Christopher Joye wrote a great article very
recently in the Australian Financial
Review. It perfectly critiques the demented policies of the Reserve Bank of
Australia (RBA) and the dire consequences that may eventuate.
Glenn Stevens and his cronies at the RBA are abetted
by that bunch of buffoons in Canberra that passes these days as a “Government”.
Sadly our Treasurer (Joe Hockey) hasn’t a clue (neither has our completely out-of-touch
Prime Minister, Tony Abbott, an individual, who, I for one, will never trust
again). And yes, I’ve been a long time Liberal supporter, but what a
disappointment this Government has been. It’s sad and pathetic.
As a side note, it’s also very alarming that
Newscorp journalist Terry McCrann still appears to be being briefed by someone
in the Reserve Bank regarding interest rate decisions before they are
announced publicly. This gnome-like man moves markets with his (grammatically poor)
writings in the grubby Murdoch tabloids - it beggars belief. What sort of
country runs on this basis?
Anyway, I digress. Here is Christopher
Joye’s article (main points):
The Reserve Bank of Australia has screwed savers by giving them negative
"real" interest rates that do not cover their cost of living (after
tax, they're miles behind). It has ruined retirees who cannot earn anything
remotely like the 2 to 3 per cent real return above inflation they've become
accustomed to since the RBA started targeting consumer prices back in 1993.With the cash rate set at depressionary levels, main street and conservative retirees are being forced to take complex risks (hybrids anyone?) they cannot fathom in a search for yield that will end in tears.
What is less appreciated is that the RBA, and its myopic political co-conspirators in Canberra, are also emphatically
screwing home buyers pouring their life earnings into five-times leveraged assets
that are grossly overvalued. My current mark-to-market is Australian
housing is trading at least 20 per cent above fair value.
Central bankers are taxing future generations to superficially stimulate
the present. It's classic human hedonism or, more technically, hyperbolic
discounting. The economy is like a human body. If you fall sick, there's a case
for temporary medicine to mitigate the malaise and facilitate recovery. The
policy analogy is lower interest rates and budget deficits. But if you dope up the patient on extreme
quantities of drugs for long periods, you actually start damaging the body's
capacity to heal itself. Rather than relying on its innate ability to
repair, the body becomes addicted to external bailouts. And the medicine morphs
into the problem.
Imposing excessively stimulatory interest rates for
unnecessarily long periods (it is eight years since the GFC first hit)
undermines the regenerative qualities of the economy that are the cornerstone
of long-term productivity growth. Ridiculously cheap money inflates the value of
leveraged assets to unsustainable levels, sucking scarce people and capital
away from other businesses. Debt-laden firms are rewarded while the prudent are
punished.
These distortions are especially acute in Australia where the price of
money for most households and small businesses is based on the variable
overnight cash rate rather than the long-term fixed rates that are popular
overseas. The unusually high share of variable-rate debt in Australia is why
the RBA was able to deliver such powerful relief to consumers by slashing its
cash rate from 7.25 per cent in August 2008 to 3 per cent in April 2009.
The worry is policymakers have come to believe that
if they keep debasing borrowing costs to zero, they can diversify away the
business cycle and massage nominal growth back to their ivory tower conceptions
of "trend". They have forgotten that episodic downturns –aka creative destruction
–are precisely what the economy requires every so often in order to replace bad
businesses with good ones.
The whole point of the GFC is that it was a negative productivity shock.
Those stunning 2008 and 2009 price falls reflected in freely functioning
markets, while painful for our portfolios, were perversely positive because
they signalled that we had tied up too much money in unproductive retail and
investment banks, and leveraged assets such as commercial and residential
property.
Officialdom was not listening. CBA is worth 111 per cent more than it was in 2007 while our
house prices are 29 above their pre-GFC peak. Australia is destined not to learn the lessons of history and it will
take our own, very personal shock to set us straight. You can only stretch
the market's elastic band so far before it snaps back in your face.
Every half-smart investor I know is worried about deflation. But you don't make money from consensus
views. I hunt out heterodox opportunities. Lower asset or consumer prices
triggered by excess supply or insufficient demand in one area (e.g. housing,
financial services, petrol, or commodities) can be a vital part of capitalism's
rehabilitation process that apportions winners (renters and consumers) and
losers (bankers and miners). Therefore, I'm not convinced a bit of deflation is
an absolute evil in the same way some inflation can be a good thing.
Right now, we have strong asset price inflation across housing, listed
equities, private equity and bonds. Core
consumer price inflation is expanding at a normal pace despite crisis-level
interest rates. My contrarian view is that as the US labour market tightens
and wage inflation stirs, the world's largest economy will start exporting
inflation. This will be reinforced by dearer Chinese product prices as their
once-cheap labour gets repriced and a large middle class emerges. Inflation
stoked by the two biggest economies will then likely be amplified by central
bankers keeping rates too low for too long, partly because of pressure from
politicians to continue monetising public debts.