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wait and see « Previous | |Next »
April 7, 2005

The independent Reserve Bank of Australia is in a 'wait and see' mode. Waiting to see the data come in over the next month about the inflationary pressures in a weakening economy.

The inflationary pressures (wage and price increases), due to the disequilibrium between overheated demand and capacity constraints, are still there. And so is the ongoing decline of a weakening Australian economy. And the record level of household debt is still there at a time when the fallout in the property market (especially investment housing in Sydney) continues apace.

What suprises me in all of this is the heated political debate by the economic commentators, most of whom focus their light on the Reserve Bank. I cannot help but notice how most of the economic commmentary in Australia is structured around an obsession with interest rates and an indifference to the current account deficit that borders on silence.

Why so? Why all the emphasis on the interest rate tree and not on the economy forest? Why buzz around the Reserve Bank's eyes like flies in the market place? Why all the emphasis on the Reserve Bank's brain trust and on one economic policy instrument?

One suggestion is that central-bank driven monetary policy has now become the preferred and principle way in which modern freemarket economies are governed to deliver growth without the boom and bust cycles of the past. It is a market doctrine that makes us feel secure and safe. In the RBA we place our trust that the asset bubble will not burst and we drown in debt.

Hence the criticism directed at the RBA. Consider Bob Shwartz's op.ed in today's The Australian Financial Review (p.62):

In a move that basically amounts to an admission that it got the timing of its last decision dreadfully wrong, the Reserve Bank of Australia kept official interest rates on hold yesterday. This begs the question: why did it raise interest rates last month? A single quarter-percentage point rate just manages to upset people, but won't change their habits. Instead of just looking like a schmuck, like it did last month, the bank now looks like a schmuck with egg on its face.

Huh? Pretty strong.

Now Schwartz does make a case. He says that the inflation squeeze should have happened towards the end of 2002. Schwartz says that if so, then the RBA

"would now be in the position to support a weakening economy by lowering interest rates."
But he pours it on in his conclusion, By getting it so wrong, he says "the only thing left to the bamk is sit back, try to finesse its cards, bluff the economy, and pray."

Huh? Schwartz does science whilst the RBA does religion! That is so over the top that it's macho overkill. But he does have a point: the Reserve Bank is currently trying to minimize the impact of an asset bubble and consumption party that its monetary policies have created. That means deflation with a debt hangover.

So what is the significance of all that buzzy surface commentary on interest rates? Andrew Bartlett's suggestion is that all the market buzz reflects uncertainity and apprehension. I reckon that we have a credibility problem with our economic commentators. Most of the talking head commentators are either ideologues paid to run the company/industry line in a little media grab; or they are prophets divining the tea leaves as they try to outguess the RBA oracle they've placed on a pedastal.

The commentary of the talking econheads is s not scientific analysis and it's not cultural analysis. Most of it on radio and television (the chatter in the Finance slot) makes little sense. It's more a mythological chatter that acts to dull your brain.

Then again, maybe the doctrine that central-bank driven monetary policy as the principle way to deliver growth in a modern freemarket economy is just too simple. It's a bit too like a Catholic catechism.

Maybe our economic commentators do not think of the trajectory of the Australian economy within the ebb and flow of the international economy (Japan and Europe with declining growth; China stretched to the limit in terms of manufacturing capacity; the shaky US in recession) or the effects of the twin deficits of the US economy is having on the international economy.

Let us wait and see shall we.

| Posted by Gary Sauer-Thompson at 12:52 PM | | Comments (0)