Budget emergency or a gambler in trouble?

hockeyDuring those first few weeks after the election, as over half a nation sat there in shock contemplating what had just happened, presumably flushed with joy at having the keys to the safe, Joe Hockey made the astonishing decision to borrow $8.8 billion to give to the Reserve Bank.

Hockey tried to sell this as crucial to our economy in giving the Reserve Bank a buffer zone to address future crises. What a load of hooey.

The RBA deputy governor, Philip Lowe, ‘said the level of the bank’s capital reserves had not been keeping him awake at night’. The board had wanted to rebuild the capital level over time but the government wanted to do it immediately.

In a speech at a Sydney investment conference in October, Reserve Bank governor Glenn Stevens backed up comments by the RBA deputy governor that the bank was happy to rebuild its capital reserves over time. The RBA certainly didn’t ask for Hockey’s $8.8 billion capital injection and didn’t think it was necessary.

At the current five-year commonwealth bond yield of nearly 3.4 per cent, the borrowed $8.8 billion will cost taxpayers about $300 million a year.

There were two reasons that Hockey did this and they have nothing to do with stability.

Hockey is making a shrewd political gamble. Any near-term budget deficit – made worse initially by the $300 million in interest accruing on these borrowed funds – will be blamed on the former Government’s proflicacy as perceived economic mis-management. It added a great deal to the deficit over the forward estimates which Hockey then blamed on the previous government. Approximately $68 billion of the deterioration in the deficit between PEFO and MYEFO is due to policy decisions made by the Coalition.

Secondly, this was a blatant gamble in the hope the Aussie dollar would go down. Then as the Australian dollar falls, and dividends from the RBA reserve fund flow to the Government, Hockey will be better placed to show improvement in the budget bottom-line and claim himself as a fiscal super hero. The last time the Aussie had a sharp fall, the RBA paid the government a dividend of more than $5 billion. Trader Joe is playing the forex market with borrowed money hoping for a windfall just before the next election.

Fairfax’s Michael Pascoe suggested that perhaps Hockey was acting on “in-house advice from the former head of foreign exchange and global finance at Deutsche Bank, Melissa Babbage. Hockey is Ms Babbage’s husband.”

Unfortunately, that gamble isn’t going so well so far as the dollar remains persistently high.

The Reserve Bank of Australia’s move to a “neutral bias” on monetary policy has angered the Abbott government, which believes any upward pressure on the dollar will make it harder to manage the economy and Treasurer Joe Hockey’s displeasure was made known to the RBA directly.

The government has become uncomfortable with the Australian dollar’s upward move since the RBA dropped its explicit easing bias, paving the way for the currency to rise on the expectation that the central bank’s next move will be up.

RBA Board member, Dr John Edwards, responded by saying Australia was in the grip of a “bountiful” mining and energy export-driven revenue surge.

“It’s very difficult to expect rhetoric to have an impact on economic forces which are running in the opposite direction. If you’ve got a mood going on in the currency, then rhetoric alone is not going change it. The currency argument is that a fall in the terms of trade should see lower exports and therefore less demand for the Australian dollar. It’s not working out like that. In fact US dollar revenues have increased [for local mining companies]. And the balance of trade has for several months been positive, once again. And that means, in terms of what happens in foreign exchange markets, you wouldn’t necessarily expect to see a weaker dollar if it’s associated with, effectively, a boom in exports.”

An article called Swaggering unarmed in the global currency war in Macrobusiness suggests that the dollar has turned for a number of reasons. The US recovery has again disappointed, pushing back rate hike expectations. China has hit the stimulus accelerator again (albeit mildly), the EU is clearly in the process of entering the money printing race as deflation looms, and Japan’s Abenomics burst is slowing and requires more money printing to get going again.

In short, we’re traversing an echo period of competitive monetary devaluation in which the US dollar is held down, commodity-intensive emerging markets are seen as the growth driver and real assets are seen as value protection. This is putting upwards pressure on all of the commodity currencies, and gold, not just the Australian dollar. We aren’t losing competitiveness against commodity competitors, for the most part. It’s against the manufacturing and service economies that we’re losing production.

Even before the Reserve Bank indicated it was disinclined to cut rates again, and more likely to keep them steady, the Aussie dollar had begun to climb.

Despite pointed references by Reserve officials about an “uncomfortably high” dollar, financial markets continued on their merry way, pushing the dollar higher. Regardless of the Reserve’s rhetoric, currency buyers continued to prefer to buy Aussie dollars and pay a higher price for them.

That’s not surprising when you remember that the return on many currencies around the world is exactly zero.

The Reserve Bank’s current assessment is that, with signs emerging that the economy is strengthening, the argument to reduce interest rates again from already record lows is weak.

The RBA indicated in February that it had finished its easing cycle, supported by strong inflation readings and finally a rebound in jobs growth. Most economists now expect rates will be on hold at 2.5 per cent – a record low – until at least later this year. The RBA is not just battling with the impact of an Australian dollar trading above fair value. It is concerned with trying to keep house prices under control and ward off an asset bubble fuelled by low interest rates.

When it began slashing interest rates two and half years ago, the RBA explicitly targeted a housing boom. Now it has a growing bubble on its hands and hence interest rate markets are pricing interest rate rises in the next twelve months, long before the real economy is ready for them given the long unwind ahead in mining investment. That has global hot money flows pursuing the carry trade into the Australian dollar as the interest rate spread has climbed a long way off last year’s lows.

Some suggest that the RBA should have introduced macroprudential tools, which would have insured that housing credit was controlled in this recovery cycle and interest rates could be another 50-100 bps lower. The recovery we should have had is in tradables with support from housing construction, not the other way around.

It could still be done and would have an effect. But the risk now is that it would work too well and cause a housing bust, just as we head off the mining capex cliff.

Likewise, Joe Hockey need not wait for the RBA. If Hockey really wants to push the Reserve back to cut interest rates and lower the exchange rate, he could trash the economy with irresponsible policy making. He could slash and burn in the Budget and force interest rates and the dollar lower.

Or he could shift negative gearing to new dwellings only. That would stall house prices and offer the opportunity for rate cuts to close the carry trade spread. He could install Tobin taxes on hot money inflows, a tax on all spot conversions of one currency into another to put a penalty on short-term financial round-trip excursions into another currency, which would help take the edge off and raise extra revenue.

As we have seen with the Coalition, they can find money for things they want – Operation Sovereign Borders, fighter jets, paid parental leave, roads, bribes to polluters, Tim Wilson, private jet travel for politicians, businessmen and journalists, tax concessions for the wealthy – so it is hard to buy the ‘need for austerity’ line. I think Hockey is sweating bullets because his gamble isn’t working out so well and he desperately needs to do something to make the dollar go lower.

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Categories: Politics

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36 replies

  1. By the governments own estimates the MRRT should generate around $700 million for 2013/14 rising to 1 billion in 2014/15 and $2.2 billion by 2016/17.

    The repeal of this eminently sensible revenue source is one of the reasons this government is so keen to tell us that we have a spending problem rather than talk about revenues.

  2. Not to mention carbon pricing. The revenue raised directly by the carbon price mechanism of $6.6 billion in 2012-13 is slightly higher than the $6.5 billion forecast in last year’s budget. It is projected to raise $7.2 billion in 2013-14. They are keeping the compensation but trashing the revenue. Add this to the $3.2 billion for their stupid Direct Action madness and we will be about $17 billion worse off. They are stubborn bastards aren’t they.

  3. “Austerity Measures” so last GFC.

    Time to move on Mr Hockey. Telling a wealthy AAA country that we need take such extreme measures as taking from the poor to enable the rich is last century thinking.

    Where did I leave my umbrella?

  4. <

    As a good catholic Hockey can see the gates of hell everytime he has to lie and no amount of sweat is going to change that.

    He is no doubt applying for more redemption from Pell ….. even with the knowledge that it is useless.

    In now remains to be seen if the catholic Abbott gang will take their families with them.

  5. Trouble with Catholics john fraser is that they believe a confessional wipes away their sins. So I have no doubt Catholic Abbott and co. know absolutely they are doing wrong and being sinful in the eyes of their God, but believe they will wipe out all that wrongfulness by kneeling before a priest and pouring out their evil souls to be absolved and walk away pure.

    No guilt left and the door to their heaven remains open to them.

  6. Hail Mary full of grace shoot me off to outer space got me a smack on more than one occasion

  7. KL

    I usually just give my dealer …. not that kind of smack?

    Apologies.

  8. lol I remember saying to my father as he was dying, now might be a good time to find out what all the fuss about heroin is for. This government is almost enough to drive me to mind altering substances.

    The trouble with Hockey is that he doesn’t seem to understand that for every action there is a consequence. You want to up investment in mining then you will keep the dollar high and lose jobs in things like manufacturing and tourism. You want interest rates low then you will drive up the price of housing. They don’t seem able to chew gum and walk at the same time.

  9. It appears Hockey,s Missus might we wearing the trousers at his house .Like Credlin controls Abbott & the rest of the Rat pac !!!

  10. Ouch! Your reference to your father? My dear mum, may she rest in peace, finally understood what the fuss was about…

    The trouble with Hockey is that his “austerity measures” not only do not work – as you have clarified but are 7 years too late and we got to see how well these measures did not work in other OECD countries. Didn’t think I’d say this but thank (insert deity of choice) Rudd was at the helm and opted for stimulating the market.

    Appears that the LNP is trying to rewrite history.

  11. Möbius,

    Trouble with Catholics john fraser is that they believe a confessional wipes away their sins. So I have no doubt Catholic Abbott and co. know absolutely they are doing wrong and being sinful in the eyes of their God, but believe they will wipe out all that wrongfulness by kneeling before a priest and pouring out their evil souls to be absolved and walk away pure.

    I suspect you know this isn’t true. No Catholic who knows anything about the nature of the Sacraments would believe such a thing.

    Three things are required of a penitent in order to receive the sacrament worthily:

    He must be contrite—or, in other words, sorry for his sins. (Not a chance for Abbott and co)
    He must confess those sins fully, in kind and in number. (Not a chance for Abbott and co)
    He must be willing to do penance and make amends for his sins. (Yeah, like that’s going to happen for Abbott and co).

  12. I don’t see a problem with that Dan… well maybe the contrite part for Abbott, he has no empathy whatsoever with anything so cannot be contrite. But the others, even the evil bastard Morrison, could be contrite but political expediency overrides that until they go to confession.

    Fully and in number. No problem, though I guess they would be in the confessional for an awfully long time. Maybe they have to camp out in there and the priests go in shifts.

    Penance is a farce. Rosaries or a few prayers repeated n times.

  13. <

    @Dan Rowden

    Lets not leave out Pell.

    And that's another problem for Hockey …. he knows Pell's true nature.

  14. Kaye Lee:

    The trouble with Hockey is that he doesn’t seem to understand that for every action there is a consequence…

    Oh of course he understands! It’s just a matter of priorities. He knows exactly who he wants to please!

  15. The question is easily answered based on the fact that gamblers lose OTHER PEOPLE’S MONEY. Whose money is at stake here, the taxpayers’ or his?

  16. Kaye Lee you are Australia’s answer to the disreputable Murdoch!
    If I had a $ billion I would fund a paper with you, MikeSeccombe,Guy Rundle and Margo Kingston as the journalists.

  17. Thanks for the kind words Ruth but I’m not sure that they are warranted. I am passing on information that anyone can find on the net. I learn more from the commenters here than I teach them. Thanks to all for what is always a stimulating conversation.

  18. Kaye great article:

    Hockey’s gamble is that due to the complexity of the markets most a Austrians will not be conscious of the wealth transfer and the risk of moving into austerity. That is why the fundamental of economics must be simplified. The carry trade is one area we cannot influence without a strengthening of US currency. A property bubble is meaningless for many because they have no idea what it means. They just want property values to rise regardless of the consequences. As you noted Kaye our shit pre-Hockey economy has a AAA rating. Funny that.

    Mr Sweaty bags is going to be standing in a pool of his own excreta if he keeps this up.

    Australia, the envy of OECD, has suddenly gone from success to failure due to one election. Bit suspicious don’t you think.

    From confidence to misery in a few months.

  19. Thanks for another excellent article Kaye Lee. I will only add, my growing anger at the broken promises and blatant lies coming from the mouths of the Tory Govt, not just front bench, releases emotions of hatred I’ve never experienced previously in my many years involvement/following politics. I recall daily the dirt and abuse thrown at Juilia Gillard re her stance on carbon, shamefully not just from her political opponents but the main stream media.
    I was revolted then, that revulsion has grown immeasurably since August 2013 to intolerance. Never in the history of political life in Australia has hypocrisy reached such heights. The trashing of the PM encompassed an almost hysterical hatred of her, not because Abbott and his thugs found great fault in her Govt’s policies but because being a woman she dared enter the fray as the nations leader and gave as good politically, as they dished out. Unheard of in the land of Menzies, Howard and Abbott.
    Abbott, Hockey, Brandis, Pyne and co., assisted by an equally hateful media, set out to portray Julia as a habitual deliberate liar and successfully. A false accusation easily acceptable to a lazy electorate who had it too damn good, through the wise economical management of the Labor financial team, lead by the worlds best Treasurer.
    The Tory pigeons with feathers badly ruffled, askew and torn have now headed home to roost, bringing with them a desperate message of economical despair, a message imploring the Australian public to accept their lives are headed towards hardship the likes of, never experienced by past generations unless they accept and swallow the Tory foul tasting medicine. Oh one exception to the receipt of such pain, Abbott’s rich benefactors, they’re all right Rupert.
    Yes lies and hypocrisy, its all Hockey has..oh and lots of sweat, the type of sweat associated with one who knows he is hopelessly out of his depth, flaying around looking for an unsinkable straw.
    Such lifelines don’t exist Hocks, keep sweating and flaying until the inevitable .

  20. Thanks Kaye Lee for another piece to fit onto this puzzle, there the spot and it fits perfectly right beside the destruction of manufacturing and jobs and increasing the retirement age. I dont think I will buy a house now but an imported car is getting cheaper. No I want an Australian made one that employs Australians. Gee what a puzzle.

  21. Sorry I was working on the wrong puzzle I thought it was the one for keeping Australia a great and fair country for all Australions but Tony and Joe are doing the one that makes the rich people richer at the expence of all other Australians. Hope they are getting well payed and a big fat pension for all there hard work.

  22. Its a Tad Amusing Melisa, Babbage feeds Joes Garbage , Thank you Kaye Lee for once again explain9ing just what is behind These evil deeds, This truly a terrible Government The Like not seen before in Australia So much Damage done in only 7 Months, No doubt Tony claimed his allowance for His latest charity ride ,

  23. Möbius,

    Are you Catholic or were raised Catholic?

  24. Thank you KL, clear precise and cogent… and it was nice seeing “Cereal-Toyota-Killer” Hockey savaged and embarrassed in front of a Ch 9 audience by that English journo… he presented like a shyster.

  25. if only we had someone in our MSM to ask hockey the hard questions as Andrew Nell did , a great read on independent australia

  26. I was raised a Catholic Dan Rowden and I can tell you that you say three Hail Marys and it’s all gone 🙂

    “They are stubborn bastards aren’t they.” Yes Kaye and they will remain that way as long as they can claim it’s all Labor’s fault.

  27. Reblogged this on A View from Bribie Island and commented:
    We have a responsibility as citizens of our nation to do the heavy lifting. Not the rubbish Hockey is talking about, but the heavy lifting of critical thought. We should nor just read the news but analyse it. Examine the use of language, the way the story is presented and what is covered and what is ignored. This excellent article by the quite brilliant Kaye Lee dose just that.

  28. Reblogged on A View from Bribie.

  29. The problem with the “penance” idea is that Tony Abbott et al think they’re on the side of the angels. They truly believe their “all boats will rise” BS and feel that the only way to improve the lot of Australians at the bottom is to take the shackles off those at the top. A bit of political dishonesty here, a few lives shattered there, moral standing in the world trashed for a while, it’s all in a good cause. I’m pretty sure they sleep very well at night.

    As church-going Christians they might occasionally be subjected to sermons about acceptance and honesty and charity, but the cognitive dissonance of the Coalition is great enough that they can nod sagely along without ever realising that the criticisms are aimed at them.

    It’s actually sad. The Coalition is tarred with the brush of being “Catholic radicals” but their actions do not reflect this, bringing disrepute to both the government and the church. If the church really was willing to broach the church/state barrier, I suspect excommunication of individual politicians might make a point. But that will never happen because the churches, contrary to popular sentiment, generally do not want to be seen to be politically active; and anything less seems to be ineffective. The church is engaged in high-level intense lobbying behind the scenes but people don’t see this. And the government has consistently and stubbornly refused to listen to this lobbying.

  30. And on a related topic; “When only the “Truth” will do.” 😦

    http://truthseekersmusings.wordpress.com/2014/04/26/when-only-the-truth-will-do/

    Cheers 😉

  31. The world stands on a precipice, it isn’t by accident. At the very start of our lives our parents, mostly in ignorance, inform on us & register us, they submit us to the regis AKA the crown & they are given a birth certificate with our NAME on it. Who or what is ‘the crown’, great question, I barely have a grasp on it, it’s so covered in legalistic riddles. Through our birth certificates a corporate fiction, a persona, the same as our birth names but written in UPPERCASE is attached to our humanity, our flesh & blood. Our NAME is on all our ID, it’s in our pocket, right next to our magic plastic & paper. Our corporate persona contracts us under civil law which includes maritime law & or uniform commercial code. Under civil law through our corporate contractual obligations we all, politician & peasant alike pay tax to central banks for their great service of conjuring $ out of the ether & charging % on their magic. Under civil law most of us also pay % to extinguish debt that banks are chartered to allow us to create through our persona out of the same ether. How all the banks relate & who or what finally owns them is an enigma. What is clear is that banks have leveraged, quantitatively eased, borrowed, created, credit default swapped, deferred credit buy backed, no money downed, easy terms financed, hypothecated & rehypothecated debt until now too big too fail too indebted too live zombie banks gnaw away on humanities enterprise crying eternally for debt, debt, more 0% debt! This is much bigger than left or right, Julia Gillards inability to control spending or any of the Mad Monks & Diamond Joe’s chicanery. What is likely coming is a global exercise in problem, reaction, solution. The problem, debt. The reaction, global market & fiat money melt down. The solution, the extension of the Bank of International Settlements & The International Monetary Fund’s Special Drawing Rights into a pan global digital fiat meta money. A 1 world fiat currency for 1 world governance, the banksters dream of the ages. I find that many are happy with the football of left VS right & that talk of the corporation(s) who own the game sends many off into meme chants of conspiritard, tin-hatter, loon & the like.

  32. you know, I take hope in the fact that this lot, in reinforcing their ineptitude, will awaken the duped, and they will, along with their imbecility, be eternally politically damned. Defeated by a margin which will make labor’s pale.
    in the meantime, I’m relishing the expose of the conservative members of Obeid’s flock.

  33. Aboriginal Australians know what it is like to live in poverty, social exclusion & having no one to listen to our plight of existence. Now, white Australia will feel how we have had to live since Westerners invaded, burgled our homes &. mass murdered the original society of Australia. White Australia will now know how it feels to struggle financially & socially in a hostile environment dictated by the Government. However, “better the devil I know than the devil I don’t know” like living under Shariah Law governed by Islam.

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