Commentary on Political Economy

Saturday 18 December 2021

 US Fed and Frydenberg joined in policy lunacy

It really is extraordinary. Over in Washington, the hapless, hopeless, helpless head of the Fed Jerome Powell has utterly abandoned any semblance of responsible monetary policy; irredeemably hostage to the infestors of lower Manhattan, he has simply abandoned the other 330m Americans.

While here in Canberra, and it really is a ‘Canberra thing’ – combining the ivory tower disconnect from reality of treasury bureaucrats with the sheer cynicism of the political class – the always smiling treasurer Josh Frydenberg has similarly, simply abandoned any semblance of responsible fiscal policy.

Strikingly and all too appropriately they chose to announce their respective failures on the same day, Thursday. Although the substance – more accurately, the ‘message’ Frydenberg wanted to lock-in via compliant ‘postbox’ journalists – had been well and truly leaked ahead of the formal release.

It was Frydenberg who had the timing discretion and chose to exercise it to make MYEFO contemporaneous with the Fed statement – joining irresponsible hands across the Pacific, so to speak.

Let me cut through all the numbers in and around MYEFO and get to its heart: the final abandonment of any pretence of fiscal responsibility.

In a phrase, it was a case of ‘happy days’ – of big spending, big deficits (and no REAL tax cuts, far less tax reform) and ever-rising debt, first stop $1 trillion and then on to $2 trillion – are not just ‘here again’, but here permanently.

The outlook for the economy – more accurately, what Treasury is ‘predicting’, and will certainly get wrong, but it’s what the budget numbers are built on – is actually better than forecast in May.

Yes, this current fiscal year’s growth has been cut from May’s 4.25 per cent to 3.75 per cent, but the growth forecast for 2022-23 is up sharply from 2.5 per cent to 3.5 per cent; so over the two years growth is forecast solidly higher.

This means revenues are up a thumping $72bn over the two years. So that means Frydenberg has started on the long road to reducing the deficit, right?

Ur, wrong. This year’s deficit is projected $7bn lower, next year’s less than a billion. The deficits for the two ‘out years’ – or, as I like to more accurately call them, the fiscal fantasy years – are essentially unchanged.

The better numbers came despite the negative impacts of the long-lockdowns in NSW and Victoria through August-to-October and which obviously were not factored into the May numbers.

This may be attributed – it will certainly be, by a certain smiling treasurer – to the very things that stopped the revenue rise turning into a deficit fall: all the economy-supporting spending.

It also is the fiscal version of the great feeling you get when you stop bashing your head against a brick wall.

It also reflects Treasury’s endemic inability to read, from Canberra, what’s actually happening in the economy where the other 25m-plus Australians live.

The key thing about both the four-year projections to 2024-25 and the ten-year ones to 2031-32, is that they assume that ‘everything’ runs smoothly and uninterrupted.

I do mean ‘everything’: so we get unending, uninterrupted economic growth, no elections where politicians promise spending increases rather than spending cuts or tax hikes, China continuing to smile benevolently on us and the world, and, oh yes, no Covid-19 or whatever else might emerge from a lab somewhere.

And, by the bye, we go back to our ‘population Ponzi’ of bringing in more and more people every year and building more and more shoeboxes, sorry houses, and pouring more and more concrete in Melbourne and Sydney.

We can run through all the remaining letters of the Greek alphabet – and after that, what, the Russian? The Chinese? Or just back to A, B, C? – and we won’t see anything like 2021 far less 2020 again.

So even though, the economic sun supposedly shines brightly and uninterrupted for first four years and then another six years after that; still the deficit would be around $60bn in 2024-25; gross federal debt (you have to add the assorted state debts on top) would be just shy of $1.2tr and net debt just over $900bn.

But surely unending growth after that would fix things? Indeed, the budget hails an “expected improvement of the underlying cash balance” by 2031-32.

Actually it hails the deficit falling, but only slightly, and only in relation to GDP, to a projected 1.8 per cent of GDP in 2031-32.

In dollar terms – I’m telling you not Treasury or Treasurer – it will actually be at least as big as 2024-25’s (projected) $58bn. But in reality, it will be greater, maybe much greater.

And to stress, that’s on the basis of utterly unrealistic unendingly and uninterrupted optimistic forecasts for literally ‘everything’.

As I wrote at the start of all this, we will never see a budget surplus again. But I didn’t really expect Frydenberg to actually ‘aim’ for bigger deficits.

I can best capture the really quite embarrassing hopelessness of Powell and the Fed by contrasting one key sentence in the latest and previous, November, statements.

In November, Powell said “with inflation having run persistently below this longer-run goal (2 per cent)”.

On Thursday he said “with inflation having exceeded 2 per cent for some time”.

So at the same time, we are told by Powell that US inflation has been persistently below 2 per cent and also above 2 per cent – actually well above 2 per cent, like 6-7 per cent – and has been both for “some time”.

Even more hapless and hopeless, arguably, were the commentators who hailed Powell’s supposedly more hawkish stance.

He’s not switching from stimulus to restraint, only – very slowly and gingerly – reducing the stimulus. He’s still stimulating; he only plans to get around to raising the Fed Funds rate from zero in six months time.

He should have announced an immediate stop to the money printing and immediately raised the rate to 1 per cent, with more to come in January.

He’s hopeless, he’s a disgrace. And it’s not just 330m Americans he’s betrayed.

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