RBA & the Government – so out of touch!

I read today the Reserve Banks latest Statement on Monetary Policy and also most chocked on my water (I have recently given up coffee!).

Here is an excerpt from the Statement:

“Short-term indicators of housing construction suggest that activity weakened late last year, and there were modest declines in aggregate house prices. Nonetheless, prospects for the year ahead should be supported by the significant declines in interest rates that have occurred, along with the increase in the first home owners’ grant announced in October. A recent pick-up in housing loan approvals and in reported display home traffic suggests that these factors are now starting to add to housing demand.”

To read this it sounds like the property sector is in a slight downturn and that things are now looking up. Seriously, who are these guys talking to! If they would talk to any real estate agent or developer who is on the ground they would tell them how tough things really are. A pick up in traffic to onsite displays from 0 to a couple a week for anyone (other than those selling to First Home Buyers) is hardly cause for optimism.

Unfortunately the Government hasn’t really figured it out either. Their plan is to spend money. In fact it is the same plan we all have had for the past decade or so – spend money. The Government is now replicating the exact same thing that consumers have done for the past decade and more that got us into this problem in the first place…. that is, spending more than we earn. Effectively financing our lifestyles on credit.

At the time of course we all thought that our increased spending was not financed by credit, but by increases in asset prices. So as our homes and shares increased in value, we borrowed more money as we believed we had it, to spend more. Sometimes on other assets (thereby pushing up asset values further), and a lot on discretionary items. The problem is now is that our assets are not worth what we thought they were. So what we were spending wasn’t our money at all as whilst out asset values have dropped, unfortunately, our debt levels haven’t. So in effect we were spending the bank’s money. No different to a credit card really when you look at it like this, and credit card’s have to be repaid at some stage don’t they?

So what is the Government doing now? Pretty much the same thing. Spending money that it doesn’t have based upon what? ….. future revenue which will be predominently funded from what? ….. commodity revenues! So the Government is going to spend Billions of dollars of our money on the hope that Commodity Prices will once again boom and our economies fortune will turn around.

Well my question is… what if it doesn’t? What if commodity prices remained subdued for 3 years or even 5. What happens then? I don’t hear anyone talking about that. Are we going to spend $50 Billion each year to try and shore up the economy for the next 5 years? People talk about leaving a legacy for our children. Now that would be a legacy worth talking about!

What should we be doing? I don’t purport to be an expert but surely we need to focus on productivity improvements. Surely we need to bring back into balance our society so that we generate more than what we spend … excluding digging stuff out of the ground. You see the emergence of China, India and the other emerging markets of Asia and Latin America have all breed huge inefficiencies into Western Economies. You tell me how it can be efficient to pay Wall Street brokers millions for retention bonuses (eg Merill Lynch) when they almost drove the company into the ground, and there are no other jobs to go to anyway. How can it be efficient to pay grounds people at schools in mining communities $150,000 salary? Not that I think it is great that they can earn it, but how can that be classed as efficient. We have all been lulled into a sense of security that by exporting our manufacturing and other labour intensive jobs to developing nations we have begun efficient. Certainly this has improved efficiencies. Certainly we all work harder. But 0 elasticity in employment, asset bubbles and high commodity prices have not been conducive to productivity improvements within our own workforce.

So we should be offering incentives to businesses to retool, upskill, employ. We should be spending our money on big ticket assets that will produce productivity benefits for years to come, such as new and upgraded ports, hydro-electric schemes like the Snowy River and improved rail. We should be helping our exporters in every way we can (and not just mineral exports).

We shouldn’t be doing cash handouts. We should be providing tax benefits and other incentives for businesses and individuals to invest in anything that delivers productivity enhancements.

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