“Mad” Adam says peg the Aussie dollar

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From “Mad” Adam Carr today:

The Reserve Bank of Australia has lost control of monetary policy. This is a simple fact borne out by the RBA’s decision earlier this week to cut rates in response to similar moves by central banks elsewhere.

…In following this path, however, policymakers have actually destroyed confidence and put the economy on a weaker footing than it would otherwise be on. This easing cycle is three years old and rates were already at generational lows.

It’s with that in mind that the exchange rate target being pursued could be formalised, perhaps by establishing a currency board. Under this arrangement, rather than having a fixed interest rate target at any given point (currently 2.25 per cent), the AUD-USD exchange rate would be fixed at a particular level (or the trade-weighted index). Interest rates would then simply move up or down automatically in order to reach that target.

This idea might be described as going “full retard”. Has the RBA “lost control of monetary policy”? Did it only cut owing to the currency? A little and no. And the former is being addressed through macroprudential.

Is confidence falling because of RBA cuts? No. It’s low because of the structural problems of household debt and falling commodity prices that “Mad” Adam pretends don’t exist.

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In fact, I’m not sure what Adam is arguing. The peg he describes simply reverses the order of the process from rates-to-currency to currency-to-rates. The end result is the same only you’ve junked your entire monetary system to do it. He closes:

The problem is this unshakeable view in policy circles that the commodity price slump will lead to a disastrous fall in national income and jobs. That is, unless the exchange rate falls as well. This is crux of the current problem. Unfortunately, this simply forces the RBA to respond to whatever central banks elsewhere are doing. Consequently, there is no consistency in policy. Under this current ad-hoc approach, Australia’s institutions risk their credibility, financial stability, currency stability and inflation — even if just asset price inflation. Changes clearly need to be made.

But not these changes. Macroprudential is being deployed and will work to cap credit if firm enough yet would still be required in Adam’s new world order given his peg lowers interest rates anyway.

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The problem is not the “view” that tumbling commodity prices will hit income and jobs. The problem is that tumbling commodity prices will hit income and jobs. It’s not only about the currency. It’s about the entire economy.

“Mad” Adam is the perfect Australian exceptionalist with an exultant belief that nothing external matters. Proceeding from that point leaves him grasping at some pretty wild ideas. (Or, at least, I think he is, because I’m not confident I’ve traversed this winding logic correctly!)

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.