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Central bank at odds with Australian treasury – again

It’s Wednesday and a blog-light day as usual combined with some great jazz. But it is worth commenting briefly on yesterday’s monetary policy decision, which saw the Reserve Bank of Australia hold its policy rate at the record low of 0.1 per cent. That was no surprise. Mildly surprising given all the hype about the size of the public debt at present was the RBA’s decision to expand its asset purchasing program by an addition $A100 billion. In effect, the RBA is doing what many central banks are now doing – buying up the debt that has been issued to match (not fund) the expansion of fiscal deficits by governments as they try to deal with the negative consequences of the pandemic. While all this has helped the Australian economy record the disastrous economic impacts of the virus the state of affairs is still very poor. And the RBA knows that and is urging extending fiscal and monetary policy support until “at least” 2024. Yet, the Federal government is starting to talk about cutting fiscal support next month. This tension in aggregate policy was evident before the crisis. And it has been a global tension. The neoliberals haven’t disappeared. Austerity is in the wind. More struggle is necessary.

The RBA will continue to purchase both federal and state government debt for at least another 12 months. The current $A100 billion program ends in April 2021 and the RBA said it would continue to buy $5 billion worth of bonds a week to ensure that bond yields remain low.

In its – Monetary Policy Decision (released February 2, 2021) – the RBA Governor said that:

… the Board … decided to purchase an additional $100 billion of bonds issued by the Australian Government and states and territories when the current bond purchase program is completed in mid April. These additional purchases will be at the current rate of $5 billion a week.

Pointedly, the Governor said that while prospects for the global economy have improved as a result of the “development of vaccines”, the recovery in offing:

… remains dependent on the health situation and on significant fiscal and monetary support. Inflation remains low and below central bank targets.

Make sure you read every word of that statement and here is a summary.

1. Significant.

2. Fiscal AND monetary support.

3. Inflation is no issue.

The idea that Australia, or any national government for that sake can think it possible to revert back to fiscal austerity and leave monetary policy to do the ‘heavy lifting’ is far fetched and the Monetary Policy Board of the RBA know that.

They are also now telling the Australian Treasury that in these shielded words.

They were saying it before the pandemic as the world economy had started to slow quickly on the back of a lack of fiscal support for non-government saving aspirations.

The need is even greater now.

The RBA Board considered that:

The Board remains committed to maintaining highly supportive monetary conditions until its goals are achieved. Given the current outlook for inflation and jobs, this is still some way off. The current monetary policy settings are continuing to help the economy by lowering financing costs for borrowers, contributing to a lower exchange rate than otherwise, supporting the supply of credit needed for the recovery and supporting household and business balance sheets. The decision to extend the bond purchase program will ensure a continuation of this monetary support.

In doing so, it has expanded its balance sheet (assets) by around $A160 billion.

It has also signalled that it will hold interest rates low until (at least) inflation is “sustainably within the 2 to 3 per cent target”.

Which means that “wages growth will have to be materially higher than it is currently”.

And when do they think that might be?

The Board does not expect these conditions to be met until 2024 at the earliest …

Now consider that:

1. It doesn’t implicate the current elevated fiscal deficits in any inflationary pressures.

2. It thinks cost pressures must rise before there is any inflationary pressures.

3. It also doesn’t think that buying up $A200 billion of government debt with strokes of computer keyboards (as it is doing) is inflationary.

4. They know they can control yields (and interest rates) on any maturity segment of the yield curve if they want. They are doing that now and can extend it for as long as they like.

5. They think this ‘significant’ fiscal and monetary support will be needed for AT LEAST the next three years.

Quite a significant set of statements.

And diametric to the way the Federal government is trying to manipulate the public debate (as of yesterday).

The Prime Minister made a speech yesterday at the – National Press Club, Canberra (February 1, 2021) where he started to set the scene for the withdrawal of the fiscal stimulus support that has helped the Australian economy weather the crisis.

The stimulus was not large enough but was better than nothing. It has saved thousands of jobs even though it could have saved thousands more if it has been calibrated properly.

But the idea that it should be withdrawn now is crazy given that nearly 15 per cent of available labour are still underutilised in one way or another (unemployment or underemployment).

I will write more about the plans to cut the unemployment rate again tomorrow.

But the PM started to reeducate the population back into mainstream myths.

He knows the cover on all that nonsense has been thoroughly blown so his speech marked the first real effort in a renewed propaganda strategy.

He said among other things:

1. “You can’t run the Australian economy on taxpayers money forever.”

The correct statement would have been “you never run an economy on taxpayers money”.

2. “We are not running a blank cheque budget.”

Yes they are. Everyone now knows that they can type any numbers in bank accounts it chooses and the currency is created – instantly.

3. The PM also said he was worried about lumbering debt on future generations even though the RBA has bought a significant proportion of the new debt issued, and, as noted above has committed to buying another $A100 billion worth over the next year.

I am sure the PM wasn’t worried about future generations when his government refused to provide any fiscal support to the University sector during the COVID-19 crisis in the face of a massive drop in revenue as a result of the closure of borders, which prevented foreign students from returning for the 2020 academic year.

A media release this morning (February 3, 2021) from the peak body, Universities Australia – 17,000 uni jobs lost to COVID-19 – has quantified the damage.

1. “Australian universities shed at least 17,300 jobs in 2020 and lost an estimated $1.8 billion in revenue compared to 2019”.

2. “The sector is estimated to lose a further 5.5 per cent, or $2 billion, in 2021.”

3. “We always said universities would face a multi-year hit to their revenues. If an international student didn’t enrol in 2020, the loss would be felt for what would have been their entire three or four years at university.”

4. “No sector can absorb revenue declines this large without staff losses. At least 17,300 jobs have been lost on campuses in 2020.”

5. Universities has stalled “infrastructure projects”, cut courses and made other cuts to avoid job losses.

6. “Unfortunately, it is probable we will see further reductions this year. The loss of any – and every – one of those staff is personally devastating, bad for the university community, and Australia’s knowledge reservoir.”

And all these cuts will reverberate for the next generation.

Young researchers have been sacked.

Experienced researchers have been shown the door via early retirement schemes.

All of which undermine our children’s capacity to build careers, develop skills, and, probably, find something new that might change the history of the world (discovery).

Meanwhile, while the academic and research staff has been cut savagely, the bosses of universities have hardly taken a hit and there is evidence in the sector that additional and unnecessary layers of management have been added while the ‘troops’ have been shown the door.

The point is that the narrative is now beginning to start inflicting austerity long before any spending constraint is necessary.

In the last month’s labour force data, Australia recorded a total underutilisation rate of 15.1 per cent (underemployment 8.5 per cent and unemployment 6.6 per cent).

It will take years to get that down at current settings.

Withdrawing stimulus too early always ends up with an extended period of inferior performance.

Leading into the pandemic, the Australian economy still had not recovered from the GFC. That is because the Federal government withdrew the stimulus in 2012 (some years too early) and the economy stumbled after that.

And then we get the Labor Party Opposition leader Anthony Albanese yesterday, demanding to know what the Australian people have got back for all the debt the government has issued since the pandemic.

He didn’t say that a significant portion of that new debt has been bought up by the RBA.

But the whole framing that the ‘debt’ must bring something.

Why not just ask: What has the government’s investment in the economy since March 2020 been able to achieve? The fact that the increased government spending has been accompanied by debt-issuance is not the relevant focus.

The Opposition thinks it is because they want to stir up the debt hysteria again and perpetuate the myths that neoliberal create about the solvency of Australian government debt.

Why would the Labor Party want to be the ones pushing that line?

Answer: Because they are unelectable!

Music – Getting mellow

This is what I have been listening to while working this morning.

After two days of thinking and writing about the European Union, I felt I need to chill out a bit or explode (with anger). Well, just a bit anyway.

So when one gets into that sort of mood, one of the best remedies is to pull out the November 1957 album – Gerry Mulligan Meets Stan Getz – and put on track 6 – A Ballad, written by Gerry Mulligan.

So that is what we have today.

The band featured:

1. Gerry Mulligan – on baritone.

2. Stan Getz – “The Sound” as he was known as, on tenor.

3. Lou Levy – on piano.

4. Ray Brown – on bass.

5. Stan Levey – on drums.

During the recording of this album the two saxes swapped baritone and tenor roles. But for this track it is as above.

You quickly get cool with this sort of playing.

And it is okay to play it twice and just look out the window as you do and to forget about MMT, the Eurozone and all the rest of it.

That is enough for today!

(c) Copyright 2021 William Mitchell. All Rights Reserved.

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    This Post Has 16 Comments
    1. “They were saying it before the pandemic as the world economy had started to slow quickly on the back of a lack of fiscal support for non-government saving aspirations.”

      “The stimulus was not large enough but was better than nothing. It has saved thousands of jobs even though it could have saved thousands more if it has been calibrated properly.”

      “Saving is a residual flow left after household consumption decisions out of disposable income are made.”

      Be courageous and coin a word that people immediately understand when we are talking about a residual flow from household consumption. Save, saving, savings- it just doesn’t work. There has to be a better word for it. ‘Left-overs’ would be better but then I might start on about the stock of leftover Chinese take out in my fridge and how the older ones are starting to flow.

      You might say this is how economists use the word Saving, but would I be wrong to say most economists get this confused also? This certainly isn’t your fault, but then MMT has not in the past been afraid to describe what they are talking about by using different terms. ‘Private sector net financial assets’ comes to mind and actually that is probably a part of what a normal person would consider a ‘stock of savings’ except apparently there is no such thing. Well, it is mystifying to me.

    2. Thanks Bill.
      The examples you gave in regards to the university sector outline the same Neoliberal problem we have faced for decades now.
      That the managerial classes are locked after while the real wealth creators are thrown onto the scrap heap.

    3. If the Australian situation looks bleak, imagine how things look here in the exceptional nation. As far as Australia may be from an adequate response to the pandemic and resulting economic crisis, it is light years ahead of my country. Perhaps the best we can hope for over here is that we will serve as an example for the rest of world of how NOT to address the mess we’re in.

    4. Jerry,

      “…….a ‘stock of savings’ except apparently there is no such thing…”

      This was clarified for you the other day.

      It is OK to say stock of savings but not stock of saving.

      You just have to stop resisting the distinction and let your prejudices go.

    5. The clarification didn’t work Henry.
      “It is OK to say stock of savings but not stock of saving.” That doesn’t work to clarify anything and I suspect you know that doesn’t work.
      And of course I am highly prejudiced in all sort of ways.
      Bill should have a contest to make a new word that means exactly what it means and won’t be confused with all the other meanings of derivations of the word ‘save’. Maybe we could vote on what the best word is. I think that might be fun and democratic and more useful in the long term even if it caused a bit of confusion initially. People make up new words all the time to express what they want to express more clearly.

    6. If you want to play with words, debt can be considered a stock of saving. A debt is a pre-arranged stock of not-spending into which money can vanish periodically as you make the payments.

    7. Usi. Short for unspent income.

      GNP- C -T = U U is unspent income or usi. Not very original or attractive but it might work.

      Mel- got any usi? I want to get a case of beer before the game. Well it ain’t perfect for sure.

    8. Well you might be smarter than me Henry. The not so bright bulb up here finds it confusing but thinks there might be a way to make it less confusing.

    9. Jerry,

      Don’t want to teach to suck eggs but it’s simple english.

      “saving” is the present participle of the verb to save – denotes action, movement which equates with the notion of a flow.

      “savings” is a noun, something which at any instant has a fixed form, which equates with the notion of a stock.

      I think you’re just being obstinate. LOL!

    10. I find the economics terminology that has tried to commandeer a very common word for its own specific purpose to be confusing. Needlessly so. And yes, I am stubborn as a mule when I want to be and so are you. It isn’t always bad to be that way.
      I have been speaking some form of English for around fifty years but am still impressed by your understanding of the distinctions in the language. But when you start to talk about ‘participles’, past, or present, or whatever, in describing what a word means- well you already lost the argument I was making. It is needlessly confusing.

    11. “Mel- got any usi? ‘

      Usi — OK. It’s what we’d wind up saying anyway to make sure a stranger knew what we meant by “saving”.
      Yeah, I have more than I used to, now that my car loan is payed off, and $250/mo isn’t going unspent down that hole. I have that income now.

    12. Following on from your comments regarding the University sector, I am seeing the total opposite in the construction sector, especially housing. Reports are showing “Homebuilder” is responsible for house starts and loans being at a 4 year high. This of course places pressure on the workforce and supply chain. I am hearing that 15% increases are about to hit in timber framing and steel supply. Some sizes of timber are not available at all! This is partly due to Homebuilder demand, demand in China and lower production due to the virus overseas. Concrete and other materials will be sure to follow. Some sectors have pushed contract commencements out to beyond July due to sheer bulk of work, and material and labour shortages! This will no doubt have an effect on CPI and the recovery signals the government will feed the media in a lead up to an early election! In reality some sectors (University, Tourism, Hospitality and the Arts) will be depressed for the indefinite future. In affect the economy will be having what people in the country call “a green drought”. That is everything looks green, but there is insufficient water to make long term gains and fill dams.

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