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  • PD Jonson

Sunday Sanity Break, 6  October, 2019 -  Great men’s musings

Updated: May 1, 2020

The global economic news steadily gets worse. Asset prices looks dangerously like the USA stock market in early 1929, unable to decide whether it is time for the great twenty-first century share price collapse. Ordinary consumer inflation remains very low, another feature of the US economy in 1929. History shows that a combination with high asset prices and low consumer prices is a dangerous combination.

The USA-China trade war stumbles along with Presidents Xi and Trump failing to reach a conclusion despite economists everywhere saying continued trade war will cause great hardship.

Paul Volker smashes inflation.

Small economies are generally described as facing ‘tradewinds’. Australia’s central bank (RBA) has followed the lead of the European central bank and has reduced cash interest rates almost to zero. Encouraged by President Trump, the US Fed is following. Great men like Peter Costello, Warwick McKibbin and Ian Mcfarlane have all pronounced this will do little or no good. Indeed, it looks like reigniting Australia’s housing boom and is helping investors at the expense of retirees who tend to hold fixed interest rather than shares in an attempt to avoid risk.

Low consumer inflation is combined with low wage inflation and high growth of jobs. Low wages growth encourages high jobs growth. I can recall a time when such a combination was prayed for by high officials, now current high officials pray for higher wage inflation with still good jobs growth. That isn’t possible, great men, and there are signs that Aussie jobs growth may be slowing. Be careful what you wish for great men and women of the RBA.

The Great men, or some of them at least, say we are in a new era whose working is virtually inexplicable. I beg to differ and the remainder of this blog makes my case.

Low inflation in the modern era was introduced to the USA by Paul Volcker, the brave head of the US Fed who changed the Fed’s operating procedures and introduced two sharp recession in 1980 and 1981/2. US consumer inflation was finished until the next big boom, so far not seen.

Australia’s relatively high inflation was coming down in fits and starts as a nervous RBA governor fiddled with tightening interest rates and cutting the floating exchange, which was tending to rise. In 1990 two new boys at the RBA – Messrs Fraser and Macfarlane - took a sledge hammer to the economy with cash interest rates over 20 %, a number unthinkable in today’s combination of low consumer inflation and near zero low cash interest rates. Consumer inflation was fixed in Australia, partly by accident and partly by design.

Here is my hypothesis. Workers in Australia’s last great recession undertook a severe hit to employment and expectations about future prosperity. This cautious attitude is still evident. It was reinforced and indeed strengthened in the Great economic Stumble of 2007-08. The hit to Australia was moderated by China’s great boom, which greatly boosted Australia’s resource exports. ‘Miracle economic management’ said the great men. After the global Great economic Stumble brave Aussies started to buy houses, widely perceived as a safe asset in a wild world. But still the prevailing mood of the battlers is gloom about the future.

Consumer expectations did not buy official optimism, theoretically encouraged as it is by the RBA’s three 25 basis cuts to cash interest rates. Low interest rates encouraged house buying. Both before and after latest move to near zero cash interest rates. Now house prices seem to have stopped falling and may again be rising. Household debt relative to household incomes is at an all-time high compared to most other nations, in fact second highest in the world.

I am in the final stretch of research on the arcane matter of ‘Animal spirits’. I define this term as economy-wide optimism or pessimism, but the battlers and the elites can have different views, as we see over Brexit. The first round of work involves building a model of the UK economy with data from the Bank of England’s three centuries of data. Hypotheses about ‘Animal spirits’ are built into the model and the relevant hypotheses show significent impacts on British share prices, business investment and bank lending. Until the RBA takes serious account of the state of ‘Animal spirits’ in the Australian economy, it will continue to make avoidable mistakes. But the current crop of RBA boffins, sadly, do not seem to get the point.

Naturally I am willing to debate this matter with any official or private person who wishes to see the light. I am also willing to be proven wrong, although my lifetime research and my seven years as RBA Head of Research, at that time lead presenter to the Board, gives me great confidence that the economy is not impossible to understand.

The missing issue in current research and policy analysis requires people’s expectations to be properly understood and acted on.


Fiona Prior visits the latest iteration of that Clown Prince of Crime … and ‘Joker’ completely creeps her out! This on is really dark. More here.

Sporting Life

The AFL is closed down playing and instead working hard to improve their playing lists.

The Rugby team flogged Uruguay but sadly lost to the canny Welsh who seemed to have a closer relationship to the referee.

Rugby League tonight will be well worth watching.

Horses will be raced vigorously for a bit now. I expect a lot of positive Animal spirits from winners, and negative vibes from the losers.

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