Comments on: Let’s get real! http://clubtroppo.com.au/2007/08/10/lets-get-real/ Fearlessly dispensing political, legal and economic analysis (and some whimsy) since 2002 Thu, 24 May 2012 12:13:01 +0000 hourly 1 http://wordpress.org/?v=3.3.2 By: James Farrell http://clubtroppo.com.au/2007/08/10/lets-get-real/#comment-164746 James Farrell Sun, 12 Aug 2007 11:56:40 +0000 http://clubtroppo.com.au/2007/08/10/lets-get-real/#comment-164746 "...high inflation under your government should be seen as a good thing..." That is an odd way of putting it. A high interest rate is inevitable when inflation is high. That's not a terribly esoteric point. I suppose you could reword it as 'given that the interest rate was high, it's fortuntae that we had a high inflation rate', but since the premise -- if taken to imply that the interest rate was high for reasons of its own -- is clearly wrong, I don't see that too many people would understand it that way, or indeed that it could sucessfully be spun that way. “…high inflation under your government should be seen as a good thing…”

That is an odd way of putting it. A high interest rate is inevitable when inflation is high. That’s not a terribly esoteric point. I suppose you could reword it as ‘given that the interest rate was high, it’s fortuntae that we had a high inflation rate’, but since the premise — if taken to imply that the interest rate was high for reasons of its own — is clearly wrong, I don’t see that too many people would understand it that way, or indeed that it could sucessfully be spun that way.

]]> By: David http://clubtroppo.com.au/2007/08/10/lets-get-real/#comment-164035 David Sat, 11 Aug 2007 23:05:20 +0000 http://clubtroppo.com.au/2007/08/10/lets-get-real/#comment-164035 Yes I'm serious. Look it's a fair point you make: homebuyer borrowers should really care about real interest rates rather than nominal rates. But I think it's a hard sell to be saying effectively that high inflation under your government should be seen as a good thing (which in a sense is what you're saying or at least how the other side would spin it). I think there's lots of room to be attacked on this on the way to explaining to voters that real rates are what matters. Yes I’m serious. Look it’s a fair point you make: homebuyer borrowers should really care about real interest rates rather than nominal rates. But I think it’s a hard sell to be saying effectively that high inflation under your government should be seen as a good thing (which in a sense is what you’re saying or at least how the other side would spin it).

I think there’s lots of room to be attacked on this on the way to explaining to voters that real rates are what matters.

]]> By: cs http://clubtroppo.com.au/2007/08/10/lets-get-real/#comment-162518 cs Fri, 10 Aug 2007 14:14:58 +0000 http://clubtroppo.com.au/2007/08/10/lets-get-real/#comment-162518 James, FWIW, it is calculated to take into account the "Fisher Effect" (don't, no-one, ask). It makes intuitive sense to me on the basis that the 1983 contraction was more severe than 1991 (then again, why wouldn't it show up until 1985?). James, FWIW, it is calculated to take into account the “Fisher Effect” (don’t, no-one, ask). It makes intuitive sense to me on the basis that the 1983 contraction was more severe than 1991 (then again, why wouldn’t it show up until 1985?).

]]> By: James Farrell http://clubtroppo.com.au/2007/08/10/lets-get-real/#comment-162499 James Farrell Fri, 10 Aug 2007 12:39:41 +0000 http://clubtroppo.com.au/2007/08/10/lets-get-real/#comment-162499 David, I'll assume you're serious. Most people are lenders at some time (even if only as depositors) so they understand the need for a lender to be compensated for inflation. It shouldn't be that hard for politicians to explain. Furthermore, I don't think the voters who remember that far back actually blame Labor for the inflation itself. It was well entrenched when they came to power in 1983, and at worst it didn't get worse, in fairly prosperous times. Looking forward to having a closer look at at your blog at some stage. David, I’ll assume you’re serious. Most people are lenders at some time (even if only as depositors) so they understand the need for a lender to be compensated for inflation. It shouldn’t be that hard for politicians to explain. Furthermore, I don’t think the voters who remember that far back actually blame Labor for the inflation itself. It was well entrenched when they came to power in 1983, and at worst it didn’t get worse, in fairly prosperous times.

Looking forward to having a closer look at at your blog at some stage.

]]> By: Jc http://clubtroppo.com.au/2007/08/10/lets-get-real/#comment-162498 Jc Fri, 10 Aug 2007 12:38:59 +0000 http://clubtroppo.com.au/2007/08/10/lets-get-real/#comment-162498 James High nominal rates are a result of stress in the credit markets. It could be because of a credit crunch which is usually only temporary or it could be because of a high inflation rate. Hawke /Keating were forced to run a high inflation rate because the accord was underpinned by periodic rises in higher nominal wages. Rather than a virtuous circle this policy had the effect of turning absolutely vicious in the early 90's.The final upshot was the recession we had to have- the worst in 60 years. "Nor am I saying that its only the real rate that matters, or that inflation isnt a bad thing. But it is, at the end of the day, easier to pay off a loan at 17% when your income is rising at 10% per year than when it isnt." Try doing that when you wage rate is not set by an accord. Try and achieve that when you're planning to retool and don't have the magic of an accord setting the price of goods you wish to sell but staring at a loan repayment of 18% p.a. James

High nominal rates are a result of stress in the credit markets. It could be because of a credit crunch which is usually only temporary or it could be because of a high inflation rate. Hawke /Keating were forced to run a high inflation rate because the accord was underpinned by periodic rises in higher nominal wages. Rather than a virtuous circle this policy had the effect of turning absolutely vicious in the early 90′s.The final upshot was the recession we had to have- the worst in 60 years.

“Nor am I saying that its only the real rate that matters, or that inflation isnt a bad thing. But it is, at the end of the day, easier to pay off a loan at 17% when your income is rising at 10% per year than when it isnt.”

Try doing that when you wage rate is not set by an accord. Try and achieve that when you’re planning to retool and don’t have the magic of an accord setting the price of goods you wish to sell but staring at a loan repayment of 18% p.a.

]]> By: crocodile http://clubtroppo.com.au/2007/08/10/lets-get-real/#comment-162490 crocodile Fri, 10 Aug 2007 12:00:17 +0000 http://clubtroppo.com.au/2007/08/10/lets-get-real/#comment-162490 "who had a better record on interest rates, we never hear any mention of the real interest rate?" Since the article highlights the obvious link to inflation can we also examine what influence our governments of the day during this period really had over inflation given the prevailing conditions on the global scale. I seem to remember when we had the stagflation albatross through the seventies and early eighties, so did most other western nations. Same story on interest rates. If it were true that we have low inflation and interest rates today simply because these conditions pervade the world economies then nobody has a better record at all. “who had a better record on interest rates, we never hear any mention of the real interest rate?”

Since the article highlights the obvious link to inflation can we also examine what influence our governments of the day during this period really had over inflation given the prevailing conditions on the global scale. I seem to remember when we had the stagflation albatross through the seventies and early eighties, so did most other western nations. Same story on interest rates. If it were true that we have low inflation and interest rates today simply because these conditions pervade the world economies then nobody has a better record at all.

]]> By: David http://clubtroppo.com.au/2007/08/10/lets-get-real/#comment-162488 David Fri, 10 Aug 2007 11:58:21 +0000 http://clubtroppo.com.au/2007/08/10/lets-get-real/#comment-162488 Ummm, perhaps coz it doesn't sound great to say "Sure, interest rates were high under us, but inflation was really high too so that made up for it"!!! Ummm, perhaps coz it doesn’t sound great to say “Sure, interest rates were high under us, but inflation was really high too so that made up for it”!!!

]]> By: James Farrell http://clubtroppo.com.au/2007/08/10/lets-get-real/#comment-162487 James Farrell Fri, 10 Aug 2007 11:52:09 +0000 http://clubtroppo.com.au/2007/08/10/lets-get-real/#comment-162487 Chris: Yes, I came across <a href="http://www.rba.gov.au/PublicationsAndResearch/Bulletin/bu_oct91/bu_1091_2.pdf" rel="nofollow">that series</a> too when I was hunting around, hoping I wouldn't have to calculate it myself. It does look a bit different, either due to the choice of rate (some kind of bond rather than a bank lending rate) or the method of calculation. But I doubt that the averages would be much different. Chris: Yes, I came across
that series too when I was hunting around, hoping I wouldn’t have to calculate it myself. It does look a bit different, either due to the choice of rate (some kind of bond rather than a bank lending rate) or the method of calculation. But I doubt that the averages would be much different.

]]> By: amphibious http://clubtroppo.com.au/2007/08/10/lets-get-real/#comment-162459 amphibious Fri, 10 Aug 2007 10:01:39 +0000 http://clubtroppo.com.au/2007/08/10/lets-get-real/#comment-162459 Probably for the simple reason that most, if not all, political journalists are innumerate and even the financial/economics writers are hard pressed without their cheat sheets. Most punters feel baffled by B/S when the figures & counter claims whirl about, though really anyone with basic arithmetic or a $5 calculator could clarify it in a few minutes. Apart from real interest rates, what about average, as distinct from, median wages? When I heard a couple of months ago that the 'average male full time wage' was >$1,100 pw I rang the ABS to find out what the median wage was. Answer? "We haven't published that since 2004." Wonder why? Probably for the simple reason that most, if not all, political journalists are innumerate and even the financial/economics writers are hard pressed without their cheat sheets. Most punters feel baffled by B/S when the figures & counter claims whirl about, though really anyone with basic arithmetic or a $5 calculator could clarify it in a few minutes.
Apart from real interest rates, what about average, as distinct from, median wages? When I heard a couple of months ago that the ‘average male full time wage’ was >$1,100 pw I rang the ABS to find out what the median wage was.
Answer? “We haven’t published that since 2004.” Wonder why?

]]> By: observa http://clubtroppo.com.au/2007/08/10/lets-get-real/#comment-162452 observa Fri, 10 Aug 2007 09:11:01 +0000 http://clubtroppo.com.au/2007/08/10/lets-get-real/#comment-162452 Why don't they use real interest rates? Because everyone paying those interest rates at the time thought they were real enough. Anyhow polls show the punters don't hold the Govt responsible for recent interest rate rises but then those polls clearly don't matter. Why don’t they use real interest rates? Because everyone paying those interest rates at the time thought they were real enough. Anyhow polls show the punters don’t hold the Govt responsible for recent interest rate rises but then those polls clearly don’t matter.

]]> By: cs http://clubtroppo.com.au/2007/08/10/lets-get-real/#comment-162433 cs Fri, 10 Aug 2007 08:26:34 +0000 http://clubtroppo.com.au/2007/08/10/lets-get-real/#comment-162433 My copy of the 1992 INDECS <i>State of Play</i> reproduces an RBA Bulletin chart showing real and nominal rates from 1972 to 1992, which gives 1985 the prize for the highest real rate (it looks like nealry 11 per cent, compared with about 9 per cent in 1989). My copy of the 1992 INDECS State of Play reproduces an RBA Bulletin chart showing real and nominal rates from 1972 to 1992, which gives 1985 the prize for the highest real rate (it looks like nealry 11 per cent, compared with about 9 per cent in 1989).

]]> By: Rex http://clubtroppo.com.au/2007/08/10/lets-get-real/#comment-162425 Rex Fri, 10 Aug 2007 07:47:29 +0000 http://clubtroppo.com.au/2007/08/10/lets-get-real/#comment-162425 Good post James. Good post James.

]]> By: James Farrell http://clubtroppo.com.au/2007/08/10/lets-get-real/#comment-162422 James Farrell Fri, 10 Aug 2007 07:43:03 +0000 http://clubtroppo.com.au/2007/08/10/lets-get-real/#comment-162422 Thanks, Stephen. Actually I used a seven-quarter average of the CPI to smooth out the real series, but using a narrower index would probably have done the job. Special pleading was basically what I meant in the penultimate sentence. Thanks, Stephen. Actually I used a seven-quarter average of the CPI to smooth out the real series, but using a narrower index would probably have done the job.

Special pleading was basically what I meant in the penultimate sentence.

]]> By: stephen bartos http://clubtroppo.com.au/2007/08/10/lets-get-real/#comment-162421 stephen bartos Fri, 10 Aug 2007 07:39:46 +0000 http://clubtroppo.com.au/2007/08/10/lets-get-real/#comment-162421 a well made point; at the risk of being a bit econogeeky, probably non farm GDP is a better index for the real interest rate calculation: but as you suggest, its not likely to change the argument. I'd guess that Labor politicians are reluctant to debate about real vs. nominal because if they did so it looks like special pleading: which means it has to be up to economics journalists and academics to make the running on the issue a well made point; at the risk of being a bit econogeeky, probably non farm GDP is a better index for the real interest rate calculation: but as you suggest, its not likely to change the argument.

I’d guess that Labor politicians are reluctant to debate about real vs. nominal because if they did so it looks like special pleading: which means it has to be up to economics journalists and academics to make the running on the issue

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