Do you ever get the feeling that global economic policy is being run by a bunch of headless chickens? If you do, then a visit to the ASX Investor Hour in Melbourne yesterday lunchtime would have confirmed it.
The presentation was by Alan Oster, chief economist for the National Australia Bank. It only lasted for an hour, but during that time it gave your editor a perfect insight into why economists are saying what they’re saying, and why governments are doing what they’re doing.
I’ll get onto that in a moment, but first…
Just before we left our sleepy hollow at the Hat Factory to travel into the suit-clad Melbourne CBD, the market braced itself for the GDP numbers. You’ve probably read the stunned disbelief in the papers and seen the shock on the faces of TV commentators.
Gone is the “Australia is different” mentality. Yes, the Australian economy has shrunk marginally. For the quarter is has shrunk by 0.5%, or if you annualize it (as everyone was keen to do for the US and Japan figures, but not the Australian figure for some reason!), the economy has shrunk by 2%.
But as we wrote in Money Morning on Tuesday:
“The reality is we don’t always need growth. There, we said it. The downside of no economic growth is a period of time when consumers buy fewer things, so companies produce fewer things, and therefore employers need less staff.”
You only have to look at the front page of today’s papers to gauge the hysteria:
Growth slumps: it’s a recession – The Australian Financial Review
We ARE in Recession – Herald Sun (although the main story is about a footballer with brain damage)
Then we turn to David Bassanese’s column inside the AFR where he states:
“Recessions are usually caused by higher interest rates crunching business investment and housing construction – with consumer spending following as unemployment rises.”
It’s a typical mistake that most mainstream economists and commentators make. They look at the current issue or problem, take one step back and ‘voila’ there’s the problem.
The problem with blaming recessions on higher interest rates is that it isn’t painting the whole picture. We noticed yesterday that Malcolm Turnbull is blaming last year’s interest rate rises for the economy moving into recession.
So, let’s get one thing clear. A recession is pleasant for everyone. Just in case you’ve missed among the hype what the consequences of recession are, here’s the quick 10-second rundown: job losses, lower business investment, less consumer spending, less bank lending.
That’s about it.
But what nearly every economist and hack fails to realize is that it is just part of the business cycle. If you are happy to accept house prices rising by 500% and credit being so easy to obtain that you don’t even need to prove you can repay it, then you have to accept the reverse.
And that brings us back to Alan Oster’s presentation yesterday. There were a number of comments made that almost defied belief, but the most telling one was…
“Basically [I] don’t care about inflation anymore… this [inflation] ain’t the issue.”
It sums up perfectly why we are seeing the kind of policy decisions by government. Don’t forget that Oster isn’t own his own with this kind of view. Almost every other mainstream economist believes the same thing.
So it isn’t surprising that government is spending billions of dollars in taxpayers’ money on stimulus packages in pursuit of their political instincts of spending money when arguments from economists encouraging them to do so.
And it won’t end there. Oster said “I don’t think they’ve [government] has spent enough.” He’s looking for the federal government to throw another $15 billion at the economy before the end of this year because:
“From an economists point of view I want to see growth so my kids can get a job.”
At the end of the presentation there was a Q&A session where your editor managed to raise one question:
“How can you justify your comment on inflation when governments and central banks are inflating the money supply by so much, and that surely growth built on credit is not really growth at all but just more inflation?”
The answer? “Inflation is just too much demand and not enough supply – we don’t have that problem.”
Of course that’s part of it, but what about the massive increase in money supply, not just here but overseas? That part of the question wasn’t answered.
The reality is that government spending cannot stop the economy from contracting. It shouldn’t even try to. It needs to be remembered that people lose their jobs all the time, not just in a recession. Businesses go bust all the time, not just in a recession.
The economy must be allowed to shrink so that it can grow again. It doesn’t have to continue on a never ending growth trajectory – mainly because it can’t, it’s impossible.
Any attempt to ’save’ the economy will be inflationary and will harm you and the economy even more.
We’ll have more to say on this topic over the next few days and weeks.
Other Stuff on the Markets
The Chinese appear to be looking at another stimulus package. US markets emerged from five days of losses on this ‘good’ news.
We continue to be bullish on the natural gas/LNG industry. Our December tip in Australian Small Cap Investigator is benefiting from the fight between Arrow Energy and BG Group for Pure Energy.
Gold continues to slip. It’s now down to just above USD$900 an ounce.