The cost of living: the evidence is clear

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This is the third and last instalment of my short series exposing that the high and rising ‘cost-of-living’ in Australia is due to government control not market freedom – ie the ancient human battle of freedom v control. The first piece was entitled The Rising ‘Cost-of-Living’ is a Government Phenomenon and the second piece was entitled The Rising ‘Cost-of-Living’: Why Is It So?. The first one set out the libertarian hypothesis that the culprit is government control like tax, regulation and money which negatively impacts costs (and services) in energy, housing and banking. The second one walked through the economic logic of why the culprit is certainly not market freedom. This third one will provide the statistical evidence from official sources such as the Australian Bureau of Statistics (ABS), Australian Prudential Regulation Authority (APRA), Reserve Bank of Australia (RBA) and Parliamentary Library (PL). This evidence is best presented in a series of graphs along with some brief commentary for each.

Nominal gross domestic product (GDP) largely tries to measure the income side of overall economic welfare. The growth of nominal GDP looks pretty healthy at first glance. But it doesn’t always feel that way to most Aussies. This is because of the price side of nominal GDP, given the underlying logic of GDP is Price (P) x Quantity (Q). The P side of GDP is similar to the cost-of-living.

Real GDP, ie nominal GDP adjusted for the consumer price index (CPI) or P inflation, shows mainly growth but at a level lower by more than a factor of 10 than nominal GDP. Real GDP, ie nominal GDP adjusted for M3 (money supply) or M inflation, shows mainly a sickly story of long periods of stagnation followed by longer periods of decline. The economic truth is probably somewhere in between real GDP (CPI) and real GDP (M3).

The annual ups-and-downs of nominal GDP growth also doesn’t look too bad at first glance. This is mistakenly called the “business cycle”, a cycle that is in reality not caused by businesses but instead caused by government-backed M and P inflation.

These annual ups-and-downs, more properly called the “boom-bust” cycle, are more downs than ups when using real GDP (M3) growth – ie more P than Q. The picture is much better, but still a worry, using real GDP (CPI) growth.

P inflation, even as measured by the economically and statistically limited CPI, has been largely and shockingly accumulating like compound interest since the early 1970s. Free-market-oriented policies in the 1990s, like National Competition Policy (NCP), helped to take the edge off of P inflation that was being driven by M inflation.

Annual changes in nominal GDP growth appear to strongly correlate with CPI … as well as, but less obviously, to M3. According to great 20th century economists like Keynes, Friedman, Mises, Hayek and Rothbard, M inflation (as say measured by M3) drives P inflation (as say measured by CPI) which in turn drives much Fake Economic Growth (as say measured by nominal GDP).

As any sound economist would expect, CPI for the lightly regulated goods and services is falling whilst that for the heavily regulated ones is rising. For instance, increasingly unaffordable housing and energy, as indicated by CPI, is mainly driven by government (G) inflation on the supply-side of the respective markets and M inflation on the demand-side.

M inflation drives P inflation as well as facilitates G inflation like taxation and regulation. Taxation and regulation adds to P inflation mainly through: reducing efficient supply and competition – ie a shortage from eg a tax or a price ceiling regulation; and/or increasing inefficient supply and entry – ie a surplus from eg a subsidy or a price floor regulation. Both also hide behind M inflation say: increasing hidden taxation through income bracket creep; or increasing use of price ceiling regulations to supposedly deal with P inflation.

M inflation, as measured by say M3, is the key to properly understanding poor Australian economic performance – ie income (eg GDP) versus the cost-of-living (eg CPI). M3, according to many of the best economists, is the key measure of M supply. It essentially includes currency M (from the RBA) as well as deposits M (from the Big-5 Banks).

The two institutions that contribute most to M inflation, and thus P inflation as well as G inflation and yet more P inflation, are central banking (ie the RBA) and fractional reserve banking (especially the Big-5 Banks). Under this legal ‘pyramid’ system, approximately $9 extra is created by the Big-5 ‘out of thin air’ for every $1 created by the RBA.

M inflation by central banking (ie the RBA) and fractional reserve banking (FRB) is made worse by the cartelisation of the banking market (ie the Big-5). All three phenomenon are only possible and sustainable through government intervention.

The purchasing power of money (PPM) is the inverse of the overall level of P also known as the cost-of-living. In mathematical terms: PPM = 1 / P. In a ‘nut shell’, M inflation (by the RBA + FRB) leads to PPM deflation which is the exact inverse of P inflation. In other words, the cost-of-living rises. This is made worse by the inevitable G inflation that goes hand-in-hand with it.

In conclusion, when it comes to the high and rising cost-of-living in Australia, to paraphrase from another piece of mine entitled Quantitative Easing by Stealth?: “The RBA and Big Government do not fight inflation, they manufacture and maintain it.” In this regard, Senator Malcolm Roberts of Queensland and John Fraser of the Commonwealth Treasury and the RBA had a very illuminating exchange in May 2017 at Senate Budget Estimates as follows:

Senator Roberts:Isn’t it the case that such money supply inflation has been the key driver, at least on the demand side of the economy, of the rising Consumer Price Index in recent decades?

Secretary Fraser:It is a hard one; I do not have an answer. I am a traditionalist, so I see money base growing like this, and it worries me but, every time I carry on and talk about the inflationary impact, everybody laughs and says, ‘You’re showing your age’—which I am. That is a non-answer, but it is interesting and I know that a lot of the people in treasuries around the world look at it and say the same thing: ‘We do not have an answer.’

Darren Brady Nelson is on the LibertyWorks advisory board, an economic policy adviser to One Nation Senator Malcolm Roberts & a Liberty Evangelion

Darren Brady Nelson