Now Treasury confesses

It’s Treasury’s turn today to confess how they got their economic forecasts so wrong over the past eighteen months. Treasury head Martin Parkinson describes the Treasury’s errors at length in the attached speech. In short, they made the same errors as the RBA, over estimated exports, under estimated imports and assumed lot’s of capital gains from consumers who couldn’t wait to bid up houses and shares again. In short, the first part of the speech is an excellent sedative.

The second half, however, is quite interesting as Parko takes us through the macroeconomic management framework that governs Budget decision-making. It’s too long to excerpt but the discussion is attached between pages 9 and 18. I’m shocked to say that I pretty much agreed with Parko on all of it. A first for me!

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Houses and Holes
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  1. BWAHAHAHAH! im finding these confessions highly amusing today.

    “MACROECONOMIC POLICY FOR CHANGING CIRCUMSTANCES”

    What macroeconomic circumstances have actually changed? nothing! its just that these guys thought circumstances were going to change and they didnt.

    Should be:

    “CHANGING POLICY FOR UNCHANGED MACROECONOMIC CIRCUMSTANCES”

  2. If you don’t like long posts skip this one.

    However surely a statement on the budget and fiscal policy by the Secretary of the Treasury deserves some serious consideration. Especially more than ‘I agree with everything he said’

    The mind boggles as to what actual world these people in Govt and Treasury live in. It is some sort of fairy land far away from the life of those of us who live and deal with the real world every day and by necessity need to apply some common sense to our actions.
    One hardly can conceive of where to begin so I’ll just go through the speech as it was presented.

    Monetary policy is supported by a floating exchange rate which acts as a shock absorber that offsets some of the effects of global shocks on the economy and naturally adjusts in response to other economic developments.

    The supposed floating exchange rate does not act as a shock absorber in response to economic developments.
    The trade in the A$ and associated derivatives is some 140 times that required to cover all our imports and exports. It is ridiculous to suggest that it is mostly responding to trade balances etc. If that were the case our chronic CAD’s over 50 years would have resulted in a lower dollar and a balanced external account.
    Our exchange rate is being determined by forces far from this shore. Currently we have the situation where import competing businesses are being sent broke, some exporters can no longer compete, all in an environment of a chronic and severe CAD. So how is the $ acting as any damned shock absorber?

    But today Australia’s macroeconomic policy framework is an asset, an endowment, forming an important part of the economy’s productive base.

    There is not a single mention in the whole speech of a CAD, of the domination of foreign ownership of industries and resources; and the policies that have lead to this domination; of how extremely serious international indebtedness despite the massive and continuous asset sales.
    How the hell does anyone work out that our macroeconomic framework is some sort of asset. You have to love how all these economists who are in power sit around and piss in each other’s pockets!

     Unfortunately it is sometimes forgotten that this framework is in no small part responsible for the relative stability of Australian economic growth for the past two decades. This is despite Australia having faced three of the most significant — some may say the largest — shocksseen since World War II in the past decade

    This wonderful economic framework is also responsible for the massive private debt that is unsustainable. It is also responsible for the massive Foreign debt that is unsustainable. more importantly it is also responsible for the sale of everything that ought be developed by Australians for ourselves and our children now being in foreign ownership.
    Where the hell does this bloke get off with his self-laudatory baloney!

    All three shocks are well known, especially to this audience, but the way that Australia hashandled them should not be undersold
    In fact, our economic performance in the face of them has been nothing short of remarkable.

    The only thing that is remarkable is how a nation, with such massive natural resources, a well educated and hard working and originally intelligent people, has managed to impoverish itself to foreign ownership and foreign debt in such short a time.

    Inflation peaked at 5 per cent in 2008, just before the most dramatic phase of the GFC(Chart 5). At the time the cash rate was 7.25 per cent.

    Note in Parkos opinion interest rates at 7.5% are supposed to be high. What was the RAT rate? Inflation is 5%,average marginal tax rate is say 35%, so return on savings is ? negative!!!! Great!!! In a nation needing capital for investment in our own mines and industry we run negative RAT rates! great policy that is i must say!

    This rise in the exchange rate acted as an important automatic stabiliser. While the highdollar weighed heavily on some sectors of the economy — as it continues to do so — ithelped spread the benefits of the boom and shield the macro-economy from the shock byhelping to bring down the price of imported consumer goods. The alternatives — tighter monetary policy or significant and costly increases in domestic prices (that is, a real exchangerate appreciation driven by higher domestic inflation) — would have a different distributionof costs on the economy, and ones which are arguably less beneficial for consumers.

    Never mind that the damned artificial exchange rate, as set by hedge funds and foreign central banks, has destroyed whole sectors of our economy, the important thing is that consumers were able to buy things more cheaply!!!!!! Hells bloody bells!!!!!! Then we get more debt which in this blokes opinion obviously doesn’t matter!!

    Indeed, it is the success of the policy response that feeds perceptionsthat there was no need for the policy response itself. The problem here, though, is that noneof us can see directly what was avoided, although it doesn’t take much effort to look abroadand see what could have eventuated here

    The real problem is that this bloke has no idea what happened here. Obviously debts don’t matter. Foreign debt doesn’t matter. Selling every asset we have for short term consumption benefit doesn’t matter!

    In addition to the monetary policy response, fiscal policy was also used to support the economy. The Government used its balance sheet to support the effective operation of financial markets — for example, through guarantees for deposits and for wholesale debtsecurities — while also undertaking significant discretionary fiscal stimulus. Overall, thefiscal stimulus was forecast to increase GDP growth by 2 percentage points in 2009 and to detract around 1 percentage point from growth in 2010.

    Does this bloke believe in Jack and the Beanstalk? The fiscal stimulus was all plus? There was no debt associated with it? Who the hell is kidding whom? We have run a chronic CAD continuously for 50 years then we go and stimulate what? Buying motor vehicles…mainly from overseas…more debt! Pink Batts…mainly from overseas…more debt! Various cash splashes that ended up at hardly normal JB Hifi and places like my own business..more imports..more debt. Wages are paid…recipients go and spend it on new home appliances or cars…more debt…except much of it didn’t show up as more debt!!! Why not? Because, at the same time, we were busy selling off our mines to whoever would buy them so we could buy all this ‘stuff’

    The automatic stabilisers also supported the weakening economy

    The so-called automatic stabilisers are BS. What supported this economy was foreign debt and asset sales to foreign entities.

    With a significant shock to the Australian economy leading to excess capacity, combinedwith a globally coordinated fiscal response to the crisis — limiting leakage through theexchange rate — fiscal stimulus was expected to provide substantial support to the domesticeconomy.

    What excess capacity? If we had such spare capacity why didn’t we do something to turn it into production rather than set in place a set of policies that only resulted in more debt. More importantly the policies are designed to ensure we can never emerge from that debt and that it will just get worse and worse…and/or we just keep selling off the entitlements of future generations for our own base comfort.

    Furthermore, the dollar fell by around 30 US cents, improving the competitiveness of our trade exposed industries and, again, acting as a partial shock absorber for the economy.The rapid and significant response by monetary and fiscal policy, coupled with a wellregulated financial system and strong growth in Asia meant that Australia came through theGFC relatively unscathed. However, there was still work to do once the worst of the crisishad abated

    So the dollar fell by 30 cents to about, or still above, where it should be then we let Bernanke et al and various hedge funds push it up to where it damages our businesses and our people…but that’s OK. Aren’t we soooo smart!!! Our consumers can have more cheaper goodies and I can buy a new Beamer for the little wifie! cheaper!!! Bloody hell….how shallow can economic thinking be????

    an injection of fiscal stimulus is offset by an appreciation in theexchange rate and a decline in net exports, resulting in a multiplier of close to zero — this isstandard Mundell-Fleming

    Now fair dinkum!!! This just exemplifies how this bloke has no idea what he is talking about. Some other idiot in Treasury has written this and he doesn’t even see, in reading it, how preposterous a proposition it is! Fiscal stimulus gives an appreciation in an exchange rate? Now in a world so distorted by mega money printing anything is pssible. However a fiscal stimulus will TEND to produce a currency DEpreciation. You have more free cash in an economy you get more imports which would TEND to cause a depreciation in your currency.
    Where the hell did common sense go??????

    But as David has also noted:
    “for less open economies with low government debt like Australia, fiscal multipliers for temporary discretionary fiscal stimulus appear to be positive and sizeable.

    Hey David!!! Hey Parko!!!
    Maybe the real difference is that we have so much more natural resource assets that we have sold. Maybe it’s that we care a whole lot less about the future of our children and more about our own consumption that anyone else? Do you actually, in your total conceit, think we are so much smarter, so much more intelligent, than all the rest of the world???? For heavens sake!!!!!

    In short, the standard Mundell-Fleming theory appears to hold under a specific set of conditions, but when these conditions are relaxed discretionary fiscal policy has significantreal effects, and to suggest otherwise risks a triumph of ideology over experience.

    That would be alright if you considered the WHOLE experience. I’m all for practical ideas and reality.

    Ignoring all the debt you stupid stupid people have created is not reality!!!

    As I have already noted, the primary objective of fiscal policy, outside of extreme events likethe GFC, is to maintain the budget in a sustainable position from a medium-term perspective,while monetary policy should play the primary role in managing demand to keep theeconomy stable

    Stable for whom??????
    It won’t be stable for the younger people of this country who will be saddled with all the interest payments and dividends payable to foreign entities and nationals!!!!!

    Sorry to all and sundry. The conceit and lack of any care for our country and future community exhibited by all this lot really gets to me!!!!

    In an economy with alarge amount of excess capacity, stimulus measures should have a larger impact on activity.In contrast, where the economy is close to full employment, the net effect can be expected to be much smaller as the exchange rate and monetary policy offset the fiscal stimulus
    In an unbalanced economy with a chronic CAD the stimulus results in a large proportion of said stimulus ending up in the external account resulting in more debt and asset sales. If you ignore foreign debt and regard the external account as a free and unlimited source of funds…sure the statement is true! There’s also a tooth fairy at the end of the garden!!!!!

    Equally, small shifts in the timing of outlays can influence the measured consolidation whileleaving economic activity little affected. And where outlays which are predominantly spentoverseas are reduced, the domestic impact is minimal.
    Oh yes!!!! Just where in all this was this little particular gem exemplified. In fact they favoured outlays being spernt overseas as this reduced the inflation rate so we could have lower interest rates, more expensive houses so the young couldn’t buy them and more goodies for us!!! How much better could life get?

    In fact, if subdued growth in the non-mining economy results in further increases in sparecapacity, putting downward pressure on inflation, monetary policy is more likely to be aneffective remedy as these sectors are typically more sensitive to interest rates and exchangerates.

    Having banked heavily on China to keep inflation down in the past, now it threatens to exacerbate our inflatiuon we can ignore it and just ekkp on stealing from the prudent to pay for our spending. What an economic genius!!

    However, even total success in minimising overlap will not address the key challenge — the gap between the expectations of government held by the Australian publicand the public’s willingness to pay what’s required if those expectations are to be met

    Here he then criticises the populace when all along he has adopted policies of profligacy and given out the ‘no worries mate’ mantra….what an absolute hypocrite!

    The good news from Australia’s perspective is that we are not in the same boat, but wecannot assume this will always be the case. ,/i>
    Geez why not Parko…hell,we can keep selling off mines and industries forever…or so you reckon!!!!!!

    Parko! David! Some one in Treasury somewhere! For God’s sake…think man think! Or as per my question elsewhere in these pages ‘Do you not give a rat’s arse except to get out with your super duper super payout intact!

      • Hoe Jockey and Aony Tbbott

        Second that. Problem is these people live in a theoretical world – that’s why they have trouble trying to explain why things are going wrong in a model that does not allow this to happen. In the end, you just mould the problem to suit your outcome.

    • Well said flawse – was easy to distinguish between the waffle and what you wrote.

      One policy change that might make a difference is to do away with indexed pensions for politicians and government employees. Encourage them to save and think about the value of savings needed to support them beyond working years rather than their whole lifetime of head in public trough.

      I would vote for Greens if they adopted this policy and I had belief it would be implemented!

    • “The only thing that is remarkable is how a nation, with such massive natural resources, a well educated and hard working and originally intelligent people, has managed to impoverish itself to foreign ownership and foreign debt in such short a time.”

      Easy – we borrowed other people’s money and spent it.

    • Jumping jack flash

      Good post. Pretty much sums up my view of Australia’s macroeconomy for the past decade or thereabouts:

      1) Mining income comes in.

      2) Apply leverage from money borrowed from overseas banks.

      3) Service economy wheels turn around.

      4) Mining income flows out.

      Fantastic and sustainable? No?

    • nah, ive seen this before. if you post a novel the website goes into overload and turns everything into italics. i think you broke the website with that post above flawse!

      but i agree with everything you said.

  3. But today Australia’s macroeconomic policy framework is an asset, an endowment, forming an important part of the economy’s productive base.

    The italics mistake is here if anyone can fix it!

  4. There is no focus on size of private debt other than implication that public’s desire to reduce debt is a negative for growth – implied as being bad.

    Both RBA and Treasury need to take a close look at the position of Spain back in 2007 and their trajectory since as it then had low Government debt. Australia is heading down the same path as all other advanced economies by discouraging savings with reducing interest rates – hence increased private debt. Surely there are enough examples that show lowering interest rates to zero does not work.

    Only USA can manufacture money that denominates its debt. Australia has a significant portion of its debt denominated in USD so cannot use the money manufacturing path to sustainability.

    Also who in hell ordained a 2 to 3% inflation rate was desirable. Savings should retain their value, not suffer arbitrary erosion. The whole focus of policy is to encourage debt creation to increase the transfer of wealth from the productive economy to the creamers.

    • Yes, that is the key part of the speech. The omission of any discussion of private debt and the implications of a desire by the public to reduce it.

      Clearly, treasury finds the notion incomprehensible and thus you can be certain they will do all they can to fight the ‘strange and unnatural desire’ to deleverage.

      Interest rates will continue to fall to zero and bread crumbs will be sprinkled on the carpet to a financiers office to attract the young and unwary.

      The usual LIRCC (low interest rate cutting cultists) suspects will applaud and look astonished when it all goes wrong.

      But they are well adept at directing attention elsewhere so dont expect any of them to carry the can.

      It will be seen as the fault of those sucked in by easy money policy.

    • “Only USA can manufacture money that denominates its debt. Australia has a significant portion of its debt denominated in USD so cannot use the money manufacturing path to sustainability.”

      Sorry but that is just not correct.

      Australia as a whole has very little unhedged foreign currency liabilities:

      http://www.rba.gov.au/publications/bulletin/2005/dec/pdf/bu-1205-1.pdf

      Fact of the matter is generally any developed country that has its own currency and a liberalised capital account can benefit from foreign seignorage.

      The U.S. is only special in that its currency is effectively the global reserve currency and as such the nation can effectively borrow several hundred billion dollars for no cost (represents bank notes in circulation in foreign countries).

      • The current private bank foreign currency liability is AUD368bn. It is off a high of AUD429bn in 2009. Now when the exchange rate is down to USD0.46, as it was in 1999 during the last commodity price collapse, the current figure becomes AUD800bn. With the consequential fall in GDP that will be around 80% of GDP.

        That covers private bank liabilities. There are also business loans and State loans in foreign currency.

        Hedged? Who is the counter party. These can only be counted on when the financial system is solvent!

        RBA efforts to encourage more debt will bring australian deposits out of banks causing more offshore funding.

  5. Diogenes the CynicMEMBER

    Thanks I saved that one for evidence I can use later on. The success of the policy response to the GFC will on a longer timeframe look like the panicked waste of a panicked government and Treasury department.

    It is quite backwards looking, the GFC is still unfolding and we are yet to really have our turn being crushed by our ridiculous houses n holes obsession.

  6. JunkyardMEMBER

    +1 one to all the comments. I too am finding these “confessions” laughable.

    These days forecasts from the RBA and government are 99% selling a positive spin story to the market, and 1 percent predictions based on hard macro data.

    • Closing question on 7.30 Report last night!!!!

      CHRIS UHLMANN: Alas we have to finish but one last thing, have we wasted the mining boom?

      DR KEN HENRY: That’s a question for future generations.

      In other words…”Yep! But who gives a rats as we’ll be OK! I look good. The kids can suffer for the waste we talked about and we don’t care!”

      That one goes up there with his reason for his growth predictions coming out of the GFC crisis.

      • Jumping jack flash

        The bloke should have said “it depends on your definition of wasted”

        Then went home to count his property portfolio and imported trinkets.

    • Jumping jack flash

      “These days forecasts from the RBA and government are 99% selling a positive spin story to the market, and 1 percent predictions based on hard macro data.”

      So at least they’re doing the same job as every other central bank on earth at the moment.

      Coupled with the soon arriving ZIRP, it won’t be long until we’re out of the woods.

      Saints be praised!