Yeats, China and the Reserve Bank of Australia…

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We are going with Yeats today. We have no good reason. But we have our reasons. We are fond of the Irish and the poet who shares his name with a horse. A fitting Yeats quotation for the day, “The worst thing about some men is that when they are not drunk they are sober.”

Before we get to the abbreviated business at hand, the Daily Reckoning’s operations here at the Old Hat Factory in Melbourne are looking for apprentices to learn the trade of financial muckraking and editorial writing. We provide extensive training in the arts of writing, perhaps some marketing, internet publishing, print publishing, and, of course, free lessons on economics, finance, skepticism, and esthetics. If you are a university-aged student, or know one who is interested in learning the tools of the trade in a highly-stimulating, underpaid environment, send us an email at dr@dailyreckoning.com.au

This just in, China has a trillion U.S. dollars in foreign currency reserves. That’s a lot of money. Where will the Chinese spend it? Infrastructure? The more we looked at answers to the question, the less we were interested in China. The World Islamic Infrastructure Finance conference is taking place this week in the Middle East. That’s where all the investment action is. We’ll have a full article on it for you later in the week.

Meanwhile, it looks like Europe could use some power grid infrastructure. The lights have gone out in Western Europe, and we mean literally, not just spiritually, or philosophically, although we could have meant either and been right, too. The International Energy Agency reckons the world needs close to US$16 trillion in energy infrastructure to meet the growing demand for energy. But according to some in Europe, what the continent really needs is another agency.

“My first impression,” Italian Prime Minister and Eurocrat Roman Prodi says, “is that there is a contradiction between having European (power) links and not having one European (power) authority… We depend on each other with being able to help each other, without a central authority.”

That’s right Mr. Prodi, instead of a better power grid, you need someone in charge running things from Brussels. Why is everything about power and authority for politicians, even something as basic as turning the lights on and off? With fundamentally stupid comments like this, Europe is headed for a new dark ages. In fact, it might already have arrived.

Finally, no news from the Reserve Bank of Australia as we go to the digital press. But something has been bothering us and we wanted to share it with you to see if perhaps you could solve the problem. We are told over and over by learned journalists that broad measures of inflation, the CPI, are not as useful as “core inflation” is the monthly metric, sometimes called “the trimmed mean” which strips out the things that have been especially volatile in price. What’s left is the average of all the things moving placidly along, gently inflating like a cat’s belly on the summer sill.

Ross Gittins of the Sydney Morning Herald puts it this way “Remember that, for the purposes of managing the economy and deciding the appropriate level of interest rates, we are not interested in the cost of living. We are looking for evidence of the strength of inflation pressures in the economy.”

If we are not interesting in measuring the cost of living with our inflation metrics, what good are our inflation metrics? This would be like measuring man’s weight, but only everything from the belly-button down. Of what possible use is it to exclude the very things that make day-to-day life more expensive? What’s that you say? Oh…yes. Well yes that does make sense. Excluding the things that are going up in price probably would make inflation seem milder than it actually is.

Gittins continues, “So the leap in the price of bananas is a textbook example of a volatile item. It tells us nothing about the strength of inflation pressures throughout the economy. All it tells us is that a cyclone wiped out most of the nation’s banana crop. As soon as another crop grows, banana prices will go back where they were.”

Our reply is that its always bananas somewhere. We are reminded of the whack-a-mole game played at carnivals. You know, the one where you mash the heads of moles as they pop up. You need a big mallet and the moles are surprisingly quick. The game is rigged to beat you. We suggest skee-ball, which has some actual skill to it (it’s all in the wrist.)

Central bankers change the rules in the inflation game because they can’t otherwise win it. Rather than conceding that raising the cash rate is having little effect on containing rampant inflation in wages and other areas, it is easier to simply suppress the impact of rising prices in the final figure. Presto! It’s gone. The Ministry of Truth would be proud, unofficially, of course.

It’s not really gone, of course. It’s just popped up somewhere else. It may even pop in tomorrow’s DR. Until then…

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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