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The economy is sinking, but where is the lifebuoy?

By Ad astra  

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 GuardianAustralia’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?

This article was originally published on The Political Sword.

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20 comments

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  1. ajogrady

    Someone wrote the other day here that the L/NP’s intent was to create a bad recession so as to have fire sale outcomes that would benefit the wealthy.I now very much believe this scenario. With interest rates so low and probably below inflation rates this has the effect of producing cheap money. Cheap money borrowings combined with fire sales equals a orchestrated recession that only will benefit the very wealthy. As they say down at the stock market you need booms and busts to make lots of money.

  2. pierre wilkinson

    and seemingly, no-one holds them to account….

  3. Peta Clarke

    Humpty Dumpty sat on the wall Humpty Dumpty had a great fall. All the money borrowing could not stop the recession at all.

  4. David Bruce

    The next recession will be global and it just a matter of time before we are up to our armpits in alligators!

    The Australian economy is a bit like the curates egg. It is good in parts. Gold mining stocks, for example, and coal sales royalties.

    The Scumbags just have to keep their finger in the dyke until April 2020.

  5. Stephengb

    The financiers can only make money in the boom and in the bust but never on a stable economy, need the instability to edge bets.

  6. Phil Pryor

    With economics idiots in office, bumboys for donors, and harlots for overseers like Murdoch, ( it used to be Merde-Schlock before the deed poll) we face an administration apparently running dead for the big arseholes to cash in with all the spare money they have had organised for them by these servants and devotees of graft, corruption, clubby, matey, sucky in crowd crawling crap. There is no economic sense in what is happening. The nation is being robbed and perverted by filth, fantasy, fraud and freaks for superstition, prejudice, dogma, deviousness and dirty deeds. AS they cloud issues, fog sense, occupy benches of law and administration, who watches these thieving, evil arseholes. Who?

  7. Alpo

    “They seem unsure of where they want to go, but determined to go somewhere, so long as they do get somewhere”… and walk long enough…. starting their third term now…. Until they fall off a cliff… and their journey abruptly stops… taking all of us along with them…

    That’s a horror story, isn’t it?

  8. Alpo

    “The financiers can only make money in the boom and in the bust but never on a stable economy, need the instability to edge bets.”…

    Yep Stephen, the Robber Barons are back in charge! >:(

  9. Alpo

    “and seemingly, no-one holds them to account….”…. Oh yeah, the Morons are supposed to “hold them to account”… but they are Morons, so they keep voting them back again… and again….

  10. John Hermann

    Their obsession with running a surplus, in the current circumstances, will be their undoing – and our nightmare. They are economic illiterates and don’t have a clue about the impact of what they are doing. Batten down the hatches.

  11. Geoff Andrews

    I always thought Barnaby Joyce was Humpty Dumpty and Josh was Pinocchio.
    But I’ve learned a lot from Pinocchio. I’ve drawn up a household budget for the next twelve months and my good wife is very pleased with it.
    It shows that I can cut my hours down from five days to four; put that second bathroom in we’ve been thinking about for six years; give our eldest an overseas holiday (he works such long hours at his surgery) and, I can confidently assert, we’ll finish up with a couple of K’s in surplus.

  12. wam

    I am rich enough to have a house, a car and enough income to buy petrol and food with an occasional holiday and a little extra to buy presents for my grandies. I am alright, jack, I have a life boat
    How am I going to care about a lifebuoy when, if it gets bad enough to sink me, even labor much less scummo, isn’t going to throw lifebuoy my way.
    When the lemon chucked a few billion(was it $40) to stimulate and avoid the GFC. The church used their cash to build god knows how many schools in little towns all over australia.
    ps Geoff you quoting Alice as well?? I just have a cuppa of fryden’s tea bag/?

  13. andy56

    Its laissez faire economic voodoo. Its based on a false premise. Create a Vacuum and the market will fill it. It has no basis in fact, actually its fiction. Its based on an american economic illusion. The entrepeuer spirit in all of us. Bah humbug.
    There is a balance required between government and private industry for the “free economy” to work. History has shown that when the government injects large sums into the economy, the animal spirits are released up to the point of equilibrium. Examples. The space race opened up the massive technology explosion we are reaping now. The american war machine keeps america going. China’s government pump priming of their economy has had a massive effect.
    MINIMISING government intervention has shown NO SIMILAR REACTION.
    We still have an edge in certain technologies, not to mention the gold in the ground. We have no real industries to celebrate apart from realestate and thats not going to save us from self destruction. Iron ore is helping the government now, but what if china suddenly says no more? And we are building ships to contain china? Clearly a dissonance in liberal brains. We are down to the last feather on the golden goose.

  14. Henry Rodrigues

    Alpo………The morons have got us where we are and they will continue to do the same, because…….. they’re morons. Its astonishing and frustrating that so-called intelligent voters can be so fucking thick. A few dollars in their pockets from the largesse of the “tax cuts” while the rich are raking in 100’s and thousands, tax avoidance and evasion schemes going full throttle, the miners and bloodsuckers banking away millions in exports without a cent in tax, the gray haired ‘entitled’ bludgers smug that their taxpayer gifts are not going to be messed with, by anyone ever again, and the funny people who occupy vast tracts of voter land in the redneck state and the west proud that they scuppered the ‘evil’ machinations of the socialists down south.

    Murdoch and the rest of the bastards and whores in the media, can truly take a bow.

  15. andy56

    Henry, i wouldnt put all the blame on Murdoch. We are complicit in this shit race too. I would start at school, early on. With hind site, the school system only taught us to be factory fodder. The biggest teacher for me was divorce. You are forced to know who your real friends are and who just wants to use you.
    Superficial and selective reading of facts really can screw a society. Any rational look at the liberals should have consigned them to the history books. So we have irrational people , thinking that they are rational, making important decisions.
    I have stopped being conciliatory with these intellectual deserts, nothing you say can change them. I am now officially a grumpy old man. Playing nice has led to them taking over, i draw the line. This is a war, make no mistake about it. Its not bloody but its a take no prisoner position against us.

  16. Ad Astra

    Folks
    I thank all of you for your enlightening comments, which I always enjoy reading. They add a fresh dimension to the topic. Your support is most gratifying.

  17. Harry

    One of the key responsibilities of a national government is full employment.

    We are not within cooee of that, defined, not as 5%. 4.5% but more like 2-3%. It’s extremely economically inefficient to leave hundreds of thousands of our citizens to struggle on inadequate income support whilst chasing too few jobs. Buts that’s what current heartless economics does, supposedly to avoid inflation. The unemployed are sacrificed.

    And let’s face it, some of the unemployed are unattractive to employers and barring a red hot economy where employers have to be less fussy, a large cohort will be left to languish indefinitely whilst their “ job readiness deteriorated along with their mental health.

    At the very least, unemployment benefits need to be raised substantially.

    Ideally an enlightened, less surplus budget obsessed government would institute a program akin to Roosevelt’s New Deal or better still a Job Guarantee, (JG) the offer of a job to any individual who wants work, is capable of it and is prepared to work at the minimum wage.

    The work would NOT be in the private sector and would not compete with the private sector— which is free to attract those in the JG program. The program would be federally funded but locally administered. The actual work would be in the social, community and environmental area and would be limited only by imagination.

    The numbers on the JG program will rise and fall according to economic conditions but fundamentally the program would stabilise and reinvigorate regional communities many of which suffer chronically high unemployment.

    Of course the current federal government will never go for it, too radical for a mob that dismisses even a boost in Newstart out of hand. Any thing to maintain their surplus budget, a false and stupid end in itself.

  18. Henry Rodrigues

    Andy…. Yes I agree and the blame must surely be on short term thinking, a few coins jiggling in one’s pocket and the constant dumbing down and trivialising and free hand given to this bunch of crooks, by the the media, which reaches into every household for much of the waking hours. Right now it does seem hopeless and we just have to bide our time.

    I have no intention of ever hanging up my gloves.

  19. Harry

    @John Hermann:

    you and I both know that running a federal budget surplus is economic stupidity in current and most circumstances. Unfortunately many voters are sucked in by the language, with its unfortunate and wrong analogy to that of a household which cannot spend more than it earns indefinitely.

    So people believe balanced or surplus federal budgets are necessary and unavoidable in the long run to avoid a mountain of debt that will be inter generational, ie a burden on our descendants. Problem is it’s all economic nonsense. There is no inherent need to issue debt to the private sector to “cover” the so called deficit.

    And let’s be clear: a surplus means the federal government is removing more dollars from the economy than it is adding. If there was full employment (~2%) there might be a case for a balanced or surplus budget but in nearly all cases a budget deficit is required to avoid a recession.

  20. Brad Black

    Listen though I might, I can’t hear Albo reminding the country that they voted for another own goal!

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