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.