Archive for the Category Australia


My critics in 2012: “See Sumner, housing prices were way too high in 2006”

Real house prices are still well below the peak, but nominal prices hit a record high in September:


The 2006 period may have been a bubble, but as of today is seems far less irrational than it seemed in 2012.  (This recovery also makes Kevin Erdmann’s arguments look even stronger.)

The world’s full of uncertainty and markets are volatile.  Get used to it.

PS.  UK house prices (green) took a dip after 2006, but are now well above 2006 levels (and equal to 2006 prices in real terms).  Australia (blue) and Canada (pink) are much higher in both real and nominal terms.

What goes up must eventually . . . go up even more!


So the US is down in real terms, the UK is even, and Canada and Australia are up in real terms.  Isn’t that sort of consistent with the EMH?

Sure, those prices will dip at some point in the future.  That’s what efficient markets do, they go up and down.


The New World Order?

Yes, the US is still the global hegemon, but this headline certainly caught my attention:

Australia snubs US by backing China push for Asian trade deal

Australia is throwing its weight behind China’s efforts to pursue new trade deals in the Asia-Pacific region amid a growing acknowledgement the US-led Trans-Pacific Partnership agreement is dead in the wake of Donald Trump’s election victory.

Steven Ciobo, Australia’s trade minister, told the Financial Times that Canberra would work to conclude new agreement among 16 Asian and Pacific countries that excludes the US.

He said Australia would also support a separate proposal, the Free Trade Area of the Asia-Pacific, which Beijing hopes to advance at this week’s Asia Pacific Economic Co-operation summit in Peru.

Again, it’s far too soon to predict where we’ll end up under Trump. But there’s no doubt we are living in interesting times. For the first time in my entire life the US is no longer the world leader in the push toward globalization.

PS:  Here’s tweet by a Danish economist who understands this country much better than most Americans:



Long run NGDP growth and long term nominal interest rates

If you had to write down a simple model of long-term nominal interest rates, you might start with long run expected NGDP growth, although as we’ll see it’s actually a lot more complicated.  Here are some recent data on NGDP growth over the past 8 years, and 10-year bond yields:

Country   NGDP growth rate   10-year yield

USA               2.75%                1.69%

Eurozone        1.17%                0.05%  (German)

Britain           2.41%                 1.28%

Japan           -0.21%                -0.15%

Australia        4.15%                 2.15%

In the first three cases, bond yields are a bit over 1% below long-term NGDP growth.  If we applied that to Japan, you’d expect negative 1.25% bond yields.  Why are actual rates so much higher (less negative) in Japan?

1.  Perhaps the zero lower bound prevents deeply negative nominal rates.  This is the best argument for Abenomics–the Japanese Treasury has been paying excessive interest on its debt.  They need at least Eurozone levels of NGDP growth, to get equilibrium bond yields up to zero.

2.  Perhaps rates are not lower because NGDP growth has recently established a higher trend, under Abenomics.  Bond yields are a forward-looking variable.

3.  Perhaps what matters is NGDP/person growth, not NGDP growth.  Thus Texas and Illinois have the same risk free rate, even though Texas’s population (and NGDP) are probably growing about 2 percentage points faster than Illinois.  Japan has a falling population, and hence growth in its NGDP per person is closer to European levels.

I’d guess all three factors matter, and others as well.

Australia is sort of the opposite of Japan.  In Australia, NGDP growth has recently slowed, not accelerated.  And they have faster than average population growth.  Those factors might help to explain why nominal bond yields are 2 percentage points behind NGDP growth.

Even so, there’s a very strong correlation between long run NGDP growth and long term interest rates.  It’s up to each central bank to determine the long run NGDP growth rate, and by implication the long-term bond yield.  If you want higher interest rates, ask for easier money.

PS.  A few corrections on recent posts:

1.  Commenter BJ Terry pointed out that in my recent Bullard post I misunderstood they way he used the term ‘regime’. I thought Bullard meant policy regime, but after reading his paper it’s clear he means macroeconomic regime (expansion or contraction).

2.  When I wrote the recent post on the Modi government, I was unaware of a decision to liberalize foreign investment regulations, which was announced yesterday. I hope my post was wrong.


Back to the 1960s

It’s been obvious for several years that the field of economics has entered a new Dark Ages.  Here’s another example, from a couple articles discussing Australian monetary policy.  First, James Alexander sent me this gem, discussing the views of RBA board member John Edwards:

“It has never been the view that the target had to be achieved each and every quarter, or for that matter each and every couple of quarters, or year for that matter,” Edwards was cited as saying. Australia’s annual inflation rate has been below 2 percent since the third quarter of 2014.

The RBA’s first rate cut in a year on May 3 came after data showed that some of the disinflationary pressures weighing upon economies from Japan to Europe are also being seen in Australia. The consumer price index dropped for the first time since 2008 in the first quarter, while annual core inflation growth slowed to the weakest on record, prompting the central bank to cut its inflation forecasts.

Some economists have argued that the inflation target should be lowered to reflect global and domestic forces that could keep downward pressure on prices for some time, the WSJ reported. The central bank will be forced to cut interest rates to 1.5 percent by August, according to most economists surveyed by Bloomberg.

This was a widespread view in the 1960s and 1970s.  Inflation was not caused by monetary policy; it reflected other forces. By the 1990s were we out of those Dark Ages, and that view was thoroughly discredited.  Actually, it was more than just discredited, it was widely mocked.  And now it’s back.

Stephen Kirchner sent me another piece on the RBA:

Former Reserve Bank of Australia governor Ian Macfarlane has lashed out at financial markets – particularly those offshore – for effectively forcing the central bank into a wasteful knee-jerk official interest rate cut this month to avoid falling victim to an increasingly erratic global currency war.

In his first public comments about Reserve Bank rates policy since handing over the governorship to Glenn Stevens a decade ago, Mr Macfarlane lambasted currency traders and analysts for assuming the central bank should always adopt a slavish adherence to its 2-3 per cent inflation target.

Describing current monetary policy as “easy” – or stimulatory – he said there was nothing in the central bank’s approach that locks it into making a cut every time a statistical report shows inflation is below the goal.

Here’s the problem.  Financial markets never have Dark Ages—they always understand what’s going on.  So when economics enters a new Dark Ages, the views of economists will be rejected by the financial markets.  Economists will then lash out at the irrationality of markets, when it’s actually the economics profession that has lost touch with reality.  (And yes, I’m also talking about the Fed.) Australia’s economic policy is clearly too tight to hit their targets, and yet they continue to insist that policy is expansionary.

Mr Macfarlane’s intervention – just as Macquarie Bank predicted on Thursday that the lack of fiscal stimulus and need for a weaker currency would see the official cash rate slashed to 1 per cent – indicates a growing desire to re-educate analysts and markets about both the limits of monetary policy and the need for greater flexibility around how the target is used.

“When countries introduced inflation targeting 20 or 25 years ago, they never envisaged a world where inflation was so low that it was below all major countries’ targets,” Mr Macfarlane, who was the first to formally announce the target when it was adopted, said.

That’s right, markets that foolishly believed that the RBA would adhere to its inflation targets need to be “re-educated”.  In fact, it’s Mr. Macfarlane who doesn’t understand what’s going on.  The markets are well aware of the fact that the RBA is willing to let inflation stay below 2%, and that’s precisely why they are putting pressure on the RBA to drive interest rates ever lower.  If markets expected 2.5% inflation going forward (the RBA target), then interest rates would probably be higher than 1.5%.

More confusion:

However, Mr Macfarlane, who is now an ANZ Bank director, suggested that one of the triggers for the surprise May cut was a fear within the central bank that markets would have reacted violently had the board left the cash rate unmoved two weeks ago because the weak inflation figures implied a cut was urgently needed to meet the 2-3 per cent target.

In the lead-up to the May rate meeting – which the Reserve Bank this week indicated was a close call – the Australian dollar traded above US78¢, an uncomfortably high level given the bank’s goal of driving down the currency to help the post-resources adjustment.

Within the board, there would have been a genuine fear that a decision not to cut could have sent the currency shooting dangerously above US80¢.

“Their problem [at the Reserve Bank] is that financial markets, particularly offshore, assume a mechanical application of what they regard as the standard model,” Mr Macfarlane said.

“The inflation targeting approach says that if inflation forecasts are below target, we should run an easy monetary policy – we already have that,” Mr Macfarlane said.

Here’s what’s actually happening:

1.   Australia doesn’t already have easy money; they have tight money.

2.  Global Wicksellian equilibrium interest rates have fallen sharply, and central banks have been slow to accept that fact.  Just as many of my commenters are slow to accept the fact that global productivity growth has slowed to a crawl. Reality’s a bitch.

3.  When the RBA (unexpectedly) holds its policy rate above the equilibrium rate, money is tight and the Aussie dollar appreciates sharply in the forex markets, which drives inflation even further below the RBA target.  The lower inflation then leads to calls for even further rate cuts.

The bond market sees what’s going on:

The benchmark 10-year government bond yield crashed this week to its lowest level in 141 years on financial market predictions that more official interest rate cuts are likely in coming months.

Over at Econlog, I have a post on the new Dark Ages in international trade.

Stop predicting recessions!

Last year, lots of people said the Australian miracle would finally come to an end.  I had commenters mocking me for arguing that Australia wasn’t a bubble.  They insisted that the bubble was already bursting.  (I wish you guys would come back to my comment section—I miss you.)

Now we are well into 2016, and the Australian economy is surging:

Australian business confidence jumped and an employment gauge in the survey surged to the highest in almost five years, signaling a healthy job market and reducing the likelihood of an interest-rate cut. The local currency gained.

The sentiment index doubled to six points last month, according to a National Australia Bank Ltd. survey of more than 400 firms conducted March 23-31. The business conditions gauge — a measure of hiring, sales and profits — climbed to 12, matching the highest level since before the 2008 global financial crisis. The employment index jumped four points to five, its best result since 2011.

“This is an especially good result in the context of a downbeat global economic outlook,” said Alan Oster, chief economist at NAB. “Low interest rates and a more competitive currency, even given recent strength, are expected to remain key drivers domestically. Consequently, our outlook for the economy remains unchanged — and with the non-mining recovery expected to progress further, monetary policy is likely to remain on hold for an extended period.”

Australia’s economy is proving resilient in the shadow of recent financial turbulence in China, negative interest rates in Japan and Europe and weaker commodity prices that have combined to increase global risk. The Reserve Bank of Australia cut rates to a record-low 2 percent in May last year in an easing cycle designed to cushion the economy from unwinding mining investment and encourage services industries to pick up the slack.

While gross domestic product grew a robust 3 percent last year and the unemployment rate has fallen to 5.8 percent, the Australian dollar has rebounded more than 10 percent since mid-January.

Last Australian recession—1991.

Funny how countries that maintain adequate long-term NGDP growth don’t seem to have problems with the zero bound.  I wonder if the problems in Japan and the eurozone are self-inflicted?  (NGDP growth has recently been weak in Australia, due to lower commodity prices, but the long-term expected trend is high enough to keep interest rates above zero.  That trend rate remains well above European and Japanese levels.)

When the Chinese stock market crashed last summer, lots of commenters mocked my claim that China was doing fine, and insisted that it was entering a recession. This month the consensus forecast for 2016 GDP growth in China (private forecasters) rose from 6.4% to 6.5%.  Even accounting for data problems, most experts think growth is at least 5%.  In an economy with a flat labor force, 5% is not too bad.  Retail sales growth is still running at double digits, and exports are picking up, although by less than this FT story suggests:

China reported stronger than expected trade data on Wednesday, the latest sign of a tentative revival in fortunes that paves the way for Friday’s release of first-quarter economic growth.

Exports surged 18.7 per cent in renminbi terms in March over the same month last year, after declines in both January and February. Imports also stabilised, dropping just 1.7 per cent compared with an 8 per cent fall in February.

In dollar terms, exports rose 11.5 per cent while imports fell 7.6 per cent for the period, reflecting the renminbi’s recent rise. The currency has gained 1.9 per cent against the dollar over the past two months.

China’s export sector has been buffeted by the slowdown in global trade, the dollar value of which has been shrinking since 2012 largely because of the slump in international commodities prices.

The International Monetary Fund this week warned that the world risked a “synchronised slowdown” but highlighted China as a rare bright spot among major economies.  Chinese officials have been working to counter international investors’ increasingly negative outlook for the country’s economy.

Their cause has been boosted by a slew of better than expected data releases, including March inflation figures that showed producer price deflation had moderated.

This contributed to the IMF’s decision to revise upwards its forecast for Chinese economic growth this year, to 6.5 per cent from 6.3 per cent. At last month’s meeting of China’s parliament, Premier Li Keqiang projected economic growth of 6.5-7 per cent for 2016.

“China’s commodity imports should see further improvement soon,” said Zhou Hao at Commerzbank.

“Rare bright spot” doesn’t sound like a Chinese recession.

When I hear constant predictions that the Chinese bubble will burst any day now, I’m reminded of Redd Foxx.  People need to stop predicting recessions, because recessions are unforecastable.  The IMF has predicted zero of the past 220 negative growth periods between 1999 and 2014.  This shows that the IMF is smart.  They know that the most likely outcome is growth, and hence they predict growth.  So do I!  Recession predictions also have a corrosive effect on economics as a science.  These predictions lead non-economists to believe that economists should predict recessions, and give undeserved reputational points to lucky permabears.

Peter Schiff said back in January that the US would have a big recession this year. If we don’t have a recession this year, people will forget Schiff’s false prediction, as well as false predictions of major crises in the US in 2015 and 2013, and recall his correct prediction of the 2008 recession.  (Insert broken clock analogy here.) Whenever I hear that someone has accurately predicted a recession, my evaluation of that person declines.  Economists should not be trying to predict recessions; the point is to prevent them.  That’s why we need NGDPLT.

PS.  If you have trouble with me praising the IMF being zero for 220, consider this analogy.  If I’m standing next to a statistician at the roulette wheel, and he predicts the ball will not land on the green numbers (36 out of 38 odds) for each of 220 spins, then I will assume he’s a good statistician.  If he occasionally predicts the ball landing on the green (2 out of 38 odds), I will think less of his statistical skills, even if it does land on the green.

HT:  James Alexander