The RBA must fight the Fed right now

See the latest Australian dollar analysis here:

Macro Afternoon

The US Federal Reserve last night dropped a deflationary bomb on Australia:

Following an extensive review that included numerous public events across the country, the Federal Open Market Committee (FOMC) on Thursday announced the unanimous approval of updates to its Statement on Longer-Run Goals and Monetary Policy Strategy, which articulates its approach to monetary policy and serves as the foundation for its policy actions. The updates reflect changes in the economy over the past decade and how policymakers are taking these changes into account in conducting monetary policy. The updated statement is also intended to enhance the transparency, accountability and effectiveness of monetary policy.

“The economy is always evolving, and the FOMC’s strategy for achieving its goals must adapt to meet the new challenges that arise,” said Federal Reserve Chair Jerome H. Powell. “Our revised statement reflects our appreciation for the benefits of a strong labor market, particularly for many in low- and moderate-income communities, and that a robust job market can be sustained without causing an unwelcome increase in inflation.”

Among the more significant changes to the framework document are:

  • On maximum employment, the FOMC emphasized that maximum employment is a broad-based and inclusive goal and reports that its policy decision will be informed by its “assessments of the shortfalls of employment from its maximum level.” The original document referred to “deviations from its maximum level.”
  • On price stability, the FOMC adjusted its strategy for achieving its longer-run inflation goal of 2 percent by noting that it “seeks to achieve inflation that averages 2 percent over time.” To this end, the revised statement states that “following periods when inflation has been running persistently below 2 percent, appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time.”
  • The updates to the strategy statement explicitly acknowledge the challenges for monetary policy posed by a persistently low interest rate environment. Here in the United States and around the world, monetary policy interest rates are more likely to be constrained by their effective lower-bound than in the past.

The Committee first adopted a framework statement in 2012.

…The FOMC reported it would continue its practice of considering the Statement of Longer-Run Goals and Policy each January and that it intends to undertake a public review of its monetary policy strategy, tools, and communication practices roughly every 5 years.

In effect, the Fed just created one-way bet on the Australian dollar as either a better recovery with tolerated higher inflation means buy commodities as a hedge or no recovery with deflation means a more aggressive Fed.

If the RBA does not fight the Fed now then a rising currency is going to drop a deflationary atom bomb on Australia:

  • consumption is buggered as house prices fall;
  • the fiscal cliff is locked-in making demand worse;
  • immigration is gone for the foreseeable future;
  • unemployment is immense and wages devastated;
  • rising commodity prices no longer trickle down to incomes as they are either foreign-owned, poorly structured, poorly taxed, or overbuilt driving no new investment;
  • the China “put” is gone outside of dirt;
  • business investment is going to crater even more than yesterday’s capex report suggested given it does not include smashed education and health.

Australia is in deep trouble. The last thing we need is a deflationary currency shock to push production offshore and lower inflation expectations that defer spending even further and start to increase household’s debt burden.

The RBA must act urgently to:

  • roll out Operation Twist to buy the long end of the bond curve in its QE operations;
  • deploy negative interest rates in conjunction with APRA to prevent a mortgage blowoff;
  • start explicit QE aimed at currency reserves.

The RBA does not exist to destroy Australian inflation but that is what it is doing by sitting around on its arse.

David Llewellyn-Smith
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Comments

    • While “sitting around on its arse”, the RBA are far more likely to be comparing their wine cellars and wines from their birth years than even knowing what Macrobusiness even is.
      A high AUD = cheaper French Bordeaux so happy days………

    • AUD may well go up for a wee while, but it’ll shortly face “uncontrollable falls along a steep, continuous pitch, route complexity, and high-consequence terrain”.

        • call me ArtieMEMBER

          It was uttered by Brian Johnston in an interview with the ABC earlier today. He’s obviously a skiier as her refers to a Colorado double black diamond slope as having all the above, including high consequence terrain. It’s also a term used by mountain bikers, in the hospital, when they can speak…

  1. I hope they won’t take any of your advises, cause no matter how much good intentions you have , they always take your points and twist them to keep the bubble on (just like when calling for low interest rates for a good purpose, and then its used for another)
    so operation twist is their twist.
    and as a wise man once said…let it burn

    • unless DLS is super long property and this is some hard core long term reverse psychology to make him millions

      • i thought of that sometimes , that he might end the day dining with that guy who looks like wolverine
        and nothing wrong with dining with another bloke

  2. Achilles Tskakis

    In the battle between the Fed and the RBA, my money is on the Fed.

    Anyone willing to give me odds on the RBA beating the Fed?

  3. “..If the RBA does not fight the Fed ..”

    Sure that is easy but it does not involve

    1. roll out Operation Twist to buy the long end of the bond curve in its QE operations;
    2. deploy negative interest rates in conjunction with APRA to prevent a mortgage blowoff;
    3. start explicit QE aimed at currency reserves.

    Variations on that theme “try to deter predatory capital from being predatory” have been rolled out for years (does anyone remember Macroprudential before it went all Wagyu and Shiraz) and the Australian economy is as unproductive as ever, as full of asset bubbles as ever and as infected with Dutch Disease as ever.

    Fighting the Fed means doing something that is actually likely to work and something the Fed and its privatise the universe free market minions (including the RBA) probably will not like.

    And that means direct action to regulate unproductive capital flows.

    https://theglass-pyramid.com/2016/12/24/tariffs-unproductive-capital-inflows-destroying-aussie-jobs-for-decades/

    I appreciate that regulating capital flows breaches a few neoliberal sacred texts but we will just have to put on a pair of big boy pants and tip them into the shredder of dud ideas.

    It is not as though neoliberalism has had much of value to offer the 21st century anyway.

    • PaperRooDogMEMBER

      Agree re unproductive cap inflows. I do wonder if now that we are decoupling from China this will mean we are no longer a China proxy and this will take the sting out of these cap flows even without legislation, though they should legislate anyhow.

    • How does one practically regulate unproductive capital flows? Forever chasing your tail, whilst fighting vested interests in a million different arenas, not to mention lags in policy reaction.

      Negative real yields creates an environment in which all capital is eroded, incentivising productive investment. An unproductive/unprofitable venture is left in inflation’s dust, as an unprofitable venture, by definition, is supplying something that has insufficient demand and thus no pricing power.

      • You might say negative real yields will chase capital out of the country, but to where, when everyone’s in the same boat? Also, isn’t the point to choke off the unproductive capital flows getting the Australian economy into trouble, whilst also resetting our currency to a more favorable level?

      • I’ve been thinking similar recently: that negative rates stifle speculative, passive investments somewhat.

        Even for myself, a reluctant speculator with some extra business capital, I’ve been thinking more about productive business investments (new equipment designs, etc), instead of passive financial investments chasing dividends and capital gains…

        • Same here. Setting up a business in the Ag sector. Low overheads, easy setup and great cash flow.

        • Depends on your timeline really. Never mind inflation studies, I think on a decade or more timeline most can see this financial system is in real trouble………how the new system will develop is unknown and for practical purposes a moot point.

          Time to go to real assets isn’t it………..precious metals, collectables, real estate at the right time, private companies with restricted shareholders……..anything that the legal system will continue when the present financial system is changed for a new one.

      • pfh007.comMEMBER

        “..How does one practically regulate unproductive capital flows?..”

        I gave you three examples in that article that cover just about all of the unproductive capital inflows that we are talking about.

        1. Sale of existing assets to foreigners
        2. Borrowing from foreigners where the security for the loan is existing housing
        3. Selling Government bonds to foreigners (how many billions have been sold since COVID-19?)

        Regulating those three would not be difficult and I explain how too!

        Don’t let the pursuit of the perfect get in the way of doing something that will make a massive difference.

        “..Negative real yields creates an environment in which all capital is eroded, incentivising productive investment. An unproductive/unprofitable venture is left in inflation’s dust, as an unprofitable venture, by definition, is supplying something that has insufficient demand and thus no pricing power…”

        Huh?

        Could you explain using an example how negative real yields (where the return after inflation is taken into account is negative) makes investment in a productive enterprise more attractive than punting on capital gains on asset prices?

        Could you also explain how negative real yields mean anything to a mercantalist country who is using capital exports to maintain downward pressure on their exchange rates.

        • You just reinforced my point that you’re chasing your tail with specific policy. Some of those policies already have regulations on them, but are not enforced. Why? Because of vested interests. China cant even manage this, and they’re an authoritarian regime with an iron grip on their economy.

          Where is your historical example of an overindebtness problem being solved through manual capital controls?

          My solution removes the incentive entirely and has been done in the past.

          Could you explain using an example how negative real yields (where the return after inflation is taken into account is negative) makes investment in a productive enterprise more attractive than punting on capital gains on asset prices?

          Huh? How about the largest asset class on the planet, the bond market. On a daily basis. Inflation running hot causes a sell off in bonds, only in the suppressed real yield environment, the private sector buyer is replaced by a central bank printing money. Or do you think retirees and asset rich elites enjoy having their capital whittled away by negative real yields?

          You want a more simplistic example? BW above. We haven’t even properly started and people are sniffing this out. Give it a few years and see what happens.

          Could you also explain how negative real yields mean anything to a mercantalist country who is using capital exports to maintain downward pressure on their exchange rates.

          That seems self explanatory. See above.

          • pfh007.comMEMBER

            There has been no serious attempt to restrict capital inflows because free flows of capital IS the model.

            The very model you seem to arguing will be cured with endless ZIRP and NIRP.

            “.. Inflation running hot causes a sell off in bonds, only in the suppressed real yield environment, the private sector buyer is replaced by a central bank printing money..”

            And you think those private sector bond holders are being chased into productive investment?

            Um no.

            They are using the proceeds (which are in the reserve accounts) to buy more bonds at a discount from treasury to off load to the central bank.

            And also borrowing money (at those now “anchored“ rates) to buy more assets that they hope will rise in price.

            There is nothing productive happening.

            It’s a nice theory that ZIRP and NIRP will drive productive investment but that is all.

            Which is why our political class are not spinning that yarn. They argue that cheaper money will stimulate growth.

            I suspect for the same reasons you do.

            The evidence is in.

            It does not work.

          • There has been no serious attempt to restrict capital inflows because free flows of capital IS the model.

            Right, so chasing your tail in the face of ever changing vested interests. You’ve still yet to explain how this aids in households delevering btw.

            Congratulations, you very effectively argued why conventional QE doesn’t work; ie what happened post-GFC to now.

            Now to get back to the actual point at hand, Government running huge fiscal deficits with the CB monetizing that spending; ie new printed dollars find their way into the hands of average people, driving inflation through currency depreciation. YCC ensures that owners of capital cannot raise the cost of capital (debt) to match that inflation, and thus via government spending and broad inflation, the spending power is eventually transferred to the lower and middle classes.

            It is not theoretical, it has been done repeatedly throughout history.

            There are only 2 ways out of an over-indebtedness crisis, monetizing the debt or mass default/austerity. Neither is pleasant, but only one is politically palatable.

          • pfh007.comMEMBER

            “..You’ve still yet to explain how this aids in households delevering btw…”

            Why do they need to delever?

            They just need to pay off their loans which they can do over the next 30 years. Even if some of them are enjoying a load of negative equity as they do it. At the end of the day – they are in their own home and paying off the loan they took out. A small fraction might warrant some assistance but it would have to be limited so they are not getting a freebie.

            Plus loads of households don’t have debt and plenty have savings.

            What is important is that the economy is not sent into an unnecessary debt deflation asset spiral which makes paying off loans impossible and which is a high probability given the only two options you seem to prefer – monetisation or bust/austerity.

            You keep asking what I propose when I have been proposing and explaining the solution for years. (I am always happy to respond to the questions that many have asked)

            1. Make the Central Bank balance sheet the core of the public monetary system rather than a shrivelled appendage and allow everyone to operate deposit accounts.

            2. Remove the banks privileges with regard to credit creation as public money and capital allocation.

            Step 2 – involves creating matching deposits on the RBA balance sheet for ALL existing bank deposits.

            https://theglass-pyramid.com/2020/08/02/myrba-what-is-the-new-cbi-account/

            After that step the banks lose their privileges as expanding the money supply will be nothing more than an expansion of the central bank balance sheet. There are several ways that can be done which are much fairer than the current bank centred model.

            https://theglass-pyramid.com/2020/08/13/money-creation-after-myrba/

            The changes are not difficult but it does take a willingness to think outside the current model which most are simply not willing to do.

            They prefer that the current broken system double down with even more NIRP and ZIRP or just jump the shark with debt monetisation. Both are options that will destroy the current system anyway.

            So why pursue destruction when there is a solution we can pursue right now?

          • pfh007.comMEMBER

            Sweeper,

            “..007, why don’t you just admit (again) that you don’t want any inflation?..”

            I am interested in beating conservatives and in case you haven’t noticed that has not been happening much lately.

            If you think the average voter supports inflation because it suits the banking industry debt peddler operations you should try running that at the next election and see how it goes.

            “Vote the ALP for higher inflation”

            Brilliant.

            Should work well with your other great policy idea

            “Nationalise the banks”

    • Jumping jack flash

      “And that means direct action to regulate unproductive capital flows”

      Agree, we need(ed) much, much more regulation of debt.

      Horse has already bolted. Its been gone for 20 years and is way over the hills and probably in the next country by now, laughing at us. Gate’s laying on the ground while we still try to figure out if there’s anything wrong with the gate.

      There’s currently 2 trillion dollars worth of misallocated capital just for outstanding mortgages, with expiry dates up to 2050. It costs us around 100 billion every year, and transfers money out of the useful part of the economy where it can be used to consume, create new fulltime positions and and pay for wage increases, to the banks to hoard or do whether it is they do with it. Certainly not pay dividends. Probably most of it is used to pay their own interest bills to their banks, and create more debt with the remainder.

      The only way this system can work is if new debt is created far in excess of the interest bill, so we replace that interest drain and get some growth, and it is quite obvious that it hasn’t kept up. Most obviously since 2017, but for the entire period from 2008 to now, debt growth hasn’t been consistently high enough to prevent collapse.

      The question is do we choose Japan or Iceland? I’d like Iceland, but we’ll probably choose Japan. We’re not savages here, you know. Not enough of that Viking spirit.

      • pfh007.comMEMBER

        JJF,

        “..Horse has already bolted. ..”

        There are a bunch of horses and they are still rushing out the gate because NO ONE is prepared to close the gate.

        The government could easily stop

        1. Selling Aust govt bonds to foreigners – I bet they have sold a truckload over the last 6 months to foreigners who know a larrikan always pays their debts

        2. Our banking sector borrowing from offshore for specific purposes such as lending secured by existing housing.

        3. Assets sales to foreigners – especially land and other productive assets. Its not as though most of the ones buying ours are keen for us to buy theirs.

        In the years since I have been arguing this point a giant herd of brumbies have been born, learnt to chew grass and have rushed out that gate.

        • call me ArtieMEMBER

          I am with you on this entire thread PHF. There may be imperfections, but the idea is sound and badly needed

          • pfh007.comMEMBER

            Thanks Artie!

            I have a lot of time for both Brenton and JJF as they are asking the important questions.

            The difficulty is that the answers require stepping right outside the current monetary model which is centred around the private banks and thinking through the very simple and logical alternative – centre the public monetary system around the balance sheet of the central bank.

            It is important to keep in mind that the role of the central bank will change fundamentally and it is probably better if we don’t even call it a bank.

            Perhaps call it the “Commonwealth Public Monetary Authority”

            or

            OurRBA

            🙂

  4. the only bright spot is tourism. If Abbot’s new testing kit really works and can diagnose covid19 in 10min then tourism will re-open as testing will be done at the airports round the world. Only problem is not many people will have money to travel.

    • Negative real yields are great for gold. So in theory, while soever they are forcing yields below inflation, the price of gold will rise. The problem is that you cant have this asset sitting on the sidelines, with no productive value, just draining capital. That’s when policymakers will come in and knock the knees out from under it, probably by curtailing private ownership.

  5. The RBA likes a higher dollar.

    They pretend to be interested in keeping us internationally competitive with a low-ish dollar, but their number one priority is ensuring Australian banks retain the confidence of the suppliers of wholesale funding.

    • Nope. RBA has given the banks unlimited funding for 3 years at 0.25%.

      If I was local bank I’d be rolling out of offshore funding ASAP to get my hands on RBA dosh at a much better rate and with no hedging costs

  6. robert2013MEMBER

    “The last thing we need is a deflationary currency shock to … increase household’s debt burden.”
    This is Australia. That’s exactly what we need!