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Can Josh Frydenberg stop the you-know-what from hitting the fan?

Peter Switzer
25 September 2019

Standby for another interest rate cut next week that will disappoint those older Australians who want the safety of term deposits at much better interest rates and younger Australians who want to save to get a deposit to buy a home.

The Reserve Bank of Australia’s boss, Dr Phil Lowe, has pretty well broadcasted (in a speech to a business group in the NSW town of Armidale) that we should expect an interest rate cut is coming next week. He’s primarily blaming the outside world, where rates are not only coming down but in places like Europe and Japan they’re negative.

Given this, you’d have to be worried that all this is a prelude to something bad but I’ll now say something that someone like me should never say — this time it’s different!

These are famous last words of many an expert who later was proved to be wrong. Historically, however, this time things are different. In all my 30 plus years of public commentary on economies and markets, I’ve never seen negative interest rates — and that’s different.

Secondly, I’ve never seen central banks so proactive before a major market crash or recession comes along. Central bankers are usually too hands off (some say they’re asleep at the wheel) but after the you-know-what hits the fan, they spring into action. This is certainly different.

So I guess I’m hoping that these differences end up producing a different outcome, where a bear market/crash is avoided and a recession-bullet is dodged.

I say this with more hope than confidence. I’d be more positive if Treasurers such as our own Josh Frydenberg were more ready to spend to ensure our economy prospers. Remember, the GFC forced the Rudd Government to ramp up spending projects and while some of them were damn stupid, we did avoid a recession that no other Western economy avoided!

As someone who has a listed income-paying fund that returned 11.2% grossed up and 7.9% net last year, low term deposit rates are good for business. But going into a stock market fund comes with the risk that the unit price of the fund can fall. Term deposits with their Government guarantee are the safer option, however, the RBA’s rate-cut policy is forcing Australians to take more risk. So we better hope that our Reserve Bank and their global central bank buddies don’t screw up this world economy rescue plan.

As I’ve said, the one big thing that’s clearly different with today’s worrying economic challenges, say compared to the GFC and most other major calamitous crashing stock market scenarios that rolled into a recession, is that central banks are not asleep at the wheel.

But they do need help. And it has to come from Treasurers’ budgets. If the Government sits on their fiscal hands, then we could see zero or negative interest rates here. If that looks like happening, I will go very negative on our economic and market outlooks.

The GFC showed us that when consumers and business lose confidence, governments have to step up and be the spender and the low confidence circuit-breaker. I know there have been Australians stressed out about government debt since the GFC but Australia remains a low debt-to-GDP country, compared to similar countries.

Our debt-to-GDP is 41%, while the USA is at 77% and Japan is around 240%!

And right now, we are on track for a budget surplus. So Josh has money in his Treasury coffers. Anyway, with interest rates so low, isn’t this the best time for the Government to borrow for those major infrastructure plays that this economy needs?

I’m talking about roads that leave us in traffic jams for hours each year and investments in say renewable energy for those who want a greener future and say dams for those farmers who are sick of drought and want greener pastures!

If global central banks weren’t cutting rates, the RBA might gamble that our economy would eventually come good — employment is good, economic growth is picking up, the low dollar helps growth, so does population growth and the housing sector is picking up.

The RBA Governor last night said that our economy “had reached a gentle turning point” following a “soft patch.” I hope he’s right.

But we’re delicately poised and the global and our economy could tip into a spiral with odd issues such as the trade war, impeachment talk for Donald Trump, Iran, Saudi drones and Hong Kong issues out there. And that’s why Josh has to give Dr Phil a helping fiscal hand or else we could see zero or negative interest rates.

I guess I’m saying that Josh also needs to be different by starting to spend before the you-know-what hits the fan! That takes guts but as the old saying goes: “No guts, no glory.”

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