Stimulus dreaming

Today the media is full of an ignominious campaign for monetary easing. There’s no need to point it out. It’s all over, with housing and share market spruikers everywhere cajoling, insisting, begging and positioning for rate cuts.

It’s increasingly likely that they’ll be delivered but not yet in my view and not at all if Europe and the US don’t, as I expect, slide into recession. So, for starters, ignore everyone trying to sell you something on the back of rate cuts. They will come only if things get worse.

That outcome looks a little more likely today. Sadly for the FOMC, it’s recent hints at more stimulus has achieved precisely what I feared it would. Metals, grains and oil are all on a tear once more. Any hope that Western consumers were about to enjoy relief from the rising costs of day-to-day goods is disappearing rapidly. And the consequences of such are increasingly apparent in the US, from Bloomberg:

One major source of weakness is consumer spending, which accounts for about 70 percent of the economy. Household purchases adjusted for inflation dropped in June for the third consecutive month — the first such occurrence outside of a recession since 1959, according to economists at JPMorgan Chase & Co.

Household sentiment, as measured by the Thomson Reuters/University of Michigan index for July, has receded to a level seen during the last recession. The Bloomberg Consumer Comfort gauge already is in territory reflective of a slump.

“Consumers are dealing with a labor market that’s gotten weaker, a hit to their wealth through declines in the stock market and just a lot of bad news and uncertainty,” said Julia Coronado, chief economist for North America at BNP Paribas in New York. “It makes them want to be more cautious in their spending.”

The rocketing stock market looks to me nothing but a short squeeze. It can run for a while, but with every pip upwards, the stimulus it craves gets farther distant as, paradoxically, the combination of a temporary wealth effect and rising commodity inflation simply raise the bar on QE3.

I hope the Fed holds off. Their toying with QE is generating a volatility that is tearing Western consumers apart.

If they pull the trigger too soon, economic weakness and the European debacle may overwhelm even the its power to reflate markets.

It seems to me a lesser evil to allow a US recession to take place and disinflation to take effect than to risk losing monetary credibility altogether, engendering a worse recession as markets panic that the Fed is out of bullets.

That may seem a crazy idea but I reckon that’s what we’re coming to. The institutions that govern the liberal market system are slowly being drawn into the collapse.

That is the backdrop for the real purpose of this post, which is to explore what stimulus options are available to Australia in the event that a new recession does reach our shores. I have already described how any Western recession will damage Australian growth via three likely channels, pressure on the Australian banks funding costs, the ongoing global equity market shock and the subsequent hunkering down of consumers, as well as the drop in commodity prices as Chinese growth is hit by falling exports.

You can see that each of these points of transmission is the result of the interconnectedness of the Australian economy with the global economy. That’s poses a particular difficulty when contemplating any likely fiscal stimulus options for the country. As Professor Garnaut pointed out in our co-authored book, The Great Crash of 2008:

Depression Economics theory was worked out for a single economy that was not closely linked to the rest of the world. The policy problem is more complex in a multi-country world.

The level of global output is the sum of the national parts. If the whole world has underemployed resources, as has been the case since the Great Crash of 2008, expansion anywhere will raise incomes, employment and expenditure everywhere else. A substantial proportion of one country’s increased expenditure serves to raise demand for imports of other countries’ goods and services. To the extent that one country’s expanded expenditure ‘leaks’ into imports from other countries, there is less stimulation of employment and incomes in the home country. To the extent that there is concerted expansion involving many countries, the ‘leakages’ will balance out, and each country will get more or less its share of the global stimulus.

For a single country, the extent to which its own expansionary policy raises demand for ‘home’ or ‘non-traded’ goods and services, and to which it increases demand for other countries’ products, depends on the real exchange rate. The real exchange rate in turn depends on what happens to nominal exchange rates (the rates quoted on the news each night) and on domestic inflation.

There are a number of implications we can draw from this framework when considering the likely stimulus outcomes for Australia. Firstly, as Deus Forex Machina has argued so well, the Australian dollar is NOT, thank heavens, a safe haven. As markets continue to price a forthcoming recession, the Aussie will get hammered, just as it was designed to.

The thrust of this weakness will be twofold. General risk aversion is one cause and the second wave will be the initial stimulus response to sliding Australian growth: rate cuts. How low rates and the dollar go will depend obviously on the severity of the recession. But if Europe gets as bad as Delusional Economics is suggesting, then the cuts and falls will be deep.

So, that’s good news. Our real exchange rate will swing heavily in our favour, which means any stimulus here and offshore will be of the greatest possible benefit, just it was in 08/09 when, although some of the consumption-based stimulus leaked offshore to Asian exporters, Chinese and other Asian nations own stimulus fired up our commodity exports and prices.

But, there is also dour news in the Garnaut assessment. In part, one major reason the West is being condemned to this recession is that the consensus surrounding Depression Economics that promoted growth out of the GFC has collapsed.

So, we can’t expect the same global response this time around with hobbled governments and zero bound central banks.

Nonetheless, there are reasons for optimism that Australia will be able to stimulate with some success. The first hope is that China is certain to pour monetary and fiscal fuel onto its infrastructure bonfire. Whilst this is part of the global imbalance problem in the long term, it will at least boost Australia’s exports at a useful juncture of weakness. That, in turn, should prevent too much winding back of the capex plans in Australia’s mining sector.

For example, look at the following chart of mining capex expenditure:

As you can see, the falls in 08/09 were substantial but hardly catastrophic. To reinforce the point, here is a chart of long term mining capex plans:

Again, we can see the 08/09 drop, but what is also obvious is that any falls in the future will be from extreme levels.

So, Australia is likely to still have a strong impulse of mining capex even in the event of a very serious recession emanating from offshore. The problem, however, will be in the rest of the economy. That forlorn and lonely beast: services.

In the event of a Western recession, some relief will arrive with the cutting of interest rates, but the contagion of Western consumer retrenchment and a surging paradox of thrift will more than offset that effect. There is also the danger that the housing market will crack as unemployment rises.

So, the critical question confronting the Federal government will be whether to use the Budget for fiscal stimulus aimed at the services economy and especially housing as it did in 2008.

The 08/09 stimulus was big. Very big. $52.5 billion or four and change per cent of GDP. The first tranche, in October 2008, was $10.4 billion of cash payments to low-and medium-income households, and First Home Owners Grant to A$14 000, with an additional A$7000 grant if it related to a new house.

The second was in February 2009 and included another cash payment, a large-scale program that subsidised energy-saving private investments in housing insulation, and a similarly large program of school construction the total value of which was $12.2 billion.

The third tranche, delivered within the annual Budget, confirmed promises of broadly based tax cuts made in more prosperous times, made major commitments to large-scale transport and communications infrastructure, and introduced new support for the commercialisation of new technologies to reduce greenhouse gas emissions in the energy sector.

Not surprisingly, the whole caboodle was wildly effective, literally stimulating a mini boom in housing and consumption that blew the lid off the labour market. It left Australia with a gross public debt of 22% to GDP.

And, now we come to it. Could it be done again?

To find out, I had a chat this morning with Moody’s sovereign rating analyst responsible for Australia’ rating in New York, Steven Hess. I asked Mr Hess what are the strengths underpinning Australia’s AAA rating. He replied:

Strong government finance as evidenced by both the policy framework (including the Charter of Budget Honesty) and the goal of both major parties of attaining fiscal balance and keeping government debt low. A relatively diverse economy that has shown resilience to external shocks, including the recent global financial crisis. A strong banking system that limits the government’s contingent liability from this source. Strong monetary and regulatory institutions. A good record of economic growth in the past decade resulting in part from a high level of investment.

However, when I probed Mr Hess on whether he sees any vulnerabilities his reply made it clear that the strengths above are alos the source of potential weakness. According to Mr Hess, “dependence on external savings to finance the high level of investment.  This is a vulnerability in times of global financial market disruptions. This could potentially cause the government to have to inject funds.” Moreover, Mr Hess went on to say that another vulnerability was “housing market developments that would cause problems for the banks.”

The implications of these risks, according to Mr Hess, is that Australia’s rating would come under pressure in the event of a “weakening of fiscal discipline that causes government debt to rise substantially.” Mr Hess also noted that a “banking crisis” might be one such triggering event. Though he reassured me that Moody’s does not expect one.

Also reassuring was Mr Hess’s emphatic statement that Australia’s public debt would need to be “far above where the ratio is presently. We don’t have a particular number, but a continuous upward trajectory that did not seem likely to be reversed would be a trigger for a downgrade”.

So, we can draw the conclusion that Australia is in a position to fiscally stimulate again if it comes to that. However, the degree to which it can do so will depend upon a number of  factors. If it were to be a downturn that triggered a long term slide in commodity prices, even if they remain at high levels, the effects on government tax revenue in the longer term would mean the stimulus had to be small.

And even without such an erosion in commodity price expectations, there are reasons to think that we could not repeat the magnitude of the 2008 stimulus. Let’s not forget the Moody’s warning of a few months ago:

At Aa2, the major banks’ ratings continue to incorporate 2 notches of uplift from systemic support. Moody’s views bank supervisors and the government in Australia to be supportive by global comparison and the banks to have high systemic importance, as implicitly recognized by the government’s “Four Pillars” policy (which restricts M&A among the banks).

In short, the banks credit ratings hinge significantly upon government support. Another round of stimulus as large as the last would take the debt to GDP ratio close to 60% (don’t forge that the 2008 round started from significant surplus). Although Moody’s didn’t provide a figure, that level is, I would have thought, getting uncomfortable for an externally funded economy whose banks rely on on implicit government guarantee in a wildly volatile world.

We might sensibly conclude then, that, any stimulus would need to be modest and monetary easing do more heavy lifting than in 2008. This in turn, however, would need to weighed against the danger of making the housing vulnerability even worse.

Houses and Holes
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  1. Great analysis David.

    Putting aside the vitriol and rhetoric around public debt it is interesting to note that we could be looking at a nearly 50% debt to GDP ratio and that’s WITHOUT a direct bailout of any financial institutions (or the State finances, which are not in tip top shape)

    The debate should be framed around how this has occurred in other nations with low public debt levels, but very high private debt levels (e.g Spain) and how we can re-structure our economy to be more robust to these external events.

  2. The first hope is that China is certain to pour monetary and fiscal fuel onto its infrastructure bonfire. Whilst this is part of the global imbalance problem in the long term, it will at least boost Australia’s exports at a useful juncture of weakness. That, in turn, should prevent too much winding back of the capex plans in Australia’s mining sector.

    A second Chinese stimulus is a near certainty, once inflation pressures ease. While this will help the already booming mining sector, it will only exacerbate the recession in non-mining Australia, where 95% of us live and work.

    The non-mining trade exposed sectors will most likely be dealing with much weaker export markets in Europe, the US and Japan, and an Australian dollar above parity.

    We are destined to become a Quarry Economy with an obsequious political class that has totally caved to the economic might of the miners. If you think Gillard is weak, wait until we have a mining company shill in the Lodge!

    • Hmmm, maybe. I still think you’d get a global inventory cycle that would knock Chinese growth first. It would’t all happen at once. The dollar would fall a lot initially and only rebound as commodity prices did following a Chinese stimulus.

      • Sounds like you are expecting a replay of 2008-2009.

        For mine, I think a plunge in the AUD is less likely this time around now that every other central bank is printing like crazy.

        I also think the Chinese will move to stimulate earlier this time, as soon as the heat comes out of food and commodity prices.

        There is a looming catastrophe for the non-mining economy.

        • The Chinese will stimulate sooner, obviously to offset weakened demand, importantly to ensure social stability.

          In my view it is better that at least of part of the economy is operating well rather than the entire shebang in doldrums. I certainly hope catastrophe does not eventuate – will all depend on the length of the recession (2,3,4 quarters etc).

          The really long term problem is what to do about services. An important sector of the economy that appears to only function effectively in prosperous (easy available credit) times. Services sector itself is not based on sustainable framework.

          • In my view it is better that at least of part of the economy is operating well rather than the entire shebang in doldrums.

            Well you would. You’re in mining.

            Sadly, Australia’s great mineral wealth means times will be harder for most sectors than they otherwise would be, thanks to the strong currency. I would prefer the hardship be more evenly spread, because this mining boom will drive a giant wedge between the lucky and the unlucky and well tear apart our society.

          • I thought you had recently agreed that the AUD was no safe haven…

            Don’t worry, resources are not going to ‘tear apart our society’ – they may to some extent sustain our society whilst we adapt. Try optimism – read david below for a primer!

          • Fanboy,

            For me, anticipating another decade of this infernal mining boom is the very definition of pessimism.

            Optimism for me is China slowing its investment boom, rebalancing towards consumption, and a consequent fall in commodity prices and the AUD. This would relieve the intense pressures on the non-mining sectors and spread the hardship of a global downturn more evenly.

            The resources sector could help sustain our society, but because of people like you, who have argued so vehemently against additional mining taxes, resources won’t be sustaining our society. Instead, our politicians have completely caved to the economic might of the miners, who are now a law unto themselves.

            The resources boom is not helping us adapt, it is hindering the process of structural change, by a) refusing to pay for the adjustment and b) driving a rapid appreciation of the currency that no trade-exposed business can ever hope to adapt to.

            The result? Look at Bluescope, SPC Ardmona, David Jones. Businesses are not adapting, they are simply giving up.

            This idea that the mining boom is helping us adapt is surely the most idiotic thing you’ve posted on these pages, and that’s saying something!

          • Nonsense Lorax. That is not what you would like to see – this is:

            “…a 20 year China boom — is a nightmare outcome for Australia and will make my personal circumstances very difficult. The best possible scenario for MYSELF is a thumping recession in China, a runaway tech boom in the US, and a weak Australian dollar…” (my emphasis)

            ‘best possible scenario for my self is a thumping recession’ – and it is in that light your comments must be always considered…


            And yes, I would like the resources party to continue!


          • As usual, when you’re losing the argument you get personal.


            I am more than happy to admit that as an Australian exporter a weak domestic economy and strong US and European economy are the ideal circumstances. However, my personal circumstances have changed considerably since that comment, because like thousands of small exporters, I am now out of business. As of now (if I was being entirely selfish) I’d be hoping for higher interest rates and strong dollar so I can splurge overseas.

            But unlike you, I’m not entirely selfish.

            Equally, your comments should be viewed as someone who works in the mining industry. Someone who benefits directly from the Chinese investment boom, and someone who is largely unconcerned about the plight of non-mining Australia.

            If you think having a runaway currency and interest rates close to 5% is helping Australia ‘adapt’ you have rocks in your head.

          • Not personal at all.

            Australia has not really started to adapt yet, still a little behind the curve in realising that that is exactly what will have to occur. Of course, if China collapses, resources too will need to adapt. Overall it is better to have some sector (other than government bureaucracy) travelling OK – that is my view.

            Current conditions are volatile; the AUD up and down, interest rates stable but again, calls for them up or down – how we navigate our way through this period is yet to be seen. We may be lucky. We often are.

            FWIW I do empathise with those individuals and companies experiencing adverse conditions – I’ve been in resources a long time and know only too well the nature of cycles.

          • Services in itself is sustainable. However there has been a severe malinvestment in services over the past decade due to easy credit. This doesn’t just include money of course e.g how many bright grads end up in the finance sector? Its more the pace of the expansion of the services sector and its share of the economy that is unsustainable.

            However The Lorax is correct in saying that the high dollar is generally bad for Australia. Mining by its very nature is capital intensive; not labour intensive and its economic rent these days has been quite high. Australia only gets profit on the mines really from the cost side of the mining + australian shareholder dividends. However the majority of mining companies have a substantial foreign shareholding and are really multinationals rather than Australian companies nowdays.

            If our dollar is higher due to their investment then yes as a country we’re in a really bad situation. The high dollar effectively diverts resources to the mining sector; driving pain in the rest of the country only so that predominately foreign interests can skim the cream (i.e the economic rent) from really Australian resources.

            Sad to see Australian’s property being used against it.

            And Lorax – we aren’t in a capitalist society – we are in a corporatist society where multinationals hold the cards and have the superior balance sheets than some countries. Of course they hold some power.

          • Mark, I disagree with a lot of what you have said.

            Briefly, services flourished at the expense of manufacturing and were only capable of exponential growth on the back of a credit boom. Put simply, take away the money(credit) and you don’t have much left. Australia has binged on a property led credit boom incurring massive foreign debt in the process. Windfall income to government from mining go some way to redress the balance.

            We have a floating exchange rate, global markets determine the AUD. The recent cycle has supported currency strength in commodity based economies. That we have been fortunate enough to have resources has been a good thing.

            There are considerable flow-on effects from resource infrastructure development – this is of far greater import than the simple percentage mining employees. Design, project management, engineering services, various technical specialist services, construction etc are all utilised with corresponding flow-on effects.

            That these companies are major multinational corporations should be of no import. If you want a piece of the action buy shares. These companies pay all requisite taxes, imposts, fees, royalties etc and operate under jurisdiction of an Australian corporate and legal framework.

            I’m not sure what you mean by this:

            “Sad to see Australian’s property being used against it.”

            Perhaps you could explain?

            Anyway Mark, be grateful for the resources boom and keep your fingers crossed it continues – without it we’d already be toast.

          • Services are sustainable – but I did agree with you not at the level they are at. There will always be people asking for services provided of others. I do agree that services cannibalised manufacturing.

            For mining however if you weren’t privileged enough to buy a mining companies shares earlier you won’t reap that benefit. Theoretically the economic rent enjoyed by these companies is already priced into the shares so even if I buy I must pay the same cost to get that benefit.

            However as a stakeholder in the economy I will pay a cost as the economy restructures to fill that need. A higher dollar than otherwise would be to accommodate a sector that really doesn’t employ all too many people. Royalties are a cost – despite these there is still significant economic rent being transferred to other holders. In addition the restructuring of the economy is being done to their betterment at the expense of Australians that aren’t involved in the boom. There is only a certain amount of resources in an economy to employ and at the moment blood is being diverted from the other parts of the economy – the parts that most Australians realistically can be a part of.

            After all miners are automating everything these days – they want to maximise efficiency even further – fair enough from their perspective.

            The thing that irks me most about mining is that it will only delay the inevitable – and unfortunately most of the benefit to the economy that mining could give is in fact being used to bail out the malinvestment in Australia before (an example would be the FHBG – money used to cause more systemic imbalances, more debt and future tax increases to bailout existing housing overindebtedness for a little while). I would prefer if there was a crash now than this mining money kicking the can down the road with stimulus and making the eventual problem worse.

            We will have empty holes in the ground, that were just once collateral for massive amount of debt. I would prefer if we didn’t have the holes at all if that’s all they will be used for (i.e buying more koolaid). At least then the resources would still be in Australia when the crash occurs.

            Our system in Australia seems to be dig up our wealth, ship it overseas, convert to money and squander it.

            The higher dollar just creates more imports creating more CAD causing more debt. So mining in effect has accelerated the debt mountain by making the incentive to spend higher. Great.

            I could list many more but I will stop. There’s too much to type.

          • Dumb_Non_Economist

            Sorry, China Fanboy, I disaagree with you, I haven’t been in mining construction for some years, but I have plenty of mates in trade and management positions who are. As for construction a large percentage is now down in China in module format and shipped to site (generally WA/QLD.. iron-ore & coal predominately). On the technical side a large percentage which is growing yearly (CAD) is now down up there as well, which companies like Mono’s etc love as there margins are greater (30% compared to 20% if lucky). A father at my daughters’ school who owns an engineering workshop said fabrication in Perth is dead, mining services is booming (haul packs etc), but little fab work. I did my Boilermaker apprenticeship in the mid 70’s and for the size Perth then there were a huge number of fab shops covering the whole range, now mainly just structural steel.

            A friend who is in senior management said it won’t be long and the design work will be China, he said the Australian employees at Bectal’s/KRB etc are just starting to wake up to this fact. Gillard would win my vote for a resource tax on coal & I-O. There’s nowhere near as much of the high end happening here anymore.

          • DNE

            I take it you have not been to Port Hedland, Karratha, Dampier, Newman (during the recent Hub refurbishment) – all busier than a hive of bees.

            One thing I do agree with you on is the widespread use of prefabricated modules in the construction of new facilities – I have long argued that there is a role for a reasonable perecentage local supply in all contracts, that has always been my personal view. There is a major new mine in production that will entirely built offshore and rebuilt meccano style here.

            We have the skills and capabililitie to do this work in Australia but, as part of the globalised world and modern business practice, all is sourced from the cheapest provider. This has led (and Australian education, unions, governments and businesses have all agreed) to a significant reduction in our manufacturing based across the country. This is not a problem confined to resources in any way. It is the way. Remember – we’re all going to move to services!!!

            It is also important to remember the windfall gains to government coffers – Treasury estimated $100 billion by 2012 – this is revenue not to be gained from a broader economy largely stagnant.

            What is this Australian desire to knock anything that is doing well…

            No mining no modern world.

          • DNE

            Your friend is correct – at some point a lot of the design/technical work will be done offshore. Not there in any major way yet. This is part of the normal path of globalisation (which is starting to look like a non-supporting broken model in regard to long term employment post credit bubble euphoria).

            Any number of services jobs are outsourced (think bank batch processing, call centres, Indian computer specialist outfits etc, Telstra services) and yet the current belief is that Australia will be key provider of services to the Asian region. Not likely and not for long. A region with a billion or so people all keenly educating themselves acquiring skills (we somehow believe only we can offer) with natural language and cultural advantage. Ain’t gonna happen.

            What do we have in the global marketplace that others want – yep – that’s it, resources. And that is it.

        • Could not agree more with you Lorax. Sorry to hear that your export bizz has gone under.

          I’ve been involved in mining a long time too (70’s). We also have soft commodity and agri-bio interests. Both local and offshore. Plus other business interests.

          To China Fanboy: who do you load the guns for? The statists thats who. The major beneficiary of mining is the government. All your freemarket nonsense is a total cover for personal greed. You work more for implementing insane government policies than you do to help your fellow free market proponents. You are keeping this government in power. Sorry, sad but true.

          A statist pawn,that sees a free market knight in the mirror, that is ignorant of who his masters are. Joolia just loves you-send

          Personally, I can’t see any difference between you and that idiot American banker who said he is doing Gods work.

          As Lorax states, the mining boom is hindering adjustments. Its secondmendment by the government for status quo maximum effect seems to be beyond you.
          It is the handmaiden of government and banking policy makers. You are the fools keeping them in power through taxation.

          Would you mine for the Nazi’s if they were paying top dollar? I think you have a serious problem with responsibility and accountability. You can’t seem to differentiate between the policies of free market principles and the Nazi policy of “Arbeit Macht Frei.” Which in English is “Work makes you free.” This was placed over the entrances to the concentration camps and slave factories.
          The “Nuremberg Excuse” didn’t hold for them and it certainly does not hold for you.

          Just like the gloaters in finance, you are nothing more than a government dung beetle.

          Do you not understand that there is no mining boom that is not preceded by deliberate CB inflation cannons roaring?

          Lorax states that he would like to see the hardship more evenly spread. Personally I’d like to see the whole shebang taken out not down. No ashes, no phoenix.

          • Seanm

            What a diatribe! Amusing though. It is curious that remarkably often when discussing the mining boom cracks open and people reveal what they really think…something rather interesting oozes out…a form of racism, a modern day ‘yellow peril’. Think about what you have said above.

            If our resources were being eagerly sought by all countries of the world – would you have a problem then? No. It all comes down to the fact that the Chinese are the buyers, and as I have said many times before, this makes people very uncomfortable. For reasons that are now deeper than garden variety racism.

            No resources industries no modern world.

  3. I can say this much. In assessing investment in Iron ore mining Chinese steel mills are using Australian Iron ore prices at about 40% of their current levels. I THINK their time frame is about 5 years…I THINK!!!!

  4. Interesting analysis.
    I understand the fear of recession may drive the govt and reserve to stimulate the economy…..but this is only likely to pump up the housing bubble again. This would be a longer term tragedy for this country, as at some point the stimulus will end and then? We appear to be on the cusp of events and sentiment that might lead to a new view of what owning a house is about, and why saving is good for you. IMO its necessary to have some pain (recession) in order to understand that speculation in anything is risky, including housing, especially if you borrow large sums of money to do it….if no one loses their job, and houses always go up in price, how is any lesson to be learnt by those who have over reached? On the contrary it will be taken as vindication of the strategy.
    Lowering interest rates as inflation rises, will save these risk takers at the expense of the thrifty who save (like me). Personal circumstances aside, that still seems like a bad idea to me….the idea that those who save should be punished for problems which emanate from others consuming more than they produce?

    • The government may stimulate again, I suspect they will – but I doubt it will reinflate the housing market in any serious way, stabilise it perhaps but reinflate, no. Households are likely to remain cautious for some time in regard to housing, no longer seeing it as an assured path to relatively rapid wealth. Too many have come too close to being burned. Memories don’t fade that swiftly. Boomers may see it as an opportune ‘out’ of the market.

      I could see a bit of a splurge on consumer items though, a lot of pent up demand there!

  5. If the RBA do drop rates soon, what does that say about their credibility given the rhetoric of recent months? It’s almost as if they’ve wedged themselves with their recent statements.

    Also, would a new round of housing stimulus really acheive anything this time around? Home ownership levels are, from what I understand, around 70% which puts us right near the top of developed nations. Where will the demand come from?

    • If they drop rates owing to weakness coming from the EU and USA, that does nothing to their cred. And I don’t think we’ll see cuts if that weakness does not come through.

  6. Quite frankly i hope we dont stimulate at all and allow recession to clean out the malinvestments that have been made during our credit boom.

    There needs to be a reallocation of capital towards productive uses. Its no coincidence that our industrial and manufacturing base has suffered while we have poured trillions into housing and frivolous consumption.

    Recessionary periods are necessary to recalibrate an economy. Our insistence on preventing recessions through consumption-based stimulus merely exacerbates the problem and kicks the can.

    • You’re assuming that the economy WILL recalibrate and recover after a recessionary collapse, to a level of activity consistent with high growth and low unemployment. Why should that necessarily be the case?

      Take the US for example – the severe recession has not led to a resetting and a rebounding. Only an ongoing stagnation with appallingly high rates of unemployment and poverty. The boom in wealth was based on a broad private sector boom in indebtedness. The nominal wealth has evaporated with the crash – but the debt and the servicing commitments to it largely remain, weighing like a millstone on consumers ability to consume. No recovery in demand = no real recovery in general.

      Governments will not be able to return surplus budgets – deficits will be the norm for the forseeable future, regardless of whether they utilize discretionary spending or whether they do nothing at all. They might as well ensure unemployment remains low.

          • “Yes, I am assuming that. Sadly, I can see a scenario where the world struggles to recover but it revolves around Europe not the US.”

            You don’t accept the idea of a balance sheet recession versus the normal business cycle recession?

      • What most people do not understand or ignore is that we have deep structural changes in western economies with manufacturing severely depleted, a lot of service jobs that have to be funded by some other economic activities and a massive overhang of debt. If there’s no stimulus we will have deflation, especially in assets, with all the associated negative wealth effects. If on the other hand western governments stimulate we will have inflation. This is the way that the system tries to find a temporary equilibrium with the same end result i.e. much lower standards of living aligned with the productive capacity of western economies.

      • The US is a good example of what happens when you try and kick the can. If they allowed a proper recession a decade ago, instead of stimulating via low interest rates, it would have cleaned out a lot of the malinvestment in a much less painful way. However the deliberate policy of stimulating to avoid recession, and especially deflation, at future cost has simply meant that the problem has become larger and larger over time.

        they are now beyond the point at which they can reset in a calm manner, and they will experience a depression at some point (all the Fed and politicians can do is delay the inevitable).

        We arent at that point, we still have the opportunity to take some pain now and restructure our economy around the ‘new normal’ which will occur. Economies operate on a cyclical basis, if you try and eliminate the cycles and create a linear system (ie permanent inflation, with no deflationary period) you set yourself up for disaster down the road.

        • And my point is pete, I don’t think what we are looking at is cyclical in the normal sense – it’s structural.

          Yes a severe recession will burn out old, inefficient capital – but I think it would be a mistake to simply assume that strong growth and low unemployment will automatically return as a result. Heavy unemployment could persist for many years, creating the sort of powderkeg situations we are seeing to day in Britain, Greece and other places.

          • When, in the past 200 years, has the free market economy not produced an increase in the standard of living for human beings over a 20 year period…

            Of course we will recover – provided the currency stays stable and wealth is not taken from the productive and given to the unproductive, by 2020 the economy of the world will be booming – with the developing countries providing remarkable growth.

            But – if Western nations keep refusing to take their medicine and kick the can down the road, then we will have riots that make the UK riots of this past week look a schoolyard brawl…

            Wait to the Yanks riot with 80 million guns floating around…

            Or the Chinese – lets see whether their police will stand and watch…or even waste time firing rubber bullets.

            The biggest threat to world at the moment are short term, politically motivated Governments that do now want a recession on their watch…

            And the worst thing is that most people are so selfish or stupid…that they actually want the Government to do this – just to avoid lessening their immediate standard of living.

          • “When, in the past 200 years, has the free market economy not produced an increase in the standard of living for human beings over a 20 year period…”

            When in the past 200 years – or ever – has there been a “free market” of the Austrian wet dream variety? Stav – when I was younger, I dreamed of a communist workers paradise. But it was a fantasy – just like a perfect, self-balancing free market.

            “And the worst thing is that most people are so selfish or stupid…that they actually want the Government to do this – just to avoid lessening their immediate standard of living.”

            Well that one made me choke on my coffee – Stavros, the champion of self-interest who has told us that it’s all about looking after number one has the stomach-churning gall to label other people as “selfish”. What he really means is that he despises the idea of other people’s jobs and livelyhoods being put before his notion of the perfect world.

            I’ll stop writing before I breach the comments policy.

          • Stavros, re the ‘Yanks’ – wasn’t there a theory once along the lines that the masses were sedated by either the pleasures of consumption; the pleasures of mindless entertainment; or the pleasures of illicit substances – combine that with an decade of declining educational standards in some demographics and a country split by petty pseudo ‘political’ squabbles and I would be surprised to see any genuine uprising at all.

            If you are correct, the guns will make it a whole lotta different to what has been seen in the UK. I just don’t know if they could muster the effort.

          • “You’re assuming that the economy WILL recalibrate and recover after a recessionary collapse, to a level of activity consistent with high growth and low unemployment. Why should that necessarily be the case?”

            Lefty – you attack the Austrian School’s theory of creative destruction by pointing out…well…that the future is uncertain??

            So in response, I pointed out that despite World Wars and Great Depressions…and famines…etc…the economy always recovers.

            The fact that we have never had a pure free market is totally irrelevant. The argument I am making is that the source of this recovery is always the private sector.

            Its only in the last 30 years that monetary policy that fuelled asset bubbles and implicit Government guarantees fuelled reckless corporate bevaivour has meant that market has failed…

            But this – as I have explained ot you many times – is because of Government involvment. Look at what happens when the Government just backs off and cant interfere (the Internet).

            A world wide web of information, empowering people to do things that Governmets could onloy dream of…

            Oh thats right, you think the internet couldnt have been invented without the Government.

            There goes your crediblity.

            Do you think that the free world could do anything without a policy or law dictating us to do it?

            Do you have any faith in human ingenuity?

            And I didnt call you selfish..I said the looters that benefit from Government bailouts (the indebted and bankers) are selfish as they only want the outcome that suits them and hide behind arguments about common good blah blah blah!!

            I also said some people are just plain stupid…as your outdate ideological blogging name suggests, you fall into this category.

          • China Fanboy…I think you will find that despite a big section of the population being sedated and distracted by those things…the rise of the Tea Party and other instances of civil uprising suggests that the Yanks will not take this lying down.

            They also value individual liberty and have inherent distrust of Big Government.

            I have no doubt the US will still be the sole economic and military superpower in 30 years time.

            The only nation that will threaten them will be India.

            The Chinese will spend the good part of a decade rebuilding from a massive revolution sometime between 2015-2017…

            In my opinion – which is obviously of the belief that you cannot keep a nation of over a billion people from enjoying the freedoms we take for granted without expecting it to blow up one day…that day gets closer and closer…


          • *”Lefty – you attack the Austrian School’s theory of creative destruction by pointing out…well…that the future is uncertain??”

            I have no issue with the argument that so-called creative destruction clears out old, inefficient capital. But to the extent that it also creates large numbers of innocent victims, these negative social effects need to be attenuated. And the only entity capable of doing that on a major scale is government. This doesn’t mean that government is perfect or wise – it just means that they are the only entity capable of broadly advancing the public purpose.

            *”The fact that we have never had a pure free market is totally irrelevant. The argument I am making is that the source of this recovery is always the private sector. ”

            Stav, I’m going to SERIOUSLY take issue with this – this argument has NO basis in fact. The main source of recovery following major catastrophic events is government budget deficit spending, which provides the demand needed for private activity to re-start properly.

            *”Oh thats right, you think the internet couldnt have been invented without the Government.”

            As a matter of fact Stav, the internet was invented by the US government, originally as a piece of military hardware. As the cold war diminished, countless peacetime uses were discovered for it. What was that about credibility?

      • The US is a very different beast. It has its problems because it didnt let defaults occur and kept the debt there. If you let the system reset and the debts defauted then yes the system would reset after some time. We as humans do recover from this stuff eventually when there isn’t a ball and chain on us by our governments loaded with too much debt. More stimulus and transferring the debt to the public sector rather than letting the deleveraging occur makes the debt intergenerational – I.e its the debt of the country now rather than the people who originally borrowed the money and its effects will be here for years to come.

        In other words stimulus by using the public balance sheet, moves the pain of deleveraging from the private to the public sector extending the life of the debt.

  7. Tony Abbott’s poll number will hold the key as to whether a stimulus is possible. I do not think it will happen this time.

    As to ‘cleaning up malinvestment’, as the malinvestment is housing, that would require a 50% drop in housing prices, followed by the complete collapse of the banking system. We’ll definitely be ‘cleaned out’.

    • Labor are still licking their wounds after the Opposition played merry hell with the roof insulation fiasco and other aspects of the stimulus. Swann is sticking to his surplus pledge come hell or high water. If the economy slips into recession or we have another global crisis it’ll be interesting to see what they actually do. The idiocy that was Costellonomics is still haunting Labor.

  8. Frankly, I would rather have our government go perpetually bankrupt spending money on social welfare programs rather than use the budget to bailout the banksters and go bankrupt.
    The so-called stimulus is nothing but white-collar welfare. It isn’t even Keynesian by any stretch of imagination. But this behaviour gets away with a barely a wink and a nod, while there is a huge amount of outrage that dole bludgers get their handouts without putting in any work.

    • Or that looters in London are facing speedy trials and jail terms for minor theft….and bankers who have crippled the country for a generation or two are holidaying on a beautiful beach or ski lodge in a secret elite location contemplating how to spend the bonus…

      • Yes, Immediate arrest and midnight trial for a 11-year old kid who leaned across a broken shop window and “stole” a plastic bin.. FFS man!!

      • And not a peep from the people over that theft.

        The rule of law has been replaced by the rule of government. Or, as Alex Jones put it: The selective application of the law is the essence of Tyranny. And in the end that will cause more violence.

          • Because they do not understand it. Easier to berate an angry youth for smashing a window and stealing a whatever than a couture attired banker with perfect locution who may have engineered financial fraud on a huge scale for bonus benefit. I do not condone the violence that has taken place, but violence make take any number of forms.

  9. IMO, this is not a replay of 2008, not even close.

    Reason being that the private credit situation is not even close to then.

    Yes, we now have the issue of public debt with flattish GDP growth in some economies, but that is a lot more manageable. You can always print money = inflation, which private organizations can’t do: they just go bankrupt.

    IMO this is a slowdown caused by QE and world-wide monetary imbalances. The USD is too weak and the rest of the world is starting to pay for it.

    Arguably Australia has higher to fall, the risks are higher here. But we can’t underestimate the impact that rate cuts can have on the economy in Australia. If you map household confidence vs oil price and interest rates, the link is very clear recently.

      • Yes, I have been wondering about that too.

        In the EURO zone the level of private debt is not very high compared to anglo-saxon economies, so a cut/raise would not have the same impact on the household economy. Fixed rates are more common too.

        In the US, the rate cuts did not have much impact at all, it’s true. I think that’s because the cuts during the housing collapse were too late, and the increases during the housing bubble were too late as well.

        If people get scared of debt and confidence turns, no rate cuts will help. Deflation sets in. The unknown (for me) is if we are, or will ever reach that point, in Australia.

        I was honestly surprised by the strong rebound in 2009 – 2010 created by the govt stimulus and the rate cuts. I still think population growth is a key driver of the Australian economy (Japan, Europe don’t have that).

    • It’s not a replay at all – it’s all part of the same thing!

      Three words: Bear, Market, Rally.

  10. We are going through one of the very rare globally synchronized cyclical downturns in industrial production, overlaid on an economic framework still stressed and incapacitated by the collapse of the Greenspan Bubble.

    It is not clear yet whether this cyclical downturn will trip into renewed decline in total economic output. But let’s suppose this doesn’t happen, in spite of the indiscriminate carelessness “The Authorities”.

    Global output, employment and incomes will improve and then monetary conditions – as experienced by households and SME’s – will gradually become a bit more user-friendly. Growth in emerging market economies (EME’s) will resume. EME household, business and public sectors remain in in basically good health, but consumer markets in the US and Europe will remain slack for many years, inducing a new phase in EME economic development. More and more of their growth will come from self-sustaining intra-EME trade and investment and eventually, as they cone to dominate global GDP, the EME’s will become a source of growth for the existing advanced industrial economies, though this will take time to evolve.

    In the meantime, Australia, as a minor industrial economy, is experiencing a minor downturn in its industrial sector, along with other economies. This will abate as household behaviour adjusts in coming months, stresses in the global economy recede, a cyclical upturn in industrial output commences, and internal expansion in EME’s revives.

    (I am feeling very optimistic today!)

    • Love the term ‘Greenspan Bubble’!

      And +1 for your refreshingly mildly optimistic view. Hurrah.

  11. I find it very interesting that the government is hell bent on return to surplus, while most of economy enters recession. There is one (not inplausible) scenario that says Australia is simply following our northern hemisphere counterparts on a lag of several years. Our private debt bubble was kept inflated by a then low debt government and demand from China. Notwithstanding, the government still upped its debt by c. 15% of GDP. Private debt has now reached saturation point, the government may end up needing to do a big bout-face on surplus targets to stimulate a recessionary economy and, lo and behold, we end up taking the debt on the public balance sheet (sound familiar?). Clearly we’re in a much better starting point than the US, but as they say history doesn’t repeat but it rhymes. It’s almost like you can see the same themes playing out here with a few years lag. And shortly after Australia is will be China…just as well they’ve got the reserves.

  12. I have a question about Chinese stats…..and that is whether housing construction is classified as “fixed capital investment” or is regarded as part of the household consumption mix.

    I think this is important from an Australian standpoint, because the sustainability of growth in China is the single most important source of growth in the Australian economy.

    The quite superficial treatment of Chinese economic and other news is a notable weakness in Australian media generally. We really need to be much much better informed about economic events and developments in China.

    • Housing construction is classified as fixed asset investment.

      Yes we need much much better analysis of China, which rarely goes deeper than “this is a once in a century urbanisation of the world’s most populous nation” –and– “this boom will run for at least another decade”.

      To criticise China these days, is almost un-Australian.

      • “To criticise China these days, is almost un-Australian.”

        Just as it was almost un-Australian to suggest twelve months ago that property doesn’t always go up in value.

      • Though shalt not question our great and benevolent Chinese overlordsPascoe said as much today………..that guys is becoming a weekly comic fix for me. Apparently emerging markets will save the day and Eurpoe and the US don’t count anymore.

        I want whatever he’s on!!

        • Oh Lord. Just lost my lunch over Pascoe again.

          I didn’t think he could get any worse, but he’s plumbed new depths today.

    • There is a surprisingly large amount of information regarding China’s status, economic, social and general news available. That MSM chooses to print only press-release information is no different in regard to China than almost anything else is reports on (consider the recent housing boom – endless pundits extolling the benefits and profits to be gained). So to expect any more is a stretch!

      The other difficulty is that Chinese statistics have always been notoriously difficult to confirm and in the past have not been particularly reliable. Brad Setser endeavoured for some years to determine the accuracy of Chinese economic data with some success, alas he is gone now – sucked into an Obama think-tank at one stage. Recently (2010 I think) a senior Chinese government official joked that even they did not always rely on official figures. Also think Shadowstats in the US.

      Companies that trade strongly with China use all the usual data financial sources and commodity tracking services and importantly have good networks of “on the ground” personnel (this can be a good forward indicator of the zeitgeist).

      I don’t doubt that RBA/Treasury types also utilise the above resources and I certainly don’t worry that MSM do not. Decisions cannot be based on the superficial analysis of most MSM commentators.

  13. Interest rates do not need to be set at current levels. The step up in November last year was taken in anticipation of much stronger outcomes than we have actually experienced, and the outlook now is for weakness in employment, incomes and consumption. Since fiscal contraction is the new orthodoxy, their should be some relaxation in the private sector.

    I do not believe in inflicting (or experiencing) pain for its own sake. The RBA should have cut rates months ago. They should do it now, and demonstrate they are capable of adapting policy to circumstance, rather than, perversely, trying to do the opposite.

    • Personally I disagree with the need of rate cuts.

      Rate cuts and increases should only be used to soften the extremes of natural economic cycles, not to flat-line economic growth. Continuous cuts and increases (see USA) only create a large centrifuge that spins and spins until it bursts!

      We are no where near needing a cut IMO, based on current data. It is healthy that housing comes down after ridiculous growth rates. Employment is at 5% (good). Inflation is too high (it will come down).

      Next year, that could be a different story!

      • Tend to agree, it has been correct not to cut rates. Rates have remained stable for seven months, effectively stifling any exuberance in the property market – this needed to be curtailed.

        • I agree as well. I don’t think interest rates should be cut – just because economic activity is weak. I think if you keep cutting due to that you delay the period of reckoning and allow credit at cheaper prices to keep malinvestment going and built up even longer. And we have a lot of malinvestment that is dragging down the economy – its the reason people are lobbying to keep rates low (i.e most people are guilty in Australia by over capitalising on their house).

          Inflation if it was calculated with asset values in mind would be a better guide to rate setting. I also thing it needs to be more dynamic (i.e a market) rather than the RBA’s once a month meetings clouded by their judgement.

    • “I do not believe in inflicting (or experiencing) pain for its own sake. The RBA should have cut rates months ago. They should do it now, and demonstrate they are capable of adapting policy to circumstance, rather than, perversely, trying to do the opposite”

      but given the underlying inflation rate…cutting rates would simply have shifted the ‘pain’ from those who are risk takers (overleveraged households) to those who are risk adverse (households with savings). Why is that more acceptable? If there is only reward for risk takers and the cost of any risk is only borne by the risk adverse….the logical outcome will be that we all become risk takers, savings tank and we maximise personal debt…..and is that not what got people over leveraged in the first place?

      • All I can say is spot on Russell – summed it up nicely. Lowering interest rates just adds fuel to the fire and rewards the actors who created the buildup in personal debt in the first vindicating their decision against the people who acted prudently. Moral hazard spread on a large scale encouraging you to borrow and spend to oblivion.

  14. Evans poured a bucket of cold water on all the stimulus talk. It’s all up to the RBA now but I wouldn’t have my hopes high for an interest rate cut in the near future.

    “Federal Jobs Minister Chris Evans said the Government was not considering another stimulus but conceded some trade-exposed sectors, such as tourism and international education, were doing it tough due to a patchwork economy.

    “The reality is that we are at a very strong economic position, the fundamentals are very strong and the government is able to respond in whatever economic circumstances may come our way,” he told ABC television.”

  15. Stephen Koukoulas, an alleged economist and former economic advisor to the Julia Gillard, joins the squeal for rate cut
    The money-shot quote:
    “Another critical thing about interest rate changes from the RBA is that they don’t cost any money! Unlike fiscal stimulus measures, which are costly and often difficult to wind back, the RBA can cut – and hike – interest rates by any amount and at any time without costing the budget a cent.”
    Nice, but patently false – private mortgage debt will balloon when RBA cuts rates. And when the rates go back up, mega mortgage mugs will go bust, taking the banks and the government budget with them.

  16. The lead indicators for the Australian economy suggest monetary easing would be a good idea. Underlying inflation is within the RBA’s band and the outlook is for a decline in the rate of change of prices. Employment conditions are softening. Credit demand is at all time lows. The property market and building activity is anything but animated.

    The only energized sector is capital investment in the resources sector. Activity is capital-intense, and a lot of the investment expenditure is manifesting outside Australia. It really does not pose an over-heating problem for the wider economy.

    Meanwhile, the public sector is returning to surplus and the private sector is de-leveraging, so we see deceleration in jobs growth and private consumption. Cut rates, sustain employment, support the budget and enable households to more quickly adjust their savings/consumption profile.

    Makes sense to me!

    • What rate level would you suggest in order to sustain employment – is any cut big enough to compensate for the home-equity ATM being in off mode?


  17. The world is hitting energy limits to growth. Untargeted stimulus spending simply going to push up energy prices again, especially for countries like the US that have no carbon tax/incentives to switch to sustainable energy sources.

    Even targeted stimulus is going to have a tough time finding energy sources/efficiency savings that give the short term energy return on energy invested that traditional fossil fuel sources have.

    (Real) recession is the new normal. Get used to it… at least until WWIII breaks out 🙂

  18. I am not advocating public sector stimulus. On the contrary, the public sector has a contribution to make to national savings, especially when (externally-derived) national income continues to grow.

    But I think the situation is fairly straight-forward. The global economy is going through a synchronized downturn in the growth of industrial output. Because of the linkages between economies, events in any one economy are felt in other economies. These linkages consist of demand, output, price, monetary and capital market signals. Within reason, what we should do – what everybody should be doing, really – is resist the temptation to run pro-cyclical policies: that is, we should refrain from following policies that will amplify the current cyclical downward impulse.

    This is just logical. If the economy is going to contract, why would you deliberately set out to make the contraction more intense? Using policy to mute the loss of jobs, incomes, savings and businesses is just the converse of using policy to prevent intense growth.

    Economic contraction entails personal hardship, usually borne by those least able to bear it and who have the least influence over economic affairs. Since we have the means to at least ameliorate some of the loses that flow from contraction, why would we chose not to use them?

    In principle there could be countervailing problems – an increase in inflation, a surge in bubble values, a boost to aggregate debts loads, to name just some – but the question is, are these things likely outcomes? The lead indicators suggest they are not likely. The data we have suggests the opposite.

    This is like crossing a busy road with the kids and an armload of shopping. We know we want to get to the other side of the road in safety, so we check the traffic, check again, and cross the road directly without lingering and hopefully without dropping the oranges.

    It is not that hard to figure out given what we know about the national economy and the international context.

    It is also worth noting that any reduction interest rates does not necessarily mean households will increase borrowing. It could also enable a more rapid reduction in existing debts, because discretionary income will be increased – that is, knowing what we do about household behaviour, any increase in discretionary income is likely to be saved and not spent.

    So lower rates can help rather than harm private debt profiles, and this will be unequivocally good for the economy in the medium term.

    Try 25 points, see what happens, keep a firm grip on the oranges and keep the kids in line at the same time….. 🙂

  19. david – you said:

    “Uing policy to mute the loss of jobs, incomes, savings and businesses is just the converse of using policy to prevent intense growth.”

    A few things here:
    1) The job losses that are being felt are as a result of the deflation of a credit boom…a private sector credit boom that the policy of Governments encouraged. Through artificially low rates and fiscal stimulus (FHB Grant) the Governments did not use policy tools to cool down intense growth. They threw fire on it…and now, when it is going up in flames…you think the solution is more public debt and more fire, to prevent job losses. So you support Government speding during booms and busts…pretty much you just want the Government spending to be the economy?

    2) How would the Government prevent job losses – and which jobs should they prevent from being ‘lost’? This is a key weakness is any argument that Government can save the economy. Every time the Government spends a Cent, they prioritise one group over another. As has been shown since the Government started their attempts to ‘save the economy’ they have misdirected their spending from an economic point of view and have spent based on political calculations – (the re-inflation of the housing bubble being the prime example). So what gives you any faith that they will spend the money (money they don’t have) with any efficiency or public benefit. I cannot think of a worse example of Government interference than what has occurred in the housing markets. Anyone who has seen the Government act in this sphere must have rocks in their head if they still think Government spending is the solution.

    3) Finally – how bad do soveriegn debt concerns have to get before you realise that there is a limit to how much a currency can be trashed and bond yields ignored? We now have Greece, Ireland and Portugal all broke. The US and UK debt levels are horrible and recently, we have Italy, Spain and France all being sucked into the debt black hole in Europe.

    So although contraction in Government spending during a time of private sector contraction may seem illogical – it makes perfect sense when you confront three realities:

    1) the jobs and income that you think need to be protected through Government spending are not meant to exist – they are a mirage, they were created through the issuance of unsustainable credit growth. Facing this reality is the first step any MMT proponent or plain Keynesian must face. I am yet to hear a single rebuttal to this key point.

    2)The ability of the Government to properly target their spending is insane. How can a handful of faceless and nameless public servants be excpected to design stimulus packages that dont result in billions of wasted $$$ and even lost lives and destruction of property. The people you are turning to are clueless.. they have no idea how to create prosperity…they live off their prosperity and hard work of others.

    3) There are worse economic outcomes then a recession. Try the debasement of our currency, bankrupt Governments, civil unrest on a massive scale and a total destruction of the institutions of Government and society.

    So avoiding a recession at all costs is not admirable or sensible. Its short-sighted and naive.

  20. HnH said it best…

    “It seems to me a lesser evil to allow a US recession to take place and disinflation to take effect than to risk losing monetary credibility altogether, engendering a worse recession as markets panic that the Fed is out of bullets.

    That may seem a crazy idea but I reckon that’s what we’re coming to. The institutions that govern the liberal market system are slowly being drawn into the collapse.”

  21. Stimulus dreaming:

    The first round of mega stimulus globally has run its course.

    The order of firing for the toilet bowl cylinders is (2nd round) EU, USA and China. Slowing the descent into the bowl.

    The order and timing are of utmost importance. China went early and hard in the first round.

    The EU is dithering for two major reasons. One is seeking concessions from other parties. Two, it is caught up in internal power struggles over the EU itself.

    If global momentum and confidence is not restored by the EU moving decisevely now, all could be lost. Focus needs to be pushed towards action, otherwise people will focus on negative issues leading toward inertia.

    Australia was very fortunate in its own stimulus package for two reasons. One, it went early and bridged. Two,the bridge performed until the Chinese stimulus kicked in hard. We were a major early beneficiary of China being first out of the blocks. Slingshot booster trajectory.

    China will not, repeat not, go first this time. They will demand concessions and these will not be met.

    So expect more financial storms and burnouts from dislocations in both order firing and timing. The EU will not have its shit together in time. This does not bode well for Australia, or commodities in the short run.

    Wait for the real dislocation down the track if the USA has to go first with QE3 in 3rd Qtr.2011. Already, Bernanke’s portfolio balance channel effect is under pressure of total erosion.This will engender both bank down spirals and increased currency volatility and dislocation.

    So the EU is courting CreditAnstalt contagion consequences again. Where’s the effer with the fat finger when you need him?

    Same old, same old. We get fat heads when we need fat fingers. What’s new?

    • +1, an interesting perspective…..I like the toilet bowl analogy. Perhaps we here in Oz should bring back John Howard as we slide down the side of the bowl. I remember someone once referred to him as the ‘unflushable turd’.