News&Views No 22
Updated: Jun 26, 2022
AFR Weekend, ‘Hard Landing’, Much to read.
‘As surging inflation smashes markets and signals a global recession, a new government wonders how Australia’s red-hot economy can avoid the worst of it’.
John Kehoe, P 15, ‘Race against inflation’.
‘As central banks go into overdrive, there is a growing risk their actions could lead to recession’.
‘Australians are living through a series of remarkable and historic economic disruptions. Post-pandemic forces are collided to bring into sharp focus the challenges facing central banks, business, investors, households and the new Albanese government.
‘Economies seem to be overheating so engineering a soft landing and avoiding recession will be a delicate balancing act.
‘This week, the world’s most powerful financial institution that sets the price of money – the US Federal Reserve – imposed its largest interest rate rise since 1994, lifting rates by 0.75 of a percent point. It also admitted that jobs may be lost to cool the economy’.
‘Chalmers flags tougher budget cuts, Pp 1 and 2’.
‘The Albanese government will cut harder than first signalled when it hands down a budget in October, and then build public support for a second-term agenda of a tough revenue and spending measures needed to repair the nation’s finances.’
AFR, Editorial&Opinion, P 42, ‘Labor’s first job is to avoid a recession’.
‘Treasurer Jim Chalmers’ job has become that much harder while in COVID-19 isolation. Wall Street flashed recession warning lights as the US Federal Reserve lifted its funds rate by an aggressive 0.75 percentage points.
‘Reserve Bank of Australia governor Philip Lowe’s TV appearance warned that average mortgage repayments could rise by $1000 a month by the end of next year in order to tame the economy’s inflation outbreak. And regulators dramatically suspended Australia’s electricity market.
‘ On leaving isolation, Dr Chalmers’ main task will be to prepare for the US-based global recession being signalled by both equity and debt markets. Australia is not immune, but it can avoid the worst if Labor’s new team recognises the burning deck they have stepped onto.’
The Aussie, P 17, Paul Kelly, ‘Labor is caught in a web of contradictions’.
‘The government’s election promises to come up against the reality of rising inflation’.
‘Australia now confronts its decisive transition – the battle against inflation and its expectations – with the Albanese government, yet considers how it presents this challenge to a public soaked on cheap money and fiscal entitlement in a world where both have to be cancelled.
‘The dilemma facing the government and our economic institutions was on graphic display this week – Reserve Bank of Australia governor Philip Lowe, now a converted hawk, predicted the cash rate will triple to 2.5 per cent while the Fair Work Commission under president Iain Ross lifted the minimum wage by 5.2 per cent to protect the low paid and deliver and deliver an increase in line with inflation’.
‘The RBA pledgers to defeat inflation, while the FWC seeks to maintain real wages where feasible. Both institutions are doing their heroic job. Yet the contradiction between beating inflation and retaining real wages will be untenable as the future unfolds.
‘The Albanese government’s woes on energy prices and institutions are heading into inevitable and sharp adjustments in a transformed world of higher prices’.
Adam Creighton, P17, ‘America’s economy: Building back broke’.
‘The end of pandemic restrictions was meant to usher in a stronger, richer US, with more electric cars, less dependence on fossil fuels improved infrastructure and higher wages.’
Later: ‘The costs of the giant and historically unprecedented economic experiment that was the US (and our) response to COVID-19 - shutting down swathes of the economy and propping up households and business with money created by the central bank – are starting to emerge as the Russian war in Ukraine wreaks havoc on global energy supply.
‘Inflation has lurched to almost 9 per cent across the year to May, the fastest pace since early 1981 and more than quadruple the US Federal Reserve’s target level’.
Greg Sheridan, P 20, ‘How can we resist Xi’s ambitions?’.
‘This week China significantly advanced its strategic ambitions, with a new directive and expansive and ominous claim, while resuming high-level ministerial contact with Australia, with Chinese Defence Minister Wei Fenghe meeting his Australian counterpart Richard Marles, in Singapore.
‘There are epic times of complexity and unbridled strategic competition. Nothing is more important for Australia than navigating them effectively’. …
‘How Canberra and Beijing manage their bilateral relationship is highly important. Back it probably doesn’t affect Beijing’s ultimate strategic plans, which are inimical to Australia. Anthony Albanese, in response to the renewed ministerial dialogue, declared that it was the government in Beijing that had responsibility to improve the relationship.
“It is China that has imposed (trade) sanctions on Australia. They need to remove those sanctions in order to improve relations between Australia and China”. That contradicted statements by the Chinese foreign ministry declaring that Canberra needed to act.’
And in conclusion to a long and excellent account: ‘Labor’s journey on China has been similar to that taken by US Democrats. Both are dealing with the inescapable reality of contemporary China. Albanese, Marles, Wong and the whole Australian nation face a demanding and dangerous road ahead.’
Carlton!, with more and more injuries, especially in its back line, went down to an excellent Richmond. The Blues battled hard and hopefully get some of their best players back soon.
During the game I saw a Richmond player put his thumb in the eye of Carlton’s Saad. To me, the thumb push seemed deliberate. I guess the AFL would not like to ask that question, but I hope at least that the Richmond player concerned apologises to Mr Saad.
AFR, Monday June 20, P 1 and P 4, Patrick Durkin and Elouise, ‘Coal, gas in back up plan.’
‘All existing electricity generators - including coal and gas – should be paid to be on standby to avoid blackouts and bolster the stability of the east coast power grid, the Energy Security board (ESB) says in its response to the energy crisis.
‘But a national agreement is showing signs of fracturing with states, including Victoria, refusing to include fossil fuels, …, ahead of a crisis meeting of state and federal energy leaders later this week’.
‘The Energy Security Board released the draft design of an average fix known as a capacity mechanism today to pay energy providers to keep capacity on standby in case a power shortfall looms.
‘It recommends that the mechanism include coal and gas in addition to renewables, battery and pumped hydro.
‘But Energy Security Board and Australian Energy Market Commission Anna Collyer said although the mechanism would act as an insurance policy to guarantee supply, it “could cause customers to pay more for the same level of service”. …
Editorial&Opinion, P 34, ‘A mechanism for avoiding blackouts’.
‘The Energy Security board’s proposed capacity mechanism is the sort of regulatory advice that could have avoided the emergency suspension of the National electricity Market.
Rightly ESB’s consultation paper considers the pressing need to secure electricity supplies based on the reliability of the various generating technologies to meet peak demand. Australia needs more wind and solar generation to help decarbonise the economy.
‘Zero-emissions big batteries and pumped hydro might eventually deliver power when the wind isn’t blowing or the sun isn’t shining. But during the decades-long transition to a mostly renewable grid, coal and gas-fired back-up electricity will be needed to keep the lights on and maintain affordability.
In conclusion, which seems an obvious issue to sort out the current BS: ‘Backing national policies that support an orderly least-cost transition – as opposed to unrealistic commitments to zero fossil-fuel electricity – must be the focus when the nation’s energy ministers meet to discuss the capacity mechanism this week’.
The Aussie, reported by Geoff Chambers, has reported the same coverage on P 1 of The Australian.
Tom Ducevic, also P 1 and P 4 of the Oz. ‘Employers warn of economic suicide in 5pc-plus pay claims’.
‘It’s the great inflation fight: Philip Lowe vrs the People. If households don’t cut back their spending, there will be blood.
‘Behind on points, the Reserve Bank governor claims he will do whatever it takes to crush rampant consumer price growth, but to do that he’ll have to shove Australians back into their corner by tripling the cash rate to around 2.5 percent [or more], putting more strain on household budgets’. …
In conclusion: ‘On the ropes, Dr Lowe is looking to land a decisive blow against inflation in the early rounds, without swinging so wildly he bludgeons the innocents sitting ringside’.
P 10, ‘Balance high wage claims with enterprise gains.’
‘Mr Burke’s goal to reinvigorate enterprise bargaining will be vital to workers, employers and the economy. As he said on Saturday: ‘Historically, he the best way to deliver both a productivity dividend and a wages outcome that has been through the bargaining system. But that system has nearly ground to a halt.
AFR, Tuesday 21 June, P 40 and 41, Niall Ferguson, ‘Slow, Steady Fed Loses Race.’
A great special project with a totally interesting double page analysis ‘Stagflation then (1970s and now’. Niall Ferguson at his best.
‘I knew Paul Volcker. Jay Powell is not Paul Volcker. I also remember the 1970s. For younger readers it is going to come as a shock to see The 70s Show for the first time. Spoiler alert. Not much about that decade was transitory. Try listening in the interminable guitar sobs on Stairway to heaven or Free Board to get the mood.
‘I never met Arthur Burns – Volcker’s predecessor, but one, as Federal Reserve chairman – who preferred puffing on a pipe to cigars’. But I think I’ve read enough about Burns to suggest plausibly that the current Fed chairman, Jay Powell, has more in common with him than with Volcker. This is unfortunate and potentially disastrous for the US economy’. …
Now read all the story about Stagnation in the 1970s, the pressure on Fed Chiefs and the fun and difficulties in the period. Then I jump to current matters.
Niall Fergusion ‘with inflation above 8 per cent and the Fed scrambling to catch up with expectations, I still hear complacent arguments about the transitory nature of the problem, despite the evidence that the monetary policy mistake of early 2021 was even bigger that those of the 1960s and 1970s.
‘The argument is that pretty much every component of inflation, except energy, is now heading down, while warehouses are overflowing with inventories.
‘Sure, we can reasonably expect inflation to reach a peak at some time this year. But the history is that it is unlikely to come all the way back down to below 3 percent next year, below 2.5 percent in 2024 and then 2 percent afterwards.
‘Yet, that’s exactly what the Fed’s anticipate – as do those of the Congressional Budget and the International Monetary Fund.
‘Despite the fulfilment of my prediction last year that the Fed would have a real problem with inflation expectations if there was a war, people seem to be assuming that global economic life will return to “normal”, meaning 2019, very soon.’ …
‘As the late, great historian of the Fed, Alan Meltzer showed [Alan was a good friend of mine when I was at the LSE], the Fed raised rates plenty of times during the Great Inflation. Between the ‘big error’ he identified (the rate cuts of 1968) and the ‘big solution’ (the appointment of Volcker 11 years later), the Fed lifted rates at 21 out of 36 listings. In four cases, however, the Fed then paused for nearly 20 months and reversed in November, 1970. Thanks in part to Nixon’s browbeating of Burns’.
A more committed effort began in January 1973, when the Fed lifted by 50 basis points in the face of mounting inflation. It continued raising rates for the next 15 months, with a final 50 basis point increase in April 1974, bringing the discount rate to 8 per cent’….
‘Monetary policy during the great inflation was not just ineffectual – it was a stairway as in a game of snakes and ladders’.
‘To quote Meltzer again, bringing down inflation expectations ultimately necessitated ‘More restriction that anyone on the FOMC had anticipated’.
‘Will the Powell Fed be more like the Burns Fed or the Volcker Fed? We won’t know for sure until it confronts something much uglier or the current equity bear market’.
‘All we know is that Powell has blinked before now – and in response to a 19 per cent share market correction in late 2018 and a President with a twitter habit. Trump’s successor is not much of a tweeter. But the market is already down further.
The Aussie, Tuesday, June 21, P1 and P4, Penny Williams, Geof Chambers, ‘Watchdogs spotlight on power firms’.
‘Energy companies face a consumer watchdog probe into any price gouging and anti-competitive conduct during the rolling national power crisis, with a report in the electricity market to be handed to energy ministers next month for a five-fold increase in wholesale electricity prices.
‘The Australian Competition & Consumer Commission investigation will examine energy companies ‘ profits and margins as part of a forensic audit into soaring energy bills linked to coal outages and Russia’s invasion of Ukraine.’
Continue on if concerned.
Robert Gottliebsen, P 21, ‘Beware Inflation Cocktail’.
In conclusion: ‘If the phone calls show that last week’s inflationary cocktail has gathered pace, it is clear that interest rates are going to need to rise a lot more.
‘Rather than nibble at the task, maybe the next rate increase needs to be greater than 0.75 per cent.
‘If the transport companies’ volume fell 20 percent then big price rises would move off the agenda. …
‘If the Reserve Bank directors check with corporate executives in the US (but not the Federal Reserve) they will discover the retail sales are indeed starting to slip, although the well-off are still spending but are directing more of the spending away from goods into services, led by travel.
Footnote: Full marks to Treasurer Jim Chalmers for extending the independent panel Reserve Bank inquiry into the board structure.
AFR, Wednesday, P1 and P 10, Wednesday, Ronald Mizen, ‘RBA puts 3.5pc lid on wages’.
‘Reserve Bank of Australia governor Philip Lowe has sought to put a lid on wages growth of about 3.5 per cent and warned regular pay of 4 per cent to 5 per cent could entrench higher inflation.
‘Dr Lowe flagged the need of regular real wage cuts, saying annual rises in the mid-threes was a good ’anchoring point’ for employees and unions, even while inflation was forecast to reach about 7 per cent by year’s end’. …
‘Dr Lowe said inflation would remain above the target for years and the RBA would do ‘what is necessary’ to pull it down.
‘And while pay rises above 3.5 per cent ‘for a short period of time’ were possible, he warned that a wage price spiral would force aggressive rate rises that slow the economy and push unemployment higher’.
I must say that I doubt that the RBA will be able to keep wages at Dr Lowe’s preferred set of numbers, and that his ‘worse case’ of 5 or 6 per cent, or more, is likely.
A key point is that there are numbers of workers who are keen to work, and one hears of plenty of workers shifting jobs with large bonuses as an inducement. Heavily increased wages will not show up for some time and by the time Dr Lowe discovers this the cat will be out of the bag.
Dr Lowe on pages 36 and 37 of Wednesdays’ AFR provided ‘an edited and abridged’ lecture.’ My view is the inflation genii is well out of the bag, and current ‘wonderful’ employment figures and historically surprisingly low unemployment data will soon show far worse data due to RBA very poor reading of the numbers emerging from the good but inaccurate doctor.
The Aussie, Wednesday, June 22, P1, Patrick Commins, ‘Wage hikes ‘risk economy’.’
More or less a sympathetic version of Dr Lowe’s ‘risk to economy’ speech.
‘Dr Lowe’s speech comes at a time of growing discontent about the RBA’s extraordinary monetary policy policies intervention [the most obvious, the 0.1 percent cash interest rate] during the pandemic, and the only delated of these measures and ultra-easing settings’.
‘With Dr Chalmers set to oversee an externally led review this year into the central bank’s governance and practices, a Reserve Bank internal internal review of its Covid-era commitment to keep rates at zero all the way out to three years had ‘caused some reputational damage to the bank’.
Who wrote this statement, and what was his ‘reward’?
AFR, Thursday 23 June, P1 and P6, ‘Labor bows to RBA real cut.
This front page headline seems to me to refer only to ‘political Labor’. Then there is ‘working (small 'l') labor’.
Time will tell, but with the rate of unemployment 40 years low, and unofficial data about many workers moving jobs for large bonuses, how can political Labor produce an outcome compatible with small 'l' labor?
The Albanese government is battling the possibility of giving the unions a small real wage rise, hoping the unions failed to notice that wage increases will be well below inflation by years end.
‘Philip Lowe warned against common pay rises of 4 to 5 years’
‘The unions rejected the idea and said they would continue to push for annual pay rises of 5 to 6 per cent in negotiations with employees, putting them at odds with the government’.
Two very interesting further comments:
P 46, ‘The AFR view’, To shield Australia from a potential global recession, Mr Albanese needs to articulate a wages policy to back up rather than undermine, the central bank’s anti-inflation policy.’
P 31, Jonathon Shapiro, ‘The widening gap between interest rates in Australia and the USA is a measure of the RBA’s apparent credibility gap.’
The Aussie, Thursday, June 23, P1 and P4, ‘Covid cases urged to tap antivirals’.
Rosie Lewis, ‘Australians who tested positive to Covid-19 would receive text messages advising them to speak to their doctor immediately about the possibility of taking antiviral drugs in a move by the Albanese government to ease pressure on the struggling hospital system’.
‘We’ve got 1.3 million doses sitting in warehouses, it’s on the PBS so for most people in this population group [over 65?] it is $6.80. We should be pushing it out the door. [I assume for elderly people, however defined.]
P1, David Rogers, ‘All eyes on Fed as markets take turn for worse’.
‘The Fed chairman is caught between the proverbial rock and a hard place. It’s not clear he has any wriggle room until the US economic outlook becomes more of a problem than the inflation outlook. Any sign of backing off on rate rises risks fuelling inflation and causing a bigger problem later.’
This much seems sensible, but then it gets tricky. People have a complicated set of options. At least a bloke like Dr Lowe can make mistakes that make the sensible road really clear.
Fiona Prior discusses Tom Cruise and cognitive dissonance. More here.