May The Fourth Be With You 2016 Edition

Fighting Deflation In Japan

Here's something from Zero Hedge.

Interestingly, the BoJ’s attempts to achieve its price inflation target continue to end in failure with unwavering regularity. While the central bank’s astonishing ineptness in this respect is a blessing for Japan’s citizens (at least for the moment, their cost of living doesn’t increase further), it harbors the danger that even crazier monetary experiments will eventually be tried. 

While threatening additional easing measures at his press conference (such as driving negative deposit rates further into negative territory) Mr. Kuroda seems to have explicitly ruled out the adoption of “helicopter money” by the BoJ. This is quite funny, since it seems extremely unlikely that the BoJ will ever be able to extricate itself from its balance sheet expansion (which de facto amounts to an “unannounced” case of helicopter money provision)

Of course BOJ boss Haruhiko Kuroda ruled out 'helicopter money' provisions for the way to go about funding the government directly because it would be illegal. Thus it follows that they'll have to think up something else other than the Negative Interest Rates Policy to do in order to reach this 2% inflation goal. 

It's sort of interesting how the Bank of Japan went looking for this 2% inflation rate and did so by massively expanding the monetary base - which inlay man's terms is "printed lots of money" - and somehow still managed to have the Yen go up. From our old high school texts we learned that the Weimar Republic era Germany printed money to pay reparations and this resulted in astronomical inflation. It is therefore interesting that the emir scenario hasn't kicked in at all.

One of the reasons the expanded monetary base hasn't done the trick is because the printed money has gone to the banks who do not lend the money out as planned, and so the money sits there in the banks unspent. The banks for their part complain that there is nothing in which to invest. Thus the great printing press experiment remains stuck in the vaults of the banks. 

The problem is that the inflation would only go up if that money went around the economy chasing assets. To do that, they need consumers to spend, but consumers have all sort of reasons not to spend. Shinzo Abe for his part has been imploring the major corporations to raise their wages. Yet even pay has stayed largely stagnant. 

What this indicates is that the printed money went to the wrong place, pretty much as TARP and QE money went to the wrong places. As objectionable helicopter money is, the BOJ need to figure out how to shove that money into the pockets of the ordinary citizens so they feel they can spend that money. Otherwise all the prince money is going sit in the vaults of banks.

Reserve Bank Of Australia Cuts Rates

So much for the prognostication that the RBA might cut rates around June.
Instead, they were decisive.

Tuesday's historic interest rate reduction coincides with the federal government's third budget, which is expected to be mildly stimulatory despite pressure to narrow the deficit.
Deflation in the headline consumer price index, due mainly to falling oil prices and aggressive retailer discounting, was the first such quarterly contraction in seven years. 

Moderate inflation, the result of demand for goods and services – including labour – just outstripping supply, is usually the mark of a healthy economy. 

However, when prices and wages continue to fall, consumers often hold off on buying and companies on investing. Deflation also pushes up the relative burden of debt.
The cash rate is now easily at its lowest level under the current system of monetary policy setting. 

The latest cut puts Australia into the club of developed economies with ever-falling interest rates and bond yields. Japan, the European Union and parts of Scandinavia now have zero or even negative nominal rates. New Zealand, too, looks likely to keeping cutting from an already-low 2.25 per cent official cash rate.

Let's not kid ourselves. If the economy were actually running well, the RBA wouldn't be cutting interest rates. As the vagaries of politics go, it happened on the same day the Budget was brought down and really gave no scope for the Federal Government to argue it was managing the economy well.

If there's one dumb thing that the Howard Government entrenched in the public consciousness, it was the asinine idea that lower interest rates were a sign of better government. Now that interest rates are at historic lows and set to go even lower, it puts a big lie to the position that the Governments doing any good management of the economy. If this is good management of the economy, for goodness sakes give us the other stuff.

And So The Budget Happened

This year's budget would underline just how ineffective this government is.

Labor has questioned why the government is cutting corporate taxes while the budget is in deficit and only handing income tax relief to Australians on over $80,000 a year even though 75 per cent of Australians earn under that amount. 

In his first interview since Tuesday night's speech by Treasurer Scott Morrison, Mr Turnbull said he believed his first budget - which delivered tax cuts for small and medium businesses, new measures to encourage young people into jobs and cutbacks to superannuation concessions for wealthy Australians - was an "exciting" one.

"A lot of newspapers are saying, 'this is a bit of a dull budget'," Sunrise host David Koch told Mr Turnbull. 

"We all thought you would bring the big excitement and changes."
Mr Turnbull responded: "Scott Morrison was delivering a plan for jobs and growth - I think that's exciting but everyone has their on views on that. 

"The BCA [Business Council of Australia] described the changes to business tax, the biggest changes to business tax in more than a decade. 

"These are substantial tax reforms but these are reforms that are designed not for the short term, not for an election. 

"They are designed for the long-term, to ensure that we continue to get that successful, economic transition from an economy that was fired up by a mining construction boom to one that enables us to live within our means, have a sustainable tax system but above all, drive that economic growth and jobs upon which our futures and those of our children and grandchildren depend." 

Despite the RBA's shock decision to cut the cash rate to a record low of 1.75 per cent on Tuesday, Mr Turnbull said the economy remains fundamentally strong.

I like the insistence that it is an exciting time and that the economy remains fundamentally strong when on the same day the RBA goes and cuts interest rates to historic lows. For reasons and factors totally out of their control, the Australian economy is heading into the ZIRP twilight in the next few years without a plan to get out. It's not even as if Australia has a really matured manufacturing sector or the population growth is stagnating (thanks to immigration it's not) so it can be sheeted home to the massive amounts of money tied up in the Property Bubble together with the world's largest private sector debt per capita. If you want us to get excited about that, you've got another thing coming Mr. Turnbull. 

None of those problems are solved. Negative Gearing stayed in place, which was something expected, but you have to wonder about the wisdom of tightening the Superannuation loopholes fr the rich while keeping Negative Gearing going because some people think the money is going to flood into the property market, furthering the Bubble. It strikes one that the Federal Government - regardless of which party is in power - refuses to acknowledge the elephant in the room and keeps trying to talk around it as if there's room to manoeuvre. 

A crackdown on superannuation tax concessions for the rich, coupled with a budget day cut to interest rates, could increase the flow of funds into negatively geared investment property.

Ahead of the 2016-2017 federal budget announcement, two of the country's leading actuaries, Rice Warner chief executive Michael Rice and Mercer senior actuarial partner David Knox, warned that any crackdown on super tax concessions for the rich without any changes to the negative gearing rules could have the unintended consequence of pushing more money into property. 

That is exactly the policy combination that we got on Tuesday night. And to add fuel to the fire, earlier in the day, the Reserve Bank of Australia dropped the benchmark interest rate by 0.25 per cent to a record low 1.75 per cent.

In other words, this Government just fed the elephant in the room while not acknowledging it's there. 

All that being said, it's not as if it's making outlandish forecast projections for growth like WTE Joe Hockey's last budget. There's some difference between a plain old crappy crap sandwich and a double poo sundae.