The last few decades have seen a fairly good run for macro-economics in Australia. That may be coming to an end.
Rudd recently ran over to the UK to have a talk-fest with the other neo-socialists about how the government can spend us out of a recession. This will leave us with bigger government, worse government and more political risk… and it won’t work.
One of the reasons that government spending won’t work is that it will crowd out private investment, and we are seeing evidence of this now. With western democracies going on a borrowing binge, they are sucking up the available savings from the financial markets and leaving less for private investors to borrow. This is a classic case of crowding out, done on an international scale.
The consequence is that banks must pay higher interest rates to get money, and they pass this on to us as higher retail interest rates. When the big banks refused to pass on the recent 0.25% cut in official interest rates, the government was quick to complain. But it is the government’s fiscal policies (along with the high-spending ways of other western countries) that is causing the cost of finance to go up.
But that is only the first of the macro-economic mistakes going on now.
The RBA was right to cut interest rates to compensate for a reduction in bank lending, to ensure that the total ‘broad money’ stayed roughly constant. But I think they’ve gone too far now — by about 0.5%. That obviously means I don’t think they should cut rates any more.
My fear is that a loose monetary policy may lead to either inflation or another ‘bubble’, or both.
The problem with fiscal and monetary policy now is that we are getting political judgments, not economic judgments. Fiscal policy should be to maintain balance (while understanding that automatic stabilisers will lead to a temporary deficit). Monetary policy should be to maintain a roughly constant money supply so that the value of money is maintained. That’s all. The current trends towards macro-activism is dangerous.