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.