The Reserve Bank of Australia is becoming ‘conventional’


The Reserve Bank of Australia has lowered the cash rate to 1.5% in an effort to stimulate growth, boost inflation and encourage a fall in the Australian dollar.

The cut of 25 basis points from 1.75% is the last decision from outgoing RBA Governor Glenn Stevens. In a statement on the rate decision he says:

“Low interest rates have been supporting domestic demand and the lower exchange rate since 2013 is helping the traded sector. Financial institutions are in a position to lend for worthwhile purposes.”

In addition:

In his statement, Glenn Stevens also addressed the concerns around Australia’s property market. He noted Australia’s banks have been cautious in lending to certain sectors like the property market and despite the possibility of a considerable supply of apartments emerging over the next few years, lending for housing has slowed this year.

It seems the RBA has ‘unlearned’ the lessons of 2008. Then it did not suffer a recession because, contrary to what most major central banks, it did not allow NGDP to tank.

What supported domestic demand was an adequate monetary policy that kept spending growing close to a stable trend path. Maybe because of worries about house prices, monetary policy has been overly tight for the past two years, despite the drop in the policy interest rate.

Australia Aug16_1

Australia Aug16_2

Australia´s monetary policy statement says:

In determining monetary policy, the Bank has a duty to maintain price stability, full employment, and the economic prosperity and welfare of the Australian people. To achieve these statutory objectives, the Bank has an ‘inflation target’ and seeks to keep consumer price inflation in the economy to 2–3 per cent, on average, over the medium term.

The chart shows that since 1992, when the target was set, inflation has averaged 2.5%. The RBA couldn´t have done better! Soon we´ll hear Steven Williamson say “Told you so; interest rates are falling and so is inflation. If rates continue to fall and remain low, you´ll get deflation”!

Australia Aug16_3

If only the RBA had continued to pay attention to NGDP!

The chart shows that the house price boom ended, without tears, more than 10 years ago.

Australia Aug16_4

The Fed Will Fail

A Benjamin Cole post

House prices feed heavily into U.S. inflation rates as measured, and as pointed out by Kevin Erdmann of the excellent blog Idiosyncratic Whisk, there is hardly inflation at all but for housing costs.

The matters little for U.S. Federal Reserve officials or the gaggle of inflationistas who monomaniacally jibber-jabber about prices. At every juncture, monetary policy is about the perils of inflation and the need to raise rates.

But, as noted by many, from here the Fed cannot tighten its way to higher long-term interest rates. The United States is in that monetary zone long ago noted by Milton Friedman: Interest rates are low as a consequence of tight money.

The present-day reality is this: Easy money for years on end does not lead to sub-2% 10-year US Treasuries, which we see in the market now.

And Fed policy gets more confounding.  If the Fed raises rates, it will only succeed on the short-end of the curve. As money is already tight, long-term rates will sag, and that includes long-term mortgage rates.

Okay, so lower long-term mortgages rates, ceteris paribus, lead to higher house prices and thus higher rents, as rents are tried to house prices.

Of course, the real solution to high housing costs in the United States is twofold, involving aggressive upzoning or dezoning of property in high-cost cities, and a looser money policy and extension of credit to home-building industries and buyers.

An aggressive pro-growth monetary policy might actually result in prosperity and higher long-term rates. Oddly enough, the higher mortgage rates might somewhat depress house prices and related rents, which feed into reported inflation.

As it stands, there is little the Fed can do about property zoning, which is a local prerogative. At the last Fed shindig in Jackson Hole, every panel discussion was about inflation, but none mentioned property zoning. I would call this a blind-spot, but that would suggest the Fed has eyes.

In any event, the U.S. property-owning class in each city seems content to zone out competition, and is politically powerful. In the real world, prosperity in the United States will incur moderate inflation, in large part due to housing costs.

The Fed’s chosen solution is to prevent prosperity, but that is a central banker’s fix and not a good one. The Fed’s better recourse from here is to shoot for higher long-term growth and interest rates, and moderate inflation, by any means necessary, including helicopter drops.

Of course, the best course is targeting NGDPLT.

The Fed is likely to enter the next recession with interest rates near the zero-bound and inflation dead. Then what?

The Tale Of Two Markets, Or, Why “Fighting Inflation” Is A Bad Idea For The Fed

A Benjamin Cole post

Motor vehicle sales are booming in the United States, up 10% in the last year, and double since the Great Recession. In 2015 more new light vehicles may be sold in the U.S. than ever before. Used cars sales have risen also.

Of course, there is a price to pay for relentless growing demand of complex equipment such as the modern-day automobile. In the U.S. motor vehicle prices have soared…er, been flat since 1998.


Thanks to blogger Kevin Erdmann of Idiosyncratic Whisk, we have a better understanding of inflation in the U.S. and the role that ubiquitous local property zoning plays in suffocating supply, and thus boosting price.

There is nothing the U.S. Federal Reserve can do about local zoning, and the U.S. Supreme Court upheld local property zoning in 1926. America’s right-wing, which ostentatiously lionizes free markets when the topic is the minimum wage, goes mute when the discussion is single-family detached housing districts. Highest and best use, and free markets, the capitalist system and all that? Not a polite topic. And that’s the right-wing, the left-wing is worse. See San Francisco. Although the City of Newport Beach, Ca., GOP territory, is just as bad.

Worse, housing is a large component of the CPI, about 40% of core CPI. And, of course, the cost of housing must indirectly feed into other costs, such as the cost of labor. Who is going to live and work in NYC for how much a week?


Yes, the Fed can hold inflation to 1% to 2%, it has proven that. The cost is in lost output, to the tune of trillions of dollars since 2008, or perhaps 10% of GDP in any year.

Better the Fed shoot for 6% or 7% growth in the nominal GDP, and live with some inflation. Given the nature of U.S. housing markets, we will not see robust growth and microscopic inflation together. The central bank’s 2.0% IT is too low, and if a IT is favored, then should be a band, perhaps 2.5% to 3.5%.

The supply-side in the U.S. today is global. Even booming demand for automobiles results in stagnant prices.

The Fed should let it rip.




A Thought-Provoking Op-Ed In Forbes

A Benjamin Cole post

Advances in production and information have created an ongoing surfeit of goods, argues Kevin O’Marah, in a Forbes March 17 op-ed.

O’Marah makes a good case that the incredible U.S. retail network—think WalMart—can easily meet any increase in demand. O’Marah concludes that inflation is dead.  O’Marah could have gone further: thanks to the globalization of the U.S. supply-side, the idea of demand outstripping supply is outdated.

No longer does a Big Steel, or Big Auto, set prices. Steel, autos and consumer goods come from all over the world into the United States, and the domestic market is saturated with product.

With the passing exception of oil (a peculiar market dominated by global thug states), it is difficult to conceive of a product or good in short supply, rationed by higher prices.

Anyway, Inflation Paves The Way To Higher Supply

Supply-side improvements are always a good idea; every sensible economist agrees. That said, when there are “shortages” of a product—say oil—the way to greater supply is often paved by higher prices. Who can deny that higher oil prices led to today’s glut? To become hysterical about inflation every time oil or corn prices rise is to misunderstand the nature and beauty—and effectiveness—of the price signal. Let the price signal work.

Housing—The Exception

Market monetarists and others of late have been more closely examining housing markets, and in general concluding that onerous state and local regulations create some regional shortages, that are in fact settled by higher prices, which could be called “inflation.” In good times, bidding may propel housing prices up in famously attractive U.S. markets along the coasts.

The solution to housing costs, or “inflation,” does not lie in the U.S. Federal Reserve, and to fight housing costs by tight money to suffocate the economy to get rid of a fever.

In fact, there probably is no (political) solution to higher housing prices. Powerful and often wealthy homeowner groups do not want condo high-rises, with ground-floor retail, plopped down into their neighborhoods. Nobody wants more traffic on their streets.

Take the City of Newport Beach, a GOP-enclave in famously conservative Orange County, California. To build a structure of greater than 250,000 square feet there, you need approval…by the city voters. Every well-positioned city in California is much the same. In a free market, there would be a wall of condos along the Pacific Ocean.

Add on, that housing prices in attractive cities probably “should” rise with rising disposable incomes, and as perceived investments. The federal tax code may be  another villain in house prices, and certainly local governments are, but not the Fed.

BTW, if the Fed is causing house prices to explode, how do you explain Detroit?


Has any modern nation prospered by fighting real-estate inflation? And when was the last time the United States faced inflation even above 5%, a rate at which was once met by casual shrugs by most economists?

The Fed is fighting the last war.

Print more money.