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[00:00:00] The longer this general state goes on, the more difficult it becomes. I'm afraid that is something we can fairly easily deduce. So look through the volatility. The longer this problem goes on and the longer the disruption to energy supplies goes on, it seems other things equal. It's likely that therefore energy prices will stay higher and the more difficult the scenario we're in.
[00:00:26] This is the Debunking Economics podcast with Steve Keen and Phil Dobbie. Now that scenario that he's talking about, of course, is the blockage of the Straits of Hormuz, which could see inflation rising to maybe six or seven percent, maybe more. That is the governor of the Bank of England. He sounds a little nervous about what they could do about it. In fact, what can anyone do about it? Are there better ways than monetary policy to keep inflation down, particularly at a time like this and certainly putting up interest rates?
[00:00:56] Is exactly the wrong thing to do. So this week on the Debunking Economics podcast, what can you do about inflation? So Steve, this week, very simple, inflation. By the way, we've swapped places. You are in Australia and I'm in Europe at the moment.
[00:01:19] It's only a temporary measure. Inflation. So we know it's there because of this increase in energy prices. And we know the knee jerk response from central banks is inflation is going to become ingrained. We need to put up interest rates, even though people are struggling right now. We're going to put up interest rates so they struggle even more. So nobody's spending any money. So that cuts demand. And you see inflation come down.
[00:01:47] I mean, that's that's the approach, isn't it? Fundamentally. But does it ever work? Actually, that is actually better than the approach, because if you actually look at what the economists who run central banks think they're doing, they think what they're doing is modifying our expectations of inflation. And by modifying our expectations, they will change the rate of inflation instantly. Fundamentally.
[00:02:12] So we don't so we don't change our behavior. We just we do change our behavior based on what we think the world's going to be. It may be the same thing, though, doesn't it? It's like if I think everything is going to become much more expensive, therefore, or the economy is going to tank. Therefore, I'm not going to I'm not going to spend because I need to save all that money for any day. The real effect of interest rates actually happens when you put up interest rates. The main effect is it's going to hit people with mortgages. Yes. OK, that's the fundamental thing. So the rate goes up.
[00:02:41] You've got less money left over to spend to buy goods and services. That does restrict your demand on goods and services. So that's the real world impact. It also has a slight impact depends upon companies and rates of return and so on. But to some extent, it might make companies revise revised long term investments and say the internal rate of return or the net present value has declined because of this increase in the rate. So we won't go ahead with an investment.
[00:03:09] So that is sort of real world type decisions people actually make. The textbook stuff, which neoclassical economists are driven by, tells them that we have we're planning for a life. We're planning for an infinite future. We are shopping on the basis of having money for our great, great, great, great grandchildren. And so if there's an increase in the rate of interest, that will change our decision about how much to consume versus how much to invest.
[00:03:38] If we consume less than automatically investment rises. So the economy grows more rapidly. It's all fantasy. It is all a complete and absolute fantasy. So this is what irritates me about it, because if I was looking at what's happening right now and seeing the increase in oil prices and know that's going to hit working class people in particular. You know, they've got to buy petrol to drive to work in their job and back again.
[00:04:07] I'd know that there's going to be that's going to reduce demand. And I would be thinking about the need to enable them to buy goods and services and saying the last thing I want to do is force them to have to spend more money servicing their mortgage. I'd rather reduce it. So interest rate your interest rate your way out of a lack of oil or gas. I mean, that's. Yeah, this is the it's fundamentally it's a supply.
[00:04:32] I hate to use the word shock because that's the way that neoclassicals think every happened by shocks, external shocks to the economic system in their models. But the reality is, yes, it's a huge shock to the supply side of things. And changing interest rates will do somewhere between be all and if all. Yes. To change. Or make things worse, actually. It'll make things worse. It makes things worse. Yeah. Yeah.
[00:04:58] Because if you've got rising oil prices, rising fuel prices, you've got less money to spend on the stuff that you buy. Therefore, you buy less of that stuff. And therefore, the economy starts to slow. So people who are employed making that stuff lose their job. Yeah. If you push up interest rates in that process, in that environment, because you think that's going to bring down oil prices somehow magically. And it's not.
[00:05:24] It's actually going to expedite the whole process because people paying their mortgage to pay even less money to spend. Therefore, they spend less. Yeah. Yeah. It accelerates a debt deflation. And this is where I went through this with Australia's Reserve Bank back at the time of the global financial crisis. I was warning that there was a huge crisis coming. They were worried about inflation.
[00:05:46] So if you take a look at the data, you'll see that after the formally recognized start of the GOC, which was in August of 2007, the Reserve Bank of Australia put up interest rates twice to fight inflation. Before they caught on, oh, gee, there's not inflation happening. This must be deflation. So they dropped their rates to zero. You know, morons. They will not realize what they actually, what caused the crisis. And they had a delayed reaction to the real world.
[00:06:16] And the fact that the economy tanked is what forced them to put rates down rather than any real management of the entire system. And this is another extreme example how anyone could think that putting up interest rates is a good idea now when oil prices are going through the roof and supply chains are being smashed across the globe. Have anybody thinks, oh, that's a good time to put up interest rates? No, that's a good time to get sacked.
[00:06:43] You know, go and read your fantasies to kids in kindergarten. But I mean, the central banks might say, well, this is just a short term thing. You know, it doesn't look like it's going to be a short term thing. It looks like it's going to be a very long term thing like Afghanistan. Well, everything's right. But with the whole news straight, it's just making it worse. But they would say, some of them would anyway, because, well, not only would they, they are saying. But you know what?
[00:07:09] Inflation was starting to go back up again before we got this energy crisis. So we're looking through the energy crisis. What we're wanting to put interest rates up because we were worried that inflation was rising. And that was, and core inflation. So in other words, take energy and food out of it. We were worried that the demand that was being placed on the available resources was growing. And so that was pushing prices up. So that's what we're trying to tackle.
[00:07:39] But that's fine. But throwing an energy crisis in the midst of all of that, and that is quite a minor argument, I think. Oh, the whole thing is minor. I mean, the realistic response is the economy is going to tank. It's going to fall. The global economy could fall by the order of 10% decline in GDP because of the fall in energy. And in those circumstances, the last thing you want to do is to give employers more of a reason to decide to sack people. Yeah.
[00:08:06] The last thing you want to do is give people less of a reason to buy because you're going to have a shock to it. You're going to have a decline in not just expenditure but also income coming out of this. Now, one causes the other. But the fundamental thing is if you have a cut in energy supply and a cut in fertilizer and a cut in sulfuric acid and a cut in helium, then you're basically smashing the legs of the global economy. And what the central banks are doing is saying, oh, it would help if we make it harder for you to walk.
[00:08:37] Let's give you a steep hill to walk up on your smashed legs. To me, it's just a sign of how completely out of touch mainstream economists are. And the last thing that I think they should be doing right now is putting up rates. They should be actually dropping them to give people more disposable cash to be able to cope with the increase in prices. Well, that gives everyone disposable cash, though. I mean, wouldn't it be good that this is actually one of those opportunities where they do look and try and target things? So they actually say, do you know what?
[00:09:06] We are, I know I talked the exact opposite of this way of thinking last week or the week before. But wouldn't this be the opportunity where they actually say, we need to subsidize fuel. If we subsidize fuel, then the inflationary impact of fuel is lessened. And it gives more money for those people who are dependent on fuel. It gives them more money to spend. So we don't see quite so much demand destruction. The issue, of course, is you've still got that ceiling on the amount of oil that exists. Yeah, yeah.
[00:09:35] I mean, this is the last. There's no circumstance in which mainstream economics makes sense to manage an economy. And this is outside even that realm because we've never had this scale of destruction of the capacity to produce output before. And people and the energy costs are going to run through the entire system. There's necessarily going to be inflation, but it's because we're destroying the physical basis of the economy.
[00:10:05] The last thing you want to do is add to that by crushing the financial basis as well. And that's what I can see coming out of this. So my preferred approach would not be to do anything to interest rates, but apart from reduce them. But you try to get together with what used to be unions, that unions have been destroyed as a component of modern societies, generally speaking.
[00:10:29] But try to get some agreement between manufacturers to accept the decline in the markup they're getting, workers not to put wage demands forward. And that's a problem. But this is the time to think as if you're in a war, because we are in one. And what you're having is traumatic destruction of physical resources. You need to rebuild them as fast as you can.
[00:10:56] That should be the focus, not worrying about the bloody rate of inflation, which to me is generally speaking trivial. But in this particular case, the inflation is going to be caused by a destruction in the physical productive capabilities of the economy.
[00:11:14] You can't do interest rates will do nothing to improve it and make the crush of that collapse in physical output worse for people who are wage earners. That situation you've described, though, where you want unions to say, well, OK, we'll accept we won't push. We can see this is a difficult time. We can see inflation, but we're not going to push for wage increases. As companies saying, well, we're not going to try and benefit from this situation with increased margins.
[00:11:44] So that is why central banks say, yes, we look at inflation expectations. Because that is when people believe that inflation is going to rise. That's when the workers do push for higher wages to try and compensate for the money, the increased costs, which they see as coming down the line. So the answer to that is, well, we're not going to get because unions don't exist anymore. We're not going to get people saying, well, we'll accept a lesser increase. They're always going to fight for that.
[00:12:13] So the only way to stop that happening is to push up interest rates. There's a tighter labor market, fewer jobs around. So they're in less of a position to do that. It's hit it with a sledgehammer. But what you're talking about is two things. First of all, the individual saying, well, we're not going to do that. We are going to accept the wages stay where they are. But the other side, I'm not taking margins and taking a margin squeeze. That's price controls. You can't do price controls in the modern economy. Steve, that's socialist thinking.
[00:12:43] Yeah, that's what you do during a war, which is what we're in. Yeah. This is why I think the capacity of conventional economists to not engage with the real world is dramatic in its own right, let alone now when you're seeing what is – once the supply chain runs out for the oil that's coming out of the stratoformos and the fertilizer and everything else
[00:13:09] that normally travels on ships through that strait – when the physical supply constraints hit, then there are going to be food shortages. There are going to be the source of things that the current mob have never imagined. The only people who would have any experience of events like that died in the 60s and 70s after when they were involved in the war effort. And they knew you had to – what's the physical supply chain?
[00:13:39] How do we increase the rate of production of different devices? That was the focus of people in World War II. And anybody who had practical experience in that probably died in the 80s or 90s, I would say. So we've got people who have grown up only in the relatively calm economic environment since the Second World War. They're not even old enough, most of them, to experience the Yom Kippur War and the impact of the fourfold increase in oil prices back then.
[00:14:07] So we've got a bunch of people who've only lived inside economics textbooks who see the world through the prism of that textbook model of the world and can't actually see the physical causes of inflation to begin with, don't even know that firms have markups. They think it's all set by marginal cost versus marginal revenue. So they're making ludicrous decisions. And we'd be better off if they basically sat on their hands and did nothing at all
[00:14:34] or they dropped the rates because what we're going to need in trying to rebuild out of this disastrous war is massive levels of investment in alternative energy sources. I think this is hopefully the wake-up call for most people who used to say that, you know, you can always rely upon the oil. Well, no, you can't. We now realise that.
[00:14:58] You've got to massively electrify both industry and home and transportation. That's the only way to avoid this shock, being a permanent debilitatator of the economy. And, you know, forget interest rates. Central banks should get their noses out of the way because all they're going to do by putting up rates is make things worse than they are, and they're already pretty bad.
[00:15:25] And so stagflation, is that the consequence of all of this though? I think it's… Michael Cutson and I had a bit of conversation about this with Nika Drobowski's on the David Graeber Institute a few weeks ago. And the thing which Michael and I agreed on, which we might could be wrong, but our argument is what we're going to see is a temporary boost of inflation followed by deflation.
[00:15:51] Deflation because the slowdown in GDP growth? Yeah, a whole lot of… Well, partly because the thing which the Reserve Bank thinks it's got under control of is the idea of a wage price spiral. So they get an increase in wages, which causes an increase in prices, which means an increase in wages, and you get this reinforcing feedback loop. And that's how they interpret what happened in the 1970s.
[00:16:17] And to some extent that's true because in the 1970s we had an oil price shock. It was also an oil supply shock because OPEC banned exports of oil from OPEC countries to anybody who had supported Israel in the 1973 world. And of course, that included America. So that then meant there's a cutoff of supply to America from imported oil, but they still had their domestic oil. And the price rose from $2.50 a barrel to $10 a barrel.
[00:16:47] And that then led to a wage price spiral because oil prices go up at the bowser. Workers face the higher cost. There was high employment at the time in 1973, 74. It was the last big boom before the permanent bust we've been in ever since. So that's a huge increase in price. With that high level of increase in prices and high employment, unions could bargain for wage rises to compensate.
[00:17:17] So the wage rises occurred. That cut into margins again. So the firms put up prices. So you did have that classic wage price spiral. This time round, you've got a dramatic increase in the oil price. Workers have to pay the higher price at the bowser. But what capacity do they have to bargain for wage rises? Well, they're all the unions. But we do have, I mean, they, you know, we keep on hearing the labor market is pretty tight.
[00:17:46] There's, you know, unemployment is quite low. And companies, I mean, we're, you know, it's being described that we are in a low hiring, low firing regime at the moment. So companies don't want to get rid of people, but they also don't want to recruit people. So, I don't know. Does that, I guess that means you haven't got a great deal of. Well, everything, when you had big trade unions back in the 1970s. Yeah.
[00:18:12] And, you know, I had a bit of involvement in a number of trade unions in Australia at the time. So I saw how they behaved. But it basically meant there was a wage negotiation on a regular basis. Well, now, when you've slashed all those, the unions have basically debilitated or destroyed unions for in most Western countries around the world. Then you don't have that union bargaining thing. Yeah. So the only way you get paid. Wages only go up when you change jobs. Actually, that's what the statistics are showing.
[00:18:42] Yeah, that's right. It happens true. Yeah. Because, you know, if you leave a position, then the person who replaces you tends to get paid more than you did. But what it means is it comes down to the decision of firms to pay those higher wages. And they're, in effect, they're competing workers away from each other to put the wages up. Now, and that's why we have a tight labour market at the moment.
[00:19:07] Also, because there's huge fiscal stimulus, which, you know, Trump was going to destroy, but he hasn't destroyed it. You've still got a degree of fiscal stimulus in the UK and Australia and Europe as well. So that's sort of a hangover from the COVID days. There's that level of government spending. But they're going to knock it. They're trying to reduce all that. So they're getting rid of the one thing which is keeping the high employment going, which is government spending.
[00:19:37] You've got AI coming in and slashing jobs in clerical and low level clerical jobs and computing jobs and so on. And I think the last, you're not going to see a desperate desire to hire new workers coming out of this. So what I can see is the prices go up. So you get the inflation from the increase in the oil prices. Wages do not go up as much. And they don't necessarily feed back.
[00:20:03] So you don't get that feedback loop giving you sustained inflation. So I see a bout of inflation coming through. But then in the aftermath of that increase in the oil price, wages don't rise. Workers can no longer service their mortgages, which have been made more expensive by central banks. OK, on top of that, people start to lose their jobs. They start to sell their houses because they can't afford to sustain the mortgage anymore.
[00:20:32] You get a slump coming out of that. And then in that situation, manufacturers and retailers find they haven't got the customers coming in through the door anymore. Their response is to cut their margins, retail margins fall. Everybody drops their retail margins because everybody's trying to make sure they get the sales rather than their competitors. The general price level drops as a result of that. And the debt level relative to income rises.
[00:21:01] That's what happened in the 1930s. So from 1930 on, the level of private debt in America was falling. But the private debt ratio rose between 1930 and 1932 because prices and output were falling so rapidly that the level of debt, which was reduced by paying off the debt, fell by less than the GDP fell. So the debt ratio rose. And that's what Michael and I both think is likely to happen. Right.
[00:21:29] Initial inflation, then deflation. Yeah. OK, so hold that thought. We'll come back to it in just a second. We can take a very quick break. Back in a moment. This is the Debunking Economics Podcast with Steve Keen and Phil Dobby. So what you're describing, Steve, that situation where we're seeing that prices have gone up because of the higher cost of energy.
[00:21:58] Wages aren't going up because we don't have that bargaining power. Therefore, you describe people having to sell the house. Even if they don't have to sell the house, they've still got less money in their pocket to buy stuff after they've paid to fill up the car, et cetera. So they're buying less. So therefore, companies say, well, we've got to drop our prices because people are not buying our stuff anymore. Therefore, we need to take a cut in our margins and also probably lay off a few people to try and reduce our costs.
[00:22:24] So the inflation disappears as a result of that, even though energy prices might still be high. The cost of everything else has come down as far as it can. And companies are feeling the squeeze because they've got higher costs from energy, but lower costs being prepared to be paid for by consumers. Then you're adding on top of that to try and get through all of this. People are borrowing money, whether it's businesses or individuals, just to go through this crisis. So that is deflation. This is debt deflation that you'd like to talk about. It is.
[00:22:52] And that's, I mean, you know, it's not the same situation they gave us 2007 because then it was obvious that there was rising level of private debt. That's why I said the crisis is going to happen. The level of private debt relative to GDP was rising so rapidly. It was already so high that I said it simply can't sustain this rate of growth. At some stage, it will stop growing. And when it stops growing, it'll go from being positive credit increasing demand and negative credit reducing demand.
[00:23:22] That's what actually that's what happened. That's what caused the crisis. This time around, you haven't had the size of the credit bubble. So debt in America, for example, has fallen from about 170% of GDP to 150%. And it was bouncing around that level. COVID caused a bit of a rise and then a fall. But it's fallen about 25, 20%, so from 170 to 150% of GDP.
[00:23:50] And credit is actually quite anemic. Credit before the global financial crisis in America was running at 15% of GDP. Now it's running at 2% of GDP and falling. So it's not the situation where you'd expect a dramatic plunge from that point. But if you, when you suddenly destroy the productive system, while you still have the same financial debts in existence, then those financial debts get harder to service because your cash flow declines.
[00:24:18] So I think between the two of us, we've given a fairly good argument as to how we could go from inflation to deflation courtesy of this crisis. And then central banks will be completely lost. Yeah, well, we'll be back down to zero or below zero interest rates, right? We'll try and cope with it all. But because my initial question was, how do we cope with inflation at a time like this? And that would be a case in the old days. Sorry? You're saying, don't worry about it because it's going to correct itself anyway.
[00:24:49] Well, this is not a self-correcting. This is a Khorash. This is a collapse. Yeah. So if it was in the 1970s, what I would do is what I was trying to do when I worked in the Australian government for a brief while in the early 1980s, was to arrange worker union, union management accord. That was the idea of it, the agreement between unions and management to not respond to things like this by putting up pages or by putting up markups.
[00:25:16] So you have a negotiated settlement between unions representing workers and employer organizations representing owners, capitalists, et cetera, et cetera. And therefore, you wouldn't have this. You'd break the spiral by an agreement not to raise one or the other. Now, this time you can negotiate with the management, but there are no worker unions worth talking of to negotiate with on the other side.
[00:25:43] So you could sort of, you'd try to tell management not to put markups up to order or to absorb a fall in their markups to avoid a crisis. But, you know, the structure you need to have those sorts of negotiated settlements relies upon the existence of both employer representatives and union or worker representatives. And the latter, the workers' representatives basically represent almost nobody now.
[00:26:10] I think the level of unionization in the American workforce is below 15 percent of the population in a union, probably even lower than that. So you don't have that bargaining structure to enable those sorts of negotiations anymore. But certainly price controls, yes, that's the sort of thing I think we need. And wage control, I mean, the government could say, well, OK, central banks, you should lower the rates to as low as possible because this is a crisis.
[00:26:38] Employers and employees, you can't see a wage increase more than 2 percent this year, for example. It doesn't matter what the wage is, we're going to set a limit. That's the new law as an emergency power to get us through this energy crisis. And then in the meantime, you put in price controls on the oil or you provide subsidies to people, enable them to actually still continue buying it. And you encourage people to move away from private transport to public transport as much as you can.
[00:27:03] I mean, again, that's something where America is completely stimmied because it doesn't have a public transportation system worth speaking of in most of its major cities. So there's all sorts of structural things which you need to do to reduce the damage. And America in particular is extremely poorly prepared for that. The size of the impact of all of this is quite pronounced, by the way. I don't think it's quite recognized in the mainstream just yet because this looks like this is not going to go on for very long.
[00:27:33] I'm selling a car at the moment because I'm moving back to Oz. Yeah. It's an electric car. I'm not getting, you know, I've lost so much. I spent, I've lost about 20,000 pounds on the car from two years ago. The guy I was talking to said, you know, you're lucky. He said diesel cars and petrol cars are 20% below their market value right now. Oh, yeah. And that's a massive percentage down for a crisis that, you know, you'd hope might go away.
[00:28:02] So the impact of the crisis is quite profound, it's fair to say. Yeah, because we're going to have, I mean, anybody who's got a petrol car or a diesel car is quite unlikely, quite likely not to be able to drive in about one or two months time because there won't be any fuel. Yeah. And, and, I mean. Well, there'll be 20% less fuel, won't there, on the, on the planet. If it's 20% less fuel, then it's 20% less journeys. Yeah.
[00:28:31] And, and that means people have got to decide which journeys they don't go on. Now, if you leave it to the marketplace and you let, you know, wealthy wankers hop in a Lamborghini and, you know, drive up a mountain for the fun of it and back down again, that's rather socially irresponsible at the moment. So you don't want to leave it to the price system because, isn't it, you leave it to the price system, you leave it to the income distribution system, and that favours the wealthy over the poor well and truly.
[00:28:59] When the ones you want to actually be able to get the petrol to go to the factories are the workers, are the poor. Yeah. So it's. And you want the poor to have the money because they spend their money, so their propensity to consume is obviously that much greater for the money that you have versus everybody else. So there needs to be. That's one of the arguments that you've in favour of trickle up rather than trickle down. Yeah.
[00:29:20] But we've lived in a trickle down world for the last 40 years, and it's extremely hard for those people to change their mindset on, you know, we must have a price system. We did. You know, the ignorance of the situation in which we're in is telling because when we had the last major world war, World War II, it was, you know, a decade or two decades after the previous one.
[00:29:47] There were people in management positions. There were people in bureaucratic positions who experienced World War I, who were therefore ready for World War II.
[00:29:56] And if you take a look at what was done in World War II in terms of trying to control inflation, it was exactly doing what Isabella Weber talks about these days, which is wage controls and price controls and negotiated settlements between workers and management to devote as much of the resources as they could to the war effort and put as little as possible into the consumer market.
[00:30:19] And a similar tough decision is needed now because, first of all, we're going to need to rebuild the oil infrastructure, which has been damaged by this war. But secondly, countries which thought they could take their time and, you know, laughed across about greenies and ridiculed global warming.
[00:30:41] You're now finding that, yes, it's true the sun doesn't shine every day and the wind doesn't blow every day, but the sun shines and the wind blows somewhere on the planet. And that actually makes, in some ways, solar and wind more reliable than petroleum. So this is a wake-up call, get off petroleum. And that means huge investments in, you know, producing electric cars and the infrastructure that goes with them. Yeah.
[00:31:10] And the sun doesn't actually need to be shining for a solar farm to work. I think it's still like 80% efficient even under clouds. So I think the difference between putting a solar farm – I might have got this percentage wrong, but it's sort of the order of magnitude. If you built a solar farm in Saudi Arabia and you built one in Scotland, the difference in efficiency is less than 20%. So it's sort of like 15%, even though the sun's always shining in Saudi and it's always raining in Scotland. So you don't need perfect sunshine for solar to work.
[00:31:39] But it's interesting because before this crisis, of course, we had the gas crisis in Europe from Ukraine. And that was pushing energy prices up until, you know, new routes were found and new sources were found. But there was a huge variation within Europe of inflation levels because some places like France, for example, the government was subsidizing fuel, particularly for those people on lower income.
[00:32:09] So while it might not have covered the inflation once you take out energy, if you look at the headline inflation, it was lower in those places basically because the government had provided that subsidy for energy. So you can artificially bring inflation down just by putting money into supporting people buying stuff that's expensive. Yeah, yeah.
[00:32:34] And that's the sort of thing which we have, pardon me, I've lost my train of thought there trying to go back to the World War II situation. But yeah, that's what you have to look at is what is this supply destruction going to do to the distribution of income? And it's going to screw it for workers. They're going to be the ones who have nothing spare and they're already struggling.
[00:33:01] If they start going bankrupt, it feeds in through the property market. But it's bad for everything to allow them to get screwed. So you've got to enable them to be able to remain financial and able to continue working as well in the middle of this shock, which is going to take five years to resolve. That's the damage which has been done to some of the production facilities in the Gulf are huge.
[00:33:29] And that's because Donald Trump does every single power plant and every single bridge in Iran, which, you know. Oh, I know, I know. Yeah. Coking with that madness is... But the... So it's interesting that Australia, you know, I mean, we criticise Australia for not having much in the way of reserves. But Anthony Albanese is the only person I've heard actually saying that once we get to stage four or stage five or whatever, we're going to have to start rationing.
[00:34:00] And he's the only person I've heard mentioning that. We've got a shortage of something. The logical answer is you've got to ration it. Exactly. We're not enough to go around. But no one's talking about that yet. As though we're all just going along with our eyes closed. No, it'll be fine. La, la, la, la, la. She'll be right, mate. Yeah. The global management system. Like, I was just... I'd love to get more data on China's situation on this front. But I saw one tweet, as much as you can trust tweets these days.
[00:34:29] But it was the International Energy Authority talking about the reserves that various countries have of petroleum. I think it was. China's got one and a half years. Yeah. They've built such a huge stock that they can cope with virtually any shock. Whereas the West, which has got this obsession with efficiency, again, coming out of being driven by mainstream economics. Buffers are as low as 30 days in the case of Australia.
[00:34:56] So, any disturbance that this crisis caused will be felt by most of the West. China may be able to sail through it because it has the buffers there. So, it's the absence of the buffers. But it's a huge reason as to why this is a crisis. And in Australia's case, again, the International Energy Association recommends 90 days as a minimum storage level for oil. And what does Australia have? 32 days. Yeah.
[00:35:26] Well, it did have. Yeah. Those days rapidly disappearing, drying up. Yeah. So, is the issue then the final question? I mean, we started this by asking, you know, how do we control inflation at times like this? But I think we're rapidly coming to the conclusion is you can't. But what you've got to do is make sure that those people who are most disadvantaged by this aren't feeling a disproportionate amount of hurt from it.
[00:35:52] And all of this gets back, doesn't it, to economists and central banks looking at spreadsheets rather than actually looking at the availability of a physical resource. So, they're looking at the price as though the price is the only factor, whereas in reality, the absolute factor is the amount of stuff that actually is available. Yeah.
[00:36:14] And this is why I think they're so completely ignorant of the danger that we're in because their models talk in terms of homogenous products and thousands of firms and plenty of competitors. And, of course, if you take out one competitor out of a million perfectly competitive firms or producing oil, then who cares? It doesn't matter. It gives you a false idea of robustness. In the real world, there's a handful of firms that produce differentiated products.
[00:36:42] If one disappears, you can't replace them because what they made was unique in some sense. And there are critical choke points, which economics has no understanding of. And we've just choked off one of the biggest ones, which is the Strait of Hormuz. And that is going to crush our economies. And it's the sort of thing you need people who understand industrial processes, manufacturing flows. And that's not any mainstream economist.
[00:37:11] None of them have that understanding. That leads us nicely on to next week because we're going to talk about productivity. productivity or the lack of productivity growth and whether it's just a vain hope, actually, that in this new world, efficiency in the old style of thinking has gone. But for this week, yeah, we don't have to fight inflation. That's the answer, isn't it? That's not the main concern. Inflation is the least of our worries right now.
[00:37:41] Don't make it the most of them. What you need to do is to get people through the physical supply shock. And that means you've got to forget about the price system, start using rationing. Yeah. Yeah. It's a big ask for government, isn't it? The mindset that a bunch of people trained by neoliberal thinking, neoclassical economists thinking neoliberally without even knowing they're doing it. Yeah. They're mentally unprepared for the world in which we live.
[00:38:10] But just a few weeks to go. Going to be interesting to watch those fireworks. And I'm selling my car and I'm going to use public transport in Sydney because it seems to work quite well. It does. I'm all right, Jack. All right. We'll see you next time. Thanks, Steve. Okay, mate. Bye. The Debunking Economics Podcast. If you've enjoyed listening to Debunking Economics, even if you haven't, you might also enjoy The Y Curve.
[00:38:37] Each week, Roger Hearing and I talk to a guest about a topic that is very much in the news that week. It's lively. It's fun. It's informative. What more could you want? So search The Y Curve in your favourite podcast app or go to ycurve.com to listen.