Budget shoves RBA to event horizon of deflation black hole

Leith has nicely summarised the new budget:

In normal times, I would not have any major concerns with this budget. It is a fairly conservative affair with not too much pork, save for some excessive wage subsidy giveaways to business.

The problem is, these are not normal times. This is the biggest economic contraction since the 1930s Great Depression. And viewed in this light, the budget badly lacks ambition.

What stimulus there is focuses on the supply-side at a time when Australia already faces a gigantic output gap and excess capacity everywhere.

Meanwhile, the budget contains no meaningful measures to stimulate demand, which has collapsed:

It should have included measures that boost income support to the unemployed (e.g. by permanently lifting JobSeeker), as well as provided traditional Keynsian stimulus via big investments in public building works and infrastructure, among other things.

Because of these oversights, the Australian economy will face a longer and deeper downturn than necessary with stubbornly high real unemployment, widespread business failures, and increased homelessness.

Leith also described the budget as having “no real surprises” which is true in news terms given it was all leaked, but it is certainly not the case in terms of policy history.

The Depressionberg budget is in no way reflationary or Keynesian. It is a supply-side and deflationary vortex. To wit:

  • the deficit itself rips out 5% of GDP from 2020 to 2021;
  • $26bn of the remaining spending is accelerated investment incentives that will, basically, automate labour;
  • there is almost no added infrastructure;
  • JobKeeper and JobSeeker are done;
  • the income tax cuts are still poorly targeted and far too small, and
  • everything else is window dressing as immigration goes into full reverse.

Keynesian reflation is the opposite. It is demand-side targeted and all about government spending because the private sector either won’t or can’t. Consider the post-GFC Labor budget which unleashed:

  • a $50bn NBN;
  • another $50bn in various building projects.
  • $20bn in income supports, and
  • huge house price and building incentives, plus;
  • a mass immigration surge.

In an economy two-thirds the size that had only a brief interruption to a once per century mining investment boom. It is true that the deficit is much larger this time around but most of that is because the shock was much larger and the initial income supports were so huge. They are going, going…gone.

The inescapable conclusion is that by comparison, and in absolute terms, Treasurer Depressionberg has unleashed a businessomics budget that will:

  • accelerate structural adjustment as business returns from COVID-19 to discover that it needs half of the staff;
  • leads to greater automation, and
  • accrues the benefits of such entirely to capital amid a gigantic output gap.

This is not all bad given what Australia needs, and has needed for a decade, is a structural adjustment from a private debt-led economy to a competitiveness-led economy. But, make no mistake, this budget will not support households through that transition. It will crush them into it with Thor’s merciless deflationary hammer.

Which brings us to one other inescapable conclusion. This budget is Deflation Phil Lowe’s worst nightmare. He will have to try to fill the giant aggregate demand suckhole just as he runs completely out of conventional ammunition to do so.

We know that the RBA does not want this job. It has waged a multi-year campaign to get fiscal to lift aggregate demand but now it faces its Waterloo. Either the RBA continues its deflationary War of Stupid, as I have called it, refuses to ease and all of Australia tips over the event horizon of a yawning demand-deficit black hole, or it breaks and goes all-in on filling it.

It will be the latter. Every single unconventional policy tool will now be on the table including:

  • operation twist to buy debt out the curve;
  • QE proper as it wades directly into sovereign bond markets;
  • perhaps most vitally, expanded state-level QE to boost demand-side stimulus at that level;
  • a dramatically expanded and relaxed TFF that buys much more bank debt to drive down mortgage rates;
  • negative interest rates;
  • and anything plus everything it can do to lower the currency.

If it does not do all of these things urgently then a deflationary singularity of inescapable velocity will suck in wages, real estate, and every other Australian price you care to name, to obliterate and spew them back out as low-cost gamma rays that irradiate households.

The conclusions for markets write themselves:

  • buy Aussie bonds;
  • sell Aussie stocks;
  • most especially, sell Aussie banks as the ZIRP margin squeeze goes nuclear, and
  • get your money offshore to play a weak AUD.

David Llewellyn-Smith is Chief Strategist at the Macrobusiness Fund, which is heavily invested offshore and looking to add more as opportunities arise.

The information on this blog contains general information and does not take into account your personal objectives, financial situation or needs. Past performance is not an indication of future performance. 

David Llewellyn-Smith
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Comments

  1. GunnamattaMEMBER

    Beautifully put

    It is a deflationary budget from an ‘elite’ which simply cannot grasp what they have created……

    It is deflationary.
    It is the sort of budget response which breeds revolution.
    It is a fake budget.

    It had the leaks, it had the presentation in parliament with lots of politicians shouting ‘here here’, it had lot of TV commentary, it has lots of print media headlines touting tax cuts (within weeks).

    But the only ‘investment’ it spurs is in tax avoidance, accounting firms, entitlement objet, and ponzi apprenticeships

    But it does sweet FA about per capita demand, not enough about aggregate demand, and sets us all up for a deflationary event – as well as a ‘pre election’ givaway budget in H1 21.

    In a lot of respects this is ‘the’ fake budget which neatly defines the limitations of the NeoLiberal Age. It is all fake now. What do we have in the budget – a pretty standard load of ideological cherries, some givaways, and some parsimonious gifts from those telling us they represent lifters to those they see as leaners – the problem is there are so many in the latter camp now that one must surely wonder if we collapse into a mega demand hole as early as the end of JobKeeper and the reversion to normal insolvency rules.

    That would generally mean that in the lead up to the next federal election there could be an electorate looking for heads on sticks. They may well be still, only they aren’t likely to be looking at the ALP.

    But I think the punterariat is now starting to see the faux almost everywhere. And slowly but surely we are starting to twig. The advent of COVID19 and its impact on the Australian economy has been to witness the mounting doubt about what the hell is ‘real’ about the Australian economy, and about what the hell has been the reality of Australian economic performance over the course of a generation.

    If we start with the quite logical questions which started cropping up some time ago – like this What has this Coalition government actually achieved in seven years? https://www.smh.com.au/national/what-has-this-coalition-government-actually-achieved-in-seven-years-20200911-p55uqa.html And from articles like that conclude that maybe Sweet FA is the answer – particularly after moseying over to the Liberal Party website https://www.liberal.org.au/achievements-government) where they have their Sweet FA credentials plastered all about in such a way as I would have thought would lead to embarrassment but which it appears they have no shame about

    But it isn’t just the Torynuff side of politics which is fake. A couple of days after the serving of Liberal nothingness came a reminder of why they have had seven years with their hands in the till…….an ALP which is not just leaving an imprint on the electorate akin to a ‘Here’s Lucy’ episode seen for the 90th time but which seems to have deliberation processes revolving around providing ‘Here’s Lucy’ vintage responses to the biggest economic jolt the country has had in generations. Albanese flags an eight-point economic plan as key to COVID-19 recovery https://www.smh.com.au/politics/federal/albanese-flags-an-eight-point-economic-plan-as-key-to-covid-19-recovery-20200915-p55vyf.html

    For anyone who missed the ALPs serving of anodyne gruel this was the offering………….

    Labor’s eight-point plan
    1. Reverse cuts to JobKeeper and JobSeeker and expand JobKeeper to include casual workers
    2. Support small business through improving cash flow
    3. Invest in aged care and the care economy workforce, including child care and disability care
    4. Provide temporary financial support for community groups and charities providing essential services to vulnerable communities
    5. Improve labour market programs to support vulnerable job seekers
    6. Encourage local governments to bring forward plans for local infrastructure
    7. Improve compliance with the code of conduct for commercial tenancies
    8. Reverse decision to “freeze” the pension

    No need for revisiting the entire economic box and dice, no need to think about debt, the sorts of jobs we have been creating for a generation, or house prices. No vision looking at how we fund our services, and what the actual economic effect of endless tax cuts for people on 150k when the median income is circa 60 actually is. Of course that is after a glimpse at Albos photograph brings to mind the question of whether he is trying to look like someone from the 1940s and should wear a trilby to further the effect.

    Of course if that doesn’t alert us to the possibility we have fake politics and policy at the core of our political economy we got a reminder from a former ALP PM in the form of Paul Keating lambasting the activities of the RBA – The ‘Reverse Bank’ has to quickly rediscover the gear stick https://www.smh.com.au/national/keating-the-reverse-bank-has-to-quickly-rediscover-the-gear-stick-20200923-p55yh5.html Now if you think to yourself that the political economy has revolved around worship of the RBA for more than a generation, and that this worship was largely embedded by Keating, who defined it, and who bequeathed it to Costello and subsequent successors (who have never questioned or changed thing about the RBAs focus) then his comments were utterly damning. He nails it with…….

    The problem about central banks — and this is true of the Reserve Bank of Australia — is that it has become a sort of deity, where lesser mortals might inquire, however respectfully, what the exalted priests might be thinking or have in mind for their prosperity or the country at large.

    The only thing he misses is that it isn’t just central banks which cant be questioned these days. It is politicians, executives from large companies, senior public servants, and university vice chancellors as well….

    And that sort of brings us back to the fakes in power. They not only haven’t had an answer of any meaningful type in the seven years they have been in power, but now seem determined on giving us a reheated serving of exactly the same policy which hasn’t worked for that period of time. Our October 20 Budget gives us tax cuts weighted to those up the chain, a range of expenditure offsets which will no doubt be rorted, and a bowl full of magic mushrooms underpinning outlook forecasts. That pretty much guarantees us two things – 1 they will need to double up on the givaways as the paucity of the forecasts dawns more closely on the punterariat & 2. extra serves of utter bullshit all round as the government grasps for some electoral straw (lets keep or eyes pealed for the return of the population Ponzi at the earliest possible date and some prayers to Chinese iron ore purchases)

    But there isnt much there for anyone looking to completely revisit Australia’s whole economic box and dice and to make something productive of it – it barely rates a mention.

    Not for ScoMo’s government the experience of being dragged kicking and screaming to the need to have a Royal Commission into Banks and their activities, not for them the Royal Commission discovering that banks are fraudulently facilitating predatory lending on ordinary Australians. They have decided that we can have that all over again. ‘Responsible’ lending laws to be axed https://www.afr.com/policy/economy/responsible-lending-laws-to-be-axed-20200924-p55yvw ……only this time with all the debt that they accumulated last time around in the saddle right from the start.

    Not for ScoMo’s government a population already asking questions about the levels of immigration which have nailed wages growth to the floor and crowded infrastructure with a population Ponzi which since 2005 has run at 3 times long term average rates. Their monosynaptic reflex is to fire that Population Ponzi up again just as soon as they can. ‘Migration will come back’: Budget to reveal first negative migration since 1946 https://www.smh.com.au/politics/federal/migration-will-come-back-budget-to-reveal-first-negative-migration-since-1946-20201002-p561hr.html – without once asking the question ‘Are we growing the population to improve the lived experience of Australians or are we growing the population to improve corporate profits?’ and from there to ask ‘what are the effects on the lived experience of returning to the population Ponzi as we have run it?’

    Not for ScoMo’s government questions about the value of tax cuts focused on corporates who already openly minimise their tax payments and have been show to go to considerable length deploying whole accounting structures, transfer pricing, and related party loans to minimise their taxation. Not for ScoMo’s government questions about the marginal value of taxation cuts for high income earners which will undermine the budget for years to come. They want to serve up even more tax cuts and small government mantra. They want us to take trinkets and beads equal to half a mortgage payment for most Australians and give the uber set enough to really speculate some more. They are obviously planning to wipe out the budget for years to come on behalf of those who have no need whatsoever to spend, and who wont generate enough additional expenditure to float Australia’s ‘consumption’ driven economy across the hole we are now in.

    The paucity of vision is there for all to see when considering who isnt getting getting much at all from the budget – Australians over the age of about 30 paying off mortgages, particularly if they are single income households (on less than circa 100k) or have experienced a job loss. Young Australians hoping to find a career which might involve rising incomes. Those who dont own their homes. Those who may be remotely interested in investing in themselves. The epic number of Australians who are underemployed, if not unemployed, and would actually like to do something more. Most of all those unknown Australians of the future who might hope to own their own home and raise a family, or even hope to have meaningful employment within easy travel of wherever it is they can afford to find an abode.

    That brings us to the real point of the fakery. It is fakery to cover failure. It is distraction to avoid dud. It is Numberwang to head off political pain, it is ‘we can’t hear you!’ with fingers jammed into their ears by people we elect to parliament. It is ‘Free Trade’ ‘Low Taxes’ ‘Deregulation’ ‘Outsourcing of Public Services’ ‘Non disclosure’ and ‘There has never been a better time to buy’ as offered by people who have ‘You signed a contract’ in the back of their minds and want you to spend 25 minutes on the phone wasting your time before you hear ‘You calls will be recorded for coaching purposes’ and getting to talk to a peon who cant help you anyway.

    That fakery is you being superglued to the neoliberal seat as you wonder if something somewhere is burning.

    • Jumping jack flash

      “But I think the punterariat is now starting to see the faux almost everywhere. And slowly but surely we are starting to twig. The advent of COVID19 and its impact on the Australian economy has been to witness the mounting doubt about what the hell is ‘real’ about the Australian economy, and about what the hell has been the reality of Australian economic performance over the course of a generation.”

      Anyone who has eyes and ears can easily see what is going on if they bother to take a look, 20 years of interest rate cuts don’t happen for no reason. But the problem is that everyone is too busy playing the game to look up and see what is actually going on, and even if they did, they’re already in it up to their eyeballs, so to end the game now would be catastrophic.

      If someone takes on a truly huge pile of debt, a pile of debt so large that ordinarily nobody would have any business taking it on, with the steadfast belief that in 5 – 10 – 15 years there will be someone else ready, willing and waiting, and ELIGIBLE to take on an even larger pile of debt to hand over [and also believing that the government will ensure that the someone else is available]… and then that someone else doesn’t appear, or the banks don’t deem them eligible. Can you imagine?

      An entire generation, maybe 2, maybe more, drowned in a sea of debt. The economy in tatters. Banks in ruins. Cities on fire. Politicians chased around with burning torches and pitchforks. Bankers strung up on the outside of the RBA building in Martin Pl.

      We’re talking financial Armageddon kind of stuff here.

  2. Will it all (economy, employment, budget, dollar) crash before or after ScoMo’s 2021 election gamble?

    I’d love to see the dollar where it belongs, where this kleptocracy disguised as a slave nation banana republic gets exposed to the truth. Only then can we kick all the rentier scum in the balls and find some leadership who are in it (in the main) for Australia instead of themselves and their vested mates.

  3. Claud Bollinger

    The budget is not deflationary. Frydenberg and the RBA are smart.

    By crashing the AUD with money printing and borrowing, we’ll get inflation and not deflation. Expect the AUD at 40c and petrol at $3.50 a litre.

    • This is the name of the game.
      Scummo isn’t going to do so much to let the RBA off the hook. Lower rates are a necessary part of the plan which is to stoke a wealth effect and protect bank balance sheets through house price inflation.

  4. Jumping jack flash

    They first need to acknowledge the debt. Then they need to acknowledge that it is a massive anvil around the neck of the economy to the tune of 100 billion a year.

    Then they need to get real about what the growth was during the 00s period – it was debt. Just a huge ball of debt.

    Then after that they need to make a choice, will they continue growing the debt to simulate an economy, or will they actually start building PRODUCTIVE infrastructure like factories and processing plants. State owned of course.

    If they choose the path of debt then they had better give it one almighty kick to get back to the heady days of 2006. Im talking the loosest lending standards imaginable with 99% LVR loans, A HEM that leaves you below poverty, (countered by) a UBI, and NIRP down to the proverbial.

  5. Less Woke More BlokeMEMBER

    Although I get a decent tax cut, I am very uncomfortable with the lack of permanent support for JobSeeker.

    I also think Bandt was right – there is a missed opportunity here around renewables. Large scale solar, home PV storage, hydrogen, grid improvements etc etc

    Bandt was pretty good this AM, except for his stratification of the budget as a millionaires tax cut frame – obviously lots on lots less who will benefit.

    I like his characterisation of this – particularly with the coal support – as all Brown and Trickle Down. That’s brilliant. Albodross won’t pick it up, though, nor will Dim Chalmers.

  6. I’ll be happy with no fiscal or monetary support. Time to let the zombies, both business and individuals, burn to the ground so that our children might have a chance with fully functional society.

  7. RobotSenseiMEMBER

    I’m voting LNP next election.
    I want no excuses from this miserable lot when it all goes pear-shaped. No other government is going to come in and be the “fall guy”. They can wear the nation’s misery like a crown.

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