The RBA must slash and burn 50bps to -25bps urgently

Via RBA sockpuppet, Terry McCrann:

But because it would be not just a rate cut now; in these ‘living-with-the-virus’ days, it’s become a ‘rate cut-plus’.

So if it did cut to 0.1 per cent, it would follow through by cutting the rate it charged the banks to 0.1 per cent and it would also step up its bond-buying to bring the yield down to 0.1 per cent.

It would also be likely to move to push that lower yield further out along the bond curve, to say five years bonds.

McCrann is probably right about the pace of the glacier. If that’s all we get then the RBA will remain miles behind the curve.

The Depressionberg budget is a deflationary stinker. It is going to rip out demand stimulus and replace it with supply-side tax breaks that will be retarded owing to the output gap.

The RBA needs to get much more aggressive to fill the domestic demand black hole:

  • cut rates 50bps to -25%;
  • launch an “Operation Twist” that halves the ten-year yield;
  • loosen the rules on the TFF and buy enough bank debt to crater mortgage rates the whole 50bps, and
  • have a yarn with state treasurers about what infrastructure stimulus that they can get up in a hurry and buy whatever debt they need to do it.

Otherwise, the fiscal cliff is going to savage demand going into Christmas and then gut it completely in Q1, 2021 as the withdrawal of JobKeeper and JobSeeker destroys household confidence, stalls any property rebound and renders all tax cuts savings.

If the RBA eases aggressively now then it can crater the Australian dollar while the US election cycle lifts DXY. If it waits until next year then the RBA will be chasing a falling DXY trying to lower the AUD. To guarantee the stimulus flows mostly into the currency, APRA should also lift the lending buffer 50bps.

Contrary to nearly all MSM reporting, the Depressionberg budget is not a Keynesian recovery plan. It is an experimental trickle-down tax deformation that has little or no demand growth to service. What it has, it will automate into.

I would like to argue that the Morrison Government has seen the error of its ways, is no longer interested in stoking private debt creation and is instead focused on repairing Australian competitiveness and capital deepening to match its China decoupling plan. But for that to be true it would not be increasing the cost of energy via the gas unplan, nor blabbering about the removal of responsible lending laws.

So, that leaves only one conclusion to draw. The Morrison Government is overly ideological and has no idea how to craft an effective Keynesian stimulus program.

That leaves the RBA with no choice but to slash and burn to meet its mandate. Undoubtedly it will be too slow to realise it.

David Llewellyn-Smith


      • In all seriousness how will crashing the Australian dollar help our economy ?

        My business purchases single board micro-computers for advertising. These are farmed out at a weekly rate with in built software and cloud software for building and running ads. The unit costs of these computers is around $50 – as I add things on the prices of these are all done in US dollars it now doubles the cost. I have literally halved by earnings as the dollar falls. I can’t pass that on – no chance. Lower dollar is a DISASTER unless you do NOT import anything and only EXPORT finished manufactured products.

        That is so few companies – I have no idea who you are trying to benefit?

        This website posts almost every single day how ending our export relationship with China wont matter for agricultural products because we can just ship them elsewhere – and China has no choice but to buy our commodities.

        So why lower the price ?

        It wont make university degrees any cheaper. And our manufacturing export sector is so ridiculously tiny it wont expand enough to cover the losses from commodities and agriculture – so where is the benefit ?

        • happy valleyMEMBER

          Exactly – the only things Straya manufactures are housing debt, money laundering, uni degrees, corruption and inequality and in those we are gold standard. And in any event, it would take some time to create any genuine meaningful export markets, all in the midst of a still emerging pandemic which has already destroyed so many western economies.

          • Yeah exactly.

            The point is made in this article that we need to supplant Chinese exports with our own supply lines – ok fine – that will take years at the absolute minimum. So deflate the dollar in line with developing our exports, nurture them here domestically with a protected higher dollar to accommodate the imports they will need – then deflate.

            To deflate now will honestly wipe out what remains of our trade balance – I really do not understand why anyone would be pushing for this unless it was to lower their own housing repayments.

        • I dont know for the economy but as I export a business service in $USD, I pray for a $AUD to the floor ( at 1.1 I was not having much fun)

          • Sure – I get that, but business services are less than a single digit percentage of our trade balance. That’s the point – and asking this question appears to result in the threat of a ban.

            What are the actual maths behind it – the increased inflationary costs of imported means of production, reduced revenue through exports, particularly in non-elastic demand products like Iron Ore (our major exports) , plus the reduced domestic demand through inflation of imported products and the increased inflation through price protection mechanisms invoked by foreign owned domestic utilities vs the benefits of increased foreign demand through lowered dollar and increased competitiveness on international markets.

            Its a very simple concept and in my view clearly leans to one side – I would like to see some analysis in some way or some input from others.

            Slashing our currency and destroying savings really does very little to help the domestic economy and only helps – well I really don’t know who it is meant to help – I just can’t get my head around it at all.

          • pfh007.comMEMBER


            You are right.

            A lower AUD means we are poorer.

            Especially if it is the result of printing money to pay top dollar for rich people assets or to encourage rich people to use bank credit to concentrate asset ownership.

            The only time a lower AUD is good is if it results from blocking currency rate manipulations by trading partners and even then the goal should be for it to become more valuable so we can buy more of what we cannot or don’t wish to produce.

            But that is definitely not what is being proposed.

            In fact, rarely is a word spoken about unproductive capital imports…..which continue to occur even with a trade surplus.

            The neoliberal economic myths and fictions have eroded the capacity of most economic commentators to think straight and see the evidence that is straight in front of them.

            Good luck with your business.

        • It’s a classic argument from contemporary economics that is so riddled with flaws it’s barely fathomable. You’ve just highlighted one but there are many others.

          The theory goes that a beggar-thy-neighbour strategy i.e. trash your currency race to the bottom, benefits exporters (never mind that most of our exports are priced in USD rendering that argument irrelevant). However, the company accounts of exporters do look glossier via the FX translation and, of course, the National accounts which benefits from the same i.e. optically higher GDP. It’s all fake, when you care to look at the substance, of course.

          The logic of trashing your currency is: We need to get poorer to get richer!

          • Thanks – I get the idea of exports increasing. However exports like Iron Ore, gas, coal will not increase in VOLUME at a lower price point. So lowering the currency does not increase volume.

            The idea of lowering the currency revolves around international competitiveness – we can sell more washing machines if ours are cheaper than our foreign competitors say.

            However this does not apply to bulk commodities at all – it simply does not.

            It applies to university degrees as they are comparatively cheaper – however we are not selling them any more. Further even university degrees are fixed places. So we only have 100,000 (hypothetical) degrees – these are fixed numbers of places – lowering prices reduces revenue.

            Increased demand may allow for more places – however demand for Australian degrees is based on quality and visas – so again – no beneffit.

            I would just love to see some justification of it – in ten years of this websites operation. 2010 it started.

          • “However this does not apply to bulk commodities at all – it simply does not.”

            Agreed – a point I’ve made a thousand times on this blog. The reason being that they are priced in a currency that isn’t the AUD. Which is why in my comment above I highlight the fact that FX translation is the only real benefit (to company and national accounts). The losers are the consumers who have to pay higher prices for imported goods i.e. most of them.

          • Dominic – your assuming that its “all else being equal” and people won’t change their spending patterns. If overseas goods are more expensive then it may make sense to shift spending away from them to local stuff. Sure it won’t be your iPhone, computer gadgets from China, etc but for most essentials Australia is best placed to do an ecnomic isolation strategy. If it gets cheap enough some entrepreneur will see over the ditch and realise they could “steal” the idea and create a local market here (see China’s main reason for success).

            We are mostly self-sufficient in commodities; we could easily reserve some for domestic manufacturing use. Hell if we do this our dollar might bounce back again because we have our backyard economic settings worked out; rather than because we are a debt/sell the farm country to pay for our cheap imports and overseas holidays (things I think are not worth selling out our future for). If it does bounce back its because of real wealth generation as opposed to the current system; I would rather that than the imported goods you think I will lose.

            Sadly I predict that’s what we should do with US-China tensions, the higher COVID cases overseas, and our current account balance (selling the farm). I’m maybe not as optimistic about the future; and think being slightly isolationist for protection isn’t totally a bad thing.

        • 100% agree and have been saying the same for ever.

          The threats of bans for asking reasonable questions is pathetic and shameful and a blight on MB.

          Drop the threats, lose the TDS, go back to your roots and stick to what you know. Then the subscriptions will come.

          DLS, you need a holiday mate. Have a smoke and a pancake.

        • Less Woke More Bloke

          DLS – demanding someone subscribe or be banned – what is that all about?
          Not a good look, bloke.

          • And yet another thread is complaining about how there’s no debate about economic policy in Australia. Hrm!

          • billriskasMEMBER

            DLS that pure BS. DLS, you rant about the destruction of Australia’s fibre and then you pull a stunt like this “become a member of get banned”. Come on, pull your head out. Your going about it the right way to loose members with an attitude like this. Moderation is good, threats are poor. DLS must be having a bad day and is a tad cranky hopefully, we all them on occasion.

          • Reus's largeMEMBER

            Not a good look DLS, you guys need to stop banning people that have opposing view to you, just like how you delete my MPLOL comments too, have a cup of cement, harden up and debate properly !

        • Doesn’t work like that. As the dollar gets lower and people are confident it will stay that way for a long time the desire for these goods won’t just go away. It may even be competitive to set that up locally again if the dollar expectations are that they will stay low, and there’s pent up demand from people such as yourself. Some business person will see there’s money to be had in putting the investment in and do it in the long term.

          Hey it may even by you if you can think its cheaper to “build it yourself vs buy”. Yes there is short term pain, but long term it’s good for Australia. I argue our dollar should be lower – its only being supported by our borrowings from overseas anyway which we have too much of at any rate.

        • There is little doubt in my mind that you are correct but I would still try to collapse the AUD.
          Why do this if it benefits no one?
          Well that’s easy the benefit occurs at the margin.
          At the margin we will punish foreign Australian bank bond investors, it was their predatory lending which contributed to much of our current Asset over pricing, they need to know that the AUD can fall to practically zero, they need to factor in this assumption with every future loan they make.
          If this had been factored in when the AUD was approaching parity in the 2000’s then we would in all likelihood have not overshot, in all likelihood we would still have an automotive industry, in all likelihood house prices would have remained lower as a result of bank liquidity issues.
          So yes I agree with you but given the opportunity I would still crater the Aussie, send it down to $0.30, our kids will thank us for doing the necessary.

      • Yes because this time I already own a house. Ha. So I’ll temporarily experience the wealth effect!

        • If monetary policy keeps going in this direction your home will double every year. Josh and Phil have your back 😉

          • Too bad really… because it’s of 0 benefit if you are buying and selling a single home (PPOR) in the same market. Which most people forget. Except for maybe LVR perspective. If I was Nathan Birch though. Winner Winner Chicken Dinner.

  1. The RBA won’t do any of that … they are probably still deciding on what vintages they need to restock the RBA cellars with.

    • happy valleyMEMBER

      And don’t forget they also wanted a must-have ~$250+m refurb to the ivory tower on Martin Place, so if that were to happen that would fill their days which are currently only taken up quaffing wine and running a sheltered workshop for boffins to write totally useless research papers.

  2. Recovery is impossible when 20% of the country is under house arrest. Let’s not kid ourselves, Victoria needs to reopen ASAP and internal state borders need to follow.

    • The greater the border opening the more we optimise for economic activity peak. The cost of this obviously that it is more “brittle” of a recovery if that any systemic thing occurs the more open you are the more that even small risk factors hit you hard and fast.

      This isn’t just the COVID virus risk btw. It includes any system including our banking system, leverage, financial markets, electrical grids, anything where a small risk becomes more likely due to more “rolls of the dice” across a larger population/area (i.e. tail risks). You are trading system redundancy for peak performance.

      Opening your borders is basically a higher return/higher risk play however it isn’t linear. For example opening state borders has a greater return/risk ratio than opening international borders (where TBH we are a CAD country so it is net negative even without the risk). Which is a big reason why crisis’s like this happen in the first place (humans think linearly, the real world systems aren’t) – the early adopters get the benefits and the risks seem small; however as more people do it and the paradigm is expanded the system becomes more brittle and more people are exposed to the eventual fallout.

      TLDR; Other states don’t think the return/risk ratio justifies opening borders to VIC at present.

  3. adelaide_economistMEMBER

    “have a yarn with state treasurers about what infrastructure stimulus that they can get up in a hurry and buy whatever debt they need to do it.”

    Here in SA there is the final (and incredibly expensive) part of the North-South Corridor to be completed. Cost estimates vary but it’s way beyond the scope of the State Government alone to fund and it has half a dozen engineering plans already about how to do it. Given we have a Liberal State Government prepared to ‘play ball’ and open borders to all and sundry prematurely to align with the Feds population ponzi obsession (not to mention allowing the nuclear waste dump), surely we are a perfect target for an extra $3bn or $5bn (or whatever the Feds want to chuck in) to get it happening. I can’t believe this sort of stuff isn’t being funded all around the country.

    • TailorTrashMEMBER

      You chaps in Adelaide need to follow Dans lead and sign up to the OBOR …..lots of Chinese dosh could head your way ……and you have a couple of nice ports I’m sure they would be happy to take off your hands
      …..if you can’t manage them yourselves

    • Gee, what a pity they didn’t build the MATS plan in the 1960s. That north south freeway would be 40 years old by now and built at a fraction of the cost. Dunstan didn’t help the state on that one.

      • adelaide_economistMEMBER

        Indeed. Terrible that we had a plan and most of the land already owned to end up where we did. Shortsighted doesn’t even begin to describe it.

  4. Can’t see negative rates with no outlet to spend on helping the economy – all it will do is lead to a bank run and more fear.

    • happy valleyMEMBER

      You would hope there would be a bank run, because Straya deserves that – the RBA and the government have destroyed savings of depositors in pursuit of debt and housing price bubbles.

  5. There it is folks ‘Keynesian stimulus’. No mention of the fact we’ve had a decade of such by both parties. Including an NBN pissing huge volumes of taxpayer money away when other countries delivered better at 20% the cost.
    It really is the theory that can never be falsified, when it fails just claim the stimulus wasn’t big enough!
    Next post will be faux indignation that this stimulus is captured by game of mates rent seekers. Who knew?

  6. “stalls the property rebound” rebound? I want to see property market collapsed. Yes I understand the wider implications of this to the economy but I also want the kids to afford s roof over their heads. If the whole thing turned to sh$t, so be it!

    • happy valleyMEMBER

      +1,000 And let’s hope that NOM is not -70,000 over the next couple of years, but more like -700,000 for starters, as people wake up to the sh.thole that Straya is and if only Chin-ah would stop buying our IO for a year or two, that would also be a plus.

      • China is building up to 8 nuclear reactors a year for the next ten years. They are transitioning into arc-electrolysis and hydrogen based metals and ore refining and industrial energy. This means gas and coal are cactus – truly finished. (Many northern “green” countries are as well).

        IF arc-electrolysis and hydrogen takes off it will also usher in recycling steel as the preferred option as it is much cleaner, more refined and targeted – you can make what ever you want really easily.

        • happy valleyMEMBER

          You have made my day. Straya will have the economy destruction it deserves and needs to have and surely under an LNP watch. And what fate for our IO and Chin-ah? Will Straya soon be the greatest “one trick pony” economy built solely on houses?

    • pfh007.comMEMBER

      Thanks Hoody!

      Unfortunately, after 40 years of economic nonsense people are determined to limit the options to more nonsense or even more nonsense.

      We are facing a massive disruption to the usual patterns of economic activity. Those changes appear likely to be as permanent as the car replacing the horse which allowed millions to leave the squalid inner cities for suburbia.

      The fastest adjustment requires money to go where it needs to be… the wallets of the general public.

      Let them decide whether to save, invest or consume as their circumstances demand.

      But that is too simple for the arrogant pointy heads who love economies run by lever pulling point heads like them.

  7. “effective Keynesian stimulus program.” Keynesian theory is on its last legs. It is a complete failure.

  8. Jim's Central Banking

    If we’re going to accept idiotic monetary policy to paper over government ineptitude, we better assume the position for the inevitable immigration boom.

    I’d rather we go a different route rather than more of the same but morerer.

  9. “The Morrison Government is overly ideological and has no idea how to craft an effective Keynesian stimulus program.” But they’ve tried their best. The worst part though is the lack of an effective opposition; it would be more of the same, but worse.

  10. Cutting rates has always led to a stronger economy, more jobs, less debt, affordable housing, business investment in R&D.
    Just have to pop out now and feed my flying pig.

  11. TailorTrashMEMBER

    Trying to revive the strayan economy with “ stimulus “
    is like giving a 90 year old patient in an ICU
    a combination of drugs hoping they can get up and dance the tango …..the drugs are expensive
    but the bones and muscles to dance just ain’t there .

    The patient might be able to sit up and even get out of bed and we say look recovery is on the way . Then they fall over dead .