McKibbin calls an end to easing cycle

Warwick McKibbin has jumped in with a big “told you so” this afternoon courtesy of Chris Joye at the AFR:

“I would not personally have cut rates in October or December,” McKibbin says. He believes that “barring any disasters out of the US and Europe, the RBA’s easing cycle should be over…It will become increasingly important for the RBA to normalise what are extraordinarily stimulatory interest rates given the striking asset price inflation we are now seeing coupled with the economy’s nominal growth. I would not rule out two hikes before the year is out,” McKibbin told The Australian Financial Review.

Here’s the R.P. Data daily house price index to the day:

Some other indexes are more bullish but together they paint a picture of slowly accelerating gains. After 175bps of cuts over a year, they they do not stick out as “striking” in my view.

Mr Joye himself goes on:

Egged on by a growth-centric board dominated by commercial interests, the RBA alleged that the sharp decline in iron ore and coal prices had materially affected resources companies’ spending plans. It claimed that this change in the outlook necessitated even more cuts on top of the 125 basis points worth of relief it had baked into the economy to insure against the risk of a severe global downturn.

It’s a simple fact that the iron ore crunch smacked mining investment plans. And that the LNG boom has effectively gone bust at the same time. Mr Joye seems more intent of self-serving revisionism than useful commentary.

The discussion that needs to take place here is not cheap point scoring over rates, it’s what matrix of stimulus is going to carry the economy over and through the mining investment cliff.

58 Responses to “ “McKibbin calls an end to easing cycle”

  1. Rusty Penny says:

    Elect me.

    My policy mandate will be Warrick McKibbon has sole authority within the RBA.

  2. 3d1k says:

    What if Ray Dalio proves correct: 2013 the year of transition – and all this QE and cash flows into assets and commodities; what if commodity prices hold and demand continues?

    There is every likelihood projects currently on watch may get the go-ahead and whilst not likely to match the level of investment in recent years, still attractive.

    • What if you’re run over by a bus when you go out your front door?

      You raise rates if conditions warrant it.

      • 3d1k says:

        Make sure you have clean underwear me mum used to always say!

      • Dude, how do you find the time to be ‘always here’ are you honestly paid to do this.

        I check in a couple of times a day but your plethora of posts in my opinion whether I agree or not are epic!

        Can you let us know what your day job is that allows such excess?

        I want to work their if I can get paid to read MB assuming that your not paid to comment that is.

        TM.

      • drsmithy says:

        I check in a couple of times a day but your plethora of posts in my opinion whether I agree or not are epic!

        I’m more impressed that he can keep track of _where_ to post given the rather primitive comment threading (and reply notification) in this forum.

  3. flawse says:

    “You raise rates if conditions warrant it.”

    Increasing debt, asset sales to fund consumption aren’t ‘conditions’ to be considered? Well obviously not by the current crop of economists and rulers but…what ‘conditions’ are we talking about?
    We have inflation we are not considering.
    We’ll then get inflation we’ll be looking through.
    Rising house prices are a sign of growth and we can’t raise rates to stop that.
    Just what ‘conditions’ justify rate rises?
    I can’t think of one!

    • As you know, the solutions to those things lie back in time.

      • Explorer says:

        It may be that the best solutions lay back in time, but if problems get big enough to demand action by a clear majority then changes/solutions will be implemented, even if it would have been more optimal to have done something earlier.

        Don’t forget, much of the debates we have are about sectoral, industry and regional and interests competing for settings more favourable to themselves and generally by definition less favourable to someone else.

      • 3d1k says:

        “…much of the debates we have are about sectoral, industry and regional and interests competing for settings more favourable to themselves and generally by definition less favourable to someone else”

        Exactly. Swings and roundabouts.

      • flawse says:

        Explorer
        I think expectations are a big problem. People expect the life they now have. The majority will, as happens now, seek to enrich themselves, at the expense of others. The longer this low interest rate, more debt, policy remains in force the more that majority become the non-productive. The changes that we bring on will not be those that are the best solution. They will favour the biggest gang at the expense of others. (As you observe)
        There seems no way out.

      • flawse says:

        P.S. re the solutions lie back in time the root cause of our problem is US. We’ve distorted our education system and social system.
        Even if we elect me dictator and I make the policy changes now it would take at least three generations to make real progress.

        It’s taken us 50 years to make this mess. It can’t be cleaned up in less.

      • Rusty Penny says:

        It can be cleaned up in 9 months.. you’re a weak dictator.

      • flawse says:

        You haven’t thought clearly enough about the issues. They aren’t just economic.

        It’s amazing how some think that all our ills can be cured by a bit of a fiddle of the money supply. If that was the case the world would not have the problems it has.

    • jimbo says:

      +1 Flawse.

      That inflation they’ve been ignoring will ultimately cause them (them being the Libs most likely as the other mob have essentially turned the rates process into a popularity contest) to raise rates, which will have an immediate negative effect like it did 18 months ago. They’ll then need to slash again and the process will repeat. One to two more cycles and they’ll have zero ammunition left and the party’s over.

      Speaking of asset sales there’ll be some absolute bargains for foreigners at the end of all this, when the dollar gets crunched. A few Chinese I know won’t touch us for that reason (FX).

      • Explorer says:

        The alternative to fighting inflation by raised interest rates is to take money out of the economy by increasing taxes a little. Tighten too much (as perhaps Labor has done over the last 12 months) and recession threatens/ensues then interest rates would then fall, just as they have done over the last 12 months.

        This over reliance on interest rate policy is part of what creates the boom and bust cycle as when interest rates, especially long term interest rates, move they tend to drag asset capitalisation rates, PE ratios, hurdle rates of return for projects and the like with them.

        A more judicious use of fiscal and monetary policy in a coordinated fashion would be far more sensible than over-reliance on interest rate policy.

      • flawse says:

        Explorer
        Neither interest rates not taxes will stop the inflation that is coming. It’s not a monetary problem.
        Consider that low interest rates have not stoked inflation. The reverse process will apply.

      • Rusty Penny says:

        Taxes can always supress inflation.

      • flawse says:

        Sorry RP You’re thinking of an isolated economy. This is a wave coming way outside anything that living economists have seen or conceived of before.

        Modern academics are way too confident in their own genius. If the last few years have done anything they have demonstrated that.

      • flawse says:

        Rp BTW In any case, even for an isolated economy, consider an economy where margins are already squeezed to death; you have an arthritic IR situation combined with an insane IR dominated WHS regime; you have very powerful self-interest groups; you have already destroyed a large part of your productive sectoryou have high debt throughout the whole economy; in that case your taxes may well kill the economy but not inflation.

      • Rusty Penny says:

        Sorry RP You’re thinking of an isolated economy.

        No I’m not.. I understand fully well what is likely to occur outside of Australia if counter-cyclical fiscal policies, aren’t implemented, which is very likely.

        All the excess money that demands product.. the very element which causes inflation, causes less inflation when some of that money is stripped away via tax.

        If tax is 100%, demand is pretty low.

        This is a wave coming way outside anything that living economists have seen or conceived of before.

        I wouldn’t say that.

        The Spanish in the 16th did something completely foolsh when they decided to extract and the gold and silver from the world world they could.

        All they did was increase Spain’s, and Europe’s money supply.

        It killed Spain as a power, something they haven’t recovered from as they are still pretty feeble after 400 years.

        We’ve seen this before.

      • Rusty Penny says:

        Rp BTW In any case, even for an isolated economy, consider an economy where margins are already squeezed to death;

        Profit share in Australia is at post WWII highs, so you can’t be talking about us.

        you have an arthritic IR situation combined with an insane IR dominated WHS regime; you have very powerful self-interest groups;

        OK, then your target group is made obvious by who to tax.

        you have already destroyed a large part of your productive sectoryou have high debt throughout the whole economy;

        Debt across the entire can be restored to zero within 30 days. Default means assets swap hands.

        in that case your taxes may well kill the economy but not inflation.

        tax is a tax on margin for business. If no margin exists, not taxe can be collected.

        You’ve put the catr before the horse here.

      • flawse says:

        This is not monetary or economic. It is demographics and changing economic and power structures.
        Taxes might kill all business and production but they won’t stop the inflation.

      • Rusty Penny says:

        This is not monetary or economic.

        Erhh, how can inflation be non-monetary?

        It is demographics and changing economic and power structures.

        Nothing that euthanising baby boomers won’t fix.

        Taxes might kill all business and production but they won’t stop the inflation.

        Right….. so now we have non-monetary inflation existing in an environment of no one trading away surplus product…

        So how will that work?

      • flawse says:

        “It killed Spain as a power, something they haven’t recovered from as they are still pretty feeble after 400 years.

        We’ve seen this before.”

        This has no resemblance to that situation whatsoever.

        “tax is a tax on margin for business. If no margin exists, not taxe can be collected.”

        You are obviously not in business. Most of the tax we pay is NOT income tax.

        “If tax is 100%, demand is pretty low”
        Yes…you’ve killed the economy but not necessarily inflation. Your source of inflation is not coming from within your own economy. Once it arrives you have to deal with a totally inflexible system. You raise taxes then you’ll get demand for compensatory rises in prices including the prices of inputs.

      • Goldilocks says:

        Jimbo, that’s why I am considering buying property overseas. Not because I fear prices rising here, but to simply make the most of the high AUD.

  4. reusachtige says:

    Soemone’s walking naked soon!

    • Perhaps, perhaps not. Your all so bloody jumpy on house prices it’s amazing.

      I am not at all sure that these mild rises will continue, let alone when the economy goes off the mining investment cliff later this year.

      I can only repeat, credit ags are still going sideways.

      We need macroprudential to prevent them doing anything else.

      • reusachtige says:

        But macroprudential aint happening therefore these low rates, and especially if they go lower, are just going to fuel housing which is bad, bad, bad.

      • Rich says:

        reusachtige agree totally. As was said months ago they are using the wrong tool for the job and its a dangerous job at that. At least McKibbon has his head on straight

      • They have no other tool and the government won’t give them one. Having said that, I agree fewer cuts and more fiscal would be good. But not as good as MP.

      • No, they are not all bad. MP will come if we all talk about it enough. And lower rates keeps the dollar from cruising up another 50%, which is what would happen if you crashnics had your way.

      • The Lorax says:

        Surely if the dollar is up another 50% its all swings and roundabouts? Imagine how cheap petrol would be? Imagine bargain overseas holidays to be had?

      • Where u been? It’s not easy handling these nutters all alone!

      • flawse says:

        :) Thinks I’ll change my name to Macadamia…hard nut to crack!

      • Mav says:

        MP will come if we all talk about it enough.

        I hope you are kidding! You have great faith in the people who hired a PR spin doctor at tax payer’s expense to spin away a bribery case, no less.

        But we can reveal she has been advising the Reserve Bank of Australia on its response to the Securency bribery scandal. The RBA paid her $24,950 for communications advice last year.

        RBA will never listen and MP will never come. RBAcrats (not the board) are wedded to the monetary policy that will help the banks – anything that keeps the status quo going for a bit longer. If SHTF, they will probably hire yet another spin doctor to spin it away.

        Capt Glenn does not even commit/admit to AUD being overvalued! So why the hell is RBA reducing rates to solve a problem that does not even exist (in their mind) ??

      • jimbo says:

        Jumpy on house prices? You started a blog on it!!

        Time to close the textbook and concede MP are never going to happen. Rate cuts will continue to fuel the fire.

      • Wing Nut says:

        MP’s should be implemented but let’s face it, they’re a pipe dream. No political party will implement them, hell then can’t even get their collective brain farts around the fundamental basics. Even if they did, the vested interests will be on every fundraising dinner table to tell every powerbroker what a mistake that would be.

      • flawse says:

        HnH We’re jumpy because the rises are what we said would happen in response to lower rates. We see no evidence of a single other policy enactment or recommendation. We see the government, RBA, the Banks, MSM happy that house prices are rising again as they perceive this as the economy on an even keel again. So does the average punter.

        Nobody sees any need for any policy changes
        As per Reynard’s Grumpy Economist of today the more you reinforce the low/negative rate into the future the more it becomes embedded into people’s calculations.
        If rates are zero, everything is valued at infinity. The only thing that stops that is the expectation that they might not be zero next year.
        The longer you hold negative RAT the more it becomes embedded into valuations, the more ridiculous they become, the more everything is mis-priced.

        You’re dealing with explosive material here.

        Someone else posted today that we will see the distortions in the economy more clearly when the dollar does fall. That was a good observation and surely true. Low/negative interest rates are not the answer under any circumstances. Low/negative rates without all the other policy changes create more distortion which leads to a bigger disaster when the dollar eventually falls.

        So we all sympathise with your efforts at getting other MP on the table. It’s not happening…..unfortunately!

        As Jimbo intimates above suppose we get the dollar to fall 20% over the next 12 months. We’ll get around a 20% increase in our imported inflation give or take a bit. So you’ll immediately have inflation in the 6 to 7 % range.
        You can’t stop the reinforcing loop that feeds back into the non-tradable sector so pretty much you will have 10% inflation on your hands within a short time thereafter.
        What is your interest rate going to be?

        Now this little peek at the possible future provides no solutions. You jest, perhaps now half-jest, at my take that the answers lie back in time. However this IS our future starting from where we are now. Every time we make the current distortion worse we make that future crisis worse.
        We will have more debt. We will have less savings. Our CAD will be worse than it would have otherwise have been and as you recently observed, but unfortunately didn’t follow through on, this will be critical at that time.

        Low/negative interest rates have convinced the population that this is how life should be. Our people’s expectations of the future and of what Government can do will be even more exaggerated than they are now. Perhaps that is the real biggie in all this? Europe will demonstrate this problem for us I suspect.
        It has to all stop sometime.
        As JFK said “If not now…when?”

        Again sorry….I’m providing no answers. I honestly have none that would be considered. (Elect me dictator!)I just hope to sow a seed.

        Many of the tsunamic changes that will engulf us have started rising way from our shores. It is inevitable.
        We ought start seriously thinking about what our future really looks like. Then, and only then, would we have a remote chance of having any policies that might lessen the crisis.
        Indulging ourselves in greater consumption and more ‘prestige’ cars sure as hell does not constitute a policy.

  5. davel says:

    Parties who beiieve in the old economic models see modest signs of recovery and assume we are back in the pre-GFC world.

    We are not. We have seen similar if smaller bounces in sentiment and indicators over the last couple years, all have proved false dawns. So will this one.

    Overall, we’re part way through the Japan experience. Australia is just farther back on that curve. No 2 countries will experience the same journey anyway.

  6. Explorer says:

    Surely it is not an mining and processing investment cliff.

    The projects do not finish construction in the same month, but there is a decline which will likely be quite significant over say 3 years, with each year contributing a negative growth to GDP. But how big each year?

    As investment runs off, production and national income increases, what is the net effect on national income?

    And how much of the mining boom was on imported plant, equipment and services provided overseas. All that imported steel, locomotives, mining equipment and the like will drop out of the imports side of the balance of trade but the increased production will be increasing the exports side. What is the net effect on the balance of trade?

    But I suppose there will be more interest and dividends payable overseas so will there be an adverse effect on the current account?

    Productivity nationally should increase as a workforce say 20-30% of the size the production phase but now producing all the additional revenue little of which was produced during the early investment phase.

    For me the big one is the effect on employment and unemployment across the economy. What are the estimates for run off in Australian employment and the increases in the unemployment rate as the boom peaks and investment work reduces? And what is it over each quarter for say 5 years and how much of it is offset by the growth in production, transport and port staff?

    • 3d1k says:

      There is no mining investment cliff. As you rightly point out projects taper over time – those that exempt any announcement of new projects in the coming three years possess a certainty I do not share.

      • flawse says:

        3d1k Does it have to be a cliff? Would a slowing in the rate of increase be enough to put a hole in things let alone an actual decline?
        I suspect given the structure of the economy and current policy we need continuous increase into infinity.
        I am very open to other thoughts on that!!!!

      • 3d1k says:

        That I don’t know Flawse – but we will find out because I suspect you are right – the structure of our economy is reliant on never-ending boom and that is impossible.

      • Rusty Penny says:

        No, it’s a cliff.

        A soul destroying, country killing cliff.

        And you.. you’ve sold us out for 30 pieces of silver. I hope it was worth it.

      • 3d1k says:

        No regrets mate. It’s been a blast – and thirty pieces of silver – no one will get out of bed for that!

      • flawse says:

        RP…we sold ourselves out…long ago. We chose what we wanted and we now reap the rewards. If we didn’t have mines now we would all very quickly find out what real hardship means
        It is wrong on all bases to launch a vindictive unreasonable assault on any person here.

  7. seanrace says:

    Question: who decides the election?

    Answer: capt glen silly.

  8. Gunnamatta says:

    He has coqued up a few dates in this piece

    But certainly identified flaws in the national narrative…

    Satyajit Das

    http://www.economonitor.com/blog/2013/02/australias-economic-outlook-the-nauru-option

    • 3d1k says:

      Was hoping for something new but unfortunately not. Much of the article could have been cobbled together by a selection of MB posts and TAI ‘papers’.

      However he is right to point to the shallowness of the Asian Century concept – aside from our mineral/agricultural wealth there is very little we currently make or do that will be desired in the long run.

      We are nothing like Nauru! Whilst our most important exports are moderately limited in diversity, they are not confined to a single product. We have an established developed diversified economy with strong institutional framework.

      Do we face challenges finding a position in the global economy not reliant on resources, yes. Can we do it, difficult but with supportive policy and new thinking, maybe.

      I would have rather read Das putting forward some Big Ideas than rehashing the usual concerns.

      • Gunnamatta says:

        We are nothing like Nauru! Whilst our most important exports are moderately limited in diversity, they are not confined to a single product. We have an established developed diversified economy with strong institutional framework.

        Pop on over to a diversified economy sometime – seen from there Australia certainly has such a narrow range of exports that it is close to Nauru.

        Do we face challenges finding a position in the global economy not reliant on resources, yes. Can we do it, difficult but with supportive policy and new thinking, maybe.

        How do you propose? What sort of policy and thinking did you have in mind?

        I would have rather read Das putting forward some Big Ideas than rehashing the usual concerns.

        Well for many people, including many of those in the global investment community, Australia is making so little progress on addressing the usual concerns that restating them over and over again is probably more fundamental than coming out with big ideas. Australians may not get the latter if they dont get the straightforward stuff first.

      • 3d1k says:

        What can I say Gunna.

        Donald Horne wrote The Lucky Country in 1964…

      • Gunnamatta says:

        He could write the same thing now and not have to change much at all.

      • 3d1k says:

        Agree. That was my point.

      • flawse says:

        “Australians may not get the latter if they dont get the straightforward stuff first.”

        Well said on that front Gunna! There’s far too much adulation of the ‘big ideas’ BS going on. Let’s get some real common sense facts on the table. Then let’s take a realistic look at what we might be able to change and achieve.

      • 3d1k says:

        Flawse the real problem is there appears no agreement on what the issues are and how to remedy. More importantly, we appear bereft of true Big Ideas – I don’t mean all that Asian Century Clever Country Green Economy for the Working Australian Family stuff. I mean genuinely new thinking.