Building a Toy Macro Model for Australia

Bayesian approach to estimating NAIRU, potential output, and the output gap

Electoral calculus: The Coalition's Net-Zero Framing

Let's assume that the Coalition's abandonment of the net zero target is rational positioning for electoral success. But note, while this strategy may have short-term electoral benefits, it carries medium-term risks to Coalition unity (as it exposes unresolved regional vs urban tensions), and long-term risks for grid stability.

Labor's announcables vs architecture

Australia's energy transition has been hobbled by three distinct failures: the Liberals' policy whiplash that achieves little, the Nationals' agrarian caution that pines for Eden lost, and Labor's substitution of announceables for architecture - a glossy, frenetic politics that talks to consumers while industry and the underlying system barely features.

Liberal backflip on energy policy

Less consequential than it sounds: Yesterday's Liberal Party announcement is unlikely to deliver a substantially different outcome from the pathway the energy system is already on. Even if the Coalition abandons net-zero entirely and reorients policy to the single objective of cheap, reliable electricity, the physics and economics of the grid do not change. The policy shift slows the transition, but it does not fundamentally redirect it.

The Twenty-One Deadly Sins of Net Zero

The lights haven't gone out, but confidence has. For a decade, Australia's energy transition has stumbled from plan to panic, promising cheaper, cleaner power while delivering neither in full. The problem isn't the destination - net zero - but the map. Somewhere between ideology and inertia, the system lost its logic.

Australia's first truly domestic inflation cycle in decades

Australia may be facing its first truly domestic inflation cycle in decades. Productivity stagnation, rising labour costs and entrenched services inflation have boxed the RBA into a narrow corridor. Inflation will ease only when structural constraints - not just interest rates - are addressed.

Can the Nationals' plan work?

The Nationals' 2025 energy policy rejects net-zero haste for a slower, regionally negotiated transition. While politically coherent, it fails on its own terms: nuclear costs too much, coal can't attract finance, aging infrastructure won't last. The plan addresses cost anxiety without confronting grid physics. It buys time, not stability - and delay only compounds.

The Right’s Wrong-Headed Retreat to Energy Nostalgia

The Nationals’ decision to abandon net zero by 2050 reveals more than a policy shift — it exposes a deep confusion on the Right between nostalgia and realism. Australia’s energy future will be decided not by ideology, but by physics and economics.

The Price of Stability

Australia risks settling into a low-productivity, high-population-growth equilibrium: stable yet stagnant. Ageing, cheap credit, and migration mask weak dynamism, keeping the natural rate of interest pinned low. Escaping the trap demands productivity, not inflation.

Australia’s Energy Betrayal: From Abundance to Austerity

Australia once built prosperity on cheap, reliable power. Three decades of regulatory failure and moral vanity squandered that advantage and locked in mediocrity for a generation.

The Q3 inflation surprise

The Q3 2025 inflation print surprised on the upside, with annual headline inflation once again exceeding the Government’s 2–3 per cent target band. The Government has downplayed the result as statistical noise, arguing that inflation remains on a trajectory towards the centre of the band. That may prove correct - very occasionally rogue prints happen - but the data are not yet conclusive. For now, the result makes it increasingly unlikely that the RBA will cut rates at its November 2025 meeting.

The Mirage of a Return to Cheap Power

Australia’s energy debate is trapped between green idealism and coal-era nostalgia. Our transition demands realism, sequencing, and resilience — not ideological speed or nostalgic retreat.

Why No One Is Building New Coal Plants in Australia

The energy transition has flipped the logic of the electrical grid. What mattered once – scale and steadiness – now counts against coal, and even against nuclear.

Net Zero: Caught Between Urgency and Feasibility

Australia’s net-zero debate is torn between moral urgency and practical constraint. Real progress demands honesty about pace, cost, and technological limits.

The Weekend That Shook Crypto

Crypto’s machinery looks modern, but its foundations are medieval – a casino built on debt and faith.

Measured Consideration: Initial Reflections on Grattan’s “Bills Down, Emissions Down”

The “bills down” claim flatters itself with aggregation. Electrification may lower total energy costs in theory, but for many households the transition means dearer electricity, persistent fuel spending, and inflation that feels anything but transitory.

The Fragile Promise of a Net-Zero Grid

Spain’s 2025 blackout exposed the fragility of inverter-dominated grids. Australia’s net-zero plan must master four physical pillars – energy, capacity, inertia, absorptivity – or risk abundance becoming the next blackout.

Anchoring the Cycle: Why Independent Central Banks Matter

An exploration of how central banks evolved from crisis lenders to stabilisers of modern economies, showing why independence, credibility, and disciplined expectations remain vital to managing inflation, employment, and public trust.

Echoes of Euphoria: The Dot-Com Bubble and the AI Boom

A comparison of the late-1990s dot-com boom and today’s AI surge, exploring how financial exuberance, over investment, and slow productivity diffusion distort genuine technological revolutions. 

The Great Electricity Cost Blow-Out: 2007–2013

Gold-plated networks, not green schemes, drove the electricity-price shock -- and their legacy still burdens every bill.

AI, Moats, and the Question of a Bubble

AI is the new gold rush -- fortunes for a few, illusions for many. The winners will be those with moats deep enough to survive the flood.

The US Economy

Fed Independence

• The biggest source of risk to the US economy is the loss of Federal Reserve independence. Trump said the benchmark federal funds rate should be reduced from its current 4.25-4.5 per cent range to around 1 per cent. What is less clear is whether this represents the firm policy intention of the President, or whether this is just a political distraction, or a way to blame someone else for any pain arising from the new tariffs. If money markets come to the view that the Federal Reserve was not taking sufficient action to bring inflation to target, bond yields would rise in line with long-run inflation expectations (regardless of the Federal Reserve policy rate), and the cost of sustaining the US national debt could increase significantly.

US Trade Wars

Analysis

The US will end up with higher tariffs

1. Trump is ideologically committed to tariffs, and short of a disaster in implementation, the US is likely to end up with an increased tariff regime at the end of a protracted and probably chaotic negotiation process.
2. Trump’s baseline 10% tariffs on every nation are likely to stay in some form as they are a new revenue source for the government. Given the Republicans traditional hatred of new taxes, this might be Trump’s only way to (at least partially) address US fiscal problems and/or offset the costs of continued tax cuts.
3. The April-2-announced-then-paused additional tariffs on creditor nations (the so-called reciprocal tariffs) are primarily a negotiating tactic in Trump’s inimitable idiosyncratic style. He will ultimately reduce them or remove them where the targeted countries offer some significant concession to the US for their trade imbalance. In the short-run, this is a shakedown. In the longer-run, it is unclear whether Trump will continue to sustain sufficient market and public support for these add-on tariffs. 
4. Some form of super-tariff on China is likely to remain (see below).

The US tariff negotiation process could become messy

5. Trump will muddle though the tariff negotiation process: he will add new tariffs, pause tariffs, reduce tariffs, increase tariffs, remove tariffs, and back track as he negotiates with the rest of the world. If he fails to move forward with one country, he will shift focus to another country. He sees unpredictability as a negotiation strength. He does not play by the conventional bureaucratic rule book. 
6. Negotiating credibility requires him to be rougher, tougher and meaner than he was in 2018-2020 tariff cycle. Because Trump needs to be tougher, he is happy to take some market pain to pursue his negotiating strategy. His strategy will continue to provide short-term shocks to bond and equity markets in the US (and globally). 
7. But this is a high-wire act. Trump would not want to crash markets, see a flight of capital away from the US, nor bring on a full-blown recession. Hence, I expect markets to be tested and then eased back on multiple times. Market volatility will be high during the negotiations.
8. It is also a lot of work. Trump is trying to negotiate with perhaps up to 100-plus countries at once. This is a Herculean task for the US, that benefits the nations in the rest of the world. each of whom only need to negotiate one agreement with the US.
9. China, Mexico and Canada have been subject to this strategy once before in the 2018-2020 tariff cycle. All nations would have learnt that capitulating to Trump does not buy long-term reprieve or certainty from Trump’s US. Consequently, Trump is likely to find this round of negotiations much more challenging than the 2018-2020 round. He runs the risk of being seen as a one-trick-pony. No-one likes to be repeatedly extorted with the same strategy – it will be a case of once bitten, twice shy.  If Trump is not careful, rougher, tougher and meaner can quickly look like an over-exaggerated pantomime when it is ignored.

China is a particular focus of US concern

10. China is a growing threat to US hegemony and dominance. China has grown quickly over the past 35 years. Its global trade has exceeded the US every year since 2012. Trump’s tariffs appear to have the added objective of constraining China’s trade and geo-strategic ambitions. Trump undoubtedly wants to tighten the screws on what he sees as China’s poor trade practices. Consequently, China is likely to have higher US tariffs compared with other nations.
11. China is not without options in this negotiation:

• First the US negotiating hand is weakened by its large fiscal debt and deficit. If Trump moves too far or too fast, it could trigger a fast devaluation of the US dollar, a flight of capital from the US, an increase in the US inflation rate, and/or a increase in the US Treasury bond yield rate. 
• Second, the US negotiating hand is weakened by any public reaction to higher prices for Chinese imports or (if nothing is resolved quickly) empty supermarket shelves. 
• Finally, China can more easily purchase from the rest of the world what it currently imports from the US; than the US can import from the rest of the world what it imports from China.

12. It is possible that as part of its negotiations with other nations, the US will ask its interlocutors to impose similar tariffs on China. You can expect China to retaliate against any nation that participates in a US-led tariff blockade of China. If the US and China get into these positions, Australia could find itself with some difficult choices.
13. China would not want to lose face by being humiliated into providing more trade concessions.

Final observations

14. While Trump will continue to use the rhetoric of repatriating industry to the US, his approach is unlikely to achieve this goal (it just doesn’t offer the policy certainty over the 20+ year time horizon business needs to bring manufacturing back to the US). I suspect Trump knows this. Nonetheless, the rhetoric is useful red meat for his supporters.
15. I do not for one second think Trump is playing 4D-chess or executing a sophisticated and finely calibrated optimal tariff theory approach. It is not who he is. This is a bare-knuckled playground bully brawl.
    

The State of the Australian Economy

I am seeing posts on X (formerly Twitter) and Bluesky that argue all is well with the Australian economy. The stylised facts go something like this:

• Unemployment is at 4.0 per cent
• Headline inflation is at 2.3 per cent / year
• Wages growth is at 3.5 per cent / year (well above inflation)
• The stock market is at record highs
• Household Wealth is at a record high

And in the main these statistics are correct, although arguably some are in part misleading. More fundamentally, these statistics are cherry picked: Good statistics are highlighted and the more challenging ones are glossed over. I would contend the state of the Australian economy is much more of a mixed bag. There are definite strengths. But there are also challenges. And, importantly, there are pain points arising from the economic trajectory since the COVID pandemic notwithstanding the current good news. Let's begin with the strengths.

Australian Recessions

We have lived through more than 12 months of the advocates for an immediate central bank interest rate cut saying that if we don't get a rate cut this month, the economy will enter a recession.  So far those advocates have been wrong. It reminds me of the Paul Samuelson joke: “the stock market has predicted nine out of the last five recessions”.