The economic cycle, in simple terms, is the process of moving from an excess of consumer and investment spending to stability, and then to deficit. New spending then begins the next virtous cycle. If income is pressured, so is spending. Lower interest rates and lower taxes will drive the recovery.
Ecinya 23/2/2001
TODAY’S FRONT PAGES………
are telling us that the Federal Government is about to ditch the promise of a budget surplus. The budget surplus was always a figment of the imagination of an inept Treasurer who in previous budget reportings was able to ‘cook the books’ by bringing forward income or deferring expenditure, or accruing income for the next rainy day and charging current expenditures to a prior period. That game is over with recession in Europe and the possibility of recession in America and a major slow-down in Australia in the September quarter which will likely flow into the fourth quarter.
‘Cooking the books’ functions best in the broader context of fabricating the economics. This was almost certainly a bit easier when Ken Henry was Treasury Secretary, but may have now become more difficult under Treasury Secretary Parkinson. The fiscal promise of the mining tax has faded, the costs of refugee policy have accelerated, health and education revolutions and climate change ‘initiatives’ have been expensive and counter-productive.
Also as companies move their operations offshore to escape the harsh business climate that Australia has become, so do they move their tax base, and do not have to suffer the delays that come from visitational over-kill from Occupational Health and Safety bureaucrats and doyens of the environmental world.
And the consumer who has watched his superannuation diminish, interest rates and electricity prices rise and his income stagnate and his job prospects and/or job security reduce has suffered a loss of confidence leading to him repaying debt and also paying lower levels of taxation.
Mr Swan has always told us that he ‘has the balance right’ because people on both sides of the economic debate were disagreeing with him.
Where did it all go so wrong? Ecinya covered this in a number of past Insight articles, but two will suffice to tell the story –
The real GFC – Government Facilitated Chaos
A reflection: Australia and the global financial crisis
FISCAL AND MONETARY POLICY
Sound monetary policy cannot function at optimum levels without there being in place sound fiscal policy. Fiscal policy and monetary policy are natural dance partners and the systemic and structural failings that are evident in Europe, the Middle East and America have been hidden under the blanket of reckless central banking, softened by the euphemisms ‘money printing’ and ‘quantitative easing’. The ‘fiscal cliff’ in a fiat money world is probably the latest hoax to obfuscate and mitigate responsibility for poor political policy and fiscal vandalism.
At home our Treasurer and last two Prime Ministers Messrs Rudd and Gillard have squandered the Howard-Costello-Hawke-Keating-Walsh legacy and exposed us to the Asian consolidation or slow-down, depending on your definitional perspective. Macro fiscal policy settings have dented, and in some cases, decimated consumer and business confidence.
It is likely that quantitative easing will, with the benefit of self-serving hindsight, come to be regarded as having solved some or all of the problems. The reality though is that one silver bullet does not create a recovery. It will really be a combination of factors that herald the end of one cycle and the beginning of another. One of Ecinya’s confidants (Dog) is already of the opinion that QE3 has some traction. In our view the main reason that problems are solved is because the personnel who gave rise to the problems in the first place have left the dance floor (George W. Bush, Alan Greenspan, Tony Blair, Gordon Brown, Strauss-Kahn, various Greeks with unpronounceable names and forgettable Italians such as Berlusconi etc.).
Ecinya is ever hopeful that their replacements are in possession of the velvet gloves and the iron fists which will save the world from its currently perceived and allegedly complex dilemmas, which are generally referred to as ‘crises’ so that an elected official can pretend to be solving the riddle.
If you then add in the occasional war such as Iraq, Afghanistan, Syria and Israel and Palestine and the resultant refugee problems, you can then understand how misallocation of scarce resources can lead to various calamities. Then just for a dose of spice add in the odd weather problem such as Hurricane Sandy. Before you know it fiscal policy suddenly adds up to a mountain of debt and current account and domestic deficits stretching well into the future.
AND just as you were getting comfortable will all of that the big question of ageing and demographics comes into focus.
BUT IT WILL ALL WORK OUT IN THE END
Cycles come and go. Within the cycles there are waves. The world is in fundamenatlly good shape and better times lay ahead. Getting the timing right is always THE CHALLENGE.