Bartleby the central banker

The Reserve Bank of Australia has delivered 28 years of solid growth in NGDP. Unfortunately, its recent performance has been subpar. Even more worrying is the fact that its communication has been borderline incoherent:

In its quarterly monetary policy review earlier this month, the RBA downgraded a series of economic forecasts, including growth, wages, consumption and inflation, and warned “further easing could unintentionally convey an overly negative view of the economic outlook”.

It said it was prepared to cut rates again, if required, to stimulate growth but flagged the possible use of unconventional monetary policies. Philip Lowe, RBA governor, is due to deliver a speech later this month outlining options, which are likely to include negative interest rates and large-scale buying of government bonds.

Actually, it would be more accurate to say that making the statement, “further easing could unintentionally convey an overly negative view of the economic outlook” is itself likely to unintentionally create an overly negative view of the economic outlook.  Markets will look at that sort of statement and assume the RBA doesn’t know what it is doing.

This statement is just one more indication that the problem in central banking is not the zero lower bound, it’s a much deeper failure.  Central banks seem paralyzed for some reason that I don’t fully understand.  Ben Bernanke noticed this phenomenon way back in 1999.

As an analogy, we’ve all known someone who stayed in a dysfunctional relationship that they should have left.  To an outsider, it’s hard to understand why they stay in a relationship where they are subjected to continual abuse.

Similarly, people like Bernanke and I have trouble understanding why so many central banks clearly need to do something and yet hold back for some unknown reason.  Why?  It’s one of life’s great mysteries.

As a result of their paralysis, there are now calls for fiscal stimulus in Australia:

The Liberal-National government is now under increasing pressure to abandon its election pledge to return the budget to surplus for the first time in more than a decade and instead to unleash fiscal stimulus via tax cuts and infrastructure spending.

After all, it worked great in Japan:



20 Responses to “Bartleby the central banker”

  1. Gravatar of Stoneybatter Stoneybatter
    18. November 2019 at 08:36

    Philip Lowe’s background is in the linkages between monetary policy and financial stability. I wonder if that explains his (mistaken) view easier policy can lead to stability risks. A case of “when you have a hammer, everything looks like a nail.”

  2. Gravatar of policy_wank policy_wank
    18. November 2019 at 08:39

    Well, Bernanke shouldn’t have trouble understanding since he experienced this first hand within the Fed. We (the informed public) still don’t have a good understanding of the reasons for central bank timidity since 2007-08. Is it just overly conservative institutions? Fear of accountability? Privileging the priorities of the banking sector? An obsession with low inflation? A lack of understanding of how monetary policy works? Granted, most of the key actors don’t have a MM worldview, but there has been a general recognition that policy has been overly tight for most of the post-crisis period. And you have highlighted the bits of progress that the Fed has made under Powell, but it’s frustrating that no one in power seems to quite GET it.

  3. Gravatar of Carl Carl
    18. November 2019 at 08:45

    Google Search: “Central Banks cause deflation”
    Hits: 3.0 million.

    Google Search: “Central Banks cause disinflation”
    Hits: 0.2 million

    Google Search: “Central Banks cause inflation”
    Hits: 17.2 million

    Google Search: “Central Banks cause hyperinflation”
    Hits: 0.9 million

    Based on my comprehensive study I would conclude that Central Banks are perceived to have caused more inflation and hyperinflation than deflation and disinflation and/or people are more worried about Central Banks inflating money supplies than deflating them.

  4. Gravatar of ssumner ssumner
    18. November 2019 at 08:56

    Everyone, Good comments.

  5. Gravatar of John Hall John Hall
    18. November 2019 at 09:40

    Japan is also launching new fiscal stimulus.

    Coincidentally, they just raised their VAT…

  6. Gravatar of Brian Donohue Brian Donohue
    18. November 2019 at 09:44

    Seems to me most bankers, central or otherwise, are biased against inflation, because that’s what creditors do.

  7. Gravatar of rayward rayward
    18. November 2019 at 10:16

    We’ll always have Paris. And inflationistas. To give the inflationistas the benefit of doubt, I suspect their underlying concern, maybe not even known to themselves, is a financial crisis precipitated by inflation. But inflation was weak preceding the 2008 financial crisis. And it was weak preceding the 1929 financial crisis (indeed, there was deflation not inflation). And inflation is weak now. So what’s the worry. It’s the “inflation lurking in the background” (Summers’s euphemism for asset bubbles). It’s true that an asset bubble preceded the 2008 financial crisis. And it’s true that an asset bubble preceded the 1929 financial crisis. And it’s true that expansionary monetary policy can feed asset bubbles. After watching the stock market decline after the Fed adopted a contractionary monetary policy last year (and being the target of Trump’s attacks), the Fed responded by cutting interest rates, the stock market has since soared, Trump is happy (well, as happy as that grump can be), and all is well in the kingdom. Isn’t it?

  8. Gravatar of Arilando Arilando
    18. November 2019 at 11:43

    I don’t understand why you keep referring to Japan as an example of fiscal policy not working. When they engaged in surplus, GDP growth did in fact increase, and when they engaged in austerity, GDP growth did in fact fall. It’s pretty dumb.

  9. Gravatar of ssumner ssumner
    18. November 2019 at 12:18

    John, The VAT increase means they are not adopting a policy of fiscal stimulus, despite the claims made in the article.

    Arilando, I have no idea what you are talking about. What is “engaged in surplus”? Can you translate that into English?

    The biggest fiscal stimulus in global peacetime history (1993-2012) was accompanied by the worst growth in aggregate demand in modern history.

    The Japanese austerity began with Abe, and growth has picked up.

  10. Gravatar of Iskander Iskander
    18. November 2019 at 12:33

    When aren’t there calls for fiscal stimulus?

  11. Gravatar of P Burgos P Burgos
    18. November 2019 at 17:55

    What would it mean if central bankers were catering to overblown inflation fears in the financial sector? It seems that bond markets might still be a reliable gauge of whether or not the Fed will meet its targets, but what if the rest of the financial sector ignored bond markets? Or what if most of the wealthy elite of a country had overblown fears of inflation? Maybe it is just as simple as central banks relying on outdated economic theories, in preference to market signals (because of a belief that markets can be irrational?). That seems to be Sumner’s preferred explanation, which seems as good as any that I have seen.

  12. Gravatar of Todd Kreider Todd Kreider
    18. November 2019 at 22:08

    “John, The VAT increase means they are not adopting a policy of fiscal stimulus, despite the claims made in the article.”

    Then what do you think the stimulus package is?

  13. Gravatar of Georg Georg
    18. November 2019 at 23:09

    The newspapers in Australia are running very regular articles suggesting that very specifically the RBA’s decisions to cut rates to low levels are causing negative perceptions of the economy.

    It’s very common for newspaper readers to read multiple articles suggesting cutting rates is “spooking the economy”, or that “rate cuts are eroding business confidence” or that “rate cuts are having peverse effects on the economy”, and many more variations on that theme.

    It doesn’t help that it’s extremely common for many people, including Lowe himself, to complain about monetary policy being “overburdened”, and “near the limit of effectiveness” and “no longer having an impact”.

  14. Gravatar of Ross Ross
    19. November 2019 at 04:22

    I second Georg’s point. Markets fully priced in the RBA’s cuts months in advance of them happening. The media proclaimed the cuts as inadequate (even counter productive) before the official decisions were handed down.

    Ross Greenwood was on breakfast television the day before last months cut calling for an interest rate hike. The basic premise was current account deficits and international competitiveness don’t matter, a rise would push the AUD higher and lead to import growth.

    Hopefully this link works in the US:

  15. Gravatar of ssumner ssumner
    19. November 2019 at 07:58

    Todd, It’s just PR. I don’t expect the Japanese budget deficit to increase significantly.

    Georg and Todd, Thanks for the info. Roughly 99% of what’s published on monetary policy, everywhere in the world, is total nonsense. No reason that Australia should be any different.

  16. Gravatar of Pyrmonter Pyrmonter
    20. November 2019 at 00:41

    I expect Lorenzo from Oz will comment on this in due course, but the RBA’s most recent pronouncements, from both the Governor, Lowe, and his Deputy (and likely successor), have read as if professional opinion was stuck in 1960, and the Philips Curve as both stable and cutting-edge. Something changed radically when Glenn Stevens retired in 2016.

  17. Gravatar of Pyrmonter Pyrmonter
    20. November 2019 at 00:50

    As an aside, this is a studiedly non-committal speech by Lowe addressing (I expect with a great deal of assistance by his underlings, acknowledged in the first note) the reception of Keynes in Australia, and early discussion of the Zero Lower Bound. Melville, the subject of the Memorial, held a chair in his 20s; went on to be a government advisor during the Depression, and served as Australia’s delegate to the IMF in its formative years.

  18. Gravatar of Nick Nick
    20. November 2019 at 03:15

    From the link:
    “The argument that current monetary policy in Japan is in fact
    quite accommodative rests largely on the observation that interest
    rates are at a very low level. I do hope that readers who have gotten this far will be sufficiently familiar with monetary history not to take seriously any such claim based on the level of the nominal interest rate.”

    this was 20 years ago! knowledge is learned/absorbed slowly (when you cant act on it individually otherwise i think people get it pretty fast)

  19. Gravatar of ssumner ssumner
    20. November 2019 at 11:43

    Thanks Pyrmonter.

    Nick, Even Bernanke seems to have forgotten this point when he was Fed chair.

  20. Gravatar of Lorenzo from Oz Lorenzo from Oz
    20. November 2019 at 14:14

    I do not have anything specific to add about the RBA, except to note that corporate memories in bureaucracies can sometimes be not as good as you might expect, or want them to be.

    It is, after, a long time since Australia has had a full recession and we are getting people rising to the top who were undergraduates or younger in the last recession.

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