Wayne Swan wrote in his weekly economic note on Sunday that there are all sorts of crazy assertions out there about the Australian economy. And “only with a firm foundation of facts,” the Treasurer wrote, “can we have a considered and responsible debate about the economic opportunities and challenges we face as a nation.”
The Treasurer has maintained this line for the past year or so as a key plank in his economic narrative for the nation. He has done so as his Treasury has repeatedly missed to the downside its forecasts for Budget balances for the past two years and by very wide margins. Yesterday it missed again, with a small admission that further cuts will be required for Australia to reach its surplus. The reason this time is the falling terms of trade which the Treasury estimated would be down 5.5% but is looking like at least double that.
The small admission means another $10 billion or so in savings will need to be found.
In his Sunday note the Treasurer went on: “We hear absurd claims that there is rising sovereign risk in Australia, that the investment pipeline has suddenly run dry and that our economy has stopped growing. Such claims are not just plain wrong, they are an insult to the hard work and determination of our workers and our businesses. What’s more, such claims have the potential to undermine confidence in our economy.”
Plain wrong. An insult. Strong words. Clearly Mr Swan sees bears are under the beds, spooking fair-minded Australians and de-stabilising the Commonwealth.
But is this attack either right or useful? It has become fashionable among a small but influential group of commentators to refer darkly to a menace known as “the bears”. They are never named. Their arguments are rarely unpacked and examined. They are simply written off or abused as the hirsute monsters of economic myth.
From commentators this is perhaps understandable. It’s a rhetorical trick to cover a lack of thoroughness in “bull” arguments and to entertain. To enrage the reader and enlist that anger against some secret nemesis makes great copy. Just ask Michael Pascoe.
But is it a good line coming from the Treasurer, our top economic advisor? Last week, a conga line of Australia’s best economic thinkers, including Ross Garnaut and Bob Gregory, both legends of Australian economics, warned about a difficult adjustment ahead for the Australia economy as the mining boom winds down. The RBA is also preparing to slash interest rates again, presumably not on economic strength. Are these men and institutions ‘bears under the beds’?
No, of course not. The Treasurer is also engaged in a rhetorical joust which leaves us to wonder why?
There is an economic argument for “think positive” rhetoric which aims to keep up our “animal spirits” as John Maynard Keynes described it. If we all become too risk averse there is a danger of falling into a negative feedback loop in which the desire to deleverage becomes a self-fulfilling prophecy as asset prices fall. This is a danger for Australia given how overvalued our assets are.
But, by the same token, is it useful to ignore legitimate risks? To bash and mash them into a simplistic binary of bears versus bulls so that the truth is overwhelmed by irrationality?
Clearly not. In fact, good investment is a battle to keep your emotions completely out of the fray. At Macro Investor we go further still. We actively dissuade ourselves from subscribing to either a “bearish” or “bullish” view of anything. Rather we address every investment on its merits. Experience has taught us that to do otherwise simply costs us money.
So, I have to ask, if it’s a good idea to keep your emotions out of your investments, it is surely equally the case that it’s best to emotions out of your economy? Moreover, the majority of Australians (or the marginal Australian) currently and rather sensibly now agree with this proposition given that they have returned to savings habits that existed for many decades before the irrational exuberance of the last business cycle (which involved a big urge to leverage up). But eve so, Australians haven’t given up on borrowing, as our banks profits still attest. Lending levels have stabilised at low levels of growth that are allowing a slow deflation of our past excesses. In the community there is a quite reasonable balance of risk and reward assessment.
The Treasurer and his ever optimistic Treasury officials might take note.
David Llewellyn-Smith is editor of Macro Investor. Macro Investor is offering a 21-day free trial to help you keep your emotions in check as you make money on the upside and down. This is on op-ed running in the Fairfax press today.
