The Kouk sees the glass overflowing

From Stephen Koukoulas this morning comes the RBA piece of the day:

The about face from the Reserve Bank is good news and is further evidence of its pragmatism and flexibility. When it gets it wrong, the bank has acknowledged its errors with sudden and often unexpected interest rate moves. In addition to yesterday’s rate cut, the easings in May and June were shocks to the market but reflected well on the RBA’s quest to do the right thing.

…The objective of easier monetary policy is to encourage private sector borrowing, investment and spending and discourage private sector saving. In isolation, this translates higher growth and higher inflation than would otherwise be the case. I would like to emphasise “in isolation” because the interest rate cuts, which now total 150 basis points since November 2011, have been delivered with the Reserve Bank giving consideration to a huge array of unfolding events and new information which point to generally weaker activity and downside risks

…After the dust settles from the recent global policy changes and now the Reserve Bank moving to a more accommodative monetary policy stance, the scenario for the Australia through to the end of 2013 is annual growth in real GDP bouncing around 3 per cent, plus or minus a few tenths of a per cent, underlying inflation (excluding the temporary effect of the carbon price) running in a 2 to 2.5 per cent band and the unemployment rate ticking up towards 5.5 per cent but probably not going much higher than this.

It is a near perfect economic scenario that will be enhanced if even easier monetary policy down the track can lift growth sufficiently to see the unemployment track back to 5 per cent or even a touch less.

The risks to the near perfect economic outlook are evenly balanced. On the upside, we could see a more favourable outlook for consumer spending and housing…The downside risks are linked to ongoing Australian dollar over-valuation, further caution from consumers and an even more aggressive fiscal easing.

The “Kouk” is largely known as a Labor guy so some of this has to be taken as rhetorical. But still, such optimism is highly questionable. The RBA is not cutting interest rates to these levels because we are entering economic nirvana. On the contrary, we are entering the end of the mining boom much earlier and at much lower levels than earlier assumed.

Take a look at the following recent charts from ANZ:

Because of the uncertainty over China, right now, there is a question mark over all of the projects in this chart that are not either under construction or committed. That leaves only the dark blue columns as certainties with the light blue as hopefuls. The RBA can see this and is cutting rates. I suspect by the second quarter business investment will be subtracting from growth. Take a hard look at what that might mean if China does not pick up. It involves a very quick slide in investment away from the peak. It is questionable, to say the least, that we’ll be able to offset it with borrowing and building houses (as much as we might try).

In the face of this challenge, sobriety is prudent.


  1. The Kouk sees the reflation of the housing bubble as a good thing, when what we need is a sustained deleveraging. His opinions are inane.

    • Yep. Detracts from his argument which in this case is a curious mixture of HnH and the Bernanke: cut will induce spending/investment likely into housing and more easing down the road will be a boon for all. Taking a hell of a long time to achieve that outcome in the US.

      And let’s not forget, it was 25bps. Only.

    • Sadly this is probably true. He’s a smart guy, but everything he says is distorted by his political biases.

    • Woo hoo! Having brought 3d1k and Lorax together in a sweet moment of agreement, I shall hereby celebrate the occasion with … another caffeine hit.

  2. GunnamattaMEMBER

    ‘The objective of easier monetary policy is to encourage private sector borrowing, investment and spending and discourage private sector saving.’

    Australian private debt is about 145% of disposable income, should we be discouraging saving that much?

    • And implying a bigger CAD. Maybe he’s talking to all these PE companies with all the cash in funds just waiting to invest in Australia … I jest.

    • Well, from the links, the ABS did find hidden wealth at the bottom of the garden. So we are ok.

      As the miners from down-under continue to struggle against a fading China, this miraculous ‘find’ has dropped the ratio of debt to liquid assets from a worrisome 170.1% to a meager 129.1%. Rumors are circulating that the ABS is now looking for the ark of the covenant, the philosopher’s stone, and Shangri-La.

      (Pl ignore the trolling in the ZH comments)

      • I saw that in the Age/SMH the other day, and surprises like this make me question the ABS other stats. What else are they mis-reporting, and more importantly what data samples are they throwing away. Colourful ZH comments as usual.

      • Well here’s one. The amount of R&D that is going on in the country is taken from the ABS survey of corporates on R&D.

        The corporates just use the same numbers they use for claiming the tax credit/concession and which include buckets and buckets of business as usual work repackaged as ‘eligible R&D’ under the sieve-like tax provisions.

        Hilarious. Australia’s actual R&D numbers are abysmal.

      • 3dik, I was in Shanghai silicon valley last year to try and get joint R&D projects for Melbourne Uni’s, and they were not interested. One of the themes was our universities are seen a maybe third rate.

      • a63, funnily enough I have heard from respectable sources similar misgivings in regard to Australian tertiary sector. Flies in the face of the sectors’ own self-image as prospective provider of ‘services’ to China.

        Truth is a couple of our Us are very good, a handful middling and the rest lucky to be called Us at all.

      • Then I wonder why the Chinese send their kids over here for ‘education’, our third largest export industry.

        *cough* PR visa insurance policy *cough*

      • Yea, even Canada ranked higher than us.

        Plus, a lot of kids got sent here because they don’t stand a chance going through their version of HSC exams.

        They call it “gold-plating” their kids.

      • a63, we do have the smarts, and I think we are going to need to do it ourselves.

        Unfortunately, our natural cultural “operational pragmatism” (which, unfortunately, includes “selling the farm” and settling for primary resources) takes place of much potential “entrepreneurial pragmatism”….

        The result is short-termism, and fledgling innovation.


      • General Disarray

        Yep, and unfortunately I’ve also been avoiding the comments section here at MB on an increasingly regular interval.

  3. Koukoulos is far from alone in his interpretation of what an interest cut means.

    The debt industries are crossing their fingers that the debt pump is not broken and the RBA cuts will get debt growth flowing again.

    The idea that the RBA wants low interest rates to drive new housing construction sounds nice but is largely wishful thinking – if that is what they mean then they should say so.

    Rapid growth in new housing construction would soften house prices and we need better evidence than attributing good intentions to the RBA.

    In the absence of that the only fair conclusion is that they are seeking to assist the debt industries roll over the existing debt levels by enticing new contestants.

    In the absence of any explicit statements we should proceed on the basis that the RBA have a fairly sanguine view regarding household debt per the statements to that effect made by Luci Ellis.

    Sure they mention household debt from time to time with a mild finger wagging but they have and continue to do diddly squat to encourage any real reduction in the level of household debt.

    Any action to increase interest rates over the last few years was for one reason only – a fear of inflation.

    Pitchford is alive and well in the RBA.

    • RBA have a fairly sanguine view regarding household debt per the statements to that effect made by Luci Ellis

      Please note that Luci Ellis had an fairly sanguine view regarding US household debt prior to the GFC in 2006.

      It seems we keep forgiving/overlooking the blunders and actually reward such people by taking their school essays aka financial stability report.. seriously.

      • Absolutely,

        It is simply not possible to read any of her speeches (and those of other staff) and be left with the idea that the RBA considers the level of household debt a major concern.

        At best they mention it and suggests that cranking it up may not be a good idea. That is worlds away from acknowledging that reducing debt levels is an important objective to increase financial stability and de-risk the economy.

        While the rate of household debt growth is low it still means that people are being induced to take on debts that are largely secured by inflated asset prices. It is amazing that the rate of growth is still positive when supposedly every man and his dog is busily saving as fast as they can.

        The rate of growth of debt should be NEGATIVE and interest rates have a role to play.

        That certainly may mean an impact on economic activity but softening that impact is the job of the elected government and that may involve micro and regulatory reform to encourage private economic activity (ie reduce red tape on housing construction that cranks up the cost of new land) and direct fiscal activity (or even a bit of MMT-style employment/job programs.

        Adjusting to the end of a debt boom is not easy but there is plenty that can be done without mindlessly pumping the interest rate lever.

      • Not being contrary to you pfh

        “While the rate of household debt growth is low”

        It has been pretty much totally offset by massive acceleration in Govt debt.
        So, as a nation, accelerating debt is still our growth driver.

      • Yes – All those foreign CB’s buying up the govt securities (including the off balance sheet ones for the NBN etc) is also putting pressure on the exchange rate.

        Funny how relying on debt (household or public) makes the job of economic management that much more complicated.

        Just as well that ‘debt/leverage’ has magical powers to make our lives better or we might actually start to have second thoughts about using it so freely. 🙂

      • Jumping jack flash

        Oh, we had better be careful with that government debt or we’ll be breaking out the ouzo before you can say “Australia – the most indebted advanced economy on earth”

        Our only saving grace with regards to our debt profile at the moment is the absence of significant government debt.

      • Nothing inherently wrong with govt debt or household debt for that matter.

        Just a question of how much and who provides the funds.

        Oz Govt debt is still relatively low compared to other countries but that can change quite quickly as it is hard to wean oneself off debt that has become part of the day to day lifestyle.

        Look at the reaction to any attempts to trim the more excessive elements of govt pork that were introduced over the last 15 years.

        Relying too much on the saving habits of foreigners rather than the saving habits of locals is not a good idea – leaving to one side that at the moment the poor people on the planet seem to be doing the saving while the rich countries like Australia borrow and spend.

  4. Mod: leave the personal attacks out GB

    “It is a near perfect economic scenario that will be enhanced if even easier monetary policy down the track”

    its a perfect economic scenario for stocks but thats about all.

  5. Just a question, for anyone what was total credit growth for all sources over the year.

    I remember Steve Keen quoting a figure of about 6% credit growth is required to have the economy stand still, however i am not sure whether that was just private credit growth or total credit growth. If it is 6% credit growth, maybe the RBA has adopted that as its guidline as private credit growth was about 4%

  6. Good old Kouk … drank the cool aide …
    Firstly the kouk, thought that Swanies budget numbers last year was gospel when he said the budget deficet was going to come in around -$10b … we know for a fact it was $44Bill. therefore he should be calling for swanie to resign due to mismangement or at least treasury officials for not supplying accurate data (with only 2 months to go) … I would suggest that this is a $34million black hole that now requires more interest and principal repayments from us the tax payers.
    Secondly I understand that Kouk wrote the charter (or some other RBA doc) on the operations of the RBA. therefore any commentry made about the RBA needs to be questioned as to its indepenace or accuracy.

  7. The fault line between Macrobusiness (and probably all of the posters here) and The Kouk seems to be over a long term vs short term view.

    It seems implicit in The Kouk’s up to the minute reporting and forecasts (which never extend past more than a quarter) that we shouldn’t worry about sub 5% Chinese growth over the next decade, or that we have the most overvalued property market in the world and the second highest household debt-to-GDP.

    On paper, right now, in aggregate, Australia by TRADITIONAL metrics of economic measurement is incredibly healthy. And if you have a strong belief in equilibrium economics then those metrics will suffice. But looking around the world and at the state of neoclassical economics I don’t think they do.

    • if you have a strong belief in equilibrium economics [Op8: and the infallibility of ALP governance] then those metrics will suffice

      +10 … a most astute observation.