The view from Martin Place

That’s two misses in a row for me! Not that I blame myself. Judging RBA moves has become a game of reading the mood of mysterious bubble managers. There is no objective basis on which to make external judgements.

That’s the lesson from the last two meetings. In traditional monetary policy terms, the economy needs lower interest rates and a lower currency but the RBA is not going to cut until housing slows again, either through exhaustion or macroprudential policy.

The view from Martin Place is now filled entirely with the bubble.


  1. in no way does the economy “need” lower interest rates

    the economy needs higher interest rates to squash speculative and malproductive investment, assisted by large government deficits to support demand

    Perhaps Glen realizes this, and is trying to force the government’s hand

    And there are far more efficient and productive ways of lowering the australian dollar if that is felt to be necessary: the interest rate myopia is ridiculous

      • I was ready to jump down your neck till i noted your very careful wording – you headed us all off.

        Waiting for someone ‘to do the right thing’ about the economy and nation can be a 50 year long world of frustration!

      • The RBA in its current setting does not go back far into the past to term whatever they do or don’t do as “traditional”.

        We should not fall for the neoliberal narrative of the “modern” central bank and its “independence”… and the pseudo-scientific way of describing how they function. So far, they have turned out to be the biggest wealth destroyers in the world,the greatest promoters of income inequality through income suppression/debt destitution and completely captured by the banks they were supposed to regulate!!

    • Fair response HnH.
      Hopefully the RBA’s near 2 decade failings are set for a turnaround…

  2. should’ve held off in Feb. They cut and set off a speculative frenzy as the punters thought this was the start of a cycle.

    Then they realised their error and now they’re sitting back crapping themselves. Waiting for MP/Godot.

      • agree. but a nervous and hesitant one. hardly conducive to getting those famed animal spirits going. Not that interest rates help on that front anyway. But that’s the story Glenn is running with. Along with the fiscal situation, this just seems like confused policy. A great metaphor for Australia’s situation right now.

      • Confused policy is fitting right now. Australia is the coyote hanging in mid-air immediately before the fall. At this point, it doesn’t much matter what the coyote does; no matter which direction he tries to run, it’s ineffective.

      • 2big – I’m not finished yet – just dealing withthe Sovereign money model.
        I’m, like you, sceptical of that Committee. I can’t see the difference between that and what we now have. The CB’s are essentially that committee but REFUSE to pull the Commercial banks into line – i.e. they keep printing extra reserves for them. Why would not a committee do teh same thing? Again, I am deeply sceptical about politicians making money supply decisions based on a short term election result horizon.
        Anyway as I say I’m not finished yet so I won’t/shouldn’t comment further except to say the paper seems to completely miss the central point surrounding the realtionship between IR’s and money supply – to be a modern economics blindspot it seems.
        Edit: Low /negative RAT IR’s mean less and less savings and more and more borrowing. To keep teh IR negative you have to keep feeding the monster with reserves otherwise rates will rise. If it isn’t official rates that rise the secondary market (and black market) come into play.

      • 2big2fail,

        See my comment on that thread but basically ANY money supply is going to need to be managed. There is no magic solution in that regard – not even using a specific metal avoids that problem.

        The money supply is always going to be a political issue – but there is a world of difference in the different ways in which the politics of money supply are handled.

        I don’t think there is any particular problem with having a committee determine whether the money supply needs adjustment to allow for growth etc. The results of their decisions are going to be very clear and easily measured against their objectives. The decisions of taxation and expenditure remain political issues for the pollies to resolve. Nothing to stop a small government party limiting the role of government or a big government welfare state party to use a sovereign money system.

        Sure a pollie might want them to pump up the money supply (fill the punch bowl) but they would first need to influence the committee and why would the committee be keen to accede to the demand knowing they are going to have explain the result of boosting the money supply.

        In any event it is much much better than the current arrangement where the banks control the money supply and hardly anyone understands that they do because of the confusing, complicated way in which central banking is currently conducted. Allowing the banks to control the money supply and to profit from its expansion has infected our political system with extremely well paid lobbying so at the very least getting the banks hands off the lucrative returns from running the money supply is a must.

        Flawse reckons the RBA has all the power it needs right now, but that is not correct as the RBA’s mandate is to control interest rates and NOT target money supply directly. In theory they are able to influence the money supply by fiddling with the demand for debt by altering interest rates. If banks grant fewer loans there is less new money etc but in practice that is no longer feasible and they really have no choice but to encourage the banks to keep expanding the money supply. The system that RBA is trying to manage is largely unmanageable. It is out of control.

        As we can see they are now trapped by the existing level of debt and the interest trailing commissions on that debt. The need to satisfy the interest payments on existing debt mean the RBA is forced to encourage even more debt based money creation. That is why they keep cutting rates even though it is clear that trying to create more debt in a debt saturated environment is not a strategy for fixing the problem.

        The debt machine is out of control and the RBA are just trying to stop it crashing by driving rates lower and lower.

        I suspect that they held rates today because while they want to keep the Debt Machine running they don’t want to give it any more momentum than is necessary. At the moment they seem to think it is going fast enough.

        While the paper does come down in favor of sovereign money it does mention some other alternatives.

        I think sovereign money looks like the best of the lot but realistically NOTHING will happen in dopey Australia until someone like Iceland has tried it and shown it to be successful or we have a massive bust and that creates an environment in which alternatives get discussed. But we missed the clear message of the GFC so it will take a lot to get a message into our thick Aussie skulls.

        And yes – I am sure there will be lots of people doing their best to make sure that any experiment with non debt based money supply fails.

      • “In any event it is much much better than the current arrangement where the banks control the money supply and hardly anyone understands that they do because of the confusing, complicated way in which central banking is currently conducted. ”

        The current situation exists mainly because the focus is on the inteerst rate not the money supply. The money supply can, currently, be expanded without ‘apparent’ ‘inflationary’ impact. THe bubbles are in assets and the CAD. So low IR is maintained .through goosing the money supply. The corollary is also true. You limit that money supply you are going to raise rates – whether official, secondary or black market.- they’re going to go up.

      • “…The money supply can, currently, be expanded without ‘apparent’ ‘inflationary’ impact…”

        Yes – but only because it is not going where it would actually be helpful – such as the wallets of most people. Expanding money supply and squirting it into assets prices and the bank accounts of the already wealthy is not very helpful. Especially when it comes with an interest rate trailing commission that is sucking up a bit of every bit of new money that is created.

        If someone was to come up with the current model (of driving private bank debt with bait rates) as a smart way of managing the money supply they would be laughed out of the room.

        What makes it worse is that the premise of private bank endogenous money creation has fraud at its core – the whole idea derives from the fraud of fraction reserve banking. It is a private banker scam that “went legit” by getting the taxpayer to go back stop on their dodgy promises.

      • Pfh007,
        Great summary. Let’s hope that Iceland “sees the light” and shows the rest of the world that it can be done. Iceland is probably the perfect country to pioneer this. The approach taken in this paper creates an antifragile system that’s limits risk (and its consequences) to the risk takers without punishing the rest of society. We desperately need that.

      • 2big (&pfh)

        The paper conspicuously refuses to connect interest rates and money supply. They want to limit money supply but, at teh same time, enjoy low interest rates. I do find it amazing that a fundamental piece of reality is so conspicuously denied. These blokes will solve nothing while they adopt this notion – that’s the basic notion on which the current baloney is based. So to that extent this paper changes nothing.

      • Flawse,

        Your concerns about a CAD are warranted but managing that is a separate issue.

        If a government is prepared to allow capital inflows without restriction you are going to end up with a CAD.

        The move peoposed would be from a system that has a CAD effectively baked in to a system where a CAD is much more a decision.

        If government is prepared to encourage the public and private sector to borrow off shore the monetary system can’t stop that.

  3. The Patrician

    More delphic mumblings from Glenn.
    Where are the clear unambiguous statements from our RBA Governor to our Treasurer on the urgent need for real MP? FIRB enforcement? NG for new builds only?
    Sack the dud.
    Hire Wheeler.

    • He singled out the decline in the oil price for special mention, over a 25% crash in iron ore since we last heard from him.

      I’d ask what world he was living in, but I already used that line today.

  4. Although it is just another day in what has been a 12 month ordeal of excessively high interest rates and a staunch refusal among our policy elite to accept the external shock and cage the banking behemoth, today feels especially irksome.

    • lowering interest rates is the refusal to accept the external shock. Lowering rates to increase imports in the face of a decline in exports in a chronic CAD addicted economy is just plain nuts!

      Lowering interest rates to blow even bigger bubbles in everything in a moribund nation is nuts!

      Nothing makes sense.

      • Flawse, that’s why it looks a rock/hard place scenario – and why cutting makes little sense. Hold as long as you can.

      • Who had the simile of the soccer goalie (Mark latham?) – they dive to one side orr the other to make it look like they are doing something. They have an equal chance if they just stand still – but then they are not seen as doing anything about the problem! Appearances are everything walking down Martin place!

      • If the banking system’s tendency to plunge into wholesale credit markets offshore is severely curtailed, then this isn’t the expected result of lowering rates flawse. In the absence of a housing bubble/wealth defect, lower rates and a lower currency are extremely unlikely to raise demand for imports over and above the change in foreign demand for Australian exports and domestic demand for local production.

        But who really cares now. The RBA has intentionally boxed itself into a conundrum where it cannot devalue the nominal exchange rate because of a housing bubble of their own design. Instead of making trade-competing industries the focal point of Australia’s post-boom adjustment, they inflated a housing bubble. It was wrong policy 2 years ago. This will-they-or-won’t-they pantomime we’ve been treated to over the past couple of months is of little relevance.

      • MJV, two years ago I thought it impossible – agree in essence with your comment. The Big4 are TBTF and must have implicit guarantee in that respect.

        Flawse, Zen Stevens…

      • mjv – Yep re the RBA.
        I regard the other issue as extremely complex and impossible to review in a comment. We’ll have to box it out another day. However please just run this around….It’s a different end of the stick to the one you hold…
        Keen (and many before him) et al argue that Banks create credit which creates deposits. OK I think we can agree (a few capital requirement provisions just set aside for the moment for simplicity). Where things turn turtle and require the foreign capital is where the money goes around and each time around about 40% disappears into imports – so teh Banks have to replace that missing money through the foreign currency borrowqings mechanism.
        Now, in practice, this is all happening instantaneously and it can look like we are borrowing to fund housing or borrowing to fund imports. However from a macro view and in order to try to shape policy I think we should work from the, in my view, correct model. This suggests that Aus wants its lifestyle and isn’t going to give it up no matter the cost. So we can expect the expenditure on imports, in A$ terms, to continue as long as this IR holds. Further we can expect that expenditure on imports in A$ terms will grow if we lower rates further (less savings more borrowings for consumption) We agree we are also going to see house prices bubble even further.
        If we then add in macroprudential we crush housing but people are still out there spending with all the extra funds available ( – NOTE HERE – as per my comment above – to maintain negative IR’s the RBA has to feed the beast every night – there will/has be plenty of funds available to maintain the IR..)
        So according to my theory we will jst feed other bubbles – my bloody coffee machines, tattoos, cars, booze etc etcetc

        On your point re the wealth effect of housing that is my area of doubt. I take that on. I do think others should take on the doubt surrounding the possibility of just blowing all the other bubbles bigger. – It’s just never considered in thse pages it seems. Yet, in my view, theory suggests that as a more likely outcome.

  5. Glenn could have raised rates by 50bp and stated outright that political reform to counter the housing mania is needed before he can lower rates again. That would have put him in the pantheon of greats instead of the bar of pathos.

    • I’m curious to know what you think would cause this “bubble” to pop? I’ve read your old posts on sectoral balances, and I’m guessing the fall in exports will cause private sector to reduce spending and this might be the catalyst for the bubble popping?

      • The only thing that will cause the ‘bubble’ to pop is when foreign lenders ask more for their exports of capital to Australia. At that point we are in all manner of trouble.

        The only thing that is keeping us going at the moment is that most of our foreign lenders are suffering from the same disease as Australia (too much debt) and are desperately trying to devalue their way out of the problem. That means we get to sell them IOUs at a much higher price than normal (lower interest rate)

        That means that providing we are happy to accept the long term damage caused by an over valued exchange rate and just enjoy the short term benefits of imports cheaper than they should be and IOUs sold for more than they should be, we can continue in our present direction for much longer than we normally could.

        The catch is that running an economy like this causes long term and lasting damage, not just factories closing down but decisions as to what careers people will commence and businesses people will create etc.

        If our trading partners decide to fix their dopey monetary systems or the current ones crash completely we could find the cheap goodies and IOUs vanish quickly and with little economic base (or asset ownership to rebuild).

        In short we find that our junk food economy can not be turned back into a real healthy and balanced economy over night. That is likely to be very painful.

      • @pfh
        Yup! Absobloodyloodle!

        OR We get to have sold so much that there is nothing left to sell!!!! Has to happen one day and all our resources and businesses will become much cheaper for foreigners to buy on both fronts – the price in A$ and especially the price in USD/RMB. So we’ll get busy selling till we run out..NOTE rre that Q&A schmozzle – not one mention of a CAD nor one mention of foreign ownership. My opinion as to why that is belongs in the tin foil hat arena. There are some things you are not allowed to voice in public!

      • Capitalist, the thing I see to bring the whole thing down is national income. As we’ve talked about quite a lot on this blog the big, misguided, driver for the whole economy over the last 15-ish years has been the leveraging of the current account towards non-productive investment. Or in layman’s terms, digging up shit , selling it and taking the money to the bank to leverage it up to buy houses off each other at every increasing prices and thinking that’s how you create “wealth”. In the meantime, to actually pay the leverage differential, ( the real bill ) we ever increasingly sell off assets of real wealth to the rest of the planet

        You can read my macro view on this here

        It’s a great model, but it’s also an illusion created on the back of ever increasing foreign investment. That all works well as long as the rest of the world thinks you are a great bet to pay back your bills, but obviously that comes with the massive risk that one day they may wake up and decide you aren’t.

        AT MB, H&H, UE and myself realised years ago that iron ore was the proxy for that bet. We saw a massive bubble in commodities and realised once that busted we were swimming in the brown. What made that more funny was the fact that no one in the country, until very recently, even talked about iron ore except us. You’ve got to laugh at an economic model where the entire country isn’t even smart enough to recognise the primary driver, while constantly patting itself on the back about how smart it was.

        But alas, that is history, we were mostly right and will probably be hated for the fact all the way to the bottom …

      • @DE

        That about sums it up. Lower nominal wages and higher unemployment to follow (already happening).

    • “Stuck between the bubble they created and the one they never understood.. What could possibly go wrong ?”

      Beautiful!!! 🙂

    • Time for younger Australians to get the ejector seat fitted….. They called the British pound the North Atlantic Peso, we need a sweepstake to come up with the best name for the AUD….

      • 3d .. see above.. Happy to write more when I get some more time, and yes maybe it is about time I dig up some of the old stuff for the newbies. I’ll see if I can get to it on the weekend.

  6. Im going to put myself out there a little by saying that a interest rate hike is some what plausible only + 25bps but in a effort to send a weak warning to all those who are taking on risk.

    Im going to say 20% chance next move is up
    60% for decrease in may
    40% remain stable in may