Garnaut: RBA has lost touch with “monetary reality”

Bravo Professor Ross Garnaut, published with permission from author:

Productivity growth has been dismally low in the 21st century. PEFO says in the projection years it will return to an average of the 30 years that covers the stellar 1990s. Inflation has been stuck below the bottom of the Reserve Bank’s range for longer than we care to remember, but it will return in the projection years to the middle of the range. Community frustrations at stagnant real wages will be salved by a return in the projection years to wages growth a full percentage point above inflation – again, all by assumption.

Strong revenue from the return to historical growth trends in output, prices and wages in PEFO support a wafer-thin budget surplus through the forecasts and the projections. That is the foundation for the government’s statements that future tax cuts of unprecedented dimension are “paid for” in the Treasury forecasts. The government makes no allowance for yet another disappointment in Treasury’s assumptions. No cushion for a hard response at home to falling house prices. No cushion for the US travails that will follow Trump’s deficit-fuelled budget expansion at the top of the economic cycle.

It is possible for Australia to return to sustainably rising living standards with sound budgets through the cycle. But we won’t get there by assumption. We need to do now what we didn’t do in 2013.

The old standard way of measuring unemployment focuses on a single measure of unemployment, obscuring large increases in underemployment.

The stagnation of real wages has turned a significant fall in the Australian dollar into a real depreciation.

The real depreciation needs to go further. We will get there if the Reserve Bank has finally accepted that the Australian monetary present, like the present in other developed countries, is different from the past. The difference is that changes in global savings and investment propensities have reduced decisively and permanently real interest rates — set by markets for the long term and by central banks at the short end. In the happy circumstance that the Reserve Bank has caught up with monetary reality, a cut in cash rates will be the first of a series. That will bring another fall in the exchange rate and prospect for real depreciation. The bigger real depreciation can restore strong incentives to invest in our export and import competing industries, and eventually bring large expansion again in the volume of exports.

Real wages have stagnated because the labour market – with supply augmented by this century’s historic increase in short-term work visas – is genuinely weak. The old standard way of measuring unemployment focuses on a single measure of unemployment. This obscures large increases in underemployment. The weakness will only be removed by sustainably strong growth in demand for labour. The real depreciation can make a big contribution.

What happens if the real depreciation that comes with a zero cash rate is not enough? The Reserve Bank has wondered out loud about quantitative easing. That would be a wasteful way of using an increase in assets on the central bank’s balance sheet. It would be much more productive to support a comparable increase in government investment in productivity-raising infrastructure and private investment through accelerated depreciation of capital expenditure.

Bloody hell. Sense at last:

  • productivity reform, especially for capital;
  • cut immigration (at least temporary preferably all);
  • reform RBA mandate to include underemployment;
  • crash AUD;
  • reform energy for cheaper prices;
  • drop helicopter money on productive investment.

It ain’t rocket surgery once you remove the parasites and interests.


  1. – Whether Ross Garnaut and/or the good folks here at MACROBUSINESS like it or not, the RBA’s cash rate follows the short term rate. And that short term rate is determined by a person called Mr. Market.
    – Short term rates go up in an (economic) expansion and go down in an (economic) recession. That’s the way Mr. Market operates.

    • proofreadersMEMBER

      MB playbook seems to be ZIRP,, NIRP, QE x 10, etc etc – whatever it takes in the race to the bottom and goosing up their returns?

    • Know IdeaMEMBER

      How do you see debt fitting into that picture?

      Is the abundance of cash looking for a return (that is, savings) a result of the abundance of debt that has been issued?

      • Willy2MEMBER

        – It all revolves around Demand & Supply.
        – When the economy expands people / companies are willing to take on more risk and are buying higher yielding (corporate / government) bonds. And pull their money out of less riskier and lower yielding bonds. This pushes short term rates higher. Then investors start “chasing yield”.
        – In the beginning of a recession people / companies start selling their riskier higher yielding (corporate/government) bonds and start buying less riskier lower yielding bonds. Then they want “the return of their money” instead of “a return on their money”. This mechanism pushes short term rates lower.
        – That’s why the yield curve is such a useful instrument for gauging the health of the australian/ US economy. It’s a very good gauge of how much risk appetite investors have.
        – In a recession companies will see thier income shrink and that makes servicing debt more difficult. That’s is being reflected in higher yields on corporate bonds. Then the effective rate on a corporate bond could go up from say 3% up to say 6%. This means that when this company needs to pay off the old loan and issue a new loan with a higher interest rate. This doubling of the interest rates (from 3% to 6%) could push such a company from making a nice profit into making (very large) losses.

  2. As usual, far too direct and sensible to ever be implemented, as it would disadvantage the leaner rentiers bigly – can’t have that in our crony capitalistic vested interest banana republic

  3. MB keeps arguing to reduce the immigration rate to reduce supply in the labour market and thus induce an increase in wages. Will that not also reduce consumers as workers=consumers, and subsequently stuff the economy?

    • SweeperMEMBER

      Short answer is yes. The demand side effect of immigration on wages is probably greater than supply side effect.
      More immigrants mean
      1) more consumers
      2) more workers so more investment required to at least maintain capital/labour ratio
      3) more stock of savings saved out of foreign income to be spent in Australia.

  4. Tamash1MEMBER

    So the tool is a weaker AUD. Agreed.
    Cutting rates to do so is blunt and hopeful. The side effect is a further increase in household debt and inflated house prices.
    Australia’s open capital account and the welcome mat to foreign purchasers of assets, means there is a consistant bid for AUD.
    Massive current account deficits mean nothing to a currency today, as surpluses are just recycled, traditionally into bonds but more and more into real assets.
    Remember that all of the worlds largest central banks have printed $12t – the RBA hasnt . Some of these printed dollars have found their way to AUD.
    Slowing down the bid for Aussie assets ( by foreigners ) will push AUD down.
    We have the ridiculous situation that foreigners pay less tax on gains from assets than citizen do. Compound these over 20years and it starts to effect national ownership and wealth.

  5. Jumping jack flash

    Everyone forgets the effect of the debt… maybe they don’t want to anger the bank-gods who run this country.

    We ran an infinite debt machine for 10 years or so, it pumped up the debt to dizzying amounts. Trillions of debt dollars. We slashed the interest rates, dismantled productive capacity in favour of services because the growth was all taken care of by magical debt expansion.

    Now they’re blaming the symptoms of this debt for the cause of problems we now have.

    Casualisation is a symptom of enormous wads of nonproductive debt.
    Gouged living costs is a symptom of gargantuan piles of nonproductive debt
    High property prices is a symptom of the mountains of nonproductive debt attached to them
    Stagnant wages is a symptom of the insane quantities of nonproductive debt that must be repaid plus interest.
    consumers not consuming is a symptom of the ridiculously huge amounts of nonproductive debt.
    High immigration is a symptom of the stupid amounts of nonproductive debt.

    The debt requires repayment in full plus interest, but nonproductive debt has not boosted productivity in excess of the amount of interest owing. The result is that proceeds of production that ordinarily would be used to increase wages and employ fulltime staff are taxed to repay the interest on the debt. And there is a LOT of debt after 10 years of unfettered debt generation.

    The result of this taxing of productive activity is that everyone becomes frugal and use less resources which lowers profits for the providers of essential items for life. Their reaction is to stabilise their profit growth by increasing the prices of their goods and services thereby raising living costs. They do this because they can.

    The result of this taxing of productive activity is that everyone becomes frugal and buys less stuff which lowers profits for sellers of discretionary items. These cannot raise their prices by much so instead they cut costs by casualising their employees, reducing their hours, and/or replacing existing employees with cheaper alternatives, all allowing the business owners to pocket the difference to repay their debt.

    The result of this taxing of productive activity is businesses cry out that they need more population to buy more stuff, so the government dutifully imports more people to consume more which exacerbates the problem of casualisation and creates a population ponzi.

    It is very simple really, yet these mental giants tie themselves in knots trying to ignore the effect of the debt.