RBA Rates Decision & Roy Morgan Unemployment

Flattr this!

Click here for this post in PDF: Debtwatch Members; CfESI Members
Click here for the economic data in this post: Debtwatch Members; CfESI Members
Click here for the house price index data in this post: Debtwatch Members; CfESI Members

The RBA’s decision not to reduce rates this month caught most pundits by surprise—including me. Given the international and local data, I thought they’d err on the side of caution and cut rates.

As I always note when asked to call what the RBA will do next, this is a call on how another body will respond to what they perceive as the economic data and the direction their model of the economy predicts the actual economy will move in. That’s closer to picking which cockroach is going to walk out of a circle first in a Changi prison gambling den than it is to economic forecasting per se (which is dubious enough activity in itself). So making a wrong guess about what the RBA will do is not the same as making a wrong economic forecast; you’re just making a different forecast of the future than is the RBA.

The RBA’s explanation for its decision shows that it is making a rosy call of both the current data and the direction in which the Australian economy is headed.

Information on the Australian economy continues to suggest growth close to trend… the unemployment rate increased slightly in mid year, though it has been steady over recent months… In underlying terms, inflation is around 2½ per cent… the Bank expects inflation to be in the 2–3 per cent range.

Credit growth remains modest, though there has been a slight increase in demand for credit by businesses. Housing prices showed some sign of stabilising at the end of 2011, after having declined for most of the year. The exchange rate has risen further, even though the terms of trade have started to decline … With growth expected to be close to trend and inflation close to target, the Board judged that the setting of monetary policy was appropriate for the moment.

As the Sydney Morning Herald editorialised, the RBA message was that the future looks good:

MOVE right along folks. Nothing to see here. By keeping interest rates on hold this week, the Reserve Bank is sending a subconscious message to borrowers: the economy is doing reasonably well. There is no need to panic…

Although we in NSW seem bogged Eeyore-like in our sad and dank little corner of the forest, glumly chewing our thistles day after day, perhaps we really ought to cheer up. Gloom is not just miserable in itself. When it comes to the economy, it’s dangerous.

This is not the take that the majority of economic pundits have on the data—and for once, I’m with the majority. Normally the majority is bullish (because they have a Neoclassical perspective on the economy that largely ignores credit, and thinks the economy always returns to equilibrium) and I’m bearish (because I have a “Post Keynesian” perspective that sees credit as the key motive economic force, and believes the economy is always in disequilibrium).

The majority of economic pundits lined up with me for a change because there was a range of data that implied the economy was stalling. Firstly, unemployment has been trending up, and the “steady over recent months” phenomenon that the RBA referred to above was entirely due to a fall in the participation rate. Had this remained at the November level, the ABS unemployment rate would have jumped to 5.6% last month.

Figure 1

And that’s the good news: as was widely reported, employment fell by almost 30,000 last month, so that net job growth in 2011 was zero—the worst outcome in 20 years.

Secondly, a broader measure of unemployment maintained by Roy Morgan Research hit 10.3 percent—5 percent above the ABS figure. The ABS treats someone who has worked for one hour in the previous two weeks as employed, a definition that Roy Morgan rightly rejects:

“Surely if someone is not working, is looking for work and considers themselves to be unemployed, then they should be considered unemployed regardless of whether they happen to have done a couple of hours work here and there during the month?”

The ludicrous official definition of unemployment is a classic case of bureaucracies (including the United Nations International Labor Organization in this case) eliminating a problem by redefining it rather than solving it. Many people have criticised this definition (including Peter Brain from the National Institute for Economic and Industry Research, who found that over a dozen official redefinitions of unemployment had all reduced the recorded level); since the late 1990s, Roy Morgan has gone one better and conducted a monthly survey using a definition of unemployment that actually makes sense:

” According to the ABS definition, a person who has worked for one hour or more for payment or someone who has worked without pay in a family business, is considered employed regardless of whether they consider themselves employed or not.

The ABS definition also details that if a respondent is not actively looking for work (ie: applying for work, answering job advertisements, being registered with Centre-link or tendering for work), they are not considered to be unemployed.

The Roy Morgan survey, in contrast, defines any respondent who is not employed full or part-time and who is looking for paid employment as being unemployed. ” (Roy Morgan, September 2011)

Roy Morgan’s definition therefore necessarily records a higher level of unemployment than the ABS—and they are also a more legitimate measure of real unemployment. However their results are also more volatile, since their sample is smaller than the ABS’s, and the results are not seasonally adjusted.

Figure 2

Overall however, Roy Morgan’s figures are a more accurate indicator of the level of unemployment than the ABS’s, and also as a harbinger of where the ABS data may move in the future. The current gap between the two measures is the highest it has ever been—over 5 percent, when the average gap has been about 2.5 percent—and this implies that the next move in the ABS figures could be substantially upwards. Gary Morgan warned that the economy is a lot weaker than the RBA seems to think:

“Today’s Roy Morgan unemployment estimates strongly support anecdotal evidence of continuing job losses throughout Australia. Just in the past week we have been told that Westpac has announced 550 jobs to go; ANZ is axing 130 jobs; Holden will cut 200 jobs at its Adelaide plant; Toyota will cut 350 jobs in Melbourne; Reckitt Benckiser (maker of Mortein & Dettol) is to retrench 200 jobs at its Sydney operations; defence firm Thales shedding 50 jobs in Bendigo — these are just the most prominent examples of job losses occurring in the Australian economy!

“Economists and politicians are wrong to talk about a ‘tight’ labour market in Australia driving wage pressures. Wage demands (inflation) at the moment are being driven by unions — a small minority of the Australian workforce — not by a tight labour market with workers changing jobs to secure better wages and conditions. Today’s Roy Morgan employment estimates show why inflation in Australia is contained, and will remain contained — at its meeting next Tuesday the RBA must drop interest rates by at least 0.5% and probably more.”

Figure 3


If Gary Morgan is right, the RBA’s rosy forecast for the future will be shown to be in error. The primary source of that error will be not merely misplaced optimism, but reliance upon neoclassical economic models about the economy that ignore the role of credit just at the moment that decelerating credit is finally setting in in earnest in Australia, after being delayed by the First Home Vendors Boost.

Figure 4

The First Home Vendors Boost was the sole cause of the reversal of deleveraging in Australia after the crisis began, with the growth in mortgages more than offsetting the reduction in debt by the business sector.

Figure 5

With that artificial stimulus to credit growth over, credit growth is now decelerating in Australia, and causing unemployment to rise despite the offsetting impact of the resources boom.

Figure 6

Mortgage debt is now decelerating strongly, and taking house prices down with it.

Figure 7

From its comment that “Housing prices showed some sign of stabilising at the end of 2011”, the RBA appears to be buying the RPData spin that a one month upwards blip in their data series after 11 months of decline signals a bottom to the housing market. However a simple comparison of house prices here to those in Japan and the USA after their bubble economies burst makes it hard to argue that “Australia is different”.

Figure 8

Of course, at this stage it is too early to tell whether we’ll follow the long slow decline of Japanese prices, or the sudden fall that marked the USA. But by the end of 2012, Australia’s house price decline profile should be apparent.

Figure 9

About Steve Keen

I am Professor of Economics and Head of Economics, History and Politics at Kingston University London, and a long time critic of conventional economic thought. As well as attacking mainstream thought in Debunking Economics, I am also developing an alternative dynamic approach to economic modelling. The key issue I am tackling here is the prospect for a debt-deflation on the back of the enormous private debts accumulated globally, and our very low rate of inflation.
Bookmark the permalink.

74 Responses to RBA Rates Decision & Roy Morgan Unemployment

  1. Lyonwiss says:

    @ RJ February 11, 2012 at 10:33 pm

    I think you are an idiot just like me.

  2. Philip says:

    From what I gather about national accounting identities, the private sector will run a surplus equal to the government deficit + current account surplus.

    The graph by Scott Fullwiler provides a good illustration of this.


    My question is this: does the accounting identities take into consideration government debt held by other sectors of the government e.g. central bank, state and local governments?

  3. Steve Hummel says:


    “I would believe in something only because I have NO choice but to believe in it.”

    But this is many times a false or delusional choice. For instance, today no matter whether you believe in American capitalism or European socialist democracy you must believe in wage slavery. The falsehood is the orthodoxy that you have chosen the most humane or in some way best system. The reality is that you’re simply enslaved either way.

    “Believing in something just because you feel that you are compelled to choose between available alternatives is surely a path to human misery. This applies to economics as much as it applies to life in general: one wrong idea against another wrong idea.”

    Quite agree. The above example illustrates this accurately.

    My point in the prior post however, was that Man chooses. He’s a choosing being. If he doesn’t choose to base his orthodoxy on universal human values and ideas he will choose to base his orthodoxy on economics and finance or some other lesser values.

    If he chooses in fact to say “I don’t know.” He’s cultivating an open mind which is certainly something we need in today’s world which is fraught with false dualisms and orthodoxies. But choice and choosing is ultimately not the problem. It is inevitable. Suspending belief until REAL choices are actually considered….that is a discipline and a goal severely needed.

  4. Lyonwiss says:

    @ Philip February 11, 2012 at 10:49 pm

    For the national accounting identities to hold empirically, all sources of government debt would have to be included.

    In the last equation (your link), the first two terms apply to a closed economy, which is what fiat currency fiends focus on, whereas the last term is the important one, in the real world of open economies.

    Sure, USD foreign debt accumulated from current account deficits can be paid for by printing USD. But it is conceivable that one day, the US will be required to settle its current accounts in gold or something, not USD. For example, Iran would want the US to pay for its oil imports in gold. That may explain why the US has been exercising its “fiat” by waging wars in the region.

    There is a parallel in the 19th century, when China wanted silver to settle trade balances with Britain. Britain was running out of silver when it sent in the gunboats to force China to accept opium imports, which were exported by the British from India. Clearly, the British currency was irrelevant to the Chinese then.

    The gold price is a measure of the abuse of fiat currencies. Every attempt has been made by authorities to cap it in order to hide the fact. Much of the world of shadow economy, money laundering, arms smuggling, drugs, wars etc. lies outside economic theory. War may be an inevitable consequence of fiat money.

  5. RJ says:

    “My question is this: does the accounting identities take into consideration government debt held by other sectors of the government e.g. central bank, state and local governments?”

    No to central bank debt

    No I think to local Govt debt UNLESS (maybe) they raise the money direct from a bank rather than from the market.

    So if banks loan more this flows into profit for companies

    So if I loan 1 million from a bank to buy a house and the house seller buys local Govt bonds with this money. The key event is the increased bank lending not the local Govt debt.

  6. RJ says:

    “For example, Iran would want the US to pay for its oil imports in gold.”

    This will never happen. Importers to the US will be paid in US dollars. If they then want gold (or any other asset) they will use the US dollars to buy gold or the appropriate asset. Very simple. And some do this and other prefer to hold interest bearing bonds or maybe shares or property etc

  7. David Andrews says:

    Can you tell me where the data for the Australian real house price index comes from?

  8. Lyonwiss says:

    @ Steve Hummel February 12, 2012 at 6:11am

    I certainly wouldn’t believe anyone with cocksure opinions, as the truth is never as simple as the textbook or the government or the media presents. Here is something (right or wrong) which simple monetary theory does not even consider:


  9. Philip says:


    War seems to be an inevitable consequence of the existence of the nation state system regardless of the type of financial system.

  10. Lyonwiss says:

    @ Philip February 12, 2012 at 12:12 pm

    True, there are many reasons for war. But as my previous link suggests the recent wars waged by the US may be caused by the perceived need to defend the fiat-money, petrodollar system.

  11. Steve Hummel says:


    “I certainly wouldn’t believe anyone with cocksure opinions, as the truth is never as simple as the textbook or the government or the media presents.”

    Neither would I, and thats not what I am saying or pointing at.

    I’m saying that the philosophical roots of whatever one believes in regard to economic, financial or monetary theory must be aligned with one’s PERSONAL values……or there is illogic and resulting cognitive dissonance. The problem with the world today is that we have gone on too long with the primary purposes and values of profit and/or work for its own sake. These are inadequate ideas and values to base a fully humane and Good society upon. For that you have to ACTUALLY and CONSCIOUSLY decide to base ALL of your systems PRIMARILY (profit and work can be secondary purposes in such a system) on universal ideas and values like faith as in confidence, hope, love, grace and the intention that the individual be free and empowered…not just the the systems and their various business, banking or governmental entities.

    We need to committ to the re-assessment and alignment of our systems with these universal values. Philosophy is the proper beginning of every serious endeavor. And that is also how you not only begin to actually change society, but to change the entire paradigm of the economic, financial and monetary systems….economically from cynicism to confidence, from hopelessness to hope, socially from fear, lack of trust and reluctance to committ, to love and all of its fruits, monetarily and economically from scarcity to recognition of true and potential abundance, financially from once removed and denying any concept of grace to direct consumer financial distribution based on a dividend derived from one’s cultural heritage of productive potential.

    The self actualization of these values, ideas and experiences are restricted and even prevented by the paradigms of our current systems. If we are want to continue to evolve it is NECESSARY to make these changes.

  12. clive says:

    Phillip, “War seems to be an inevitable consequence of the existence of the nation state system regardless of the type of financial system”

    To retain their position of power most of them will stop at nothing. Look how successful England was for 100’s of years.
    Wars are usually the last resort these days. So called free trade agreements WTO and copy write laws work well at the start, for anyone who might challenge ‘authority’.
    Terrorisms a great control mechanism as well. Fear works wonders to galvanise your population against the ‘Bad Guy’.
    These days I think it may have even gone beyond sovereigns, multi nationals only need to keep their operations near the current power base, from there that can use leverage to ensure the sovereign will use any means at their disposal to ensure the corporations survival. Perfect symbiotic relationship

  13. mahaish says:

    central bank debt is the wrong terminology me thinks

    the central bank deals in treasury debt .

    the central bank is the dealer and account holder that manages treasury account operations both within and outside the money supply

    it could conceivably issue its own securities depending on the regulatory environment


    central bank liabilities are bank and non bank assetts

  14. RJ says:


    Agree. And this is the key

    “central bank liabilities are bank and non bank assetts”

    Although by non bank I assume you mean Govts.

    The central bank is the banks and monetary sovereign Govts bank. I know at times other companies can have a central bank reserve balance (not bonds) but this rarely happens I believe

    But central banks do not issue our money

    So if a central bank (say from QE)

    DEBITS Commercial bank loan (or Govt bond account)
    CREDIT Commercial bank reserve account

    It makes no difference to our money in circulation. Only Govt debt and bank debt increases or decreases does this.

  15. RJ says:


    This article seems plausible but is total garbage

    The reason people hold US dollars is due to high US Govt deficits

    High deficits = lots of US bonds = an asset for people to invest in and also = money for US citizens to pay for imports.

    The problems at present is far too little money. Or more correctly far too little Govt debt (from deficits) worldwide.

    People need money and then assets to invest in to save for their retirement. This can only come from Govt deficits and then Govt debt (as non Govt debt cancels out).

    The US is one of only a few countries proving Govt debt. Overall though Govt debt is grossly inadequate hence our current problems

  16. RJ says:


    few monetary sovereign countries providing large safe quantities of Govt bonds (from Govt deficits and debt) for the worlds savers to invest in.

  17. alainton says:

    Excellent article

    The mathematical equation that caused the banks to crash


    By Ian Stewart a professor of Mathematics – not overly dumbed down and makes the right conclusion about volatility and the need for a new economics based on complexity science.

  18. clive says:

    Alainton, That’s an interesting article

    At the forefront of these efforts is complexity science, a new branch of mathematics that models the market as a collection of individuals interacting according to specified rules

    Note, ‘specified rules’ and that’s where the problems start,


    Change the rules
    Break the rules
    Ignore the rules
    Introduce new rules (only in some jurisdictions and not others)
    In some areas there are no rules because we are inventing and introducing new products before the regulators can make them.
    To fix the last point we then forget the rules and introduce self regulation, which in effect brings us back to no rules.

    Finally to pacify those few who feel things might be getting out of hand the regulator informs us that things are fine, this is the great moderation it’s all in equilibrium.

  19. mahaish says:

    interesting article re iran,

    heres a prediction ,

    i think the iranians will have their hands full sorting out their own squables to worry about anything else.

    the same forces that bought gadafi undone and now threaten to undo asad and just about everyother feudal vestige in the middle east will cast its shadow over the ayotolahs of iran.

    theocracies are just as much under threat as dictatorships and monarchies in the middle east.

    but the balance of power between modernist and traditionalists in iran will be poised on a knife edge as this decade passes into the next. the power of money verses the power of religious zenophobia.

    within the next 20 years, revolution , counter revolution, followed by zenophobic nationalism. iran may well get its own napolean or hitler. and then the mid east will go to hell in a handbasket.

    we only need to study the french revolution and the chain reactiuon it caused in the collapse of the european power stucture in the following 150 years to understand this.

    the americans will obviously see the demise of the ayatollahs as good thing, and they will do all theycan to assist in the demise. but they should be carefull for what they wish for.

    replacing tired old men who rattle their sabres with young angry true believers who see the persians as the rightfull masters of the mid east may not be a good idea

    anyway i dont think we have a choice in the matter, because i dont think a peacfull solution in iran can be found

  20. mahaish says:

    the petro dollar system is only part of the reason as to what underpins the value of the US dollar.

    despite the machinations of forex markets, they usually get dragged back to fundamentals eventually,

    and that is,

    the external value of the currency is dependent on the internal value of the currency.

    domestic demand and the domestic employment and wage rates drives the value of the currency and drive capital flows

    so as long as american spending power is maintained in its sovereign currency and it is willing to run an external deficit with the rest of the world, foreigners have no choice but to accumilate dollar assetts thus maintaining the demand for the dollar

    the americans still have the largest economy in the world and
    americans have to pay their taxes in greenbacks, and if foreigners want to do business with americans they have to do business in greenbacks.

    petro dollar or no petro dollar

    right now the american congress seem hell bent on sabotaging their system through various arbitrary constraints to the treasury and debt ceiling, but this does not deny the fundamental power they have with their sovereign currency,

    which can be used to drive investment and saving, and hence external capital flows

  21. Alan Gresley says:

    I won’t make a full comment yet. Just a correction. The link for unemployment with the text “Roy Morgan, September 2011” is to a Roy Morgan poll from September 2001.

    There is one in 2011,


    and two in 2012.



  22. Lyonwiss says:

    @ Alainton February 12, 2012 at 9:10 pm

    I admire Ian Stewart’s books on castrophe theory and chaos, which helped my early education a couple of decades ago. But he is totally out of his depth here on the role of Black-Scholes in the cause of the banking crisis.

    Black-Scholes is only a part of the efficient-market, universal equilibrium, neoclassical economic paradigm. Samuelson had an option pricing formula, also based on Bachelier random-walk, which had two parameters, instead of one, as in Black-Scholes. Only one parameter is needed, if you assume no-arbitrage equilbrium. This was thought to be a “breakthrough” in Black-Scholes, but I beg to differ. Simplicity was preferred over accuracy.

    The key point here is Black-Scholes was NOT preferred because it was deemed to be the most accurate. Therefore, being “wrong” or inaccurate in calculation is not the issue in the cause of the crisis. In fact, most traders use their own modified versions of option pricing and the Black-Scholes is used as a benchmark, relative to which over-pricing and under-pricing is estimated. Hence to say the world trades on Black-Scholes is simply not factual.

    Black-Scholes is based on a partial differential equation, which is a multi-variate version of ordinary differential equations, for which most finance and economic graduates are ill-prepared, as Steve has pointed out before. Mathematically, it is straight-forward, but beyond the ability of most people in the financial markets. So selling financial engineered products is treated no differently to selling electronic engineered pproducts, like your flat-screen TV: you don’t have to know how they work.

    But there is one important difference: if you TV doesn’t work, you soon know about it, whereas if your OTC derivative doesn’t work, you will know about it only when it “blows up”. In a somewhat over-simplified explanation, this is how derivatives are created and sold in the markets for mortgage back securities, CDOs, CDS etc. which led to market failure when unexpected losses were realized.

    It is ultimately human greed, corruption and incompetence, not some misunderstood mathematical equation which caused the banking crisis. As usual, the cause is that corrupt or incompetent people were in charge.

  23. alainton says:


    I think you miss why Black-Scholes was initially so widely taken up – it was tractable on a programmable calculator – unlike its predecessors.

  24. alainton says:

    One for the Tea Shirts

    Economist Juston Wolfers gained some notoriety last week my shouting out at Greg Mankiw ‘Thats bollocks Greg’ in class – but what was the issue?

  25. Lyonwiss says:

    @ Alainton February 12, 2012 at 11:10 pm

    No, benchmarking is the main reason, because most traders used printed tables anyway even with Black-Scholes in the 70s. Programmable caluclators came later in the 80s.

Leave a Reply