JC: Fire Phillip Lowe

Phillip Lowe, the governor of the Reserve bank has been talking at a gab fest somewhere around the world. These days, whenever I read something Lowe has said, I always look for Paul Krugman’s influence on the man. It’s never that far away because Lowe did his PhD under Krugman’s tutelage. He never disappoints with his Keynesian nonsense (Lowe).

Lowe is the head of the RBA and among his many responsibilities, one is by far the most important of all. It’s the inflation mandate.

Here it is, right from the horse’s mouth, or rather, the RBA website.

The Governor and the Treasurer have agreed that the appropriate target for monetary policy in Australia is to achieve an inflation rate of 2–3 per cent, on average, over time. This is a rate of inflation sufficiently low that it does not materially distort economic decisions in the community. Seeking to achieve this rate, on average, provides discipline for monetary policy decision-making, and serves as an anchor for private-sector inflation expectations.

This means that over the medium term the RBA’s responsibility is to hit that target.

What’s Lowe saying at the bag fest?

The Australian

Reserve Bank of Australia governor Philip Lowe has taken his warning that governments must do more to stimulate the economy onto the global stage, arguing central banks risk reigniting bubbles in house prices and stock markets with ultra-low interest rates.

 Lowe’s warning … must be important.

“Monetary policy cannot deliver medium-term growth,” he said, according to reports of his remarks by Bloomberg. “We risk just pushing up asset prices.”

The RBA recently cut Australia’s cash rate for the second time in as many months to a record low of 1 per cent in July. Many economists and analysts expect the RBA to slash the cash rate to as low as 0.5 per cent by the start of next year to combat a stagnating local economy and rising unemployment amid the global trade jitters.

Dr Lowe told the Jackson Hole conference that infrastructure investment and structural reform in economies around the world would have much greater impact than cutting interest rates.

But he warned politicians were reluctant to act.

“With these three levers stuck, the challenge we face is monetary policy is carrying too much of a burden,” Dr Lowe said.

 It appears to be lost on Lowe fiscal expansion doesn’t just entail spending on infrastructure – that tax cuts, of the ones we’ve seen here both proposed and enacted are fiscal stimulus. He doesn’t appear to like that type of stimulus and remains silent.

Here’s the rub. Lowe took the job as RBA head on the presumption that he adheres to the inflation mandate. He’s now saying that it will be too hard or sees obstacles in the way. On the basis of what he’s said, the Australian government needs to fire Lowe immediately and put in place someone who both understands and believes a central bank can reach any inflation target that it chooses or is chosen on its behalf. It’s extraordinary this Krugman disciple is giving the Australian government and the world for that matter advice on engineering projects.

Lowe talks about the fear of bubbles and overheated markets. Where are they? I don’t see one major index in the world trading at what people like Lowe would consider bubble territory. Lowe is obviously referring to Australian real estate markets where here too he shows concern about a bubble. Real estate markets are impacted by several things, with interest rates being one factor. High immigration levels, restrictive code, taxes and interest rates all factor in. The US experienced a great deal of QE in the past decade and real estate markets have not taken off to reach bubble territory. Texas as an example of a state with high levels of immigration for decades and the cost of a home is way below Australia or California for that matter. In fact, there have been no apparent bubbles forming in either the EU countries or Japan which went in reasonably hard with QE.

The problem around the world is the market participants do not believe central banks will reach their targeted inflation mandates and therefore investment decisions are acted on accordingly. Bond yields are falling because of this.

Fire Phillip Lowe and fire him immediately as he doesn’t believe in keeping the most important mandate set by law. It about time public servants were held to a reasonable standard.

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82 Responses to JC: Fire Phillip Lowe

  1. Dr Lowe told the Jackson Hole conference that infrastructure investment and structural reform in economies around the world would have much greater impact than cutting interest rates.

    Structural reform as in lower taxes and reduced regulations. Infrastructure upgrades are needed throughout the Western World. They are also medium to long term investments. How about some new coal/gas fired power stations?

    “Monetary policy cannot deliver medium-term growth,” he said, according to reports of his remarks by Bloomberg. “We risk just pushing up asset prices.”

    This is a correct statement.

  2. Entropy

    Humby, I suspect JC likes the idea of pushing up asset prices. He liked QE which also just happened to do that.

    I think with the RBA though, is it only really has one tool in the tool shed. Maybe the Q is has the RBA passed its use by date?

  3. JC

    Humbug

    Lowe hasn’t hit anywhere near the top of the target band since he’s been in the big chair (2016). Admittedly, he picked up an inflation rate also that was also below the target. He’s now suggesting that moving ahead, we have no hope of reaching the top of the range.. in fact anywhere near that. He signed up to hitting the target medium term and now appears to be giving up. Fire him.

  4. JC

    Ent

    Don’t try to read minds. Frankly I don’t need a jump up in asset prices. Also, I’m not convinced QE raises all asset prices, but just some and it’s not that easy to pick.

    Here’s the thing that you and others may be missing. There is a LAW.. legislation that requires the inflation target to be respected over the medium term. That’s the law. Lowe is basically saying that he’s either reluctant to hit the target or can’t. That means he’s unable to do his job or is not capable of doing so. Let’s be clear, in a fiat , floating exchange rate regime, the central is perfectly capable of reaching any inflation target it wants. Moreover, as a right-winger, you ought to to howling about his views. Finally, after a decade, we seem to have some control on the deficit and Lowe is perfectly happy to break it..Only because he doesn’t want to do his job, or can’t. He needs to go.

  5. Squirrel

    Fascinating that Dr Lowe seems somewhat more willing to speak about asset price bubbles overseas than he does in Australia.

    The RBA’s fingerprints are all over Australia’s insane property prices (which have done so much to make us internationally uncompetitive, with related costs flowing through the economy) and now they are busily dreaming up reasons for ever lower rates to rescue our massively leveraged households and massively leveraged banks.

  6. DaveR

    Governor Lowe is coming to the end of his useful role at the RBA. As Entropy says, with only one weapon to fire, he is fervently looking to extend his role as interest rates approach zero, least he become irrelevant. And so far he is rattling the negative interest rate/QE sabre.

    Determined to be a player in the solution to heading off recession, who knows where this self-important individual will take the country. I had hoped that he would become quieter as interest rates fell, to beooming almost dormant about now.

  7. JC

    The RBA’s fingerprints are all over Australia’s insane property prices

    Not true. The RBA’s remit is the inflation target and full employment. Leave the full Emp aside for the minute. The RBA’s job is not to concern itself with asset prices. It’s job is to run a stable monetary regime which the government believes to be 2 to 3% inflation.

    Real estate, in places where was lots of QE have not gone up the way Australia’s has where there wasn’t any QE. Our real estate problems are associated with supply issues.his alone refutes this argument. Next.

  8. JC

    Dave R

    Sumner, tells us to always fall back on Friedman. He’s right. Low interest rates of the type we’re seeing in the West are the rest of tight monetary policy similarly the opposite is true when in periods of very high rates. If the RBA is forced to QE it is because it has failed to adhere to the target.

    Markets do not believe central banks will adhere to the inflation targets, which is the reason we have long rates where they are.

  9. vr

    JC — It was Dornbusch I believe. Not Krugman. Did you read the hagiography in the Fin Review magazine last month.

  10. mh

    JC
    #3141180, posted on August 26, 2019 at 6:05 pm
    Ent

    Don’t try to read minds. Frankly I don’t need a jump up in asset prices.

    JC, Ent suspected that “JC likes the idea of pushing up asset prices”, not that you needed a rise. It’s a fair point as you do have a considerable property and share portfolio.

  11. Bruce of Newcastle

    But he warned politicians were reluctant to act.

    Therefore keep Philip Lowe and fire the politicians.
    You can fire Dr Lowe if you really want to, but I don’t think that will do anything.

  12. JC

    vr

    His Wiki

    He later completed a doctorate in 1994 at the Massachusetts Institute of Technology (MIT), with Paul Krugman as his adviser.[9]

    Is “advisor” different?

  13. JC

    mh

    My concern is the inversion of the yield curve is dangerous. I’ve read a great deal of stuff with people suggesting this time its different. Well maybe so, or maybe not.

    The argument that I prefer higher asset prices should also be looked at this way. I prefer a healthy economy and I believe an economy or a bunch of economies with very very low long rates is not healthy. It’s not healthy for me, you or the average fucker on the street. Very low long end rates implies expectations of very low returns on capital. That’s not good.

    Think of it like this. I prefer a normal… positive…. sloping yield curve.

  14. Eyrie

    FMD, the only inflation rate worth a damn is 0%. What a dumb idea to keep making the measuring stick smaller. Only economists could come up with this garbage.

  15. JC

    Eyrie

    Explain the mechanics of keeping it there (0) in the medium term? If you support 0 inflation then by default you also support QE, because when the inflation rate is below 0, QE is the only option available to a CB.

    Also, please explain how you deal with sticky prices (labor and goods markets) with a 0 inflation objective/law.

    Go!

  16. mh

    Following Greenspan imploding the US economy, steps should have been taken to end the US Federal Reserve Bank attempting to run the economy.

    Same here in Oz. What has dropping interest rates to emergency lows for eleven years achieved? Falling production, inflated property prices, and incredible levels of debt.

    https://australiandebtclock.com.au/

  17. Tel

    The Governor and the Treasurer have agreed that the appropriate target for monetary policy in Australia is to achieve an inflation rate of 2–3 per cent, on average, over time.

    Presumably that was an ad-hoc agreement between one particular Governor (although they are a bit cagey about which one) and one particular Treasurer. No one ever passed a law about this, never voted on by the Australian people, never formally debated in Parliament. If you follow their links they take you to Governor Bernie Fraser in 1992 praising the Price Fixing and Income Reduction Accord as a wonderful inflation controller.

    Ergo … no mandate at all, merely a whim.

    The RBA would be better off keep Australian central bank rates close to US central bank rates and prevent the imminent implosion of the AUD.

    Oh and if Phillip Lowe wants to pretend that he has only cut rates with the deepest reluctance … of course I don’t believe that.

  18. John Constantine

    The implication that whatever you buy now will be worth less in a few years time.

    With depreciation on top of capital loss.

    Almost like the hundred thousand worthless dodgy dogbox Ponxi apartments are contaminating the entire economy.

  19. JC

    John C

    Currency is not a store of value. It is a medium of exchange and unit of account. If you want to store value, buy assets… and there are plenty of choices. In fact, you’re spoiled with choices.

  20. JC

    Eyrie

    I’m heading out for dins. By the time I get back you had better have a post on the topics I raised for you to discuss and properly argue. Avoiding this is a very bad look. Like really bad.

  21. Roger

    Alas, iirc, the Reserve Bank governor cannot be sacked for incompetence but only for insanity or insolvency.

  22. Bruce of Newcastle

    the only inflation rate worth a damn is 0%.

    No. A target of say 2% is quite useful.
    There are two reasons.

    First deflation is very bad since it can cause customers to defer purchases. Unfortunately for SMEs it isn’t possible to defer rent, electricity bills etc, so deflation can have a very detrimental effect on an economy due to unnecessary business failures. Therefore a bit of a cushion against deflationary percentages is good.

    Secondly another bit of human psychology comes into it. When there’s a small amount of inflation, say 2% pa, there’s a slowly increasing pressure on businesses to raise prices. But as soon as they do that the customers all decamp to the competitor which didn’t raise prices. Therefore there’s a very strong incentive for business to absorb the inflation and keep prices the same to maintain sales. That then stimulates discipline as the business finds ways to cope with the effective price reduction – so they shave costs from their supply and manufacturing chain. The result is more competitive slimmer businesses.

    So a little bit of inflation actually helps to make the economy fitter.

    An example of this is cars. Twenty years ago a basic car was about $15k. Today a basic car is still about $15k. That is because the punters are prepared to pay $15k but every time the manufacturer tries to raise the price the customers move to a different manufacturer – Toyota to Hyundai to Great Wall etc.
    So the former have to find ways to cut costs out of their businesses to maintain sales. Which they’ve been doing with automation and supply chain optimization.

  23. JC

    Alas, iirc, the Reserve Bank governor cannot be sacked for incompetence but only for insanity or insolvency.

    Sure, but any Krugamn devotee on this subject could be deemed clinically insane. 🙂

  24. Tel

    The argument that I prefer higher asset prices should also be looked at this way. I prefer a healthy economy and I believe an economy or a bunch of economies with very very low long rates is not healthy. It’s not healthy for me, you or the average fucker on the street. Very low long end rates implies expectations of very low returns on capital. That’s not good.

    You are muddling up real returns with nominal returns. There’s nothing a central bank can do to change the real returns on capital (unless you have the central banker doing engineering projects and then all bets are off) so all they can do is change nominal returns on capital. If the long term bond buyers are expecting inflation then they want more return to compensate for the loss of value on their money.

    I would argue that real returns are already negative given that the Australian government 10Y bond is at about 1% (or slightly less) nominal return in an environment where inflation is not quite 2%. The chance of getting your purchasing power back after 10 years is bugger all, let alone any actual return on the capital. Then you get taxed on the nominal interest that you nominally received despite going backwards in real terms. Who would buy this? Normal people don’t. Only institutions buy government bonds and usually those institutions where they aren’t spending their own money, and they are under pressure to hold bonds.

  25. Tel

    First deflation is very bad since it can cause customers to defer purchases.

    Let me guess … you have never purchased either a computer or a mobile phone because every year they get cheaper and better. Am I right?

  26. Bruce of Newcastle

    At an inflation rate of 0% there isn’t much pressure on industry to cut costs. Instead everyone keeps on keeping on and the whole business sector will tend to stagnate.

    At a higher inflation rate, say 5%+, the problem is that businesses now have an excuse to raise prices. The customer accepts the excuse because everyone knows the manufacturer can’t do anything about it. So all the producers hike their prices regularly and no one has much incentive to squeeze their costs hard.

    That’s human psychology.

  27. John Bayley

    Let me guess … you have never purchased either a computer or a mobile phone because every year they get cheaper and better. Am I right?

    LOL…
    Bruce is great to read when he writes about science, but not so much when regurgitating discredited statist fallacies about price inflation being somehow ‘beneficial’. No disrespect meant to the gentleman; this is just a personal observation.
    The whole notion of ‘inflation targeting’, where the ‘magic’ 2% is somehow, despite no evidence whatsoever, repeatedly offered as the holy grail, and the tired tirades about how the ‘all-knowing’ monetary central planning alchemists, otherwise known as ‘central bankers’ should best be ‘stimulating’ and ‘kick-starting’ the economy, ought to only be discussed on a supposedly libertarian blog as a topic of derision.

  28. vr

    JC — The Fin Review article said Dornbusch. Here is the SMH article.

    Stanley Fischer and another MIT professor, the late Rudi Dornbusch, were the key influences on the MIT alumni inside our central bank: Philip Lowe, who replaced Ric Battellino as deputy governor in February; Guy Debelle, who took on Australia’s key market co-ordination job on the cusp of the global crisis in 2007 when he became assistant governor (financial markets); Christopher Kent, a former head of economic research who took Lowe’s role of assistant governor (economic) when Lowe was elevated to deputy governor and heir apparent to Glenn Stevens; and Jonathan Kearns, the central bank’s head of economic research. Fischer was a curator of the MIT’s hands-on economic management culture when they studied there in the 1990s. Dornbusch was the PhD adviser for Lowe, Debelle and Kent.

  29. Bruce of Newcastle

    Let me guess … you have never purchased either a computer or a mobile phone because every year they get cheaper and better. Am I right?

    Price inflation is different from capability inflation Tel.
    I tend to spend about $2k on a desktop. I paid about $2k for my Exidy Sorcerer, $2k for my C64, $2k for my Amiga, $2k for my 386 and, several such steps later, $2k for my current one. The current desktop is a bit more capable than the Exidy Sorcerer.

    Same goes for cars. The quality and capability of today’s $15k car is much more than a $15k car two decades ago. Yet money-conscious people seem comfortable buying a car for $15k, and are prepared to sacrifice capability for lower price, within limits.

    I recently looked at new laptops. This one cost $600. I was unhappy with what was around, as what I wanted – basic performance with a SSD – wasn’t available less than $1k. Very few laptops were available under about $800k. So inflation, including AU dollar depreciation, has cracked the inhibition of retailers of laptops. I still am using this old one despite a worn out CTL key, a dodgy ‘B’ and 2 wine-fried USB sockets and a dead DVD. (My desktop next to it is much younger and nicer!)

    The problem is when there’s a shock people all wait to purchase big items. So if there’s a GFC people will stop buying white goods for example. Which happened for about two months after Lehman Bros. Bad luck for the small white good retailers who have to pay the rent despite no sales.

    Same goes for a spike of deflation. People will hold off purchases for a month or two because they can get their new washing machine cheaper then. Again that is very bad news for SMEs with rent to pay. That leads to business failures and unemployment.

  30. feelthebern

    JC, would it enrage further if the RBA had actually started a QE program?

  31. John Bayley

    At an inflation rate of 0% there isn’t much pressure on industry to cut costs. Instead everyone keeps on keeping on and the whole business sector will tend to stagnate.

    Bruce, during the period of the classical gold standard and no central banks as they exist now, namely between about 1850-1890, slight deflation was the norm. As it should be, because money should in fact be gaining in purchasing power in line with, and as a reflection of, general increases in productivity.
    And, contrary to what JC says above, money *is* a store of value. Ask any saver how they feel about having an arbitrary amount effectively taxed away by inflation each year; on top of what they already pay in tax!
    And no, many people do not feel comfortable *investing in assets*. They don’t understand shares etc, and in fact are quite happy to stick with their low risk term deposits, which only some 5 years ago were paying 7%, thank you very much!
    Yet those days (the late 1800s) recorded some of the greatest increases in general living standards ever.
    Businesses do not ‘need’ inflation as an excuse to raise prices.
    If you only have a basic commodity as your product, you will *always* be a price taker, regardless of some abstract/bogus CPI bulsh*t indicator. Which means you will not be able to increase prices unless your competitors do that as well.
    If you have a unique offering, you will be a price maker and will get away to charge almost whatever you want.
    Look at Porsche, Ferrari, or Apple for examples.
    This has nothing to do with CPI.

  32. John Bayley

    …would it enrage further if the RBA had actually started a QE program?

    They are stupid enough to do just that, until the current debt-based fiat money system collapses.
    We can look forward to that, plus negative interest rates, sooner rather than later.
    Which, in my opinion, is something most of us here are ‘young enough’ to yet get to experience.
    How any sensible person can continue to believe that somehow the massive falsification of markets by the money printers in chief is somehow desirable is something I’d understand if this was an ABC-run blog, but here?
    We are so f*cked.

  33. Tel

    So inflation, including AU dollar depreciation, has cracked the inhibition of retailers of laptops.

    Laptops have been falling in price like crazy.

    https://www.thegoodguys.com.au/hp-14-inches-laptop-4nb34pa

    Basic laptop with SSD for only $400 and that’s after baresark Australian taxes, real-estate costs, labour costs and worthless AUD. If you searched hard and could find someone to send it in a post pack probably there’s equivalent laptops overseas for $300 or less. Vastly more power than your old Amiga or 386. Thing is, you did buy all those old machines, like everyone did, because no one wants to wait.

    Same with cars, most of the price of an Australian car is tax. If you want cheap there’s heaps on the second hand market … but people want the newest and latest and they want it ASAP.

    Besides, what’s wrong with people not buying what they don’t need? What’s the problem with savings?

    Used to be (only a generation or two ago) that every small business OWNED the shop. They didn’t give a shit about rent because they didn’t pay any. The obsession with rental everything started in business and then moved to ordinary people who now enjoy a rental lifestyle, own nothing and save nothing. I see that as a backwards step.

  34. Bruce of Newcastle

    The whole notion of ‘inflation targeting’, where the ‘magic’ 2% is somehow, despite no evidence whatsoever, repeatedly offered as the holy grail

    John – I agree with you about targeting. But I am just observing that human psychology makes a small amount of inflation beneficial through the discipline it exerts on businesses. Whether the RB can actually control inflation to their desired band is a different question.

    One thing which does suggest they do have a little control is that if the Reserve rate falls there will tend to be a fall in the small business loan rates too. That then reduces costs in SMEs, which means there is less desperation to raise prices to survive. Unfortunately our pollies are offsetting that by doing crazy things to electricity prices and other business imposts, especially green tape. So any wins from lower loan servicing costs are more than consumed by government crap.

    Hence my suggestion that we fire the pollies rather than Phillip Lowe.

  35. John Constantine

    https://www.abc.net.au/news/2019-08-26/cash-ban-so-you-pay-the-bank-to-hold-your-money-what-imf-wants/11443646

    It is based on repeated public papers and statements by the international body in charge of financial stability — the Washington-based International Monetary Fund (IMF).

    A recent IMF blog entitled “Cashing In: How to Make Negative Interest Rates Work”, explains its motive in wanting negative interest rates — a situation where instead of receiving money on deposits, depositors must pay regularly to keep their money with the bank.

    As the blog notes, during the global financial crisis central banks reduced interest rates.

    Ten years later, interest rates remain low in most countries, and “while the global economy has been recovering, future downturns are inevitable”.

    “Severe recessions have historically required 3 to 6 percentage points cut in policy rates,” the IMF blog observed.

    “If another crisis happens, few countries would have that kind of room for monetary policy to respond.”

    The article then goes on to explain that to “get around this problem”, a recent IMF staff study looked at how it could bring in a system that would make deeply negative interest rates “a feasible option”.

    The answer, it said, is to phase out cash.
    Cash acts as an ‘interest rate floor’

  36. mh

    We should let the RBA impose taxes, specifically an extra tax or ‘levy’ on a basket of supermarket groceries.

    Whatever it takes to get inflation up to the magic 2-3 percent target range.

  37. John Constantine

    If gold is a floor to interest rates that prevents deeply negative interest rates operating, banning private physical possession of gold is their answer.

    Cryptocurrency in a deeply negative interest rate enviroment?.

  38. Bruce of Newcastle

    Tel – I want something with about the same capability as my current laptop which is this one (i5 2.4 GHz dual CPU). But with a 500 GB SSD instead of the 500 GB HDD in this one. I might go for a 256 GB SDD if the price was ok.

    A 64 GB SSD is pretty tiny. Ok, I’ve got a few USB HDDs lying around I can use for storage, but that’s not the point.

    I bought my old laptop in 2011 from J&B Hi Fi. When I went into the same store recently I was interested that there were very few sub $700 laptops. Most were well over the $1k mark. Same on the Dell website.

    (Sorry this is getting a bit OT.)

  39. Bruce of Newcastle

    We should let the RBA impose taxes, specifically an extra tax or ‘levy’ on a basket of supermarket groceries.

    Much better to index tax thresholds to the inflation rate.
    That way pollies get no credit for “cutting taxes” by returning bracket creep.
    An idea roughly as popular in Canberra as a truckload of dead rabid skunks.

  40. Robber Baron

    A simple one line computer code could replace Lowe.

  41. JC

    JC, would it enrage further if the RBA had actually started a QE program?

    Sure it would Bern. The reason is that it should be considered an abject failure on behalf of Lowe and the doofi who surround him if we ever reached QE. That’s the sign the central bank has failed in its mission.

  42. JC

    Robber Baron
    #3141280, posted on August 26, 2019 at 8:36 pm

    A simple one line computer code could replace Lowe.

    Sure. We don’t need a central bank board to figure out monetary policy. Scott Sumner has argued for around a decade now that all we need is a futures markets in guessing Nominal GDP. The central bank simply removes funds or adds to the system in order to reach 5% NOMINAL GDP

  43. JC

    I can’t believe how some of you guys.. in fact nearly all if not all.. aren’t outraged a public servant is explicitly disobeying the law and his term of employment. Think what you want about the current inflation target. Propose having it at zero if you want. However, we currently have a tax eater on a million bucks a year more of less saying he’s unwilling to achieve his objective. This is shocking.

  44. Arky

    Low to zero interest rates into mid 2020’s, then a rapid increase, rising all the way to 80’s levels.
    Driven by long term debt cycle, nothing anyone can do about it.
    Australian housing still high because we skipped the last recession, dickheads still feel wealthy + Chicoms stuffing middle suburbs with their brats.
    Flat or declining for next few years.
    There’s your Arkynomics for today.

  45. mh

    I can’t believe how some of you guys.. in fact nearly all if not all.. aren’t outraged a public servant is explicitly disobeying the law and his term of employment.

    Where is it in legislation?

  46. Arky

    * Financial and economics advice for entertainment purposes only.
    Consult someone else before divorcing your wife, selling your home and moving to Cuba to live with hookers.

  47. mh

    JC, have you overreached on your latest NYC real estate purchases?

    You seem desperate all of a sudden.

  48. JC

    mh

    A few people have suggested this is the reason for my concern. I’ve tended to ignore it because it’s possibly the stupidest suggestion I’ve ever see here at the Cat… and that’s something.

    Lets say I was concerned and I managed to convince most people here. What on earth would that do? Would it manage to change the Fed or RBA’s views because say you and 20 other oddballs were persuaded? The chances of persuading you and then changing the global dynamics are zero.

    No, I’m posting this not because of my own position, but because I am concerned about the slope of the yield curve and trying to explain why to bods like you.

  49. JC

    mh

    A few people have suggested this is the reason for my concern. I’ve tended to ignore it because it’s possibly the stupidest suggestion I’ve ever see here at the Cat… and that’s something.

    Lets say I was concerned and I managed to convince most people here. What on earth would that do? Would it manage to change the Fed or RBA’s views because say you and 20 other odd balls were persuaded? The chances of persuading most of you and then changing the course of global dynamics are zero.

    No, I’m posting this not because of my own position, but because I am concerned about the slope & level of the yield curve and trying to explain why to intelligent people… like you.

  50. Tel

    Low to zero interest rates into mid 2020’s, then a rapid increase, rising all the way to 80’s levels. Driven by long term debt cycle, nothing anyone can do about it.

    Very similar to the “Stagflation” scenario that Peter Schiff has been talking about. Thing is that Schiff thinks it will happen in the USA but he also thinks that the USD is stuffed, while reality shows the USD pretty darn bulletproof and a Fed willing (against all odds) to stand and defend the mighty dollar. Translate the Schiff “Stagflation” scenario to Australia and it looks more plausible.

    We are a whole lot more vulnerable in Australia, and our debt levels are higher, and a run of lower interest rates will nudge Australians to go even further into debt that they can’t afford. There’s a reason we have periodic recessions, it’s a time for deleveraging … healthy deleveraging. The USA got a whacking in 2008 and 2009 but they also purged some of the bad debt out of their system … Australia really hasn’t.

    I’m worried about the USA from a political point of view in terms of divisiveness, but if they can keep a lid on that their economy has a lot going for it.

    Low interest rates are like Krugmanite to our Superfund economy.

  51. JC

    and a run of lower interest rates will nudge Australians to go even further into debt that they can’t afford.

    There is zero evidence for this argument. In 1932 interest rates in the US were at the lowest of the low point. Would you want to take a bet that debt accumulation was nowhere close to prior 1929?

    This invalidates the argument that interest levels are what determines debt levels. It simply incorrect. Never ever make an argument simply by price or in this case the level of interest rates without looking at the wild blue yonder.

  52. Procrustes

    Sorry, I only read your first paragraph but I already knew that I completely agreed with you.

  53. Ƶĩppʯ (ȊꞪꞨV)

    Low to zero interest rates into mid 2020’s, then a rapid increase, rising all the way to 80’s levels.

    nonsense. rates will not return to those levels anytime this century. dying populations don’t inflate.

  54. Tel

    Tel – I want something with about the same capability as my current laptop which is this one (i5 2.4 GHz dual CPU). But with a 500 GB SSD instead of the 500 GB HDD in this one. I might go for a 256 GB SDD if the price was ok.

    I just searched the Samsung 500GB SSD 860 EVO with SATA-III, fits same space as normal laptop HDD … usually around $100 to $150 for the bare drive on it’s own. You can either swap it over yourself or get someone to do it, there’s heaps of computer shops around. Some laptops are tedious to take apart, you need to find a guy who is good at it. The Samsung drive should drop into your old laptop … make sure you back everything up because a reinstall is probably required.

    In terms of looking at prices coming down, you aren’t comparing apples with apples.

    https://www.harveynorman.com.au/hp-14s-dk0026au-14-inch-laptop.html

    Something like that would be the modern equivalent of the laptop you purchased in 2011 for $600 and now almost the same specs are for $500. Same screen resolution, same HDD, same RAM, almost equivalent 2.3GHz CPU. By my calculation in 8 years that’s a deflation of approx 2.5% per year in nominal prices, but when you consider that the AUD itself has been going down in value the price deflation in real terms has been more than that. Perhaps more like 5% in real terms.

    You are looking for something better than what you already have, and if you don’t do anything radical, there’s not a lot that goes wrong with a modern laptop other than the batteries aging. Therefore people only ever buy better than what they already have.

  55. Tel

    In 1932 interest rates in the US were at the lowest of the low point.

    That was an unusual time: recently finished the biggest war anyone had ever seen, stock market crash 1929, signs on the horizon of another war building up, countries going off the gold standard.

    You can’t say we are the same today.

  56. Tel

    nonsense. rates will not return to those levels anytime this century. dying populations don’t inflate.

    At some stage, as the AUD continues to fall, what choice will there be but to raise rates?

    What other miracle would come along to rescue the falling AUD? Another mining boom perhaps.

  57. Arky

    Very similar to the “Stagflation” scenario that Peter Schiff has been talking about.

    ..
    I think it is demographics.
    You get small generations alternating with big generations.
    In the US, that cycling goes back, I think to the before the civil war.
    You take the generations we are familiar with since early 20th century:
    My grandfather’s generation, born in the 1880s or 1890s: Big generation. Big population, went to war, gave birth to another big generation, the “greatest” gen: which also went to war, WW2, and then gave birth to the post war boomers, who then shat out the latest “big” gen, the millenials.
    In between these were the “small’ generations: “Silent gen”- born in the twenties and thirties, and their children, early “gen Xers”- born mid ’60’s to mid ’70’s.
    The big gens bring in social upheaval and in their teens and twenties, increased violent crime rates, fucked up education and on a global scale war and shit.
    The small generations have little social or economic impact, but their youth coincides with increasing conservatism and economic bad times.

  58. Arky

    One needs to keep in mind that a generation is not what they say it is: 22- 24 years.
    That might be the average female generation in normal times: a woman reproducing in her early to mid twenties.
    But women marry older than themselves.
    Also there is a difference between average time to first born of each generation, and the mean age of conception.
    All that adds up to the average male generation length of around 33 years.
    And it is the behaviour of men that matters economically and socially.

  59. Arky

    This is why sociologists and economists and demographers get stuff wrong: they take the female generation and try to extrapolate meaningful shit from that and lump in people who don’t really belong in a generation.
    Take some early baby boomer bird born in, say, 1948. Gets knocked up age 19 and gives birth in 1968.
    Obviously the kid is a gen X chronologically.
    But he is only gen X in reality if the bird was knocked up by Jim Morrison or some other silent gen dude.
    Which she probably was.
    But a Boomer bloke, born in 1948, on average, wasn’t reproducing very much until the very late seventies/ early 80’s, and in his peak, he was producing millenials. His late boomer younger brothers only produced millenials.

  60. JC

    Zipperhead

    The highest inflation rate in the world like 1,000,000% pa is being experienced in a country which has lost around 15% of its population.. Venezuela. Your projection of deflationary times because of population patterns is therefore invalidated.

  61. Lazlo

    Lowe is suffering relevance deprivation syndrome. Central banks don’t matter much any more.

    For elaboration, I recommend the chapter The Evolution of Money in Matt Ridley’s book The Evolution of Everything.

  62. jupes

    I can’t believe how some of you guys.. in fact nearly all if not all.. aren’t outraged a public servant is explicitly disobeying the law and his term of employment. Think what you want about the current inflation target. Propose having it at zero if you want. However, we currently have a tax eater on a million bucks a year more of less saying he’s unwilling to achieve his objective. This is shocking.

    Shocking? No. I share your outrage JC, but this is just business as usual for public servants these days. Witness the ABC and their charter to be unbiased.

    No one in government cares.

  63. DaveR

    I wonder what happens to Australian banks when interest rates fall to zero or even negative?

    There’s still a lot of older Australians’ cash sitting in there as simple deposits, and its counted as part of the banks capital for loan adequacy.

    And I can see new equity raising and debt notes starting to become unattractive for investors.

    Pressure on capital = Banks unable to lend any more $?

  64. JC

    Lazlo

    If Ridley suggested or intimated in any way Central banks don’t matter much anymore, well let me disabuse you of that. They matter. They matter a great deal as they have the power to swing monetary policy.

  65. gary

    From Zero Hedge:

    “One thing that should be tweeted every single day until there are no more central banks, is this from Mark Carney’s J-Hole speech:

    “Past instances of very low rates have tended to coincide with high risk events such as wars, financial crises, and breaks in the monetary regime.”

    The people running the world think they have invented something new with QE, Negative Interest Rates etc, I think they are just making the same old mistakes, and we will eventually get the same results. For once I agree with a central banker.

  66. Mother Lode

    Okay, at the risk of revealing myself somewhat of a novices’ novice in this area, I am still uncertain as to the need for inflation targeting.

    I have read that it is partly a psychological device – but once you know it is such it stops working at a psychological level. I have heard that it encourages innovation, but doesn’t competition and the normal desire to increase profit by decreasing costs do that already? And it seems bureaucratically obtuse in the extreme to assume that businesses can keep shaving a percentage of costs – innovation is a matter of previosly non-existent ideas, processes, changes in costs or availability of inputs – which is a quaint way of saying that suppliers are acting in this predictable way with innovation and prices – and all this happens seamlessly (even if not precisely uniformly), in the medium term, across all industries?

    I have no doubt these processes happen continuously, but not that it happens in the way that central banks have based their thinking on, and hence destructive at the points in the economy not obediently complying with theory.

    Like trying to get smarter kids by raising the pass mark in the exam on the morning they are going to sit it.

    On the other hand, it might work in avoiding recession, burning a bit of a real boom to make less likely real bust cycles.

    So, I ask: is there a basic explanation out there which is also correct that I can read? Just a link would be fine.

  67. feelthebern

    JC, from my observations, the RBA actioned QE in Australia post their August meeting.
    Unlike other central banks, the RBA does not have to announce or publicise it’s movements.
    If at a committee hearing in Canberra, they can ask for all QE questions to be taken in camera.
    In my view, they have started.
    If it fails, they simply say any action was part of the RBA charter.
    It it works, pushes down rates, liquidity increases, they’ll announce a win in a month or two.
    Just my views.

  68. sfw

    I’m with Mother Lode, I have never read anything that has clearly explained why some inflation is a good thing. Bruces explanation doesn’t make much sense to me, people deferring purchases because it may be cheaper next year doesn’t happen in the real world, computers, TVs etc are all cheaper in 12 months than now but people buy them every day. Maybe property purchases could be an exception. I doubt Bruce has ever been in business as I have never seen a business than didn’t look for ways to cut costs or increase profits.

    The only thing (people?) who benefit from inflation are borrowers and the biggest debtor is the gov and it’s in its interest to inflate away debt. Of course that hurts those who loaned the money but borrowers don’t care about that. Anyway there has been massive inflation over the past 20 years but it’s all been in areas where it’s not counted – assets. Anytime new money is created it goes to the wealthy first, they buy the assets because they know how to protect themselves. The proles get cheap TVs and expensive housing.

    Where am I wrong? I listen to Macro Musings podcast, it’s very informative however the host and nearly all his guests focus on inflation and nominal GDP targeting. They never actually say why an inflation target is a good thing, they just take it as a given. I’ve read the comments above and while learning a few things nobody seems to have a good explanation why inflation is a public good. Can anyone direct me to a clear simple explanation?

  69. struth

    All these wanker public servants wouldn’t have a clue.
    Interesting to note the comments about Hong Kong’s success and the reason for it was the brilliant British governor who wouldn’t even supply these morons with the statistics they would then use to stuff things up.
    Freedom from government creates wealth for the people, for as long as it occurs.
    The economy should not be regulated by government at all.
    The closest it should come is maybe, maybe, a few infrastructure projects and the private sector could do it better anyway, besides defence and basic law and order, they should not be heard from.

  70. Tel

    Because the explosive growth of the Afterpay sector isn’t real debt, it is afterpay.

    Might be a good time to think up a new and friendly sounding name for poker machines.

    How about, “Payout Opportunity Windows”, would that fool a few?

  71. feelthebern

    The scary thing about Afterpay & a few others is that they are already securitizing parts of their loan books.
    Sound familiar?

  72. max

    Inflation equal Debasement and Debasement equal Theft

    The Oxford English Dictionary provides the most applicable definition of “debase”: “To lower in quality, value, or character; to make base, degrade; to adulterate, spec. To lower the value of (coin) by the mixture of alloy or otherwise; to depreciate.”

    “Thy silver is become dross, thy wine mixed with water”

  73. Tel

    Employment participation in the USA, looking at prime age workers, vs younger workers.

    https://fred.stlouisfed.org/graph/fredgraph.png?g=oHQX

    First significant recovery in prime age workers has happened since 2015.

  74. Frank Walker from National Tiles

    Tel
    #3142136, posted on August 27, 2019 at 6:19 pm

    Employment participation in the USA, looking at prime age workers, vs younger workers.

    The problem is overall that Trump can’t seem to break the current unemployment and participation rates, despite, to his credit, high growth, low unemployment and the most jobs ever.

    The Oxford English Dictionary provides the most applicable definition of “debase”: “To lower in quality, value, or character; to make base, degrade; to adulterate, spec. To lower the value of (coin) by the mixture of alloy or otherwise; to depreciate.”

    But you can have an appreciating stock and M1 decreasing in value due to credit expansion. Or, you can have deflating base money and no net change in M1 as GDP grows in real terms.

    feelthebern
    #3141778, posted on August 27, 2019 at 9:47 am

    The scary thing about Afterpay & a few others is that they are already securitizing parts of their loan books.
    Sound familiar?

    Why is it scary?

    I’d say because of QE and artificially cheap money. Inframarginal loans aren’t made when we don’t have inflationism. The loans per se might be low risk but the systemic risk is high, re; Australian household debt/US student loan debt, put together with public debt.

    sfw
    #3141707, posted on August 27, 2019 at 8:27 am

    I’m with Mother Lode, I have never read anything that has clearly explained why some inflation is a good thing. Bruces explanation doesn’t make much sense to me, people deferring purchases because it may be cheaper next year doesn’t happen in the real world, computers, TVs etc are all cheaper in 12 months than now but people buy them every day. Maybe property purchases could be an exception. I doubt Bruce has ever been in business as I have never seen a business than didn’t look for ways to cut costs or increase profits.

    Bruce’s idea was rather unsettling. That is a fundamentally bad idea. If you read Financial Reckoning Day, if you stuff up the valuation, then you create macroeconomic problems later on. Goods are nearly always cheaper in the next year. More so with technology per unit of output/utility to the end-user. What was really unsettling about Bruce’s comments is that it is similar to the arguments that Marxists and social credit cranks use to try to say that interest rates should not exist at all.

    Mother Lode
    #3141638, posted on August 27, 2019 at 6:29 am

    Okay, at the risk of revealing myself somewhat of a novices’ novice in this area, I am still uncertain as to the need for inflation targeting.

    Because it gives a range of certainty with respect to asset valuation and some macro variables, such as inflation itself, monetary growth and so on. If policies are time-inconsistent, then this makes capital evaluation (more) difficult.

    You can either say the net result is that investment is reduced or that investments are improperly priced.

    JC is right about MP. It is more important than fiscal policy because all fiscal policy is ultimately transmitted directly or indirectly through the monetary channel.

  75. mh

    John Bayley ⬆️ sums up this thread nicely

    How any sensible person can continue to believe that somehow the massive falsification of markets by the money printers in chief is somehow desirable is something I’d understand if this was an ABC-run blog, but here?
    We are so f*cked.

  76. Frank Walker from National Tiles

    Pressure on capital = Banks unable to lend any more $?

    I agree Dave R. A lot of the QE stuff is really FI recapitalisation. QEII was almost certainly the US subsidising the EU to recapitalise so in their view, the systemic risk to the US would be less.

    A recent IMF blog entitled “Cashing In: How to Make Negative Interest Rates Work”, explains its motive in wanting negative interest rates — a situation where instead of receiving money on deposits, depositors must pay regularly to keep their money with the bank.

    This more or less is the IMF going all in and revealing the cards – aligning with what I said above about QE.

    Arky
    #3141549, posted on August 26, 2019 at 10:41 pm

    This is why sociologists and economists and demographers get stuff wrong: they take the female generation and try to extrapolate meaningful shit from that and lump in people who don’t really belong in a generation.

    You ought to read Financial Reckoning Day, it really nails the issues regarding demographics and the poor choice that the US FED took in using a hedonistic price index.

    Funnily, Arky implies there is a Kondratieff wave (or waves). These long term trends ought not to be ignored (like solar cycles influencing climate and primary production). The problem is of course, signal noise. After WWII we were more likely to see a signal with more definition. Now after such a brutal event governing lifetimes and birth rates at certain dates, the noise to signal ratio might be very high.

    Tel
    #3141479, posted on August 26, 2019 at 10:10 pm

    In 1932 interest rates in the US were at the lowest of the low point.

    That was an unusual time: recently finished the biggest war anyone had ever seen, stock market crash 1929, signs on the horizon of another war building up, countries going off the gold standard.

    You can’t say we are the same today.

    The US Great Depression was not as bad as it is made out to be. Go and look through the stats. Remember that Hoover Inst. economists blamed FDR for prolonging it – they might have used appropriate time series econometric techniques like intervention analysis to prove this. What really convinced me was that the situation in 1932 was not as dire as hagiographies of FDR make out it was.

    There really is no need to have cash rates at or near zero now. The only decent argument I have seen is not to upset the apple cart in paying off hundreds of billions or trillions of public sector debt.

    Bruce of Newcastle
    #3141223, posted on August 26, 2019 at 7:09 pm

    At an inflation rate of 0% there isn’t much pressure on industry to cut costs. Instead everyone keeps on keeping on and the whole business sector will tend to stagnate.

    You have this backwards Bruce. Inflation is a whip. It diverts useful investment into unproductive investment. Competition and the profit motive are under normal or simply put, sane circumstances, many times larger than what inflation may be.

    JC
    #3141214, posted on August 26, 2019 at 6:53 pm

    John C

    Currency is not a store of value. It is a medium of exchange and unit of account. If you want to store value, buy assets… and there are plenty of choices. In fact, you’re spoiled with choices.

    Really? We need to be pedantic. Given the woeful rates on term deposits, cash becomes a store of value. More and more retirees are going to choose this option as they shuffle off their employment coils.

    Explain the mechanics of keeping it there (0) in the medium term? If you support 0 inflation then by default you also support QE, because when the inflation rate is below 0, QE is the only option available to a CB.

    But how would it get to a liquidity trap in the first instance otherwise? My preference is to not fiddle with the rates if possible. Let M1 expand and contract; the rate only need to be altered to reset M0 with respect to V and the (inverse) reserve ratio.

    Sumner, tells us to always fall back on Friedman. He’s right.

    If you consider the following:

    1. V can be volatile.
    2. Money is non-neutral in response to its own shifts and pivots of supply and demand.
    3. The Fischer relationship can break down under extreme policy responses.

    The RBA’s job is not to concern itself with asset prices. It’s job is to run a stable monetary regime which the government believes to be 2 to 3% inflation.

    They’re afraid of asset prices falling though. They’re like a home team referee that ends up being biased against the home team so they don’t look like they’re biased…

    The RBA’s fingerprints are all over Australia’s insane property prices

    I would say they are only an accelerant. The issue is the choice to inflate in the first instance, and how high taxes and regulation create constricted supply in a market where demand is inelastic; we also have policy mistakes in centralising the economy in the public sector in capital cities, along with increasing numebr sof non-economically viable migrants.

  77. JC

    It’s like a motherhood statement, mh. It is meaningless and has not a shred of evidence. Markets are people making decisions to buy, sell or doing nothing. Suggesting the entire world, or markets around the world are massively falsified is pure nonsense bordering on paranoia. Bayley is able to buy gold, stocks or anything he wants. No one is stopping him from avoiding this massive manipulation. I guess he thinks those are falsified too. 🙂

  78. Frank Walker from National Tiles

    I learnt the hard way JC.

    You can’t break central banks because they can whale you with volume. You make a speculative investment on gold against inflation and they can just tap out and you end up holding your dick.

  79. mh

    You make a speculative investment on gold against inflation and they can just tap out and you end up holding your dick.

    The last bit I understand.

  80. mh

    From the RBA website:

    What are the Objectives of Monetary Policy?
    The Reserve Bank Board sets interest rates so as to achieve the objectives set out in the Reserve Bank Act 1959
    * the stability of the currency of Australia;
    * the maintenance of full employment in Australia; and
    * the economic prosperity and welfare of the people of Australia.

    Really? Do people here really think the RBA can achieve full employment by setting interest rates? They obviously cannot because our wonderful Central Bank has been pushing the record immigration numbers otherwise the economy will take a severe downturn apparently.

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