MUNGO MACCALLUM.  Reserve Bank gives up on Morrison

The Reserve Bank, like so many economic pundits, has finally given up on the government of Scott Morrison.

After months, years, of pleading for a sensible stimulus policy to drag Australia out of its torpor, Philip Lowe has conceded that it just not going to happen and all he can do is bet the farm on interest rates, his only effective weapon.

Not that they have proved very effective to date; successive cuts have produced little if any real improvement. But now the stubborn refusal of inflation to move upwards as a result of wages growth is reaching a crisis point and reducing unemployment levels to around 4.5 per cent has become the overwhelming imperative.

So biff bam whish, the final fling – rates, already at record lows, will be slashed further, perhaps to zero and even beyond. Whatever it takes, and if it still doesn’t work, well, at least he can say he has done his best. Unfortunately it will almost  certainly not be enough. The bastardly banks have already declined to pass on the latest rate cut, and will probably do the same next time around.

Their reluctance is not altruistic – it does not stem from a concern for the retirees trying to live on the interest from their savings, or a worry that lower rates might reignite the property boom that has shut out the young from any prospect of owning their own homes. The banks are acting purely from self-interest – they are worried that their margins will be squeezed, and that their profits may decline.

Morrison and his unhappy treasurer, the floundering Josh Frydenberg, are outraged: “When will they ever learn?” splutters our putative leader. But in fact the banks could make a good case that they are simply following where the government has led.

Frydenberg has insisted that his budget surplus has to be the priority, that nothing must interfere with it. But the banks’ own budget surplus is no more than their operating profit. If that is the imperative for our Treasurer, surely it should be good enough for those now being jawboned.

And beyond that, Morrison, Frydenberg and their conservative cheer squads have constantly demanded that the banks and indeed all businesses should stick to their core responsibilities and not be distracted by fringe issues of social debate, like climate change and homophobia, to name just a few. Given that the core responsibility of business, and especially the banks, is to deliver the maximum benefit for their shareholders, ministers can hardly complain when they proceed to follow their adjurations.

And there is no point in arguing that the banks are too greedy, that their record profits should be trimmed  to look after their struggling clients when the government’s entire economic policy, such as it is, demands less compassion, not some wishy-washy empathy likely to reduce the bottom line.

But even if the banks came to the party, it probably wouldn’t make much difference. As a former RBA governor, Ian Macfarlane, pointed out at the weekend, interest rate cuts have just about reached the point of no return – they are already so low that further decreases are likely to be ineffective. Consumer confidence has simply tanked .

And to confirm his analysis, the August retail sales figures managed only a limp stumble forward, with no sign of a general recovery. Indeed, two of the big discretionary spends – new cars and eating out – actually went backwards. It is now clear that the budget tax cuts have been almost entirely ineffective – in fact it was clear last month, but the Pollyannas in the government insists, in their Macawberish way, that we should wait a few more months for the bonanza to sweep through.

And in the meantime, Morrison continues to soothe his sedated Australian with  assurances that someone, somewhere, is doing worse than they are. Look what we have to celebrate – 27, no, 28 years of continuous economic growth – except that per capita income, real living standards, is now actually falling – that doesn’t feel much like growth.

But don’t worry – we still have our triple A credit rating. Yes, Australia remains comparatively safe and stable, but no-one is investing or spending. Not much joy there. And even our triumphant job market has its weak points – almost all (97 per cent in fact) of the new jobs last year were in the public service. Nothing wrong with public jobs, but it is obvious that the private sector – the economic engine room, as Morrison like to call it – has stalled.

So no immediate hope for the punters, and especially not for the perennial victims of Newstart. Last week his ministers were ganging up on them: Peter Dutton (who else?) demanded that if they indulged in their democratic right to demonstrate, they should be named, shamed, stripped of their derisory welfare payments and thrown in the slammer until they learned to be grateful for the government’s benevolence. The so-called Employment Minister, Michaelia Cash, enthusiastically agreed.

And the Minister for Families and Social Services, Anne Ruston, told her local paper that increasing the Newstart allowance would do absolutely nothing, because the recipients would spend it on booze and drugs. And perhaps some of them would, have been crushed into impotent despair at the refusal of the government to afford them any relief from the long-standing abject poverty in which they have been forced to exist.

However, the brutality – which the government absurdly calls “tough love” – hardly equates to an economic policy, an ambition that Morrison and Frydenberg have effectively abandoned. And, as the RBA and numerous others – including those in the international sphere which Morrison derides – are now warning, we are running out of both resources and time.

We have now entered the December quarter, the one that traditionally gives spending a big boost over the Christmas period. The signs are not good, and if things still fail to improve in the new year, the last desperate interest cuts will have to be put on the table, before the ultimate surrender – quantitative easing, aka printing money – has to be invoked. Of course none of this will be the government’s fault – it is all about those international headwinds, and the bastardly banks, always a handy scapegoat. The Libs always make the best economic managers – that is an iron law of nature, so the last six years have actually been a momentous triumph.

The operation was a total success – a pity the patient is dying, But hey, how good is ScoMo’s surgery?



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4 Responses to MUNGO MACCALLUM.  Reserve Bank gives up on Morrison

  1. Nicholas Agocs says:

    is this action totally bad?????

  2. Allan Kessing says:

    It appears that, on so many issues – economic, environmental, social cohesion and the common weal – the current “government” substitute shouting & gurning, often simultaneously, for rational explanation or even pretend-answers to soi-disant probing questions from the press pack.

  3. (Dr) John CARMODY says:

    I’m not convinced, from the way that he writes, that Mungo MacCallum really understands the interest rates issue. The important point is what the Reserve Bank’s rate is NOT. It is not the rate at which (whether from Australian or — more importantly — international sources) those banks must borrow to obtain their operating capital. Hence, the Reserve’s rates have only a relatively minor influence on the REAL cost of money to our banks: therefore, it is utterly unrealistic (unless Mr MacCallum and diverse populist politicians and commentators want the banks to operate at a loss) to expect that they will (or can) follow the Reserve’s rates exactly. That would not be in anyone’s interests, least of all Australia’s retirees, who (largely) rely on their superannuation funds which, in turn, expect profits from their considerable shareholdings in our banks in order to be able to pay so many pensions. It is crucial that our financial institutions ARE “too big to fail” (which some populists, irrationally, use as a criticism of the banks).
    What ARE those Reserve rates, then? They are simply the rates which the banks must pay one another (or the Reserve, itself) when they draw on them to ensure that their operational activities always remain in credit. Since they do not, therefore, directly relate to banks’ costs — and, thus, the rates which they must charge borrowers — they are inevitably a “blunt instrument” for influencing wider economic policy. Given that private debt in Australia is about the third-highest in the world, is is crucial that lower interest rates do not fuel additional real estate purchases. More needs to be spent on employment-creating activities but — obsessed with the sacred cow of their “surplus” as they are — that is precisely what the Government is refusing to do.
    The Reserve is, thus, in an invidious position: it must, repeatedly, employ a VERY unsatisfactory instrument to — vainly — try to achieve what an obdurate government is stubbornly resiling from doing.

  4. Alasdair Wardle says:

    Poor old Morrison struggles to understand the difference between monetary and fiscal policy. Struggles to understand that his Government is sucking money out of an economy that needs stimulus. Surplus fetish is the best description.

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