OK, I know I said I was on a 2 week break, but today I noticed the Hansard of Reserve Bank Governor Glenn Stevens’ testimony before the Senate Economics Committee from this Monday was up on the Parliament house web site, and I just could not resist giving it some coverage. (Apologies for it being a tad long!)
Let’s take up the action from when Barnaby Joyce (via telephone from Christmas Island) begins his questions, it is instrumental in displaying the bizarre world of Senate hearing where an expert is asked questions by someone who is the personification of “a little bit of knowledge can be dangerous”.
Senator JOYCE—Does the amount of Australian borrowing—government borrowing—force up the amount of interest rates and, if so, by how much?
[Joyce gets straight to it – he wants Stevens to give him a juicy quote to put on a media release]
Mr Stevens—I take it that we are talking about the rates that the government actually pays to borrow at—
[Stevens, cool as you like, quickly demonstrates that the question is actually not as straight forward as Joyce thinks it is]
Senator JOYCE—And also by reason of the government’s involvement in the market. Between the state governments and the federal government they were in there now for hundreds of billions of dollars. How much effect is that having on interest rates in Australia or is it having any effect at all?
Mr Stevens—I do not think that it is having a significantly large effect on the rates that they are actually paying at their tenders. As I said earlier, the 10-year yield in Australia is in the bottom half of the fives, I think, at the present. These rates go up and down but that is not materially different from the sorts of rates we have seen on average for a decade or so.
[Bugger, no quote there. In fact he’s killed Joyce off – and also started talking about Bond yields, rather than the easy media friendly home loan interest rate. This is not what Joyce was after at all…]
Senator JOYCE—Less than a per cent or more than a per cent or—
[So Joyce ignores complexity and keeps searching for simplistic numbers]
Mr Stevens—I think the effect, if any, is quite small. It is certainly not more than a per cent, no—much less, if anything.
[A quite small effect???!! Hang on! That’s too simplistic!!]
Senator JOYCE—Is there any extent of government borrowings where it does have an effect, or are government borrowings irrelevant?
[He keeps plugging away, seemingly unaware that Stevens has already given him the answer]
Mr Stevens—They are not irrelevant, but this is an area where over the years, in my memory at least, the studies which try to pin this down empirically find a pretty wide range of estimates and often they struggle to find much effect. I think that if we had much larger debt burdens, like 50 per cent of GDP or something like that, we would see a noticeable premium on Australian debt reflecting that, but I do not really think that one can claim that there is a significant measurable impact on these yields at present. These yields, presumably, embody the market’s expectation of all the things that are ahead.
[Stevens throws out the figure of 50% of GDP as an example of how huge things would have to get, in the hope that Joyce will realise we’re talking fantasy land]
Senator JOYCE—Okay, say, 50 per cent of GDP. Now Australia’s GDP is about $1.2 trillion, so we are looking at about $600 billion. Is that a fair analysis of what you are saying when you talk about debt levels of GDP?
[He hopes in vain; Joyce thinks he’s onto something!]
Mr Stevens—What I am saying is that with debt positions of 10 or 15 or 20 per cent of GDP, the likely impact of that on the premium that our government pays over and above what other governments would pay is likely to be pretty small. The most likely cause of a big rise in government borrowing costs is the borrowing by other governments around the world. After all, it is a global capital market.
[Stevens starts off with Gov of RBA speak for “Listen you dolt!”… and then points out that the Australian financial market is part of the world market – you know of which Australia is a very small player]
Senator JOYCE—I am not looking so much at the premium of what we pay to other governments, because other governments are in hock to their eyeballs as well. I am looking at the effect on the domestic borrower in Australia by reason of the largest purchaser of money in the economy being the Australian government. What is the percentage effect on them?
[Stevens might as well have been speaking gibberish, Joyce doesn’t realise Stevens has already answered this]
Mr Stevens—My point is that the Australian government borrows in a global market. There are free global capital flows here and long rate in Australia is driven more strongly by what happens in global markets than by what happens here, frankly, at the sorts of debt levels we are talking about. If we were talking about much, much bigger debt levels that would be different. But in prospects—
[Code for, “Ok. Let me say this, One. More. Time]
Senator JOYCE—You mentioned 50 per cent. Australia’s current federal debt is around $100 billion or $115 billion, and the states’ debt is heading towards quarter of a trillion dollars, so we are heading way over $300 billion already in government debt—and, as you know, but others need to be informed, the federal government has underwritten the states’ debts—so we are well on our way towards having 50 per cent government debt.
[Joyce gives up – no easy answers here, and gets back to that 50% figure that Stevens threw out earlier, he obviously thinks he’s tripped him up on that]
Mr Stevens—I do not think that I agree with that.
[Code for “Quite possibly that is the dumbest thing I’ve heard all year”.]
Senator JOYCE—What is your view?
Mr Stevens—The 50 per cent anyway was a reference to federal general government debt—
Senator JOYCE—Just the federal government?
Mr Stevens—Remember the Maastricht Treaty that all the Europeans had to sign to get into the Euro area? It was a matter of whether they could or could not meet it, and that was for debt to GDP of 60 per cent. Actually, Australia would have walked in on that criterion had we been part of Europe. So this is a world where we have got the G7 group gross debt to GDP going to be 100 per cent pretty soon. We have got countries like Japan at 140 or 150 per cent and a number of countries in Europe not much different from that. We are talking about debt numbers for Australia in gross terms and even if you do add the states in I would have thought it would be significantly less than 50 per cent of GDP.
[OK, you’ve just lost the Senator here Stevens. Masstricht?? Europe?? What the… you… I mean… look, stop showing off how bloody smart you are!!]
Senator JOYCE—But the budget position is for $517 billion, half a trillion dollars. We have only got a $1.2 trillion economy. We are getting up there.
[Joyce has latched on to the 50%, like a mangy dog with an even mangier bone]
Mr Stevens—Hang on, what is the $517 billion? What figure is that?
[Code for, “What the hell are you talking about, Senator???”]
Senator JOYCE—In the budget—and I have not got the papers before me because I am in Christmas Island—the gross long-term liabilities were to the extent of half a trillion dollars by 2013 or 2014.
[As an aside, why is he on the telephone? Don’t these guys have Skype?]
Mr Stevens—I am not familiar with what that figure represents. There is not much argument that the state of the government accounts in this country is just so superior to virtually anybody with whom we would want to compete.
[“I am not familiar” means, “That figure is completely bullshit and meaningless, but if you want to pretend it means something, go right ahead Senator”]
… at this point Joyce asked some nothing questions on what might happen when the stimulus stops. We pick up the action when Joyce gets on to debt.
Senator JOYCE—Has there been any statement about peak debt or about when federal debt will actually stop going up and start coming down?
Mr Stevens—That is the budget papers.
[Ouch; a withering put down. “Has there been any statement?” Yeah you fool – the Budget – you might have heard about it, comes out in May every year… it’s on TV and everything – gets a mention in the papers as well…]
After a follow up that demonstrated Joyce really thinks the Budget is not a Budget statement, he gets on to the stimulus itself:
Senator JOYCE—In relation to the stimulus payments, if a portion of the stimulatory effect driven by the $900 cheques were compared with the effects of exports and export dollars, what portion would it be?
Mr Stevens—The first round of payments—the ones in December, as I recall—was a little bit under a percentage point of GDP—about 0.8 or 0.9.
Senator JOYCE—What was the percentage of GDP for exports in that same period?
Mr Stevens—Exports are about a fifth of the economy, but you have to work out here what you think the counterfactual was. Exports did not really grow very much. The point about exports is that they did not decline by from 10 to 35 per cent, like everybody else’s exports did. That is the big point there.
Senator JOYCE—What portion of the economy’s GDP was exports?
Mr Stevens—It is routinely about one-fifth.
Senator JOYCE—About 20 per cent. So the effect of the stimulus was less than one per cent?
[Joyce thinks he’s onto something here – he thinks he’s proved that the stimulus didn’t work because as a percentage of the contribution of export to GDP it’s less that 1%. No I don’t understand why he thinks this means something either.]
Mr Stevens—The debate over the stimulus measure is that it was worth about eight-tenths of one per cent of GDP. Did people spend it and, if so, how much of it and how soon?
Senator JOYCE—Eight-tenths of one per cent?
Mr Stevens—Yes, to growth.
Senator JOYCE—How is eight-tenths of one per cent at all responsible or quantifiable against the massive effect of exports? How can a $900 cheque be responsible for putting one tonne of coal onto a ship?
[Ok, you lost me here Barnaby, let’s see if Stevens has kept up]
Mr Stevens—Senator, I think you are comparing things that cannot be compared.
[Code for, “You really have no idea what you are saying do you?”]
If I take the level of exports—it may be 20 per cent of GDP—and it does not grow, then it has not contributed to growth. If there is an impetus into the economy that is half a percentage point of GDP then that contributed to growth in that quarter of half of percentage point, whereas exports contributed no growth in that quarter.
Senator JOYCE—But a slight reduction in exports is likely to reduce exports by eight-tenths of one per cent, and that would have a massive effect. Obviously, the economy is being driven by exports, and three-fifths of five-eighths of hardly anything is what the effect of the stimulus package was. If exports go down by eight-tenths of one per cent, which would not be much of a change to the quantum of exports, then all the effects of the stimulus would be negated. That goes to the next statement: how do you reckon we will go with an emissions trading scheme which might do precisely that?
[The Emissions Trading Scheme? What the hell? Barnaby is obviously now just bringing up whatever happens to be floating through his head, and from what he has been saying thus far, I’d say any idea floating in his head is not in grave danger of bumping into any others]
Mr Stevens—I have no comment on the emissions trading scheme. On the broader issue, it is quite true that had a very large fall in exports occurred it would have meant a much weaker economy than we have had. While I am not here to defend the stimulus package, I do not think that means that the stimulus package either was infective or should not have been done. That does not follow from that statement.
Senator JOYCE—It seems that the vast majority of the GDP is return on export dollars. Shouldn’t there be a greater investment in what actually brings about those export dollars? Shouldn’t that be a far greater investment in that than in what prospectively could have just been the purchase of imported chattels—imported retail goods?
[Joyce demonstrates yet again that he has not understood (or perhaps, not listened to) anything Stevens has said. Stevens has noted three times already that exports account for around 20% of GDP – Joyce himself has said it once, and yet for some reason he thinks that 20% is “the vast majority of the GDP is return on export dollars"]
Mr Stevens—Actually, 80 per cent of our GDP is produced at home. It is not true to say that most of the economy is a return on exports. A significant chunk of it is, but it is one-fifth, which, by the standards of many other countries, is low. We are not that open an economy in comparison to most in Asia or Europe.
[And after that complete put down by the teacher to the student, Joyce’s part in the proceeding finishes. He ends no wiser than when he started. Stevens probably feels his IQ has dropped just through having to undergo the experience and was thinking of the thousand better things he could have spent his time doing… important stuff like ordering his 2010 desk calendar or slumping back in his chair for 5 minutes wondering if he should cut his toenails…]
Here’s a quick snippet of other things Stevens said in his testimony:
Senator BOB BROWN—Governor, if we take the stimulus measures domestically and internationally away, do you think the result would have been different?
Mr Stevens—It would have been weaker, yes. I do not have any doubt that that is true.
Senator BOB BROWN—Do you think we would have faced a recession and/or depression in this country had these stimulus packages not been there?
Mr Stevens—I do not think we would have faced ‘the Great Depression’. …. We would have been affected. We would have had recession. I am not sure we would have had depression—personally I would not have thought that—but we certainly would have faced a deeper downturn than we have ended up having. And that is costly, of course.
That is as blunt as an RBA Governor ever gets.
How about this:
Senator COONAN—… The measures will be pushing up the level of GDP until at least mid-2012. Is there not a risk that this big budget stimulus will become destabilising if it is not recalibrated as the emergency has passed, and won’t that show up, for example, in asset bubbles, particularly in the housing market?
Mr Stevens—The potential for asset price misalignments or bubbles is obviously something that we need to be wary of. I would say that the possibility of very low interest rates for a long period is the bigger contributor to likely imbalances. That is actually an argument, I think, for making sure that the return towards normal on monetary policy is not delayed.
Here Stevens is screaming out loud to the nation that extremely low interest rates are NOT GOOD for the economy. Low interest rates, not fiscal stimulus, will likely lead to a housing bubble, and then before you know it, we’re like the USA, and the bubble bursts, and yet interest rates are so low you can't lower them to increase demand, and so all the work has to be done on the fiscal side, which means massive, massive deficits and well, good night nurse.
Everyone should repeat this over and over: If interest rates go up that is a good sign, because it means things are going back to normal!!!
Remember this: At the November 2004 election, when Howard and the Liberals were bragging about “interest rates at record lows”, the cash rate was 5.25%. It is now 3%. So until it gets back up to 5.25%, Joe Hockey and Turnbull and Coonan and anyone else should shut the hell up about interest rates, because if 5.25% is good enough to boast as being “record lows” then anything lower than that cannot be attributed to wasteful ALP spending.
Remember as well at the 2007 election, rates were 6.75%, and NO ONE is suggesting they are likely to even get close to that level any time soon.
On interest rates, the Liberal Party has nothing to say, and after their efforts questioning Stevens they’re also quickly getting to the point of having nothing else to say on any matters economic. Just a pathetic performance.