R-star as an international price

I have written about r-star twice this year. The first post tried to pin down Australia's natural rate the standard way, a Holston-Laubach-Williams state-space model, trend growth and the IS curve doing the identifying work. It couldn't be done. The IS curve coefficient on the real rate gap came out at around minus 0.05, against quarter-to-quarter noise of about 0.7. A signal one-fourteenth the size of the noise floor cannot identify anything. Every variant I tried failed the same way, the latent r-star collapsing onto whichever prior I fed it.

The second post started with the premise that liquidity is global, and in every country investment seeks out the best returns in the world. The standard approach to r-star instead asks Australian output and inflation to reveal the real interest rate that balances desired saving and investment, as though that equilibrium were fundamentally domestic. But saving and investment now meet in a global capital market. A single global market still leaves room for a country-specific wedge, the way a single global oil market leaves room for regional basis differentials between Brent, WTI and everything else. The wedge is the local story. The level it sits on top of is not.

This post takes that global understanding and uses it to model Australia's neutral real rate of interest, r-star. World r-star plus the Australian wedge gives Australian r-star, rather than Australian output, inflation and trend growth being asked to produce one on their own. Australia's own market tells you the wedge on top, not the underlying price.

The Australian Economy Right Now

Four numbers rarely line up the way they have this year. Growth sits above potential. Unemployment sits below the non-accelerating inflation rate of unemployment (NAIRU). Inflation sits above the target band. And the cash rate sits above the neutral rate, r*, but still short of what a standard Taylor rule would prescribe. Put together, these estimates describe an economy running hot while policy leans against it, but not hard enough.

Growth Has Overtaken Potential

Headline GDP growth through the year is running at 2.14%, although most of that growth happened in the tail end of 2025. Growth in the first half of 2026 was much more modest.

The New Keynesian Synthesis, Explained

When a central bank moves the cash rate, it’s acting on a specific model of how the economy works. That model is the New Keynesian synthesis, and it’s the closest thing modern economics has to an operating manual for monetary policy. Every inflation target, every rate decision, every line in a central bank statement about “returning inflation to target” comes out of this framework. Understanding it is the difference between watching the news cycle of rate rises and cuts and actually seeing the logic behind it.

This isn’t a history of how these ideas came together, nor an account of what exactly got synthesised between classical and Keynesian economics. It’s a walk through the intuition: how the pieces of the model fit together, and where they hold up worse than the theory suggests.

Output and Output Gaps

Every economy has a speed limit. Economists call it potential output, or Y*. It represents how much an economy can produce when its workers, factories, and capital are all fully but sustainably employed. Actual output (also known as GDP or Y) moves around this limit. The difference between the two, Y minus Y*, is called the output gap. Sometimes it’s negative and Y sits below Y*, and resources go idle. Sometimes it’s positive and Y pushes above Y*, and something has to give.

What a Real Bond Crisis Looks Like

People throw around the word "crisis" every time yields move. It's worth being precise about what that word actually covers, because the different versions call for completely different responses.

Markets reprice all the time as new information arrives. That's their job. A repricing on its own is not news. What matters is the size of the move, the speed of the move, and whether anything underneath the market itself is breaking. Those questions are what separate the ordinary from an actual crisis.

Potential: the speed limit for the economy

Every few weeks someone describes potential growth as the economy’s speed limit. The metaphor is useful, but it is attached to the wrong thing. The real speed limit is potential output, the level: the amount the economy can produce sustainably with inflation at target. Potential growth is only the rate at which that limit itself moves. The two answer different questions, and mixing them up produces bad readings of the cycle.

This post uses a small model of Australian potential output to make one point. Conventionally, the output gap is the difference between actual and potential output, a difference between two levels. This model goes one step further and splits that observed difference into an inflation-related component and a residual. Potential growth tells you how fast the potential level is moving. It does not tell you the sign of the gap, and neither potential growth nor observed GDP growth on its own tells you where inflationary pressure sits.

Two levels and the distance between them

Let's not mention the war

The latest in a series of monthly reflections on the war in Iran.

Six months ago the United States began the largest military campaign it has fought since 2003. It killed a head of state on the first morning. It has struck more than eleven thousand targets. Eighteen American service members are dead and 756 wounded. The Strait of Hormuz has been closed (again) since 11 July.

You would barely know it.

That is not an accident, and I do not think it is simple neglect. The silence is the most informative thing that happened in August.

Weekly Energy Update

 Status

• Petrol prices - elevated but stable in August. 
• Singapore refined - elevated
• Crude prices - elevated 
• Natural gas - above early Iran war prices

Charts

Who Fights Inflation

Australian inflation took off in 1973 and did not get back below five per cent, and stay there, until 1991. Eighteen years. Germany peaked at 7.9 per cent and was under 5 within three. The United States peaked at 14.8 and took nine. We peaked at 17.5, and the Reserve Bank's own 1992 conference on disinflation ranked Australia poorly on the unemployment cost of getting there, putting it down to high real rigidities.

Australia has an inflation problem

 Underlying inflation is running at 4.9% annualised and climbing.

QE and the Estimated Neutral Rate

TL;DR

Money for long-term borrowing moves freely across borders, so liquidity is a global phenomenon. QE bought bonds from asset holders and paid in cash. With this cash they bought other assets, everywhere and in every class. Asset prices rose worldwide, including in countries that never ran a QE programme of their own.

That was inflation, in a market the consumer price index does not cover. And bidding an asset's price up is bidding its yield down, so the same event was a global fall in borrowing costs.

None of this began in 2009. Bernanke saw low rates in 2005 and diagnosed a global savings glut as the cause, favouring a structural explanation over a liquidity one.

Most econometric models that estimate the neutral rate are fitted to consumer prices, output and interest rates. Asset prices are not among the inputs. So the figure they report is the rate that is neutral for groceries, and it has nothing to say about whether borrowing was running ahead of the capacity to service it.

There is a second problem underneath. The models infer the rate from two relationships that a decade of successful stabilisation had flattened, leaving the history of the policy rate itself as the main thing to lean on. Policy rules then took that estimate as an input, and naturally recommended something close to the policy already in place.

Estimation needs variation, and stabilisation exists to remove variation. A central bank that succeeds gradually erases the evidence it needs to keep doing its job.

The liquidity story does the work of several. It explains why asset prices boomed where no programme ran, why consumer prices stayed quiet and then surged in 2021 when the same mechanics reached households instead, and why every country's estimate fell together despite different demographics, deficits and growth.

For a decade, the rate that would have kept borrowing serviceable sat far above the one the models report. That is not a measurement problem. It is a specification problem, and a specification problem returns a confident number to the wrong question.

US Bonds Crisis

Everyone is panicking about the US bond market. Here is thirty years of data on the thing they are panicking about.  

Weekly energy update

Crude

Cheap oil isn't coming back anytime soon.

Yes, I use AI

I use AI to write. I use it to research, to draft, to code, and to argue with. This essay included.

I expect that within a few years the disclosure will read oddly, the way it would read oddly if I told you I had used a pen. Or a spreadsheet. Or a search engine. Tools stop being remarkable once everyone has them, and the announcement stops being a confession and becomes a tic. We are not there yet, so here is the confession.

Privatisation of Government Businesses, Services and Financing

1. Scope and definitions

What the word covers

Privatisation, at its broadest, is the transfer of ownership, financing or delivery of a government function into private hands. Four distinct transactions travel under that one word.

• An asset sale transfers ownership of a government business.

• Outsourcing keeps public funding and public responsibility but contracts delivery to someone else.

• Contestability makes a government provider compete against private providers rather than necessarily replacing it. Think of it as optional outsourcing.

• Private finance brings private capital into public infrastructure while ownership of the service stays public. These are sometimes called public-private partnerships (PPPs).

Weekly Energy Update

Refined product

We are seeing the diesel (gasoil) price rise relative to petrol (gasoline). The refinery crack spreads for diesel and jet fuel are also increasing. These must ultimately flow through to Australian prices.

Weekly Energy Update.

Australian terminal gate prices

The Good, the Bad and the Unknowable: The US Economy and the AI Buildout

With apologies to Sergio Leone and Clint Eastwood.

Figures current to 7 August 2026, including the July employment report released that morning.

This paper is general information only. It is not financial or investment advice. It does not take account of any person’s objectives, financial situation or needs, and should not be relied on in making an investment decision. The author is not a licensed financial adviser. Figures are drawn from public sources, are current only to the date above, and may contain errors.

Introduction

As we approach the frothy end of the business cycle, there are growing voices predicting a crash, some within months, others within one to three years. Some see a shallow recession like the dot-com crash of 2000, while others see the deep trauma of another 2008 Great Financial Crisis. The purpose of this paper is to allay fears of an immediate catastrophic crash. The US economy is currently healthy, and the danger signs of 2007-08 do not appear to be present.

That last claim carries one significant qualification, and it is why this paper has three parts rather than two. The risk that most resembles 2008 has not disappeared. It has moved out of the banks and into private credit, where nobody can price it.

This paper looks only at the United States, because that is where the AI buildout and its risks sit. The five hyperscalers, the chip designers, the bond market funding the whole thing and the private credit funds and insurers increasingly financing it are American, and the electricity constraint binds in Virginia, Ohio and Texas. The frontier labs are mostly but not all American. For everyone else, including Australia, the exposure is second-hand and runs through four channels: equity markets, where the top ten US names are 41% of the S&P 500 and sit inside almost every global index fund and superannuation balanced option; commodity and capital goods demand; the price of AI services themselves; and the overflow of the buildout itself.

In short, the argument runs as follows. The strength of the US economy makes a deep, GFC-style recession unlikely (the good). The arithmetic of the AI buildout makes disappointing returns on much of that capital investment likely (the bad). And the private credit funds and insurers increasingly funding the buildout are the ones who will absorb those disappointing returns, and who will at some point stop financing the next project (the unknowable). That withdrawal of finance, rather than any single spectacular failure, is the most plausible route from an investment disappointment to a slower economy, and at some point, more likely than not, to a shallow recession. President Trump's trade and immigration policy and the war in Iran bear on the same question and are outside this paper’s scope.

The Morass, and Why the Peace Only Lasted Eight Days

I write about this war once a month, mostly for myself. Writing is how I think. Building an argument on the page is how I work out what might be happening and what might come next. The method earns its keep, but it keeps catching me out, because this war has surprised me more than once.

The cleanest miss was the last one. In June I argued the peace would hold, albeit messily, on two self-enforcing ceilings neither side could afford to break. It broke inside three weeks. I had the deal itself roughly right, having put a negotiated climbdown in May at better than three chances in four, and the memorandum arrived on cue on 17 June. What surprised me was how briefly it lasted, and that Iran discarded a settlement written largely in its favour.

Put the misses together and a pattern shows through. I keep expecting this thing to end. Brevity in March, a deal by summer in May, a durable settlement in June. The one outcome I kept discounting, the long grind, is the one we now have. It is becoming a morass.

There is a second habit sitting underneath that one, and I only caught it while writing this month's piece. I keep assuming the staff work has been done. In March I assumed serious planning lay upstream of the military execution. It did not. This month I assumed an agreement had been tested for workability before it was put to Iran. It had not. Both are the same error in different clothes. I keep crediting the US in this war with more competence than it possesses.

So I will pay less attention this month to what Tehran and Washington say, and more to what they do. This piece is mostly about the memorandum of 17 June, because a peace that died in eight days is the most instructive thing that has happened in this war. Understand why it could not survive and you understand why the morass is stable, and why the next attempt is likely to fail in much the same way. I close with the energy market, which is splitting in two, and with the forces that will shape the months either side of the November midterms.

Weekly Energy Prices Update

Crude

House Purchase Affordability: Where I Stand

Earlier this week, the Productivity Commission released its interim report on housing supply regulation. There is much to like here, and I find myself in broad agreement with much that is written.

For some time I have been thinking about how I view the house purchase market in Australia and how my views align with or disagree with some of the louder voices I encounter on twitter.

This note sets out how I think the market works, what would actually improve affordability, and where my view aligns with and departs from the main twitter commentators. Throughout, this is about the owner-occupier purchase price. While the rental/investor market is related, it is out of scope for this piece.

Weekly Energy Prices Update

With the war in Iran re-intensifying, I have returned to preparing a weekly energy update.

Crude

Brent is heading back towards $100 USD per barrel in the front month futures market.

Why Demand Rules the Housing Market

One boundary first. This is about the owner-occupier market, the price of buying a home to live in. Rents run on a different mechanism, the balance between demand for housing services and the dwellings available, and are a separate story. And, while both markets operate over the same total housing stock, what follows is about the price of buying.

Most goods compete for a share of your budget, and when they get expensive, someone makes more of them and the price eases. Housing competes far less than most, and in the places people most want to live it does closer to the opposite. It climbs toward whatever buyers can pay, because the supply that would hold the price down cannot easily be added there. In every market both sides - supply and demand - set the price. This essay is about why, in housing, the demand side rules, and why the supply side is so unusually unable to answer it. Take them in turn.

Update on the Iran War; solved, next please

Context

Each month I have taken the opportunity to reflect on the war in Iran and consider what might happen next. This is the fifth piece in that series, and the first written after the war it has been tracking formally ended.

It ended on 17 June, at Versailles, on the sidelines of the G7. Trump and Pezeshkian signed a memorandum of understanding declaring the war over, reopening the Strait of Hormuz, lifting the US naval blockade, issuing waivers for Iranian crude, releasing frozen assets, committing to a reconstruction package, and parking the nuclear question in a sixty-day negotiating window. "It's signed," Trump told reporters leaving the palace. "Signed in Versailles. Just signed it."

Weekly Energy Update

Terminal Gate Prices

Prices at the pump will rise this week as the fuel excise is partially restored. This will see a 16c/l increase at the pump. 

Weekly Energy Update

The Strait, Again

• MoU signed 17 June (the Islamabad Declaration); last week's "wait for a signature" call now settled.

• Question shifts from whether it's signed to whether it holds and whether oil flows through the strait of Hormuz again; the early signs are not good.

• Iran declared Hormuz closed again Saturday 20 June, citing Israeli strikes on Hezbollah (an Iranian proxy in Lebanon). Iran needn't enforce its closure, since the declaration alone most likely freezes marine insurance and uninsured tankers don't sail. 

Raw products (prices pre-date 20 June closure)

MMT in Three Layers

I often find myself in conversation with supporters of Modern Monetary Theory, and for a long time I was mystified by what they are saying. This is the MMT I meet in argument and online, not the academic literature, which is more careful and more divided than any single account allows.

Over time I have come to think of MMT as three layers: a small set of accounting identities, a set of mechanisms, and a set of normative principles. Some are uncontroversial. Others are either inconsistent with the rest of MMT or simply impractical. What is most evident is that the identities do not establish the mechanisms, and the mechanisms do not establish the principles. If anything the arrow runs the other way: the mechanisms flow from the principles, and the identities are recruited afterward to make the whole look derived.

Three of the identities are mainstream economics; nothing new there. MMT adds a fourth claim and presents it as though it too were an identity, but it is not. It is the first of the mechanisms, an institutional design proposal wearing accounting's clothes. Of the six mechanisms, four rest on a technically true core the mainstream accepts but add reasoning or consequences it does not accept; the other two are institutional proposals the mainstream rejects outright. None of the principles are mainstream at all.

MMT did get one thing right: a government that issues its own free-floating currency cannot be forced into nominal default on its own-currency debt, and even mainstream central banks now accept as much. The disagreement is about everything the theory builds on top of that one sound insight. I will take the layers in the order MMT usually presents them, from the arithmetic up to the politics, because that is the order you meet them in argument.

A Cruel Irony in the Housing Target

The Government wants 1.2 million new homes built in the five years to June 2029. It is not going to happen on current trends. The first five quarters delivered around 219,000 homes against a run rate that needs roughly 280,000 a year. The National Housing Supply and Affordability Council now expects the target to be met around September 2030, more than a year late, and that estimate predates the latest commodity-price shock.

Weekly Energy Update

We have heard it many times before: the United States is on the verge of a deal with Iran. Trump has announced breakthroughs that never materialised, and markets have learned to discount the rhetoric. This time appears different, and for one concrete reason. The progress is no longer just a presidential claim. On June 12, Pakistan, the mediator that brokered the ceasefire, publicly confirmed that both sides had agreed on the final text of the memorandum of understanding, the so-called Islamabad Declaration. A signing venue in Geneva is being arranged. Agreed text confirmed by a third-party government is a different animal from another "soon" on Truth Social, even if Tehran is still careful to stress that nothing is final until it is signed. My take: more believable this time, but let's see if it is actually signed.

Crude

Crude prices are reading it as optimism. Both benchmarks have rolled over from their May highs, with WTI settling at \$84.88 and Brent at \$87.33 to close the week. 

A tour of the microeconomics of housing

What this is

Home purchase prices in Australia have risen a long way, faster than incomes, for at least a generation. There is a great deal of argument about why, and what to do. This piece is a tour of that argument, drawn on a common set of axes so the competing views can be compared rather than shouted past each other.

Capital Gains Tax: Good Reform or Bad?

Australia has a fiscal problem, and it is not a small one. The 2026-27 budget carries an underlying cash deficit of \$31.5 billion, roughly one per cent of GDP, with aggregate deficits of some \$150 billion across the forward estimates and no return to balance projected until the middle of the next decade. On the headline measure, which also counts the equity injections and concessional loans the government channels through off-budget vehicles, the gap is far larger: cumulative headline deficits of around \$217 billion over the forward estimates, against roughly \$150 billion on the underlying measure. Gross debt has passed \$1 trillion and is heading toward \$1.1 trillion. 

The headline balance, on the Treasury series, has with the exception of two recent surpluses sat in deficit for most of a decade, and those surpluses were the product of a once-in-a-generation surge in commodity prices rather than any structural repair. Strip out the mining windfall and the underlying position stayed in deficit throughout, with successive budgets projecting a return to balance that has repeatedly failed to arrive. Anyone arguing about tax policy who pretends the money is not needed is not being serious.

A problem of that size has to be closed from both sides of the ledger. Some combination of spending restraint and revenue measures is unavoidable. This piece does not try to settle that balance or to nominate where the axe should fall. It takes up a narrower question, are the changes to the Capital Gains Tax (CGT) well designed? Because a gap this structural will not be closed by a tax that raises little while doing real harm, and on that test the CGT changes fail. They reveal a budget well aimed at fairness in the present and poorly aimed at the wealth of the nation in the future.

Q1 2026 GDP: A Soft Quarter, an Above-Potential Year

The headline reads as solid for the year but weak for the quarter. The AI/data centre investment boom is largely discounted because the equipment was imported rather than produced in Australia. Once the imported equipment is netted out, the boom adds nothing to GDP. What remains is an economy still running above its annual speed limit, inflation that has mostly returned to the band but is not all the way home, and a productivity trend that continues to disappoint.

The quarter itself was quite soft. GDP rose just 0.27% in the March quarter, well below the 0.87% of the quarter before and below my own nowcast of around 0.5%. A single quarter's figure is an unreliable guide at the best of times. The through-the-year figure is the one that usually matters, and at 2.52% it sits uncomfortably above the RBA's potential growth estimate of roughly 2%. And that 2% is itself flattered by strong population growth feeding the labour input in the production function, with productivity adding almost nothing. The economy is running hot in the least healthy way: adding bodies and hours rather than output per hour. The fear is that another weak quarter will see a substantial reduction in the through the year figure because of base effects (when the 1pp contribution from Q2 in 2025 drops off).

Weekly Energy Update

 Australian Fuel Gate Prices

Of note: the Fair Work Commission has a proposal before it to extend the diesel cost pass-through for truckies. 

GDP nowcast update

Summary

I've been working on a GDP nowcast over the last few months. Three models now, all pointing at a hot 2026 Q1. The rest of this post is about why I don't fully believe them.

I foreshadowed this work back in April with a Bridge model write-up. The Bridge has been refined since then. It now runs 13 bridges rather than the 7 in the April post (private capex and construction split out as their own bridges, the NAB conditions survey added, household spending brought in alongside the existing consumption bridge), and most of the within-quarter data is in. The remaining pieces, business profits and government final consumption, are out next Tuesday, one day before the national accounts. So this isn't quite the final pre-release nowcast, but it is close.

In addition to the Bridge model I now have a dynamic factor model (DFM) and a Bayesian Vector Auto-regression (BVAR) model. Three independent ways of producing a nowcast running on a similar input panel.

Here is where they land for 2026 Q1.

Model	QoQ %	TTY %	70% CI (QoQ)	90% CI (QoQ)
Bridge	+0.82	+2.96	[+0.54, +1.12]	[+0.38, +1.30]
DFM	+0.69	+2.83	[+0.02, +1.36]	[−0.37, +1.75]
BVAR	+0.80	+2.95	[+0.22, +1.39]	[−0.12, +1.73]

The three models agree on a print near +0.7 to +0.8 QoQ, roughly +2.8 to +3.0 TTY. The Bridge runs the narrowest band because it conditions on monthly indicators directly. The DFM and BVAR widen as expected given their factor and VAR formulations.

Update on the Iran War

Context

Each month I have taken the opportunity to reflect on the war in Iran and consider what might happen next. This is the fourth piece in that series.

Eighty-nine days after Operation Epic Fury began, the war is closer to its end than it has been at any prior point. The Mexican standoff I described on 1st May appears to be resolving in substance, with Trump taking a Bath, which the May piece called as the most likely outcome. Trump has not yet signed and surrendered. But the question is less whether he will and increasingly: when he will.

On 23 May US time, Trump posted on Truth Social that a deal had been "largely negotiated, subject to finalization." The deal as described in regional press includes an official declaration of the war's end, a 30 to 60 day window for nuclear talks, gradual reopening of the Strait of Hormuz with Iran continuing to manage access on a fee basis, and US ending its blockade of Iranian ports. Iran's foreign ministry, through spokesperson Esmail Baghaei, publicly described the emerging text as a "framework agreement." Iranian Parliament Speaker Mohammad Bagher Qalibaf travelled to Qatar to take part. Fars News, the IRGC-affiliated outlet that had spent two months denying that negotiations were occurring, confirmed implementation details and corrected Trump's characterisation by stating publicly that Iran would continue to manage the waterway.

This is largely the same deal Iran put on the table on 28 April. The terms have not moved in Trump's favour. The position has been publicly acknowledged by Iran for the first time. The signature has not yet arrived.

Inflation Targeting vs nGDP Targeting

What Are We Talking About

Today's blog post is very technical. We are talking about which variable should be the focus of a central bank when it sets interest rate policy. Most of the world's central banks use an inflation target, typically around 2 per cent, although Australia has a 2 to 3 per cent target band and within that it targets the 2.5 per cent mid point. An alternative which is often promoted is nominal gross domestic product (nGDP) targeting, where the bank aims to maintain a steady growth rate or path for nGDP.

Weekly Energy Update

 Wholesale prices

Wholesale prices were up a touch at the end of this week.

Australia's Productivity Slump

In my last post I argued the Aussie dollar is being held up by the carry rather than by the fundamentals. The biggest of those rotten fundamentals is productivity growth. Australian labour productivity sits below where it was in 2019. Capital deepening has collapsed to zero. Multifactor productivity peaked in 2004 and has gone nowhere since. The slump is deep and it has been persistent.

Why is the Aussie dollar so strong?

Australian productivity has gone backwards since 2019. Unit labour costs are running ten points above the United States from a common base. The goods trade balance in trend-terms has fallen from above 13 billion dollars a month at the 2022 peak to barely 3 billion, with the latest print briefly negative. Inflation has reaccelerated above the target band on every measure. By any fundamental read, the Australian dollar should be weakening. It isn't. It has rallied from briefly below 0.60 last year to above 0.72 now and the trend is looking up.

The answer is the carry. Everything else is detail.

Housing Shortages and the Elasticity of Demand

Almost no one lives in the house of their dreams. We rent the flat we can afford, not the one we'd choose. We buy further out than we wanted, or smaller than we planned, or later than we meant to. The spare room becomes a bedroom. The study becomes a nursery and the nursery stays a nursery. The adult child who would have moved out is still down the hall. We tell ourselves the commute is fine. We build a granny flat to accommodate ageing parents. Whether we rent or buy, almost all of us are living in a compromise, and we made it because of what housing costs - be it the purchase price, the mortgage repayment cost, planned renovation costs, maintenance costs or rental costs.

That ordinary, universal experience is the reason a claim now circulating cannot bear the weight being put on it. The claim, in its various forms, is that we are building enough houses, or that at some lower rate of population growth the current rate of construction would be sufficient. The evidence offered is usually a ratio: dwellings against households, or population growth against completions, or population per dwelling with the conclusion that if the two roughly match, or match some historical figure, then demand has been met and there is no real housing shortage.

I am not going to argue the opposite. I am not going to tell you there is a shortage of a particular size, because I do not think anyone can honestly tell you that. I am going to argue something narrower, and I think harder to dismiss. You cannot cleanly conclude adequacy from a ratio like that, in either direction, because the quantities in it are not independent of the thing you are trying to judge. And what we most need to know, how much housing demand has been compromised away, and at what price it would reappear, is not in the data at all.

Weekly Energy Update

Australian Wholesale Prices (Cents per litre)

The Federal Budget in Pictures

The Federal Budget papers contain a number of charts, tables and forecasts. The forecasts are the part most people focus on. They are also the part most likely to be misunderstood.

When the Reserve Bank publishes a forecast, it is trying to predict the path the economy will take. The Bank looks at the data, consults its models, applies its judgement, and prints a number it thinks is most likely to happen. When the budget papers publish a forecast, they are doing something very different. They start with where the economy is today and assume it returns to something like normal over the medium term. The forecast then asks a simple costing question. Under normal economic conditions in the out years, what would revenue and expenses look like?

The distinction matters. The budget forecasts are not predictions. They are an arithmetic exercise built on top of an assumed normal economic equilibrium. The numbers that define that equilibrium, things like the medium-term GDP growth rate, the wage and price assumptions, the unemployment anchor, are framework conventions. They are not Treasury's literal central case for the path the economy will take. But, if the equilibrium is wrong, every number that flows from it is wrong too.

This year's papers contain an equilibrium that does not add up.

The reversion always looks the same

Start with real GDP. The black line is what actually happened. The orange lines are successive Treasury forecasts. Almost every forecast bends back toward 2.5 to 3.5 per cent growth, regardless of where the economy actually is. That end point was higher in the 2010s and it is lower now. 

A budget about today, dressed in the language of tomorrow

Treasurer Jim Chalmers has now handed down five budgets. All of them, including this one, project deficits. The forward estimates show deficits stretching to 2029-30 and beyond. The budget itself does not return to balance until 2034-35, on Treasury's own modelling. Gross debt crosses \$1 trillion next year and reaches \$1.25 trillion within four years. Interest on that debt is now the second fastest growing expense in the budget, behind only the National Disability Insurance Scheme. At \$30 billion a year, interest alone exceeds the total cost of the Pharmaceutical Benefits Scheme.

The Treasurer calls this "responsible fiscal management." The budget is built around a claim of intergenerational fairness. Both descriptions sit awkwardly with the arithmetic, but the deeper problem is simpler. This is a budget about managing the present. It does very little to set the country up for the future: the productivity slump goes largely unaddressed, fiscal resilience continues to erode, and the housing supply problem is treated as a tax problem rather than a supply problem.

Weekly Energy Update

Australian Wholesale Fuel Prices

Finding r-star after the Great Divergence

TL;DR: r-star, the real neutral rate of interest, is one of the unobservable star variables in mainstream macroeconomics. It is notoriously hard to estimate. The Australian IS curve coefficient on the real-rate gap is small relative to macro noise, so the model cannot choose between a growth anchor, a bond-yield anchor, or a blend of the two. Those three approaches, drawing on Wicksell, imply a real r-star between roughly 1.5 and 2.6 per cent, and a nominal neutral cash rate between about 4.0 and 5.1 per cent. With the RBA policy cash rate at 4.35 per cent, policy is not extreme. The data alone does not say whether it is mildly restrictive or mildly accommodative. The post-GFC track record and Governor Bullock’s recent language both lean toward the yield-anchored interpretation, on which 4.35 per cent is mildly restrictive.

Finding r-star after the Great Divergence

After doing additional analytical work that further shaped my views, I have withdrawn my original post. 

Please see the replacement post here.

Weekly Energy Update

 Crude prices/futures

Update on the Iran War: the Mexican Standoff

Where Things Stand

Sixty-one days after Operation Epic Fury began, the war has settled into a structure neither side wants to call by its real name. The shooting has mostly stopped. Nothing else has been resolved.

A two-week ceasefire took effect on 8 April after Pakistani mediation. Trump has since extended it indefinitely. Both sides have accused each other of repeated violations. On 11 and 12 April, US and Iranian officials met face-to-face in Islamabad for twenty-one hours, the highest-level direct talks since 1979. They produced nothing. By 12 April Vance had publicly conceded no agreement. By 13 April the US Navy had imposed its own blockade on Iranian ports. By 18 April Iran had reimposed the Hormuz closure it nominally lifted the previous day.

This is the war now. A dual blockade with no agreed terms, no fixed deadline, and no visible off-ramp. Iran controls the Strait of Hormuz. The United States controls Iranian ports. Both sides are inflicting sustained economic pain on each other and on third parties who never asked to be involved. US Central Command (CENTCOM) has redirected 38 ships from Iranian ports. Iran has reduced Hormuz traffic to a trickle. The Pentagon has assessed that mine clearance alone could take six months.

Central Bank Purposefulness, Take Two

I wrote about central bank purposefulness a couple of months ago, and on reflection I was not happy with what I had written. The argument was buried under too much scaffolding. This is a second attempt, stripped back to what I actually wanted to say. The core argument is that a central bank should follow three principles:

• Don't be a cowboy;
• No surprises; and
• Stay in your lane.

The first is about how the Bank moves, the second about how it communicates, and the third about what it comments on. Each is a piece of the same underlying point. The Bank's credibility is the asset that makes its instrument work, and credibility is built and lost through the ordinary discipline of how the institution carries itself. Cowboy rate setting depletes it. Surprises deplete it. Editorialising on matters outside the mandate depletes it. Everything else in the post is consequences of those three.

Should the RBA Raise Rates in May 2026

The Monetary Policy Board meets on 4 to 5 May. The cash rate sits at 4.10 per cent after two consecutive 25 basis point hikes in February and March, the first reversals of the easing cycle that ran through 2025. Markets are pricing roughly a 60 per cent chance of a third hike. The case for or against another move depends on what the data say about the underlying inflation problem, not on what borrowers would prefer to hear.

The framework set out in Inflation: Causes, Diagnosis and Cures is a useful discipline here. Diagnose first. Decide second. Skipping the diagnostic step is how public commentary about monetary policy generates more heat than light. So let me work through the diagnosis using the five drivers the framework identifies, then turn to the policy question.

Inflation: Causes, Diagnosis and Cures

The Bloomberg Commodity Index, a broad-based benchmark covering energy, metals, and agricultural commodities, is up at the moment. In the past this index has been correlated with periods of higher inflation.

Weekly Energy Price Update

 Spot prices

Stagflation: the Lead in Australia's Saddle

Previously I argued that the Reserve Bank's credibility is a critical defence against a repeat of the 1970s stagflation experience. That is true, but it is only half the story. The other half is the architecture around the central bank, which determines whether that credibility can do its work. 

This post is about the broader architecture necessary to manage inflation, told through the question that the set of charts below forced me to confront: Why did Australia take so much longer than everyone else to get inflation back under control after the 1973 oil shock? The UK, Japan and Italy all had an inflation peak higher than Australia's in the wake of the oil shock. All were broadly back towards pre-shock inflation levels in three to eight years. Australia took 15+ years. 

Stagflation

I grew up with stagflation. In the 70s and 80s it was the word everyone reached for, here and abroad. Inflation and unemployment were both pushing towards double digits at times. The misery index piling up month after month. And it stuck around. The United States got out because Paul Volcker (Chairman of the Federal Reserve 1979-1987) broke the back of US inflation at the cost of a brutal global recession in the early 1980s. Australia took longer to reset, and only fully closed the chapter with the recession we had to have in the early 1990s.

What Australia Owes Itself

The Principle Is Simple

Australia's minerals belong to the nation – the people. The Commonwealth owns Australia's offshore petroleum resources. The States own onshore minerals – coal, iron ore, gold, lithium, every extractable resource beneath Australian soil. Private companies do not discover resources and then own them. They apply for the right to extract resources that already belong to the nation, and that right should only be granted on the basis of a reasonable return to the people who own them.

This principle has been watered down. The Federal Government has allowed private companies – many of them foreign-owned multinationals – to extract finite, irreplaceable public wealth at scale while returning far less than the value of what is being alienated, and far less than Norway, the United Kingdom, and other comparable jurisdictions capture. Six of Australia's ten liquefied natural gas (LNG) export facilities pay no royalties and little or no Petroleum Resource Rent Tax (PRRT), despite generating billions in annual export revenue. 

The Australian Taxation Office's (ATO) Corporate Tax Transparency data shows the oil and gas sector has been a systematic low payer of PRRT relative to its revenue scale. That pattern has prompted repeated policy intervention to secure a more timely and minimum return from the offshore LNG industry. These are not normal business profits on private assets. They are returns on resources that belong to Australians, and Australia is not receiving a fair share of them.

This is not an argument about government needing more money to spend. It is a prior question: on what terms should a government grant private companies the right to extract and sell public assets? The answer should be straightforward – only on terms that deliver a fair return to the owners. Norway has built a sovereign wealth fund worth \$1.9 trillion, roughly \$350,000 per citizen, on exactly that basis. The question for Australia is not whether to insist on fair terms. It is how to get there from where we are now, given two previous failed attempts and constitutional arrangements that complicate comprehensive reform.

Weekly energy price update.

On Friday, Iran's Foreign Minister announced that the Strait of Hormuz had been reopened to commercial vessels, coinciding with the Israel-Lebanon ceasefire. The announcement occurred after markets had closed for the weekend in Australia but before they had closed in Europe or the United States. While Iran states the strait is fully operational for commercial traffic, vessels must use Iranian-designated routes and obtain permission from Iranian authorities. The US naval blockade of Iranian ports remains in place. Markets reacted strongly to the news, with oil prices falling sharply and stock indices reaching record highs.

Crude oil benchmarks

Net Permanent and Long-Term Arrivals

A quick note on why Net Permanent and Long-Term Arrivals (NPLT) is not a useful measure of Net Overseas Migration (NOM) - even though it gets quoted constantly (because it's timely and deliciously large).

NPLT counts border crossings by stated intention (staying/leaving for 12+ months). The ABS explicitly cautions against treating it as a migration proxy: intentions shift, the 12-month rule produces double-counting, and it doesn't reconcile with the population.

The following chart shows why this matters. Three measures of the ostensibly same thing:

Weekly update: energy prices

 Global benchmark prices

Updated weekly fuel prices

GDP Nowcast: Q1 2026

Summary

Australia's GDP is tracking +0.78% quarter-on-quarter (+2.93% through the year) based on data available as at 6 April 2026. If realised, this would be the strongest quarterly outcome in three quarters and would push annual growth to its highest since early 2023.

Updated Energy Benchmarks

Housing Tax Reform without Housing Reform

The Setup

The Albanese government is set to announce changes to negative gearing and the capital gains tax discount in the May 12 budget. It will be framed as a landmark moment for housing affordability and intergenerational equity. It is neither. It is a modest tax adjustment to second-order mechanisms in a system whose first-order problems are not being touched.

Here is what the policy is, why it matters at the margin, and why it does little to fix housing purchase affordability and may even harm rental affordability.

Groupthink with a Group of One

Introduction

Before the war:

1. Iran didn't control the Strait of Hormuz. Now it does.
2. Iranian oil was sanctioned. Now it isn't.
3. Iran was not building a nuclear weapon. Now it will.
4. US bases in the Gulf were assets. Now they are liabilities.
5. US inflation was declining. Now it is increasing.

That five-point summary, from financial analyst @TheMaverickWS, is the most concise strategic audit of Operation Epic Fury yet written. Each point is directionally clear, even if the margins of some are debated. One note on point one: control doesn't require a physical blockade. Iran's missile threat has been sufficient to make the risk calculus unacceptable to insurers and ship operators alike. The result is functionally identical – traffic has stopped. Together the five points describe a war that has actively worsened the situation on every dimension it claimed to be addressing. File it away. We will return to it.

CPI Reform Won't Fix Housing

Introduction

There is a growing chorus of voices arguing that Australia's Consumer Price Index is broken. The CPI, they say, fails to capture the real cost of living because it excludes house prices – the single largest purchase most Australians will ever make. The frustration is genuine. The lived experience of millions of Australians – particularly younger ones, renters, and aspiring first home buyers – diverges sharply from what the headline inflation number suggests. When the Treasurer announces that inflation is under control and real wages are growing, people who cannot afford to buy a home, or who are watching mortgage repayments consume an ever-larger share of their income, are understandably sceptical.

But the argument that the CPI should be reformed to include house prices, land costs, or mortgage repayments rests on a fundamental confusion about what housing affordability actually is. Housing is not one problem. It is three distinct problems, each driven by different forces, each requiring different policy responses, and each moving in different directions in response to the same policy lever. No single price index can combine all three in a way that remains conceptually coherent, policy-usable, and suitable as a monetary target – and trying to force them into one would produce a measure that misleads more than it illuminates, while damaging one of the most important instruments in Australia's macroeconomic framework.

Underlying the whole debate is a confusion between two things that are not the same: a headline indicator of lived economic pressure, and a target variable for monetary policy. The public wants the first. The Reserve Bank needs the second. Forcing a single number to do both jobs is the source of most of the confusion – and it cannot be resolved by reforming the CPI, because the two purposes are structurally in tension.

Let's start with the three housing affordabilities.

Energy Prices Update

 Global prices

From December through late February, all four benchmarks traded in a tight \$60–70 band, with Brent carrying its usual small premium over WTI and the Middle East grades clustered nearby. The Hormuz closure changed that almost instantly. Within days, prices spiked \$50–100 across the board – but the move was not uniform. WTI and Brent priced in a global supply shock; Oman and Dubai appear to have priced in that plus the direct disruption of their primary export route.

Australia's Oil Reserve in America

A Country Running on Empty

For years, Australia has been embarrassingly non-compliant with its International Energy Agency (IEA) obligations. As an IEA member, Australia is required to hold emergency reserves equivalent to at least 90 days of net oil imports. Yet for well over a decade, the country has consumed more oil than it produces, and its emergency reserves have been consistently among the lowest of any IEA member country.

Energy costs are rising

Why Housing is (Primarily) a Supply Problem

Australia's Population Growth is Extraordinary – and Hard to Justify

The Australian housing debate has a favourite villain: immigration. Too many people, not enough homes. It's an intuitively appealing argument, and the population data is genuinely striking. But it's the wrong diagnosis – and wrong diagnoses lead to wrong policy.

Let's start with what the data actually shows. By any international comparison, Australia's population growth rate is remarkable. Since 2000, Australia's population has grown to an index of 142 against a base of 100 – well above the OECD mean of 117 and median of 115. Since 2022 alone, Australia has grown at around 2.2% per year, second only to Saudi Arabia and Canada among OECD-monitored nations, and roughly double the OECD average.

The Most Dangerous Scenario – and Why It Explains This War

The Eight Rationales – designed to obfuscate

On 28 February 2026, the United States and Israel launched Operation Epic Fury, killing Supreme Leader Ali Khamenei and triggering the most significant military engagement in the Middle East since the 2003 invasion of Iraq. Within days, the Trump administration had offered not one explanation for the war but eight – a proliferation of justifications that, far from clarifying the mission, seemed designed to obscure it.

Those eight rationales, as catalogued by commentators and confirmed by officials in overlapping and sometimes contradictory statements, were:

1. To ward off an imminent Iranian threat – a claim rejected by Iran, by the Pentagon, and by US intelligence assessments that found no evidence of an impending Iranian attack.
2. To enforce a publicly drawn red line – Trump had warned the regime against shooting protesters. Once crossed, the logic of his public identity required a response regardless of strategic calculation.
3. To pre-empt Iranian retaliation against US forces following an expected Israeli strike – Secretary of State Rubio’s candid admission: “We knew that there was going to be an Israeli action. We knew that that would precipitate an attack against American forces.”
4. To destroy Iran’s missile and military capabilities – a degradation objective with operational logic, even if it falls well short of a strategic rationale for war.
5. To prevent Iran from obtaining a nuclear weapon – Trump’s stated casus belli in the State of the Union Address, though the IAEA reported no evidence of a structured nuclear weapons programme at the time strikes commenced.
6. To secure Iran’s natural resources – an objective floated by administration officials and widely noted, though rarely elaborated upon.
7. To achieve regime change and bring the Iranian opposition to power – a goal with broad Israeli support and a long tail of strategic complications.
8. Force protection by pre-emption – the US joining the strikes not from independent strategic conviction but to control escalation dynamics before an ally’s action forced a reactive entry.

Australia's Fuel Reserves

Australia's fuel vulnerability didn't begin when the first US strikes hit Iran. It began around 2012, when Australia quietly fell below the 90-day oil reserve requirement it had been treaty-bound to meet since joining the IEA in 1979 – and stayed there.

By the time the current crisis started, Australia's reserves sat at around 36 days of petrol, 32-34 days of diesel, and 29-32 days of jet fuel – figures the government has cited as the highest in 15 years. That context matters, but so does what those numbers actually mean. Multiple non-comparable metrics, different inclusions for ships on-route and/or in Australia's exclusive economic zone, and the question of what is continuing to arrive and what has been released since make it surprisingly difficult to pin down the true usable buffer at any given moment. The fact that we can't get a clean number after a crisis has already started is itself part of the story.

Once fuel already in transit is stripped out, the usable buffer may be materially closer to four weeks. The critical reserve appears to be jet fuel. China – which supplied roughly 32 per cent of Australia's jet fuel imports in 2025 – has instructed refiners to halt new fuel export contracts, a move expected to cut Australian supply from April.

Australia's savings problem and the current account deficit

Introduction

Take a look at the chart above. At first glance it’s just two wiggly lines. But those two lines tell a story about the Australian economy that stretches back more than half a century – and it’s a story that affects everything from your mortgage rate to your superannuation.