The reasons behind the RBA’s decision to leave interest rates unchanged yesterday have largely been ignored in today’s commentary. The radical alterations made to the accompanying statement have been overlooked, lied about or dismissed. Instead, pretty much to a man, media and bank economic commentary has stuck to its so far completely wrong assessment that rate hikes remain imminent.

I won’t say I completely disagree. It’s always possible that we’ll see another hike in the near future. But the lack of engagement in the detail of why it’s unlikely, the lack care in assessing the available information and the sheer lack of interest in the evolving situation I find just a tad bizarro.

As I explained yesterday, the statement was a total reversal of the month before. And I mean complete. The May statement was just about the most hawkish I can remember. Yesterday was one of the most dovish. So, we find ourselves in a discordant situation in which RBA rhetoric is lurching from one extreme to the other yet those who follow them are the proverbial stopped clocks. What gives?

I’ll offer several explanations. The first is the maddening media game played by the many participants. Interest rate commentators have their priorities upside down. They are obsessed with getting the call right, as opposed to explaining why things might move one way or another. As such, the vast majority of commentators are hoisted on their own petards. Once a call is made, all subsequent commentary is bound, gagged and tied to that judgement. The bullhawks are the prime example but it’s more widespread than that. Even senior bank economists seem addicted to it. And certainly media commentators are. One can only ask, why is it so hard to so say ‘I was wrong’?

Second, and this is where it gets hard for the economists, the Australian economy is not the beast that they remember. Most (all?) of these guys have grown up in the ever expanding system of mortgage credit growth. Most, too, work for companies that are firmly embedded in this obsolete system. As well, pretty much all were rescued in the GFC and, whether by design or default, the comfort that this has provided has thrown a blanket of numbness over everyone’s head. The paradigm shift that has occurred is like some nasty creature under the bed that must be ignored lest it becomes real.

The third reason I’ll offer is the government has actively fostered this blanket. System guys trust the system and when the system says China will grow for ever so it will! When it says we must make room for Futureboom! so we must. When it says Australia was untouched by the GFC, so be it! When it says jump off the cliff, obey! The government has very successfully pretended there was no GFC whilst assuming the risk of the national mortgage market on the sly but that’s not something to worry those in the system.

The intellectual failure in all of this makes me sad. But the fact that people rely on these guys to make investments makes me angry.

The RBA has been more forthright. It has explained that the end of debt accumulation is nigh, that the jig is up on offshore borrowing, that the mortgage system upon which most commentators feed, cannot grow. But, it has also been a little complicit, unsure of its own diagnoses, by pumping out growth projections that depend upon rebounds in consumption that are also part of the old system. We’ll see more RBA growth downgrades soon.

So, what the hell is this new paradigm anyway? It can be summed as follows.

As the ratings agencies have made abundantly clear, Australia can no longer prudently expand its offshore debt. That means the banking system cannot grow except through internal funding, which also means the mortgage system will struggle to grow. This much is on the record. I would go further. The RBA is engaged in a grand project of attempting to keep household debt from growing in the hope that through disleveraging (lowered credit growth rates) Australia can grow into its enormous debt and housing bubble. This has a long way to run. Based on GDP to March and March credit aggregates, Australia’s debt to GDP is at 153%, down from 170% in 07/08.

The RBA is also attempting to prevent household debt from growing for the other oft-stated reason, to make room for dramatically expanded resources investment.

In short, the RBA is having to manage two historic economic transformations simultaneously. One of them is potentially enormously deflationary, the other is potentially enormously inflationary. Pulled between these poles, the RBA may continue to lurch from one extreme to the other, at least in its jawboning.

Yesterday the RBA had the intellectual integrity to discard its previous statement and go with the data. The response amongst interest rate observers could not be more different.

Houses and Holes
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    • Mad Adam is n a permanent state of denial about anything that doesn’t fit his obsessive theories.

      If the guy was genuinely interested in finding out how things are in the real world there would be no shortage of examples.

  1. “When it says Australia was untouched by the GFC”

    They swept it under the rug to find out that now it might be much worse to deal with.

  2. I think its more to do with housing market showing continued signs of weakness…that is all they are focussed on at the moment and that is why rates WILL NOT rise again in 2011

    IF they see the housing market falls are too quick and causing concern…they will drop rates later this year.

    Steve Keen was the ONLY economist to not predict a rate rise (he predicted a rate decrease)…maybe when he gets this call ‘right’ then people will start listening to the best economist we have in this nation.

    • “Steve Keen was the ONLY economist to not predict a rate rise (he predicted a rate decrease)…maybe when he gets this call ‘right’ then people will start listening to the best economist we have in this nation.”


  3. You’ve nailed it. Great analysis.

    RBA are now in the circus game – they’re like the tightrope walker with a balancing pole, a false move either way…not good…will require a stronger opposing move! We know who the clowns are…

  4. It is not correct to refer to yesterday’s statement as a “Statement on Monetary Policy” – those are issued only four times a year. It was a “Statement by Glenn Stevens, Governor: Monetary Policy Decision”. That is something quite different.

  5. “The intellectual failure in all of this makes me sad. But the fact that people rely on these guys to make investments makes me angry”

    Couldn’t agree with you more H&H with the second sentence. With the first part – it’s my opinion that it’s not intellectual failure.

    These MSM jurnos are viewed in a position of trust by the average Joe who mostly struggles to comprehend financial matters and relies on what is spruiked. For any of them to mislead Joe by placing a positive spin on negative data is downright misleading and deceitful in my book. These jurnos aren’t stupid – there are other forces at play here.

    The great positive is that MB exposes such treachery and applauds the untainted ones.

    A wise man once said, “ By their deeds you shall know them.”

  6. Well said H&H.

    Regarding the GFC, and it might have been discussed before, but when the NAB, Westpac, and CBA got FED loans during the GFC didn’t they have an obligation to report that to the market? If not what is the explanation?

    The other thing is Bill Shorten’s article in the Australian a few weeks back where he sees our Super as the Nation’s Sovereign Wealth Fund, and my feeling is that the banks will get wholesale access to Super to keep the housing bubble going. Ireland have done a similar thing so he may be looking at this.

  7. Great article, H&H. I’d like to add that the RBA is “up there”, flying high, alone, while the rest of the central banks are down there with no clear plans of moving: that must make them quite uncomfortable.

    • Yeah nice piece….but what a coincidence that I find his article mainly arguing a point that (I think DFM it was) construed as a technical outlay in “Australian Gold Standard”. More bond vigilantes piling up in AUS/CAD….Makes me wonder are these guys essentially hedging their bets against ever rising commodity price rises or something else is brewing..

      • “Makes me wonder are these guys essentially hedging their bets against ever rising commodity price rises or something else is brewing..”

        No, no, this is why I say the article is quite prescient, Joye is arguing that speculators are piling into government bonds, thus the AUD, to reap the capital gains as interest rates fall (bond prices rise). They know at the first sign of trouble the RBA will cut, even move into longer duration debt a la QE.

        In fact, there is an argument to be made that falling yields are necessary to hold the entire crumbling fiat monetary system together. Only risk free profits in the form of rising bond prices is keeping the bond speculators from running to the king of all sovereigns.

  8. H&H,

    To me, the RBA fiscal policy has never made sense and it still doesn’t. It is openly stated that the policy setting has to be accommodating the ‘mining boom’ and restraining all other economic activities.

    I understand that the RBA is independent of the government, but the government essentially is adjusting its fiscal policy to ‘accommodate the mining boom’ – same as RBA. Hell, the budget is all about the ‘resource boom’.

    Now, correct me if i am wrong – but did ever encounter any government and reserve bank in the hall world that essentially set out to ‘shrink all industries and services’ with the aim of directing every private investment dollar into mining and related activities.

    To me – this looks like, feels like intentionally growing an existing bubble. I firmly believe that the ‘home grown mining bubble’ will end in a bust, will leave Australia’s economy with few competitive industries and services, no diversification, no skills, no economic vision for progress for the 21st century.

    The resources are technically public, but the mining companies are private. It should not be the RBA’s and the government’s policy to try and ‘jawboning’ market forces into mining at the expense of all other private and public industries/services.
    They are setting up Australia for a big economic shock when the resource speculation ends.

    Essentially, the govt has not been elected to govern for a particular private industry, the RBA is not even an elected body – if they ignore 92% of the economy and 98% of the people – they will have blood on their hands when this grand experiment ends.

    • This is good. There are many issues vital to the long-term future economic prosperity of this country that need wider discussion – issues not to be left in the hands of the non-affected in government and bureaucracy, nor to self-promoting pundits of various vested interests. Hopefully the msm will lift its game, redevelop investigative skills and dispense with press-release reporting. It’s a start for us and some validation for persistence and endeavor on the part of H&H.

      Here’s to plenty more!

  9. The RBA are really weakening their hand with their constant jawboning and lurching from one position to another. Decisive action is needed, rather than this pussyfooting around, good cop one month and bad cop the next. They should have some integrity and just get the job done.