise the real estate/construction industries? I never would have guessed...

The Reserve Bank's deputy governor says the boosted first home owner grant may have pushed up house prices at the lower end of the market.

The Federal Government has in some cases tripled the value of the grant, in a bid to stimulate the housing market.

But the RBA's Ric Battellino has warned it could lose its incentive value.

"The benefits of that policy can get eroded very quickly by being capitalised into house prices," he said.

"From all accounts the bottom end of the housing market has picked up a lot in recent times, and it doesn't take long for the average house price to rise by $20,000 and leave the home buyers no better off than they were before."-- Source

The government never cared about homebuyers. If they did, they would have allowed the housing industry to suffer the necessary downturn making houses more affordable for low income families. That aside, since when was it a 'right' to own a house? In most cases renting is a far more economical, flexible way to go. The incentives behind home ownership are usually non-financial and instead psychological in nature (if we want to get more cynical -- the government loves it because it makes it that much harder for people to leave).

The first homebuyers grant was(is) nothing more than another prop-up for the real estate and construction unions along with various other interest groups. Good riddance.