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The recession and the right's sloppy economic thinking
Gerard Jackson
This country has been in recession since about the middle of last year. As I recall, I was the only one ringing the bell on this. And the year before I warned that Australia was heading for a recession. And what did we get from the media? More nonsense about a "dual economy" that emerged — again — from the observation that manufacturing was sinking while resources and housing were booming. That the contraction in manufacturing was signalling the arrival of recession was not — to my knowledge — noted by a single economics commentator, including John Stone.
John stone, a leading member of our so-called right, states that this is "not a conventional recession, but a much more unusual balance sheet one". (Recession they won't admit is happening, The Australian, 13 July 2009). With all due respect to Mr Stone, a former Treasury head, this is complete nonsense. The "balance sheet" approach to the recession is just as fallacious as the idea of a dual economy.
Stone points out that firms and householders are de-leveraging. So what? This is to say no more than they are trying run down their debts, which is precisely what firms and households usually do when recession strikes. John Stone is not the only one pushing this nonsense Westpac chief executive Gail Kelly asserted that our recession is being driven by a financial crisis that brought about "a significant trend of deleveraging". She needs to understand that the financial crisis is a symptom not a cause. Last August I pointed out that the state of manufacturing was "signalling a recession". I was right. In other words, also look at real factors.
That the current process of "de-leveraging" is unusually severe suggests that borrowing had been unusually steep. But why did so many households and firms borrow so much at the same time? (An important question that Mr Stone overlooked). Because, thanks to the Reserve's criminally loose money policy, the economy was flooded with credit. Unfortunately, money doesn't matter to our economic commentariat, and that evidently includes Mr Stone.
Well, money does matter — a lot — and Australia's monetary record is an appalling one. From March 1996 to July 2006 currency grew by 95 per cent, bank deposits by 138 per cent and M1 by 125 per cent. Yet Mr Stone and his fellow professed free market economists find absolutely nothing amiss here. One has to wonder how much the money supply has to expand before they think it warrants their attention, if at all.
The real problems here is that our self-appointed defenders of the free market have absolutely no idea about the actual effects of monetary expansion on the economy. They also appear to be completely oblivious to the consequences for the exchange rate. (For having the temerity to raise this subject I have been labelled as "senile", "dishonest", "unbelievably stupid" and a "fool"). Nevertheless, it strains credibility that they could be so obtuse.
Bank deposits are the largest component of M1 and if one looks at the Reserve's monetary aggregates it is cleat that M1 is driven by deposits. Where in heavens name did our free marketeers think all these deposits were going? Let me give you a clue: Loans. Just in case our free marketeers need reminding, banks make their money by making loans. So what we had was a massive credit expansion that completely managed to elude our commentariat.
We can now see that the "de-leveraging" that Mr Stone spoke of was the result of excessive loans made by the banking system. The idea that these monetary shenanigans result in "huge benefits such as massive efficiency gains in the allocation of capital" is pure nonsense. What they do is trigger booms that eventually crash and burn.
The world-wide financial crisis is due to the biggest credit expansion in the history of the planet. A symptom of this expansion was the emergence of idle deposits that led central bankers and the commentariat to absurdly assert that the world was awash in excess savings. I warned that what the world was really awash in was bank-created credit, the consequences of which would not be pretty.
More times than I care to recall I forewarned that not only would monetary mismanagement lead to another recession but that once again the market — thanks to the inability our self-appointed right to effectively defend it — would get the blame and that calls for industry planning would re-emerge. And so it has come to pass. Prime Minister Rudd — who knows even less economics than my very young grandchildren — has damned market economics as "neo-liberalism" and has proposed "industry planning" as a substitute.
Gerard Jackson is Brookesnews' economics editor
BrookesNews.Com
Monday 3 August 2009