Australia is about to lose the world’s greatest central banker and it will make a difference. Others may have watched him in action over the years, but unless they have understood things properly, they cannot have seen what he’s been doing. We may have some of the worst fiscal policy found anywhere, but our monetary and interest rate policies have been second to none. Where else can you get such good sense as this?
“Australia wants to be open to foreign capital. That’s our national philosophy. I think in that discussion it would be helpful to think about the kind of foreign capital we want.
“Foreign capital that builds new assets — like some of the capital that funded the mining boom — that’s one thing. Foreign capital that buys up the existing assets, I’m not saying that we should be closed to that, but that’s not creating new capital for the country. That’s just altering the allocation of who owns the capital that’s here now.
“When we all talk about ‘we want capital inflow’, we can probably have a bit of nuance and subtlety over what kind of inflow we mean and ask ourselves whether we’re attractive enough to the kind of capital that actually builds new assets.”
The distinction he makes is between capital in the form of money and capital in the form of things. It’s a distinction that was once at the core of economic theory but has absolutely disappeared from view. Stevens is one of the few remaining who would even understand the difference and why it matters. But there are shifts going on in central banking orthodoxies since what is crystal clear is that the low interest rate policies of the last few years have been disastrous. This is from The AFR today: .
A new economic reality calls for a new approach to central banking. . . . In the new low-natural rate environment, the Fed’s policy of targeting low inflation will no longer make sense, he said.
It actually never made sense, but they are only just beginning to figure it out. And what has also not made sense is lowering interest rates to zero (and even into negative territory). With such low rates of interest we are actually riding a tiger and I have no idea how we will ever escape this dilemma without a serious “economic restructuring”. But unless we are going to continue down this path of low productivity and sinking real incomes, interest rates at some stage are going to have to rise.