The economy is sinking, but where is the lifebuoy?

Those of you who hear experts describe in frightening terms the dire state of our economy, and then hear the faux reassurances that issue from the mouths of our Treasurer and Prime Minister, must wonder if they live in some parallel universe, where, reminiscent of Humpty Dumpty, words can mean anything they want them to mean. "When I use a word," Humpty Dumpty said, in rather a scornful tone, "it means just what I choose it to mean – neither more nor less." "The question is," said Alice, "whether you can make words mean so many different things." "The question is," said Humpty Dumpty, "which is to be master – that's all." Lewis Carroll – Through the Looking Glass.

In the face of our sinking economy, Humpty Dumpty Frydenberg assures us that ”The fundamentals of the economy are strong”, but then reminds us that “The economy is facing headwinds”, a fail-safe tactic he reckons will enable him to lay the blame on the state of the global economy if our economy sinks even further.

In another epic from the pen of Lewis Carroll, Alice in Wonderland, the Cat proffers its advice: “Would you tell me, please, which way I ought to go from here?” “That depends a good deal on where you want to get to,” said the Cat. “I don’t much care where - ” said Alice. “Then it doesn’t matter which way you go,” said the Cat. “ – so long as I get somewhere,” Alice added as an explanation. “Oh, you’re sure to do that,” said the Cat, “if you only walk long enough.”

Scott Morrison, Josh Frydenberg and Mathias Cormann must have well-fingered copies of Lewis Carroll’s classics from which they draw inspiration and guidance. They seem unsure of where they want to go, but determined to go somewhere, so long as they do get somewhere.

Let me elaborate.

Take the decision last month to cut the cash rate to 1.25%, the first cut in three years. The Reserve Bank Governor, Dr Philip Lowe, in his 20 June address to the Committee for Economic Development of Australia (CEDA): The Labour Market and Spare Capacity, said the cut “…will support the economy through its effect on the exchange rate, lowering the cost of finance and boosting disposable incomes. In turn, this will support employment growth and inflation consistent with the Bank’s target.”

He added that the decision was not in response to a deterioration in the economic outlook since the previous update in early May, but rather it reflected a judgement that “we could do better than the path we look to be on…most indicators suggest that there is still a fair degree of spare capacity in the economy. It is both possible and desirable to reduce that spare capacity. Doing so will see more people in jobs, reduce underemployment and boost household incomes. It will also provide greater confidence that inflation will increase to be comfortably within the medium-term target range. Monetary policy is one way of helping get us onto to a better path…

"It would, however, be unrealistic to expect that lowering interest rates by a quarter of a percentage point
[monetary policy] will materially shift the path we look to be on. The most recent data, including the GDP and labour market data, do not suggest we are making any inroads into the economy's spare capacity. Given this, the possibility of lower interest rates remains on the table."

The Bank's decision at its July meeting to cut the cash rate still further to a record low of 1% confirms Dr Lowe's predictions. To cut rates in consecutive months for the first time in 11 years highlights his concern for our sinking economy and his determination to stimulate it. He reiterated that the country should "not rely on monetary policy alone" as analysts predicted even more cuts would be needed to drive down unemployment and push up wages. He urged Treasurer Frydenberg to lift borrowing to spend on infrastructure while increasing fiscal and productivity measures. "We will achieve better outcomes for society as a whole if the various arms of public policy are all pointing in the same direction.”

The clear implication of the Governor’s words is that lowering interest rates [monetary policy] will be insufficient, and that fiscal policy needs to come into play, notably in the form of infrastructure development, a responsibility of government. There are no signs that the LNP is ready to embark on the infrastructure development this country needs, as is demonstrated graphically in a recent article in The Guardian: Australia's economy is in the doldrums and infrastructure is failing to prop it up. Treasurer Frydenberg seems petrified that his precious 'surplus' might thereby be placed in jeopardy. Nor does the government appear to have any strategy to develop structural policies that support firms expanding, investing, innovating and employing people.

After the latest cut to the cash rate, Governor Lowe reiterated that he would prefer the government to pull its weight by cutting tax and boosting spending, especially on infrastructure, and by policies that make Australia more productive: “The best approach to delivering lower unemployment and a stronger economy is through structural policies that support firms expanding, investing, innovating and employing people. As we ease monetary policy, it is in the country's interest that other policy options [fiscal policy] are considered too.”

Greg Jericho, writing in The Guardian, gives a detailed analysis of the economic situation in The government has been lying about the strength of the economy – its lack of policy is hurting us. He concludes: "The Governor’s words are clear. The economic path we look to be on is not good. The Reserve Bank can do what it can to shift the economy on to a smoother road, but it needs help – a lot of help. Infrastructure spending, and policy work – something this government, which went to an election with basically only a policy of tax cuts that favour the wealthy, is not all that good at doing. They can start by dropping the faux outrage at people telling them the economy is going downhill and start acknowledging they have a problem that needs fixing." Jericho’s article is well worth a read. I draw on the arguments he offers in his piece as follows:

"The yield for Australian government two-year and three-year bonds went below 1% for the first time in history. Seven months ago the rate the government paid for borrowing money for two years was 2%. As the gap between the five-year and two-year bond yields is now as small as it has been since the GFC, the market is seeing very little extra return from borrowing for five years as opposed to two years because they see very little chance that things are going to get better in that time.

"That does not happen when things are strong. That doesn’t even happen when things are just OK. It happens when things are bad.

"At the start of December last year the general expectation was that interest rates would stay flat for this year and then start going up next year. Now not only have rates been cut, it will be shocking if there is not another two cuts before the end of the year, and a 50/50 chance of a cut to 0.5% by this time next year.

"A cash rate of half a per cent would translate to mortgage rates lower than any recorded since the Second World War.

"The Reserve Bank is not doing that because the economy is abounding in sunshine and rainbows."


So there it is. Clearly, the economy is sinking, and anyone who points this out, to wit ALP backbencher Anne Aly, will cop it. When she suggested that the economy looked as if it was going into a recession, she was angrily reprimanded by Finance Minister Cormann for making assertions that were: “...recklessly irresponsible and wrong and show that Labor has learned absolutely nothing from the recent election outcome”. Cormann is a verbose master of denial.

The economy is sinking, but where is the lifebuoy?

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David Heath

12/07/2019

Actually, in relation to these 'nodding heads' in Ministerial offices as opposed to the actual experts at the Reserve Bank, I prefer the Humpty Dumpty quote...

“When I use a word,' Humpty Dumpty said in rather a scornful tone, 'it means just what I choose it to mean — neither more nor less.' 'The question is,' said Alice, 'whether you can make words mean so many different things.' 'The question is,' said Humpty Dumpty, 'which is to be master — that's all.”

Ad Astra

13/07/2019

David Heath

Thank you for your comment. I agree!

How many umbrellas are there if I start with two and take 2 away?