Introducing the Recessionberg stupidity index

There is no science to it. But there’s common sense. Jason Murphy at News kicks us off:

Australia’s economy is in a spot of bother. Let us count the ways:

• A trade war threatening the economies of our two biggest trading partners.

• Monstrous levels of household debt combined with pitiful wages growth.

• Unemployment and underemployment stuck too high to generate wages growth.

• A Reserve Bank slashing interest rates to record lows and talking about bringing in quantitative easing.

What we need from the government is a bit of oomph. A spending push to keep the cycle of earning and spending going. Instead we’re going to get … a surplus? How can that possibly be a good idea?

Australia has an absurd surplus obsession based on a misreading of what former Treasurer Peter Costello did in the 2000s. Costello was Treasurer during a time when money was coming in hand over fist. So much money that Treasury was continually surprised how much there was.

…Peter Costello and his Prime Minister John Howard were not stupid. They did not run a surplus in the bad times. That would be insane. They ran a surplus because the times were bountiful. They presided over a giant and unforeseen run of economic good fortune.

In the most recent Budget, though, Australia’s Treasurer announced a surplus. The 2019-20 surplus is projected to be $7.1 billion, and with the recent high price of iron ore, it could be even more.

Let’s just say it. This is the wrong time for a surplus. The wrong time for the government to be taking money out of the economy and using it to pay down debt. The economy needs all the money going around it can get. This is the worst surplus ever.

That is about right but a few points leaven things:

  • There are benefits of running said surplus when things are weak. Such as sinking the currency. The question is how weak do want to be and how much juice do you want to feed into asset prices?
  • Howard and Costello did run surpluses in bad times. See the Asian crisis and Millennium recessions:

That said, they did so as domestic demand boomed with a gale of household debt accumulation underway.

Moving on, Kevin Rudd also puts the boot into Recessionberg at the AFR:

The risk of recession in Australia next year is therefore real. The question for government is, are they prepared to prevent it?

Australia should reflect carefully on the lessons from a decade ago when we last faced such a challenge: which of those conditions still exist, which are different, and what new approaches may be necessary. In 2008-2009, we faced the reality of a global financial crisis, collapsing financial institutions, global recession and the possibility of a second global depression.

…The government will claim it’s introduced significant tax cuts, the Reserve Bank of Australia has reduced rates and the Australian Prudential Regulation Authority has relaxed the criteria for bank lending. These, however, are already factored in. The government will require much greater policy dexterity to anticipate and respond to the recession risk.

It’s all about Kevin as usual but he does have one point. Recessionberg will be blamed if he overcooks the surplus as growth crashes, and that is where we’re at.

So, how do we measure Josh Recesionberg’s ineptitude? I’ve drawn up a handy chart based upon next week’s GDP numbers:

The chart can be read this way:

  • If we see a Q2 growth number of 0.2 then we’ll see annual GDP meet the slowest level since 2000, almost twenty years, an impressive achievement I’ve labeled “oaf”.
  • If we see a Q2 growth number of 0 then we’ll see the lowest annual GDP since 1992, almost forty years, a startling achievement I’ve labeled “idiot”.
  • If we see a Q2 growth number of -0.2 then we’ll see the lowest annual GDP since 1992, almost forty years, as well growth deep into stall speed at 0.7%, a spectacular achievement I’ve labeled “imbecile”.
  • Finally, we see if we see a Q2 growth number of -0.4 (where it is currently tracking) then we’ll see the lowest annual GDP since 1992, almost forty years, as well annual growth at the verge of recession at 0.5%, a singular achievement I’ve labeled “simpleton”.

It must be remembered that Recessionberg is managing an economy enjoying an outrageous external boom, literally flooding the economy with a river of cash, as the global business cycle tilts very precariously towards recession itself. This sets us for a an external shock of huge proportions landing on an economy already at stall speed and losing altitude.

Why would Recessionberg act in this manner? John Hewson rounds us out:

The echoes of Trump’s triumphant rhetoric in our government’s insistence that our economy is strong and our economic fundamentals are good are particularly eerie. Both are essentially running a marketing, rather than a well-defined policy, strategy. As economic circumstances begin to run against them, exposing the hubris in their rhetoric, they see their challenge as to how best to embrace and explain reality?

…Our growth has collapsed over the past three quarters. Wages are flat, job insecurity is mounting, house prices are falling, mortgage stress is significant. We have one of the highest levels of household debt in the world and a majority of households are living payday to payday.

Our economy is one of the most exposed in the world to another global financial shock, a sustained trade war, a collapse in global trade and commodity prices, and/or a global drift into recession. Yet, the government has legislated tax cuts through to almost the mid-2020s, while inconsistently committing to deliver budget surpluses and the repayment of debts for a decade or so, and the RBA has admitted to little capacity to respond.

Not quite. Like Howard and Costello, the Recesionberg has a clear strategy. The problem is it hopelessly wrong for the times. The Morrison Government’s clear objective is to crash interest rates as fast as possible to drive a new house price boom and damn the lifeboats!

That’s what you get when you elect a real estate agent prime minister and a card board cut out as treasurer.

David Llewellyn-Smith

David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.

He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.

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  1. Can I ask a silly question: how on earth does running a surplus ‘weaken’ the currency? It should be the opposite.

    • My basic understanding is that running a surplus (pumping money into the economy) and lowering interest rates can both be used to stimulate the economy. If the government chooses to run a deficit instead, then all the pressure is on the RBA to stimulate through rate cuts. As rates go down, so does the demand for our dollar (because you get less of a return for holding it).

      • Thanks for replying. I’ll use your ‘take’ to re-work an explanation. A surplus is actually the country saving money (ignoring private debt) which should be a positive for the currency. I guess, looking at your explanation, the lack of stimulus from the Gubbermint spending those saved taxes, forces the RBA to lower rates instead, which weakens the currency. It’s utterly perverse, because you have two conflicting forces, but I think that’s the nub of it.

        • I see what you’re saying, but I think the idea that a government saving money is positive for a currency is flawed. It’s not like people holding Australian dollars are relying on the Australian Government to pay them back or something. Even if this were the case, Australia is waaaaaay down the list in terms of Government Debt to GDP (like 70th or something). Maybe if the government spends a bunch of money and a lot of it flows offshore that could be bad for the currency, but otherwise I think if it’s stimulating the economy that’s a net positive. Happy for anyone with a better understanding to jump in here!

          • I think the way you’re looking at this situation is bassackwards: budget deficits are net negative for the currency because the Govt is generally borrowing money to spend in an unproductive fashion (a surplus is the opposite because it’s a net saving for the country i.e. money isn’t being wasted). The whole Govt spending ‘stimulates’ the economy narrative is pure nonsense — if there were any truth to this then the Govt would simply borrow 5x, 10x, 20x (pick any large number) what it does currently and ‘boost’ the economy. Government debt is little more than ‘deferred taxation’ meaning that as your deficits rise so the future economic growth must dwindle – and a surplus is the exact opposite.

            Ultimately, though, a currency’s value is just a function of supply and demand. When money supply growth rates are high demand for the currency generally wanes and vice versa. Right now the AUD is offered only because, despite very low money supply growth rates here, the RBA has signalled it is sending rates to Davey Jones’ locker (and considering QE) i.e. attempting to boost the money supply. The market has said: “Okay we see what RBA policy is going to be, going forward — you want to trash the currency. No dramas, we’ll sell up and go elsewhere.”

            It’s not rocket science.

      • You have it the wrong way round – if the government is running a surplus they are taking money out of the economy. Or to put it perhaps a better way they are not stimulating the economy by spending. Many would say this is a bad idea if the economy is weak (like it is now).

  2. Cutting to the chase, will the Frydenberg “Surplus Recession We Had to Have” be enough to gift the Treasury benches to Albanese’s Australian Lazy Party? I wouldn’t bet on it, not just yet.

    • I guarantee it will put Recessionberg and ScoMo in a clear election-losing position but I expect ALP to stuff it up in the campaign as they appeal to left faction/Greens with open borders nonsense or some crusade about men being entitled to have vaginas.