Letter from The Cape Podcast

Episode 18

November 10, 2023

Hello, and here is another episode in my Letter from The Cape series where I talk about Modern Monetary Theory or MMT as it applies to the real world challenges and problems.

Earlier this week, we learned that one of the big four retail banks in Australia, Westpac recorded a 26 per cent increase in their annual net profits, a sum of $A7.2 billion, which means its shareholders will be banking extra dividends this year.

The bank's management indicated they would be using $A1.5 billion as a 'share buyback' which just means it buys some of the existing shares back, reducing the overall shareholding and spreading the profits over a smaller shareholding - which further rewards investors and pushes up the bank's share price.

The result: a big boost to those with wealth invested in the bank.

Overall, the banking sector in Australia has increased its margins - the rate is loans out money relative to the rate it pays depositors - and it has been able to do that because the Reserve Bank of Australia has pushed up interest rates.

On Tuesday, the RBA hiked interest rates again while residents of Melbourne enjoyed a public holiday to celebrate a horse race of all things.

The policy target rate is now at 4.35 per cent, which is the highest it has been since 2012.

This added around $A100 per month to the average mortgage of $A600,000, and, since May 2022, the average mortgage holder has seen their monthly payments rise by around $A1,560.

This is a 52 per cent increase - a massive impost by any measure.

The RBA has now hiked rates 13 times since May 2022 and the shift from 0.25 per cent in April 2022 to its current level is one of the fastest escalations we have ever seen.

The two outcomes - massive boost to bank profits and RBA rate hikes - are directly connected.

The latter provides the capacity for the banks to achieve the former.

And as more Australian mortgage holders segue from fixed rate contracts to variable rates in the next several months, the private banks will see their profits increase even more.

Have you ever wondered why commentators from the commercial banks, who are overwhelmingly featured in finance reports on the ABC and other media outlets, typically urge the RBA to push up rates to prevent the economy from 'overheating'?

These commentators are held out to the public as independent industry experts, when in fact they are just boosters for their companies.

They know full well that constantly telling the public that rates must rise to 'fight' inflation is just a smokescreen for their special pleading to boost their companies' profits.

The RBA's own research demonstrates that when they push up the target policy interest rate, bank profits head towards the stratosphere.

The situation is even more loaded when we realise that while the winners of the RBA policy are the wealthy segments of our society, the losers are usually at the opposite end of the income and wealth spectrum.

The RBA promised borrowers that if they took out large mortgage loans in 2020 and 2021, they could assume that rates would not rise until 2024.

Of course, it was stupid of the then RBA governor to make that statement.

But the rate rises since 2022 have significantly punished an increasing number of borrowers, and the pain is concentrated on the lower income groups in our society who have very little 'income' leeway to absorb the substantial increases in mortgage payments.

It is not too simplistic to see this as a massive income redistribution from the poor to the rich, engineered by the central bank.

The RBA claims the rate hikes are not hurting households all that much because they have prior savings to draw upon.

Think about that.

Low income families have virtually zero saving buffers.

Of the better off families that do have some savings to draw on, the latest national accounts data shows they are running down those stocks quickly.

So what wealth the lower ends of the distribution might have had is being quickly destroyed by the RBA policies and redistributed to those with immense wealth.

The latest CPI data revealed a declining inflation rate with some persistence.

But like a Pavlovian dog, the RBA was motivated to push up rates again.

The RBA says it must get the inflation rate down to 2-3 per cent as quickly as possible, even though that target rate has no basis in any legitimate economic theory.

In other words, it is just a self-imposed rule without any justification.

But that issue aside, the factors driving the inflation rate at present are not related to excessive spending by households.

Rate hikes only discipline inflation if the sources of the inflation are sensitive to interest rate changes.

At present, CPI inflation is being driven by escalating rents, which in part is due to landlords passing on past RBA rate hikes to tenants.

A case of RBA interest rates causing rather than suppressing inflation.

The other major drivers are OPEC oil price rises being passed into petrol prices and the profit gouging by the privatised electricity companies.

Neither of which are going to be sensitive to the RBA decisions and will resolve over time anyway.

There was no case for the RBA to increase rates but in doing so it has further increased wealth inequality in this country and further entrenched the power of the elites.

This is one example of our broken system.

In Japan, where I am currently working for a while, the Bank of Japan has kept rates unchanged throughout this inflationary episode because it formed the view, correctly, that the inflationary pressures were coming from the supply side and interest rate changes would do little to fix the problem.

They realised those supply-side pressures would abate as the world adjusted to the disruptions caused by the pandemic and that they would just wait the inflation out without causing families with mortgages more pain on top of the cost-of-living pressures.

There is another way, but our blind policy makers refuse to see it.

And sitting pretty are the bank shareholders who count the extra profits with glee with little regard for the low income families who are now enduring massive burdens.

That is all for today.

Until next time, see ya later.

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