At least since 2012, Treasury, the Reserve Bank and successive governments have assured us a return to the old normal of strong economic growth, high wages and low unemployment wasn’t far off. But last week big cracks emerged in governor Philip Lowe’s optimistic facade.
In all the years since then, our estimated time of arrival at the promised land has been repeatedly pushed out a year or so. On the face of it, that’s what the Reserve did yet again in its quarterly statement on monetary policy.
Forecast growth in real gross domestic product over the year to December was cut again, to 2.5 per cent (down from a predicted 3.25 per cent last November), but not to worry. By June next year it will have bounced back to trend growth of 2.75 per cent. Happy days.
But that hardly fits with Lowe’s rhetoric during his appearance before the Parliament’s economics committee on Friday. He devoted a surprising amount of time to discussing the Reserve’s possible response in the "unlikely" event that the economy stayed weak.
His own forecasts imply the need for two further rate cuts, taking the official interest rate to just 0.5 per cent.
And if it got to 0.5 per cent, the Reserve would consider some form of "quantitative easing", he said, probably lowering the longer-term risk-free rate of interest by buying government bonds and paying for them simply by crediting the sellers’ accounts at the Reserve (the modern equivalent of "printing money").
What a long way we’ve come from Lowe’s line at the first official rate cut in June. The outlook for the economy was fine, he said then, it was just that the Reserve had redone its sums and realised that, with a bit of extra monetary stimulus, it could get the unemployment rate down to 4.5 per cent without causing any problem with inflation.
Actually, when your look deeper than the latest headline forecast of an early return to trend growth in the economy, you find that, by the end of 2021, wages still wouldn’t be growing any faster than they are now. Happy days?
Larry Summers, eminent academic economist and a former US Treasury secretary, began arguing that the American and other advanced economies were caught in "secular stagnation" – a protracted period of weak growth – in 2013. Since then, many economists have agreed, though they still debate its causes.
So far, however, those naughty, negative SS-words have never crossed the lips of any Treasury or Reserve official, let alone any politician. But on Friday Lowe gave us a detailed account of the phenomenon that’s both the key explanation for, and the main evidence of the existence of, secular stagnation: the amazingly low level of world real interest rates.
"There is a structural thing going on as well, and I think it is really important we understand this. At the moment, right around the world, there is an elevated desire to save and a depressed desire to invest," Lowe said.
"You see a lot of global savings because of demographic factors [population ageing]. There is a lot of saving in Asia [because they don’t have a social security system]. Many people borrowed too much in previous times and now they’re having to repair their balance sheets, so they want to save a bit more [paying off debt is a form of saving].
"There is a lot of desire to save and, right at the moment, not many firms want to invest. The reality we face is that, if a lot of people want to save and not many people want to use those savings to build new [physical] capital, savers are going to get low returns.
"The way the financial system works is that the central banks are the ones who set the interest rates, but we’re really responding to this deep structural shift in the balance between saving and investment right around the world and there’s not much we [central bankers] can do about that."
Just so. Two points. First, the "deep structural shift" began even before the global financial crisis. It’s not just the product of recent worry about a trade war – although that does provide econocrats and politicians with a convenient excuse to shift from their she’ll-be-right rhetoric.
Second, unprecedented low interest rates are a symptom of a deeper problem: aggregate (total) demand is insufficient to take up aggregate supply. That’s why growth is weak and will stay weak until a solution is found.
Where’s the additional demand to come from? Not from lower interest rates, obviously. Which leaves the budget. Now’s the time to rebuild public infrastructure and do other useful things we thought we couldn’t afford.
Anyone who still thinks now’s a good time to run budget surpluses just doesn’t get it. It’s now neither sensible nor possible. Wake up, Josh.
