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Letter from Glenn Stevens, RBA Governor
Topic Started: 4 Nov 2014, 03:04 PM (465 Views)
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Dear Sir,

We agree with your general contention about the AUD having all the form of a sea anemone washed higher than it would like on the beach and spending long periods in strong sun, and that the continued pike positions of all commodity classes (but particularly coal, iron ore, gold and LNG) would suggest that the lightest zephyr will, at some point soon, reveal it to be completely desiccated, and blow it away.

The question for us, after we have organised the Melbourne Cup sweep, and ensured that this afternoons staff barbecue is well catered for, is the extent to which this may benefit, or disbenefit, other stakeholders in the Australian economy.

Of particular interest are those stakeholding banks, which, as I dare say you will have noticed, have handled their stakes so well as to post record profits within the last week. We have ascertained that the largest contributing endeavour in the creation of those benchmark profits is lending for mortgages – and indeed I would refer you to the CEO of Westpac and her breathtakingly forthright comments yesterday about the role of mortgage lending in the creation of those profits. As an organisation which considers a considerable volume of economic data on a daily basis I would suggest to you that there is arguably not a single other sector of the Australian economy contributing to, or having contributed to, the creation of record profits, and would believe that there is scope for interpreting the contribution of any given other sector or the economy more generally, as a contribution towards losses.

While the RBA, as a policymaking Central Bank, of global renown, accepts the place of losses as a normal part of the business cycle of any nation, and any contributing economic endeavour within that nation, we do need to be cognizant of our mandate to support economic growth. In this context it does not require implausible volumes of mental acuity to conclude that without our banks doing nicely through their mortgage lending endeavours we may find ourselves in the position of being a Central Bank without growth to support. As an intellectual proposition I accept that many economies around the world have experience this phenomena within recent years.

However as an applied proposition I invite you to consider meeting with representatives from the Australian parliament, in particular the Treasurer and/or the Prime Minister, with this situation providing a data set contributing to their understanding, and possibly in the context of requiring their contextual approval or agreement for RBA activities. I would further note, and I trust your discretion in the further dissemination of this view, that given their current inability to have had a budget passed, or even a budgetary narrative agreed by any but the most partisan of media commentators, there is considerable emphasis on the RBA and its position as informing wider market participants about the nature of the Australian economy.

This situation lends itself to considerable wider contemplation of every last message emanating from the Reserve Bank of Australia, in private or in public, printed or broadcast, such that nuances of grammar and punctuation can be parsed in infinite detail, let alone the actual vocabulary used, and that considerable volumes of financial flows are guided by such analyses as the parsing lends itself to. I would believe that as a participant in this field you, of all people, will have a deep and profound understanding of the implication of the role of communications from the RBA as a determinant of the wider economic positioning of Australia.

With this in mind I should like you to consider that sector driving the sole notable successes of the current Australian economy. I should also like you to consider that the mortgage lending for ever higher Australian residential real estate values (as arcane and complex a field of Australian endeavour as has ever been known to exist) has to a considerable, and recently increasing, degree been funded through the ability of Australia’s sole contemporary corporate successes to access funding in international global wholesale capital markets.

For an organisation such as the RBA this circumstance provides both continuity, with a longstanding Australian fiscal, taxation and monetary positioning designed to spur precisely that environment, and a challenge, insofar as communications emanating from the RBA represent a key information channel for wider market participants, including those making funds available for Australian corporate successes, to position their lending ability and conditions thereto. In this regard the approach adopted by the RBA, over a long period of time, has been to reassure and cultivate an awareness of methodical and measured policy responses informed by the broadest possible consideration of all available information pertaining to the Australian economy and its outlook. This approach has been demonstrated to have provided long standing advantages to Australia, and has been successful in cultivating an inherently measured approach to Australian monetary policy by international capital market participants.

From here, the nexus between lending to Australian banks, and their subsequent lending to Australians to speculate in real estate is such that international market participants have confidence that the funds they make available to Australian banks, are being made available to those banks in an economy with an appropriate macroeconomic backdrop, where responsible market participants borrowing funds through well understood, regulated and transparent systems subsequently use those funds to for appropriate purposes which provide them, and/or the wider Australian economy with a return commensurate with their endeavours, and building in a margin for other market participants, while shaping the wider economy for expansion with not greater than 2-3% inflation.

It is this nexus which provides a challenge for the RBA in reconciling your request for a ‘dove up’ with the nature of the intermediation of capital into the Australian economy, and the confidence of participants in international capital markets. Your call, should it be adopted in any way by the RBA, would need to be calibrated against the expectations of those market participants, which have been influenced by previous communications coming from the RBA, and considered against the influence it may have in shaping their further maximisation of opportunities with successful Australian participants in that market. It also lends itself to contemplation of other factors they may care to consider in the framing of their position within that market. Foremost amongst these will be the prices for commodities which they know Australia provides and the overtly expressed intention of Australian fiscal settings, in balance with the demonstrated ability of the budget to meet those settings, as well as the sustainability of the business models of those accessing the international capital markets successfully when considered in context with other framework position points.

In short, if we ‘dove up’ much, there may be a run to the exits. And if there is a run to the exits then we may find there is little available, after a decade of frying the Australian economy, and particularly the globally exposed non-mining segment of it, with a higher dollar than it had been hitherto used to, to sustain demand going forward. For you see, we, along with the Australian economy, are in broadly the same position as that anemone on the beach referred to in the first paragraph, and that the final service we can be to anyone is really that of providing moisture and some nutrients for the blowflies masquerading as economic contributors through real estate speculation, and that even this is only plausible provided international capital market participants think that there is something for them in supporting those blowflies. Whatever I say today will be about supporting that sentiment.

I have the pleasure to be, Sir, your most obedient and humble servant.

Glenn Stevens
RBA Governor
4 November 2014
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For an alcoholic Putin lover, Gunna does write quite well, the bastard. I don't know who he writes for but he definitely writes something for someone.

In a weird sort of way that sums up Stevens predicament.
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