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In accord with my former critic Keating's warning

By Henry Thornton - posted Tuesday, 7 December 2010

"Paul Keating has warned that the gains secured by the 1990-91 recession - low inflation and wages restraint - could be lost."

This timely warning was reported by Paul Cleary in this newspaper on November 29.

"That situation could come about, he believes, because Australia's poor productivity performance means that wages growth is now squeezing corporate profits."


There is no doubt that Australia's poor productivity performance, combined with upward pressure on money wages (the dollars paid irrespective of buying power) is a great risk to Australia's prosperity.

Keating's claim extends to having been the deliberate inflation slayer in 1990, creating the recession we had to have. He was Australia's Paul Volcker.

As someone with a claim to that crown, and with little reason to like Paul Keating - as I shall explain - I nevertheless must support his claim. For me, the background to the drama was a long tradition of the RBA's research department calling for tighter monetary policy in order to kill inflation once and for all, although we supported the Bank's gradualist approach.

In the circumstances of the mid-1980s, the "conditional monetary projections" (a Treasury initiative the RBA supported with reluctance) had been abandoned, for good reasons, and no one had yet seen the bleedingly obvious replacement by an explicit inflation target.

In defence of our failure to come up with this solution, I merely note that there was, at the most senior levels, a bias against any simple target for monetary policy, and the younger men were frequently given the benefit of a homily on Goodhart's Law, the proposition that any simple economic relationship relied upon for policy purposes would be destroyed by gaming against policy.

More immediate was the debate that led to the treasurer's Banana Republic statement. The advice of the Bank's research team in 1986 that Australia's international debt was in danger of exploding to unmanageable levels generated fierce debate both within the RBA and with the treasurer when, after a lengthy delay, he was the recipient of the advice.


I was roundly vilified by the treasurer in that latter debate but when the next current account deficit supported my case in the clearest possible manner, he capitulated. To this day I give him immense credit for persuading cabinet to turn the budget deficit into a surplus, for getting prime minister Bob Hawke to persuade the ACTU to cop a real wage cut and for endorsing the touch on the monetary policy brakes proposed by the RBA, all points in my initially vilified advice. Less praiseworthy, arguably completely boneheaded, was his decision - never conveyed explicitly to me - that henceforth I was an unperson, cut out of the policy loop that was the main reason for working at the RBA in those days of derisory salaries and pathetic pensions.

During 1987-88, every month I argued before the board for tighter monetary policy and, every month, the board agreed but somehow interest rates kept falling. The argument was that the rising exchange rate was tightening "monetary conditions" more than falling interest rates were easing them.

This was completely fallacious, and is a powerful reason why the RBA today is suspicious of a similar argument when confronted with it, as it should be.

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This article was first published in The Australian on December 7, 2010.

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About the Author

Henry Thornton (1760-1815) was a banker, M.P., Philanthropist, and a leading figure in the influential group of Evangelicals that was known as the Clapham set. His column is provided by the writers at

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