2012 05
I have an op-ed in today’s Business Spectator arguing that the euro crisis should be viewed primarily as a vindication of Milton Friedman’s pioneering 1953 essay, ‘The Case for Flexible Exchange Rates.’
Not mentioned in the op-ed, but Friedman’s essay had its origins in a 1950 memo he wrote as a consultant to the Office of Special Representative for Europe, United States Economic Cooperation Administration. The essay references many of the problems with exchange rate regimes in Europe at that time.
posted on 22 May 2012 by skirchner in Economics, Financial Markets, Monetary Policy
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I have an op-ed in today’s West Australian making the case against the proposed Western Australian Future Fund. As I note in the article, the WA Future Fund nonetheless improves on the federal model by avoiding the establishment of an expensive new funds management operation that duplicates existing capabilities. The federal Future Fund incurred expenses of $444m in 2010-11.
posted on 21 May 2012 by skirchner in Commodity Prices, Economics, Fiscal Policy
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I have an article at The Conversation referencing the Pagan-Gruen exchange at the Melbourne Institute’s Intergen+10 Workshop (you can listen to the exchange here). As I note in the article, whether the 2010 IGR growth assumptions were really the outcome of a political process is less important that the perception on the part of serious observers that they could be. This is something that needs to be addressed.
It is interesting to compare how the last IGR compiled under the Howard government in 2007 characterised Australia’s long-term debt position compared to the 2010 IGR. The 2007 IGR said that:
Demographic and other factors are projected to place significant pressure on government finances over the longer term and result in an unsustainable path for net debt towards the end of the projection period.
If Adobe Acrobat’s search function is right, the word ‘unsustainable’ never appears in the 2010 IGR. The 2007 IGR was a much more candid document in relation to the long-run fiscal outlook.
posted on 21 May 2012 by skirchner in Economics, Fiscal Policy
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New FIRB chairman Brian Wilson promises greater openness in an interview with Glenda Korporaal:
The former investment banker, who has been on the board of FIRB since 2009 and took over as chairman last month, says FIRB is making a greater effort to communicate the government’s foreign investment policies through its website and in briefing sessions for advisers. “It is important for all our constituencies—the Australian public, Australian business, foreign investors and their governments—to understand that the processes FIRB goes through are sensible and rigorous, and open and consistent,” he says. “Being a little more forthcoming, and having a little more transparency, will actually reduce, for some, the suspicion that we hear or read about from time to time.”
Wilson says FIRB is now putting up a lot more on its website about Australia’s foreign investment policies.
The FIRB has some catching up to do when it comes to posting things on their web site. The fundamental problem with the legislation the FIRB administers remains:
“There is only one test—is the proposal contrary to the national interest? What that may be varies over time depending on economic circumstances, community attitudes, geopolitics, a whole gamut of things.”
Then there is this:
“So, I wouldn’t have thought talking to FIRB about a concept or a possible transaction would tip you over the ASX disclosure threshhold.”
Probably not quite the level of certainty investors are looking for, but perhaps a good quote for the M&A lawyers to file away for future reference.
posted on 12 May 2012 by skirchner in Economics, Foreign Investment
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The government’s stated motivation for returning the budget to surplus next financial year is to give the Reserve Bank ‘maximum room to move’ on interest rates. Yet a fiscal contraction is no more effective in restraining the economy than a fiscal expansion is effective in stimulating it. In an open economy with a floating exchange rate and an inflation-targeting central bank, changes in fiscal policy do not have significant macroeconomic implications. That is why the reaction of financial markets to budget statements is so negligible. The Reserve Bank’s statements also make clear that fiscal policy is a very minor consideration in its decision-making.
During the financial crisis, the government tried to have it both ways, arguing that its fiscal stimulus saved us from recession, but had no implications for interest rates. The second part of the argument was correct, but not the first. If the first part had any truth, then monetary policy must have been much tighter during the financial crisis as a result of the government’s stimulus spending.
The government should have no concern over the macroeconomic implications of changes in the budget balance, so long as it is balancing its budget over time and conducting fiscal policy in a sustainable manner. This should free the government to focus on what fiscal policy can do effectively, namely, changing microeconomic incentives to work, save and invest.
The government and opposition’s mistaken belief in a trade-off between fiscal and monetary policy is dangerous, because it leads to fiscal policy decisions that are more about window-dressing the budget balance and claiming credit for reductions in official interest rates that would have happened anyway, rather than improving incentives. For example, the mistaken belief that tax cuts stimulate demand and lead to higher interest rates can prevent sensible tax reform that has positive implications for the supply-side of the economy. Similarly, the fiscal stimulus of 2008-09 was bad primarily because it misallocated resources. Take away the macroeconomic rationale and the stimulus measures look indefensible on microeconomic grounds, even if the spending had been administered perfectly (which it was not).
A budget surplus target can be defended as a fiscal rule designed to impose additional discipline on government decision-making that might otherwise be absent. But there is no reason to subordinate fiscal policy to monetary policy and fiscal targets should not be pursued at the expense of the microeconomic incentives that are the ultimate source of both economic growth and long-term fiscal sustainability.
posted on 09 May 2012 by skirchner in Economics, Financial Markets, Fiscal Policy, Monetary Policy
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John Freebairn makes the case against a sovereign wealth fund for Australia in the Australian Journal of Agricultural and Resource Economics (no paywall for the moment!) From the conclusion:
The applicability of arguments used in other countries, including Norway and the smaller Middle East oil producers, to quarantine the revenue windfalls of a mining boom in a sovereign wealth fund for use by future generations are questioned for Australia. Relative to these countries, in Australia mining revenues represent a smaller share of the economy and budget, and Australia has a much more diverse portfolio of different minerals and energy, and many with proven reserves exceeding 50 years at current extraction rates. There are other sources of volatility of government revenues and outlays with low correlations with mining government revenues. Future generations are expected to have higher per capita incomes than the current generation. Including mining revenues and outlays within the normal budget processes provides greater flexibility for using the mining boom revenue windfalls for a wider range of investment, tax reform and debt reduction strategies to support higher future incomes than a sovereign wealth fund.
posted on 04 May 2012 by skirchner in Commodity Prices, Economics, Fiscal Policy
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Some of us have long memories:
‘No Risk In 1% Rate Cut, Says Fraser’, PAUL CHAMBERLIN, 4 December 1996, The Age:
The former governor of the Reserve Bank, Mr Bernie Fraser, said last night he believed November’s cut in official interest rates should have been doubled. As an overheated dollar retreated in markets yesterday, amid concern about its effect on exports, Mr Fraser said he thought the 0.5 per cent reduction announced last month by the central bank could have been 1 per cent.
“I thought at the time with inflation pretty well under control, very much under control really, and the economy being a bit sluggish in some sectors, that we could have accommodated a 1 per cent cut without any risks,” he said on the ABC’s The 7.30 Report.
Bernie’s comments in December 1996 tanked AUD so hard, the RBA did not cut at that month’s regularly scheduled Board meeting. The RBA waited until 14 December while markets recovered from Bernie’s open mouth operations. So monetary policy ended-up being marginally tighter for longer thanks to Bernie. During his time as Governor, Bernie gave us an average cash rate of 8.7% and an average inflation rate of 3.6%.
posted on 01 May 2012 by skirchner in Economics, Financial Markets, Monetary Policy
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