Did you see Glenn Stevens on TV last night, dear readers? He is half a generation younger than Henry but looks a generation older. Clearly central banking is stressful, and we wish our former colleagues well as they grapple with near insoluble problems. (This article originally published on April 7, 2015.)
1. The economy is rapidly approaching real recession, with rising unemployment and an absolutely disgraceful level youth unemployment. A modest further rate cut, or even several cuts in cash rates, cannot prevent this slide. Yet the Reserve cannot look uncaring, so must cut rates to avoid looking uncaring.
2. The Aussie dollar keep looking buoyant, despite the inexorable falls in commodity prices. Further rate cuts will encourage falls in the currency, but dramatic 'banana republic' falls will not occur unless and until international investors lose confidence in Australia's ability to restore growth. While parliament remains gridlocked and budgetary reform seems impossible, risks will grow of a major loss of confidence by investors. A fall to 50 or even 60 cents in the US dollar would, or should, send shivers down our national spine, while a renewed fall in the US dollar would drive the Aussie dollar higher.
3. Further rate cuts will fuel house prices in Sydney and Melbourne and further damage young peoples' faith in Australia's future. In theory APRA will deal with the housing boom with so-called 'macroprudential policy' - imposing higher reserve ratios on banks to discourage excess lending for housing. But APRA, until it becomes as open as the RBA, will act too little too late, and the board of the RBA should recognise this and either send APRA a very precise instruction or rethink the rate cut policy.
This is the set of serious dilemmas facing Glenn Stevens and his colleagues. We read over the weekend the touching story of a relatively young RBA director. With great respect we doubt this person, and the other representatives of the good and the great amateurs who are there to keep the RBA honest, are capable of providing useful advice at this dire time in Australia's history.
The key points are these:
* Australia's growth depends on rapid and thoroughgoing economic reform. Any brave economist will provide a list. Until such reform is implemented, cuts in interest rates will have little effect except providing the RBA will the excuse that it did the best it could.
* Australia's budget problems will drive us into a very nasty dry gully of excess debt if they are not fixed in the next few years. Interest rate cuts will do little to help.
* A lower dollar, provided not the result of a massive vote of no confidence in Australia's economic management, will help at the margin, and this may be the decisive point made at the RBA meeting today. But cutting rates will also fuel asset prices and Australia has already joined the global soft money crusade that will eventually create a massive, damaging, global recession or depression.
What you should do today, gentle RBA board members, is direct Gov'nor Glenn to write a serious letter to the government, copied to the opposition and especially the so called 'independent' Senators. The three points laid out above need to make up the essence of the letter. Glenn Stevens has said he plans not to seek another term as head of the RBA, so he has the chance to be a truly independent leader of that august institution.
Please Glenn Stevens, show us what you really are capable of. I have great confidence you are the most likely person in Australia to get the attention of the politicians and start a process that may even stop their bickering, which is in fact worse than useless.