Rogue RBA is crashing the economy

If you can be bothered, there’s oodles of amateurish commentary around on the RBA today. Nobody knows what it’s going to do next given it has left the reservation of its inflation targeting regime so I won’t try.

What I will observe is that the internal ineptitude of the RBA that I’ve been pointing to for years shows no sign of abating. We know already that it has been unable to forecast its way out of a wet paper bag, but you’d expect or hope that it would learn some lessons as it went. Alas no.

Yesterday’s statement again showed the bank’s broken model of the Aussie economy in action. This is best captured by its ridiculous stochastic equilibrium algo, called Martin, which always forecasts a return to trend on everything as a matter of course. Martin appeared to punch out yesterday’s statement in his best robotic monotone:

At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent.

The outlook for the global economy remains reasonable, although the risks are tilted to the downside. Growth in international trade has declined and investment intentions have softened in a number of countries. In China, the authorities have taken steps to support the economy, while addressing risks in the financial system. In most advanced economies, inflation remains subdued, unemployment rates are low and wages growth has picked up.

Global financial conditions remain accommodative. Long-term bond yields are low, consistent with the subdued outlook for inflation, and equity markets have strengthened. Risk premiums also remain low. In Australia, long-term bond yields are at historically low levels and short-term bank funding costs have declined further. Some lending rates have declined recently, although the average mortgage rate paid is unchanged. The Australian dollar is at the low end of its narrow range of recent times.

The central scenario is for the Australian economy to grow by around 2¾ per cent in 2019 and 2020. This outlook is supported by increased investment in infrastructure and a pick-up in activity in the resources sector, partly in response to an increase in the prices of Australia’s exports. The main domestic uncertainty continues to be the outlook for household consumption, which is being affected by a protracted period of low income growth and declining housing prices. Some pick-up in growth in household disposable income is expected and this should support consumption.

The Australian labour market remains strong. There has been a significant increase in employment, the vacancy rate remains high and there are reports of skills shortages in some areas. Despite these positive developments, there has been little further progress in reducing unemployment over the past six months. The unemployment rate has been broadly steady at around 5 per cent over this time and is expected to remain around this level over the next year or so, before declining a little to 4¾ per cent in 2021. The strong employment growth over the past year or so has led to some pick-up in wages growth, which is a welcome development. Some further lift in wages growth is expected, although this is likely to be a gradual process.

The adjustment in established housing markets is continuing, after the earlier large run-up in prices in some cities. Conditions remain soft and rent inflation remains low. Credit conditions for some borrowers have tightened over the past year or so. At the same time, the demand for credit by investors in the housing market has slowed noticeably as the dynamics of the housing market have changed. Growth in credit extended to owner-occupiers has eased over the past year. Mortgage rates remain low and there is strong competition for borrowers of high credit quality.

The inflation data for the March quarter were noticeably lower than expected and suggest subdued inflationary pressures across much of the economy. Over the year, inflation was 1.3 per cent and, in underlying terms, was 1.6 per cent. Lower housing-related costs and a range of policy decisions affecting administered prices both contributed to this outcome. Looking forward, inflation is expected to pick up, but to do so only gradually. The central scenario is for underlying inflation to be 1¾ per cent this year, 2 per cent in 2020 and a little higher after that. In headline terms, inflation is expected to be around 2 per cent this year, boosted by the recent increase in petrol prices.

The Board judged that it was appropriate to hold the stance of policy unchanged at this meeting. In doing so, it recognised that there was still spare capacity in the economy and that a further improvement in the labour market was likely to be needed for inflation to be consistent with the target. Given this assessment, the Board will be paying close attention to developments in the labour market at its upcoming meetings.

This is the line we should focus on:

“The central scenario is for the Australian economy to grow by around 2¾ per cent in 2019 and 2020.”

Some very basic arithmetic shows how preposterous this notion is:

  • we already know Q1 consumption is weak from retail volumes. The two previous quarters give the guide we need to know wider services will be soft too;
  • Q2 will be weak by definition owing to the election;
  • house prices are still falling fast and so long as the RBA sits around will continue to do so, even more if Labor wins and that uncertainty means Q3 will also be weak;
  • business confidence and investment will follow;
  • housing investment will keep falling;
  • government spending is plateauing as the NBN rolls off;
  • net export growth is plateauing as LNG projects roll off.

So, it’s a very good bet that the conditions that have prevailed for nearly a year now will keep going all of 2019 if left to themselves and that includes any new fiscal spending (which is already running flat chat).

To this let’s add some quarterly GDP numbers:

Mar-2018 1.1
Jun-2018 0.8
Sep-2018 0.3
Dec-2018 0.2

Notice that two very high quarterly numbers will drop out in Q1 and Q2. These will almost certainly be replaced with weak numbers resembling the last two quarters yielding this chart:

That’s right, by mid-year annual GDP growth will be around 1.3% and H1 GDP will be 0.5%. To reach the RBA’s end of year target, Q3 and Q4 will need to deliver 2.25% growth between them.

Even with some eventual pent-up demand released in Q4 when the RBA eventually cuts enough, it is not going to happen. The end result will be rising unemployment through H2 as growth craters, forcing the Bank to cut deeper and more aggressively as it risks the jobless rate feeding back into falling house prices. This might be forgivable if inflation were running riot but it’s already crashed below the target range where it has been for years.

There’s one more point to make. Assuming the current rate of immigration persists, the per capita numbers are going to be much worse, delivering a personal recession worse than the GFC:

And that is going to trash the new Labor Government before it even gets out of the blocks. The RBA knows its coming in with promised wage rises and property tax reforms. Instead it will hand over a mushrooming output gap, intensifying income recession and property crash, adding political chaos to an already gathering maelstrom.

For no reason that I can discern, the RBA has gone rogue and is crashing the economy.

Latest posts by David Llewellyn-Smith (see all)


  1. Rba is crashing the economy by leaving rates at a paltry 1.5%, seriously? They crashed it by putting rates at 1.5%. Last thing they need now is more useless building and more useless debt for house purchases.

      • bcnichMEMBER

        Arrow the crash is coming JSP is correct, they created the crash over last 5 years
        The royal commission was a waste of time
        MB was right MP should have been bought in after GFC
        After watching property crashes in Ireland UK USA JAP Sp, we did nothing about it
        QE has just exacerbated the problem here too
        We have started into a global recession that is going to take us down
        The reflation is coming like MB says but after the crash
        Negative equity in Mel is much higher than M North or ANZ are reporting
        It’s about to get very ugly

    • Willy2MEMBER

      – Nonsense. The RBA, like the FED, BoE and the BoC follows the short term rate and that rate hasn’t moved too much (yet).

      • PeachyMEMBER

        As you know, macropru can be unwound much quicker than it is introduced.

        A crash is the answer.

      • Peachy is right. There is no fluffy cuddly rate cutting way out of this. The economy will have to feel some real pain as we deleverage.

      • MPLOL !

        It took a RC for any kind of MP to be introduced and even now there is push back against that, RBA should never have dropped the rates in the first place !

        They blew this bubble economy and are 100% responsible of the mess, they should have raised the rates many times when houses were climbing at 10% plus per year and did not.

      • Pfh007MEMBER


        The buffer and HEM will not last much past the election.

        When that bit of furniture is in the furnace and has goosed prices a bit you will get your rate cuts.

        And then the RBA will buy some RMBS if needs be.

        Just be patient.

        No one at the RBA, APRA or either side of politics wants to pop the bubble.

      • Rational RadicalMEMBER

        Yet neither Peachy nor PFH can explain why or how the Hail Mary Pass has not come yet, despite an unfolding (and inevitable) crash beginning to show up all over the economy, and despite the scale and speed of falls so far passing that of every modern correction in which the saving move was made from our uniquely skilled/corrupt leaders and regulators.

        If not now, then when? Wait until internal dynamics have crossed the Rubicon into terminal inversion from greed to fear? Seems likely that we may already be there, or approaching that point. There’s western suburbs of Sydney that are already down more than 50%, even as much as 70% (eg. Box Hill). The residents of Box Hill are definitely waiting with baited breath for the MacroPrudential dam wall to crumble so they can resume their mythical wealth trajectory…

        The prognostications began to ring hollow some months ago, seeming to take on a Michael Pascoesque quality with all of their non-empirical certain certainties. As if we could all be rich if we just understood exactly how and which financial and economic bubbles “won’t be allowed to burst”. MPLOL-LOL

        David’s right, the RBA has left the reservation. Use Occam’s Razor. Don’t bet your (and the country’s) future on unpredented levels of capability and corruption. Imagine trying to sell that to a company board as a business strategy!

      • PeachyMEMBER

        Hey RR:

        Yet neither Peachy nor PFH can explain why or how the Hail Mary Pass has not come yet,

        This is true, insofar as I am concerned. I would’ve thought that we’d see the government’s hand by now. That said, they’re clearly pulling back and about to swing:
        – immigration still growing
        – APRA poised to drop the hurdle rate
        – RBA poised to drop the interest rate

        I havve always said that only higher rates or substantial unemployment could really be counted on to demolish the edifice. Conversely, I think we both know what to expect from lower rates fromAPRA and RBA.

        Now to this:

        There’s western suburbs of Sydney that are already down more than 50%, even as much as 70% (eg. Box Hill)

        That is complete bucking fantasy. Suggest You should go get some wipes and clean the emissions from your screen and keyboard.

      • Pfh007MEMBER

        Hi RR,

        It has been a while.

        Who needs to Hail Mary? (Everyone is using Uber these days)

        As I always say, I hope your gloom proves correct as I am gloomster too. I think Peachy also has a heart of stone.

        All I am doing is pointing out the very real options available to determined asset price bubble blowers.

        You seem to think those options do not exist or the bubble blowers will not resort to them.

        It is perfectly clear that we are experiencing a self imposed post RC credit crunch. The business papers are making it pretty clear that the objective of that crunch is to teach the country a lesson.

        Don’t mess with banks fun and profits.

        What policies do you reckon the pollies will NOT explore after the election in their pursuit of accelerating housing asset price falls. Will this be deliberate or by accident,

        Relaxing the buffer?
        Cutting interest rates?
        Extended guarantees for the banks?
        More population Ponzi?
        Relaxed foreign investment rules on housing?
        FHB grants
        Delayed reduction of GST discount?
        Deductibility of mortgage interest?

        As I keep explaining it is the AUD that ultimately will bang your gloomy gong.

      • A quick sharp drop/crash or a long slow grinding lost decade? I’d prefer the crash myself.

        *Disclaimer I have a despot for a house ready to go and want to purchase at bargain basement price if possible. So I have a vested interest in a crash.

  2. I think what the RBA did from 2012 onwards is the more insane thing to talk about. Stevens should forever be remembered as the guy that told us we have a 30 year mining boom ahead, screw local manufacturing and then blew the housing bubble to infinity to cover up his stupidity.

    • bcnichMEMBER

      Correct Tim but you could add 20/30 more things
      Look what RBA did last time
      It’s now a high chance first cut will be 50bp

      • That would take a term deposit from the present 2.25% to 1.75% which would mean that you would require $2,300,000 to earn the same as the old age pension for a couple compared to $1,800,000 presently.
        The old age pension is currently worth $200,000 more than the superannuation cap of $1,600,000 and will soon be worth $700,000 more than the superannuation cap if the RBA cuts by 0.50%.
        The capital backing the old age pension is perpetual while your superannuation runs down to nothing.

      • Even StevenMEMBER

        @ Athlone

        I think you are failing to take the capital into account? $2.3m means you could draw 100k p.a. For 23 years, and I’m not even including investment earnings. People need to stop with this capital preservation mantra in retirement. Where/when did this peculiar concept arise from?

        Apparently retirees now want to have their cake and eat it too.

      • @ Even Steven

        My comment was to the younger generation not retirees.
        It took 30 years to get interest rates down this low and they may stay this low or a little higher for the next 30 years.
        Young people may consider spending their money on a good life and not adding more than the employer’s amount to super and then rely on the old age pension.

    • Why does there seem to be a nationwide amnesia over how quickly the bubble inflated during the early 2000s? It was disgraceful. This bubble became ridiculous when the Olympic flame was lit in Sydney.

      Low interest rates were not the cause but they certainly were the kerosene thrown on the fire. I say let’s raise rates to really kill this puppy.

      • I’m with you. Raise the rates. If you want something dead you have to kill it.

        Won’t happen, of course.

  3. Willy2MEMBER

    – I have said it manytimes before and I will keep saying until I die that the RBA (and the FED) follows the short term rate. Once you understand that all this guessing of what will happen next with the the “Cash Rate” can be eliminated/avoided.

  4. This housing bubble is so large it still tends to be ignored, but it is an order of magnitude bigger than previous ones…….here is the available playbook for the RBA when it has to bail them out.

    Notice the time scales………….another long depression. The new bail-in legislation they snuck in last year is just a re-run of what was done in the 1890’s. Bottom line, they have no new ideas and will proceed to ruin in a conventional manner for our times.

  5. As a friend once said to me; if the RBA were halfway decent, you’d not have a job. They aren’t, and I get paid nicely …

    Long live the incompetent RBA!

  6. GunnamattaMEMBER

    Can we get some musicians in here please…….

    Lets have the Macrobusiness Rasta choir croon this out

    Monetary Policy Oddity
    with grovelling apologies to the late David Bowie

    Ground Control to RBA
    Ground Control to RBA
    Take your wages pills and put your ponzi on
    Ground Control to RBA (ten, nine, eight, seven, six)
    Commencing countdown, rate cuts on (five, four, three)
    Check the credit and may debt’s love be with you (two, one, liftoff)

    This is Ground Control to RBA
    You’ve really made the grade
    And the people want to know whose weed you smoke
    Now it’s time to leave the bubble if you dare
    “This is RBA to Ground Control
    I’m deflating through the lower bound floor
    And the dollar’s floating in a most peculiar way
    And asset prices look very different today

    “Here I’m floating ’round my forecasts
    A Behavioural econoloon
    Consumer sentiment is blue
    And there’s nothing the RBA can do”

    Though debt’s past one hundred billion miles
    We’re feel like a pack of dills
    And we think our debt bubble knows which way to go
    Tell our fellow Australians we love them very much they knows
    Ground Control to RBA
    Your CPI’s dead, the education exports pong

    Can you hear us, RBA?
    Can you hear us, RBA?
    Can you hear us, RBA?

    “Here I’m floating ’round my forecasts
    A Behavioural econoloon
    Consumer sentiment is blue
    And there’s nothing the RBA can do”

  7. Pfh007MEMBER

    The problems facing the Australian economy are largely a product of the neoliberal obsession with independent central bank administered monetary policy.

    Looking for a solution within the current model is a fool’s errand.

    As we have seen for about the last 20 years.

    By all means keeping looking but don’t expect to find much.

    • Stewie GriffinMEMBER

      The problems facing the Australian economy are largely a product of the neoliberal obsession with independent central bank administered monetary policy.

      “Independent” from Govt – says nothing about business. Personally I’ve grown to believe their ‘independence’ is nothing more than a smoke screen to allow control of our monetary policy to be handed over to business interests/lobbyist. I’ve maintained for years that the head of the RBA should be a Govt minister.

      • DominicMEMBER

        Yup, no central bank is ‘independent’ — not a single one. They are an arm of State and anyone who believes otherwise, I have a bridge to sell them.

      • Pfh007MEMBER

        Yes, that is exactly the purpose of RBA “independence”.

        Independent from democracy and thus free to serve other interests.

        At core the role of the RBA is simple.

        To protect and offer public support to the private banking industry and to effectively privatise most power over public money.

        The denial of 100% safe deposit accounts at the RBA to anyone but banks has a simple objective.

        Force people to use the private banks.

        The failure of the neoliberal monetary policy obsession should be considered yet another failure of privatisation.

      • Stewie GriffinMEMBER

        “Independent from democracy and thus free to serve other interests.”

        Nailed it – and your excellent link nailed the other 99 nails into the coffin justifying RBA independence.

  8. reusachtigeMEMBER

    Yeah don’t these carnz farkn know anything? Only Lower teh interest rates will fix thing. That’s just what happens when you farkn do it. It fixed thing always has by farkn eh!!!

  9. SweeperMEMBER

    It is pretty clear that the RBA see 2-3% inflation as a ceiling not a target. Lowe is fine with very low inflation. And that with housing flat we need a fiscal stimulus.

    • Pfh007MEMBER

      Fiscal stimulus?

      That is not allowed as we are all economic “conservatives” now aka radical neoliberals.

    • DominicMEMBER

      Just checking but you do realise that inflation is little more than a tax? Inflation means that the money you earn today is worth less in the future (and therefore buys you less goods) and that all those scraping by on low wages are impacted the most by this insidious tax?

      There are many incredible economic fallacies in existence today (courtesy largely of the Keynesian cult) and one of those is that inflation is a good thing. How does that follow, logically? “Hey everybody, the value of the dollars I’m earning right now is draining away at a rapid rate. Yippee!”

      Here’s some adult logic for you: in an age of persistently stagnant wage growth, wouldn’t deflation be better? Ya know, the meagre sum you earn would buy you more, or said otherwise, it would be an effective pay rise 🙂

      On the ABC radio the other morning: “Economists are warning of deflation and the deleterious impact this could have on the economy — the reason being that deflation would cause people to put off spending in the expectation of lower prices in the future.” Trololololol. FFS what utter [email protected]! Who the fvck believes that sh!t. Does it really stand up to scrutiny? I should go to Coles and do a shop but I’m expecting prices to be lower by 5% in 12 months time so I’ll wait till then. I’d really like a TV to watch my favourite shows but I’m expecting prices to be 6% lower in 12 months so I’ll wait till then and read a book instead!

      The only items that are threatened with meaningful deflation are those that have been subject to bubble activities i.e. property (and that’s a BAD thing?). Almost every problem we face today has been caused rampant economic ignorance and the constant pursuit of this magical/mythical 2% inflation number is just one such example.

      • PeachyMEMBER

        Hey, you must’ve been reading my posts from a decade ago. It’s all in there, right down to the “trololololol”.

        Anyway, you’re not allowed to say things like that here anymore, mate.

        Now, inflation is not a tax and is not theft. It is a great and wonderful thing.

      • SweeperMEMBER

        You do realise wages are a price as well?
        Inflation implies rising nominal wages?

      • SweeperMEMBER

        For a little bit of reality:
        Unexpected Inflation is a very small tax on money balances and nominal fixed income – bondholders.
        In other words a very smal tax on wealthy hoarders who can afford to pay it and aren’t producing anything.

        Deflation is a private sector tax levied by rentseeking creditors / bondholders and paid by people who actually produce GDP including wage earners.

        And you are complaining about inflation?

      • Stewie GriffinMEMBER

        The issue with “Money” as a store of value is that it creates distortions over time – personally IMHO the “value” of money should decrease the further away from the temporal proximity of the activity that created it.

        For 90% of wage earners money’s “store of value” is irrelevant as very few have any “money” left in their bank accounts at the end of the pay cycle, it is used as little more than a means of transaction as it is spent on groceries, paying down debt and generally the livings expenses of life – virtually nothing is saved.

        The issue with using money as both a means of transaction and a store of value is that it enables economic miss-management from one period, or one nation to spill over and impact subsequent generations.

        For example does anyone think the Baby Boomers actually earned all their wealth on a collective basis? They are simply fortunate to have been the generation present that passed through the population python at an opportune time that corresponded with both a declining demographic dependency ratio and a period of significant productivity growth (built on the investment of earlier generations) and the population ponzi that they were shamed into accepting thanks to manufactured “white privilege”.

        Yet the bountiful quantity of ‘wealth’ that this period produced had very little to do with the actual efforts that they made, in general they were no less and no more productive than any other generation in terms of individual efforts, yet the enormous wealth that they have generated for themselves, mainly through temporal economic rents inflicted on subsequent generations, burdens earnings of all working in subsequent time periods.

        Ideally money, in my opinion would be a form of Crypto currency that would commence ‘decaying’ (ie decaying purchasing power = inflation) the further from the time proximity of which it was earned.

        “Wealth” if it is to be stored, needs to be stored in productive assets.

      • Well said Dominic

        @ Stewie Griffin
        I’m a Baby Boomer.
        My generation has done well because interest rates were so high that they kept home prices down to one or two times salary.
        Houses were able to be paid for with one wage and relative ease.

      • DominicMEMBER

        The issue that I have as far as money is concerned is that, when you receive money in exchange for work done (productivity), you should not be forced to spend that money immediately in order to ‘lock in’ the value. Your ‘productivity’ should be able to be stored until you are ready to spend it. Spending money 12 months after receiving it for work done and not being able to purchase as many goods with it suggests that somehow your original work has diminished in value over time, which is absurd.

        As for storing money in ‘productive assets’, well who says what is productive and what is not. By ‘productive assets’ I presume you mean companies that produce stuff but that is risky and not guaranteed to produce a positive return — in fact you could feasibly lose your entire investment. The definition of money includes ‘a store of value’ and a store of value means exactly that. What we use day-to-day we call ‘money’ but it isn’t really because it is little more than a leaky bucket. It is actually ‘currency’ — a means of exchange but not a store of value.

      • It’s not really that difficult to understand. If you’re old enough to remember the Cold War period than you’ll understand that in Eastern Block countries there were always two currencies. The local one that you were paid in and could sometimes buy goods and services with and the Foreign currency that was used for the longer term storage of value and to purchase what you really wanted.
        In Australia we have developed a similar system whereby we are all paid in Aussie Dollars but we all store value in a different currency probably best called the “Houseo” The different course of the two currencies is something that bemuses economists because they’ve failed to understand what the average Aussie knows only too well. The AUD is just a trade thing, it’s manipulated all over the shop and subject to massive devaluation through the import of foreign liquidity (manufactured from thin air) …only a fool would store value in a currency like the AUD ah but you have a choice and what a choice it is ….Sensible Aussies convert their AUD just as fast as their little feet will carry them to the next Auction. …well that was the case until a year ago ….nobody knows the future but I can say with some certainty that it does not involve a return to the Aussie being the most desired currency of the land.

      • Further to @stewie’s comment money is no longer backed by past work (a.k.a. gold) which is known and quantified but by debt/credit which is a claim on future activity that is somewhat unknown. Because of this its “store of wealth” property is unknown anyway and sometimes not likely to eventuate. For you to save someone else must be in debt. The more claims on future activity – given we really can’t time travel and output in the future is still constrained by real resources at that time – the more debt issued the less share of future “slice of the pie” it should be worth which is exactly what happens. If you want to store “real wealth” then you need to be in real assets IMO; and even those decay with time just like everything else.

        Money by definition isn’t a productive asset its just a unit of measurement – in fact if the monetary system goes into arrest (e.g. a debt crash/deflation) it could be considered highly unproductive. As the output gap increases, heaps of people being unproductive, and ample available resources to do something yet nothing is done by anyone due to a “lack of money” which is something conjured by governments anyway. e.g I think of the US where there’s empty homes yet people in tents next to them.

      • Stewie GriffinMEMBER


        “I’m a Baby Boomer.
        My generation has done well because interest rates were so high that they kept home prices down to one or two times salary.”

        And why were interest rates high? Because inflation was high i.e. the value of money was declining, which kept prices within the financial reach of someone currently working = proximity to the temporal effort expended.

        Dominic – I’m not saying that the value of money should immediately decrease, but it should decrease the further away from the temporal proximity of the productive effort that generated it. Wealth and societal benefit is only increased through risk taking activity, the societal cost of carrying a huge amount of wealth locked up in a non-productive asset and thereby distorting the value of every other asset involved in the means of production, is a huge dead weight loss.

        Turn to the parable on the Wealthy Man giving talents to his 3 servants, yes it is primarily used in the Bible to encourage people to continue to develop themselves and never rest on their laurels. But the implication is no less relevant for society than for an individual.

        The purpose and treatment of money is a fundamental cultural value and it is one worth continually re-examining. I agree that individuals should have means of preserving the wealth of their productive endeavours for a period of time, but maintaining enormous Scrooge McDuck money pits, while it may serve the interests of the individual, are not necessarily of benefit to society.

        Fisho, you are correct – the “productive assets” that Australians store their wealth in are existing houses, but that is a function of Govt policy. For the Chinese they store it in new houses, but again, that is a function of Govt policy. Taking a look at the money the Chinese store in their houses, and it is easy to see that it is no less a result of temporary economic aberration brought about by China’s own demographic dividend and Govt policy.

        I maintain the best store of wealth for a society, as opposed to an individual, is the storing of wealth in productive assets that will continue to generate wealth into the future – thereby maintaining the temporal proximity value of the store of wealth with the productive endeavours that generate it.

        Again, the treatment of money is a cultural value and the role and purpose it serves in society should be examined. I’m not saying my definition will ever be implemented or even recognised as valid, but it is important to consider the issue of what money is and the purpose it should serve.

      • DominicMEMBER

        I understand precisely how the system works and why it is that the future value of money is inevitably lower than it is today. All I’m arguing is that in order for the economy to function properly sound money should function as the medium of exchange and a store of value. Money is a unit of account and a unit of account that has an ever changing value is worse than useless. If you accept monetary inflation as a given then you should be long real assets almost all the time. The danger with such a position is that debt levels periodically reach such extremes that the ability of the private sector leverage further becomes compromised and money supply growth plummets thus temporarily interrupting the happy order of things, ushering in recession which is followed by fiscal and monetary stimulus to prevent the wholesale decline in value of real assets. For a time real assets look relatively ‘cheap’ until the central bank can induce another round of re-leveraging and speculation.

        In any event I believe we’re pretty close to the end of the road as regards this wash, rinse, repeat sequence and the debt -based money we have today will inevitably be replaced by something else. From that moment on this whole ‘inflation is good’ argument will be dead — at least until the resurrection of fiat.

      • @SG
        I agree completely, for a society to move ahead (under normal circumstances and normal Monetary policy) the future wealth of that society is 100% dependent on the Productivity of Assets, Human, Social, Cultural, Mineral and Capital. No society can store wealth in fixed assets …it’s a stupid idea…however an individual or group can definitely profit handsomely from denying others the right to create assets thereby running up the price of existing assets. That’s what we have happening in Australia, that along with a highly visible hand of government shifting wealth towards the cities (i.e the restricted housing zones)
        It’s a F’ed up long term play for everyone, matter of fact we’d already be seeing the effects of this stupidity if it were not for our Mineral wealth and the sudden rise of China.

      • DominicMEMBER

        @fisho and SG
        What you guys appear to be suggesting is that ‘saving’ basically holds the economy back? If so, this is straight from the mouth of JM Keynes. It is in the interest of the wealthy and those who actually have capital to make it work for them at all times — whether it’s via direct investments that make money or via savings (which are on lent to other entrepreneurs) is irrelevant.

        The fact that the Govt is perpetually interfering with the free market and allowing a select few to extract rents is another issue entirely and completely unrelated to savings in the broader economy. In fact, if interest rates weren’t so fvcking low (courtesy of the State, once again) speculation would be too expensive to engage in and (scarce) capital would naturally look for productive endeavour.

      • Even StevenMEMBER

        @ Stevie

        ““Wealth” if it is to be stored, needs to be stored in productive assets.”

        And inflation achieves that. Productive assets will maintain/improve their value in real terms. Unproductive assets (cash, bonds) will lose their value in real terms.

      • Stewie GriffinMEMBER

        Even Steven, “And inflation achieves that. Productive assets will maintain/improve their value in real terms. Unproductive assets (cash, bonds) will lose their value in real terms.”

        Agreed, but where is the monetary inflation? Buying existing housing stock isn’t productive. Building new housing stock is productive to a certain point, in that it reduces the cost of living for a shelter deprived populance, but beyond that, as China has shown, it ceases to be.

        Dominic – I don’t disagree with you on interest rates and the inflation of real assets prices that it has resulted in, or the role of Govt in facilitating the Economic Renter’s economy. My point is a conceptual one on the nature of money from the perspective of society as opposed to the individual.

        Consider that throughout most of history Money has existed it has done so where the level of economic growth from one period to the next has been close to zero. The quality of life of someone living in the 11th century Britain was much the same as the quality of life of someone living in 15th century Britain, GDP was essentially flat and there was little if any population growth – ergo money throughout that time was servicing a subsistence economy, so the store of value in money at that time did not produce an outsized economic rent from one generation to the next.

        Now consider the past century, through the exponential growth in GDP through productivity and energy consumption the productive efforts of someone 10 years ago, stored as a non-debased monetary store of wealth would have outsized purchasing power in the present if its value was held constant.

        This issue is really the core issue facing the world today – a unique set of circumstances pertaining to population growth, dependency ratios, energy usage and technology all conspired to ‘create’ tremendous surpluses of wealth or value, that were in effect temporary aberrations. Rather than accepting that it was temporary and an aberration ALL our politicians and economists have bent all available policy levers to preserving “value”, be it in soundness of money or the “store of value” that has been tied up in things like real estate – effectively it becomes a form of economic rent across time.

        This is my meandering thought process when I say “value” of money should decrease the further away from the temporal proximity of the activity that created it.”

        Non-debasing monetary store of value during periods of high economic growth, that are often a result of unique economic circumstances, extract outsized costs in future periods of time, when those unique economic circumstances reverse or end.

      • DominicMEMBER

        While I have a degree of sympathy with the view that ‘savings’ should ideally be invested in productive endeavour, in the event of the abuse of the currency by Govts, real assets provide an important haven for wealth and will outperform company stock by orders of magnitude. Just witness the Caracas stock exchange over the past 12 months: up 88,500% but of little comfort to local investors whose investments are denominated in a worthless currency. So being invested in stocks provides some ‘protection’ from debasement (better than cash, at least) but really not a lot.

        The bottom line is this: when people have confidence in the State they invest confidently in the productive assets of the State. When they lose confidence in the State they withdraw their capital to protect it. That is a completely rational thing for any person to do.

  10. Yesterday’s statement again showed the bank’s broken model of the Aussie economy in action. This is best captured by its ridiculous stochastic equilibrium algo, called Martin,
    Ah Yeah…hate to bring facts to the table but umm …Martin is not actually a DSGE model
    From RBA release on Martin

    DSGE models are currently the most widely used class of full-system models at central banks.[3] But a DSGE model was not the appropriate choice for MARTIN because the economic mechanisms in such models do not align well with the current analytical framework used for forecasting and analysis.

    Instead, we have built MARTIN as a full-system econometric model. This approach is similar to a number of contemporary models used by other central banks, including FRB/US, used by the Federal Reserve (Brayton, Laubach and Reifschneider 2014), and LENS, used by the Bank of Canada (Gervais and Gosselin 2014). It is also similar to some previous models of the Australian economy, including AUS-M (Downes, Hanslow and Tulip 2014) and its predecessor, TRYM, which was developed by the Australian Treasury (Commonwealth Treasury 1996).

    Not that model names make that much of a difference but there are some very clear differences

    To make MARTIN as consistent as possible with the Bank’s current approach to forecasting and analysis, we mirrored the staff’s single-equation models where we could. For example, MARTIN’s dwelling investment equation includes variables that influence staff forecasts like interest rates and housing price growth. MARTIN’s equation also includes a long-run relationship where dwelling investment maintains a stable share of GDP over time, which is both evident in the data and consistent with many theoretical models.

    And the penny drops …Martin includes Housing and Housing speculation which for DSGE doesn’t really exist My guess would be that Martin includes Capital Flow and maybe even some Hot Money but the RBA hasn’t specifically acknowledged this. but

    In a recent RBA Bulletin article, Atkin and La Cava (2017) outlined some of the transmission channels of monetary policy and explained how they work. MARTIN incorporates similar mechanisms to those described in that article and can provide quantitative estimates that incorporate feedback mechanisms in the economy.

    Well that’s not DSGE….It’s time to hit the books HnH and understand just what DSGE is and more importantly Isn’t …I’d suggest you start with Jesús Villaverde from my experience hos earlier stuff is the most readable analysis of DSGE ….but his more recent corrections are really important
    also take a look at BoE DSGE

  11. As i’ve said before RBA decisions can only be predicted through the hubris of old white men. When they’ve been incorrectly predicting raising rates for so long they will not switch quickly to a cutting rhetoric. Until they’ve got something big to use as their excuse for cutting expect them to keep holding

  12. Jumping jack flash

    RBA isn’t crashing the economy – they crashed it.

    Can’t blame them, all the cool kids were lowering rates and creating economies built on debt and nothing else.
    the problem was they forgot that there’s two kinds of debt, productive debt, and nonproductive debt.

    The nonproductive debt looks very much like productive debt while it is expanding, but as soon as it stops it becomes a drain on the economy as the interest on the massive debt wad is taken out of actual productive activities.

    Not only that, but when your economy is built on debt, productive activities are sacrificed for activities like services. Who needs to build useful stuff to sell when the economy just grows magically, infinitely, from all the debt expansion? Just sit back and get serviced to feel as good as possible.

    This is why we’re getting all the problems now of no discretionary spending, wage theft and gouged costs of living.

    It is all done to increase the returns on “productive” activities to repay the nonproductive debt plus interest.

    It’d be interesting to know what the interest bill on our multi-trillion dollar mortgage debt was in total, and then compare that to GDP.