McKibbin tells RBA to control the Australian dollar

There are two points worth noting about Warwick McKibbin’s persistent call for the RBA to control the dollar in today’s AFR. The first and greater point is that:

It is clear that it is better to take the appreciation of the real exchange rate caused by a commodities boom through a stronger currency rather than through higher inflation. However, it is important to understand that whether or not to intervene in the foreign exchange market depends on the shock hitting the economy. Allowing a pure float is not always optimal, especially if you have information on the nature of the shock driving the exchange rate.

There are many factors driving the value of the Australian dollar. The case of foreign central banks buying Australian dollars is particularly unusual…If foreigners want to hold more Australian dollars in order to park these dollars in foreign exchange reserves and will not be using these dollars to buy Australian goods and services, then the best response is for the Reserve Bank to print more Australian dollars. These additional dollars should be sold to foreign central banks in return for foreign assets. The foreign assets would appear on the RBA balance sheet exactly balancing the increase in money supply. There would be no effect on the domestic economy from this global shock if the RBA undertook this transaction.

Complete sense to my mind.

The second point is that this is not inconsistent with whatever movements you want in your interest rates policy, even if that means hiking:

The argument for intervention is to eliminate a foreign shock that is distorting the debate about monetary policy. It is completely consistent to argue that there should be intervention as argued above to take out excessive exchange rate appreciation and still believe that domestic interest rates should be raised to assist in managing a major restructuring of the Australian economy

Exactly. You are aligning the currency with an interest rate policy environment that takes the reserve asset buying out of the picture.

This is about as close you get in economics to a “no-brainer”. It’s time some of the high dollar chest-beating commentators got on with their back flip and supported this idea.

Comments

  1. Perhaps we could trade this newly printed money for, say, all the European telco we have to buy from Alcatel for the NBN. Half price NBN anyone?

  2. Id this “These additional dollars should be sold to foreign central banks in return for foreign assets.” a sort of SWF idea? If it is then very clever.

    • McKibbon’s idea is utterly brilliant, thus not part of the ethos of the ‘lucky country’.

      This charade of ‘free trade’ is disingenuous, as McKibbon notes, external parties are not consuming our products at non-interventionist pricing.

      Thy are preserving their capital, and with the amount of capital coming into the country, and placing extraordinary upward pressure on our currency, it has pushed its srcip prce above its proper price.

      So under the guise, and in the absence of a Tobin tax, they are getting preservation of capital for free, and the premium is being paid for by our currency sensitive export industries.

      That’s a good deal, cost free preservation of my capital, and Lorax pays for it.

      As McKibbon notes, print as much as the external parties want, and when we receive a fist full of their currency for our newly printed confetti, use their currency to buy their real assets. A SWF can being the responsible entity for these real assets.

  3. Money is being shuffled around one by one to these perceived “safe haven” currencies.

    To the USD, even as the Fed created trillions in new money supply/debt.

    To the Swiss Franc which rose and was then pegged to the Euro.

    To the Australian Dollar where now we are discussing printing more to balance things out.

    There is but one quasi-currency which cannot be printed and will likely end up being the primary beneficiary of central banks, funds and investors searching for a real safe haven…. Gold.

    • Of course you are correct, BB.

      But, unfortunately, it’s a step too far for Australia to buy gold, as it invalidates fiat currency and the only thing that backs it, confidence.

      Eastern central banks have already given up on Western fiat currencies. We will, too, eventually, but will it be too late?

      Fortunately, individuals can make up their own minds on this and swap their pieces of paper for gold.

  4. Where is MacroBears today? This paragraph seems to address the apparent contradiction is McKibbin’s position on interest rates:

    It is completely consistent to argue that there should be intervention as argued above to take out excessive exchange rate appreciation and still believe that domestic interest rates should be raised to assist in managing a major restructuring of the Australian economy

    Come on MacroBears. Lets see you rip into Warwick again. He might be reading!

    • Rumplestatskin

      Well, it is inconsistent in a way. But consistent by his reasoning.

      He’s saying that if the performance of the Australian economy justifies higher interest rates, that the resulting increase in the carry-trade and the exchange rate is not a distortion.

      However, if foreign central banks are printing their currency to buy ours, we should fight back by printing it for them. Because that is a distortion from the market outcome.

      My view however is that both are non-market outcomes, and our central bankers should give up the ‘free’ markets charade and realise that the other side of the currency trade can manipulate the ‘market’ outcome in a number of ways.

      • “our central bankers should give up the ‘free’ markets charade”.

        +1.

        Clearly, many other central bankers have done so already. Indeed, therein lies (our) the problem… our CB apparently haven’t.

    • Lorax, Warwick might think it is “consistent” with his theory but it is inconsistent with reality.

      Warwrick agrees, as we all do, that there is a “major restructuring” going on. Has anyone ever known of any examples in economics or business anywhere where a “restructuring” wasnt very painful for a large majority?

      Look at any corporate who sacks staff or closes offices. What do they say the reason was? We are “restructuring” they say.

      And what is Warwicks answer to help with this painful restructuring that is cuasing inflation to fall, businesses to fail and unemployment to rise? Tighter monetary policy?

      Macrobears, although i dont agree on with who ever it is on many things, was right last week. The fact Warwick feels he needs to get back in the media again to defend his flawed idea is evidence enough it hasnt been thought through very well.

      • I know you must be stinging at your call on rates and the AUD, but please stop haranguing former RBA Board members. It isn’t hard to deduce from your constant bleating which brokerage firm you work at.

  5. Thanks Lorax,

    Indeed one of the reasons for this clarification was the misunderstanding of my argument in the media and also in some comments this blog last week.

    Cheers

    Warwick

    • Hi Warwick, while you continue to advocate higher interest rates while inflation is falling below the target rate and unemployment is rising (see ANZ job ads and TD inflation readings today) people are going to continue to misunderstand you.

      Before we get onto the more complicated and dangerous policy of printing money to satisfy currency speculators can you please explain why interest rates should be going up while inflation is falling and unemplyment is rising?

      The AUD will come down, dont worry about that. Becuase the current interest rates, that are obviously too high, is causing inflation to plummet, unemployment to rise and the AUD to trade well above fair value.

      Wouldnt lowering interest rates be a better way to lower the AUD? Or put another way. Looking at inflation its not the AUD that too high its the OCR?

      The bond market certainly thinks the OCR is way too high. Maybe the RBA should try to manipulate that market as well? If we are going to move into market manipulation why stop at just currencies?

      • Based on a broad reading of sentiment expressed here on MB in past discussions, I would suggest that many would have a different view to yourself regarding one of the core rationales you have expressed here – that “inflation is falling” / (high) interest rates are “causing inflation to plummet”. Indeed, if pressed, I suspect that many hold to or would have sympathy for the view that CPI data is a farce, with the reality being strong inflation in essentials (eg, energy), deflation in non-essentials (eg, flatscreens).

        • “CPI data is a farce”

          The data is the data. You want believe in conspiracy theories go for it. But good luck arguing to any rational person that inflation isnt falling. Its a natural consequence of deleveraging.

          • Conversely , try to argue with any rational person that inflation in essentials isn’t rampant. You will have your hat handed to you.

            The “conspiracy theories” accusation is generally a catch all argument from those who make a living from the pedling the dodgy numbers. I believe what I know to be true.

          • Interesting. Guess that everyone who asserts that their cost-of-living is ever-rising, and cites their energy bills, rates bills, telecoms bills, grocery bills, et al in evidence, is irrational.

          • have your hat handed to you?

            houses, food, clothing. All these essentials have been falling in price.

    • So the “shock” is that foreigners – especially central banks, but possibly others as well – are buying the currency and, presumably, using the currency to buy AUD-denominated financial assets, or otherwise are placing their currency on deposit with the RBA.

      And this demand is adding to buy-side pressure in the currency market, tending to leave the market short of AUD, resulting in its appreciation. So it is possible to see a herd effect: if all others are buying, then the wise thing to do is also buy-in, enabling low-risk short term trading gains as the currency rises.

      Presumably this process will also drive a reduction in the money supply, also tending to push exchange and interest rates up if unchecked, and in turn propelling further speculative buying. So this is about preventing a contraction in the money supply that would otherwise be associated with portfolio accumulation of our currency.

      Is it not the case that any currency that is used for reserve purposes has to be met from an increase in the money supply and made readily available to foreign parties? If this did not occur, then the currency would inevitably become more and more scarce and more and more sought after by foreign account-holders.

      So any economy willing to provide its currency for reserve use also needs to create more currency than it needs for its own domestic monetary purposes – essentially, such an economy has to be prepared to run long-term surpluses in the capital account that would be larger than might otherwise be the case and, corresponding with this, larger long-term deficits in the current account. It follows that the claims of foreign parties will gradually accumulate, but in the case of reserve portfolio holdings these claims should be matched by an increase in Australian purchases of foreign assets.

      To the extent that foreigners purchase Australian assets for reserve purposes, our foreign reserve holdings can also be increased. This sounds like win-win to me, at least in the short run. One thing that would follow if this worked is that Australian reserves would become even more attractive because they would themselves reflect an ever-wider asset base. In this case, reserve holdings of AUD assets by foreigners could become far larger than the size of this economy might otherwise merit.

      As well, to make this work over the long run, foreign reserve holders need to know that the Australia will always run a sound-money policy. Were this not the case, prudent reserve managers would sell their AUD assets, possibly leading to untimely or unwelcome herd-like pressure for depreciation and upsetting monetary settings.

      If I’ve understood this correctly, this proposal is essentially about removing the opportunity for speculation in the currency while also stabilizing monetary conditions. If so, I think it is a very sensible idea. Having said that, for the life of me I cannot see how increasing interest rates at this juncture will “assist in managing a major restructuring of the Australian economy.”

  6. “This is about as close you get in economics to a “no-brainer”….. and supported this idea”

    The countries central bank should cave into short term currency speculators and debase the AUD? This idea should be thrown in the garbage bin where it belongs.

    • Speculation implies you have zero insight into the future, in regards to activity or response.

      These aren’t nuffies buying up the AUD, these are foreign CB’s.

      The Swiss are doing it more than most, channelling their debased Euro’s onto us. They will most likely continue to do so, with a high probability they will adjust their CHF to do so.

      That sort of behaviour isn’t speculative.

      • “implies you have zero insight into the future”

        Im not too sure why you feel the need to reply with an insult. We have debated many things and everytime you have been wrong and ended up looking like a fool. This will be no exception.

        The AUD is too high because interest rates are too high. Do a quick comparison of comparable economies to see where their inflation rates are and where their interest rates are. Even you should be able to perform this most basic analysis and come to the conclusion that relative to anywhere else on the planet our current interest rate settings are very high. This is why the AUD is too high becuase currency traders naturally want to own a relatively high yield low inflation currency.

        You might like to think Australia’s debt bubble is different but i hate to tell you kid…it aint. It ends the exact same way with low inflation…check, then rising unemployment, now happening.

        While currency traders (speculators, central banks, what ever you want to call them) currently “want” to own AUD this will quickly change when the RBA cuts rates becuase of rising unemployment.

        So, back to your comment about “zero insight into the future”

        What happens when the reason these currency speculators currently want to own AUD (relatively high interest rates) changes? Where do all these AUD you and Warwick so strongly advocate printing end up?

        These newly printed AUD get sold, the AUD falls more than it should and these AUD come home inflating AUD assets.

        So what you end up with is rising unemployment and rising inflation which means instead of cutting interest rates like they should, the RBA either has to hold rates where they are or raise them. Its called stagflation.

        The one thing we have going for us while we go through a painful restructuring is low inflation meaning the RBA is able to respond to low growth and rising unemployment. Printing AUD threatens the one saving grace we have.

        What was that about zero insight again?

        • “implies you have zero insight into the future”

          Im not too sure why you feel the need to reply with an insult

          Sorry, I should refrain that as ‘one has insight into the future’, that was not an attack on you. I was infering that Central banks are not speculators.

          Now….

          The AUD is too high because interest rates are too high

          Now, our dollar is high because our balance sheet isn’t that impaired, interest rates are not high.

          I made you look foolish the last time when you tried to indicate interest rates are high. They are not. We need higher rates to both indicate proper savings are required, and flush the unviable economic crap out of our system.

          By maintaining a system the poor little debtor needs to have the economy restructed for them does nothing but create a zombie economy.

          Your ceteris paribus is that we should lower rates to where they need to be for no other reason than to maintain earnings, which displays the bias from your line of work. By maintaining a zombie economy, you ensure an entire generation has no working concept of enterprise.

          relative to anywhere else on the planet our current interest rate settings are very high

          Monetary policy primary settings aren’t calibrated to other settings, but our own holistic system. This is the phallacy that very few seem to fathom, not everyone can solve their malaise by being net exporters. Sure we may incur a hig cost, but it comes with its own benefit, and that benefit should be the one exploited, by buying everything foreign not nailed down with a purchasing power of $USD1.50, instead of $0.70.

          It doesn’t our existing asset prices any good, but policy shouldn’t be made on that basis either.

          This is why the AUD is too high becuase currency traders naturally want to own a relatively high yield low inflation currency.

          As far as the ‘malignant currency traders’ go, as i said, these aren’t a handful of nuffies tradies ETF’s, they are central banks preserving, or hedging capital. This benefit to them should incur a premium, and not paid by our currency sensitive export industries, but by the parties seeking beenfit either by a tobin tax, and/or the forfeiture of their real assets by Australia buying them off them with their currency they handed over.

          These newly printed AUD get sold, the AUD falls more than it should and these AUD come home inflating AUD assets.

          i) Tax is a more effective means of styming this type of inflation.

          ii) There would be a whole bunch of foreign assets on the other side of the balance sheet, that will have gone up relative in price to the decline of the AUD, being able to endure such a shock.

          • +1. For all those sensible observations about the importance of interest rates.

            Lower rates are to be expected during deleveraging but not when there is a huge mountain of debt getting rolled over.

            Yanking the interest rate lever is not part of the solution to our high currency.

          • RP you are confusing the role of government with central banking. A new tax to contain inflation? This cant work. By the time it was realised it was needed, then debated in parliament and turned into law it would be too late.

            And what exactly are these foreign assets on the other side of the balnce sheet? And who’s balance sheet? Central banks arent meant to go and buy “foreign assets” in order to manipulate their own currency. They shouldnt be involved in “asset price targeting” at all which is what Warwick is advocating. Otherwise where does in end? They print some AUD to cap the exchange rate becuase its too high. The bond market disagrees with the RBA so do they also start selling bonds becuase yeilds are too low? Or what about stocks that are pricing low growth, low inflation. Is the stock market wrong too? Maybe the RBA should bid up stock prices to bring them back into line with the RBA’s forcasts?

            Central banks are inflation targeters first and formost. If they get this part right they dont need to manipulate currencies, stocks and bonds. The “exchange” in exchange rate is the machanism through which inflation expectations and interest rate policy are exchanged so the AUD up here at these levels is actually doing its job. Its the RBA ignoring the AUD signals that isnt doing its job.

            If the AUD remians high and inflation picks up then Warwick will be right. But if AUD up here at these levels is cuasing inflation to fall then its a signal to the RBA that interest rates are too high and need to be adjusted down. This adjustment will then bring the AUD back down. At the moment inflation is falling well below the RBA’s target so the best thing for the economy and the AUD is lower interest rates.

            The last thing you want is a few central bankers getting in the way of this excahnge mechanism.

            Its not that i want lower interest rates becuase it boosts earnings although they do and it will, Its becuase it is sound monetary policy if its wrong it can easily be undone. If rates get cut, the AUD falls and inflation accelerates than they can just raise rates.

            Warwicks approach is dangerous, it is not sound money and it cant be easily undone if (and he is) wrong.

            This idea shared here by you and others that interest rates need to stay high in order to teach people a lesson is wrong. It equates to collective punishment where many decent and innocent people end up going broke.

          • The current exchange rate is clearly the result of much more demand than is generated by the carry trade impact of interest rates. Printing money to meet that demand is one approach but it troubles me as too cute. So to that extent i agree with GB.

            Limiting temporary demand through controls would appear a much more appropriate response.

            However, trying to reduce the exchange rate by driving rates down even more than they have been is unlikely to be effective, it hasnt worked so far, and comes at great cost.

            One of the primary causes of our predicament is the myth that when inflation is under control, holding rates down is a costless exercise. Appropriate interest rates are not about punishing people. A sustainable level of debt and the resulting financial stability is in everyone’s interest.

          • GB
            I think you need to write a very stern letter to the governments and central banks of China, the USA, Switzerland and Japan (among others) to remind them of the bounds of their remit.

          • RP you are confusing the role of government with central banking. A new tax to contain inflation? This cant work. By the time it was realised it was needed, then debated in parliament and turned into law it would be too late.

            No I am not. Even as a mid-20’s guys who works in a call centre or maybe paraplanner with no skin in the game, I am not confused at all.

            What is at hand here is various central governments are using the AUD to soak up excess mullah.

            Whilst the RBA is nominally independent, it is still an arm of governance, and should be operated with other arms to optimise the welfare of our citizens.

            The Swiss central banks flushing excess Euros to us is their idea of optimising the welfare of Swiss citizens.

            Tax can soak up any amount of dollars.

            And what exactly are these foreign assets on the other side of the balnce sheet? And who’s balance sheet? Central banks arent meant to go and buy “foreign assets” in order to manipulate their own currency.

            In case you aren’t aware, a majority of the world’s central banks are now engaged in currency manipulation.

            It doesn’t serve the welfare of the Australian populace any good to preserve moral purity.

            For us to incur inflation in the future when these printed AUD come back to haunt us, and bearing in mind you pointed to ‘the data’ a few nested discussions above, you pointed out inflation is falling.

            Well CPI, points to consumer goods, which is ultimately someone’s inventory.

            Inflation will occur when too much cash is chasing this inventory.

            How if these printed AUD is exchanged for Sony shares, Apple shafres, some telecoms, some mines, some oil wells, anything real.. we have a lot more inventory/assets to sell to soak up this excess AUD when it returns, being a depressant on inflation. Probably in our favour with a currency lower than it is now.

            They shouldnt be involved in “asset price targeting” at all which is what Warwick is advocating.

            Why not?

            CPI targetting has only been the RBA’s mandate formally since the late 90’s, and informally less than a decade prior to that.

            There is every chance the game is changing, thus the mandate that serves us best. If an independent RBA’s moves ahead of parliaments explicit consent, then that’s something for policy makers to deal with.

            Otherwise where does in end?

            The national interest never ends.

            They print some AUD to cap the exchange rate becuase its too high. The bond market disagrees with the RBA so do they also start selling bonds becuase yeilds are too low? Or what about stocks that are pricing low growth, low inflation. Is the stock market wrong too? Maybe the RBA should bid up stock prices to bring them back into line with the RBA’s forcasts?

            Stocks prices aren’t part of the RBA’s charter, but employment is.

            Central banks are inflation targeters first and formost. If they get this part right they dont need to manipulate currencies, stocks and bonds.

            Yeah, but that boat has already sailed with other central banks manipulating our currency.

            What McKibbon is realising is we have to extract a benefit from those that are manipulating our currency, and we can do that by buying up external assets with the purchasing power premium they have thrust upon us.

            The “exchange” in exchange rate is the machanism through which inflation expectations and interest rate policy are exchanged so the AUD up here at these levels is actually doing its job.

            Which relates to my post above.

            It does do a job, but it is a cost being borne by our industries that are sensitive to our exchange rate. That cost is not in the long term interests of our country.

            Its the RBA ignoring the AUD signals that isnt doing its job.If the AUD remians high and inflation picks up then Warwick will be right.

            Well CPI isn’t the be all and end all of inflation. I would assert this criteria can be seen in the rear view mirror.

            But if AUD up here at these levels is cuasing inflation to fall then its a signal to the RBA that interest rates are too high and need to be adjusted down.

            Or its that profit share and rents are being flushed out of earnings.

            This adjustment will then bring the AUD back down. At the moment inflation is falling well below the RBA’s target so the best thing for the economy and the AUD is lower interest rates.

            No, the RBA’s mandate isn’t inflation stick between 2-3% at all times, it is to average 2-3% over the cycle.

            The low inflation we have now is to counter the high (and understated) inflation we’ve had for over a decade. The higher needed OCR would hasten the necessary adjustment.

            The last thing you want is a few central bankers getting in the way of this excahnge mechanism.

            As I said, that boat has already sailed. I would suggest McKibbon realises we can’t fight the last war, we have to fight the one fronting us now.

            Its not that i want lower interest rates becuase it boosts earnings although they do and it will, Its becuase it is sound monetary policy if its wrong it can easily be undone.

            Easily undone?

            Japan has found that excess cash embedded in illiquid assets can take more than two decades to unwind.

            The excess inflation embedded in our assets not only needs to cease, which is what we are experiencing now, its needs to be yanked out by brute force, and higher interest rates will do that.

            As I have indicated, if we do not, we will have a zombie economy that will have an effect that will span generations.

            If rates get cut, the AUD falls and inflation accelerates than they can just raise rates. Warwicks approach is dangerous, it is not sound money

            Erhh, the money COMING IN is not sound money. McKibbon realises this, most here realise this. Our currency sensitive industries are bearing the brunt of this.

            McKibbon’s policy is one to counter this, so that this unsound money coming into Australia is costed by foreign assets, not Australian industry and workers.

            and it cant be easily undone if (and he is) wrong.

            Smart things are rarely easy.

            This idea shared here by you and others that interest rates need to stay high in order to teach people a lesson is wrong.

            It isn’t wrong at all, it is the most correct.

            The taking on of debt now means increased consumption now, for a forfeiture of consumption in the future.

            When do the mega mortgage mugs think decreased consumption is going to occur?

            This is where bodies like the BCA has failed miserably. They cheered the benefit of excess consumption on the way up, counter to the long term interests of the parties they lobby for. They are meant to be Adam Smith’s invisible hand decrying the mis-allocation of resources.

            It equates to collective punishment where many decent and innocent people end up going broke.

            It isn’t collective punishment at all.

            I have $0.30 in my pocket at this point in time, not encumbered by any debt. If a distressed asset holder comes my way, I will buy their 11 bedroom, 5 bathroom mansion on Sydney harbour for all 30 cents. If someone else has access to greater funds, they will bid the price up, until we find a clearance price, and debt is repudiated.

            It is a zero sum game.

            As far as ‘innocent people’, then what reprieve for those on the other side?

            I as a renter, my suffering has been.

            * An increase of my rent by 250% between 2004 and 2008, way in front of wages, effectively making me poorer for what is a major enterprise on my behalf, the selling of my labour.

            * To avoid further wealth destruction effects, I have had to move further out from my centrally located workplace. This has increased from 15 minutes to 80 minutes one way. This cuts into my time raising my child, it impacted on the meal times and access to fresh(er) food.

            * In delaying to buy a house, it has caused marital friction, with countless arguments and divorce being raised two times, in a very real manner.

            * My intellectual and vocational pedigree put into question.

            I observed prices out of kilter in 2004, and as a consumer, my only proper recourse is to exert downward pressure, and not be a consumer. As above I have incurred REAL suffering, only to have policy inhibit proper pricing, and arrest the ONLY outcome I could ever hope as a sound consumer with Rudd prime in 2009.

            Now you want me to endure a death by a 1000 cuts, and share more pain, so those that deserve an adjustment can avoid the proper amount of pain?

            As I said, it is a zero sum game, if people had exercised more sound consumer choices, they’d be as tolerant to higher interest rates as I am, and the economy would be better for it.

            The best outcome is to rewards me, and those like me so in our positions of economic prevalence, we will avoid this situation in the future.