David Bassanese at the AFR today serves up a simple truth to the bullhawks, Chris Joye and Adam Carr, who have spent a lot of professional capital on attacking the RBA easing campaign over the past year. Following an analysis of recent poor trends in retail and new home sales Bassanese argues:
The bottom line is that, despite tentative signs of improvement in the global economy, Australia faces some heavy slogging, not helped by the high dollar and more cautious attitudes to debt.
Those who hurriedly suggest the Reserve Bank should not have cut interest rates late last year due to a slight increase in house prices and home lending, ignore the counter-factual.
Ask yourself: what would have happened if the RBA had not cut interest rates?
I suspect Australia may well find itself in a type of liquidity trap – where interest rates don’t pack the same punch they once did. The Reserve Bank will have no choice but to respond.
I could not have put it better myself.
“…what would have happened if the RBA had not cut interest rates?” Australia may have less household net debt, for one. Existing debt may have been relatively more expensive to service, but new debt could have been discouraged and savings retained. As for the value of the dollar? Well look where it is even with lower rates!
And you think it would not have been higher?
i mvery doubtful about the impact of interest rates on the currency in the current setting, you just have to look at Euro, economy in the deep shit, interest rates zirp and still the currency is crazy high ( 60% higher than 10-12 years ago !!! ) and finishing the killing of all European industries ( this strong Euro is a kind of disaster for France but Germany can get away with the high currency as its export are less price sensitive )
The basis for currency flows remain as a function of yield and risk.
Yield from $AUD is phenomenal, when compared to USD, GPB, EUR, YEN etc…
I would also say that uncertainty (and not necessarily intrinsic risk) has had a massive influence (though I don’t have any empirical proof).
Decent economic growth rates and robust financial system have dramatically reduced the perception of risk of our economy/dollar, relative to those still facing an uncertain future.
Frankly, I don’t know. What I do know is where it is today as a result of, or in spite of, the reduction in interest rates. I’m all for an OCR of 0% if that’s what’s required, but not in isolation! I supported a reduction in interest rates for years, to my personal detriment to be honest, but in the belief that ‘something else’ would be done to support the real economy. It hasn’t been. I doubt it will be. Hence I have to look at ‘where we go from here’ to bang some sense into the masses. And higher interest rates appear to be it….No amount of talking is going to do it. Pain is a wonderful teacher….
But the RBA never claimed to cut rates with the stated intention of reducing the exchange rate (which they claim isn’t really overvalued). They cut rates to boost construction.. And failed miserably. Now they have gone on to retrospectively claim credit for the asset price inflation ( in housing and stocks) and the same old ‘wealth effect’ from higher debt levels.
You are not helping the case for macro prudential regulation when you give RBA the proverbial fig leaf.
Yep – that is right on the money
No, it isn’t. The RBA gave up arguing the dollar is not overvalued when the bulks crashed. They now repeatedly state that the dollar has not fallen as might have been expected.
They never said they weren’t cutting rates owing to the dollar either.
And they did say repeatedly that the dollar was causing conditions to be tighter than otherwise.
House prices may have fallen further as is required because they are crippling the nation. What a pity.
Meanwhile back at the Ranch
http://www.aigroup.com.au/portal/site/aig/template.MAXIMIZE/home/?javax.portlet.tpst=45d3ff6ff99c77712aec2f100141a0a0_ws_MX&javax.portlet.prp_45d3ff6ff99c77712aec2f100141a0a0=index%3D0%26docName%3DAustralian%2BPCI%25C2%25AE%253A%2BConstruction%2Bdownturn%2Bcontinues%26folderPath%3D%252FLIVE_CONTENT%252FMedia%2BReleases%252F2013%252FFebruary%252F%26viewID%3Dcontent&javax.portlet.begCacheTok=com.vignette.cachetoken&javax.portlet.endCacheTok=com.vignette.cachetoken
There were steep declines across construction activity and new orders in January contributing to a further decline in the performance of the sector according to the latest Australian Industry Group/Housing Industry Association Australian Performance of Construction Index (Australian PCI®). The seasonally adjusted index dropped 2.6 points to 36.2 in January (readings below 50 indicate a contraction in the industry with the distance from 50 indicative of the strength of the decline).
Gunna, use html to post a link like that. If you’re using Firefox, install the add-on BBCodeXtra, which allows you to automatically post a link around selected text, so that your link would look like this:
Your text
Cheers chief, I did wonder. I am on Opera
Aren’t we replaying this a bit? Any of Steve Keen’s graphs showing personal debt levels & house prices + a short history of the AUD exchange rate would be all you’d need to predict what has to happen when the dirt industry starts laying off. It’s frustrating knowing there’s no legislation regarding real estate investment spruik, but that’s politics for you.
+1 – we could replay it every day and all we would get is the RE spruik cluttering up the message every time.
Speaking as an endangered creature – The Bearhawk – who sees merit in preserving rather than debasing interest rates as a critical economic signal/indicator.
The interest rate ‘debasement’ school keep banging on about the ‘demand hole’ and how it must be filled at all costs and quickly and interest rates is the best way to do it.
Debasing interest rates is the worst way to do it.
Usually the debasers also subscribe to the most batty of Keynesian thinking – namely that if push comes to shove there is merit in having people dig holes and fill them up if necessary. Thus they reckon govt white elephants are good even if they are useless.
As we have seen interest rate debasement does nothing to stimulate economic activity from people with savings.
It also encourages poor investment decisions as the critical signal ‘interest rates’ is distorted. These poor investment decisions – and housing is one of them – are at the cost of better decisions.
At best debasement allows those with debts to pay down their debts faster but that is nothing more than explicit coercive redistribution of income from one group (savers) to another group (debtors).
In any event, paying down debt does not stimulate any economic activity.
The only way interest rate debasement has any impact is if it stimulates debt expansion or at worst debt level maintenance.
How anyone thinks that is a sustainable solution is beyond me.
If anyone is determined to try to fill a demand hole the only legitimate options are :
1. Putting money directly in the wallets and purses of the public via tax cuts or direct payments (possibly by printing the cash rather than issuing govt securities)
2. Governments doing stuff (often badly)
Note if the money in option 1 is actually spent on fripperies and gambling that sends a pretty clear message that there really is a genuine lack of demand in the economy for stuff that is needed and trying to fill the ‘demand hole’ is simply an exercise in waste.
Sometimes, especially after a credit boom, a lack of demand is there for a reason, people lose the desire for a whole lot of crap they were putting on credit.
Of course option 2 may be a goer and there may be some worthwhile public infrastructure projects that require government co-ordination and possible legislation to get going but how many govt stimulus projects in recent times fit that criteria.
How many have involved govt ‘making work’ and doing it badly.
How many of those ‘govt projects’ could easily have been left to ‘households’ to decide by voting with their wallets, if the results of those projects were really desired?
For example:
Did the govt need to do anything more in relation to pink batts other than explain the benefits to heating bills etc and suggest that households consider using their ‘stimulus’ check for that purpose?
Do communities need the govt to tell them that their school should spend money on a new gym. What not give people the money and see if they choose to spend on their kids education and the facilities. Surely parents care more about their kids education than our political parties.
A ‘demand hole’ is always a cause for a concern but we should think twice before rushing into fill it.
Sometimes it is there for a good reason and it will take time to rebuild – especially after a credit boom ends.
And if you do want to try – how about do it by putting ‘demand power’ in the hands of the people rather than;
1. White elephant breeding governments
2. The Merchants of Debt (via interest rate debasement) and their accounting entries.
Now back to my Bearhawk den/perch!
I’m not saying that I agree rates should be lower. I’m arguing that rates should be lower with macroprudential rules in place.
And that rates are going to go lower irrespective.
Moreover, I’m illustrating that the bullhawkian view that rates don’t need to fall because the economy is so damn good is ridiculous.
I think you hopes for macroprudential controls are a bit wishful.
To misquote John Lennon I recommend that you
“Imagine there are no interest rate levers – it is easy if you try.
No fresh debt to simulate us nor bankers giving Hi-five’s”
I am confident rates will go lower in the absence of inflation as the only metric that the RBA are really paying attention to (even though Luci Ellis denies it) is credit growth.
They are not keen on it bubbling into housing but clearly they are not particularly bothered about it either.
Yes – Bullhawks sometimes agree with Bearhawks but rarely for the right reasons
Pfh
Thank you for your wise words. Just one addition
“If anyone is determined to try to fill a demand hole the only legitimate options are :
1. Putting money directly in the wallets and purses of the public via tax cuts or direct payments (possibly by printing the cash rather than issuing govt securities)
2. Governments doing stuff (often badly)”
Sorry pfh that money is not free and that makes it not ‘legitimate’
As to option 1 In a nation running a fiscal deficit and a chronic CAD it ends up as debt in the external account as more debt (or more asset sales to foreigners)
Option 2 Possible if spent very very wisely. Unfortunately short term, again in a nation with a fiscal deficit and a chronic CAD, it will end up in the external account. The works would need to significantly add to REAL productivity which doesn’t include getting lawyers and real estate agents to work more quickly nor a DPFN!
Yes – fair point.
Legitimate is putting it too strongly and it does sound like an endorsement.
A reduction in demand at the end of a credit boom is inevitable. It is doubtful that there are many ‘smart’ ways it can be avoided. Govts often get it wrong – either a dud idea or a good idea badly executed.
In my view the only thing that can be done is to ensure that every obstacle in front of anyone trying to respond to the change must minimized.
Cutting costs (including inflated real estate costs), flexibility, reward for experimenting and having a go and taking risks is the only certain way of speeding up the adjustment of an economy massively distorted by a debt bubble of historic proportions.
Can I say that I do not think that the RBA is tying to fill the hole in demand you refer to. It can see a big hole in investment coming. It is trying to stimulate other investment to at least in part fill it as the artificial demand that is coming off is also managed down.
Their problem is a lack of tools.
Your view that we should let demand correct just as investment also corrects presents a very serious risk that a feedback will form between falling demand and investment. We do not want to go there.
Interest rates are no barrier (and have not been since they dropped below 5%) to worthwhile investment opportunities.
The problem is that investors cannot see genuine worthwhile investment opportunities period.
Any investment opportunities that only make sense at super low rates are likely to marginal at best.
In most cases what we (and the RBA) are really talking about is speculation and not investment and hoping we can dine on the wealth effect of rising asset prices.
Spot on again Pfh007
To continue to use the OCR in an attempt to lower the $AUD is just dumb. If 175 basis pts cut in the OCR and no material change in the the AUD doe not make that apparent you are willfully blind. The undesirable side effects of of this bad medicine are already manifest. The encouragement and proliforation of recklessly speculative investments and the discouragement of prudent saving are proof.
+1 – Agree with you on this one.
“..presents a very serious risk that a feedback will form between falling demand and investment. We do not want to go there.”
I agree, it is not a good outlook and there are no easy options (although one would think so listening to Swan and Abbott).
Recommended strategy (in order of preference)
1. Allow the most flexible economic units in the economy to be as flexible as possible. Individuals and small enterprises.
2. Fix distorted and inefficient markets asap – especially real estate – residential and commercial.
3. Stop speculative capital flows from distorting the exchange rate.
4. If there is to be demand stimulation give that ‘demand power’ to the economic units in 1 above.
5. Govt infrastructure but only if it makes sense and can be delivered efficiently.
We are largely agreed accept I don’t see a role for interest rate debasement.
Though I do see a role for interest rates if inflation takes off but in that event they would rise naturally anyway.
HnH,
Can we get a BearHawk Graphic done, how about a bears head and Hawks wings on the body of an IT specialist, and a thought bubble “I missed the biggest boom in Australian history, pls shoot me”
Bearhawks available here:
http://icanhas.cheezburger.com/justcapshunz/tag/bears-with-laser-eyes
Fantastic!!
Watch out Stephen Colbert!
Very Funny!!
I would have to agree (on this rare occasion) with Bassanese, though my reasons have very little to do with the average householder.
My primary motive for a lower OCR is to lower the $AUD.
Banks have already flagged that their rates aren’t going to be determine lock-step with the RBA, so if the Big 4 cartel could agree to not pass on all rate cuts (blame funding costs, or whatever) it might be enough to shake sense into borrowers, and provide some encouragement toward a much needed deleveraging of household debt.
Public opinion & the ACCC would have a dim view of this approach, and no doubt many mortgage holders would be worse off (though much is self-inflicted). Why should one (or two) generation’s irrationality be passed onto the next? …and how long down the line can it be passed before we breed a generation that are smarter, and more sensible than us? (this will = a correction). By rebalancing the household balance sheet of future generations it would provide a fairer, more sustainable outcome for future generations
“By rebalancing the household balance sheet of future generations it would provide a fairer, more sustainable outcome for future generations”
Blimey what a revolutionary idea…..nah! We’d have to cut back on our own self-indulgence….can’t happen!