Terry McCrann: World monetary policy is deliberately sending economies into recession
Central banks around the world are forcing economies into recession — or worse, writes Terry McCrann.
Terry McCrann
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Four things are very clear in the disastrous, multiplying, intersecting dynamics and feedback loops of the galloping virus, plunging global share markets, government actions to shut economies down, and the desperate actions by those same governments and central banks like our Reserve Bank to offset that and keep both economies and financial systems operating.
First and most challengingly, we’ve never been anywhere remotely like this before, where governments are trying quite deliberately to send their economies into recession — if not much worse, like the sort of real depression we haven’t seen since the 1930s.
This shows how so different — and so much worse — it is in comparison with the Global Financial Crisis.
Back then we got hit with a global financial meltdown — share markets plunged and the banking systems of the US and Europe were essentially broke. But at least governments and central banks were throwing everything at fighting that.
Not, as they are now — utterly unavoidably — actually causing, or helping the virus to cause, the financial and economic meltdown.
But at least, and this is the second big point, they don’t have to go through the same “learning curve” as they did in 2008 through 2010.
They know, as they really didn’t back then, they can just print money — the so-called QE, or quantitative easing, plus government spending, debt and deficits.
The two big guns — the Fed and the ECB — have both once again embraced that and embraced it big time. And so also has our RBA, albeit more modestly and it’s not (yet) calling it that.
Our “Budget-balancing target” government has as well, with Stimulus 1.0 already done and Stimulus 2.0 about to follow.
Yes, this time round, central banks, including our RBA, have got no interest-rate ammunition. The Fed, rather pathetically fired off what it had left — pretty much like a nervous young soldier emptying his gun before the enemy even appears — by slashing its official rate to zero (to 0.25) per cent.
But as this is not even wildly close to being an “interest rate problem” — neither companies nor individuals are going to go on spending sprees simply because their loan rate has gone down half or even a full per cent, even, for toilet paper — that’s actually not such a worry or problem.
No one is “allowed to” and they wouldn’t be much inclined even if they were. Brutally, take the restaurant example. It’s either going to be forced to close, or if it’s allowed to stay open; feel free to join the queue.
But that is playing out with everything. And we are only starting.
The central banks really can’t do much about the economic collapse; they can keep the financial system working. That means pumping liquidity into banks and if necessary repaying bank borrowings from foreign investors. The RBA is doing the first — and will do the second.
That leads to the third point.
Nobody really has a clue on “solving it all”. There are no “magic buttons” to be pressed, either to beat the virus or to offset and indeed reverse the financial and economic negatives.
I can make no useful comment on the antiviral moves — there are plenty out there who can, and plenty more who can’t but won’t let that stop them.
Beyond that is the unavoidability of the — global — economic shutdown process.
And for once, there can’t be “free riders”; we and indeed no one else, can’t just let “everyone else” shut down and take the pain to stop the virus spreading.
Unlike conventional financial or economic meltdown — like, say, Argentina going broke — anyone who doesn’t join in the immediate pain will end up having to pay the biggest and longest price.
On all the fronts: the economic and financial and the virus itself.
So, policy moves should be aimed at trying to alleviate the pain and to offset some of the direct impacts of the shutdown policy.
On this front, I am more impressed by the actions to date of our RBA and its fellow financial regulators, APRA and ASIC, than the supposed master of it all, the Fed.
The RBA is especially critical: it’s got to keep the financial system operating and, putting it at its bluntest, solvent. It has demonstrated it knows what it has to do and it can do it.
I liked the way it did not engage in a kneejerk rate cut, to follow the Fed down to zero.
What would that have achieved? Nothing. With the Aussie in the low-60s already, importantly.
I have to say the Fed’s actions and even more its statements have been embarrassing. The latest one on Monday had that unique flavour of business as usual — that it was a bit of finetuning — and its move to full Defcon Red.
Does it really think this adequately describes the state of play: “The effects of the coronavirus will weigh on economic activity in the near term and pose risks to the economic outlook?”
Weigh on activity? Pose risks to the outlook?
Do they know what year it is, sorry, decade? What planet they are on?
The fourth big point out of all this is that no -one can sensibly predict where and how anything — the virus, the financial or economic dynamics, the policy impacts — will play out. And when we will emerge on the “other side”, although we can — with absolute confidence — state that we will.
In short, the year is going to be volatile, very painful, and very uncertain.
For investors the biggest risk is the uncertainty of when everything starts to snap back.
The surge will be as big and dramatic, or almost, as the plunge.
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