Incredibly, there was barely a murmur of commentary about this rapid growth in money supply.
Thirty years ago, there would have been mayhem in financial markets if the RBA had ticked off a rate of monetary growth more than double the rate of nominal GDP. Maybe our policymakers came to believe that inflation was indeed dead and buried and was immune to expansionary fiscal and monetary policies.
Indeed, a new school of thought had developed which argued that the RBA was in fact doing too little to stimulate the economy, and should have been doing a lot more with its new set of monetary tools.
The monetary policy free lunch
Ipso facto, it was argued that the undershooting of inflation targets in previous years was proof that monetary policy had been too tight and should have been looser.
The proponents of modern monetary theory, as it has become known, were now arguing that with the risk of inflation gone, we could stimulate our economy almost at will. The monetary policy free lunch was, in effect, here.
You may have noticed we don’t hear much about modern monetary theory lately. Just like technology companies a little while ago that could get valued on ridiculous multiples of sales or revenues rather than profits, it was fashionable to see MMT as the new way to run monetary policy.
Until it wasn’t. Inflation has roared back into the global and Australian economies. And central banks everywhere have been left stunned by its return. Their forecasts of continued low inflation are in tatters. They completely failed to forecast what has actually happened.
Ultra-loose monetary policy should now be packed into a box and labelled: ‘never to be tried again’.
To be sure, there have been shocks from both the impact of the pandemic and Ukraine-Russia war, but ultimately we are learning once again that inflation is nearly always and everywhere a monetary phenomenon.
Ultra-loose monetary policy should now be packed into a box and labelled: “never to be tried again”.
The upcoming review of the RBA has many questions to answer. Top of mind: Why was the forecasting of inflation so poor? Why did our central bank have such little regard for history? Why did our central bank become so infatuated with modern monetary thinking and techniques? Why was the board so passive in not challenging management? Why was medium-term guidance provided in a highly uncertain world?
Hopefully, the review will be able to look at these questions and more, led by a totally independent figure free to challenge all the current norms and conventions.
Meanwhile, we are going to learn again that once the inflation genie is out of the bottle, it is very hard to put back.
Bankers are forecasting that only modest rises in the cash rate will be necessary, more to protect the credit quality of their loan portfolios than because they have any great insight into how to lower inflation from over 6 per cent back to 2 to 3 per cent.
It stands to reason that as our policymakers failed to forecast this surge in inflation, it would be naïve to believe that they can now accurately forecast and manage how and when it will come down without a serious impact on the underlying economy.
The best advice is to fasten your seat belts and hope the government and its key advisers are now up for the serious challenges ahead.