Aussies & NZ: You're the Voice Try and Understand It

[Impmk2]

13 hours ago, Paxter said:

The underlying cause is high inflation. Australia has been and is running one of the highest rates of inflation in the OECD. Housing costs are one element of this. 

The US has not had the same erosion in incomes, in part because it happens to use the world’s reserve currency. One of the reasons our incomes have suffered in Australia is a dive in the exchange rate as the Reserve has not maintained the higher interest rates of other developed nations. The petrol we import, for example, is typically US dollar denominated.

ETA: I should add, the story here is not about timing or whether inflation lagged in some countries from a timing perspective. It’s that Australia has had one of the highest magnitude falls in real incomes since the pandemic. 

Again, it's hard to comment on an article I can't read, but re: Australia being hit by inflation uniquely hard - I just don't see it in the data I do have access to.

Inflation peaked in Australia at 7.8% in December 2022 per the ABS. As far as I can find the OECD average peak inflation was 10.7%, with several of the advanced economies in western europe (Germany, Italy, UK, Spain) peaking above 10%, the US at 9.1%, and eastern europe faring much, much worse. Right now much of western europe (notable exceptions of France and Italy) looks to be still sitting in the 3.5-4.5% range at the end of 2023. 

I still think we need to wait to see how this all shakes out in a couple years rather than just looking at datasets mid-crisis. 

ETA: To be clear - not denying that Australian's have had a lot of an increase in their cost of living pressures with little relief over the past 18 months and inflation is a big part of that. But I am skeptical of the narrative that cranking rates another 1% could've done much to ease them without crashing the economy (and the pain associated with that). There's other factors at play such as very high personal debt levels, and long EBAs leading to a lag in wage increases.

Edited February 4 by Impmk2

[Jeor]

On 2/2/2024 at 2:46 PM, The Anti-Targ said:

Govts can always make any payment so long as the debt is denominated in that govt's currency. Govts should avoid taking on debt in any other currency.

I sort of get what you're saying but I struggle with this part of it. Unless you are in some completely self-sufficient economy (and Australia certainly isn't), the exchange rate matters. Proponents of MMT and so forth often forget that virtually no economy runs in a vacuum and that global confidece in a country's currency has a major effect.

A government that runs long, systemic deficits will have a falling currency. If the objective is to always create more money to make payments, that currency quickly becomes worthless. Why would an international investor put money into Australia if the Australian government keeps flooding the market with more and more created AUD? An international investor will demand higher yields to offset this, this creates a falling currency, a big rise in the cost of imports, and in the long run, hyperinflation. Then you have a trade crisis like the one that befell Sri Lanka recently, who couldn't pay for imported medicines, fuel, etc.

Now, if you had a completely self-sufficient economy that could manage itself, then this would have more of a chance of working, but even so the inflation spiral would start when fiscal discipline gets out of hand and the yields on government bonds keep rising.

 

[Paxter]

18 hours ago, Impmk2 said:

Inflation peaked in Australia at 7.8% in December 2022 per the ABS.

This is not a good way to observe the effects of inflation. You can peak at 7% and still have a worse fall in real incomes than a country with peak inflation at 10%, if the inflation is enduring. Just look up real incomes or real incomes per capita and do a global cross-section, you will see the point of the AFR article.

Anyway, like you say, the proof will be in the pudding. I’m in the camp that inflation is gonna be sticky and rates will have to stay higher for longer, particularly in a country like Australia that has been a clear outlier on monetary policy. We will be able to analyze this more deeply once we have more economic data in. The last RBA hike was not that long ago, so we have to give a chance for these rates to work their way through. A decent chunk of mortgage holders are still on fixed rates, so some of that impact is yet to be felt. And if the Fed cuts anytime soon, our exchange rate will get a nice boost, which will help reduce the price of imports. But there are also some negative possible shocks, like Jeor’s wage rise fears or more geopolitical events hitting energy or freight prices.

 

Edited February 4 by Paxter

[Jeor]

9 hours ago, Paxter said:

But there are also some negative possible shocks, like Jeor’s wage rise fears or more geopolitical events hitting energy or freight prices.

 

Yes we need to keep the wages down!! More seriously though, Australia's multi year enterprise bargaining system is probably going to result in a few years of strongly rising wages and I wonder if this will force the RBA to keep rates high. Many sectors are struggling to find workers and in the current cost of living crisis, most industries are going to have to lift wages by at least 5-6% per annum (if not more) for several years in a row. Consider the striking wharfies who just got 23% over 4 years.

[The Anti-Targ]

On 2/5/2024 at 1:50 AM, Jeor said:

I sort of get what you're saying but I struggle with this part of it. Unless you are in some completely self-sufficient economy (and Australia certainly isn't), the exchange rate matters. Proponents of MMT and so forth often forget that virtually no economy runs in a vacuum and that global confidece in a country's currency has a major effect.

A government that runs long, systemic deficits will have a falling currency. If the objective is to always create more money to make payments, that currency quickly becomes worthless. Why would an international investor put money into Australia if the Australian government keeps flooding the market with more and more created AUD? An international investor will demand higher yields to offset this, this creates a falling currency, a big rise in the cost of imports, and in the long run, hyperinflation. Then you have a trade crisis like the one that befell Sri Lanka recently, who couldn't pay for imported medicines, fuel, etc.

Now, if you had a completely self-sufficient economy that could manage itself, then this would have more of a chance of working, but even so the inflation spiral would start when fiscal discipline gets out of hand and the yields on government bonds keep rising.

 

The MMT school requires a floating exchange rate for a fiat monetary system to work properly. Confidence in a country is all about confidence in the economy, not with how much money is in the system. It's also wrong to characterise this as advocating flooding the system with money any time the government wants to. Governments have to spend money on procuring goods and services that will be of benefit to the public, transport infrastructure, health system, housing, education, science and research etc. Handing money out for nothing in return (which is what govt bonds are, passive income for the rich) is not what MMT advocates.

[Paxter]

Nice lines in an RBA speech today summarizing why I think we're in for "higher for longer" on interest rates and inflation:

Quote

But services price inflation remains high and broadly based. This strength has been because of continued pressure from the level of demand exceeding supply alongside strong growth in domestic costs. Firms in our liaison program continue to say that they face pressure from higher labour and non-labour costs like professional services, logistics and insurance. We are forecasting that services inflation will decline from here, but only gradually as demand moves into better balance with supply and domestic cost pressures moderate. This decline in services price inflation is necessary for the inflation target to be achieved over time.

 

[The Anti-Targ]

The effect of interest rates on inflation increasingly trends toward being inflationary as the private debt to GDP ratio drops. When debt is high private spending is squeezed because of increased debt servicing costs, but when debt drops there is less of a spending squeeze and higher interest rates simply lead to higher prices.

Australia's private debt to GDP ratio has dropped from ~141% in 2021 to 131% in 2023. That's a rapid drop in a fairly short space of time, and possibly going to continue to drop this year. This means if interest rates were at all effective at bringing down inflation they are going to become increasingly ineffective and at some point potentially counterproductive.

New Zealand's ratio is higher but has dropped more. In 2021 it was 153% now it's 139%. If there is an absolute ratio that turns interest rates from being anti-inflationary to inflationary Aus is closer to that ratio, but New Zealand is also going to see interest rates having less of the desired effect than conventional economic "wisdom" thinks.

Reserve banks really need to have a debt ratio number in mind rather than an inflation number for when they need to start dropping interest rates.

Edited February 13 by The Anti-Targ

[Paxter]

The short-term interest rate is a blunt tool. But it’s the only one we’ve got.

Barnaby in the news again. I wish these guys would fuck off. At least ScoMo got the memo.

[The Anti-Targ]

It's better not to use a tool that will make things worse so instead let things settle of their own accord. To a hammer every problem is a nail and all that. Though the interest rate tool can be deployed up or down, so the thinking right now needs to be around when to start moving down, not whether to move further up.

As long as economic fundamentals are sound and govts aren't too corrupt inflation fixes itself. The interest rate tool is an attempt to speed up the process. But its not a universal panacea, and the cure can eventually exacerbate the disease. It's like treating infections with cortisone. Cortisone can reduce the severity of the body's response to an infection, but it also weakens the immune system, too much cortisone for too long eventually makes the immune system so weak the infection becomes worse. If it's the only medicine you have on hand it can be useful up to a point beyond that point it becomes actively harmful.

[Jeor]

Inflation is a hard beast to tame because it also involves psychology (inflation expectations) which are very hard to control. Economics all runs on incentive, but how to incentivise the right behaviour when inflation is involved is a very hard thing to do.

If not interest rates from independent central banks, the only other real way of fighting inflation is through fiscal policy and no government in this era is going to implement austerity measures. Theoretically, the government could depress demand and increase savings rates by a variety of methods, but they are all unpalatable and amount to engineering a downturn. And I think we all know the other method of government intervention, price controls, doesn't work effectively to tamp down inflation as a black market then prospers and supply is withdrawn from the market.

It's no surprise that, given this, governments are happy to pass the unpopularity contest over to the central banks.

[The Anti-Targ]

Like I said, inflation is self correcting in a sound economy with a trustworthy govt that is implementing sensible policies, especially those that help to stimulate supply. So, policies to build more houses when housing is short. Policies that improve energy production and reliability of supply. Policies that make transport more efficient. Policies that don't inflate prices by the imposition of import tariffs.

Lots of govt activity and spending can be disinflationary, so there is rarely a need for absolute austerity, more there is a need for re-prioritising spending, and spending more in the areas that help improve the productivity of the private sector. 

[The Anti-Targ]

Moving off inflation and interest rates to climate change.

https://www.newshub.co.nz/home/new-zealand/2024/02/analysis-world-is-watching-m-ori-climate-activist-mike-smith-s-case-against-some-of-nz-s-biggest-polluters.html

Quote

ANALYSIS: In recent weeks, the Supreme Court of New Zealand has delivered a landmark decision on a case brought by Māori elder Mike Smith against a group of New Zealand's largest corporate greenhouse gas (GHG) emitters.

The Supreme Court overturned lower court rulings which had struck out Smith's ambitious claim seeking to establish civil (tort) liability for those emitters' contributions to climate change. Smith argued these contributions had a negative impact on his family's and tribe's land, water and cultural values.

With the Supreme Court decision, Smith has won the right to present his full case before the High Court.

While only the beginning of what could be a long legal process, the Supreme Court's decision has attracted local and international attention as one that "may open a new avenue in climate law".

This could get pretty spicy. 

 

[Paxter]

18 hours ago, The Anti-Targ said:

Like I said, inflation is self correcting in a sound economy with a trustworthy govt that is implementing sensible policies, especially those that help to stimulate supply.

What kind of fantasy land do you live in? 

Oh. New Zealand. 

[The Anti-Targ]

2 hours ago, Paxter said:

What kind of fantasy land do you live in? 

Oh. New Zealand. 

Sadly it is a bit of a fantasy to a greater or lesser extent everywhere. Which is why some sort of action needs to be taken. But it does not need to be as severe as most central banks seem to believe.

There is no objectively correct interest rate to set, which is why leading up to decisions banks and economists pretty much make bets, and the central bank committee votes on what number to set, based on what the current number is. They set a number and then wait for a period that is no where near long enough to find out the effect that number is going to have and then they vote to set another number.

[Paxter]

Haha not sure you picked up the tone of my post.

Was just joking A-T...

I love NZ for the record. Dream is to retire in Wanaka. 

[The Anti-Targ]

I know, but it's one of those jokes that initially makes you laugh, but then makes you feel sad about the underlying truth of it.

We may meet some day, since my son has his own fantasy of moving to Queenstown to raise his family and if that nice fantasy ever becomes a reality the pressure will be on to follow so we can see the grandchild(ren) whenever we want. My son got married in Queenstown (in August!, outside!!!) and it's always been his and his wife's favourite domestic holiday destination, summer and winter.

[karaddin]

I was trying to decide my ideal city to live in to escape climate change making Sydney too hot like 8 years ago and thought Auckland might wind up with a similar climate to what Sydney had before. These days I've realized the extremes are much wilder than just the sample increase of +2C so Auckland will probably still wind up too hot. And NZ will probably cop more cyclones than Sydney AND has the bonus earthquake risk. And I think its also following the unaffordable housing path too?

So I'm probably resigned to just sticking here and relying on wasteful AC to survive.

[Paxter]

10 hours ago, The Anti-Targ said:

I know, but it's one of those jokes that initially makes you laugh, but then makes you feel sad about the underlying truth of it.

We may meet some day, since my son has his own fantasy of moving to Queenstown to raise his family and if that nice fantasy ever becomes a reality the pressure will be on to follow so we can see the grandchild(ren) whenever we want. My son got married in Queenstown (in August!, outside!!!) and it's always been his and his wife's favourite domestic holiday destination, summer and winter.

Yeah I love Queenstown too. Great memories of family trips there and one with my partner too. 

@karaddin: South Island all the way! Or Wellington. 

[The Anti-Targ]

If you need to be in a city of at least 1 million people then I guess your only option over here is Auckland. But if you can downsize and consider points south of Auckland then there are several options. Also the further south you go, so long as you stick to the west side the cyclone risk drops away quite fast. Australians are a bit too fearful of Earthquakes I think.

I do think Auckland will become unbearable in a decade or two, it is so humid and that makes the heat so much worse, so it's already pretty unbearable to me.

 

[karaddin]

Oh the earthquake part isn't a major concern, I'd just want it to be a big difference to uproot everything when I do love Sydney. And yeah, only a big city is an option, I could possibly go smaller but Brook really needs it.