Regular readers would be aware of my penchant for rubbishing the political (leaders?) folk who vie for our votes, and who decide on how legislation and laws that govern our lives are drafted. It’s maybe a tad disrespectful of me, and more than a little unfair to those individuals who strive to do their best, and to represent their constituents with the least compromise to their basic election promises.

However, none of that stops me from bemoaning the complete and utter failure of governments the world over to get on with the job that they were elected to do. European politicians and “elites” who demurely mutter total nothings such as “we will do whatever it takes to ensure that … blah, blah, blah” while their economies spiral into disaster. American politicians who talk about “We the people” while adjusting the pork to suit their donors and  Australian politicians that boast about the ‘lucky country’, while presiding over momentous times and opportunities squandered. So i will continue to call for better modes of thinking about the long term future of this country.

But all is not lost. i actually do see a light in amongst all of these dull beacons of blandness parading as community leaders. Get ready because there will be a lot of complaining at my next statement….

i think that Reserve Bank of Australia Governor Glenn Stevens promotes a shining ray of light and vision that is incredibly lacking in the leadership (whether political, community or commercial) of Australia today.

Glenn Stevens today gave a speech in Adelaide, in which he puts the case for the ‘glass being half full’ when pondering Australia’s position in the world. He notes the rampant pessimism eminating from Australian media and social commentary, and points to a few of the possible reasons why this may be the case. Even better, he then proceeds to give a few basic lessons in how the RBA’s role and mandate impact on its decisions, and why those decisions won’t always fit in with the objectives of one or another pocket of society.

A chart is shown, which illustrates Australia’s gross domestic product “GDP” against other major countries. It is expressed in terms of GDP per person in each country, which is a pretty good measure given Australia’s strong population growth. Is the country making more money per person than it was in the past…?

As a financial planner, surrounded by analysts, commentators and Very Clever People, who are currently reflecting imagination time-frames equivalent to that of an adult mayfly, i find it incredibly comforting to know that our national monetary policy is in such solid and steady hands as those of Mr Glenn Stevens.

Glenn Stevens points out that a lot of the ‘angst’ in sectors of the economy (such as retail) is really just about changing expenditure habits, and the structural difficulties associated with accommodating those changes – in other words, it not just about mining stealing industry or retail jobs and other such catch-cries.

Here’s a chart illustrating the current rates of business investment (which hopefully leads to better capital stock and eventually higher future outputs) with those of previous (pre-commodities boom, pre-GFC) periods. They suggest that our growth rates are doing quite well – even without mining. In other words, the “two-speed economy” line trotted out by economists and commentators ad-nauseum, is not a true and correct picture of the Australian economy, nor is an expectation of 1995-2011 growth rates continuing a reasonable expectation of the near term future. So maybe a great deal of the dissatisfaction with RBA outcomes is more a reflection of people not adjusting their expectations to face altered realities?

 

Central bankers don’t dictate fiscal policy

Anyone watching global events in the past 5 or so years will by now be highly cynical of the actions of politicians in regards to so-called ‘fiscal policy’. In other words, the ability to keep government expenditure within budget, to provide services and infrastructure where it is needed, when it is needed. To put in place legislative policy measures that best provide the balance of social dignity and propriety for the less fortunate, while promoting the creativity and productivity of those with the where-withall to get things done.

Central banks operate the proverbial ‘blunt instrument’. That is, they can allocate the interest rate at which capital is made available and in a vague sense, the level of credit in the economy. That’s about it. If governments fail to legislate or promote policies to effectively allocate resources in a fair and efficient way then bubbles and busts will develop in one or more sections of the economy. Central bankers are severely limited in what they can do to tackle such distortions. If they drop interest rates too much, overactive speculation rises in some sectors. If they raise interest rates too much then they may kill the marginal flow of money and dampen the speculators but cause further hurt to already depressed sections of the economy. It’s a tightrope balance in which the best outcome is likely to be when only some sections of the community disagree with your position.

Here’s a section from Glenn Steven’s speech (my italics)…

One thing we should not do, in my judgement, is to try to engineer a return to the boom. Many people say that we need more ‘confidence’ in the economy among both households and businesses. We do, but it has to be the right sort of confidence. The kind of confidence based on nothing more than expectations of ever-increasing housing prices, with the associated willingness to continue increasing leverage, on the assumption that this is a sure way to wealth, would not be the right kind. Unfortunately, we have been rather too prone to that misplaced optimism on occasion. You don’t have to be a believer in bubbles to think that a return to sizeable price increases and higher household gearing from still reasonably high current levels would be a risky approach. It would surely be a false basis for confidence.

When reading the notes accompanying monetary decisions, i have often had the feeling that our central bankers are more than a little annoyed at having to try to do the work of goverment, and are irked that they do not have the tools with which to do so at their disposal. Real estate bubbles and infrastructure bottlenecks in recent times are examples where prudent and insightful government policy would have far more productive impact towards achieving positive outcomes.

The paragraphs following are quite a large chunk of Governor Steven’s speech, as it relates to the interest rate policy settings of the RBA. Those people who have accumulated savings or who are living off savings, can take a great deal of comfort from these statements.

In saying that, of course, we cannot neglect the interests of those who live off the return from their savings and who rightly expect us to preserve the real value of those savings. Popular discussion of interest rates routinely ignores this element, focusing almost exclusively on the minority of the population – just over one-third – who occupy a dwelling they have mortgaged. The central bank has to adopt a broader focus. And to repeat, it is not our intention either to engineer a return to a housing price boom, or to overturn the current prudent habits of households. All that said, returns available to savers in deposits (with a little shopping around) remain well ahead of inflation, and have very low risk.

So monetary policy has been cognisant of the changed habits of households and the process of balance sheet strengthening, and has been set accordingly. As such, it has been responding, to the extent it prudently can, to one element of the multi-speed economy – the one where it is most relevant.

All very balanced and logical and prudent and fair. Not exactly the impression you get after reading the mainstream media after interest rate decisions are announced, is it? And notice the statistics relating to mortgages and mortgage interest rates? And the concern about those with accumulated cash? In the USA, Japan, UK and large chunks of Europe, money-printing and currency debasement has combined with ongoing inflation to take money off those who have been prudent and saved, and passing that wealth on to others. In these countries, interest rates are generally less than 1% in inflation rates of around 3%, meaning savers are losing out. In Australia, our interest rates reward those who have saved money on hand. In other words, the prudent are rewarded for denying themselves the retail therapy of consumption.

And now the part which i think is most significant in terms of central bankers the world over asking their respective governments to please do a better job of setting up policies and legislation to take advantage of any interest rate settings or economic realities.

What monetary policy cannot do is make the broader pressures for structural adjustment go away. Not only are the consumption boom and the household borrowing boom not coming back, but the industry and geographical shifts in the drivers of growth cannot be much affected by monetary policy. To a large extent, they reflect changes in the world economy, which monetary policy cannot influence. Even if, as a society, we wanted to resist the implications of those changes other tools would be needed.

The full text of Glenn Stevens’ speech can be found on the RBA website here.

Yay Yay, R.B.A..!

Yes, i am one of the very few people who would push a Facebook “like” button on the RBA’s wall, if i knew how to do such things. This makes me a bit of a Robinson Crusoe at dinner tables or financial planner functions – but i think many people confuse the role of the RBA with that of the government. One is getting on with the job, while the other is fostering community stand-up comedy and farce. Your guess which is which.