View From The Couch - 19/Feb/2015

The Recession We're Going To Get

Back in the Hawke-Keating years, the RBA jacked up the interest rates to 17% temporarily, to cool down the financial markets that were going pretty apeshit. I promptly put some money into term deposit and it was the happiest 3month return I had for term deposits. The mergers and acquisitions craze of the late 1980s was something to behold. People like Alan Bond were borrowing gobs of money to buy out Kerry Packer from his TV network. Think about that. 10% rate and Bond is still willing to borrow the money to buy out Kerry Packer from something he spent his lifetime building. He bought the thing for 4 times what it was worth.

Packer of course later said that "you only get one Alan Bond in your life", and eventually bought the Nine Network back for the sum it was actually worth based on real earnings. And you look at the ZIRP world we know live in, and I can't help but wonder what an Alan Bond might have done with it. Except of course we're living in an era of record private debt. If there is an old 80s style M&A corporate raider out there, he or she is already too in debt to borrow more. The animal spirits are constrained by the considerable debt burdens that are out there.

I bring all this up because as the RBA edges ever lower with its interest rates, it is clear the Australian economy isn't traveling all that great. All these people have jumped in to the share market but the earnings just aren't there. Weirder still, we have a government that doesn't recognise just how badly things are going and is backing away from reforms. So much so that some economist is recommending a recession to focus their minds.

All of this is extraordinary because for the better part of the last 20years we've been told high interest rates are bad and low interest rates are good. Admittedly, it was a line peddled by the Howard government so it deserves a truck-load of salt, but truly, the fabricated political narrative has been that  low interest rates are sign of good, stable governance when in fact it has been the mechanism through which we've built up a property bubble and record private debt. Basically, the RBA cutting rates correlates with bad management of the economy, low consumer confidence and low business confidence.

In other words, in the olden days governments would spend money and it would stimulate economic activity, and when this got too heated, the RBA would raise interest rates to slow things down. Now, we have a government that won't borrow money, won't invest and is cooling down the economy in the hopes of an austerity-led way back to budget surplus and so the RBA has to do the stimulatory work by cutting interest rates to historic lows.

So another way to look at the interest rates being at 2.25%, is that it's clear the RBA is telling us we're not exactly in the best way at all. Now that the mining boom is over there isn't exactly a sector that can push Australia's economic growth. Of course under the Gillard-Swan budgets, the plan was for housing construction to take over, but even that has its problems. If property prices are already out of line with historic norms and over-invested, it's unlikely that there's hidden room for growth in that sector. Builders and property developers are potentially building things that could turn into the Australian equivalent of China's ghost cities, or they could take a huge loss.

The Real Reason They Print Money

It's kind of strange how for the better part of the late 20th century, inflation was what had to be tamed. This was done by raising interest rates. Today, the great fear is deflation, and to this end interest rates have plummeted around the world. Not content with that, the US Federal Reserve printed money in the hopes that the printed money would be inflationary, and counter the fall inapt prices. The money that got printed didn't trickle down to the street as per the classic claim about 'trickle-down' effects. They went overseas in search of yield, and ended up causing asset bubbles in far-flung places like Turkey.

Now that they've stopped printing money, the money has repatriated back to the USA, bringing about an asset collapse - a sudden deflation, if you will - in these emerging markets. As the US dollar rises, the money still doesn't exactly find its way to the street level. There's no real growth, there's no real investment into businesses, there's no movement that printed money was supposed to buy.

So why do they print all this money? It's so banks don't take a loss. It's so the rich don't take a loss. It's so people with mortgages don't take a loss. Which is understandable but when it is on the scale that it is, you have to wonder how this is going to distort the economy. But people who bought assets on borrowed money? They just can't be allowed to take a loss.

That's it. All this time we'd been led to believe it was for the good of everybody but no matter how you dice it, it works out okay for the people on the street because they don't lose their jobs; but it works out better for the rich because basically they get to have their cake and eat it too. I think this is called a moral hazard, but really, it's too late now.

What Have We Done For You Lately?

I'll keep this brief, but Tony Abbott sure cuts to the jugular. He's reminded the Indonesians it's not just any neighbour, but a friend who forked over a lot of money in aid after the 2004 Tsunami. At first glance, it seems incredibly crass. But none of the other avenues of reasoning, cajoling, pleading, flattering, arguing for mercy, arguing the merits of mercy, and even talking behind closed doors for a long time, seem to have weakened the resolve of the Indonesian government or legal establishment. So I will have to admit that outright crassness might not be such a bad idea. After all, the message does not seem to be getting through. The Indonesian establishment perhaps need to be reminded that it's not any old neighbour or any old country asking; it's the country down south with a hefty load of diplomatic clout knocking on their door.

That being said, one imagines this makes things really hard for the Indonesian government to simultaneously save face and back down. Yet, that horrible problem was already exacerbated by the fact that so many claims were made that the reason the two Australians are getting executed is for justice. It's hard to back down from high ideals. In that sense perhaps Tony Abbott spelling out just what Australia means to Indonesia and how bloody-minded Australia can be about such things, just might help to focus the minds of the Indonesian establishment.

The question that should be running through their minds is "why is Australia and its people so dead set on stopping this execution which is so clearly just?" Yes, why would a nation go so far out on a limb for a pair of drug trafficking criminals? Is it their convict roots? Is it just another example of western arrogance and hypocrisy?

It's turning in to an interesting ideological joust between the human rights discourse and the zero-tolerance for drugs discourse. This could have interesting repercussions in years to come, even over in Australia. It might be the next piece to break down in our own anti-drugs position.