Via Alan Kohler on the weekend:
As if reducing retirees’ incomes again is going to make any difference. Apart from anything else, the borrowers who theoretically benefit from a rate cut don’t reduce their repayments, so net incomes fall, not rise. Lopping another 1 per cent off interest rates might reignite the property market, and it might get the currency below US70c, but if it’s targeting the currency, the RBA is just pitting itself against commodity markets, which is not a battlefield it wants or needs to be on.
…To keep proposing rate cuts to get consumer price inflation up is now both lazy and dangerous: there is already too much debt, and encouraging more of it will only lead to higher asset prices and more speculation, leading to further disconnection between asset markets and the real world and greater income and wealth inequality.
…The RBA’s target of 2-3 per cent inflation might be nice — ideal even — because it would gradually dissolve all the debt, but it rather looks like 0-1 per cent is the new normal, and maybe that’s OK. And maybe central banks should rethink their inflation targets.
This is one of many partial analysis from media commentators on the weekend about the RBA but it nicely captures the failure of all. The RBA only has a dual mandate: balancing inflation and full employment. The former is low because underemployment is too high. So it will cut the cash rate. That will boost growth by increased spending and a lower currency than otherwise.
Where Kolher’s (and other’s) ruminations turn really wrong is in failing to address the structure of monetary policy. There are only three ways to grow an economy: private sector, public sector and external sector. Those are the fundamental accounting identities of GDP.
Blind Freddy can see that the private sector is tapped out thanks to its reliance on debt addled households. This is confirmed by the incontrovertible truth of the zero bound for interest rates. The public sector is growing its debt as an offset. But that, too, is virtually out of gas. The commodity price boom subsidising Budget spending today is widely accepted as temporary. The next big move will be down for Australia’s key commodity prices, way down, lower than 2015, as China’s structural slowing intensifies in the next few years. That will end our dreams of building some kind of bureaucrat and infrastructure utopia via the public sector. That leaves us with the external sector for growth and, given the coming second round mining bust, only non-mining tradables (import competers and exporters).
To lift the non-mining external sector we need a lower real exchange rate. There are two ways to get it, internal or external deflation to boost competitiveness. We can take the former route pioneered by Greece (and other European PIIGs), with too high interest rates and an overly strong currency leading to high unemployment (or underemployment in our case) and crushed wages. Or we can take the latter route of the US post-GFC, with low interest rates (and QE if necessary) driving a lower currency and improving wages growth.
If you’re worried about asset markets taking off again by doing so (I’m not given banks will keep some portion of cuts and prudential policy is tight) then we need to talk about the role of APRA not the RBA. Do we really have to go through the same debates all over again? It was APRA that popped the investor housing bubble in 2016, then the Hayne RC intensified the bust, so that the RBA didn’t have to hike rates and lift the currency. After that experience we now surely have macroprudential policy as a monetary lever, right? It is now integrated with monetary policy, right? Via the Council of Financial Regulators, right? If not, then APRA and the RBA must be slammed back together and forced to cooperate as a single monetary entity like the RBNZ pronto. Why isn’t anyone but MB arguing for that?
So far we’ve bizarrely taken the Greek post-crisis path despite having our own independent monetary policy and currency. This has driven a devastating seven year income recession. The pain is obvious in the political chaos has followed. Five prime ministers in seven years have been blamed for falling living standards. The income recession is now so severe that inflation has collapsed as well, making deleveraging of the private and public sectors impossible.
It’s time we went the path of the US post-crisis, using external deflation, which MB has been fighting for from 2011.
It’s either that or Alan Kolher’s old farts can lie back and whine as their country disintegrates all around them.
