Far be it for your humble editor to criticize a professor… but, has the world gone mad?
It may however provide an explanation for some of the hair-brained ideas we’ve seen floating around recently. We specifically mean the hair-brained ‘cures’ for the credit crunch.
In today’s Australian Financial Review (AFR), associate professor at the Melbourne Business School Mark Crosby writes “it seems to me the central bank might as well bite the bullet and cut rates to zero.”
He goes on to say “While a cut in interest rates to zero might seem quite extreme to most people, it is clear that we are living in extreme times.”
Of course, Dr. Crosby is entitled to his opinion, he’s got the letters PhD, MA and BEc after his name.
His other offering to readers is for them not to worry about interest rates at zero because “the central bank still has capacity for further stimulus to the economy… through continuing to increase liquidity and via other measures.” Apologies for stating the obvious, but we assume he means printing more money.
So what does this have to do with the crazy ideas we’ve been subjected to? Well, it turns out that Dr. Crosby is the “co-author of the principle intermediate macroeconomics textbook used in Australia.”
We’ve got no idea what the contents of the amazing economics textbook are. But if any of it contains the phrase “might as well bite the bullet and cut rates to zero,” we may be tempted to leave that one on the bookshelf for some other poor unsuspecting individual to enjoy.
The final gem of the article is the now universally held belief that inflation is history. In fact we are told “the inflation risk in this environment is nil… there is a greater risk of deflation in the next twelve months.”
Hmmm, not if you’ve dropped inflation to zero and are cranking up the printing press.
What interesting economics lectures they must offer at the Melbourne Business School.
Squirreling Your Nuts Away
But it isn’t just in academia that we see the abandonment of logic. Still the analysts and economists at the investment banks and fund managers haven’t got the message.
Giles Keating at Credit Suisse told CNBC yesterday that “you have to have direct government spending.” His argument is that money needs to be spent in order to boost the economy.
He has clearly already forgotten that the previous economy was built on over-spending. That we shouldn’t be trying to build the economy back up to 2007 levels. So, why does he believe the government should spend the money?
Well, because if government’s give the money to consumers “it will not be spent.” All those crazy consumers will do is “reduce borrowing.”
And that as we know is not what those in the financial markets want. It is of no interest for investment banks and fund managers to see asset prices remain low. All they are interested in is any measure that will get cash to flow around in the economy.
Consumers doing the sensible and desirable thing of saving are not conducive to financial institutions making big profits.
Full Spend Ahead
However, the argument – and it is a fair one – does go that if consumers save money it is deposited in banks which the banks can then use as collateral to lend businesses and other consumers.
And that by doing so, it helps the banks to rely less heavily on wholesale funding markets, thus reducing their costs.
Of course, the major problem with that (as far as financial markets are concerned) is that you only have half the population spending. The other half is saving. Much better to encourage everyone to spend and hedge the whole exposure off into the debt markets.
Don’t Even THINK About Retiring
So, inflation is over is it? Nothing to worry about? Deflation is our biggest fear?
Try telling that to the Westpac ASFA Retirement Standard. The survey is intended to assess living expenses for retirees, hence the concentration on housing, food, energy, clothing, health, transport, leisure, personal care, alcohol and tobacco.
Hang on. Does that mean your editor is retired too? Because most of those items seem vaguely familiar.
The survey indicated that prices for those items had risen by 3.9% until the end of September compared to the previous year.
It means that a single pensioner needs to draw $19,617 from their superannuation in order to maintain a modest lifestyle – no smokes or booze! Or $37,829 per annum if they want to turn it up a bit.
What does that mean? Well, it means that if you are retiring today, then in today’s dollars you need over $300,000. That will give you the modest amount of $19,617 per year assuming you live to be 86.
Only it won’t will it. Because you’ve also got to factor in inflation. Now, most calculators will use a default inflation rate of anywhere between 2% and 3%. We assume because that is where the RBA has set the target as opposed to any bearing to the actual world.
And thirdly, the assumption in the calculator we used was based on a stable annual return of 6%. Of course, if as professor Crosby has his way then central banks will cut rates to 0% which would leave bank deposit rates at little more than that.
Not forgetting that as you enter retirement the need to preserve capital and rely on income increases, therefore the desire for capital growth decreases.
Current policies of lower interest rates to try and stimulate global economies are doing little more than leading to the impoverishment of those the government claims to be looking after.
Expect government spending on social welfare to increase out of all proportion in the next ten years!