Okay, so we’ve seen an announcement, we’ve got a new, or we’re getting a new Reserve Bank Governor. The Deputy’s been, is going to be elevated to the Governor role with Philip Lowe’s contract not being renewed. So we’ve had a few questions, even though it’s only been announced today, had a few questions already from a number of people basically saying hey, what does this mean? Does this matter? You know, can you give us a bit of about whether this is a good or bad thing. So look, the super short version is we’ve talked about the RBA and interest rates and inflation in the past, so feel free to check out some of those videos. But I wanna address a few more specific questions today. The really short answer is essentially no, we don’t expect that really make any fundamental changes to anything. And we also think that the recent review that’s been announced where there’s gonna be some changes to operations of the RBA, they’re gonna have less meetings, they’re gonna now have eight instead of 11, although I did notice that they’re keeping the meeting before the first Tuesday in November in Melbourne. So I think the Melbourne Cup lunch will still be on for the RBA board members, but outside of that, they’re gonna reduce the number of members. Again, the number of meetings, sorry. Will that change anything? Again, not really. The announced reason for that or the logic behind that is to have fewer but longer meetings to allow them essentially to choose through the data a bit more detail and hopefully ideally make better decisions. But neither that change or the change in Governor, we don’t think will make a material difference to how interest rates and interest rate policies set going forward. Okay, so that’s the short version. We’ll dive into a little bit of the detail now and just to explain why we don’t think that’s really going to make a huge difference. But one of the things I’ve been asked by a couple of people is to go through not just what we think, but how have we arrived at that decision. So we’re going to go into a bit of detail here. We’re going to get into the weeds a bit. So for those of you who aren’t interested, feel free to turn off. I won’t be offended. But for those of you who want to get into the detail, this bit’s definitely for you. Okay, so I guess the first question you have to ask yourself is, well, if we were placing the person at the helm or arguably the helm of an organisation, the first question is really how much influence does one person have? And so in some organisations, the leader or the person at the helm is very influential and very important. And in some organisations, they’re really just the spokesperson or a member of the team that maybe is the most visible or the public facing. Sometimes they might even simply be a token ambassador in some organisations, more like a patron or a figurehead sort of scenario. So how does the Reserve Bank Governor fit in terms of that role? Well it’s difficult to know for sure without being in the room and seeing the interaction but we have to appreciate that the Reserve Bank Governor is a member of a board and it’s the board that sets these policy decisions and while the Governor might be the person who has to front the media and take the questions and make a lot of the statements, certainly other board members are public facing from time to time as well, they just maybe don’t get the same amount of headline press as the Governor does in particular. But keep in mind there’s a board, there’s also all the RBA staff who are essentially crunching the numbers and providing information and data and policy suggestions through to that board. And then you’ve got all the other myriad of information that the RBA is collecting, collating and sort of sifting through from the ABS and various other sort of sources. So I think it’s unlikely that a single person in what is essentially a relatively democratic orientated organisation because it’s an appointed bureaucracy for want of a better term as opposed to a founder-led business or on the back of a single person’s influence or control, it’s unlikely I think that the Governor is going to be a major sort of change in direction or policy as a result of a single change. But having said that, different leaders have different styles and may have different influences in terms of the way things operate over time so I guess we’ll see. But then I guess the second question is well if we are changing leader in organisation, how much change should we really expect from within? So normally if an organisation changes drastically, normally that’s a result of someone taking a completely different approach and that rarely happens from within an organisation. It’s not very common for someone to rise to the top of an organisation, in this case we’ve got the Deputy Governor coming in to take over the Governor’s role. It’s relatively rare in organisations for there to be a huge disconnect between the 2IC and the head person, the CEO, and therefore to be a sort of major change. So it obviously can happen and does happen, but it’s obviously a lot less likely than if someone was sort of parachuted in from outside of the organisation. So again, another reason why we wouldn’t necessarily expect there to be a huge change. And I guess another really important question is how much of the role, Reserve Bank Governor role is actually determining interest rates. Again, that’s the most public thing certainly people would know about Reserve Bank Governor from a position perspective, but in reality if you look at the sort of broader job description, they’re one of a team of people who actually set rates. And even the setting and the managing of interest rate policy is a relatively small portion of the overall job. Their major job is to actually run the Reserve Bank and all the operations that the Reserve Bank are responsible for and interest rate policy is only one small part of that. It can be very important influentially in the short term, but that’s arguably more from a market trading and political position than it really is in terms of a long term. I’ll get into some of the data about why we think that’s the case in a moment. But again, not much of the role really is in the setting of interest rates. So again, if we’re promoting somebody to or hiring somebody to take over that role, you would expect that that person hopefully is being hired on their ability to execute the entire role, not just being a slightly better spokesperson or slightly better tweaker of one particular measure, which I suspect is the case obviously in the appointment of the deputy to the elevated to the governor’s position. But I guess from an outside in perspective or from a consumer of money’s perspective, rates being the price of money and the RBA’s job of trying to help control the price of money. How much influence, I guess, does the RBA really have on the rates borrowers actually pay and therefore depositors or lenders actually get to charge? Well, again, that’s changed drastically over time. So if we go back sort of 20, 30 years ago, if you look at the majority source of funding, superannuation funds were a lot smaller, sovereign wealth funds around in the world were a lot smaller. And the RBA was the majority, if not the almost total supplier of short-term, particularly short-term financing to Australian banks, particularly the majors. That’s now below 50%. Most of their funding, or at least more than 50% for most institutions, comes from the market. And that generally means overseas. And therefore, the influence of the Reserve Bank in setting the price of their money, the money they’re providing to banks and financial institutions, is not going to have the same level of impact that it would have had back when they were 80%, 90% plus of their funding source. So yes, they’re going to have some degree of influence in terms of changing their rates. But again, if the Australian rates move different to, say, US or overseas rates, and the dollar doesn’t react proportionately, because it will always a little bit, but never 100%, then the market’s going to provide an opportunity for institutions to simply borrow money not from the Reserve Bank and therefore the Reserve Bank’s movement of interest rates is going to have less of an impact than it might have had historically. So that’s another important thing to consider when you think about the Reserve Bank’s ability to truly influence that actual rate people are either receiving or paying. But I guess the really fundamental question is if, again, if interest rates are the price of money, I guess the million dollar question really is, well what should the price of money be? And we’ll look into a little bit of data of that in a sec just to see how monetary policy or interest rate setting and inflation as a measure really does affect or really is affected by economic growth versus the printing of money, etc. Because I guess the real question with air is like, well, what is inflation and why do we need it? So again, we’ve covered this in detail in some other videos, but inflation essentially is the relative increase in money supply versus the relative increase in productivity of the economy. So as the economy produces more goods and services, if the amount of money to exchange for those goods and services doesn’t change proportionally, well, then there’s the same amount of money to go around more goods and services. Prices obviously have to come down. And there is an argument, an economic argument, to say that falling prices are detrimental to businesses. Because if prices are falling, people will be motivated to spend less in the short term. because why would you buy something today when you can buy it cheaper in the future? And therefore the velocity of money, the turnover and people exchanging money is going to slow. Now, it’s a theory, it’s something that can be objectively tested. And ironically, when, well, almost all versions of testing that I’ve seen tend to indicate that, while it’s an interesting theory, that’s not how it plays out at all. People tend to spend money today on the things that they need today. And whilst they might wait for the future to buy some things that are materially cheaper, the reality is people tend to buy things as they need them, and that influences the vast majority of the decisions. So what can provide a nice academic theory doesn’t necessarily work out in practice. But the question is, why do we have inflation? Well, we have inflation only if the amount of money being printed or produced is increasing at a faster rate the economic supply, that is the goods and services produced by the economy. And so if we don’t want the prices in aggregate of things to go down, then really what we want to happen is the money supply to increase at basically the same rate as the productivity of the economy. That way prices on aggregate will be stable. Now the difficulty in that, as we’ve talked about in the past, is measuring the amount money in circulation at any point in time is essentially nigh on impossible, very difficult to do. And so really what the Reserve Bank is trying to do when they’re measuring, trying to get a handle on is there inflation, i.e. has too much money being printed, is looking at the aggregate of prices. Are prices moving at a rate in aggregate that would suggest therefore that there’s been too much money printed and therefore we have genuine inflation. So there’s often a conflation of that prices going up versus inflation. Prices going up may be a sign of inflation, but prices changing is not inflation. Too much money being printed relative to the change in economic output is what inflation is. And now why is that an issue? So let’s just have a quick look at that in terms of what happens over time if the money supply doesn’t keep pace with that. So looking at the graph here, pretty simple calculation. What we’re looking at here is a difference in economic output versus money supply. So in a very simple sense, we’ve just said, “Hey, what if we keep the money supply fixed?” So the amount of literally, think of it in terms of dollar notes, obviously most money is produced electronically via credit, but for the sake of simplicity, we’ll look at this in terms of a fixed number of dollar bills. So we have a fixed number of dollar bills and the economy grows at 1%, which is the grey line, through to if the economy grows at 3%. So this is the productivity growth. So more goods and services being produced by the economy means more– through more productivity, it means there’s more things to buy. Now, if there’s more things to buy and there’s the same amount of physical dollars, well, then the price of everything, relatively, is going to have to drop because that single dollar has to spread across more goods and services. So what’s the effect of that? So you can see, even a relatively small drop– so even at 1% after 30 years, we’re down to sort of 74 percent. So we’ve had a more than 25 percent drop in prices over 30 years. This is at a one percent differential. So again, doesn’t matter whether the money supply is growing at two and the economy is growing at three or the money supply is fixed and it’s growing at one, what we’re looking here is a one percent differential and looking at that effect over time. We can see two percent over 30 years we’re now down to more like 55 percent. So prices have have dropped from $1 down relatively to $0.55. And at 3%, we’re getting down to sort of $0.41, right? So we’re seeing almost a 60% drop in the price of things over a period of time. And so if you think about that, again, from an economic theory perspective, the idea is simply that, well, if prices are dropping in the future too fast, then people will wait. They’ll hold back and slow their expenditure. And that expenditure then slows down that velocity of money. ’cause keep in mind, one person’s expense is another person’s income, right? So it’s really important to remember that money doesn’t go anywhere, it just goes around. So when I buy something from, doesn’t matter whether I buy it from Amazon or my next door neighbour or block down the street on Facebook Marketplace or Woolworths, that’s gonna go somewhere. Even if it goes into a corporation, there’s no such thing really as a corporation, it’s just a place for aggregating money. That corporation’s then gonna pay its staff, it’s gonna pay its suppliers, where it’s going to send a dividend out to its shareholders and then those shareholders are going to then go and buy goods and services. So money’s going around the economy. There’s no mattress, you know, that Scrooge McDuck sort of, you know, putting all his dollar bills in. So if that money supply is, that money velocity slows down, then the economy can’t grow as fast because people don’t have that capital at that next stage of productivity. Now, by the same token, is that as that money goes around, If there is no productivity, if people aren’t essentially finding ways to do more with the same or with less, then that same dollar’s just gonna go around. If I buy a dollar’s worth of services from you, and then you buy a dollar’s worth of services from me, and we go backwards, forwards, backwards, and forwards, then no one’s ever better off because we’re really just exchanging the same dollar. So it’s only when productivity is positive that we’re actually seeing economic growth. Now, how do we know that productivity is positive? Well, there’s some measures in terms of that. You’ll see various statistical measures. But in reality, the easiest way to do that is to look out into the world and say, can I get more stuff now than I used to be able to get in the future? And can I get that on the same relative basis? So if I go and buy a car today for $20,000, how does that compare to a car that I used to be able to buy for $20,000? And obviously, that same $20,000 car is a vastly different piece of technology to what $20,000 would have bought you a long time ago. So that tells you that there’s productivity because everything’s getting better, even if the price itself isn’t changing, the quality of the goods we’re getting are improving. So when we’re looking at that delta, that is the gap between productivity and money supply, really what matters is, is one growing or not growing as fast as the other? And if they, ’cause if they go at the same rate, then prices are going to be stable. And the economic argument is prices decreasing in the future is a bad thing. Because again, that idea of slowing the velocity of money, even though there really doesn’t seem to be any credible evidence of that from a practical measure perspective. Because it basically ignores, as Keynes himself said, what’s called animal spirits. And that is people tend to behave in a way that in aggregate, in the long term, can be seen to be rational and in their self-interest, but doesn’t seem to be explained by that phenomenon in the short term until you understand that human beings do what they want to do in the short term based on what their short-term desires are as much as their needs. And so we’ve seen this graph before as well, but it’s worth revisiting because, again, it’s important to understand that the price of things are driven by productivity. So for example, if we look at over the 20 years to 2019, we can see some things, particularly audio, visual, computing, equipment, et cetera, dropped around 89% in price, whereas things like education, medical services, et cetera, actually went up quite considerably, sort of doubled or more than doubled, tripled in some cases in terms of the prices for those services. So when it comes to the CPI, that is the Consumer Price Index, the price of goods and services, you can see there’s a huge variation in terms of the contribution to that number. And what the Reserve Bank does in sort of determining the CPI number that helps inform whether they think there’s inflation and therefore setting interest rate policy, is to delve through that information in the short term and say, “Okay, well, education prices have gone up a lot in the short term. Is that a supply issue? Is it a money supply issue? Is there some type of short-term constraint?” a whole range of other factors, they’ll decide either to reduce the effect of that number, sometimes exclude it altogether, the price of bananas spiking because there’s a cyclone in Queensland, something for example in the past that had been used to remove the change in prices of food, and the more you mess with the composition of a number, obviously the less comparability you have between one measure and the next, and particularly over a long period of time. So I guess the short version of this sort of graph tells you that trying to use prices as a measure of inflation, i.e. money supply versus productivity growth, obviously is a long way from an exact science. And therefore expecting one person or even a group of people to be able to do that with any degree of accuracy and consistency over time is, well, nigh on impossible. And that’s why we’ve seen consistently, not just from the RBA, but around the world, central banks have routinely, and if not as a general rule, not met their inflation targets, despite the fact that they have arguably a few tools at their disposal, including printing of money, including setting of interest rates, including buying foreign currency and selling foreign currency reserves. All of those tools can have some influence on the prices of certain things, but the reality years, they’ve missed that band not just in Australia but routinely around the world because the ability of central banks to actually control that delta is obviously extremely difficult. So is that really going to change? Probably not in the short term and therefore we shouldn’t really expect the Reserve Bank to, a changing government, to have a material different in their ability to do that. So what does that mean for borrowers and people with money on deposit or lenders if you like in that case? Well look, I guess it comes back to that central question of what’s the right price of money. We need money to have a price so that people respect it, that people don’t waste it, people don’t use it to buy too speculative investments, we use it to blow up and inflate non-productive assets. So somewhere around about the current interest rate is probably if we look at historic behavioural activity in relation to interest rates somewhere around, you know, maybe even a percent or two lower than this is probably where we think interest rates need to be over the long term and then move in and around that. Rates of sort of, you know, basically zero and therefore home loan rates of 2% was clearly too low. That was always going to be the case. And the fact that rates have gone up a lot in the last couple of years is really not so much a negative effect, it’s more sort of getting back to where things should be if we’re going to allow people to make more positive, rational economic decisions in the future. Because when rates are basically almost zero, then the only thing to do when the price of money is low, the only thing to do when the price of something is low is to buy a lot more of it and that means to take on a lot more debt. And the problem with that debt is if that debt isn’t productive, and it tends not to be when it’s cheap, then you end up essentially directing your productivity, because productivity is the only way that we pay for anything. And we either pay for it historically with savings, currently with our productivity, or future with higher taxes or less consumption. So productivity is all we have to be able to repay any debt, and therefore if the price of money is too low and people borrow too much, they’re essentially going to be less net productive because their productivity tends to be wasted. So we do need interest rates to be at a level and probably not too different to what they are today. Okay, so we went into the weeds a little bit there. It’s a fair bit of data, a fair bit of detail, and a little bit of math involved, but I really just wanted to make the point that inflation, the true measure of inflation is money supply versus economic output, and the change of that relatively over time. And so there is an argument, although it doesn’t seem to have much in the way of objective, verifiable, historical measurement, But there is at least a conceptual argument to say that fixing a money supply probably isn’t a great idea. But the reality is, the reason we have inflation is because by growing the money supply slightly faster than productivity, which is what inflation is, to have positive inflation the money supply must be growing slightly faster. It means prices can be going up over time, which can make planning and projecting from business perspective maybe a little bit easier. But what it really allows governments to do is essentially spend more money because by inflating that debt essentially, it means that they’re going to be able to spend more money without having to raise taxes in the short term. So that’s a real reason we have a small amount of inflation because it does allow governments to spend money without having to raise taxes, which obviously politically is quite expedient. Whether that’s a positive economic benefit or not, if it’s a relatively small amount, sort of 1%, 2%, arguably not, but certainly inflation above sort of 3%, 4%, 5% is quite detrimental. It just means we’ve printed way too much money. And that’s obviously the situation we’ve had in recent times and therefore why we’re experiencing this very high inflation. Now, it didn’t come from nowhere. It was very predictable. It came from too much money being printed prior to but especially during COVID. And that’s essentially what we’re paying for now. So inflation is likely to stay high going forward, regardless of what the Reserve Bank does, but they’re going to keep interest rates reasonably high because that’s the only way to drive inflation down in the long term. And inflation affects everybody because everybody buys stuff, but only about 40 odd percent of people are home loan borrowers and therefore only about 40 percent of people are negatively affected by interest rates being slightly too high. And many people are retirees or investors and therefore they get some sort of benefit of interest rates being slightly high. So the Reserve Bank’s always going to side of upsetting 40% of people rather than 100% of people. That just makes basic sense. Alright so hopefully that’s enough on inflation for the foreseeable future. If you’ve got any questions or any other specific details you want to dive into, please let us know. Happy to go into the weeds for those who want. For those of you who are still watching, thanks for your attention and we’ll see you next time.