Australia needs to produce more with fewer people

afr.com:

It is important for investors to understand that we are in uncharted territory with respect to this monetary policy tightening cycle, which is unlike any other that we have seen.

Examining every interest rate raising cycle since the 1990s in Australia, Europe and the US, we find several important differences. The first is that central banks’ cash rates are starting from a much lower level than any prior period.

A second variation is that core inflation is much higher than it was when central banks started raising rates in the past. In the US and Europe, it is literally many times the pace of core inflation observed at the beginning of previous tightening cycles.

The jobless rate is 3.5 per cent, which is the lowest since the 1970s. Louie Douvis

A third unique facet of this episode is that we have a much lower jobless rate or, in other words, a tighter labour market.

A final crucial innovation is the fact that central banks have to grapple with the advent of the unprecedented cash piles that some households accumulated during the pandemic as a result of being locked down and unable to spend, coupled with the enormous amounts of cash politicians transferred to them to support demand.

An extreme example of this was, of course, Daniel Andrews’ Victoria, which had the toughest global lockdown combined with the most egregiously irresponsible fiscal policy. Following the destruction of the Commonwealth Games, Victoria increasingly resembles a failed state.

The cash buffers that some Australians have built up are worth as much as 20 per cent of household incomes and are evenly distributed among young and old, rich and poor. Care of state governments’ fiscal largesse, the cash buffers are almost double those evidenced in the US