Australia’s Economic Oddities Go Viral
Australia seems like a very odd place to everyone else in the world.
Our economy, government and investment markets are a prime example of the “odd Aussie way”. And our way of doing things is causing quite a stir overseas.
Take for example the new Reserve Bank Governor, Philip Lowe.
He’s appealing to the long forgotten third leg of Australian monetary policy.
That’s right, third.
The Europeans just have price stability. The Americans tacked on employment, so they have two.
But the Australians, not to be outdone, added a third mandate for their central bank to fulfil.
What is it? The RBA website explains:
“In determining monetary policy, the Bank has a duty to maintain price stability, full employment, and the economic prosperity and welfare of the Australian people.”
Economic prosperity and welfare of the Australian people…that could mean anything.
Price stability and employment are indicators. Even if the central bank’s goals are fundamentally flawed or contradictory, at least they have something to aim for.
But what is economic prosperity and welfare?
Worried about debt…
If Philip Lowe decides that wearing pink reduces the probability of breast cancer, he could use the RBA’s infinite funds to buy pink hats for all Australians and be legally covered under the mandate of welfare.
Any self-respecting econometrician will tell you there’s a correlation between people wearing pink and attempts to fight breast cancer, after all. Just watch any Australian sporting event to collect your data.
According to Bloomberg, the RBA’s third mandate is designed to be a catch all. If the RBA wants to do something it can’t quite justify under the other two mandates, it just appeals to the third.
Que Philip Lowe’s comments at his first two parliamentary panel meetings. He seems to have appealed to the mystical third mandate on both occasions, confusing central bank followers all around the world who had no idea the RBA is the judge, jury and executioner of all things economic in Australia.
Lowe argued that, even though lower interest rates would benefit Australians, it wasn’t in their interest to lower the rates.
The obfuscation hides some rather excellent reasoning that has huge implications for central banking around the world.
Lowe is worried about debt.
If Australia’s prosperity is based on debt growth, then of course lowering rates increases it.
But too much debt is dangerous. It leads to financial instability – a fourth but hidden mandate Lowe has added himself.
A new rule
All this is quite a stand for a central banker to take.
It’s an acknowledgement that using a central bank to manipulate the economy comes at the expense of debt bubbles if too much stimulus is used.
But such stimulus is often mandated by central banks’ two typical mandates, inflation and employment.
Australia’s third mandate has allowed Lowe to slip in “financial stability” as a further consideration, which in turn kept interest rates steady at the expense of inflation and employment.
This exposes all other central banks as blind to the flaws of how they conduct policy.
Australia’s laws governing the RBA allow it to focus on the flaws of central banking – debt bubbles. At other central banks, this doesn’t get acknowledged. One of their own has let the cat out of the bag.
Imagine the Australian Rugby Union came up with a new interpretation of a rule based on a very old obscure and forgotten sentence in the rule book.
All the other Rugby associations in the world are now in a complete kerfuffle, especially at the international level.
A lot of decisions have to be made, stands have to be taken and a lot of people will lose out in the political fray that follows.
The problems here is that not everyone agrees with the way the new rule is applied.
Lowe might be doing an admirable job, but when someone else gets their eye on the loophole he’s using, anything goes.
Right now, the RBA’s board disagree right across the spectrum for what should be done.
In the end, the RBA’s flexibility will backfire. Someone will decide that we should wear orange instead of pink.
The economy itself is just as odd
Over in the real economy, Australians also have foreigners shaking their heads in disbelief. The gap between business optimism and consumer pessimism is at a lever reached only in the financial crisis.
Business is optimistic. It expects profit, hiring and sales to do well.
Consumers beg to differ. Too much debt and not enough wage growth are weighing heavily.
Of course, one man’s debt is another man’s income. But how can a business boom leave consumers gloomy? Perhaps it’s only a matter of time before wages surge and unemployment falls.
But here too, the Aussie economy has onlookers mystified. With a higher unemployment rate than the US, UK and Japan, and very low per capita GDP growth, we have a far higher interest rate than our peers.
The good news is commodity prices are back on the rise. And the Aussie dollar is joining them. Good times look to be on the horizon.
Except for one small fly in the ointment.
A gas shortage at a gas exporter
Australia’s gas supply crunch also made global news.
Foreigners must really think we’ve lost it on this one!
Thanks to a far higher gas price overseas, Australia’s gas tends to leave our shores. That’s created what many people like to call a shortage.
This is of course nonsense.
High prices don’t lead to a shortage. Unless you declare yourself unwilling to pay, in which case it’s still not really a shortage.
High prices lead to a business and jobs boom. That leads to more gas, reducing prices.
As they say in commodity trading pits, “the cure for high prices is high prices.”
Australians should pay the global price for gas.
If they don’t, gas won’t be produced here, as gas companies will go elsewhere.
Destroying one of our booming industries for the sake of economic nationalism is senseless, in my view. And that’s where, once again, we mystify our international observers.
In London, Santos chief executive Kevin Gallagher explained how the same policies pursued by Australia’s government destroyed Argentina’s gas export market:
…“In Argentina back in 2000, the country tried to cap domestic gas at artificially low levels to stimulate economic recovery, but the result was they stopped all redevelopment because the price of gas was below the cost of development. Now we could get into that place pretty quickly if we are not careful. The last thing we need is a lack of ability to sell into free markets to scale off developments.
“In Argentina we saw lack of supply and that country went to export opportunities and pulling back gas. In five years, Argentina went from net exporter to net importer.”
Then there’s Venezuela’s oil industry.
Imitating the economic policies of Argentina and Venezuela is popular amongst certain circles internationally too.
But becoming another poster child for why we shouldn’t do it seems an odd way to go for most people around the world.
All this ties into the Tesla battery plant circus too.
Falling for a Twitter sales gimmick to purchase power infrastructure that is built in 100 days is asking for trouble.
But when Elon Musk said he’d provide South Australia with a power solution or it’s free, Australia’s politicians jumped at the chance, attracting global attention.
The thing is, batteries only store power. And South Australia’s power prices are closely tied to gas.
Putting two expensive power solutions together does not make power cheaper…
Until next time,
for The Daily Reckoning Australia