Commentary on Political Economy

Saturday 2 October 2021


Economic cluelessness a cause for global concern

The utter cluelessness of the supposed experts managing our economic present and – even more disturbingly – structuring our economic future was on full, embarrassing display on both sides of the Pacific this last week.

Here, Josh Frydenberg unveiled the final budget outcome for the 2020-21 year: a deficit of $134bn. He hailed the lower-than-forecast figure reflecting the “stronger than expected economic recovery”.

It was certainly to be applauded in comparison with the $161bn deficit forecast in the May budget – applauded both in terms of less debt added to the burden for future taxpayers, and applauded as an indicator of that stronger economy.

But in his applause, the Treasurer also rather neatly and totally unknowingly nailed the utter cluelessness of all that intellectual and analytical economic might, supposedly gathered in his Treasury department headed by secretary Steven Kennedy.

Frydenberg’s words in quotation marks can be restated as: Treasury didn’t have a clue what was actually happening to the economy.

Rather than the recovery being stronger than expected, it was stronger than Treasury understood, as it was actually happening, in the June quarter.

In the budget in May, with over 10 of the 12 months of the fiscal year already behind it – and closing on halfway through the June quarter – Treasury forecast GDP growth for the 2020-21 year would be 1.25 per cent. It came in at 1.4 per cent.

That difference might seem minuscule. But it’s actually huge in terms of what Treasury was forecasting for the June quarter itself.

Those forecasts are for the whole of 2020-21 compared with the whole of 2019-20 – not, as most forecasters do, of the year through to the June quarter.

Working back it is possible to calculate that Treasury was actually forecasting zero GDP growth in the June quarter, or possibly even a marginal fall.

New & improved business newsletter. Get the edge with AM and PM briefings, plus breaking news alerts in your inbox.

We actually got positive growth of 0.7 per cent; or nearly 3 per cent in annualised terms.

The simple reason that Treasury forecast a $161bn deficit when the year was almost over, and it came in at $134bn, is that it didn’t have a clue at just how relatively strong the economy was in the June quarter, in real time as the quarter was unfolding.

The key reason for Treasury’s misplaced relative pessimism was its belief that the end of JobKeeper at the end of March would have a much bigger negative impact on the economy than it actually had.

True, this was a rather “appropriate” bookend to the saga of Treasury and JobKeeper, as Treasury had cocked up JobKeeper from start to finish and every which way, from the rorts adding to tens of billions of dollars to the “correction” of its estimated cost from the original $150bn to “only” $90bn.

When all it had to do was to properly copy the superior NZ scheme from which it was stolen.

Ask yourself: how much more rorting was built into the original $150bn number? Or how even more utterly inept was the Treasury forecasting?

No doubt, Frydenberg was specially chuffed at the lower actual deficit. It reduced the aggregated figure for the 2019-20 and 2020-21 deficits to $220bn.

Why was that significant? Because it means that the deficits he delivered in just two years still fell short of the $240bn of total deficits delivered by his Labor predecessor Wayne Swan in not two budgets but all six.

If the latest deficit had come in at the forecast $161bn, Frydenberg’s two-year total would have topped Swan’s six-year total.

Across the Pacific, we saw Janet Yellen, elevated from one-time Fed head to President Joe Biden’s Treasury secretary, reveal she was as equally utterly clueless about what’s happening in the US economy. In her case, with inflation. That’s of some very highly, disturbing importance for us as well.

She was appearing before the Senate to argue for an increase in the US debt ceiling.

Republican senator John Kennedy noted that the last time she’d been before the Senate, earlier this year, she had forecast just 2 per cent inflation for the US by December. Was that still her forecast? Her reply: it would be “closer to 4 per cent”.

Now, the economic policy insiders in Washington – at both Treasury and the Fed – have completely failed to see the accelerating inflation all around them this year, in real time, as it was taking place.

It wasn’t only Yellen forecasting nice, gentle 2 per cent-level 2021 inflation for the US. In March the Fed’s forecast was 2.4 per cent; more tellingly, not a single one of the individual two dozen or so forecasts that went into that averaged number was higher than 2.6 per cent.

But even Yellen’s now 4 per cent is going to be way, way too low. US inflation in the eight months to August has already added up to 4.5 per cent.

Just to make that clear, I’m not talking about inflation over the year to August, but just the price rises since January.

Inflation would not just have to fall to zero but actually go negative for the entire last four months to get down to Yellen’s 4 per cent.

Inflation is going to be “closer to 6 per cent” – at least 50 per cent higher than Yellen is forecasting right now.

It’s not just the number she’s clueless about, and it is a cluelessness that she shares with all her former continuing colleagues at the Fed, including her successor Jerome Powell, it’s the far more important underlying reality. She clearly has no understanding of the forces – many of which are self-inflicted by Biden’s clueless policies – that are driving and will sustain higher US and indeed global inflation.

These cover such a wide spectrum from surging energy prices, driven by climate lunacy, intersecting with the Covid-19 supply chain disruptions, and “something” very complex and disturbing going on in China – which could well be signalling the beginning of the end of the 21st century China miracle.

Our Kennedy cluelessness is only our problem; the Powell-Yellen cluelessness is everyone’s problem.

No comments:

Post a Comment