by Chris Becker
Here’s an insight into the cognitive dissonance that is the RBA Board, where it can’t understand “why the economy is doing so well” yet has to cut rates to all time lows while governments run up deficits.
Via Forexlive, here’s part of a transcript of an interview by former (phew!) member of the RBA Board, John Edwards:
On whether the RBA is reaching the limit on what it can do:
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there’s a huge amount more it can do if you had to. You could do what is happening elsewhere. You could buy bonds, you know, quantitative easing, you can buy mortgages, you can intervene directly in the exchange rate, you could go to negative interest rates if you wanted to, but we don’t, because actually, the economy is performing quite well.
On reducing the budget deficit:
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I don’t think the Government has a convincing plan to substantially reduce the deficit within a reasonable timeframe; that is, it’s current plan depends upon a very, very big increase in personal income tax collections of the order of 20 per cent over the next three years and that really involves something like a 10 to 15 per cent increase in the personal income tax paid by all employees and basically I don’t think that’s on.
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It’s a ludicrous situation now where Australia has – as a share of GDP, our cumulative deficits since the Global Financial Crisis are far bigger than the ones we had after the last two recessions in Australia, yet we hadn’t had a recession.
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Our deficits today nationally are bigger than they are in Italy or Ireland, Portugal, Greece – countries which actually had very savage downturns in the Global Financial Crisis. This is just ridiculous.
My emphasis added.
When a (former) member of the RBA doesn’t understand the structural demand problem that is the Australian economy – which requires federal government deficits to backfill the demand gap – that is ridiculous.
It is also ridiculous that he sees no issue with the mammoth build-up of private debt and record house prices, which is the fundamental thing holding-up household demand, and is by definition unsustainable.
Finally, it is debatable that a small economy like Australia, which is running a large CAD and is highly reliant on offshore funding, can actually employ all of the unconventional central bank measures adopted in large countries/regions like the US, Europe and Japan.
In theory it can, but in practice, the Australian dollar is not a reserve currency nor a safe haven.