Stop whining, start printing: VIC lockdown $12bn nothing burger

Advertisement

Via Scummo:

Combined with the damage of the stage three lockdown, it will cost the nation $10 to $12bn overall.

“This is a heavy blow, a heavy blow: 80 per cent of this economic cost is expected to be in the affected areas of Victoria, of around $6 billion to $7 billion in that state,” Mr Morrison said on Wednesday.

“The remainder represents a preliminary estimate, and I underline that, of the broader impact of confidence in other states and supply chain impacts from the shutdown of certain industries in Victoria.”

No, it isn’t. It’s nothing. Just print $12bn and shove into the economy via stimulus various. The RBA will buy it:

Graph 6: Bid-Offer Spreads

Given that the underlying cause of the market dysfunction was an urgent need to sell bond holdings and raise cash, the Bank decided to step in and provide the market with some liquidity. We did this by offering to buy government bonds at auctions. For each auction, we announced the amount we would purchase, which particular bond lines we would be willing to buy, and let counterparties bid to sell those bonds to us. The bonds we actually bought within that suite depended on the bids at auction, whereby we purchased those at the lowest possible prices (highest yields).

The choice of which bonds we offered to buy, and the overall amount, was informed by a number of sources including liaison with market participants, the AOFM, and the state and territory government borrowing authorities. We also assessed the extent of dysfunction based on some of the indicators I mentioned earlier, including which bonds appeared most mispriced.[8] The auction results themselves were also informative for subsequent auctions. For example, at some auctions we received a lot of offers to sell bonds, and those offers were priced ‘to sell’ (that is, they were offered at yields above mid-market levels). That was a good indication that there was an excess stock of bonds in that segment of the market clogging up dealer balance sheets. In such cases, we conducted further auctions in that part of the yield curve within quick time. On the other hand, if an auction did not receive that many offers, or the pricing we received was relatively unattractive, this indicated that there was no large supply-demand imbalance and, therefore, no pressing need for further auctions in that part of the curve.

The Bank’s purchases have had the intended effect: as we purchased bonds the imbalance of supply and demand was redressed. This was evident in a decline over time in the volume of attractively priced offers to sell.[9] It was also evident in other measures, including bid-offer spreads, mispricing along the yield curve, and the ability to trade in futures without moving the price. These all improved, to be close to pre-crisis levels. The general improvement in financial sentiment – aided by the range of other policies, both monetary and fiscal – is also likely to have played a role. In any case, since late April we have scaled back purchases significantly and have not needed to purchase any bonds for some time. We stand ready though to buy bonds if bond market conditions deteriorate significantly, or indeed, if needed to achieve the target of around 25 basis points for the 3-year AGS yield.

Advertisement

If it wants, it can later just cancel the liability. DEFICITS ARE NOW IRRELEVANT.

Go for virus elimination. Monetise the virus!

About the author
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.