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Fiscal vs Monetary Policy: RBA Independance and Inflation Target not Sacrosanct? Chris Joye; Inflation targeting facing unprecedented challenge. Can the Reserve Bank of Australia abandon inflation target?
Topic Started: 3 Aug 2011, 10:16 AM (6,289 Views)
Catweasel
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Alex Barton
4 Aug 2011, 09:38 AM
Catweasel say a Joye now going the obviously mad as batshit. A RBA go from best central manipulator in a world to corrupt banana republic despots in less than a year!

As a theater, it a absolutely brilliant.
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zaph
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inflation figures don't add up

Quote:
 
FORTUNATELY, the Reserve Bank did not raise interest rates on Tuesday. Had it done so, it would have been because the June-quarter inflation figures, at face value, show that underlying inflation in the six months to June 2011 had climbed outside its inflation target.

But as the Reserve surely knows, those figures cannot be taken at face value. They are almost certainly overstated. And we know that because the Australian Bureau of Statistics, which compiles them, has told us so.

In a post-mortem of the previous cycle of CPI data, which ran from 2000 to 2005, the bureau found that its methodology over time created an ''upward bias'' in the CPI figures. The methodology assumes that consumers keep buying the same basket of goods and services, regardless of their price. And over time, that increases the relative weighting of items whose prices are rising rapidly, and reduces the weighting of those whose prices are falling or relatively stable.
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Over time, the basket of goods and services that comprises the CPI becomes increasingly unrepresentative of the real world of consumer purchasing, because it assumes that consumers pay no heed to price signals. Without correct weightings for each of the 90 categories in its basket, the CPI figures are inaccurate, and so are their derivatives, such as measures of underlying inflation.

Read more: http://www.theage.com.au/business/inflation-figures-just-dont-add-up-20110803-1ibku.html#ixzz1U0osFibg
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Count du Monet
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Creating lot's of money that doesn't move is not inflation.

Deflation is king!

PI's, you're freaking doomed!
The next trick of our glorious banks will be to charge us a fee for using net bank!!!
You are no longer customer, you are property!!!

Don't be SAUCY with me Bernaisse
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Black Panther
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Count du Monet
4 Aug 2011, 12:31 PM
Creating lot's of money that doesn't move is not inflation.

Deflation is king!

PI's, you're freaking doomed!
No, the deal is done, Inflation IS the solution.

Have you not noticed.
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Shadow
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Evil Mouzealot Specufestor

Count du Monet
4 Aug 2011, 12:31 PM
Creating lot's of money that doesn't move is not inflation.

Deflation is king!

PI's, you're freaking doomed!
Wulfie, you've been promising this imminent deflation since at least 2007 when I joined GHPC.

What happened to all your 'kisses of death' and promises of 40% crashes over the past 4-5 years?

What exactly has deflated in that time (apart from your credibility).

Wulfie's Kiss of Death! :flasher:
1. Epic Fail! Steve Keen's Bad Calls and Predictions.
2. Residential property loans regulated by NCCP Act. Banks can't margin call unless borrower defaults.
3. Housing is second highest taxed sector of Australian Economy. Renters subsidised by highly taxed homeowners.
4. Ongoing improvement in housing affordability. Australian household formation faster than population growth since 1960s.
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newjez
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Catweasel
4 Aug 2011, 10:03 AM
Alex Barton
4 Aug 2011, 09:38 AM
Catweasel say a Joye now going the obviously mad as batshit. A RBA go from best central manipulator in a world to corrupt banana republic despots in less than a year!

As a theater, it a absolutely brilliant.
Did Joyce shag your sister or something Cat? You seem pretty cut up about it?

BP - in a world with high inflation, if house prices don't move, they are deflating. Is this what you want?

To all those who say 'raisng interest rates won't affect inflation because of energy and petrol, nah, nah ,nah ,nah', I think you may find that if the Aussie keeps dropping, inflation will be over 4% next quarter. Be careful what you wish for.
Edited by newjez, 4 Aug 2011, 01:07 PM.
Whenever you have an argument with someone, there comes a moment where you must ask yourself, whatever your political persuasion, 'am I the Nazi?'
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Count du Monet
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Shadow
4 Aug 2011, 01:02 PM
Wulfie, you've been promising this imminent deflation since at least 2007 when I joined GHPC.

What happened to all your 'kisses of death' and promises of 40% crashes over the past 4-5 years?

What exactly has deflated in that time (apart from your credibility).

Wulfie's Kiss of Death! :flasher:
No, I promised a 40% crash in the 18 months from the beginning of 2010. Actually I thought property prices would rise after the share market crash back in 2008 like they did in the late 80's.

Well I missed it by that much!

The next trick of our glorious banks will be to charge us a fee for using net bank!!!
You are no longer customer, you are property!!!

Don't be SAUCY with me Bernaisse
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Admin
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http://www.theaustralian.com.au/business/economics/reserve-bank-slashes-economic-growth-outlook-amid-persistent-inflation/story-e6frg926-1226109007244

Quote:
 
Reserve Bank forecasts full-blooded recovery in 2012

Scott Murdoch
From: The Australian
August 05, 2011 4:19PM

The RBA today reminded the market that its 2-3 per cent inflation target band had served the economy well for two decades. Source: AP

THE Reserve Bank has slashed its growth forecasts for the Australian economy while predicting inflation would remain high for longer than expected.

The August statement of monetary policy released today shows the central bank believes the economy will grow by just 2 per cent in 2011, on a yearly average, compared to its earlier call of 3.25 per cent.

The reduced forecasts are greater than economists had expected. It predicts this financial year growth will be 4 per cent down from 4. 5 per cent.

On the inflation front, the RBA predicts underlying inflation will be 3.25 per cent by the end of year, up from 3 per cent. It predicts inflation, both on a headline and underlying measure, will remain outside the RBA’s 2 per cent to 3 per cent management bracket at least until 2013.

In the statement, the RBA said economic growth would be lower because of a range of domestic and overseas factors.

“Growth over 2011 has been revised downwards due to a slower than expected recovery in coal production and to a lesser extent a downward revision to consumer spending as domestic and international concerns have weighed on sentiment,” the RBA said.

“The medium-term outlook continues to be characterised by the significant pipeline of resource sector investment with a number of large projects already underway and by strong growth in resource exports.

“There is a large divergence between the mining and related sectors and the rest of the economy with the cautious behaviour of households, the unwinding of the fiscal stimulus and the high exchange rate weighing on a number of industries.”

The Australian dollar dropped after the release of the statement on monetary policy from $US104.67 US cents prior to the statement's release at 1130 AEST to $US104.38 US cents.

The local currency has shed about US6 cents in a volatile week of trading, culminating in a large fall this morning after global sell-off hit financial markets.
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Admin
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http://christopherjoye.blogspot.com/2011/08/calm-pays-during-chaos.html

Quote:
 
Calm pays during chaos

You’ve probably woken up this morning a little confused. The US government has been downgraded from a AAA rating to AA+ over the weekend. Every newspaper or media outlet you read is talking about financial markets mayhem. One minute you are hearing about higher interest rates, the next there is confident talk they will be slashed. The Aussie dollar has fallen more than seven cents from its high last week to have traded as low as 1.0378 US cents in this morning’s markets. The local sharemarket is off more than 10 per cent in recent days. Media commentators are working themselves up into hysterics about how Australia is hurtling towards recession. All this turbulence is probably doing your head in.

At times like this, it is useful to reflect on the hard facts. The so-called G7 economies—the US, UK, Germany, France, Japan, Italy and Canada—only actually account for about 30 per cent of global economic growth, which is what we are really worried about (see chart). The higher-growth emerging and developing countries account for about 60 per cent (ie, they are far more important). Around 30-40 per cent of Australia’s exports go to two of these countries alone: China and India.

So while the IMF projects that the world economy will advance at a healthy 4-5 per cent per annum clip this year and next--with Australia’s trading partners expected to expand at an even faster pace--it believes that growth in the US and Europe will be much lower (and likely downgraded further).

Posted Image

The financial markets and media commentators have not yet really understood that the global centre of economic gravity is rapidly shifting away from the North Atlantic countries towards the emerging world and Asia in particular. Australia is lucky to be situated in this region, and to possess the vital ingredients these high-powered nations require in order to fulfill their industrialisation and urbanisation plans: viz., natural resources, like iron ore, coal and natural gas, for steel and energy.

Already our floating exchange rate is acting like a reflexive ‘shock-absorber’ and relieving pressure on the economy during this time of uncertainty. The seven cents sliced off the Aussie dollar (and counting) will make our export and import-competing industries temporarily more competitive. While this is great news for those sectors, the one drawback is that a depreciating currency means we are likely to import more inflation from China and India (the huge appreciation in the Aussie over the last year had been working in the opposite direction).

As it stands, Australians remain in rude health. The unemployment rate is at its so-called ‘full-employment’ level of just under 5 per cent. Private wages including bonuses grew by 4.1 per cent over the last year. Disposable household incomes rose by even more than this amount. And, if push comes to shove, the RBA can inject enormous stimulus into the economy by cutting home loan rates to as low as 2-3 per cent.

In this context, one surprisingly resilient store of wealth during financial market turmoil tends to be Australian housing.

Compared to shares, this was certainly the case during the 1987, 2002-03, and 2007-08 equity corrections, when local share prices plummeted by 44 per cent, 15 per cent and 50 per cent, respectively and cruelled the retirement plans of so many Australians who were ‘overweight’ this risky asset-class.

It was also true in the 2001 ‘tech-wreck’ when global shares, which have historically attracted about 30 per cent of all Australian super fund money, fell by about 40-50 per cent.

During the recent GFC, the peak-to-trough fall in Australian home values was just 3-4 per cent notwithstanding that an inflation-focussed RBA kept mortgage rates at 9.6 per cent as late as August 2008 (see chart). That’s less than what the Aussie sharemarket lost in a single day last week.

Posted Image

A final test case is the 1991 recession, when despite a spike in the unemployment rate to 11 per cent, and double digit mortgage rates, overall Australian house prices moved sideways.

As regular readers will know, our central case remains that the RBA will hike interest rates once or twice more. This should continue to put mild pressure on the housing market, which has suffered from a combination of the RBA’s de facto double rate hike in November last year and the very “hawkish” expectations of consumers, who have been working on the basis that they would be hit with another 2-3 hikes. If this comes to pass, a modest downward adjustment in dwelling prices should present prospective buyers with attractive investment opportunities before a very robust recovery as the RBA normalises rates over 2012-13.

I should note here that this view is quickly slipping into the minority despite the extraordinarily high ‘core’ inflation readings in the first and second quarters of 2011 (these core estimates strip out unusual events like the floods that affect the ‘headline’ numbers).

After 20 years of uninterrupted growth, many Australians have forgotten what the cost of high and volatile inflation is. Well, I can tell you: high nominal interest rates.

The average home loan rate in Australia between 1980 and 1995 was a scorching 12.6 per cent. That was before the RBA broke the back of inflation during the 1991 recession. Since 1995 the average home loan rate has declined by 42 per cent to be just 7.3 per cent.

The cost of price stability (or low inflation) is occasional periods of higher interest rates when the RBA strives to bring those price pressures back into its target 2-3 per cent per annum band.

Of course, it also pays to remember that inflation is a tax on hard earned savings. That is, it punishes savers and rewards spendthrifts (ie, those with debt). Hence the many net savers out there in the community who have loaded up on cash and fixed-income want to see the RBA do its job properly, even if it means lower growth and higher unemployment in the short-term.

A second major thesis we have been running for a few years now is that housing could be a solid hedge against extreme adversity. The financial markets are currently pricing an incredible six rate cuts within the next year on the basis of the belief that we are going to get a GFC Mark II (see chart).

Posted Image

On the assumption of its ‘peachy’ base-case, the RBA has deliberately sought to crush consumption, retail spending, and the household sectors to make room for the huge amount of private investment that is starting to take place in Australia.

Ordinarily, consumption accounts for 55-60 per cent of all economic growth. Yet there is another $140 billion or so of new private investment that will be commenced in the next two years alone, which amounts to about 11 percentage points of GDP growth. Even if you take an axe to that number and halve it, it remains chunky.

Yet if the China and India urbanisation stories blow-up, and demand for Australian resources disappears, what will the RBA do?

They will slash interest rates (as the financial markets believe they will), and invite the consumer and household sectors to step into the breach left by evaporating resources investments.

And what is the most interest rate sensitive sector of the economy? Housing.

Think about what happened during the GFC. The RBA slashed home loan rates from 9.6 per cent in August 2008 to just 5.75 per cent by April 2009. And, unsurprisingly, Australian house prices soared by a stunning 12.1 per cent in 2009.

Since I believe the world will muddle through this current speed-bump, which is a reflection of the profound structural adjustment taking place in the global economy, I remain of the view that interest rates are more likely to head up than down (although it is possible that a crisis compels the RBA to spin 180 degrees).

This will be especially true if the Australian dollar keeps falling, as this will be equivalent to rate cuts and only exacerbate the RBA’s inflation challenge. In this environment, I would keep my investments in cash and floating-rate fixed-income.

To protect against a downside scenario whereby the RBA is forced to abandon its base-case and radically reduce interest rates—let’s say to zero—the good news is that virtually all Australians have, quite uniquely compared to peers overseas, fully adjustable rate home loans.

If the RBA reduced the cash rate to zero, we would be paying 2.5 per cent mortgage rates. And, in this contingency, housing will likely once again be a very solid store of wealth.
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davel
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wow, this is a little gem of a blog.

So much good sense, but so many assumptions/ommissions:

First, its absoutely the case that a global adjustment is underway. Neverthless, European and US growth remains very important to ALL countries, even Australia. Simply put if they both go down the pan so does nearly everything else. Because they will inevitably have huge effects on the developing world also, which wont be able to step into the breach.

Second, and probably biggest - Aussie home prices have done well in the downturns he talks about yes. But all of these have been during an extended period of home price appreciation (1980s-now) which he himself has recognised in other blogs as being a one-off structural adjustment, indeed all of his "base case" commentary previously has seen home prices tracking disp income growth for this reason. So what if that period 1980s-now is an exceptional case? Could it be possible that home prices wont behave in future as they have done in the past? (or the 30 yrs of it he likes to focus on).

Related to this is his ignoring, like the RBA and many mainstream commentators, the effect of debt. Australian private debt is very high and likely the main reason why our consumers are currently sluggish despite the boom we're having. Doesnt it at least warrant some analysis?

Last, this: "the good news is that virtually all Australians have, quite uniquely compared to peers overseas, fully adjustable rate home loans"

Massive simplification. Fixed deals in the US and UK for example can normally be exited when rates are low and the borrower can refinance. In all previus times except the GFC, US and UK borrowers did exactly this. The GFC caused a credit crunch that prevented US borrowers from doing this which led to the glut of foreclosures. This is exactly the type of systemic risk that CJ often fails to acknowledge.
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