The author has been described by News Ltd as an "iconoclast", "Svengali", a pollie's "economist muse", and "pungently accurate". Fairfax says he is a "Renaissance man" and "one of Australia’s most respected analysts." Stephen Koukoulas concludes that he is "85% right", and "would make a great Opposition leader." Terry McCrann claims the author thinks "‘nuance’ is a trendy village in the south of France", but can be "scintillating" when he thinks "clearly". The ACTU reckons he’s "an enigma wrapped in a Bloomberg terminal, wrapped in some apparently well-honed abs."

Thursday, September 16, 2010

I expect to see RBA hawks fly higher today

Bird watchers should be able to spy a hawk soaring high into the sky today. The hawk in question is the RBA's Dr Phil Lowe, who might end up being Glenn Stevens' successor as Governor.

Now there's a thought: perhaps the other candidate, Dr Guy Debelle, can take over from John Laker at APRA; Laker is ex RBA and an injection of more RBA DNA could only be a good thing.

Currently, Dr Lowe serves as Assistant Governor, or head, of the 'economic group', which includes the economic analysis team run by Dr Tony Richards and the pure economic research division (ie, the wonks that produce the long studies known as research discussion papers). Dr Lowe is giving a speech at 1.45pm today entitled, The Development of Asia: Risk and Returns for Australia. This is exactly the sort of thing I was hoping he would talk about.

My guess is that he will recycle the standard RBA lines about why Chindia's industrialisation/urbanisation is such a positive thing for Australia, how we are gradually decoupling from the US, how this decoupling will be reinforced by the emerging 'internal demand' in China as living standards rise, and, arguably more interestingly, how these developments in turn presage a lot of new medium- to long-term risks, which regular readers will have seen me hammering on about for ages here (ie, banks expanding into Asian territories that have much higher rule of law, political and economic risks).

All of the above means at least three things: Australia's economic growth is likely to be much more volatile than it has been in the past; our real interest rates are likely be higher in the next 20 years than they were in the preceding period; and we are very much subject to the vagaries of the Middle Kingdom's trajectory. Dr Lowe won't say this, but it is sobering to remember here that China is effectively an autocracy. That means anything could happen. Think Nassim Taleb. Think fat-tails. Think White Swans in Australia.

One thing that I have noticed the Bank emphasise of late is the long lags associated with monetary policy. They have referred a few times to 'up to 2 years.' To my mind, this implies that today's cash rate is too low, if the RBA's base-case proves out. And the RBA is once again subtly prepping the market for surprise hikes. By market, I don't mean economists--most of the local guys expect another 2-4 hikes. By market, I mean investors, who are hardly pricing in any.

The other interesting question will be whether Dr Lowe refers to the inextricably linked Aussie consumer. Again, I have covered this extensively here before, but it presently suffices to say that the RBA was rather heroically punting on a 'new normal' in consumer conservatism. This meant that though they expect to see strong disposable household income growth, they were also anticipating (hoping!) that this would be accompanied with higher savings rates, lower credit growth, and goldilocks (not too hot) retail spending.

The issue is that the household sector is the largest part of our economy. The RBA cannot, and will not, tolerate a coincident resources and household spending boom. The RBA wants the consumer to get out of the way of the resources boom so that it can avoid the need to crush consumers with higher interest rates. The problem, of course, is that the latest GDP and retail spending data do not fit comfortably with the RBA's thesis. Most economists have also dismissed this ambitious vision of consumer behaviour as a low probability outcome.

So the question is, Will Dr Lowe canvass the risks that households have not learnt the lessons of the GFC, and may revert back to their imprudent pre-GFC spending patterns? And since the RBA's jawboning and moral suasion of consumers, emphasising the virtues of being an austere, central banking-like character appear not to be working, will Dr Lowe unsheathe the interest rate stick and make it more clear that Aussie households have got two rudimentary choices: either pull in your horns or we are going to smash you over the head with a big blunt pacifier known as monetary policy.