Who’s man enough?

By now it will be clear to anyone with even a passing curiosity in such things that the Strayanomics view on interest rates, more or less its raison d’être last year, was confirmed on Tuesday.

Well done, team.

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The obvious question now is will the RBA cut again? The answer is yes, and perhaps quite soon, depending on employment figures this week. My expectation would be for the RBA to hold at 2% for some time, but next year we’ll see further cuts as the contraction in mining investment bites, iron ore continues to batter national income, and the last hurrah for the housing market draws to a close.

It’s going to be very interesting to see where the cash rate finds a floor. I imagine it’ll largely depend on the value of the Aussie dollar. If the dollar remains stubbornly high (because the Fed delays rate hikes, for instance), then the RBA would have room to hack right into the cash rate. If the Aussie dollar starts to fall out of bed (because the iron ore bust goes nuclear or the housing market turns down sharply or both), then the RBA may find itself having to maintain higher rates to protect the value of the dollar.

Kick the Abbott

Aside from the RBA’s ‘surprise’ cut, the other news of note this week was of course the leadership fiasco in the ALP. Or the LNP.

Who knows anymore.

The Very Serious People over at The Australian are worried: Are any of our prospective captains man enough to reverse the nation’s fortunes?

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In the accompanying article, Adam Creighton zeros in on the fundamental economic challenge of our time, and misses by a long shot.

The principle of spending restraint enshrined in the Prime Minister’s first budget, whatever its political inelegance, may well be only days away from being scrapped. Tuesday’s Liberal Party ballot may be the tipping point that condemns Australia to gradual economic decay.

The temptation for Mr Abbott’s challengers within the Liberal Party, just as it has been for Bill Shorten in opposition, will be to ditch Mr Abbott’s rhetoric of fiscal prudence in favour of a vapid, trite — but more electorally appealing — “Go for growth” theme.

That will mean, in effect, giving up on spending restraint and endorsing the sort of Keynesian debt and deficits that periodically brings Europe to the brink of financial collapse.

Plainly, the source of Australia’s ‘economic decline’ is not the federal budget deficit. The deficit is small and net public debt is miniscule. The only way that the federal deficit will become a problem as we embark on the long descent from our heady boom, is if the huge private debt burden eventually overwhelms consumers, forcing Australia into recession. We would indeed be in a precarious situation then, given that the federal balance sheet is the critical buttress to the bloated banking system.

Unfortunately, this is not an idle consideration; the federal government is likely to run into spending constraints far sooner than our low debt profile implies, when stresses start to emerge in the housing and eventually banking sectors. But any discussion of the public balance sheet in isolation is disingenuous; it is the private debt burden, combined with the end of a whooping great (and greatly mismanaged) mining boom, that is the true source of our vulnerability.

So then, who among our leading men is up to the task of reversing our nation’s economic decline? I am quite confident that very few politicians have an meaningful appreciation of Australia’s current predicament, certainly Abbott is clueless to the point of farce.

But I am equally confident that Malcolm Turnbull is one of the few.

 

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