• Pete Jonson

Where is our economy heading?

After the great discomfort of the ‘second wave and lockdown’ in the Victorian economy, and the near miracule of weeks of no new illnesses, one is entitled to be optimistic. With several different vaccines racing to be available, perhaps before the Christmas break, greater optimism may be in order.


Let us talk about the latest national news for Australia. The global background, of course, is not so optimistic. The USA keeps on reporting higher numbers of infected people and Europe is not far behind. The UK is also showing scary numbers and a new vaccine may be hailed as the ‘beginning of the end’ before Christmas. With a daughter and her finance working in New York, Henry is naturally a bit worried.


A recent Australian’s news report says ‘economy roars to life’. Specifically, most states recorded solid recovery in GDP, with only Victorian GDP still falling. The national result is June quarter minus 7 % and 3.3 % up in the September quarter. According to Treasurer Frydenberg, this is the strongest growth for any quarterly rise since 1975. As the graphs show, 3.3 % up is far smaller than 7 % down, showing despite a massive 7.8 % turnaround in consumer spending.


What’s missing is spending by businesses and the Treasurer has pointed out that recovery will be ‘long, hard and bumpy’. There seems a lot of uncertainty about unemployment and underemployment rates. In the RBA Chart book, as at 26 November the underemployment rate is around 10.5 % and the unemployment is approximately 7 %, making underemployment plus unemployment approximately 17.5 %.


There is a nice graph of recessions and bounce back, p 4 of the Oz. Cannot see a copy in the digital version, so it has to be found in the local fish and chippery.


RBA and 'surging house prices'


I have always believed that consistency is the sign of a middle class mind.


Therefore, I do not blame Philip Lowe. As a graduate student in his oversea's study he wrote a nice paper with his supervisor saying if asset prices were rising too quickly interest rates might need to be raised.


Now he sees this differently. 'The Reserve Bank has rejected suggestions that it should be keeping the heat out of the housing market as it pours billions of dollars into quantitative efforts to keep the cash rate low and turn around the nation's economic retreat'.


Philip Lowe has 'signalled that ultra-low interest rates would stay in place even if a housing bubble started to return'.


'It would be inappropriate for us to target asset prices'.

'

'That's not our job and shouldn't be our job'.


Here is my question. Whose job is it? My research shows that in the US market, the average level of prices of goods and services normally moves in the same direction of prices of assets. Occasionally, however, with monetary policy tight and goods and services prices low, asset inflation races away. The worst example is the 1920s, when this conjunction produced a massive share price bubble. When the bubble burst from 1929 to 1933 it caused the global depression that lead to great misery.


Here is my first attempt to update Friedman and Schwartz.


Soon a more rigerous study will demonstrate that asset inflation is in the UK case far more sensitive to monetary policy than goods and services inflation.


Dr Lowe, you cannot avoid going back to your youthful idea about this matter.


Labor’s support for the government.


Labor’s ‘Albo’ has cracked his so far support to Scomo’s response to China’s unkind bastardery involving a mythic throat-cutting Aussie soldier. There goes some further votes Mr Albanese. Scomo finally got the best response: ‘As a democracy we will always explore examples of human rights abuses’, or words to that effect.


Henry has been confidently advised by a retired BHP man that China will not cut its demand for our iron ore. Brazil is having trouble providing its (perhaps equally good) ore to its customers in Europe and the USA.


My guess is that the Australian economy will take a cut due to China’s poor treatment. But we will end up a safer place when we have found new customers for coal, copper, wine, barley, etc, etc. Worst case we’ll see if the WTO has any balls and whether China understands the meaning of ‘free trade deal’.

Kulture

And a masked Fiona Prior enjoyed Sydney Theatre Company’s latest production of ‘The Picture of Dorian Gray’. More here.

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