Time to consider a different approach to economic management

I realise that the Coalition, being from the right side of the political divide, are supposed to know something about how to run an economy, but I fear the evidence is very thin on the ground. And I know the RBA is supposed to be arm’s length from actual policy determined, but I have a feeling the PM and his economic ministers are absolutely onside with this: Rates could fall as low as 0.5% amid warnings of GFC-like slowdown.

Incompetent doesn’t even get near it. Incoherent and ignorant comes closer. Peter Costello was blessed with Glenn Stevens. Now we have this:

Official interest rates could be slashed to just 0.5 per cent to deal with an economy growing at its slowest since the depths of the Global Financial Crisis, markets and economists have warned as investors bet the economy needs more financial support.

Economists at JP Morgan on Wednesday became the first to predict the Reserve Bank of Australia will eventually take the cash rate to 0.5 per cent in a bid to protect the national jobs market and drive growth.

I am not going to try to explain the stupidity of this kind of policy in a blog post. So I will only make a couple of suggestions to our new government. First, talk to Peter Costello. I know, he’s from a different planet and what would he know about running an economy? However, he did set up conditions for a decade long era of extraordinary growth until we hit the GFC at the same time that Kevin Rudd was our PM. If you want to understand why we are now dealing with “an economy growing at its slowest since the depths of the Global Financial Crisis” you have to understand why public spending and low interest rates cannot and will not provide an economy with momentum of any kind.

The second suggestion is that someone provide the Treasurer with a copy of my book: Free Market Economics. It’s now in its third edition, but as a reminder of its message, the second edition of the book was launched by Peter Costello. This is what the book is about.

Key Features include:

* analysis derived from the theories of pre-Keynesian classical economists, as this is the only source available today that explains the classical pre-Keynesian theory of the business cycle
* a focus on the entrepreneur as the driving force in economic activity rather than on anonymous `forces’ as found in most economic theory today
* introduces a powerful though simplified model to explain the difference between modern theory of recession and classical theory of the business cycle
* great emphasis is placed on the consequences of decision making under uncertainty
* offers an introductory understanding, accessible to the non-specialist reader.

The aim of this book is to redirect the attention of economists and policy makers towards the economic theories that prevailed in earlier times. Their problems were little different from ours but their way of understanding the operation of an economy and dealing with those problems was completely different.

Free Market Economics, Third Edition will help students and general readers understand classical economic theory, written by someone who believes that this now-discarded approach to economic thought was superior to what is found in most of our textbooks today.

If you actually believe that lower interest rates will promote economic growth, read the last two chapters to find out the harm that this kind of approach is guaranteed to cause. It is the only anti-Keynesian textbook on the market. After a decade of Keynesian failures, isn’t it time to consider something else?

WHERE TO BUY FREE MARKET ECONOMICS: I have had a request, for which I am very grateful, about where to find a copy of Free Market Economics, and the one certain place is from the publisher, Edward Elgar.

The book is also not very expensive so far as textbooks tend to go. It was never my intention to turn publishing into a money-making project – which I have truly succeeded at – and the price of the book has been kept as low as possible from the start. In this I was assisted by the publisher so that my text became the first publication of theirs that was published from the start in both a hardback and a cheaper paperback edition. No one ever in my memory ever bought the hardback edition, but what I also found interesting was that no one also ever asked the author to sign their copy of the book.

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33 Responses to Time to consider a different approach to economic management

  1. Driftforge

    This post seems somewhat self-contradictory. It suggests talking to Peter Costello, whose primary activeity seems to have been to gradually reduce rates over most of a decade, artificially inflating the economy by driving private debt through the roof for that duration.

    And then it says not to reduce rates. Sure, clearly there is a lack of scope to effectively reduce rates now. But – what aspect of Peter Costello’s actions do you want to see replicated?

  2. Tom

    Out of pure self-interest, you’d reckon globalist politicians would get a clue about how to win elections and guarantee their long-term future.

    But, no. They’re living in the past.

    Like lemmings, they continue running towards the cliff to oblivion. (graph h/t IPA).

    The people who support globalism are too dumb or dishonest to admit it only ever had a single aim: to destroy capitalism and the wealth of the West. It might as well have been designed by the Chinese Communist Party.

    Only the citizenry understand what’s going on — and, apart from Trump and the Brexit Party in Europe, they’re utterly leaderless.

    Get a clue, ScoMo.

  3. Dr Fred Lenin

    It looks like the old ruling elite class is determined to commit uicide,now that would be no bad thing as long as they dont drag us into the grave with them ,a reckoning is coming and it has nithing to do with do with the climate lie. They will go stumbling to the cliff edge oblivious of their surroundings .

  4. stackja

    If Keynes was the solution? Why is there still a problem?

  5. Entropy

    This post seems somewhat self-contradictory. It suggests talking to Peter Costello, whose primary activeity seems to have been to gradually reduce rates over most of a decade, artificially inflating the economy by driving private debt through the roof for that duration.

    I don’t believe Costello was directing the RBA at all, let alone wanting rates to drop in order to stimulate the economy. The reason rates fell was because there was little inflation to worry about, and constant good growth meant there was plenty of money about..
    As for private debt, that is the sum of individual choices, not Costello’s Want. He did what he could about the debt he could do something about, public debt, and got rid of it. And as a result the economy did well.

  6. Squirrel

    There is an arguable case that over-reliance on ever-lower interest rates has added to the economic problems, rather than alleviated them, by directing activity towards asset price speculation which, in turn, has increased costs throughout the economy, thus further reducing our international competitiveness.

    Sadly, all signs are that the response to the inevitable slowing of the economy will be just more of the same. The decision in yesterday’s ministerial and administrative announcements to place population policy with the Treasury surely removes any doubt that rapid (or should that be rabid?) population growth will continue to be a major source of headline economic growth – with per capita outcomes continuing to languish, at best.

  7. Entropy

    There is an arguable case that over-reliance on ever-lower interest rates has added to the economic problems, rather than alleviated them, by directing activity towards asset price speculation ….

    You must admit it is pretty good for the asset holding class but. When it comes to QE, moar, moar is bestest!

  8. None

    My economics is very rusty but my understanding was that extremely low interest rates are actually quite dangerous because they give the market no room to move to accommodate shocks.

  9. Mark M

    One may ask to what extent does failed global warming play in the deliberations of falling interest rates with the RBA …

    The Reserve Bank has warned it will have to take the impact of [failed doomsday global warming] into account when setting interest rates.

    https://www.abc.net.au/news/2019-03-12/reserve-bank-warns-of-impact-of-climate-change-on-the-economy/10893792

    Does the RBA know of extreme future climate that will decimate GDP?

    Or would that happen when interest rates rise?

    Why is RBA promoting this UN hoax?

  10. Perth Trader

    I’m just a busted ass aussie , but low interest rates with a falling dollar seems worse than high interest and a higher dollar…but, what would I know? I do know that Costello was the best Treasurer this country ever had. He worked with what he had , not what he did’t have.

  11. Perth Trader

    Mark M…….The RBA is blowing wind . That article blames climate change for falling farming output but farm output has only dropped $1bill. in a year, from $61 bill. to $60 bill. Farming asset prices are rising even with drought affects.

  12. classical_hero

    The definition of insanity is trying the same thing over again and expecting a different result.

    There are two things that are infinite, the universe and the stupidity of man. We’re not sure about the first one.

  13. Driftforge

    I don’t believe Costello was directing the RBA at all, let alone wanting rates to drop in order to stimulate the economy. The reason rates fell was because there was little inflation to worry about, and constant good growth meant there was plenty of money about..
    As for private debt, that is the sum of individual choices, not Costello’s Want. He did what he could about the debt he could do something about, public debt, and got rid of it. And as a result the economy did well.

    Individual choices are made in the context of a cultural environment.

    I’m not about to suggest getting rid of public debt was a bad move – on the contrary. But allowing circumstances under which private debt continued to scale to the unsustainable heights it has done shows a remarkable lack of foresight. Cynically one could view his tenure as benefiting from the hard choices made prior, cashing those in, then proceeding to set up the problems that occurred after he left, and his ‘greatness’ as knowing when to leave.

    What we actually need now is a period of higher interest rates in order to cause a proper reset.

  14. Entropy

    How do you know private debt is unsustainable? It isn’t a monolithic debt, it is millions of little ones. Each one should be considered on its meri. Some will be bad debt, sure. But the vast majority will be debt that is serviced with little difficulty. And yes, maybe too much is tied to p i. Housing, but other debt is driving j vestment. You should not be worrying about the debt size per se, but how much is chasing Keynesian pumped asset growth, and how much is business investment. That is the concern, and while Costello was not perfect, that little problem as caused by Swan the surplus false prophet, not Costello.

  15. Up The Workers!

    “Time to consider a different approach to economic management.”

    An-Al and his team of Leftard performing innumerates from Labor(sic) agree with you.

    Their approach is called: “Mismanagement”.

    Is that different enough?

  16. MPH

    But if you inflate the debt away (C.f. proper recession, write downs, bankruptcies, asset value deflation etc) then technically you don’t get a recession…

  17. John Constantine

    Once they get rid of cash, then negative interest rates gives them a whole new weapon to strike with.

    Pay the State 5% per year of the unspent balance of your bank account.

  18. J.H.

    Friggin’ sad isn’t it.

    Taxing us isn’t enough for these Taxpool parasites. Their profligate borrowing has put us over 500 billion dollars in the hole. These people are out of control…. all of them.

    You don’t borrow money unless you can make money…. I don’t know what these people are thinking? If nothing, we need to raise interest rates just so these idiots stop borrowing. Which idiot allowed governments and Taxpool bureaucrats to borrow?…… and what other idiot allowed them to set interest rates?

    It’s not enough that they compel us under the pain of imprisonment and confiscation to give them a portion of our earnings as tax….. They have to go and devalue our money by borrowing obscene amounts of cash while using our kids future earning capacity as collateral. It’s a great life in the Taxpool.

    … as I said. It’s sad innit?

  19. Mark M

    @Perth Trader #3030187, posted on May 30, 2019 at 7:12 pm

    Some handcuff time for low-info, incompetent UN-RBA wind blowers is in order.

    We’re gonna need a bigger gaol …

    [Failed doomsday global warming] is one of the challenges that the Federal Reserve must consider as part of its mission to preserve financial and macroeconomic stability, wrote Glenn Rudebusch, a senior policy adviser at the Federal Reserve Bank of San Francisco.

    https://www.eenews.net/stories/1060130013

  20. Diogenes

    Why leave it to the Reserve Bank to cut interest rates, this will only help the roughly 1/3 of the population with a mortgage, and actually hurt about 1/3 of people like me who own their house and are trying to put something aside for my old age or are saving for a deposit to buy a house, and either slightly advantage or disadvantage the rest.

    By dropping the fuel excise by 5 or 10c a litre, the Feds would actually be putting more money in nearly everybody’s pocket

  21. 132andBush

    Adherence to the AGW cult should be used as an IQ/Litmus test as to how well a political party will perform, especially wrt economics.
    Trump is just about the only example on the world stage who is running counter to the bullshit to any great degree.
    The fraudulent miss allocation of resources, both material and capital, is obscene.
    As is the rise in electricity charges, which has become the millstone around the necks of not only business but also people lower down the socio-economic ladder.
    To paraphrase Churchill,
    “Never in the field of human endeavor has so much been grafted from so many, by so few”

    If ScoMo and Co (sounds like a stage coach business) ditched Paris and wound back all subsidies for [email protected] over a period of, say, one month, they would be able to rule for 20 years.

    That’s what I’d call a “different approach to economic management”.

  22. JC

    Diogenes

    Monetary policy isn’t meant to be used to hurt or help one group. If monetary policy requires “low” or “high” rates it’s meant to offer the optimum outcome for the economy as a whole.

  23. Diogenes

    JC ,
    regardless of whether or not it is “meant to” it actually does directly & immediately help/hurt large swathes of people, and it takes a long time to for those hurt to recover by the ‘tide lifting all boats’.

    That argument is like the one, where you your feet are encased in a block of ice , and your head in an oven set at 100c. You should be comfortable overall – right ?

    If interest rates do drop to 0.5% as is being mooted, my projected retirement age will blow out to 75 as the amount of money I need to keep in the bank to fund a modest (and by modest I don’t mean big OS holidays, it means being able to afford to not lie awake at night wondering how I am going to pay my council rates, and power bill, and if I can afford to buy a tank of fuel) retirement has increased, and as a result, a new graduate will not get my job at the age when I really want to retire (in 5 years at 65) .

  24. Ellen of Tasmania

    I suspect that if we were dealing with ‘real’ money – ie. something that in and of itself had value – instead of all these fiat currencies, then a lot of problems regarding debt, interest rates and trade would sort themselves out a bit more. I know JC has told me that money isn’t a store of value, but I think it should be.

    Also, just the fact that we have normalised debt to such an extent should ring warning bells. The debtor becomes slave to the lender. That’s old wisdom. I’m sure our fiat currencies have a lot to answer for in this regard, but smarter Cats than me could argue the points better.

  25. Mark M

    “In an interview with The Australian, Canavan – normally a great champion of the resources sector – shared a few words of rebuke.

    “Loud” Australians, he said, were skewing the debate.

    It’s not entirely clear who these “loud and undemocratic voices within our community” are.

    Perhaps Canavan meant the Reserve Bank deputy governor, Guy Debelle, who in March warned climate change poses risks to Australia’s financial stability, and, in the process, noted policymakers needed to consider warming as a trend and not a cyclical event.”

    https://www.theguardian.com/commentisfree/2019/may/30/matt-canavan-should-stop-wagging-his-finger-at-those-who-want-climate-action?CMP=share_btn_tw

  26. Iampeter

    I realise that the Coalition, being from the right side of the political divide, are supposed to know something about how to run an economy

    Yes, the Coalition that gave us the environmentalist bureaucracy, middle class welfare and generally ran the largest spending, taxing and regulatory governments we’ve ever had. Those far-right capitalists!

    First, talk to Peter Costello. I know, he’s from a different planet and what would he know about running an economy?

    You mean the guy who inherited good economic momentum from the last actual, pro-capitalist reforms of the preceding Hawke and Keating governments? The guy who was then part of a government that worked hard to turn Australia’s economy into one huge property bubble and set the scene for the current destruction of our energy industry?

    However, he did set up conditions for a decade long era of extraordinary growth until we hit the GFC at the same time that Kevin Rudd was our PM.

    No he didn’t. He inherited those good conditions from Keating and Hawk governments and left Rudd with an over-regulated mess of an economy and a property bubble.

    this now-discarded approach to economic thought was superior to what is found in most of our textbooks today.

    Steve, you can’t both claim to be a classic economist AND support trade “wars,” immigration regulations, etc. YOU are an example of how we lost touch with sound economics.

    But overall the issue for many is that you’re still operating as if the paradigm that Labor is leftist and conservatives are righties. This hasn’t been the case for half a century. As left wing as Labor is, conservatives are MORE left wing.

    This is the issue we are facing today. No one is proposing any counter ideas to leftism in mainstream politics. No one seems to have even an inkling of what that would look like. Not even theoretically.

  27. stackja

    Still more Petering out.

  28. Ƶĩppʯ (ȊꞪꞨV)

    If interest rates do drop to 0.5% as is being mooted, my projected retirement age will blow out to 75

    which happens to be about the average male lifespan.

    the idiocy of government policy is usually only revealed well after the persons involved have long left the public service.

    the idea that the difference of rates of 1/2% or 1% has any major impact on anything is bunk, the banks assume when lending money that rates will go back up and that is what they use to judge repayment ability.

    the rba has no idea what it is doing

  29. OldOzzie

    Election result sparks mini-boom

    Robert Gottliebsen

    In the wake of the surprise May 18 election result Australia is experiencing one of the biggest sudden stimulations in its peacetime history.

    The Chinese realise Australia’s outlook has changed and have created a surge of buying that has skyrocketed Sydney apartment prices by 10 per cent in just two weeks.

    As I talk with east coast home builders and land developers, they all say the same thing—-there is a rush of buyer interest which is being converted to orders.

    All the banks are seeing a big rise in loan inquiries —at the Commonwealth Bank it’s spectacular—and banks, as I pointed out this week, have eased the credit squeeze so loan approvals are set to rise sharply. Auction clearance rates are rising and the demand for cruises has suddenly recovered.

    These fundamental changes will soon spread throughout the economy (retail will take longer) and the Reserve Bank should delay next week’s planned interest rate reduction. Its pre-May 18 economic data is about the past and does not reflect this dramatic turnaround.

    I will return to the dangers of a Reserve Bank mistake below.

    Why the complete transformation of the Australian outlook?

    Two weeks ago business were in detailed preparation for a major recession and were implementing strategies to survive; 1.1 million battling retirees were slashing expenditure because the ALP was going to take $4000 on average annually from their pocket; dwelling values looked set to fall by about 10 per cent as a result of the ALP negative gearing changes; consumers had stopped buying outer suburban development land and houses and a rash of developers were about to go broke; small enterprises structured in trusts were preparing for a heavy impost; capital gains would be taxed at a higher rate: there would be a big carbon tax (called by another name); the credit squeeze was raging; unions had told business to be prepared for a major assault, especially in construction; higher income workers faced higher tax, and so on.

    Because the opinion polls told the nation that the ALP was certain to win Australians were preparing for unprecedented blows which showed up in the pre-May 18 data .

    Suddenly it is all gone. People all around the land are pinching themselves. Australia is now a totally different country.

    I am currently seeing another aspect of the turnaround at the Australian equivalent of the Davos Word Economic Forum on the Gold Coast. The international delegates who have flown in tell me that the way Australians voted is causing our nation to be viewed in a different light by the main global capital centres—especially in the light of the higher iron ore price. However, they warn that the US-China trade war may get worse and Australia will not escape the ramifications—another reason why the Reserve Bank needs to keep its interest rate powder dry.

    Over 12 years Australian confidence has been battered by four prime ministers who could not do the job. Now we have a prime minister who generates confidence and as one former PM told me this week Scott Morrison “has the common touch”. But the speed of the response by the community has few precedents—it’s like a mini boom.

    A jubilant Harry Triguboff is staggered. The Chinese rush into the Sydney market covers both existing and off-the-plan apartments. Turnover has skyrocketed. Triguboff was holding the market by financing buyers but that’s no longer necessary—they have the money.

    Because NSW has incredibly bad councils and a chaotic approval system it will take three to four years to gear up the supply to meet the new demand once the current stock of apartments is sold. That’s a danger for the future.

    Buried in their Martin Place bunker studying pre-May 18 economic data the Reserve Bank may not understand the strength of the rebound and the danger to the nation if they lower interest rates.

    Yet I cannot recall a single peacetime event that has had such a dramatic effect on the economy.

    With everyone expecting a recession the supply pipeline around the nation is run down in many areas (not just Sydney apartments) and a sudden surge can actually be dangerous if it is fanned by an out-of-touch central bank lowering interest rates.

    And here I want to put in a word for those wonderful 1.1 million battling retirees whom I, along with many others, helped mobilise to change the nation and enable this turnaround.

    Because of their fear of the future, apart from shares, they also have large holdings of cash and one-year term deposits.

    If interest rates are lowered by a quarter of a per cent that will reduce the short term rates from around 1.25 per cent to one per cent—a 20 per cent cut in income. A similar fall in one-year term deposits will cut income by 10 per cent.

    Bill Shorten believed bashing the old in favour of the young was good policy.

    In the case of interest rates that may be necessary when we face a severe downturn, but not when the economy is surging. .

  30. Diogenes

    the idea that the difference of rates of 1/2% or 1% has any major impact on anything is bunk, the banks assume when lending money that rates will go back up and that is what they use to judge repayment ability.

    Zippy,
    you may have missed it, in the last few weeks APRA changed the ‘stress test” for new loans , which was at least 7%, ie @ 2 times currents rate to whatever the bank decides, and suggests an approximate 2% buffer on current rates … cue in 5 years time when(if) rates go up “those bastard banks sold me a loan I couldn’t afford”.

    That poor grad, that should replace me in 5 years (instead of 15) will not a job to be able to afford even a 0% loan

  31. Bazinga

    Like communism, Keynesian economics must be given one more try as it’s never been done right 😛

  32. Dr Fred Lenin

    Destroy savings ,destroy the value of long term superannuation ,everyone should be in debt up tp their ears ,borrow money from countries that value saving as a virtue not a crime to be punished . We never had the problems we have when saving was a virtue and rewarded , one day the whole facade will come crashing down like all scams do and many oeople will be badly hurt . Once again career politics has stuffed up and the people will be the ones hurt not the perperators .

  33. BorisG

    Get a clue, ScoMo

    Well, ScoMo has just won an unwinnable election. Maybe give him a break ?

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