But I guess given that they have the majority in New Zealand, they kind of have to tell them, we need to act independently because otherwise, well, what is the point of having these other three members?

The interesting thing, the most interesting thing from the Reserve Bank of New Zealand decision was the justification for why the majority kept rates on hold, and particularly from the governor, Anna Braman, and an economist board member, an academic economist, Prasanna Gai.

And they talked about the, quote, material risk of a, quote, abrupt global economic downturn.

And given that they're still saying they think overall rates will need to rise further in New Zealand, basically what they're saying is we didn't want to hike at this meeting because this risk is potentially so imminent that in the six weeks between this meeting and our December meeting, things might change significantly in the global economy significantly That means that keeping on hold or potentially even looking at rate cuts might be the direction we need to head in.

So even though they think they will still have to raise rates and the market pricings basically shifted from being 95% certain they were going to do it yesterday, the day before the meeting, to being more than 80% certain, 80, 90% certain that they will go in December, having held now.

The reason given for holding off from the majority is basically we think with the AI boom and the circular financing and the risks around that, with the risks around the Middle East conflict and how oil prices might hit growth at the same time as they're pushing up inflation, and with the risks that rising interest rates globally potentially could break something in the global financial system, that's the justification they gave for holding off.

Are there any lessons from what happened in the Federal Reserve and does it have major impacts on the Australian economy or the outlook for interest rates, do you think?

I mean, clearly they are in a better position or they feel they're in a better position to where that's that above target inflation and hope that it will come down because they also have a bit of a disconnect in the US between this apparent fall fairly strong economic growth, very high productivity growth, but like in Australia, their consumer confidence is in the toilet.

Yeah

Well, like putting truth in the Medi-Scare campaign, that kind of thing, or like what the government's trying to do with NDIS, but doing it to other programs as well and dramatically scaling back the government involvement that people are used to in social services.

Um, so that's one option, which would probably, as when Joe Hockey tried it in 2014's budget, went down like a lead balloon.

So Grattan is saying, "Look, we think if you're gonna seriously tackle the budget problem, you need to look at the spending and the revenue side." And again, this is where maybe there's some alignment between the left and the right of economists, where the left would say, "Look, we don't wanna see these social spending programs slashed, and yeah, we don't really like the GST, but hey, it's a big untapped revenue source to expand this tax.

And if that means it protects You know, the social programs and the state health spending, so be it.

Um, but, you know, there's, uh, as you say, the politics of it are difficult, not least of which, 'cause you need to get all the states to agree as well.

Yep.

Um, so Newstart and Youth Allowance would go up by 20%.

Now, monthly data notoriously jumps up a, a, a lot, but that does seem like a significant figure.

It is a significant figure.

They were basically all part-time jobs.

There was actually an increase in full-time employment reported in the ABS estimates for September.

But the interesting thing, I've seen one early economist note that came out that pointed to the fact that for the first time in a very long time, in many years, we have now seen a quarterly fall in the number of Australians employed.

So that's quite significant and kind of looks through some of the month-to-month volatility.

We've also seen a fall in the employment to population ratio, which I know a lot of economists look at as an overall picture of how strong the labor market is, 'cause it kind of factors how many people are in work or looking for work, that participation rate, and then, of course, how many of those people can find jobs.

But I think that quarterly inflation data's gonna be really critical.

I.e., inflation is the issue, and the labor market at the moment is pretty close to full employment.

Yeah.

Labor market conditions have eased broadly as expected in recent months, and that kind of sums up, uh, what they...

You know, it's, it's been roughly in line with their forecasts, and they forecast that it needs to keep getting a little bit worse in, in order for inflation to get back in the middle of the target.

But to me, the, the interesting thing here, and again, you know, there's, there are some domestic factors at play, but when you look at the stuff at the top of the statement about the upside risks to inflation materializing, which was what Michelle Bullock said ahead of the meeting, and it's again what they've led their statement with, first thing mentioned, the conflict in the Middle East has broadened, and energy prices are much higher than assumed in the August forecast.

Well, raising rates isn't gonna do anything to lower those energy prices.

It might help stop some of the feed-through price increases if businesses don't think they can get away with passing them on, um, which is where they go later in that paragraph.

The question is how much further is there to fall? And, uh, if we do get a fifth interest rate hike, that's obviously gonna do even further damage to the market.

Is the downside of that, though, that it replaces workers?

Potentially, and that's what needs to be managed.

Like, do you collect enough of the increased returns to capital? If capital is producing more of the output...

Machines.

Capital will want returns.

The owners of machines.

Yeah, the owners of the machines, the capital in the economy, will want returns for their investment to build those machines and to develop that technology.

I don't think anyone wants to live in a world where economic gains are not being distributed across the population for some of the reasons Michael mentions, like There's good kind of macroeconomic reasons you want consumers.

Uh, what, what did you make of this? Does it make economic sense? Is it problematic for the budget? Or is it better to actually take this out of the, out of the, out of the hands of politicians to decide on a case-by-case basis? Is it better to have something that's formalized, or is it actually kind of risky to do that when it's formalized because the price of diesel in particular kind of has, uh, broken away from just the price of Brent crude, hasn't it? It's actually, um, moving at a much higher rate than actually what the price of Brent crude is moving.

Yeah, so we're, we're talking there about what's known as the crack spreads, and, um, my colleague, our colleague, Daniel Ziffer, looked into this last week about how high those spreads are.

So, you know, if you look at the price of diesel, it's as if the price of crude oil pre-war is $200 a barrel, not 100, because the spreads have risen that much.

They've, they've risen by about 100 US dollars a barrel for diesel refining because of that loss of refining capacity in Russia, Turkey, other countries limiting exports, China having cut back on fuel exports earlier in the year.

Um, so in some ways, you're locking in the mechanism tied to a crude oil price which doesn't reflect the change in those refining spreads, and it's not just diesel.

Aviation fuel's been subject, uh, to a similar increase in that crack spread.

The interesting thing around the coalition's proposal is it's sort of semi-automated.

Exactly.

Mm.

Supply, if you have a, uh, a weak productivity and an incapacity for the economy to adequately grow its supply to meet demand, is raising interest rates going to appro- improve the supply capacity of the economy? Probably not, because you'll send some businesses broke, so there'll be less competition, uh, and their rivals can raise their prices.

And also, higher interest rates tend to mean less investment.

Uh, businesses-

Mm

...

if that happened.

Even if it took a few years to get there [laughs], I think a lot of people would still be, uh, in severe trouble on their 25- or 30-year mortgages with a, you know, if, if those bond market rates are 6 or 7% in the US, our rates aren't gonna be any lower, and, uh, mortgage rates are usually a couple of percentage points above that.

Yeah

... it's sucking in labor and people are building these things regardless of the cost, just to get them done quickly.

Um, and then the weak supply capacity in the Australian economy.

But the thing is, Carrington, what does raising interest rates do for any of those things? Nothing.

Absolutely nothing at all.

In fact, it could make the problem worse.

Uh, and the...

Right

Mm

... your NVIDIAs, uh, your Oracles.

Oracle has had debt issues this year with the credit default swaps on its debt, um, surging as people seeking extra insurance against the risk of default.

Um, so if the interest rates on safe, so-called safe government debt push higher, it's making the borrowing costs to fund this AI boom also higher, which means the returns that you need on those AI investments have to be even higher to justify all the outlays.

So the me- the mechanics of a Bondmageddon is as interest rates surge, the return on any other financial asset has to rise to meet it, and if it can't rise, the value of that asset, much like the bond price we discussed earlier, has to fall.

So as interest rates rise on bonds, share markets tend to go down, and you can reach a point at which things just start cracking.

Mm.

But, um, I think what Das is saying there is, is fundamental, that we, our answer to the global financial crisis, which was caused by too much debt and misallocated debt, in that case into the US housing market, and this financial creativity, uh, to create instruments based on those bad US housing loans, our answer to it was more debt and pushing interest rates really low for a long time, and now we're bearing the fruit of that.

And that is kind of, is it crowding out potentially other types of investment in the Australian market, including potentially our ability to build more housing?

Yeah, look, there's certainly an argument around that.

And I think we saw two crucial pieces of information last week that have shaped thinking about where policy might head, especially interest rate policy.

One was that capital expenditure data, as you say, coming from very high levels, but showing a bit of a pullback.

And maybe that's reflective of the higher interest rate environment, maybe a bit of a a pause on some of the enthusiasm around throwing endless capital after data centers and the AI boom.

Maybe, you know, just reflective of fears about future consumer demand.

But on the other hand, we saw household spending figures out last week, which showed household spending with relative abandon.

Did she give you other information besides what we're hearing from the creditors?

Um, but it's hard to see how you can force a country who has faced, you know, uh, uh, uh, faced sanctions for decades, suddenly America is going to discover the economic, uh, you know, bullseye in order to put pressure on I- Iran.

Well, the, the claims from the US, backed up by some independent analysts as well, like we're seeing very high inflation in Iran.

I believe some of the figures quoted are around 90%-plus annual inflation, so it's, it's bad.

Um, the Iranian currency also towards record low levels and has fallen substantially this year.

Um, the damage to refining infrastructure in Iran from those US and Israeli strikes is really biting, and there's talk that there are potentially fuel s- shortages and that the heavily subsidized fuel that Iranians have been used to is now becoming hard to get and more expensive.

Um, food prices with pressure upwards leading to this inflation.

So I guess the US hope is if we go all in and cut off those last remaining, uh, trade ties and effectively what they're...

But what's going on here, Michael? Is it about the Australian economy looking more attractive, or is it about weakness in the US, and particularly about the outlook for, for the US interest rates?

So what has been the outcome and, and what will it mean for those workers involved?

Yeah.

So as you mentioned, Carrington, this relates to the closing the loopholes reforms that the Albanese government passed a couple of years ago, which gave the Fair Work Commission power to regulate gig economy workers when they're in an employment-like relationship.

So not genuine small business people totally with control of who they dealt with, and you know, but when you're a, uh, an independent contractor that basically works for the same digital platform or the same capital... couple of digital platforms, you don't have any say over the contract under which you work.

You don't get any negotiating power.

You just take it or leave it.

They're employee-like workers.

Exactly

Could you explain that kind of argument around the fuel excise to us?

Yeah, so basically the argument is we do have a supply shock in fuel.

Like, there is less oil coming out of the Middle East.

About 20% of the world's oil pre-conflict was coming through the Strait of Hormuz, and, uh, basically most of that isn't now.

And a lot of refined product as well comes from the Middle East through that strait.

Um, so the normal economic response when you've got a reduction in supply is that people bid up the price of the remaining available supply until some people either cut back on their use or drop out of the market altogether because of those price rises, what's called demand destruction.

Um, and that balance rebalances demand back down to what the available supply is.

And we had sort of been more getting towards 50%, right?

So even this trimmed mean is expected to be higher even though we've had that fall in fuel prices.

Yeah, that's right.

Um, so even in the headline figures, there are things offsetting that fall in fuel prices, some of which will themselves be cut out of that less volatile trimmed mean.

So one of them is holiday prices.

So I'm pretty sure we all know someone who's jetted off to Europe for a holiday.

I don't know where the, the usual host of this podcast is, but certainly, like, when I've been ringing people to try and line up interviews, there's been an awful lot of people unavailable or only available on Zoom because they're currently in Europe or perhaps North America.

We just had the World Cup as well, so there has expected to be a big increase in prices, particularly for, um, travel, in- including overseas travel.

Where are they heading?

Is this a, a- an attempt to undo or essentially re-impose tariffs that have been struck out by the court? Is this more likely to last longer?

The...

It does seem the early legal commentary is that these are more durable.

This section of the Trade Act has been used previously, including in the previous Trump administration, to introduce tariffs, uh, against, for instance, China, that weren't struck down.

What is novel, though, and what we're reading in US media reporting who have spoken to legal experts, is how widely these tariffs are being applied.

This blanket 10 to 12.5% tariff on 60 different countries who are all accused of having weak, uh, uh, positions against the use of forced labor or modern slavery.

Um, this hasn't been done before, and it is likely to be subject to legal challenge again.

We know what's been driving that, but why has it gone up so much?

Uh, do you think that that's... part of that is what has changed under the previous chair, Joe Longo, who's stepped aside now for Sarah Court, uh, and that potentially this kind of record-breaking year we've had sets the tone for the years ahead?

Yeah, well, I think when you look at it, ASIC really, uh, i- it's been a bit of a cash cow for the government, as you point out, Dan.

Um, because it's not just the penalties that it gets.

It's been the long-standing, uh, guardian of the business register, and companies have to pay annual fees to keep their company registration with the regulator.

And again, ASI- it's not like ASIC gets to keep the cash.

Um, it puts that cash back into consolidated revenue, and then it gets a funding allocation in the budget, and the funding it gets is not equivalent to what it raises for the government.

It's a profit-making center for the government.

Uh, so we'll, guess we'll see what happens, uh, with this slump, but at the moment, uh, very low interest, and it's hard to see with, uh, all the, uh, conjecture about, uh, future interest rate direction that there's gonna be any kind of hot interest anytime soon.

How much impact does it have when you have such eminent people, uh, getting together to sound what is really like the ringing of a bell, a warning about the unchecked way that we're heading forward?

It should, uh, cause an impact.

It has gained some attention.

To give you an idea of the names on this list, they are people like Joseph Stiglitz, Nobel Prize-winning economist, Paul Krugman.

Uh, we've got Olivier Blanchard, who used to be the IMF's chief economist, uh, Neil Ferguson, uh, from Stanford University, uh, Ben Bernanke, the former, former head of the US Federal Reserve and now at the Brookings Institution, uh, Gita Gopinath, Betsey Stevenson, also formerly of the Fed, Justin Wolfers, uh, Australian expat over in the US at the University of Michigan.

And aside from these eminent economists, we've also got people like Eric Schmidt, the former CEO of Google, Jack Clark, one of the co-founders of Anthropic, and the chief economists both from Anthropic and OpenAI.

So even people developing this AI technology, uh, warning that we need to think about the ramifications.

When you see statements like this, when you see the potential for, uh, what it can do, what do you think are the chances [chuckles] that Australia is gonna be able to harness this positively for business, for industry, for workers, rather than have it happen to us?

How will people experience the change?

So, Carrington, it's been about 20 years since the original anti-money laundering and counter-terrorism financing laws that apply to financial institutions were passed.

So these laws have been about two decades in the making, because it's always been intended that eventually real estate agents, conveyancers, accountants, and other people who deal with large sums of money in these sort of transactions would be covered by the counter-terrorism financing and anti-money laundering rules.

Australia is way behind most of the rest of the world, particularly the advanced economies, in terms of implementing this.

And so from Wednesday, from July 1 this year, real estate agents, conveyancers, um, other lawyers involved in setting up companies or involved in real estate transactions or other property-related transactions, gem dealers and other people who previously haven't been covered by this kind of legislation, which has long applied to things like banks and money lending, will now be covered, and they will need to know their client.

So basically, where is the money coming from to buy this property? Now, for your ordinary home buyer, it won't make too much of a difference, 'cause you've had to go out, prove your identity, go and get a mortgage.

If you go to your real estate agent, um, or your conveyancer and say, "Look, here's the bank that I'm paying for this property.

Yeah.

But that, I guess, starting question is, is it a bad thing if older people are being more supported than younger people, uh, because hopefully almost all of us will get old one day?

Yeah, I mean, and it's a good question, but the key point you made there is around sustainability, and this is a key point in this actuaries report, um, because they've looked at what the Australian, average Australian pays over their lifetime, and currently the average Australian over our lifetime is only paying about 73% of the cost of what we take out.

Now, it doesn't take an actuary to figure out that that isn't sustainable.

In fact, the only way they say that it has been sustainable is that because we've had such strong migration and previously had, you know, reasonably good demographics, and Australia's a bit younger relative to some other developed countries, we've managed to prop it up by having enough working age people.

But as you say, as the population keeps aging, and particularly if we do really clamp down on the total population growth through net migration, um, we're gonna run out of working age people to keep being able to subsidize that.

They say we need to get to 85 to 90% of that lifetime cost being covered, uh, by people.

So that means either fewer services or lower quality services, or we need to find some more taxes, maybe not just from working age people, but from retired people who have a lot of assets but are currently not paying much tax.

Yes

Um, [lip smack] but they are waiting to see whether or not the three hikes they've already, uh, uh, they've already imposed on the Australian economy, whether or not they are starting to have an impact in that headline figure and in that trimmed mean figure.

Yeah, and the key point here is that interest rates, both cuts and hikes, operate with a lag, which the Reserve Bank in previous research has estimated to be somewhere between 12 and 18 months to get the full effect of a, a rate move, um, because it operates through several channels.

So you get quicker effects through household spending based on how much people are paying out of their mortgage, but even that takes two or three months to filter through from, from a, a rate hike till when your minimum repayment actually goes up with the bank.

And that starts coming out of your account, meaning you have less money to spend.

You've got the exchange rate effects, and they take months to have their full effect because exporters are bringing in products that they're not planning to sell, you know, for several months, 'cause they've gotta ship them in, all these things.

So whichever channel you look at for interest rate policy, it does take time.

They're already seeing, you know, probably the most immediate effect you get from rate hikes is the confidence effect, and we've certainly seen confidence, which was already pretty weak, fall off a bit of a cliff since the Reserve Bank started hiking in February.

But they don't want so much so that the economy comes to a screeching halt.

Yeah

... strong, and stronger than expected.

Because they have had rates on hold and had until recently been very much talking about rate cuts, um, the economy there is still very robust, I mean, particularly with the AI boom and data centers and all that investment happening.

But even outside that, the jobs figures tell you that it's not just an AI story in the US.

We're not yet seeing in those big figures any AI related layoffs on a mass scale.

So while the domestic economy remains robust there, the, the Fed's really in a hard place in, in a way that the RBA isn't here because we moved so quickly this time.

Almost the polar opposite of post-COVID when the RBA was the global laggard in raising interest rates.

It, it, and it all but depends on your perspective, right? Is it a good thing that people are able to access the internet even when the governments of those places don't want them to? Um, but, uh, aren't, are we allowing the power to make that decision to rest instead of with the government of that country, hope- in Australia's case, elected officials, as opposed to the world's richest man, Elon Musk, who seems to have the power to switch on and off access and, and how vulnerable does that mean Australians are who take up Starlink's, uh, service, or even if they don't choose to take it up themselves, if other critical parts of Australia's economy or, or, um, social services are being, are, are relying on Starlink, how vulnerable do they become to the whims of, of Elon Musk in particular?

What do you think of that? Will we have less housing because of these budget measures?

Look, Treasury itself forecasts that 35,000 fewer homes will be built over the next decade specifically because of the tax changes.

Now, they also forecast that 65,000 extra homes will be built 'cause of the $2 billion infrastructure fund that the government also announced in the budget.

So they're forecasting a net 30,000 increase in homes built.

But Westpac's economists actually throw some doubt on the Treasury forecast.

They're not sure that Treasury's actually been very able to model the substitution effect that might happen given that the government's deliberately quarantined new builds, newly built homes, from both the negative gearing changes and the capital gains tax changes.

So Westpac actually thinks that will double the proportion of housing investment that is going towards new builds.

So tell me, are the headlines as significant as they suggest? Could this be the start of a new sort of era for Australian housing and the housing market? And could it mean that more Australians could achieve the great Australian dream, which is owning a house?

Yeah

...

in just three years.

And they say, well, look, as economists say, correlation is not causation.

But to quote the Macquarie note, "The large jump in real house prices in that period suggests the introduction of the capital gains tax discount was a significant factor pushing prices higher." Yes, interest rates had been on a bit of a structural decline, but that was already happening prior to 2000 because we'd been coming off very high interest rates, moved into inflation targeting, and the real juice to the market was that September 1999 change to the capital gains tax that introduced this 50% discount, which interacted with the negative gearing and suddenly made property investment a great tax minimization tool, which up to then it hadn't been as much.

And essentially, what the government's tr- trying to do is unpick that.

Uh, if that change contributed at least in some significant part to a 45% real increase in ho- home prices in three years, then one can only imagine that removing it might contribute something towards a decrease in real home prices over the years going forward.

... going up less than they would otherwise.

What, what do you think those are?

Oh, look, you know, as I said, the increased employment protection, so when people have access to things like, you know, redundancy benefits.

Obviously superannuation for people who are in employment.

You know, it's a big thing that you're trading off if you go into business for yourself, and you have to look after your own retirement planning and savings.

Uh, parental leave entitlements, again, looking at the ABC example, Dan, and, and you'd know because you're...

You and I in the past, and, and you most recently, have been on bargaining committees representing our fellow workers and negotiating these better parental leave provisions.

And, you know, later this year, I'm planning to take three months off to do that, which is something I couldn't get if I ran my own business.

[laughs]

Explain why they're upset.

Yeah, so with capital gains, the new model proposed by the government to kick in from July 1 next year is indexation.

And what they index is what's called your cost base.

That's basically the price you paid to buy the asset gets inflated by inflation...

And you only pay capital gains tax on the real gain.

That is what you sell it for minus that inflated cost base.

But if you're a startup and you start with literally nothing, your business is worth zero when you start it.

Now, what's happening in the bond market? Is it Armageddon? No.