Australian Outlook | Chris Joye

Central banks are too much under the sway of government and not doing enough to contain inflation. None worse than the RBA which is holding rates lower than they should be. The last time that we had inflation at 4.0% in 2008, the cash rate was 7.25%. Now the cash rate is only 4.35%.

RBNZ is far more independent and hiked their official cash rate to 5.5%. The NZ economy is in recession but they still face the threat of stagflation, with low growth and high inflation.

In Australia we have a negative output gap, where demand exceeds production capacity, far worse than in most other major economies. The only solution is to raise unemployment to lower demand. But RBA governor Michelle Bullock has publicly stated that the RBA is not looking to reduce employment.

The latest Australian government budget is highly stimulatory and likely to fuel further inflation.

The outcome is likely to be long-term inflation and higher long-term interest rates.


We expect strong inflationary pressures in the next decade as governments run large fiscal deficits. Additional government spending is needed to:

  1. Address the energy transition from fossil fuels to renewables and nuclear;
  2. On-shore critical supply chains; and
  3. Increase defense spending in response to geopolitical tensions.

Long-term interest rates are expected to rise over the next decade, fueled by higher inflation.

Central banks may attempt to suppress interest rates by further expanding their balance sheets to buy long-term fiscal debt but that is short-sighted. Inflation would accelerate even higher.

Apart from the hardship to wage-earners, and the subsequent political chaos, high inflation would threaten bond market stability. Bond market investors would be reluctant to fund deficits when interest earned is below the inflation rate. Unless there are no alternatives.

That is why the long-term outlook for gold and silver is so bullish.

The Output Gap: A “Potentially” Unreliable Measure of Economic Health?

Excerpt from a newsletter by Elise A. Marifian, Research Analyst at the St. Louis Fed, describing problems with calculation of the hypothetical output gap and how this can lead to incorrect monetary policy:

Some economists question the reliability of potential output and, therefore, output gap measures. For instance, as James Bullard noted in 2009, if calculations had considered the housing boom and bust, then potential GDP and output gap measurements would have been smaller than they appeared…….. Gavin (2012) shows that the output gap calculations for 2003-12 are reduced significantly when 2011 estimates of potential GDP are used in place of 2007 estimates. If our economy is improving faster than current output gap measurements suggest, then monetary policy intended to boost the economy could produce too much stimulation, thereby fueling inflation once the economy begins to pick up steam.

via Page One Economics – St. Louis Fed.