Economic Growth, They Say

They're Doing It Wrong

Nick Xenophon made an interesting remark last week that the RBA should shift its focus from inflation and on to nominal GDP growth. This is one of those interesting shifts worth considering because which ever way you look at it, inflation isn't the problem it used to be when Keating cut the RBA independent of government, so that it could independently set rates with the ai of controlling inflation. We're at a far cry from the era when Paul Volcker tamed inflation in America through jacking up interest rates. That world seems quaint, for we haven't been in that environment sense before the Dotcom Bubble burst at the turn of the Millennium.

Anyway, here's something interesting by Greg Jericho, going into the rationale for why Nick Xenophon might push for that change:

With the current policy, the worry is always that were inflation to rise due to fiscal policies, then the RBA would raise interest rates.

Thus we had the absurd situation last year where then Treasurer Joe Hockey was claiming the RBA had “room” to cut interest rates because the Abbott government’s spending cuts meant it “had been able to control the inflation genie”.
He said this at a point when underlying inflation hadn’t been above 3% for five years and nominal GDP was growing by just 1.3%.

Targeting nominal GDP resets the conversation.

Rather than having the government cutting spending (which reduces growth) in order to allow the RBA to cut interest rates to stimulate growth, both the fiscal and monetary arms could focus on improving growth – and it would put more pressure on the government rather than the current situation where it is leaving most of the work up to the RBA. 

Given government revenue has been hit due to the decline in nominal GDP growth, making that a focus would also assist with improving the budget balance.

Yes, it would make too much sense but of course the system isn't built for quick handbrake turns of policy like that, no, no.

It's worth going back to Glenn Stevens' last speech as Governor of the Reserve Bank.

Reserve Bank governor Glenn Stevens has used his farewell speech to implore the Turnbull government to take on more debt, saying that rate cuts alone can no longer "dial up the growth we need". 

Although interest rate cuts still had some effect, they worked through encouraging private borrowers to borrow more and had "possibly less" effect than in the past.

"The problem now is that there is a limit to how much we can expect to achieve by relying on already indebted entities taking on more debt," he said.
The government had far more room to borrow and spend than the private sector – owing only 40 per cent of GDP instead of 125 per cent.

"Let me be clear that I am not advocating an increase in deficit financing of day-to-day government spending," he said. "The case for governments being prepared to borrow for the right investment assets – long-lived assets that yield an economic return – does not extend to borrowing to pay pensions, welfare and routine government expenses, other than under the most exceptional circumstances. 

"The point I am trying to inject here is simply that popular debate in Australia about government debt and how we limit or reduce it seems so often to be conducted while largely ignoring the size of private debt. Foreign visitors to the Bank over the years have tended to raise questions about household debt much more frequently than they have raised questions about government debt."

So it's one thing for Nick Xenophon to say we need the RBA to prioritise growth rather than whacking signs of inflation. Given the toolset available to the Reserve Bank, which is basically raising or lowering the interest rates, there's really not much more the RBA can do to help growth.

That is to say, the limits of RBA policy - any Central Bank policy - resides at the zero-bound where Zero-Interest-Rate Policy lives. Glen Stevens may well retort to Nick Xenophon, "what the hell do you think we've been doing for the last 8years since the GFC, with historically low interest rates?"

Indeed, that's exactly where the Bank of Japan is at, trying to get economic growth to happen. It's trying massive "trans-dimensional" quantitative easing and yet there are minimal signs that the Japanese economy is coming out of its long slump. The conservative Prime Minster of Japan is telling the heads of the major corporations to raise wages instead of sitting on hoarded profits. It's a wild frontier of Central Banking experiments over in Japan, and really, I'm sure they wouldn't care which came good first, growth figures or inflation figures.

I'm going to go out on climb and say something that would scare fiscal conservatives and hawkish bankers. What Australia needs is a kind of debt forgiveness. So if the economy ends up at the Zero-bound with ZIRP, the RBA needs to forgive the private sector debt and helicopter that printed money into banks. People are going to hate that because basically they'll scream "moral hazard",   except when the economy has flatlined at the zero-bound, then the whole show needs a complete re-boot; and if there's one thing that keeps any economy from re-booting, it's debt.

Ben Bernanke's 'Helicopter Money', Applied

The logic for doing Helicopter money in Australia is pretty simple. People are not spending money because they're busy paying down mortgages as fast as they can. This isn't doing much good because it means the money goes from the bank to employer to employee and back to the bank without going through the economy. So you alleviate the mortgage stress, and the people will be inclined to spend their money. The government hands the printed money to the banks, buying out the debt on paper. Immediately there should be inflation because people now have money to go spend it on the next asset, That's when the Central Bank can re-set the interest rates at a more historic normal level.

Of course, it won't go that way because the bankers would lose out on long term money, but that would be the point. Somebody has to take a loss and the bank would have to get its money while losing out on future profit based on the booked loans. It hasn't happened because ultimately the economy is owned by the 1% and the 1% stands to make nothing out of "helicopter money". But the alternative is the current, comatose, low-growth low-inflation state in which we find ourselves.

The problem with QE as it's been carried out to date, and lots of it, they're finding in Japan, is that the money simply doesn't go to where it's supposed to go. The BOJ stuff the banks full of money, but the banks don't lend to sell businesses and entrepreneur. The lending practices still tend to lead the banks towards lending for fixed assets like property - and even then there's just not as much of that going around. The big companies of Japan's old industrial growth era are still profitable but they don't pay out dividends, and they don't give out pay-rises. They tend to sit on the big piles of cash and say they see nothing in which they want to invest.

The only way to make sure the money gets out an about in the economy is to hand it to the consumer and have them spend. In other words, it's like Capillarity Up economics. They cam very close to pulling the trigger on 'Helicopter money' this year in Japan, but at the last minute they held back. I guess there is something fundamentally weird for government stop simply be giving people money. Be that as it may, the Japanese may eventually have to do it; and if the precedent is set, other countries will do it. It's not like it's a new idea.

The Wisdom Of Solon And All That

It doesn't get discussed a whole lot unless you read a bit of ancient history. Solon, famously forgave debts. He also forbade the export foods except olives. He encouraged the cultivation of olives specifically as en export commodity. Meanwhile he forbade the export of foods because if staples got sent away, the poor would starve and that had terrible consequences for society. If you asked Solon, he'd object to 'Helicopter Money' as a policy but his big thing was debt forgiveness.

The ancient world is full of instances of debt forgiveness. The people in power in the ancient world probably looked at debt as something that becomes intractable and kills the economy. The Romans famously refuse to forgive debt and of course the aftermath of the Roman civilisation were the Dark Ages. So it is worth pondering what the hell we're going to do with a financial system that has created so much debt the world's GDP cannot begin to repay it. It's not likest's a problem that's going to go away. The more it sits there, it's going to chew away at the future, just as it is doing right now, only worse.

That's the historic context of all this bickering about debt. Something tells me the debt won't be forgiven, there won't be Helicopter Money, it's all going to crack up and turn to shit right before our very eyes. So much for civilisation.