This week, I had the pleasure of being invited to a lunch with Glenn Stevens, the Governor of the Australian Reserve Bank. The red wine was dry, but Stevens was dessicating. Apart from the odd joke.
There were two, one of which sent currency and capital markets into a tail spin. The second was a reference to his wife of thirty years wanting "long service leave". Just a joke I am sure.
The first aside was far more serious. He said that the banks' board deliberated "for a very long time" on interest rates. Others inferred that this was bank speak for a lowering of Australian official interest rates. Many were and are still predicting this outcome. It demonstrates just how sensitive world capital, currency, equities and bond markets are to the slightest whiff of volatility.
JP Morgan, in a note to their clients said "Glenn started a joke, which started the whole world cutting". "We were confused by both the content of this statement, and the manner in which it was delivered". (Australian Financial Review 5th July).
Lost in these inferences however, is a much more serious message. Many people in the community do not understand that low interest rates (whilst good for mortgage holders) are the harbinger of recession. There is not the demand for money from businesses and households, and the velocity of its circulation is reduced. i.e. there is a lot less economic activity per dollar on issue.
This has been the situation in Japan, Southern Europe, United Kingdom, and the United States (until recently: please see my Ping Pong Pang blogs on this site).
The real message from Stevens is reported in the Australian Financial Review (4th July). "Reserve Bank of Australia governor Glenn Stevens issued a dramatic pre-election request that the government restore the budget to surplus as soon as possible, and for the first time since 2008, a step which he believes will restore economic confidence". He urged that "Federal finances need to be brought back under control"and "that commitment will be heightened in the future".
It is true that monetary policy in Australia still has room to move. The problem is that money can be free (as it has been in other jurisdictions) and still not be in demand. In those circumstances, monetary policy loses its effectiveness, and is like pushing on string. That is the situation Australia faces today and reflects what has already happened in other countries.
As I have reported before, these conditions are reflected in true un- and underemployment rates approaching those in France and other European countries. The truth of this was manifested on Australian mainstream television this week (Four Corners, ABC). Don't be duped by the aggregate data coming out of Canberra.
Stevens, then may be the emperor without real clothes. His equivalent central bankers in other countries have had the same problem. These include Ben Bernanke, Mervyn King, and Mario Draghi. Each of them, together and separately, participated in a worldwide effort to prevent the advent of another Great Depression.
What is clear is that those countries that have bitten the bullet of fiscal policy and sound public finances are going to be the winners. That includes the US, United Kingdom, and the northern part of the Eurozone. Return to growth in those countries will provide investment opportunities on the upside. The rest, including probably, Australia, will be on the downside.
That is, unless the Australian government (and its constituent states) returns to sound public finances. Short term pain for long term gain. That will shake Australia out of its China induced torpor. If the Canberra soufflé rises twice, it won't happen.
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