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  • PD Jonson

Saturday Sanity break, 13 October 2018 - where to now?

One of the best forums for discussion of economic policy in Australia is the Economic Outlook conference jointly run by The Oz newspaper and the Melbourne Institute. Paul Kelly, Editor-at-Large of the Oz always presents a fine overview of issues. Sadly, however, global macroeconomics is in a greatly weakened state, so the assembled economists (and Paul Kelly) struggle with discussion of macroeconomic policy. Also, politicians, also with no confident lead from economists, take turns to present individual policies with no coherent strategy, merely tit-for-tat policies thrown into the swirling pot that is Australia's political economic discussion.

I was not at the conference because I was not willing to spend past post tax income to watch confusion reign. But a trustworthy friend confirmed my expectation that confusion was rampant, thought he praised individual efforts on particular subjects. Paul Kelly's fine discussion of implications for Australia's competing political parties should be read, and is linked here.

My core disagreement with global macroeconomics is that it has failed to definitively diagnose the problem of boom and bust. The GFC was moderated by massive government spending, near zero cash interest rates and highly innovative monetary expansion - 'Quantitative Easing' by major central banks buying their nation's government bonds, and also the near secret swapping of US dollars for currencies of other nations who were running out of American dollars as investors moved cash to the mighty USA. Many nations, including Australia, guaranteed bank deposits of Australian's bank deposits. Major bank and quasibanks were bailed out by governments, except Lehman Brothers, whose non-bail out caused a 6 to 9 month freezing of the global financial system.

All this was a great example of throwing the whole set of policies, including new policies invented on the run, at a problem that should never have occurred. Extreme financial deregulation (a policy that as a young economist at the RBA I enthusiastically promoted) was accompanied by hopelessly feeble regulation. Despite a decade of presumably hard thinking, airtravel by vast committees and negotiations into the wee hours, serious writers say things are better now, but there is no guarentee of a better system can be promised.

In this uncertain atmosphere, one answer is 'more research'. My work with Clifford Wymer of London on Animal spirits - measurement and effects - is one example. But best efforts of remaining Macroeconomists (a nearly despised group globally and noticably so in Australia) will not quickly produce a new, more robust, Macroeconomics. My answer is that at least wise government would have already done far more has been done to reverse the vast range of expansionary policies to make room for future expansionary policies when the global financial system crashes again, which it will.

Budgets should already be in surplus, and government debts should be being reduced at noticable rates. (In Australia, household debt is at scary levels in relation to income.) Quantitative tightening has been started in the USA but nowhere else that I am aware of. Cash interest rates should already be at least neutral and are still rising in the USA, despite President Trump's whinging at the independent US Fed's wise action. I realise people will cry 'But inflation is under control'. Clearly however goods and services inflation is not the only variable to be taken into account. What about asset inflation, booming madly (until last week) in the USA and house prices, booming madly (until this year) in Sydney and Melbourne and in almost every great city in the world.

Macroeconomists everywhere confess to be no great shakes at timing, because the subject is not yet a science. 'Soonish' is my best guess for when the next big crunch will occur. Whenever it is, we would be wise to be ready.

Advice to the government upon appointment of new Prime minister and Treasurer.


Fiona Prior is enthralled by director Damien Chazelle’s psychological portrait of Neil Armstrong, first man on the moon. More here

Sporting world

In a rare burst of enthusiasm Henry stayed up on Thursday night to watch the final session of the test match in Dubai. It was very hot and Australia were always a few bad strokes from a humiliating loss. The excellent Pakistani bowlers toiled on a flat pitch where even the footmarks were not helping.

It must be noted that this is an 'Australia A' team. It lacks its usual Captain and vice Captain, Messrs Smith and Warner. It contained three men newly wearing the baggy green hat. In the first innings Khawaja scored 85 and Finch, his first test match at age 31, despite brilliance in one day cricket, scored 62. Then the team was bowled out with 10 wicket for 60. A disgrace, especially as our 'A' team was chasing 482 runs. 'The game is over was the general expectation'.

Pakistan apparently believed this opinion. They batted again to reach 6 for 181, confirming that the pitch was deteriorating or their batters were not too focussed. In retrospect, they should have declared far sooner. In the morning session of day 5 their approach was that of a team expecting an easy win. They had failed to challenge a 'not out' of one newcomer on 42, Travis Head, who went on to make 72. Finch had made 49 and Khawaja was trundling along nicely using his near unique backhand sweep to great good effect.

After Head was dismissed, another collapse seemed on the books as the Marsh Bros both scored ducks - presumably they too believed the game was almost over and it was too hot to concentrate. The new captain, Tim Paine, came in. He looks like a schoolboy and occasionally shares a joke with the opposition, an unheard of practice for an 'ugly Australian' captain. No Aussie sledging could be noticed, it must also be said, though the Pakistan fielders shouted like dervishes as they began to realise that the game night (gasp!) be drawn.

Finally Khawaja was dismissed for a magnificent 141 and the Pakistani team gathered round the batters and shouted louder and louder. The match seemed nearly over when Stark and Siddle departed in quick succession. Then Nathan Lyon, Australia's finest ever off-spinner and the preferred night watchman in a crisis, came to the wicket. Lyon doggedly kept his head down with the occasional bigger hit to remind the fielders clustering around him he had a bat and knew how to use it.

Tim Paine was the hero at the end of the day. His innings was not perfect, and several near misses meant the Pakistani players were entitled to wish they'd played harder sooner. Paine finished on 72 not out and when he fended off the second last ball of the final over, so that Pakistan could not possibly win (Jon Holland was padded up in the stand), Australia's innings ended at 8 for 362, well short of the total needed for a win.

But this was a draw that was actually a win. Now the teams go to Abu Dhabi with the ledger balanced and the series to play for. More late nights for Australia's cricket tragics.

Image of the week - my favourite economists

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