Reserve Bank governor Philip Lowe has added another line to the picture of a duck appearing calm above the waterline while paddling furiously below.
This particular duck is holding its position against a strong current.
The bird’s situation is very tricky.
It is further complicated by the RBA duck having an outboard motor tucked under its wing, but it’s a motor that is dangerous to use and can only be employed in partnership with a bunch of seagulls the duck doesn’t trust to handle such a machine responsibly.
No doubt you are ahead of me with this tortured allegory – the seagulls are politicians and the outboard motor is the monetising of a lot more government debt in such a way that it disappears.
The governor’s brief statement after Tuesday’s RBA board meeting presented the calm duck – things are uncertain but not as bad as we originally thought, the government and the bank are doing a lot to support the economy, we’ll get through this eventually and you can rely on the RBA to keep paddling.
That was presented, calmly, in the following paragraph, but there were two snipes at the seagulls in the process: “As Australians deal with the coronavirus, the economy is being supported by the substantial, co-ordinated and unprecedented easing of fiscal and monetary policy. The Australian government’s recent announcement that various income support measures will be extended is a welcome development and will support aggregate demand. It is likely that fiscal and monetary stimulus will be required for some time given the outlook for the economy and the labour market.”
The snipes were that it was a damned fine thing the government finally announced the extension of JobKeeper and extra JobSeeker payments.
Reading between the lines, that it was a “welcome development” implies it would have been nice if there hadn’t been extended uncertainty about it.
It had to happen.
The sharper dig was the apparently bland statement that “fiscal and monetary stimulus will be required for some time”.
As previously explained, if the government attempts to rein in its deficit beyond this financial year, it will be running tighter fiscal policy instead of providing stimulus.
(AMP’s Shane Oliver thinks Victoria’s Stage 4 lockdown means a deficit this year in the order of $235 billion rather than Mr Frydenberg’s forecast last month of $184.5 billion. Whatever the end figure, it’s one the government is set on quickly reducing.)
A particularly intelligent government could compensate for the contractionary maths by being especially smart about the way it spends money, by targeting the very best employment-creating opportunities, by concentrating very hard on getting the best demand outcomes and not being distracted by ideology about a supply solution.
But this is a government whose Prime Minister ensured Craig Kelly remained one of its members and a Treasurer who finds inspiration in the Britain of 1979.
Ducktor Lowe calmly spelt out the RBA’s best guess of what lies ahead: “In this scenario, the unemployment rate rises to around 10 per cent later in 2020 due to further job losses in Victoria and more people elsewhere in Australia looking for jobs. Over the following couple of years, the unemployment rate is expected to decline gradually to around 7 per cent.”
So unemployment, never mind underemployment, remains high for years to come.
Given that “full employment” was considered to mean an unemployment rate starting with a 4, “around 7 per cent” at the end of 2022 or in 2023 is dreadful.
It means stuff-all real wages growth and, thus, deteriorating living standards for most Australians, never mind the unemployed.
It’s not what the duck wants, not what the RBA’s charter instructs it to achieve. So there’s that outboard motor hidden under its wing …
The yield on three-year government bonds has ticked up a little above the RBA’s announced target of 0.25 per cent, prompting Dr Lowe to remind the market who is boss and, in the process, promise interest rates won’t rise for years to come: “Given this, tomorrow the bank will purchase AGS in the secondary market to ensure that the yield on three-year bonds remains consistent with the target. Further purchases will be undertaken as necessary. The yield target will remain in place until progress is being made towards the goals for full employment and inflation.”
It was enough for the governor to restate the bank’s intention to push yields lower.
There will be plenty of time for more billions of dollars of bond purchases over the next few years – full employment and inflation within the RBA’s target band are not on the forecastable horizon.
But the RBA could go further than effectively printing billions of dollars by buying government bonds – if it trusted the seagulls and the seagulls understood.
The sort of intelligent stimulus required to rapidly ease Australia’s economic pain, instead of letting it linger for several years, would mean many more hundreds of billions of dollars of debt.
The duck has told the seagulls to go for it, that the debt is manageable, but as much as seagulls are attracted to hot chips, they have been squawking about debt being bad for so long, they’re still wary of it even while splashing the money around.
Without getting into the unending arguments about MMT (modern monetary theory), which holds that debt doesn’t matter at all to the government, what scares the RBA is that politicians can’t be trusted to directly play with the central bank’s printing press.
It would effectively mean the end of Reserve Bank independence.There was a reason the RBA achieved that independence – you couldn’t trust seagulls to set interest rates. Handing over the printing press would be another matter again.
But, but … within certain strict limits agreed by the RBA and Treasury, a one-time-only, these-are-unprecedented-times, once-a-century-calamity could see the duck and the seagulls agree on a deal.
It would be possible with a little legislation for the government to issue all the debt it possibly needs, for the RBA to purchase that debt and subsequently cancel it or, without legislation, just let it ride off into the never-never as a footnote to the accounts.
Dr Lowe specifically rejected any such thing last month.
That doesn’t mean it couldn’t happen if we remain on this trajectory if a successful vaccine is not found – if only he could trust the seagulls not to want to keep doing it.
Dr Oliver reckons the RBA will end up doing more without the duck using the outboard motor.
“In terms of what the RBA might do if it does ease further in the months ahead – it has all but ruled out negative interest rates, foreign exchange intervention and the direct monetary financing of government spending,” he wrote.
“But it sees still lower but positive interest rates and the purchase of more government bonds beyond what’s necessary to achieve the three-year bond yield target of 0.25 per cent as possible options.
“A rate cut to 0.1 per cent would hardly be worth the effort (but they may still do it), which leaves more quantitative easing as the main tool for further easing.
“The latter could take the form of bond purchases beyond three-year bonds and a possible target for the value of bond purchases. Meanwhile, rate hikes are at least three years away.”
The keywords here are “at least”.
Forecasting is always a mug’s game. Now, with the uncertainty of a vaccine/no vaccine, it’s impossible beyond scenario sketching.
In a world gripped by such a pandemic, nothing is entirely off the table – and that duck is paddling at maximum speed with the webbed feet at its disposal.
The seagulls are still having trouble working out which way the tide is running.