“Australia Just Unveiled Something Worse”: Central Planning With No Plan

By Michael Every of Rabobank

Yesterday, I was calling out for someone, anyone with the chutzpah to match Moses and point out that almost everything we are doing political-economy-wise and central-banking-ly needs to improve, both practically and morally.

Well, yesterday got a surprise 200bp rate hike in Turkey, which Piotr Matys sees as a step in the right direction (see here for more); and a 25bp rate cut in Mexico, which Christian Lawrence thinks is still not the end of the line (see here for more); and the Aussie government have really let rip too….As Bloomberg words it:

“Australia’s government will loosen responsible lending laws in a bid to boost the flow of credit and help the economy recover from its first recession in almost 30 years….the government will scrap so-called responsible lending obligations for most forms of credit that it says have made banks overly cautious and stifled access to mortgages and other loans….The move is a turnaround from the findings of an inquiry into misconduct in the financial system, which called for banks to more strictly follow lending rules…

In effect, the government has heeded what became known as the ‘wagyu and shiraz’ verdict…[where the]… regulator had argued actual living expenses should be used instead of benchmarks, which have been criticized for underestimating how much people spend. As part of his ruling, Justice Nye Perram said borrowers can change their spending habits to service a mortgage: “I may eat wagyu beef everyday washed down with the finest Shiraz but, if I really want my new home, I can make do on much more modest fare.”

Lenders…will remain subject to APRA’s lending standards, but will no longer be monitored by ASIC for compliance.”

Let’s put this into a broader context. Australia is one of many neoliberal, financialised, consumer-debt saturated, housing-bubble obsessed, low-productivity, low capital investment, infrastructure-poor Western economies. It was already stuck in the linked new normal of low wage, low GDP, and low productivity growth, and the lower quality jobs that come with it, albeit probably being 10-15 years behind the US on social and political polarisation. It is also being hit hard by Covid and a closed border, and by serious trade tensions with China.

The RBA has responded with zero rates and Yield Curve Control out to three years, the latter of which is not stopping the market pricing in more rates cuts next month. The RBA has also said it will be there to support fiscal spending as needed. In short, the government has the ability to expand the fiscal deficit to a threshold determined only by the capacity of AUD to hold up.

And what is the response? To tell banks to return to a housing bubble, exacerbating problems in society, making businesses less price competitive, starving non-housing firms of attention, making the banking system even more reliant on global wholesale money markets and, as the historical track record *everywhere* shows, eventually ending up in bad loans, which will be repackaged and sit with the taxpayer. And making a mockery of the idea of prudent regulation.

THAT is where the fiscal capacity the RBA is offering is going. I long said when the RBA goes full QE, it will be to buy shonky MBS rather than for a fiscal deficit for mega infrastructure projects…and that indeed seems to be the journey we are on.

Central-bank financing of fiscal deficits admittedly takes us to the world of central planning, but here we have something worse: central planning with no plan.

Wagyu, Australia. Wagyu very much.

Of course, this is not an Australia-specific issue. Look at the scale of fiscal deficits looming in the US, UK, Europe, Japan, and even China. Nobody has any idea how these are going to be dealt with – especially not as, in the case of the UK, it becomes clear that a grim winter looms regardless of the latest step to try to keep unemployment down by subsidising the jobs that are salvageable; or as the US initial claims figures, and the Fed, confirm that the V is behind us and things are now going to get worse without further fiscal steps, pronto.

[The Fed’s Williams also stated “structural inequality stifles growth.” Well, of course it does. Try helping everyone, and especially the working class, for once and see what happens. It really, really isn’t rocket science. But of course we can’t do that. “Because markets.”]

Indeed, what we see again and again is the utter failure of the imagination of those leading to realize that the old models no longer work. So many tools are now available to them to do something new – but that means abandoning deep-rooted dogma. As such, they prefer to stick to the tried and tested. Which is like watching someone try to eat the finest wagyu steak with a teaspoon. Or soup with chopsticks.

Hilariously, AUD is slightly up on this news, albeit down from a high of 0.7410 to a low of 0.7022 this week. If the RBA is going to be buying junk MBS to prop up the economy then it won’t be holding a 7 or a 6 handle over time.

Meanwhile, in China a giant property developer is talking about potential debt defaults. The China Beige Book also underlines that while a few major cities and the SOEs closest to Beijing are seeing a strong rebound, most of the economy is still stuck in the doldrums. One would presume that the same arguments that apply to Australia will apply here: when in doubt, just blow those bubbles bigger rather than abandoning any comforting dogma. The currency outlook remains the same there in that case though.

Of course, there is some upside given that against a backdrop of trade war, Cold War, sanctions –some over allegations of major human rights abuses– and rising geopolitical tensions (China’s Global Times says it will start a “just war” if US troops ever return to Taiwan), FTSE Russell has just announced Chinese government bonds will be included into its flagship World Government Bond Index from October 2021. ‘Wagyu. Wagyu very much’ thinking at its absolute finest: but 13 months is a long, looong time in current geopolitics.