Recessionberg is doing a Tony Abbott to the economy

David Bassanese has a whinge about the RBA:

…so far at least, lower official interest rates have gone down like a lead balloon with households and business. Key measures of both business and consumer confidence are now lower than before the first RBA rate cut. Retail sales are still barely growing, and anecdotes from retailers remain relatively downbeat.

These results are even more disappointing when one considers the federal government has also showered middle-income Australia with an extra $1000 in their tax returns.

It seems many appear to have concluded that if the RBA is cutting rates to below what were once described as “emergency” levels, the economy must be experiencing an emergency. It’s time to tighten the purse strings.

In other words, rate cuts are having a perverse expectations effect on the economy.

Really? The RBA only controls financial conditions not the economy, which is much more directly controlled by government spending, as we have seen over the past year with fiscal adding all GDP and jobs growth.

If we look at consumer surveys, financial conditions are booming but faith in the economy has completely diverged in an unprecedented manner:

In short, consumers can get debt, they just don’t want it. I’m yet to meet an Aussie that doesn’t love a rate cut. But they sense economic trouble is here or coming. This raises questions not for the RBA but for rictus treasurer, Josh Recessionberg:

  • consumers demonstrably have no faith his cut fiscal spending, household borrowing economic strategy;
  • probably because rates are already at effective zero and they are already so indebted;
  • they can see and feel international trouble brewing;
  • they haven’t had a pay rise in seven long years and one is not coming;
  • house prices remain a long way down in most areas;
  • and they have a Government so focused upon its own internal mythos that it is blind to their suffering.

Tax cuts are very predictably doing squat in this environment, other than aiding deleveraging.

The consumer needs a draught of positive, nation building, fiscal spending that at least reassures her that the Government has her back. Something like, say, the NBN. Only good.

Doesn’t anyone in the Government remember the lesson from Tony Abbott’s disastrous 2014 Budget? Small government tight-fistedness only makes things worse in a deleveraging period.

It would do well to remember the political chaos that followed.

Houses and Holes

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 fouding 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.

Comments

  1. proofreadersMEMBER

    “I’m yet to meet an Aussie that doesn’t love a rate cut.”

    You’ve never met a saver or a retail depositor, of which there are many?

    True, I guess they are to be despised in debt-junky Straya and banks don’t need retail depositors – in the end, offshore wholesale funding and the RBA with its CLF and QE can fund in a canter our “unquestionably strong” banks.

    • I covered this yesterday.

      There are basically no savers in Australia except those people who are saving for a house. And those guys want low low rates (because they are morons).

      So Dave is right – everyone loves a rate cut.

      • I think Martin North identified 3 million people that relied on term deposits etc for their cash flow. When interest rates go down they just spend less.

      • Well I must be the only saver, saving for a home that despises rate cuts because it means another 6-7 years of my life paying a mortgage when prices go up by 100-200k each time…

        Oh and as Fitzroy says, ever since they started cutting rates I’ve been making a solid effort to save even harder and spend even less. Why? Because I know trouble is brewing and I want to have as much saved as possible for when the opportunity arises.

        I hardly give a Shyte about Fraudenberg tax cut. $1000 doesn’t touch the sides.

        • You’re in a tiny minority, so you basically don’t count.

          Think of yourself as a goldbug, say, or a sovereign citizen theorist or a vintage car collector … those sorts of fringe dwellers don’t get considered when monetary and fiscal policy is set. They may as well not exist.

          So Dave is right – everyone loves a rate cut. Everyone who counts.

        • According to my logic, if you are saving for a deposit a significant rise in interest rates is indeed what you want. Your deposit grows faster and house prices don’t. High enough and house prices could even start falling.

          • This is of course correct, which is why I hate rate cuts. If interest rates were 7% I could almost live off the interest payments each month..

          • SoMPLSBoyMEMBER

            Right on SaCo!
            At 7% your money doubles from compound interest in about 10 years.
            At 0.15% ( Mega bank savings rate) it takes 480 years!

          • Of course the amount you can borrow falls drastically as rates rise, and your existing equity if already a property owner falls even faster.
            so it’s all swings and roundabouts isnt it.

            @Gavin.
            If interest rates were 7% and you were living of interest your capital would be being inflated away quite rapidly by the corresponding inflation, wouldn’t it?

          • Dom – who is better off in Zimbabwe and Argentina, those who owned houses or those who rented?

            How do you think that experience might translate to Australia?

  2. Speaking of the LNP’s internal mythos…

    Apparently ScoMo got torn to shreds by Alan Jones and his callers yesterday re: farmers, being arrogant, and generally just mostly projecting and doing not much….

    I’d like to see ScoMo and his government succeed by good and fair governance, but I think he’s had this coming…

    • Yeah nah. Scumo’s got a plan mate. Going make Australia even more vibrant to increase that GDP number. He doesn’t want you to be stressed about it. He’s not stressing about it. Everything is going good.

      • Hey, is it possible for the average Greek to buy a house cheaply in Athens?

        Genuine question.

          • Ok. That’s nice for the Chinese.

            But can someone answer my question please – following their monstrous recessions and ongoing economic calamity – can the average Greek now go and buy some cheap housing?

        • You’re missing the point here. You cannot isolate house prices in a recession torn country because capital is global and it flows across borders easily.

          Total Chinese banking assets in the year 2000: $1 trillion
          Total Chinese banking assets in the year 2019: $55 trillion (according to Kyle Bass)

          All that newly created money (debt backed) has to go somewhere. Even the Athenian property market.

          But here’s the thing, China is cooked – those banking assets are not growing from here. Look down and you’ll see the future. Prices everywhere, from Melbourne to Athens and Paris to Vancouver sit aloft a mountain of worthless fiat money. A credit bust of epic proportions is dead ahead. If you can’t see that then you don’t understand how this works.

          • Of the answer is “no”, I think that might be very instuctive in forming expectations of what might happen to affordability of Australian houses, too.

          • Bourne Ultimatum

            U speak as if $55 trillion were some sort of hard limit. Why not $80 trillion? $200 trillion? More? Your argument seems to be this number is so big it couldn’t possible get any bigger. I assure u it can…and it will. The political will is there.

          • Well, right now Peach I’m seeing plenty of 1 and 2 beds on the market for under a 100k and a Penthouse 4 bedder with views of every Grecian antiquity for just over 630k.

            Your point?

          • @Bourne
            I really don’t think you understand how this all works.

            Money cannot be created out of thin air without consequences and the larger the number, the closer you come to the day when those consequences will be realised — that said, I realise there are plenty of people out there who think money can be created ad infinitum with no consequences at all. Never mind.

          • The consequences are greater asset values and more money for the rich. There are consequences – its just a question of if you create money forever who bares them (Hint: The people asset and debt rich are the winners in a monetary expansion which is a lot of rich people).

          • @Dominic
            “Money cannot be created out of thin air without consequences”
            Actually fiat can, thats kind of the point. It will cause significant wealth redistribution from current holders to the creators of the money, but you can keep doing it forever.

          • Actually fiat can, thats kind of the point. It will cause significant wealth redistribution from current holders to the creators of the money, but you can keep doing it forever.

            Ie: it has consequences.

          • @bjw
            With respect, while money can be created out of thin air it cannot be done so sustainably. Ask the citizens of Zimbabwe (twice in recent history), those of Venezuela and those of Weimar Germany. Indeed, inflation in Argentina is extremely high right now too — not yet hyper inflation but enough to floor the economy. All the result of money creation from nothing.

          • Dom – who is better off in Zimbabwe and Argentina, those who owned houses or those who rented?

            How do you think that experience might translate to Australia?

          • Peach – you’re undoubtedly better off holding property than cash (given only the two choices).

            However, if you held your savings in gold you would be colossally better off relative to the above.

            In the Weimar melt-down there are stories of people accepting an ounce of gold in exchange for their home.

        • You really should have done your homework before piling on:

          https://rightmove.co.uk/overseas-property-for-sale/Athens.html

          Your challenge, should you choose to accept it, is to locate ONE single unit in the absolute sh1ttest part of Sydney for under 100k.

          I’ll be kind – I’ll give you a couple of years to get back to me. Given we’re still in the teeth of a dead cat bounce it’ll give you a decent chance.

          • I didn’t pile on, I asked a question.

            My second question is how much does a nurse earn in Athens.

            I’d like to compare wage multiples, see. To see where a decade of recession and 13% unemployment might get us.

          • @Gav – right, so that link says average salary is eur750/month. That’s about USD$10,000 annually.

            Those “cheap as chips” $100k apartments are actually 10x earnings.

            It’s worse than I had thought….which is pretty unusual in itself.

          • There are apartments for as little as 40k. I don’t see why ‘astute investors’ aren’t steaming in there. I’ll write to the good folks at Domain and ask the question. It may be because they don’t have an economy of much substance whereas we …. oh wait.

          • As for salaries – not sure that junior nurses are the main driver of the economy over there but I’ll take a wild swing and say that the average adult salary (all jobs) is probably in the 25 – 35k (Euro) ball-park.

            Govt jobs are the benchmark as 90% of people in Greece are seemingly employed in the public sector — a pretty dynamic economy, as you can imagine 😉

          • Dom – Gav’s source says salaries are $10k USD. There’s a big difference there…. quite an important one – about three-fold.

            Suspect Gav’s number is closer to the truth than your guesstimate.

          • Peach- one of my closest mates lives in Greece. When I was last staying with him I was chatting to a relative of his – a teacher in Athens. Admittedly in his ’50s. He was earning 35k + bonus or 32k + bonus. Something like that. All Govt employees get paid a Chrissy bonus of one month’s salary. The cost of living in Greece is very high. $10k (AUD equiv) is highly unlikely — you get paid more on the dole here than that.

          • My Googling yielded this” Euro 1,060 average (gross) and, salaries in Greece are quoted based on a 14 month year i.e. 2 months salary is paid as a ‘bonus’ at the end of the year. And …

            “A lot of press has been given to the outrageous public sector salaries …. public sector workers have, on average, salaries that are 40% higher than the private sector. And ..

            … salaries of the staff of the Greek parliament are 3,000 euro (on average), and …

            private sector wages were forced down between 22% and 32% post the Greek crisis in 2012.

            Based on the above I get an average gross salary in Greece of close to 15k euro = $24.5k AUD