Blame Martin Place
Today’s Q3 CPI outcome cements the case for further RBA tightening at the November Board meeting. The government will inevitably cop a lot of flack as a result of the mid-election campaign tightening. For this, the government largely has itself to blame. Having taken credit for the cyclical downswing in interest rates in 2001, it can hardly avoid taking responsibility for the other side of the cycle. The irony is that the government’s campaign on interest rates in 2004 set it up to be a victim rather than a beneficiary of future prosperity.
This is unfortunate, since it distracts attention from the fact that it is the RBA that is ultimately responsible for interest rates and inflation outcomes. As then Deputy Governor Ian Macfarlane once said, ‘blame Martin Place.’ It is now clear that the RBA has fallen behind the curve in its task of inflation control. The RBA was already forecasting an increase in inflation for 2008 in its August Statement on Monetary Policy, even with the benefit of the August tightening. The baseline for the underlying inflation forecast in the November Statement will be 3.0%, based on the average of the statistical core series published today. Even with the benefit of a November tightening, it will now be difficult for the RBA to publish a target-consistent inflation forecast in the November Statement. The RBA really needs to raise rates by 50 bp in November, although will probably stick with 25 bp, with a follow-up 25 bp in December.
The smartest thing a new Labor Government could do would be to demand that Governor Stevens start giving press conferences after each monthly Board meeting. This would significantly change the media dynamics surrounding interest rate changes and make clear to the public who is really responsible for inflation control and changes in interest rates.
posted on 24 October 2007 by skirchner in Economics, Financial Markets, Politics
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Explaining Higher Interest Rates
Terry McCrann explains the real causes of higher interest rates:
It’s the prosperity, stupid.
posted on 24 October 2007 by skirchner in Economics, Financial Markets, Politics
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Rudd as ‘Unreconstructed Interventionist’
Sinclair Davidson and Alex Robson argue in a WSJ op-ed that federal opposition leader Kevin Rudd is a thinly disguised economic interventionist:
a closer look at Mr. Rudd’s record reveals that he’s not a reformer, but rather an unreconstructed interventionist masquerading as a free market conservative. Call it “Ruddonomics.”
Take his parliamentary record, for a start. Since coming into the Parliament in 1998, Mr. Rudd has toed the party line and opposed most efforts to further reform the economy. The Australian Labor Party opposed the privatization of Australia’s government-owned telecommunications provider, Telstra; strongly protested industrial relations reform, including Mr. Howard’s recent efforts to reduce union power and abolish unfair dismissal laws; and, most importantly, opposed all significant tax reform over Mr. Howard’s tenure, including cuts in income taxes.
Mr. Rudd’s economic philosophy isn’t a secret. In a speech to the free market Center for Independent Studies in Sydney last year, he openly attacked the free market ideas of Nobel Laureate Friedrich Hayek, branding him a “market fundamentalist.” In Mr. Rudd’s mind, it’s okay to accept “the economic logic of markets but . . . these must be properly regulated and that the social havoc they cause must be addressed by state intervention.” He also argued that public policy should deliver long-term market-friendly reform tempered by “social responsibility.”
posted on 23 October 2007 by skirchner in Economics, Politics
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Arbitraging Federal Electoral Division Betting Odds
Simon Jackman identifies daily spot arbitrage opportunities in bookmakers’ odds for various divisional races in this year’s federal election.
posted on 23 October 2007 by skirchner in Economics, Financial Markets, Politics
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The Baltic Dry Index versus Kevin Rudd
Capacity constraints are one of the issues in this year’s federal election in Australia, with the opposition Labor Party suggesting that the federal government has failed to ‘invest’ in capacity across a broad range of areas.
A less parochial perspective on the issue shows that governments and the private sector everywhere have been caught out by the strength in global demand. As the WSJ notes, the Baltic Dry Index rose to a new record high last week and Australia is hardly alone in experiencing congested ports:
The Baltic Exchange Dry Index, the most important and widely used indicator of world-wide ocean freight rates for bulk commodities, hit a record Friday after rising 169% over the past year. And shippers, brokers and commodity merchants are braced for higher rates next year and possibly through 2009. By then enough new bulk freighters are expected to come on line to ease the shortage.
“All of the ship owners are making a lot of money because these are numbers that the market has never seen,” said John P. Dragnis, commercial director of Athens-based Goldenport Inc., one of the largest providers of ships to commodity sellers.
Even when ships are available to carry the cargo, inadequate port facilities can cause delays, driving up the cost of shipments. At Brazilian ports, ships often wait offshore for as long as two weeks for their turn to load or unload, like airplanes sitting on a runway waiting for a gate.
posted on 22 October 2007 by skirchner in Economics, Financial Markets
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The Future Fund versus the Republic of Azerbaijan
Which of the following sovereign wealth funds would you expect to score more highly in terms of transparency and accountability: the State Oil Fund of the Republic of Azerbaijan; Timor’s Petroleum Fund; Singapore’s Temasek Holdings or Australia’s Future Fund?
The answer is that Australia’s Future Fund lags behind all of them according to a scoreboard of sovereign wealth funds compiled by Ted Truman of the Peterson Institute. The Future Fund scores seven out of a possible 12 for transparency and accountability compared to 9.5 for the State Oil Fund of the Republic of Azerbaijan. Indeed, the Future Fund scores only half a point better than the National Oil Fund of Kazakhstan (jagshemash!)
In terms of the overall scoreboard, which takes into account additional factors such as structure and governance, Australia’s Future Fund ranks sixth with a score of 17 out of 25, behind New Zealand’s Superannuation Fund, Norway’s Government Pension Fund, Timor’s Petroleum Fund, Canada’s Alberta Heritage Savings Trust Fund and the Alaska Permanent Fund.
Having recently attended a presentation on the NZ Super Fund by its head, Adrian Orr, I think New Zealand’s number one ranking is well deserved. The NZ Fund is in many ways of a model of public sector accountability and transparency. Yet for all that, the Fund is also designed to support bad public policy, namely a universal pension system. You would rather have Australia’s retirement income system than New Zealand’s. But that is no excuse for the Future Fund to be falling short of world’s best practice in terms of transparency and accountability.
posted on 20 October 2007 by skirchner in Economics, Financial Markets
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Kevin Rudd’s Anti-Market Ideology
‘Traditional Labor voter’ Paul Kerin exposes the ignorance and intellectual laziness underlying Kevin Rudd’s anti-market ideology:
The best glimpses of Rudd’s philosophy are contained in a couple of articles he wrote in The Monthly last year before becoming Opposition Leader. His social aspirations - and genuine passion about them - are admirable, although not ambitious enough. But his economic philosophy, or lack thereof, is worrying. The ideologically driven uni-dimensional view of the world outlined in the essays prevents him from entertaining the thought that freer markets could help him better achieve his social aspirations. Rudd depicts the “real battle of ideas in Australian politics” as the “battle between free market fundamentalism and the social-democratic belief that individual reward can be balanced with social responsibility”.
This depiction - replete with false mutual exclusivities (free market v social responsibility) and put-down labels (free market fundamentalism) - implies that anyone who supports free markets must be a selfish bastard who doesn’t care about social goals. Nothing could be further from the truth…
Rudd attacks “market fundamentalists”, a label he liberally attaches to Hayek and modern economic liberals, for believing that humans are “almost exclusively self-regarding” and for holding self-regarding values themselves. He contrasts this with “other-regarding values of equity, solidarity and sustainability” of social democrats such as him.
Ironically, he claims fundamentalists “distort Smith, adopting his Wealth of Nations while ignoring ... his The Theory of Moral Sentiments”. I can’t believe that an intelligent, reflective man such as Rudd has read either book. If he had, he would not have drawn this conclusion. It is a gross distortion. Smith’s views on human behaviour in both works are perfectly consistent…
Rudd clearly hasn’t read Hayek either. His only evidence on Hayek’s values are quotes from former communist and non-economist David McKnight.
posted on 20 October 2007 by skirchner in Economics, Politics
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The World Bank as Rogue Institution
Ahead of this weekend’s meeting of the World Bank in Washington, Adam Lerrick argues that it is a rogue institution that needs to be brought under control by its members:
While presidents come and go, a bureaucracy, hostile to change and clever at manipulating an unwieldy multinational board, is flouting the bank’s founding articles, distorting the facts, concealing losses, lowering standards and now planning to take on new risks. The bank is desperate to “remain relevant” to middle-income countries that no longer need its money and do not want its advice.
The bank does not, as it claims, lend where the poor live. More than half of loans since 2000 flowed to six upper-middle-income nations which tally less than 5% of the developing world’s hard-core needy. For the creditworthy countries the bank courts, the private sector will underwrite any pro-poor project the bank would consider. Far from generating a surplus for the poorest, fees and interest on middle-income lending now fall $500 million a year short of the bank’s cost of doing business. The $2 billion return on the bank’s $40 billion of zero-cost capital masks the loss.
Australia contributed AUD 176m to the activities of the World Bank in 2004-05.
posted on 19 October 2007 by skirchner in Economics, Financial Markets
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Laissez Faire Books Going Out of Business Sale
Laissez Faire Books is going out of business:
We are sad to announce that Laissez Faire Books is going out of business. The book market has changed tremendously over the past 30+ years, and it has gotten harder and harder for a small niche bookseller to cover expenses. I suppose the market has spoken.
I want our loyal customers, supporters, and friends to know how much that support has meant to everyone at LFB over the years. You helped us stay around as long as we did and made our efforts worthwhile.
In the days before Amazon, LFB was one of the few means by which those of us in the Antipodes could access classical liberal literature. Grab a bargain while you still can.
posted on 19 October 2007 by skirchner in Economics
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Can Greenspan Write?
Michael Kinsley reviews Alan Greenspan’s The Age of Turbulence and pronounces:
So the suspense is over: Alan Greenspan is able to express himself in clear English prose.
That is just the first of many things wrong with Kinsley’s ridiculously partisan review of Greenspan’s memoirs.
I’m about half-way through Greenspan’s book and my first reaction was that Greenspan did not write it. Greenspan himself acknowledges the assistance of a collaborator in the writing and it is clear that whatever Greenspan contributed has been heavily re-written. Greenspan’s distinctive voice is evident in his many speeches as Fed Chairman, but it is not to be found in this book. With the publisher having paid a USD 8.5 million advance, it is hardly surprising they would want the book professionally written.
As for the substance of the book, more later…
posted on 16 October 2007 by skirchner in Economics, Financial Markets
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Supply-Side Implications of Lower Taxes
The ‘tax cuts lead to higher interest rates’ brigade have been relatively quiet in response to the government’s tax cuts announced yesterday. This is in no small part due to the government continuing to highlight in the Budget papers the positive supply-side implications of its tax cuts. According to yesterday’s Mid-Year Economic and Fiscal Outlook:
The 2007-08 MYEFO tax cuts and the Government’s goal for the personal income tax system will continue the focus on encouraging workforce participation that has been a feature of the tax cuts delivered by the Government since the introduction of The New Tax System. The estimated impact of the 2007-08 MYEFO tax cuts is to encourage around 65,000 new entrants into the workforce. The cumulative effect of the tax cuts delivered by the Government since The New Tax System is estimated to encourage around 300,000 new entrants to the workforce.
Far from leading to higher interest rates, the government’s tax cuts may play an important role in preventing the labour market from becoming a source of inflationary pressure and a constraint on economic growth.
posted on 16 October 2007 by skirchner in Economics, Financial Markets, Politics
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Promises, Promises…Good Policy, Bad Strategy
The government announces $34 billion in tax cuts, the day after calling the federal election for November 24:
Treasurer Peter Costello has announced five years of progressive reductions of income tax that will see the current tax system eventually reduced to four tax brackets—15, 30, 35 and 40 cents in the dollar.
The plan would see the tax-free threshold raised to $14,000 next year, while the lowest tax rate would kick in on earnings over $34,000.
In following years, the top tax rates would be lowered while the tax-free threshold would be lifted again.
Mr Costello has said the goal of the restructure was to arrive at a tax-free threshold of $20,000 and for there to be only four marginal tax rates, with the top rate set at 40 cents in the dollar.
The changes, to be introduced gradually, will see the tax threshholds for lower income earners increased and the reduction of the percentage of tax paid in the top two tax categories—currently 40 and 45 percent.
This is good policy, but bad political strategy. These initiatives would have been much more credible had they been announced in the May Budget and legislated ahead of the election. As things stand, they are just another campaign promise that the public is likely to treat with scepticism. The electorate may even be resentful that it takes a federal election to induce good fiscal policy from the government.
Moreover, should the government lose the election, the proposed tax cuts will give way to the as yet unannounced tax policy of the federal opposition. The government runs the risk of bequeathing to the Labor Party the surpluses it has accumulated in the Future Fund and the other artificial lock-boxes it has used to warehouse revenue it doesn’t need to meet current expenditure commitments.
At least the government is ignoring the advice of the ‘tax cuts equals higher interest rates’ brigade. No prizes for guessing what Chris ‘Rainy Day’ Richardson will have to say about it.
posted on 15 October 2007 by skirchner in Economics, Financial Markets, Politics
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Fiscal Policy and Interest Rates in Australia
Alan Wood mentions my Policy article on fiscal policy and interest rates in his column in today’s Australian:
The very large (potential) budget surpluses of recent years tells us Australia has a structure of tax rates that is excessively high and major tax reform is needed.
It just has to be done in a way that doesn’t add to inflationary pressure—that is, it needs to be offset by spending cuts or spread over future budgets.
Yet it is quite clear from the run of huge budget surpluses the Howard Government has enjoyed that structurally, Australia’s tax rates are excessive.
This is no time to take serious tax reform off the economic agenda.
posted on 13 October 2007 by skirchner in Economics, Financial Markets
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Two RBA Tightenings Before Christmas?
Terry McCrann speculates on a December RBA tightening, in addition to a November tightening:
so hot is the economy, it is even possible—but, I hasten to add, nowhere yet likely—that he could raise the rate again in December.
I’ve previously suggested that a November rate rise was only certain with a ‘bad’ inflation number in the September quarter. If ‘baddish’, Stevens and the RBA brains trust would have to weigh all the other evidence.
Consider it ‘weighed’. Now even a ‘baddish’ inflation number will deliver a rate rise. Only a clearly ‘good’ number will avoid one. Or postpone it.
Malcolm Maiden also notes the high probability of an election eve rate rise:
the bank itself was perceived to be maintaining what could be called an interest rate demilitarised zone around elections.
The dimensions of the interest rate DMZ were never precisely outlined. But the markets believed that the Reserve would not change rates during an election campaign, and was less likely to do so when one was approaching.
The Reserve’s action and inaction tended to bear that out. It began announcing interest rate hikes and explaining them at the start of the ‘90s, when Macfarlane’s predecessor, Bernie Fraser, was in charge. But until August this year there were no examples of a rate rise in an election year, let alone a rate rise in the middle of an election campaign. So the August move set a precedent, and it did so as new governor Stevens was reshaping the view of the bank’s independence.
As I argue here, the August move set a precedent only in that it is the first time that the electoral and interest rate cycles have coincided in this way. The current conjunction of political and economic events has made it necessary for Stevens to spell out the implications of RBA independence in a way that has simply not arisen in the past.
posted on 12 October 2007 by skirchner in
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Not a Minsky Moment
If you read only one paper on recent developments in credit markets, this should be it:
the correct application of the Minsky model to the current data indicates that the financial system may be able to absorb the subprime mortgage and securitization technology shocks in an orderly fashion, without a large “financial accelerator” effect. The financial system has suffered a significant liquidity shock, and it is not over yet. But the worrying turmoil does not necessarily mean that the turmoil resulting from this shock should be viewed, as some have labeled it, as a “Minsky moment” – that is, the beginning of a severe economic decline produced by a collapse of credit, which would magnify adverse aggregate demand shocks. Such collapses of credit, in the Minsky framework, tend to occur in reaction to asset price collapses, which are themselves partly a result of the widespread overleveraging of consumers and firms. At the moment, however, it is not obvious that housing or other asset prices are collapsing, or that leverage is unsustainably large for most firms or consumers. That is not to say that the economy will avoid a slowdown, or possibly even a recession.
posted on 11 October 2007 by skirchner in Economics, Financial Markets
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