Captain Glenn.. Softly Softly

Previously has warned, and then he warned again. Did anyone listen ?

Today we note that Dun & Bradstreet report that debt reached yet another record in June, so it looks like noone did.

Consumer debt rose to record levels in the June quarter as defaults on commercial leases increased in spite of improving economic conditions, debt agency data reveals.

Two days ago Captain Glenn gave a speech in Shepperton about monetary policy and regions. It was all pretty boring stuff until this…

… we only have one set of interest rates for the whole Australian economy; we do not have different interest rates for certain regions or industries. We set policy for the average Australian conditions. A given region or industry may not fully feel the strength or weakness in the overall economy to which the Bank is responding with monetary policy. In fact no region or industry may be having exactly the ‘average’ experience. It is this phenomenon that people presumably have in mind when they refer to monetary policy being a ‘blunt instrument’.

The issue is that it is not possible to have different monetary policies by region or by industry within the country, at least not while we are all using one currency and funds are free to flow around. Either each area that wanted its own interest rate would also have to have its own currency, or there would need to be a draconian set of regulations to prevent savings in one region flowing to another to be loaned out – a sort of local and regional equivalent to the pervasive capital controls which once existed on international capital movements. Quite possibly both of the above might be needed for a comprehensive tailoring of interest rates to each set of local conditions. Obviously that is unlikely to be practical.

That is as polite as you will ever hear a central banker say “I am going to raise interest rates soon to control inflation and the large inflow of money from the mining boom, sorry it will effect you too”.


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