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2008 03

Business Spectator Column

This week’s Business Spectator column.  If you would like to receive an unedited version by email on Fridays, let me know and I will put you on the distribution list.  Email info at institutional-economics dot com.

posted on 29 March 2008 by skirchner in Economics, Financial Markets

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A ‘New Era’ for the Reserve Bank?

I have an op-ed in today’s Age on the proposed Reserve Bank Amendment (Enhanced Independence) Bill, which is a brief summary of a more detailed article that will be forthcoming in Policy.  The op-ed concludes:

While formally enhancing the independence of the RBA, the new arrangements leave it operating under an outdated and internationally anomalous governance structure that is incompatible with modern demands for central bank transparency and accountability.

UPDATE: Full article can be found here.

 

posted on 26 March 2008 by skirchner in Economics, Financial Markets

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The Gittinomics of Stink

Ross Gittins wants you to wash less and stink more:

In the old days, if you got a bit sweaty you allowed the sweat to dry and thought nothing of it. These days, many people can’t rest until they’ve showered.

And then there’s underarm body odour. It’s completely and utterly natural, we all have it, but since the spread of deodorant we’ve convinced ourselves it’s offensive and a sign of ill-breeding.

So, much of our incessant showering arises not from a desire to be clean but from a relatively modern desire not to have a smell. I suspect many people have a quite exaggerated notion of the extent to which they smell - or would smell if they didn’t take as many showers as they do.

Many of us feel a social obligation to maintain what we believe to be the prevailing standard of personal washedness.

 

posted on 26 March 2008 by skirchner in Economics

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Central Banking for Monarchists

From the not-always-reliable Real Time Economics blog:

and the exception, the Royal Bank of Australia, which has been raising rates lately to fight inflation in the commodity-rich economy, to boost its key rate from 7.25% to 7.5% later this year.

posted on 21 March 2008 by skirchner in Economics, Financial Markets

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Meganomics: Demand Without Supply

George Megalogenis’s proposed solution to record low housing affordability – make investment in housing less attractive through higher taxes:

It can only be done by making property less attractive than other investments…bricks-and-mortar should lose its taxpayer supports.

The analytical error Megalogenis makes is to assume that the attractiveness of housing as an investment only contributes to demand and higher house prices, but not to supply.  It is the same error he and many others make in assuming that tax cuts are necessarily inflationary, contributing only to demand, while the supply-side of the equation is completely ignored.  Megalogenis is not alone in this.  Chris Richardson has also argued that abolishing the principal residence exemption from capital gains tax would improve housing affordability, because he views house prices as being largely driven by demand and not supply.

As we have noted previously, the record low in housing affordability has only one solution: build more houses.  A very simple reform that would quickly address Australia’s growing shortage of dwelling stock and its inflationary consequences would be to abolish capital gains tax on investment property, to put it on the same footing as owner-occupied housing.  Since assets are acquired out of after-tax income, capital gains tax is a form of double taxation on saving and serves only to lower the nation’s capital stock, including the stock of houses.

 

posted on 15 March 2008 by skirchner in Economics

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Business Spectator Column

This week’s Business Spectator column.  If you would like to receive an unedited version by email on Fridays, let me know and I will put you on the distribution list.  Email info at institutional-economics dot com.

posted on 15 March 2008 by skirchner in Economics, Financial Markets

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Stevens on Monetary & Fiscal Policy

RBA Governor Stevens, speaking to Treasury officers Wednesday, remained decidedly agnostic on the appropriate mix of monetary and fiscal policy in controlling inflation:

It strikes me that in the popular discussion about fiscal policy, many participants talk past each other because they are looking at different time dimensions. It is not unreasonable to say that if the budget is perpetually in surplus, there is no debt to speak of and no other looming large unfunded liability, taxes should probably, over some long run horizon, be lower.  This, it seems to me, is the economic case for structural reductions in taxes, which some observers articulate. Others argue that such reductions should be delayed, for cyclical reasons, given that demand needs to slow to contain inflation. So there is a structural case for taxes to fall, and a cyclical case for them not to. It is no doubt difficult for any government to reconcile these two, equally valid, points of view, the more so if the same tension persists for a number of consecutive years…

If it is accepted, on the other hand, that inflation is sufficiently general that overall demand has to slow, the amount of slowing has to be the same regardless of whether it comes via monetary policy or fiscal policy. It would be somewhat differently distributed across sectors and regions, as the impact of interest rate and exchange rate effects obviously would not overlap exactly with the tax or spending measures that would occur in their place. I would hazard a guess, though, that a good many people who are today paying higher interest rates would instead pay higher taxes in a world where fiscal policy was used more actively to manage the business cycle.

posted on 13 March 2008 by skirchner in Economics, Financial Markets

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Chinese Inflation

Jonathan Anderson is relaxed about Chinese inflation:

All the evidence suggests that the current spike in prices will prove to be temporary, likely fading away by the second half of 2008, and as it does the prevailing furor over the inflation issue will subside as well…

We agree that money growth is a fundamental force behind inflation in China, and there is a clear and tight correlation between the two over time. But the salient point is that monetary factors drive underlying inflation, and not every short-term twist and turn in CPI along the way. During the deflationary period 1997-2003, the measure of broad money, M2, grew at an average annual rate of 16.4%. What was the comparable pace for the second half of 2007? Around 17.6% year on year—in other words, only slightly higher.
Base money growth has been much lower still, with sharply falling commercial bank excess liquidity ratios in the process. So while it’s easy to argue that money growth may have been nudging core inflation upward, it certainly can’t explain a seven percentage point rise in the headline rate.

posted on 10 March 2008 by skirchner in Economics, Financial Markets

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Peak Oil as Doomsday Cult

Derek Brower, editor of the Petroleum Economist, on peak oil cultism:

Worries about a peak in oil production, however, are not moving the oil markets. I doubt Jeremy Leggett thinks they are, but his article yesterday implicitly linked the peak oil theory with high oil prices. It also claimed that a growing number of oil executives, like Total boss Christophe de Margerie, now support the theory.

Not really. What worries executives like de Margerie isn’t a geological peak. Industry studies show remaining reserves to be literally trillions of barrels greater than the figures offered by the peak oil theorists. They’re worried about getting access to the good stuff. Increasingly, it lies in countries that don’t much like western companies. De Margerie and other executives are simply doing what they always do: putting pressure on producer countries to open up.

posted on 09 March 2008 by skirchner in Economics

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Business Spectator Column

This week’s Business Spectator column (which updates interbank pricing referenced in the previous post).  If you would like to receive an unedited version by email on Fridays, let me know and I will put you on the distribution list.  Email info at institutional-economics dot com.

posted on 08 March 2008 by skirchner in Economics, Financial Markets

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Rate Cuts by Christmas?  Good Luck with That!

If you believe the interbank futures market, then there is a small chance the RBA will be cutting the official cash rate by November this year.  This is partly based on the market’s reading of the statement accompanying yesterday’s increase in official interest rates, in which the RBA focused on the expected moderation in domestic demand and inflation.  This is simply a reiteration of the RBA’s February SOMP forecasts, but these forecasts look increasingly aspirational. 

Today’s December quarter national accounts confirmed headline and non-farm GDP growth were both running above the RBA’s forecasting assumptions.  Domestic demand, far from slowing, accelerated over the December quarter to 1.6% q/q and 5.7% y/y in real terms.  The first bottom-up estimates for March quarter CPI inflation point to an increase of 1.3% q/q and 4.2% y/y.  With a nominal official cash rate of 7.25%, this points to a real cash rate of only 3.05%, although market-determined rates are significantly higher.

This is not the first time this tightening cycle that financial markets have priced in future reductions in interest rates.  Markets condition their view in large part on what the RBA says, or more importantly, what it does not say.  Yesterday’s statement gave no explicit forward policy guidance, but neither did the February tightening statement.  It was not until the February SOMP and Board minutes were released that the RBA bothered to mention its view that further significant increases in official interest rates would be required.

While an easing by Christmas is not impossible, this leaves markets grossly underpricing the risk of further intervening increases in official interest rates.

posted on 05 March 2008 by skirchner in Economics, Financial Markets

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Oil Aplenty: Debunking the Peakniks

Nansen Saleri, former head of reservoir management for Saudi Aramco, debunks the peakniks in the WSJ:

The world is not running out of oil anytime soon. A gradual transitioning on the global scale away from a fossil-based energy system may in fact happen during the 21st century. The root causes, however, will most likely have less to do with lack of supplies and far more with superior alternatives. The overused observation that “the Stone Age did not end due to a lack of stones” may in fact find its match.

The solutions to global energy needs require an intelligent integration of environmental, geopolitical and technical perspectives each with its own subsets of complexity. On one of these—the oil supply component—the news is positive. Sufficient liquid crude supplies do exist to sustain production rates at or near 100 million barrels per day almost to the end of this century.

Technology matters. The benefits of scientific advancement observable in the production of better mobile phones, TVs and life-extending pharmaceuticals will not, somehow, bypass the extraction of usable oil resources.

posted on 04 March 2008 by skirchner in Economics, Financial Markets

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The Need for a More Timely CPI

If you like your inflation with a ‘four’ in front, then the February TD-MI inflation gauge has good news for you.  Their proxy for CPI inflation was running at 4% y/y in February, matching the previous record high for this series in May 2006.  The trimmed mean, which proxies for the RBA’s preferred measure of underlying inflation, rose 0.3% m/m and 4.1% y/y, a new record high for this series.  The February inflation gauge points to an official Q1 headline CPI outcome of 1.3% q/q and 4.2% y/y compared to 3% y/y previously, well outside the RBA’s 2-3% medium-term target range.

Australia shares with New Zealand an anomalous position among developed countries in publishing its official CPI at a quarterly rather than a monthly frequency.  The ABS has traditionally defended this practice on the grounds that the additional costs of publishing at a higher frequency outweighed the benefits.  One suspects that this assessment has more to do with the costs and benefits for the ABS, rather than society more generally.  If a higher frequency CPI reduces the risk of a macroeconomic policy error, then the benefits from a more timely CPI release could be very large indeed.

It has been widely noted that most of the Reserve Bank’s increases in official interest rates this cycle have been announced at the Board meeting immediately following the release of the quarterly CPI.  This strongly suggests that the RBA Board is looking to these quarterly releases for confirmation of the direction of inflation before taking policy action.  This gives monetary policy a backward-looking bias, one that is exacerbated by a low frequency CPI. 

Moving to a monthly CPI release has the potential to significantly change the dynamics of monetary policy decision-making.  Each monthly Board meeting would have the benefit of an updated reading on inflation, eliminating the current bias to take policy action at a quarterly frequency.  This could result in more timely monetary policy action than has been evident from the RBA this cycle, leading to better inflation outcomes.

posted on 03 March 2008 by skirchner in Economics, Financial Markets

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