The AFR is completely lost on macroeconomics

Last week I offered a few suggestions to Australia’s league of failing economists in the hope that some might escape the mediocrity of debate that is holding the nation back. Paramount was that they should avoid the Australian Financial Review because, frankly, it has no idea what it is talking about when it comes to monetary policy.

The paper has been obsessed with resisting lower interest rates for years for three main reasons.

First, its “businessomics” ideology means national interest benefit always comes second to sectional interests.

Second, it is stuck in the 90s Pitchford thesis worldview in which neither private debt nor economic structure matter.

Third, it loves the banks, one of its largest advertisers and lower rates have not helped their worldbeating, greedy margins.

This combination leads the AFR into a parochial monetary dead-end so complete that it extinguishes the daylight of debate. After week’s epic fail, in which it goaded various numbskulls into declaring that the RBA was about to turn hawkish just hours before it turned the most dovish ever, we had the following on the weekend:

The Reserve Bank of Australia has effectively “green lit” risk-taking on property investment, and the biggest change in policy in 27 years has not only triggered a home loan war but also raised the prospect of another house price bubble.

A day after RBA governor Philip Lowe’s bombshell speech, mortgage lenders were preparing for an intensification of an already “brutal” battle for market share and a resulting sharp increase in home prices.

The respective founders of Aussie Home Loans and Yellow Brick Road, John Symond and Mark Bouris, say the home loan war is firing up and house prices are set to rise as much as 7 per cent from here on.

Tim Toohey, the head of macro and strategy at Yarra Capital Management, said this was the central bank effectively saying “don’t worry about risk”.

…”Why do you give up on forward-looking inflation targeting when the evidence is that COVID-19 hasn’t been the disinflationary event that many feared? In the US for instance, underlying inflation measures from the Cleveland Fed remain close to 2.5 per cent year on year and industrial surveys clearly show price pressures are building again.

Sigh. So…dated. For proper debate, you do not ask blood-sucking mortgage cavaliers. And, if you can’t forecast, and other central banks have given it away as well, then when would you try? Tim Toohey has been just as bad, predicting rate hikes for years since 2016 as he misread an iron ore rebound. He should give it away as well.

Most importantly, why must we persist with this dated notion that the RBA is the regulator of first resort for financial stability? That is a prudential task. Systematically as well as at the individual bank level. The first regulator of that risk today is APRA, not the RBA.

It was APRA that intervened and ended the last cycle of house price inflation and, given the world has become even more currency war aligned since then, it will have to be APRA again. If you are really concerned about a new housing bubble then start talking about APRA.

After all, there are all sorts of unanswered questions about its role. How will APRA and the RBA combine? What will be the triggers for APRA tightening? Why is APRA unchanged following its utter humiliation in the Hayne RC? Why have APRA and RBA not been banged back together like the RBNZ so they can work seamlessly in the low-interest rate world? Why is APRA still in the shadows? Why should responsible lending laws be scrapped if that lands even more responsibility for financial stability at the door of APRA? What is APRA going to do when, inevitably, the RBA is forced to adopt negative interest rates (just as it has adopted all other easings it once condemned and eschewed)?

The AFR is a total monetary bust because it asks none of these questions, instead hectoring the RBA such that it makes both of them perpetually wrong.

Given this failure to grasp the tenets, trends and contemporary debates in global monetary policy, which includes some convergence with government spending, the AFR has now turned retrograde on fiscal policy as well.

The recent budget was a deflationary shocker. A radical experiment in trickle-down economics, I suspect masterminded not by tennis pro-Josh Depressionberg, but by an exiting Mathias Cormann, who is a renowned and formidable supply-side nutter. I have nothing to go on to prove this other than the instinct that Depressionberg has neither the intellect, conviction nor gumption to produce such a radical document, but Cormann has all three, as well as the motivation to produce his swan song.

Clearly, the unstimulus budget was the final straw for the RBA which saw the deflationary shock coming and threw out the monetary rule book in response.

But did the AFR read these facts? Of course not. As usual, it was all about protecting its businessomics mates. And, over the weekend, that, in turn, led to further preposterous notions promulgated by the AFR’s macro lost boys:

Another question is whether QE is money financing. Technically, the Reserve Bank and other central banks only buy bonds from other investors which provide the initial funding to governments.

But there’s no escaping the fact that their activity reduces borrowing costs and frees up funds for the other buyers to finance governments.

In the Australian context, the fact that our long-term bonds were higher than elsewhere allowed the government to raise tens of billions of dollars in the bond market to fund a record deficit with relative ease. It may be slightly harder from here.

So, goes the argument, although it makes borrowing easier for all other governments, it will make it harder for us? Bond rates will rise as investors flee? I mean, come on. They’re going to pile in as they front-run the RBA. That’s the whole point. Borrowing is about to become the easiest ever for the Australian Government, if only it would do something useful with it.

Which brings us finally to MMT, the AFR’s most hated macro notion. “Monopoly money” editor Stutch calls it while ignoring that his favoured banks are already ‘passing go’ to collect their printed billions on a minute-by-minute basis.

Let’s make one thing clear about MMT. The AFR is going to be wrong about it as well. It is coming. It has already started but it will go much, much further. As it should. Why?

Because MMT is the only way out of the debt trap that financialised capitalism is stuck in. It is the only way to deleverage everybody as it also inflates wages and profits, leading ultimately back to rising interest rates and a cost for capital. It will be messy as hell, take decades, and come in fits and starts. But come it will because there is no other way.

Guaranteed under current management, which will abhor the tilt of the playing field from creditors to debtors, the AFR will fight it all the way and be perpetually wrong again.

Doing damage to Australia and investors throughout.

David Llewellyn-Smith


  1. There will be no deleveraging under MMT – that is the whole point, to ensure that existing leverage doesn’t implode as it should. MMT will be used the same as every other monetarist tool has been used for – ensuring that debts continue to be serviced.

      • I wonder if Stewie is implying that for every delveraging, the punters and system will simply see an opportunity to releverage?

        In that sense, you are both right, and I suspect that Stewie’s cynicism is well placed…

        • Jumping jack flash

          This is exactly how it works. Just as before.
          Debt is used to repay debt, plus its interest, plus enough capital gain to use to obtain a larger pile of debt.

          They can call it whatever they like.

      • Like lower interest rates inflated debt away and provide the borrower with the additional servicing capacity to pursue deleverage?

        MMT also assumes a closed economy where additional clean skin consumer units eager to take on debt and compete against established consumer units, are not constantly being added to the economy. All participants will simply up their debt load to the maximum they can service under the new MMT system, bidding up assets in the process, to ensure that their relative advantages are maintained.

        Without first repudiating enslaving debts, all MMT will do is ensure that the productive endevours of society continue to be used to service enslaving debts, just as every moneterist tool that has been used before has done.

  2. happy valleyMEMBER

    The AFR is just another LNP spruiksheet – and very expensive at $4 per day now and nothing in it (a 5-minute read).

    • You are right about that – it is getting quicker and quicker to read – I appreciate that as if you are working you don’t have time to read everything. Flipping through the AFR gives you what you need quickly – it’s like one of those highlight packages.

    • Bodacious Ta-tas

      If you had half a brain or a bit of resourcefulness you’d easily find a way past their flimsy paywall

  3. Jumping jack flash

    “The recent budget was a deflationary shocker. A radical experiment in trickle-down economics, I suspect masterminded not by tennis pro-Josh Depressionberg, but by an exiting Mathias Cormann, who is a renowned and formidable supply-side nutter. I have nothing to go on to prove this other than the instinct that Depressionberg has neither the intellect, conviction nor gumption to produce such a radical document, but Cormann has all three, as well as the motivation to produce his swan song.”

    Nice observation.
    And highly likely that someone else was helping Joshy-boy prepare the doc. No chance in hell he would be able to do it himself.
    The lot of them are intellectual lightweights. Basically their brain has evolved just to the point where it can operate their mouth without getting their foot in it, at least some of the time.

    There are two obvious options to repair the economy, the first is to stop the debt and then limp our way through the 30-year deleveraging period, with the government injecting enough money so the deflation isn’t too bad as a result.

    The other is to give the debt can an almighty kick, which will involve the government “whispering” to the banks to lower eligibility criteria (possibly through APRA) and then implementing -ve interest rates, and supplementing everyone’s income with as much as is required to take on the upsized wad of debt in the hope that the system becomes self-sustaining again. After self-sustainability has been achieved, then DON’T slay the inflation dragon because once it leaves its very hard to get it back with all the debt about, as we see.

    I don’t think there is a 3rd option.

    • RBA will open the TFF spigot for the banks to the max…and then lend the banks the money to buy ever more “cheap” government bonds and escape the clutches of offshore lending. The bank bailout was done and dusted under cover of darkness, now they and he RBA can lend to infinity and beyond. Well, until the real economy can’t service its myriad mountains of debt. Or Soros decides to short the poo.

    • Main problem is that incomes have been massively out-distanced by asset prices, both equities and fixed income. Deflating the asset bubble produces a balance sheet depression, which is too painful, but protects the currency. How does one inflate incomes? Not easy. Currency devaluation yes, but everyone tries to beggar thy neighbour and it’s zero sum. Running domestic inflation hotter produces currency devaluation but also produces more uncertainty for business and the adverse effects are pushed to those without pricing power. Not a whole lot of good options here.

      • You are right, there will be no asset deflation exercise – apart from anything else, it would render the banking insolvent, so that’s out.

        How does one inflate incomes? You can’t. Certainly it cannot be done with policy measures. The economy needs to be in healthy shape and productivity needs to improve on a constant basis. Neither of those conditions exist today and nor is there any prospect of them doing so.

        Currency devaluation is a fool’s errand and makes the country poorer relative to others. A nasty side-effect is that it makes this country’s assets more attractive to foreigners — so property prices go up at the expense of locals who are relatively poorer and therefore unable to afford the same properties.

        Currency devaluation looks, superficially, like a zero-sum game but it’s not really, because gold cannot be printed, so all fiat currencies decline in value vs gold. $250 bought you an ounce of gold 20yrs ago, now the price is $1,900 and only going higher (subject to short term fluctuations, of course). The above price move in gold is a more realistic representation of inflation over the past 20yrs than CPI.

        Now we’re so far down the Debt rabbit-hole, high inflation is the only realistic response — coming at a high cost to the economy, as you suggest. High levels of un (and under) employment is the future, along with endless Gubmint handouts / stimulus.