Just a fark in the road…
23 July 2020
Frydenberg told reporters in Canberra today. “The economic outlook remains very uncertain.” No shit Sherlock.
The Back in Black budget surplus has been blown out of the water. Josh is calling current net debt (June 30) at just shy of $500B. He expects it to top $680B by this time next year.
All bad of course – but with debt at 35% of GDP by next year, we are still in reasonable shape when viewed against our international competitors. As such, our country rating of AAA should survive. More a case of less a disaster when compared to others.
Whilst official unemployment rate is 7.4% Joshy reckons we are tracking closer to low 11% and on track to finish the calendar year at 9.25%. Of course that is very dependant on those Vicexicans getting their shit together.
Being raised in the more traditional “mean reversion” style of economics, you may recall an earlier article on this site explaining the erosion in the value of money as the government starts to print the cash. I still believe in that principle, but I have been reading an increased number of articles lately that challenge that entire theory.
Rather than explain in full – Wikipedia says:
Modern Monetary Theory (MMT) is macroeconomic theory that describes currency as a public monopoly and unemployment as evidence that a currency monopolist is overly restricting the supply of the financial assets needed to pay taxes and satisfy savings desires.
MMT is an alternative to neoclassical economic theory and may be more effective in describing the global economy in the years following the 1930’s recession.
MMT argues that governments can issue bonds or print new money by using fiscal policy. According to advocates, the primary risk once the economy reaches full employment is inflation, which can be addressed by gathering taxes to reduce purchasing power.
In my language that means pump prime the economy (Josh and ScoMo spending like drunken sailors) with no regard to any deficit until unemployment is low and supplies cannot keep up with our growing demand. At this point, inflation will kick in, and the government will need to take the punch bowl away from the party. Taxes will do the trick.
Wacky theory you say?
Former RBA deputy Stephen Grenville wrote an article last week on just this subject. If you are having trouble sleeping, then have a read…https://www.eurekareport.com.au/investment-news/modern-monetary-theory-and-mainstream-economics-converging/147725
He states “Economists, even those who have spent a lifetime warning of the perils of budget deficits and government debt, seem to accept these astronomical deficits with equanimity. Stranger still, central banks everywhere are abandoning time-honoured conventions and funding these budget deficits to a greater or lesser degree by buying government bonds – what is often called ‘printing money’.”
Maybe then it is a case of the theory is insanely wacky….until you have to use it – and justify your actions.
The proof will be in the pudding as to how history will review current global economic response. Unfortunately I remain in the camp of “if it seems and smells like bullshit, it probably is”.
If you were a $300 million investor in Virgin, and Bains reckon you might be down the tube by $270 million, I reckon you would be looking for a parachute. Word on the street is that powerful forces may tackle Bains and Deloittes still. SMH article covers it well; https://www.smh.com.au/business/companies/virgin-bondholders-push-to-meet-airline-management-and-unions-20200720-p55dqk.html Worth tracking because it is high stakes, “real” money – not MMT.
Two things offshore of my interest. Geo political risks continue to rise. China and the USA seem to be escalating towards arm burn or nipple cripple. Issues for the Aussie Navy in South China Sea also not good.
On the flip side, Europe got a resolution on the Covid economic response. With such a vast variety of views from within that was good news indeed. The euro got a nice kick higher as the punters believe that the queue for the exit door behind Boris has now cleared.
AUD has tracked higher as we predicted – $0.7135 as we write. Aussie dollar up 2% for the week and at 16 month high is not reflective of just how well we are doing – more a matter of how the international market is valuing the USD at present. You cant “mask” that fact Donald.
Equities tracking largely sideways for the week.
Bills and Bonds are likewise. 90 day BBSY at 0.16% remains below RBA official cash rate, but still not a believer that RBA will go lower.
10 year inter-bank swaps still below 1%
In line with the economy, I’m revisiting some old roots.