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  • Writer's pictureFiona Prior

Sunday Sanity Break, 21 May 2017 - Problems with Macroeconomics

The Economist looks at President Trump's economic policies and reaches a gloomy conclusion. 'Trumponomics is a poor recipe for long-term prosperity. America will end up more indebted and more unequal. It will neglect the real issues, such as how to retrain hardworking people whose skills are becoming redundant. Worse, when the contradictions become apparent, Mr Trump’s economic nationalism may become fiercer, leading to backlashes in other countries—further stoking anger in America. Even if it produces a short-lived burst of growth, Trumponomics offers no lasting remedy for America’s economic ills. It may yet pave the way for something worse'.

Many other articles in the same edition, which are warmly recommended.

My emerging view about Macroeconomics is that there are two big problems not being properly confronted. For fiscal policy, increased government spending may boost output for a time and to some degree. But extra spending is likely at some stage to create obstacles to expansion, if only because of higher interest costs as government debt grows. And in the broader economy 'headwinds' includes household debt, growing inequality - currently due to low wage growth - rising unemployment and especially underemployment and especially low productivity growth.

Robert Gordon, the great American economist, thinks various headwinds are likely to severely limit US growth in the foreseeable future. And in other western nations, headwinds are likely to restrain growth and perhaps blunt near totally attempts to boost growth by fiscal policy.

Monetary policy suffers, especially in small open economies like Australia's, for trying to do too much. In Australia, low inflation (for much of the past decade below the RBA's 'target range') cash interest rates are lower than they should be, partly in futile attempts to boost output growth. A secondary objective has been to reduce the exchange rate to boost trade. Asset prices, in Australia's case East Coast house prices, have gone through the roof. Clearly other policies are needed to contain asset prices. At last, such policies are being tried too little and too late in Australia by direct control of bank lending.

Whilever confusion remains about such matters macroeconomic policy will be ineffective or even damaging, as excessively low cash interest rates have boosted house prices to levels making house purchase too expensive for most first home buyers and nothing was done to reduce sensible values for the aussie dollar - my suggestion of a tax on capital inflow was dismissed with sneers one assumes, certainly no attempt to discuss.

Debt and deficit is in the bin, assumed return to a bare budget balance being hidden by dangerously optimistic economic assumptions by successive governments. Headwinds will just get stronger, gentle readers, so keep spending to a minimum and reduce household debt. A severe recession is now very likely and you need to take defensive action.


Fiona Prior reviews Graeme Murphy’s acclaimed reimagining of The Nutcracker, like his Swan Lake, masterfully weaves together the enchantment and fantasy of the beloved classic with emotional depth and a modern perspective.

The sporting life

Another wonderful weekend of thrills and spills and an occasional surprise. Among the surprises was Collingwood beating Hawthorn, Essendon flogging West coast and Caaaaarlton! jumping out of the box in the first quarter to rock Freo in Perth. Sadly the Blues (in white outfits) were pegged back in the second quarter. Then with two men injured and off the field Freo finally ran away with a comfortable 35 point win. Another brave effort from the young Blues.

Will Aussie cricket self-destruct? Will we need to bring Julie Bishop in (assuming the Donald is unavailable) to mediate between players and bosses?

Image of the week - courtesy The Economist

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