Specufestors vs industry

While the two leaders of Australia’s political parties are busy stroking racist sentiment in Western Sydney, the RBA meets today and will very likely not cut interest rates despite a manufacturing capex reading last week first seen in 1989 (in nominal dollars, real dollars being FAR worse).  It’s not that the RBA would not like to cut but as its various boffins have recently noted, the risks of an asset blowoff are too great.

Given the asset class in question – property – has so far rebounded almost exclusively on a charge by investors into the existing home market, we now face the very explicit national situation of being unable to rescue our dying industrial base from a well-overvalued dollar because a cabal of specufestors (apologies to more upstanding property investors) are busy bidding up pressure on interest rates.

Of course it’s not actually the fault of the specufestor. The issue is with our macroeconomic settings which encourage such behaviour. Two stories today underline the folly of this situation.

The first comes from Banking Day, which describes the moves by the RBNZ towards macroprudnetial tools, which enable the central bank to control mortgage issuance without using interest rates and thus can be used to lower a currency:

The Reserve Bank [of NZ] has asked for feedback by April 10 on a process that has recently been accelerated. Finance Minister Bill English said in a speech last week that the Government and the Reserve Bank planned to have the tools and their framework ready to use by mid-2013.

The Reserve Bank is increasingly worried about an over-heated housing market in Auckland and a surge in high loan-to-value ratio lending in the last six months.

The bank spelled out more detailed proposals for a counter-cyclical capital buffer, changes to the existing core funding ratio, sectoral capital requirements and limits on LVRs for home mortgages.

The second story offers another option for dealing with Australia’s current impasse too. Find below an eminently sensible suggestion today from Henry Thornton that Australia impose a Tobin tax in capital inflows. For those that don’t know, Henry Thornton is the nom de plume of PD Jonson, former head of research at the RBA.

THE Reserve Bank meets today and interest rates will remain on hold. This is because there is no compelling reason to change them. Inflation remains within the target range, unemployment (as measured by the ABS) is low and the dollar is strong. Share prices are rising strongly, company profits are growing and house prices seem to be reviving.

Looked at by people with secure, high-paid jobs and generous defined-benefit pensions, the macro picture of Australia seems glowing.

But come down to the grassroots and the picture quickly seems less rosy. Jobs are hard to get and companies are cutting costs largely by cutting jobs. The cost of living seems to be rising inexorably. Home ownership looks impossible for all but the lucky young people who get one of those precious jobs.

Look a little deeper, if you will. We learn from recent news reports that Australian peach growers are destroying their crops because canners are preferring cheaper imported peaches. Another iconic Australian business, Rosella, is closing its doors/being purchased by a foreign buyer. And Nelson’s Honey in Boggabri, NSW, has sold 900 of its 1000 hives because it is unable to compete with the high salaries offered by Whitehaven Mines.

Such stories are a constant part of the news cycle and who, pray tell, cares? Australian businesses, and in particular smaller businesses, are suffering. Competition at work? Yes it is.

But the heavily competitive, global economy, while offering expanded opportunities for gain, is also one where small economies (read Australia) may suffer longer-term negative effects, just as small businesses within Australia suffer from the greater efficiency of larger businesses.

The very strong Australian dollar is great for overseas travel but it is crushing Australian manufacturing and even parts of Australian primary production. There is an avoidable reason for lack of competitiveness of Australian industry, but this is not yet the subject of serious debate.

The powers, including to its credit the Reserve Bank, have at least conceded in public that the Australian dollar is overvalued. The dollar is slightly overvalued, so goes the story, with an implication that if necessary interest rates can be cut further.

The manipulation of interest rates within a deregulated financial system with a freely floating exchange rate is a tool that has been highly successful in achieving low and stable goods and services inflation in Australia. However, manipulation of interest rates cannot simultaneously be effective in both keeping inflation low and stable and controlling the level of the Australian dollar. As Milton Friedman said, “Monetary policy cannot serve two masters.”

The purest economists say the answer is renewed micro-economic reform, raising productivity and restraining wages. I strongly agree that such reform is highly desirable, but it is not going to happen and it is certainly not going to happen soon. In the meantime, more jobs will be lost and more businesses will close down or be sold to overseas buyers. And serious economic reform would not necessarily make industry more competitive, as the Aussie dollar might rise as the reforms took hold. This is because relevant and successful microeconomic reform would make Australia an even more attractive place to invest, driving the Australian dollar higher and killing more businesses that cannot make it in a global economy where Australia becomes an even more highly successful player.

I question whether the Australian dollar is only slightly overvalued at present. Australia’s productivity is perhaps 80 per cent that of the US. My crude logic says that perhaps the natural or equilibrium exchange rate is 80 per cent of the value of the US dollar. I may be challenged on this, but the standard view of “slight” overvaluation needs a rethink.

I am certain the Australian dollar is overvalued, and that if monetary policy is eased to help reduce the value of the dollar it will create other problems, as it did in the late 1980s, when such actions led directly to “the recession we had to have”. Monetary policy is not equipped to get the Australian dollar back to where it should more realistically be, whether this is $US1.00, US90c or US80c.

This is a problem for government. Governments are elected to work in the interests of Australian citizens and it is time for the Australian government to consider alternative options for controlling the Australian dollar.

The global economy remains mired in a growth recession that is likely to be prolonged, making global business increasingly competitive as it makes many of its people miserable.

Last week a mere report that the US Fed was debating how to exit from current super-easy monetary policy caused a mini-panic in which US stocks plunged. The US government has since failed to agree on sensible plans to cut its unsustainable fiscal position, leaving the crude and damaging “sequester” to cut spending across the board. The eurozone is still struggling in recession, China’s new government faces many challenges, and another global crunch is looking increasingly likely.

Australia will need to get many things right to do as well in the coming global crunch as it did in 2007-08. But we can do better than simply let market forces impose massive instability and uncertainty. The way to do better is to impose a variable tax on capital inflow. This should be implemented by the Reserve Bank, which would give it the power to maintain firm monetary policy without destroying large swathes of Australian industry.

Even more simple of course would be to tweak capital gains tax or negative gearing benefits for property. Of course, with our two leaders busy stroking racist sentiment in Western Sydney, ancestral home of the specufestor, none of these will be considered.

Houses and Holes
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  1. “Monetary policy is not equipped to get the Australian dollar back to where it should more realistically be, whether this is $US1.00, US90c or US80c.”


    Monetary policy only has a role when inflation is rising or is already a problem. When inflation is behaving Monetary policy has no role -using it will simply drive debt and malinvestment/speculation as we have seen over the last 20 years. Unwinding that debt is difficult if not impossible without major pain. It certainly will not happen if a debt growth strategy remains RBA policy.

    In the event that ‘economic stimulation’ is required when inflation is low the appropriate tools are economic reform to improve the responsiveness and flexibility of the economy and fiscal policy.

    Don’t hold your breath waiting for a Tobin Tax as a high currency suits the low interest rate debt driven strategy of the RBA and Mr Swan.

    They havent learnt a thing.

    • rob barrattMEMBER

      Actually Pf, they’ve learned a lot:

      1) Never rock the boat by dealing with a moral imperative (abolishing negative gearing on existing properties say?);

      2) Hire an army of spin doctors, but if you HAVE to speak on TV, always have one or two people standing behind you staring at you without expression (I love watching them);

      3) Vote yourself a huge tax free super package;

      3) Do the 2 terms you neeed to;

      4) F off with the money.

      Credit where it’s due, please..

    • I am with Pfh007. A Tobin Tax is a no-brainer, especially if a nation is trying to stay above “currency wars”.

      The problem that no-one is so far identifying, is the difference between “main street” and “the rent seeking class”. The difference between “the free market” and “crony capitalism”. Henry George said before 1900, that it was a tragedy that “the workers” were being turned militant against their employers, when their worst enemy, and the enemy of their employers, was the financiers and land owning oligarchies.

      It is absolutely a tragedy that the finance sector in the USA has gone from making 10% of the profits in the economy, to nearly 50% of them. What is the figure in Australia? It is also a tragedy that so much political spite from the Left is targeted at the employers, producers, industrialists, and so on, when in fact the problem lies elsewhere.

      • The problem that no-one is so far identifying, is the difference between “main street” and “the rent seeking class”. The difference between “the free market” and “crony capitalism”. Henry George said before 1900, that it was a tragedy that “the workers” were being turned militant against their employers, when their worst enemy, and the enemy of their employers, was the financiers and land owning oligarchies.

        Much of that problem has to do with the producers themselves. The likes of Gerry Harvey, or their group lobbbyists such as heather Ridout, were only too happy to see rents passed onto workers, whilst engaging in a little bit of price gouging themselves.

        If Gerry Harvey or Heather Ridout stood on the side of workers and said ‘this housing bubble is in non ones interests’, and shown themselves to be on the side of workers, instead of being another cog exploiting them, then we’d all be better off.

        Now, Gerry Harvey seeks to have consumption impaired by wanting to oversee a costly expanssion of GST at best, and denying foreign cinsumption at worst. That sort of puts him at odds with the best interests of workers, placing him in the camp of the enemy.

        • drsmithyMEMBER

          Another group are the companies responsible for importing goods into Australia while skimming what must be enormous margins off the top for doing bugger all.

          The obvious examples are a certain three European marques, that like to throw a 40%+ margin onto the vehicles they sell in Australia.

          However, this sort of naked gouging abounds in pretty much any part of retail you care to look. For example, the exact same Weber BBQ I bought in the US for $1200 before moving back to Australia, costs around $3,500 from the local BBQ dealer.

  2. Well it is good to see more arguing along the same lines that a number of people at MB have been arguing for ages. The AUD is overvalued, and is causing considerable pain in Australia’s globally exposed sectors.

    I agree too that the suggestion the AUD is ‘slightly overvalued’ needs a look and think 80% productive – 0.80 USD is far more the order of magnitude I would be looking at for the AUD. Sure mining Capex has changed things, but the underlying economy is basically one which was structured around (and not very competitive at on occasions) circa 0.65-0.75/USD (one economist noted to me how well the Australian economy used to handle significant instability – swings from circa 0.60 to about 0.80, which he argued was the case for an economy which was within its ‘natural range’)

    Nailed to the roof at +1.00USD (even though I tend to the view it will come below fairly soon – as China/Iron ore come off) isnt in Australia’s interest.

  3. I’d suggest the A$/NZ$’s are not overvalued, but that other currencies are undervalued. We have wasted the opportunity to re-balance our economies (and keep our dollars ‘in line’) at a time that others were doing so for their own economic reasons. We should have gone with macro tools years back, and reduced our gross household property debt; but we didn’t. It’s not as if this property problem wasn’t obvious. For heavens sake! The Governor of the RBNZ told us all so back in ’06 and started moving on the matter. Now…it’s probably too late, for both of us.

  4. Wow, Henry Thornton said that??!! It challenges the narrative of our resident “swings and roundabout” guy, who also happens to be an HT fan.. 😉

    • Yep I was wondering what 3d1k would make Henry Thornton’s piece, seeing as he quotes HT so often.

      The very strong Australian dollar is … crushing Australian manufacturing and even parts of Australian primary production.

      I mean, that’s pretty unambiguous. None of this “manufacturing has been in decline for decades” stuff. Its being crushed.

  5. reusachtigeMEMBER

    OK people, time to get over all this and just accept it. We are a nation of wannabe specufestors! That is all we want, on the whole. Give us cheap money so we can go off and play house. F the dollar – the higher the better anyway, it just means we can get to Bali and Phuckit much cheaper. We want houses and we want cheap holidays.

    Bring it on – a smashing devastating crash that is. It is THE only way to fix this. There is no compromise. Harder the better!!

    I’m a proud crashnik, I really am! Call me subversive, but I’d almost fight for it, almost. But Bali does look more fun.

    • C.M.BurnsMEMBER

      for those that haven’t read it already, “Things Bogans Like” offers a wonderful insight in the mindset and values of the bogan/specufestor.

      • Seriously – you actually believe that all property investors are bogans. What metric do you use to conclude that?

          • I think that might just be an urban myth. I’m sure there will be a few bogans amongst them, but less than the normal population spectrum.

            The notion reminds me of Leonard Cohens words “we are ugly but we have the music”

        • C.M.BurnsMEMBER

          For the easily offended / logically challenged:

          all specufestors are investors,

          not all investors are specufestors (although judging by the statistics on the number of negatively geared investment properties per-person, there is at least a high correlation)

          many specufestors are bogans,

          and as R2M said, many bogans are specufestors.

          hope that helps PF

          • Thanks CM Burns.
            I don’t share that view, but it’s probably best if I leave it there.

          • DrBob127MEMBER

            Of course you don’t share that view, I mean you could hardly be seen to be referring to your clients as bogans (or specufestors) could you?

          • I don’t have your insecure elitist view of the world Dr Bob127 – I have many clients who are exceptionally intelligent and some who are less so, but I treat them all with the same respect.

            Mostly they are trying to do the best for themselves and their families with whatever resources they were born with, and that earns bonus points from me.

            I know that there are many people who look at others who have succeeded and console themselves that somehow they were not worthy of that success, but that’s not my philosophy.

          • DrBob127MEMBER

            Look I really don’t know how you think that you can assess what my view of the world is (insecure and elitist?!?), but personal insults reflect more on you than they do about me Peter. (I’m rubber and you’re glue)

            I wasn’t denigrating you or your role, I was merely making the observation that many of the people that were being termed ‘specufestors’ or ‘bogans’ by others here are also likey to be your clients.

            So I’m sorry for upsetting you, but just pointing out that you wouldn’t see them as such because they are buttering your bread.

          • Mostly they are trying to do the best for themselves and their families with whatever resources they were born with

            Plus the taxpayer dollar (NG).

            The most startling thing I saw in regard to this was UE’s post that most negative gearers are only in the middle income bracket. What kind of insanity is that?

          • Jason – investors don’t become wealthy via negative gearing, it’s a fairly modest tax incentive at best if you do the math.

            Perhaps they are trying to build an asset.

            That neither makes them insane or a bogan.

          • Mostly they are trying to do the best for themselves and their families with whatever resources they were born with, and that earns bonus points from me.

            A lot of Heroin dealers are trying to improve the standard of living for them and any family members.

            It won’t endorse it carte blanche because there is a harmful effect in the wider community.

          • C.M.BurnsMEMBER

            Correct Peter. NG doesn’t build wealth, but it does allow a lot of specufestors to buy into housing at negative real returns (the very definition of a bad investment in every other market); hold onto it for a while before they then sell it at significant capital gains. Gains made possible and at the expense of FHBs (ie the cannon fodder) entering into the ponzi scheme at the ground floor.

          • CM Burns – actually that isn’t the definition of a bad investment at all. Many very good investments run at a loss in the initial years.

            You mention that they then sell with significant capital gains. If capital gains are on offer why don’t FTB’s buy them? It also doesn’t sound like bogan behaviour as I know it.

            Bogans mostly booze away their money, not build wealth.

          • Mostly they are trying to do the best for themselves but not their families. They are trying to get more money now at the expense of their children in future.

  6. Alex Heyworth

    Australia’s productivity is perhaps 80 per cent that of the US.

    I wonder why? Would that have anything to do with the occasional recession cleaning out the dead wood?

    • Remember that the McKinsey Institute in their 1998 paper on the UK economy, suggested that MOST of the UK’s shortfall in productivity was due to their urban planning system.

      I say the USA’s high productivity is because of their excellent diversity of city types; industries can actually relocate somewhere that really suits them instead of being driven out of business altogether by inimical local policies. Hence (this link cannot be posted too often)


    • How about extremely over-the-top safety regulation? Most manufacturing is slowed down by onerous OH&S legislation and busybodies who feel they need to bubble-wrap everything.

  7. Tobin tax is new so why suggest this when expanding the existing withholding tax regime will do the same thing.

    Apply this non retrospectively and disallow Mega Bank from hedging offshore borrowing in foreign currencies will create gradual develeveraging of banks.

    Specifically targeted infrastructure spending by government to match deleveraging to balance the unemployment effects. It also has the effect of taking so called “value” out of housing and into infrastructure.

    Well we can all dream

    • Alex Heyworth

      Eminently sensible. You should make the same points at Henry Thornton’s. He may still have contacts in Treasury and the RBA.

    • What about the flight to safety of international investors, into a currency that is not being inflated? The Swiss capitulated and pegged theirs to the Euro. I say they SHOULD have done a Tobin tax.

      Does Aussie’s existing withholding tax regime safeguard against this factor?

  8. I beleive that we need a system that a child can understand, and we are a long way off that.