The RBA will deliver MOAR QE

Will the RBA upsize QE at ay time? This question was asked by Chris Joye on the weekend. It certainly could though I think it is unlikely. The RBA is too conservative for it. Joye channeled Dr Andrew Leigh again:

  • QE has lowered yields by 0.3% and suppressed the Australian dollar:
  • If QE works to lower yields and the Australian dollar then why wouldn’t the RBA expand it to bring forward growth and inflation?
  • It has scope to do it give it remains far behind other economies:
  •   The RBA could get more aggressive at any time.

These are all fair points. But I suspect that the RBA won’t get more aggressive for now.

First, because Phil Lowe just said so. Second, because even the newly-minted, super-easy RBA won’t lose all of its spots in one go. It is a very conservative edifice.

Still, the outlook is for MOAR QE not less over time. Why? Three reasons.

For now, Australia is enjoying a terms of trade boom thanks to China’s trade on itself which is flooding fiscal coffers. That will come off hard in 2022 as China reverts to structural reform and any notion of explicit budget repair among fiscal authorities will collapse with it. At that point, letting the budget fix itself via bracket creep will become an interminable drag on the economy, private incomes and households, jeopardising even tax cuts. Even as the Australian dollar falls, the RBA will face a weakening growth and inflation outlook. Upscaled QE will be vital then.

Following that, by late 2023, the housing boom will have run for three years and be demanding macroprudential tightening as financial stability risks rise. The same housing boom is going to expand already bloated private debt to above 200% of GDP so consumption will also decline.

Again, still MOAR QE will be required as that risk is sat upon in 2024. Ramped-up TFF may also be needed depending upon how successful is macroprudential tightening.

And that’s before I even reference three other key inputs. If virus disruptions become a part of normal life, which seems likely, then that’s MOAR QE. If not, then the Canberra immigration consensus will throw open the borders and wages be crushed all over again also equalling MOAR QE. Then there is the structural China decoupling, another demand headwind, especially as universities are dragged in. MOAR QE.

Any way you cut it, RBA QE is here to stay and will grow.

David Llewellyn-Smith

Comments

  1. “..Any way you cut it, RBA QE is here to stay and will grow…”

    That seems highly likely considering the absence of any serious debate about alternatives to misallocating our capital on a grand scale.

    We will just have to wait until China pulls the plug on our “good times” and then we can flap our jaws about how nobody could have seen that coming.

    The crazy part is that China is trying very hard to warn us to stop acting like fools.

    • Jumping jack flash

      Anything other than using debt growth requires people to make things skillfully to sell to the world for profit, and that is not only very difficult it is terribly damaging to the environment.

      Services are a good choice too. A million coffee outlets and restaurants. B2B services. Some lucky ones may be able to get overseas clients for a short time before being outsourced overseas.

      But it is largely moot because we have debt now. Who needs anything else? Anything else is also risky and slow. Debt is guarranteed and quick. Instant riches. Nothing is faster than receiving a huge pile of debt from someone else straight into your bank account.

    • “The crazy part is that China is trying very hard to warn us to stop acting like fools”

      Well, the Strayan way is to double-down on what has been tried overseas, especially that has been shown to fail. It will be very hard to stop Strayans acting like fools.

  2. Jumping jack flash

    Moar QE is certainly required. The thing about when you prop up a ponzi economy based on nothing but debt growth to let it continue to grow, it becomes reliant on those supports.

    The solution is wage inflation, but how to get it?
    The debt must grow at the correct rate to reinstate the feedback into wages, through the conduit of CPI.

    Grow the debt! Flood the world with colossal debt disguised as COVID stimulus to kick off perpetual debt. You’ll get no argument from the banks either.

  3. I tell you what these morons don’t understand and are going to get a very very painful lesson

    You can do QE in deflation but inflation is seriously breaking out in commodities

    I’m sorry there is no house boom for 3 years.

    You’ll see price falling from mid year into spring

    The more QE and liquidity they pump in RBA FED etc the greater inflation.

    What I said last year was that we would have stagflation moving forward.

    You can already see the US and AUST 10 year yield is breaking up

    House prices will be declining H2 this year as interest rates rise

    RBA will eventually be forced to raise interest rates due to runaway inflation

    I said last year we have started a multi year global bond bear market

    The RBA can say and try what ever they like

    They ain’t stopping interest rates from rising, the imbeciles with PHDs are going to create even higher inflation with these policies

    When US 10 year and AUST 10 year is up at 1.60/1.80% in next few months, I don’t know how banks can keep interest rates where they are now, we aren’t far away from out of cycle rate increases

    House prices will start declining from H2 as interest rates and unemployment rise over the next few years

    The millennials are going to learn about 1970s/80s

    The RBA have painted themselves in a corner, unfortunately the Ponzi scheme has run its course

    This is going to end in 😭

    Economics 101 “there is no free lunch”

    Tip…….watch RINF NYSE. ETF (inflation expectations)

    • I tend to agree with you. With regard to household debt there are some serious issues:
      to those who have the capacity to fund growth in their personal balance sheets – maybe fine for the time being but has the potential to get very messy if there is inflation and banks get on the rate rise front foot.

      LVR’s will likely tighten to try and ensure that if property prices fall then the owner/investor will have a measure of capital in the asset that will protect bank lending risk
      Interest only mortgages as an “ad infinitum” facility will not be possible, especially from “traditional” banks. What might the second tier lenders come up with? There’s plenty of money available outside of main stream lenders
      Certainly has the potential to get very messy and the RBA will simply change their tone and increase rates. Very stupid IMHO to be forecasting outcomes and policy out to 2024

      • Irresponsible to be saying rates will be low for the foreseeable future
        Anyway let’s see
        Definitely has the possibility to get very ugly very quickly

    • Jumping jack flash

      “RBA will eventually be forced to raise interest rates due to runaway inflation”

      No.
      “Runaway inflation” is a symptom of the correct functioning of the debt economy. How can it work any other way? The debt needs to grow, prices need to grow to support the wages, wages need to grow to support the debt, and house prices grow as debt is secured against them. Its a wonderful system and very simple. It has worked well for almost 10 years, and then it was broken due to “runaway inflation” (unnecessarily, in my opinion).
      The next 13 years was spent trying to get it back, which was a bit of an overall fail, if you ask me.

      The end result of this kind of economy is nothing else but debt hyperinflation. The real question is are they comfortable with letting that happen?

      If they break it now it will be bigger than 2008, last a lot longer, and require a lot more stimulus to get it working again after they realise their mistake, which they will almost immediately.

      • This is all great in a non immigration world. But what happens when the farmers and the IT companies, the banks and universities squeal like pigs to get immigration pumped up so you get inflation in everything else but no wages inflation?
        How do you inflate the debt away? You dont. You just end up with heaps defaulted.
        And you can bet your money that CBs will stamp out wages inflation the min it breaks out as the fed did back in 2013.
        Sorry but that inflating the debt away crap is fantasy. Works in theory but if you think about the outcome of it is actually in favour of the plebs and not in the interest of the top 1% you will see just how ridiculous that sounds.

    • ” I don’t know how banks can keep interest rates where they are now, we aren’t far away from out of cycle rate increases”
      It’s easy, the RBA lends the banks money it can create at will at whatever rate is required to maintain retail rates at the desired level, all the way to as negative as they like if required effectively paying the banks to lend out money.

        • Really?
          Even before the slightest hint of inflation appearing they are making statements about “looking through” it.
          It will be well and truly ignored if/when it arrives. For a very long time.

          • Yeah coz a central banks has never lied before. And RBA has been so credible in their past forecasts that they would never get it wrong and have to reverse course immediately.
            Oh wait.. Did the fed say one thing and do another last crisis…. didnt rba rise rates last crisis and have to revert asap…
            This is probably a make or break for central banks now. If the market stares them down with bond yields ticking up, which is what i feel is happening: market calling b.s. on central banks commitment to low rates forever. They will have to fight it to survive another cycle.

      • Jumping jack flash

        “..effectively paying the banks to lend out money.”

        Sort of.

        Basically the RBA covers some of the banks’ interest expectations so banks can charge their customers less interest and still earn the same amount of money for selling their product. Its a subsidy. And it makes perfect sense that an economy that produces debt has subsidies for debt.

        An economy that produces cars, say, could pay subsidies to car factories. Ditto steel works. Etc, etc. We don’t do any of that anymore. We’re in the debt game now, so the debt factories, ie the banks, get debt subsidies.

        Now how that is accounted for and how that looks is obfuscated and called something catchy so ordinary plebs don’t catch on. QE and Negative interest rates and that funding window thingy, but its really just paying banks money so they charge people below cost on their debt.

  4. Oil has just broken above a very long term resistance line at $60,approx
    Really they are absolute imbeciles

  5. AUST 10 year just just hit 1.30%

    Woohaaa, guys is this going to be ugly as 10 year bond yields heads to 2% ouch ……..

    Everyone and their dog is going nuts buying property thinking rates with be 2% for 30 years

    Forget stock market and property market, retirees are sleep 💤 walking off a cliff, fixed income bond funds are going to the slaughter house

    Faaarrrkkkk

    • happy valleyMEMBER

      Welcome back – we have missed your contrarian views, just as we would miss Reusa if he ever vanished – how could get a fix on relo parties.
      And now you can join me in watching the the RBA happy clappies play “angels of death” for savers, depositors and fixed interest income reliant retirees, as the clappies go about “experimenting” with the financial system.

      • They’ve created Frankenstein 2.0

        I am not sure my views are really contrarian, really just think what I think and then see what the consensus, but I don’t just the opposite.

  6. happy valleyMEMBER

    As an ex-alumnus of the RBA (and always acting with a healthy dose of self-interest), I suspect our Christopher knows how the RBA is “thinking” – just as Peter Martin was a clairvoyant as to what was going on in Captain Glenn’s mind and also likewise Terry McCrann early in Captain Phil’s reign before these two old timers were supplanted by the razor-sharp clairvoyancy of our Christopher.