Yes, money does buy happiness* *terms and conditions apply

 Years ago, when our kids were young, we used to stay at a guesthouse in the mountains in the same week of January every year, as did various other families. When we met up with people we knew quite well, but hadn’t seen for 12 months, the greeting was always the same: D’ya have a good year?

So, has 2022 been a good year for you? Something similar is asked by the Australian Unity Wellbeing Index. Each year since 2001, researchers from Deakin University ask 2000 people how they’re doing. Are they satisfied with their standard of living, their relationships, purpose in life, community connectedness, safety, health and future security?

The index combines the answers to those questions into a single rating of our “subjective wellbeing”, somewhere between zero and 100. It’s too soon to have results for this year, of course, but the researchers do have them for the first two years of the pandemic – “the worst economic crisis in a generation, and the worst health crisis in a century”.

Guess what? The index actually rose from a low of 74.4 in 2019 to a high of 76.4 in 2020, before falling back a bit to 75.7 in 2021.

But don’t take those tiny changes literally. Allow for sampling error and the best conclusion is: no change. Indeed, in the survey’s 20 years, there’s been only minor variance around an average of about 75.4.

So I can tell you now that our wellbeing in 2022 will have been much the same as it always is, just as almost everyone at the guesthouse gave the same answer every year: “Not bad, not bad”.

The index’s stability from year to year – which is true of similar indexes in other rich countries – confirms a point its founder, Professor Bob Cummins, has been trying to convince me of since I first took an interest in the study of happiness.

Measures of satisfaction with life reflect both biological factors and situational factors. At the biological level, it seems humans have evolved to maintain a relatively optimistic and happy mood. This is controlled by “homeostatic” mechanisms similar to the one that keeps our body temperature stable – unless some situation (such as getting COVID) causes it to go off range.

The researchers say the situational factors most likely to adversely affect a person’s wellbeing equilibrium are insufficient levels of three key resources: money, connection with others, and sense of purpose.

A nationwide average bundles together those people whose wellbeing is reduced by such deficits with a greater number of people who are doing well.

So nothing in this finding denies that many people did it tough during the pandemic, whether monetarily or in their physical or mental health. It’s just that more of us stayed happy enough.

Remember, too, that the media almost always tells us about people with problems, not those doing OK. Similarly, medicos rightly focus on the unwell, not the well. But if you’re not careful, you can get an exaggerated impression of the world’s problems.

And when you look further than the average, you do see the pandemic making its presence felt. The index always shows people living alone, those in share houses and single parents having the least satisfaction with their lot.

But get this: those living alone and single parents enjoyed a big increase in perceived wellbeing. Why? Keep reading.

When the survey divides people according to their work status – unemployed, home duties, study, employed or retired – it always finds the unemployed far less satisfied than everyone else.

In the first year of the pandemic, however, the satisfaction of the unemployed leapt by 9 percentage points. Why? Maybe because the composition of the unemployed had changed a lot. Or maybe because, with many more people becoming unemployed, the stigma of being without a job was reduced.

But a much more obvious explanation is that, early in the pandemic, the rate of the JobSeeker unemployment benefit was temporarily doubled. Suddenly, it went from being below the poverty line to well above it. And wellbeing went up.

Trouble is, when the payment was cut back heavily in the second year, the satisfaction of the unemployed fell below what it was in the first place.

This supports a finding of “behavioural” economics: people suffer from “loss aversion” – we feel losses more deeply than we enjoy gains of the same size.

And it’s borne out by the survey’s finding that the satisfaction of all those people whose household income had fallen was more than 3 percentage points lower than that of those whose income was unchanged.

But. The satisfaction of those people whose income had risen was no higher than that of those whose income didn’t change.

The survey shows that people on the lowest incomes were much less satisfied than those on the next rung up. But it also confirms economists’ belief in “diminishing marginal returns”. The higher incomes rise, the smaller the increase in people’s satisfaction with their lives.

So, unless you’re really poor, don’t kid yourself that more money will make you a lot happier.

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Printing money to fund the deficit ain't the free lunch it seems

The new Treasurer, Dr Jim Chalmers, is saying a lot about the trillion-dollar debt he’s just inherited. He’s saying less about the tension between the new government’s plan to “invest” in improving the economy and all the pressure he’ll be under from mainstream economists to reduce the budget deficit and so reduce what Labor will be adding to that debt.

But whenever I write about debt and deficit, I know to expect puzzled or angry pushback from people who’ve read US Professor Stephanie Kelton’s bestseller, The Deficit Myth, or studied “modern monetary theory” (MMT) at university.

Why all this fuss about budget deficits? Who said the shortfall between what a government spends and what it raises in taxes must be covered by borrowing from the public? That’s just a rule someone made up.

Surely the government can avoid ticking up all that debt – with all the interest payments on it – simply by telling the central bank to “create” – some still say “print” – the money the government needs.

After all, all currencies are “fiat” currencies. When a government prints a $50 note, it becomes “legal tender” worth $50 merely because the government says it is. By government decree or fiat.

So why all the fuss about debt and deficit? Just create all the extra money the government needs with the stroke of the central bank’s computer program.

There’s a lot of truth in what the MMT people say. But if you think it all sounds a bit too good to be true, it is. So what’s the problem?

The “monetarists” of the 1970s taught that every time the government adds to the supply of money in circulation it adds to inflation. Not true. We value money because of what we can buy with it. Economists say what you’re buying is “command over real resources” – that is, raw materials, physical capital equipment and labour, often embodied in goods and services, or physical assets, including buildings and land.

Inflation is caused when the demand for real (that is, tangible) resources runs ahead of the supply of real resources, thereby causing prices to rise.

So, even though people spending the money you’ve created will add to the demand for real resources, this won’t cause inflation provided you do it when demand is weak. Only when you reach the point where demand catches up and overtakes supply will you have a problem with inflation.

That’s the purely pragmatic reason most economists disapprove of MMT. Once politicians had the idea they could keep spending without worrying about debt and deficit, how would you get them to stop adding to inflation by continuing to create money rather switching back to borrowing and having to pay interest?

How would you get them to do what Chalmers is doing as we speak: looking at all the spending plans of his Liberal predecessors that aren’t sensible and stopping them, so as to make room for Labor’s own spending plans?

Even so, as the econocrats would prefer me not to point out, the MMT brigade has had a qualified win. As part of the Reserve Bank’s resort to “unconventional” monetary policy during the pandemic – aka “quantitative easing” – it has bought more than $350 billion-worth of second-hand government bonds.

Bonds it paid for merely by crediting the “exchange-settlement accounts” that each of the banks it bought the bonds from has with the central bank.

So indirectly, the Reserve has done what the MMT people say it should have done: covered about $350 billion of budget deficits by creating money.

This means $350 billion of the government’s $1 trillion debt – and the related interest payments - is owed to the Reserve Bank, which just happens to be owned by the government. Roughly a third of the government’s debt is owed to, and must eventually be repaid to, itself.

So, the government’s liability is cancelled out by its subsidiary’s asset. That’s what I wrote a few weeks’ ago, and it’s true. But, as some fossilised central banker explained to me, it’s not the whole truth.

When you trace through all the double-entry bookkeeping, you see that the created money the Reserve paid into the banks’ exchange-settlement accounts in return for the bonds it bought is still sitting there. It’s still a liability on the Reserve’s balance sheet, and an asset on the banks’ balance sheets.

That money is part of what monetary economists call “base money”. Base money consists of all the “currency” – notes and coins – issued by the central bank, plus all the money the banks are holding in their exchange-settlement accounts at the central bank.

And the trick to base money is that its quantity can be changed only by a transaction with either the government or the central bank on the other end of it. That is, nothing anything any person or business or even a bank can do of their own volition can change the quantity of base money.

It’s true that bank A and bank B can do a deal that reduces the balance of bank A’s account – but only by increasing bank B’s balance by the same amount. That is, the banks can move base money around between themselves, but they can’t change the quantity of base money held by the banks as a whole.

OK, but why is this a problem? Because the banks have money they own stuck in bank accounts with the central bank, on which it pays little or no interest. They’d like to lend it to someone else at a much higher interest rate.

So they’re tempted to enter highly contrived, highly risky arbitrage arrangements which involve borrowing short-term and lending long-term. The Yanks call this “picking up dimes in front of a steamroller”.

It’s fine until there’s a financial crisis, which brings down banks and does huge damage to the rest of the economy, as we saw with the global financial crisis of 2008. Yet another case of there being no free lunches.

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Morrison's surprise investment in a better class of economic debate

When he was appointed chair of the Productivity Commission, Michael Brennan looked to be just another political appointment by a government that disrespected the public service and was busily installing its own men – and I do mean men – to plum jobs and key positions.

Three years later it’s clear that, whatever Scott Morrison’s motives in insisting he be appointed, Brennan is his own man, with his own inquiring and “well-furnished” mind. His disposition is conservative and he’s expert in the neo-classical orthodoxy of economics.

He’s what Treasury-types used to call an “economic rationalist”. But Brennan is no narrow-minded dogmatist who, having discovered the truth, sees no need to look further. He’s learnt from behavioural economics and is interested even in “evolutionary economics”.

Brennan’s appointment to head the Productivity Commission coincided with the early departure of John Fraser as secretary to the Treasury and then-treasurer Morrison’s decision to replace Fraser with the chief of staff in his own office, Philip Gaetjens.

Fraser, you recall, had been hand-picked for Treasury secretary by Tony Abbott, after his first act as prime minister had been to sack the existing secretary, Dr Martin Parkinson, and several other top econocrats.

The fact that Brennan had previously worked for Liberal ministers, federal and state, and had once run for Liberal preselection, framed his appointment as political. What this misses, however, is that Brennan is his father’s son.

Geoff Brennan, an economics professor at the Australian National University, won an international reputation for his contribution to the theory of public choice. All professors have sharp minds; Brennan’s is sharper than most.

In all its previous incarnations, going back to the pre-Whitlam Tariff Board, the Productivity Commission has been a bastion of economic orthodoxy. Its influence on elite thinking played a big part in the transformation of the economy under Hawke and Keating.

It’s usually been led by neo-classical, rationalist warriors. Brennan fits the bill, but he’s far more open-minded, widely read and persuasive than his predecessors.

In a speech last week, Brennan noted that the commission will soon release research on working from home: what it might mean for cities, for our work health and safety regime, the workplace relations system; what it might mean for productivity.

“We analyse these things from an economic perspective,” he explained, “and our starting point is a fairly conventional neo-classical framework.

“The conventional economic framework is useful because it helps us think through the forces acting on wages, rents, productivity and – importantly – overall wellbeing. But I do think that to really understand the path of digital technology and its economic impact you really need to combine those traditional neo-classical insights with the insights gleaned from a more evolutionary approach.”

Eh? What?

“The evolutionary approach to economics – of which [Professor] Jason Potts [of RMIT University] is a leading practitioner – eschews that narrow profit maximising assumption in favour of the more realistic view that firms face uncertainty – both about the state of things and the future – and do their best to navigate their way through the fog.

“The evolutionary approach stresses the importance of variety – the idea that different firms make different bets based on their subjective hypotheses about what will work; with these experiments submitted to the test of the market and society.

“It stresses that variety can foster novelty. It is not an aberration, but that it’s actually fundamentally important – particularly in the early stages of a new technology.”

None of Brennan’s predecessors at the commission would ever have said anything like that. Recognise that the neo-classical model is just one way of trying to understand how the economy works, and that there are other, quite different ways of analysing economic activity that could add to our understanding of how it ticks? Never.

In an earlier speech, Brennan gave a warning about the relaxed approach of some to the massive build up in deficit and debt since the pandemic. All his predecessors would have shared that concern. But they would never have expressed the warning in such a well-reasoned way.

The new conventional wisdom among economists (to which I subscribe) is that high public debt doesn’t necessarily have to be paid back. It will decline in relative terms – relative to the size of the economy, gross domestic product – so long as nominal GDP grows at a faster rate than the rate of interest on the public debt – and, of course, so long as you’re not adding to the debt.

Brennan’s warning: “The risk in the public debate is that this insight – that GDP growth tends to exceed interest rates – is taken to imply something altogether different and much bigger: that debt and deficit no longer matter at all.

“That we can afford the next and the next ‘one-off’ rise in debt on the grounds that growth rates will continue to outpace bond yields . . .”

Brennan outlines various reasons for not being seduced by this life-was-meant-to-easy view, but focuses on the micro-economic case for caution. He notes, as economists do, that hidden behind the amounts of mere money being spent is the use of “real resources” in the economy. We can print as much money as we want, but what can’t be produced from thin air are the land and raw materials, capital equipment and labour that money is used to buy.

And there are physical limits on the extent to which real resources – as opposed to money – can be borrowed from the future. Real resources bought by the government are no longer available to be used by business for investment and innovation.

True. Good point. Surprise, surprise there’s no free lunch. But this tells me we should be trying a lot harder to ensure the money governments spend isn’t spent wastefully. We should spend on things governments are prepared to ask taxpayers to pay for.

What doesn’t follow is neo-classical economics’ implicit assumption that spending decisions made by the private sector are always superior to the things governments spend on.

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Now's a good time to work on your rules to live by

The week between Christmas and new year is unique among the 52, a week of no great consequence, a kind of no man’s land between the end of the old year and the start of the new. Not a gap year, but a gap week. A week where all the sensible people are on leave and having fun with the family, while the few who must work while others play hope there won’t actually be much work and no one will mind if they skive off early.

But I’ve always found it a good time for reflection and taking stock. What were my great achievements in the year just past – if any? And what are my grand plans for achievement in the coming year?

A few days ago I happened upon a list of "17 Things I Believe", written by the American management professor Robert Sutton, which I put away a decade ago because I believed so many of his 17. Some of them are useful for anyone using this week for a little reflection.

Let’s start with number 14: "Am I a success or a failure?" is not a very useful question.

That’s because all of us are both a success and a failure. Successful in some aspects of our life and less successful in others. Good at making money, for instance; less good as a spouse and parent.

If so, see number 17: Work is an overrated activity.

Many men do need to find a healthier balance between work and family. They need to stop kidding themselves that sending their kids to an expensive school and buying their loved ones expensive presents is a satisfactory substitute for their presence and attention.

More generally, however, the school of "positive" psychologists says that, rather than always focusing on fixing your weaknesses, you make more progress if you concentrate on getting the best from your strengths.

But Sutton has his own twist. "Rather than fretting or gloating over what you’ve done in the past (and seeing yourself as serving a life sentence as a winner or loser)," he says, "the most constructive way to go through life is to keep focusing on what you learn and how you can get better in the future."

This ties in with number 8: Err on the side of optimism and positive energy in all things.

Yes, a much happier way to live your life.

And it leads on to number 5: You get what you expect from people. This is true when it comes to selfish behaviour; unvarnished self-interest is a learnt social norm, not an unwavering feature of human behaviour.

This really chimes with my experience. I’ve found it particularly true of bosses. If they can see that you expect them to give you a square deal because they’re a decent person, they most likely will if it’s within their power.

That’s because of a person’s natural desire to meet the other person’s expectations of them. Hold them to a high standard and they’ll rise to it. But let them see you distrust them and half expect to be cheated, and they’re unlikely to dash your expectations.

Another one I really like is number 7: The best test of a person’s character is how he or she treats those with less power. Or, as I prefer to say after too much Downton Abbey, how you treat the servants. The taxi drivers, shop assistants, receptionists and executive assistants trying to stop you getting through to their boss.

It’s a test I apply in retrospect to my own behaviour, and often don’t pass.

Now here’s a better one for this time of year, number 9: It is good to ask yourself, do I have enough? Do you really need more money, power, prestige or stuff?

Like many economists always have, in this age of hyper-materialism and vaulting ambition it’s easy to assume more is always better. It often isn’t, particularly when quantity comes at the expense of quality. Nor when we use cost as a measure of quality.

I think the world would be a nicer, less frantic, more generous, less unequal and, above all, more enjoyable place to live if our politicians and business people put more emphasis on making things better rather than bigger. (And by quality I don’t mean striving for an all-Miele kitchen.)

Sometimes I think top executives strive for ever-higher remuneration because they don’t get much satisfaction from the jobs they do. They’d be better off themselves if they put more emphasis on making sure their staff had more satisfying and reasonably paid jobs, and their customers always got value for money.

Which brings us back to work. There is more to life than work, but since work takes up so much of our lives, I think the secret to a better life is to keep wriggling around until you find a job that’s satisfying. And a business full of satisfied workers – from the boss down – should still be one that makes a big profit. That is, big enough.

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Reserve Bank suffering relevance deprivation syndrome

I’m sorry to say it, and it’s certainly not the done thing to say, but the Reserve Bank looks to me like that emperor with a serious wardrobe deficiency.

Apart from the nation’s allegedly “self-funded” retirees – whose angry letters to Reserve governor Dr Philip Lowe must by now be absolutely blistering – no one wants to question last week’s decision to make what must surely be the smallest-ever cut in the official interest rate, and engage in a bit more of what central bankers prefer to call “quantitative easing” or “balance-sheet expansion” rather than use those verboten words Printing Money.

I guess there’s no reason any borrower would object to paying lower interest rates, no matter how microscopic the reduction. Nor are the nation’s treasuries and governments likely to object to having their own interest bills cut a fraction.

As for the experts in the financial markets, their vested interest lies in having the central bank stay as busy as possible, organising events where they can lay bets. An inactive Reserve is a central bank that’s not helping them justify their lucrative but unproductive existence. “Negative interest rates? Might be a fun day out. Bring it on.”

But I’ve heard from a lot of retired central bankers who disapprove of the Reserve’s scraping of the barrel. And last week Dr Mike Keating, a former top econocrat, also questioned the wisdom of keeping on keeping on.

Some other people have seen the Reserve’s decision to, in Lowe’s words, “do what we reasonably can, with the tools that we have, to support the recovery” as a sign it judged last month’s budget not to have done enough.

Maybe, but I doubt its motives are so noble. Alternatively, Lowe’s reference to “doing what we can” with “the tools we have” could be taken as a tacit admission that his tools can’t do much.

As Treasury Secretary Dr Steven Kennedy made clear last week, monetary policy’s “scope . . . to provide sufficient stimulus is limited and has necessitated the large levels of fiscal support”. His speech was devoted to making sure his financial-markets audience – and the rest of us – understood that the headquarters of short-term management of the macro economy has now shifted from Martin Place, Sydney to Parkes Place, Canberra.

No, I think what we’re seeing is our most well-resourced economic regulator (well-resourced because it prints its own banknotes) desperately trying to look busy and relevant because it’s lost its main reason for existence, but can’t be shut down or even sent on “furlough” – the latest euphemism for being put on unpaid leave, in the hope the need for your services will return.

No country could leave itself bereft of a central bank. The Reserve can’t be shut down because one of its infrequent but vital roles is to flood the financial markets with liquidity whenever they become dysfunctional (as happened in the global financial crisis and, in a smaller way, in the early days of the pandemic).

But the fact remains that the Reserve’s primary function – the short-term stabilisation of demand - has gone away and isn’t likely to come back in my lifetime (another 20 years, max). That is, its problem is structural (long-lasting) not cyclical (temporary).

Your modern, independent central bank was designed to respond to the problem of high and rising inflation. And during the 1980s (and, in Australia, 1990s) its ability to do so was clearly demonstrated.

But, as former Reserve governor Ian Macfarlane has reminded us, inflation rates in the advanced economies have been falling for the past 30 years, and now seem entrenched below the central banks’ targets. And, as Treasury’s Kennedy reminded us last week, the global (real) neutral interest rate has been falling for 40 years.

Central banks need independence of the politicians so they can raise interest rates to fight inflation. They don’t need it to lower rates. But with inflation having gone away as a problem, it’s now 10 years since the Reserve last raised rates (and even that proved unnecessary and had to be unwound).

When nominal interest rates were high, cutting rates in big licks did seem effective in helping revive growth and employment. But with interest rates now so low and getting lower in the 12 years of weak Australian and advanced-country growth since the financial crisis, there’s little reason to believe cutting rates is effective in reducing unemployment and underemployment.

Last week Lowe insisted that an official interest rate down at 0.1 per cent does not mean the Reserve has “run out of firepower” – by which he meant that there’s still plenty of money he can print.

True. But, as Reserve assistant governor Dr Chris Kent has explained, the dominant purpose of the money-printing is to lower “risk-free” (government bond) interest rates further out along the maturity curve beyond the official overnight cash rate.

And this doesn’t provide a reason to believe slightly lower interest rates will induce households and firms to borrow and spend in a way that fractionally higher rates didn’t. Whatever people’s reasons for not spending, the high cost of borrowing isn’t one of them.

The old jibe that cutting interest rates to induce growth is like “pushing on a string” for once seems apposite.

Remembering the retired Reserve bankers’ point that it chose to limit its intervention in financial markets to short-term and variable interest rates for good reason – to limit monetary policy’s distortion of private sector choices - one thing we can be more confident of is that printing money and cutting rates when few people want to borrow for consumption or real investment will be effective in inflating bubbles in the prices of assets such as houses and shares.

How this would leave the unemployed better off is hard to see. Risking our heavily indebted household sector becoming more so doesn’t seem a great idea.

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We're edging towards a change in economic management

We must be in a recession because I’m getting a lot more letters from readers telling me they’ve figured out how to fix the economy in a way the economists haven’t been smart enough to discover.

Their solutions can be weird and wonderful, but a lot of them boil down to a simple proposition: if the economy’s in recession and unemployment’s high because people aren’t spending enough money, why doesn’t the government just print a lot of money and spend it itself?

But here’s the scoop: the idea that, rather than borrowing to fund their budget deficits – thus incurring big debts and interest bills – governments should just create the money they need has been anathema to economists for the past 40 years, but this may be changing.

There is a growing debate among economists, between the proponents of what they call “modern monetary theory” and more conventional economists and econocrats over whether governments should just create the money they need.

The defenders of the conventional wisdom have had to concede a lot of ground. Whereas a decade ago MMT was lightly dismissed as a crackpot idea, as this radical idea has gained more attention its opponents have had to admit it would be perfectly possible to do. They just think it would be a really bad thing to do.

Trick is, the “unconventional policy” of “quantitative easing” – where the central bank buys second-hand government bonds and other securities and pays for them merely by crediting the seller’s bank account – is quite similar to what the radicals are seeking.

All the major advanced economies – the US, the Eurozone, Britain and Japan - began doing this in big licks in the aftermath of the global financial crisis in 2008, once their official interest rates were so close to zero that they could be pushed no lower.

And now, once this coronacession had prompted our Reserve Bank to drop our official rate to its “effective lower bound” of 0.25 per cent in March, it too has resorted to quantitative easing, promising to buy as many second-hand bonds as necessary to keep the interest rate on three-year government bonds no higher than 0.25 per cent.

So, how exactly would what the Reserve is already doing be very different to what the MMT advocates say it should be doing?

The greatest proponent of MMT is an Australian, Professor Bill Mitchell, from my alma mater, the University of Newcastle. Internationally, its highest profile salesperson is Professor Stephanie Kelton, of Stony Brook University in New York, author of the big-selling The Deficit Myth.

Our leading commentator on the debate is Dr Stephen Grenville, a former deputy governor of the Reserve. And our most vocal opponent of MMT is present Reserve governor Dr Philip Lowe.

Those opponents are right to say there’s nothing new about “modern” monetary policy. In the days before the loss of faith in simple Keynesianism, it was common for governments to fund their budgets partly by selling bonds to the Reserve Bank, rather than to the public.

So the fatwah on governments “printing money” dates back only as far as Milton Friedman and his monetarists’ semi-successful attack on Keynesian orthodoxy in the late 1970s, when all the developed economies had a big problem with high inflation.

Friedman argued that inflation was “always and everywhere a monetary phenomenon” which governments could control by limiting the supply of money. Governments eventually realised that the quantity of money was “demand-determined” and that setting targets for growth in the money supply didn’t work. They switched to using the manipulation of interest rates to target the inflation rate.

As sensible economists always knew, it was never true that creating money always leads to greater inflation. It does so only when the demand for “real resources” – land, labour and physical capital – exceeds the supply of real resources. Only then do you have “too much money chasing too few goods”.

This has been confirmed by the failure of all the money created by quantitative easing since the global financial crisis to cause much, if any inflation, contrary to the predictions of the world’s few remaining monetarists.

The opponents are also right to say, quoting Friedman’s most famous aphorism, that “there’s no such thing as a free lunch” and it’s a delusion to imagine MMT offers one.

As Lowe argued vigorously at his appearance before the Parliament’s economics committee earlier this month, in reply to questions from Greens leader Adam Bandt, it may seem that by creating money rather than borrowing it you’re avoiding a lot of debt and interest payments but, in reality, all you’re doing is delaying and hiding the bill to the government and its taxpayers.

It’s also a delusion (as the leading proponents of MMT acknowledge) that governments would be free to create (or “print”, to use a misleading metaphor) as much money as they needed, without restraint. The restraint is the same one it always was: the limited supply of real resources.

While ever the demand for real resources – the things we use to produce goods and services – is falling short of the supply of those resources, creating money should lead to increased demand for them (provided you do it more effectively than the big central banks did it after the financial crisis).

But once demand was growing faster than the supply of real resources, any further money you created would simply cause inflation. This is what’s really worrying the opponents of MMT (and me). If you let the politicians off the leash to spend as much as they liked up to a point, how would you ever get them to stop once that point was reached?

While ever all we’re doing is quantitative easing, the independent central banks do the deciding, not the politicians. Which brings us to Lowe’s “advanced negotiating position”: why risk letting the pollies start creating money when the government can borrow from the public at interest rates that are pathetically low. And Lowe’s promising to keep them low for as long as necessary.

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Pandemic could kill off governments' credit rating bogeyman

I guess we shouldn’t be surprised that an economic shock as big as the pandemic is breaking down longstanding rules – written and unwritten - about how the national economy should be managed.

One rule is the rigid demarcation between fiscal (budgetary) policy and monetary (interest-rate) policy. Another is that the states leave management of the macro economy to the feds, and stick to a Good Housekeeping approach to their own budgets. A third is that there should be free trade and movement between the states.

A corollary of the strict separation of fiscal policy and monetary policy is that the federal government and its Treasury should leave all public comment about the appropriate levels of interest rates and the dollar to the independent Reserve Bank, while the Reserve makes no public comment on the appropriate levels of government spending, taxation and budget deficits.

On that convention, Reserve governor Dr Philip Lowe has been stretching the friendship almost since the day he took the job in 2016. His problem is that macro management works best when both arms of policy are pushing in the same direction: either moving the economy along or holding it back.

But whereas his goal has been to use low interest rates to stimulate a weak economy and get unemployment down, the Abbott-Turnbull-Morrison government’s goal has been to tighten fiscal policy and turn the budget deficit into a surplus.

Lowe hasn’t been able to resist the temptation to note - repeatedly - that he could do with more help from fiscal policy. And as the level of interest rates has fallen further and further towards zero, he’s been more and more outspoken. Now the official interest rate has reached the “effective lower bound” of 0.25 per cent, he’s been even more importuning.

But in his evidence to the House of Reps economics committee a fortnight ago, he moved to putting the hard word on the premiers. Replying to a question about fiscal stimulus, he said: “I think we need both the federal government and the state governments carrying their fair share.

“The federal government, I understand, has announced measures so far equivalent to roughly 7 per cent of gross domestic product ... The measures to date from the state governments add up to close to 2 per cent of GDP ...

“The challenge we face is to create jobs, and the state governments do control many of the levers here. They control many of the infrastructure programs. They do much of the health and education spending. They’re responsible for much of the [regular] maintenance of much of Australia’s infrastructure.

“So I would hope, over time, we would see more efforts to increase public investment in Australia to create jobs, and the state governments have a really critical role to play there.”

At the national cabinet meeting on Friday, we’re told, Lowe told the premiers they should collectively spend $40 billion over the next two years – equivalent to 1 per cent of GDP per year – on job creation measures, including infrastructure, social housing and training.

Trouble is, the states have already done about as much as they can without exceeding the borrowing limits set by the credit-rating agencies, and so endangering their triple-A ratings. So what’s Lowe’s solution to that problem? Dooon worry about ’em.

At the parliamentary hearing, he said: “From my perspective, creating jobs for people is much more important than preserving the credit ratings. I have no concerns at all about the state governments being able to borrow more money at low interest rates. The Reserve Bank is making sure that’s the case.”

At one level, this is a sign of the momentous times we live in. Governments around the world are borrowing massively as the only way they can think of to overcome the coronacession. With interest rates on long-term government borrowing at unprecedented lows, what have they got to fear?

In effect, they’re daring the three big American for-profit rating agencies to downgrade them. And so far, those supposedly righteous judges haven’t accepted the dare. Perhaps they’re remembering the time after the global financial crisis when one of them had the temerity to downgrade US government bonds. No one took any notice.

The presumed penalty for being downgraded is that the bond market increases the interest rate it requires to lend to you. But what if the market has stopped listening? In any case, with interest rates ultra-low, why should anyone fear having to pay a tiny fraction more?

At another level, however, this is Lowe telling Treasuries, federal and state, that the jig is up. Ever since the mid-1980s, they’ve used the threat of a rating downgrade as a stick to wave over the heads of the spending ministers, to limit their spending. They’ve used the rating agencies as the ultimate policemen enforcing Smaller Government.

Not any more, it seems. Right now, apart from the appalling prospects for unemployment, Lowe has bigger worries: the push from the proponents of “modern monetary theory” urging governments to stop funding their budget deficits by borrowing from the public and just print the money they need.

In Lowe’s mind, this would be the ultimate breach of the separation of fiscal policy and monetary policy. The elected government would be telling the independent central bank how much money to create.

Lowe would be willing to bend the rules a lot to avoid this ultimate breach. He certainly wouldn’t want the rating agencies adding to the pollies’ temptation to print rather than borrow. But he would be willing to resort to “unconventional measures” and buy big quantities of second-hand Commonwealth and state government bonds and so ensure their interest-rates stay ultra-low.

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Money is created by the banks, not the government

Just for a change, let’s talk about money. What? Don’t economists always talk about money? Well, yes, in the sense that almost all the things they talk about are valued in monetary terms. But otherwise, no, they rare talk about money as such.

Sometimes I think economics is about finding a host of synonyms for the word "money". Why do you go to work? To make money, of course. But economists prefer to say you earn a wage. Or, if you’re a big shot, a salary.

Businesses sell us things to get money, but economists prefer to say they make sales to generate turnover which, after they’ve paid out a lot of money on wages and rent and many other expenses, leaves them with money called income or profit.

Economists do talk specifically about money, but they define it much more narrowly. Consider this: how would you like to live in a barter economy, where you’re paid with some of whatever it is you’ve helped produce, then have to exchange those things with other people for some of the things they’d help produce?

It would be a hugely cumbersome and time-consuming business. Which is why, a long time ago, someone invented money. We get paid with money, which we use to buy the things we need. Much simpler and easier.

That’s what economists mean by money – a means of paying for things; a "medium of exchange". To an economist, money has little intrinsic value. It’s the things it buys that are valuable.

Economists mainly focus on those valuable things – what’s happening to them and how they work - and ignore the money used to buy and sell them.

It’s true, of course, that economists and the rest of us put dollar values on all those things – prices of the goods and services we buy, the value of the houses and other assets we sell.

Expressing the value of so many and varied things in dollars makes it easier to compare them, add and subtract them. So another part of economists’ definition of money is that it’s used as a "unit of account".

(This, however, exposes a big limitation of economics. There are a lot of important things in life and the economy whose value or cost can’t be reduced to a dollar figure. Things like love, trust, honesty, anxiety and stress. Economists are always forgetting to take account of factors than can’t be measured in dollars.)

Of course, not all the money than comes our way is spent immediately. Some of it we save to spend later – sometimes much later. Which means the third requirement money must fulfil is to be a good "store of value".

That’s why we need to keep the rate of inflation low and steady (and why Bitcoin doesn’t rate as money).

But now we’re clear on what money is, the big question is: where does it come from? How is it created?

Well, we know that coins and banknotes come from the government. Notes are printed in Melbourne by the Reserve Bank; coins are made in Canberra by the Royal Australian Mint. The Reserve sells to the banks all the notes and coins they want.

But notes and coins account for less than 4 per cent of all the money in circulation. Most of us hold most of our money on deposit with the banks.

In principle, the Australian dollar is a creation of the Australian government. Like almost every currency these days, it’s a "fiat" currency – meaning it has no intrinsic value: notes are just pieces of paper, and the metal used to make a $2 coin is worth a small fraction of $2. An Australian $50 note is worth $A50 purely because the government says it is.

This also means the government could print – or credit to people’s bank accounts – as many dollars as it wanted to (though not without ramifications).

But here’s the trick: although that is true in principle, in practice money is created by the banks. As Emma Doherty, Ben Jackman and Emily Perry explained in the Reserve Bank’s Bulletin last year, money is created when banks make loans.

The bank either puts the loan money directly into its customer’s deposit account, or pays it into the account of the business selling whatever it is its customer needed the loan to buy. Either way, since money is notes and coins ("currency") plus bank deposits, the amount of money in circulation has just increased.

Amazing, eh? But before you run away with the idea that a bank could create as much money as it wanted to, there are two further points to understand.

First, there are obvious limits on how much money the banks can create. For a start, they’re not giving it way, they’re lending it. They must have a customer wanting to borrow at the interest rate charged, and likely to be able to repay it.

And the banks also need to be in a position to make the loan. They must keep a sufficient share of their assets in liquid form (cash) to be able to meet any withdrawals the new borrower makes from their account, as well as to meet any withdrawals by existing borrowers.

This pretty much means they need to attract more cash deposits to support the loan they just made. The banks’ loans need to be backed up by enough capital, supplied by shareholders, in case borrowers can’t repay their loans or other bank assets fall in value.

All this is necessary to ensure the banks don’t collapse. So these factors imply that creating money comes at a cost to the banks, which limits the extent to which they can increase their loans.

Second, an individual bank can’t create money in this way, only the banking system as a whole can. That’s because the bank that initiates the loan can’t be sure that all the loan money spent comes back to it as deposits. Some of it will, but most may go to other banks.

Next week it’s back to talking about the things we do with money.

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Why cut interest rates again? It's the exchange rate, stupid

The trouble with the Reserve Bank's continuing cuts in the official interest rate – this week to another record low, of 1.5 per cent – is that it could leave people thinking the economy's in bad shape.

It isn't. As Reserve governor Glenn Stevens was at pains to point out, recent figures suggest that "overall [economic] growth is continuing at a moderate pace" notwithstanding a very large decline in investment in new mines and natural gas facilities.

In consequence, employment is increasing and unemployment is, as they say in the financial markets, “flat to down”.

It's not brilliant, but it's not bad. Our economy is growing faster than most other developed economies. Nor is it expected to slow.

In which case, why is the Reserve cutting interest rates? Good question. Actually, it says more about the trouble other rich countries are having getting their economies moving than it does about ours.

The advanced economies – even the Americans – have still not recovered properly from the Great Recession precipitated by the global financial crisis of 2008.

The long boom that preceded the crisis involved a lot of borrowing by banks, businesses and households, partly to bolster living standards, but also to buy housing, commercial property and other assets.

When, inevitably, the credit-fuelled boom busted and asset prices fell back to earth, a lot of households and businesses were left with assets whose value no longer exceeded their liabilities.

Recessions that arise from such "balance sheet" problems always take a long time to recover from, as households and businesses cut their spending and investing in order to pay off their debts.

That was bad enough. But the difficulties were compounded by governments on both sides of the North Atlantic convincing themselves the problem wasn't excessive private sector borrowing, but government borrowing.


They not merely concluded they should do no further deficit spending, they embarked on the deeply misguided policy of "austerity", in which they tried to cut government spending and raise taxes at a time when the economy was already weak. Unsurprisingly, they made little progress in reducing deficits and debt.

This foolish fashion of forswearing the use of fiscal policy (the budget) to increase public sector demand at a time when private demand was weak threw all the task of restoring the economy's growth onto monetary policy.

From a position in most North Atlantic economies where official interest rates were already quite low, central banks cut their rates almost to zero.

When this did little to boost demand they resorted to the unconventional policy of "quantitative easing" – they bought bonds from banks with money they created with the stroke of a pen.

This was intended to lower long-term bond rates, which it did. But it did more to push up the prices of financial assets than to encourage increased spending in the real economy.

With QE doing little to help, some European central banks have even moved to negative interest rates – actually charging lenders a tiny percentage for borrowing their money.

If this sounds increasingly crazy, it is. But it's the world we and our central bank have to live in.

Historically, monetary policy was designed to keep inflation low. But it's a long time since many countries had to worry about high inflation. These days more of them worry about the opposite problem of "deflation" – continuously falling prices.

We, too, have very low inflation: an underlying rate of 1.5 per cent, compared with the Reserve's target range of 2 to 3 per cent.

This situation has led some to conclude the Reserve's reason for cutting the official rate this week was to help get the economy growing a lot faster, so inflation pressures would build and get the inflation rate back into the target zone.

That would make sense in normal times, but times aren't normal. Nor do I imagine the Reserve thinks a cut of another 0.25 percentage points (and less for people with mortgages) will make much difference to the strength of borrowing and spending.

So why did the Reserve feel it needed to cut by another notch? My guess is it had more to do with trying to reduce upward pressure on the dollar – our exchange rate.

The biggest effect of QE – creating more of a country's currency – has been to put downward pressure on that country's exchange rate. Meaning, of course, upward pressure on other countries' exchange rates – including ours.

Our dollar soared during the resources boom when the world was paying extraordinary prices for our coal and iron ore. It dropped back when commodity prices fell, but its return to more comfortable levels for our export and import-competing industries was impeded particularly by the Americans' resort to QE.

It eventually got down to the low US70¢s and the Reserve regards a lower dollar as a key element, along with low interest rates, in stimulating faster growth in our production of goods and services.

Of late, however, the dollar has drifted back up to about US76¢, which the Reserve regards as a retrograde step.

Get this: contrary to the easy assumption of some people, there's no simple, mechanical relationship between the level of our interest rates (or, strictly, the difference between our rates and those offered by big players such as the Americans) and the level of our exchange rate.

Even so, with no inflation problem in sight – and, indeed, with any fall in expected inflation leading to a rise in our real interest rate – the Reserve decided to err on the safe side by trying to reduce upward pressure on the dollar.

So why did the Reserve cut rates? It's the exchange rate, stupid.

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Business - and customers - pay for bad business behaviour

It's remarkable the way the Business Council of Australia constantly lectures us on the "reform" we should be accepting to improve our economic performance (and, purely by chance, their profits), but never seems to lecture its big-business members on their manifest need to "reform" their own standards of behaviour.

Among its most profitable members would have to be the four big banks. But the litany of scandals over their bad treatment of customers never seems to end.

The latest was CommInsure's denial of legitimate life insurance claims, but there's also been ANZ's alleged manipulation of a key commercial interest rate and the Commonwealth Bank's bad financial planning advice that lost money for many customers.

Now the chairman of the Australian Securities and Investments Commission, Greg Medcraft, has joined Australian Prudential Regulation Authority boss Wayne Byers in demanding the finance industry fix its corporate culture.

"Time and again, we have seen firms blaming [behaviour] on a few bad apples driving bad outcomes for consumers, rather than taking responsibility by looking more closely at their organisation and implementing the necessary changes to address the cause of the problem," Medcraft said on Monday.

"At the end of the day, you need to have a culture that your customers can believe in."

The captains of finance have not reacted well to the bureaucrats' admonition. David Gonski complained about the corporate regulator being the "culture police", while someone from the Institute of Company Directors offered the uncomprehending advice that corporate culture could not be imposed by law.

It would be wrong to focus only on the bad behaviour of the banks, of course. There have been other instances from other industries. Take 7-Eleven's underpaying of foreign workers.

Or take the many notorious cases of businesses rorting government subsidy schemes in ceiling insulation, childcare and vocational education and training.

It's possible what we're seeing is merely greater exposure of the bad behaviour of big business thanks to a surge in business investigative journalism, with Fairfax Media's Adele Ferguson at its head.

But I've been in and around businesses since I left school 50 years ago, and I think bad corporate behaviour is definitely worse than it was. As executive remuneration has headed for the stratosphere, so the willingness to exploit customers and staff has grown.

But why? One reason is the rise of a more fundamentalist approach to economics. "Economic rationalism" has prompted much deregulation, privatisation and outsourcing, which has made competition a lot more intense in many industries.

That's not necessarily a bad thing, but as managers have experienced greater pressure to perform – as it's become harder to keep profits high and rising – they've passed the pressure on to staff and customers.

Economic fundamentalism is both a product of the greater materialism of our age and a cause of it, with all its emphasis on monetary values and view of "labour" as just another resource to be exploited along with other raw materials.

What's worse is that economic fundamentalism has had the effect of sanctifying selfishness. When I put my own interests ahead of other people's, I'm not being greedy or self-centred or antisocial; I'm just being "rational".

One effect of the greater pressure to perform is the present "metrics" fad – the obsession with measuring aspects of the firm's performance, then using those measures to improve performance, such as by setting targets based on "key performance indicators".

What the KPI obsession is saying is: just get results; how you get them is of lesser interest. I'd lay money that the reason people at CommInsure were knocking back legitimate claims was they were being encouraged to do so by KPIs or other "performance incentives". (That's why it's dishonest for people at the top to blame "a few bad apples".)

Most people's sense of what is acceptable, ethical behaviour is determined by what they believe their peers are doing. If they do it, it's ethical for me to do it; if they don't do it, maybe I should feel guilty about it.

The trouble is, studies show that adults, like children, often harbour exaggerated impressions of how many others are doing it.

Social conformity (aka "culture") is such a powerful influence that it's always been hard for people to follow their own "moral compass". With the decline of religious adherence, it's harder even to have one.

The Business Council and its members ought to be a lot more worried about the decline in their standards of behaviour than they seem to be.

One fundamental the economic fundamentalists keep forgetting is that market economies run best on widespread trust: mutual trust between management and staff, and between businesses and their customers.

Allow declining standards of behaviour to erode trust and the economy suffers. Customers become harder to persuade, argue more with counter staff, are surlier with call-centre staff and more inclined to take their business elsewhere. They resist "upselling".

With less trust you have to waste a lot of money on increased security in its many forms. And governments react by multiplying laws and legal requirements.

When so many companies demonstrate their contempt for other taxpayers by the way they manipulate the tax they pay – their ethic is that if it's (barely) legal, it's ethical – it becomes much harder for governments to get voter support for cutting the rates of those taxes.

Who knew?

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Very low rates are more worrying than you think

Never thought I'd see the day when Treasury willingly surrendered the leadership of the nation's economists to the Reserve Bank, but it happened this week.

The new Treasury secretary, John Fraser, has broken a tradition lasting more than two decades to speak about the budget at a luncheon of the Australian Business Economists on the following Tuesday.

This follows the absence of Budget Statement No. 4 from last week's budget papers. It's the statement I call Treasury's sermon, but a disappointed Saul Eslake, of Bank of America Merrill Lynch, calls Treasury's "thought leadership essay".

But Dr Philip Lowe, deputy governor of the Reserve Bank, personfully stepped into the breach with a ground-breaking speech about "what seems to be a transition to a world in which global interest rates are lower, at least for an extended period, than we had previously become used to".

Does that sound like a good problem to have? Don't be so sure. Interest rates are two-edged: a cost to borrowers, but income to lenders. No one enjoys suffering a drop in their income, as many oldies have been reminding us lately.

The central banks of the US, the euro zone and Japan have for some years had their official (overnight) interest rates set at or near zero. At the other extreme, the yields (interest rates) on 10-year government bonds in these countries are at "extraordinary low levels".

These very low nominal rates mean savers investing in risk-free assets (government bonds) are earning negative real rates of return – because nominal rates are lower than the rate of inflation. "They also mean the time value of money is negative," Lowe says.

Huh? Say you win $10,000 in a lottery, but are offered the choice of receiving the money now or in three years time. Which would you pick?

Most people would want the money now. If you've got it now you can either use it to buy something and enjoy what you've bought for three years, or you can lend the money to someone else for three years and be rewarded by the interest you charge them.

When you think about all that, you realise the truth of the economists' saying that "a dollar today is worth more than a dollar tomorrow". That's the time value of money. The actual amount of that value is determined by the interest rate you could earn if you had the dollar today, or the rate you'd avoid having to pay to be able to spend today a dollar you didn't have.

This analysis isn't about the effects of inflation, but about the value of the use of money over time. So the time value of money is the real interest rate (the nominal interest rate minus the expected inflation rate).

Time value means that if I had to pay you $10,000 in three years time, the amount I'd have to set aside today would be less than that because the money I set aside could be earning interest between now and then.

If I knew the interest rate was, say, 4.5 per cent, I could work out how much I had to set aside today to have $10,000 in three years time. The process of working this out is called "discounting". It's compound interest in reverse.

The initial amount you'd need turns out to be $8763, which is called the "present value" of $10,000 in three years.

All this is standard stuff for economists and business people evaluating investment projects or managing invested funds. It's deeply ingrained in the way they've been taught to think.

That's why it's quite shocking for Lowe to say the time value of money is now negative. He's saying that, for goodness knows how long, a dollar today is worth less than a dollar tomorrow.

Another implication is that there's now no compensation for postponing consumption to tomorrow – which, of course, is what savers are doing.

How do we find ourselves in this remarkable situation? The "proximate" (most obvious) cause is the actions of the big central banks and their "quantitative easing" (creation of money). But, Lowe says, central banks don't act in a vacuum, they respond to the world they find themselves in.

That world is one where more people want to save, but fewer people want to invest in new physical assets. In such a world, the interest rate, which is what "equilibrates" saving and investment, falls.

If this situation is long-lasting, Lowe says, it poses "new questions and challenges". It changes a lot of our unconscious rules about how the world works.

For a start, for people seeking to fund future liabilities – such as employers with defined-benefit pension schemes, or even just people saving to amass an adequate lump sum to retire on – it just got a lot harder. The present value of future liabilities is now higher, meaning you have to put more in to reach your target.

Second, lower rates mean the present (that is, discounted) value of a stream of future income from an asset is now higher. This, in turn, means the asset is worth more and so will now have a higher price.

This is brought about by savers, dissatisfied with the low returns on risk-free assets (government bonds), seeking the higher returns from riskier assets (say, shares of companies with high dividend rates) and thereby pushing up their prices.

Third, if the cost of (financial) capital has fallen but firms don't lower their "hurdle rates" – the expected rate of return required before potential physical investment projects get the go-ahead – then we don't get the growth in business investment spending needed to get the economy moving (and don't have increased demand for the use of savings working to get interest rates back up).

We just have to hope businesses eventually learn how the rules have changed and adjust accordingly.

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Why monetary policy stimulus is less effective

The advent of "stagflation" in the 1970s - the previously unknown combination of high inflation with high unemployment - led to a loss of confidence in Keynesian policies, with primary responsibility for management of the macro economy being shifted to monetary policy and with fiscal policy taking a lesser role.

Four decades later, the wheel may be turning again. The two hot stories in the world of macro management are the decline in effectiveness of monetary policy and a consequent resurgence of interest in active fiscal policy.

Last week Dr Philip Lowe, deputy governor of the Reserve Bank, gave a speech explaining the monetary policy story, so let's look at that today and leave the fiscal story for another day. (Monetary policy refers to the central bank's manipulation of interest rates - and, these days, its creation of money - and fiscal policy refers to the government's manipulation of taxation and government spending in the budget.)

In the aftermath of the global financial crisis of 2008, the big developed countries' central banks cut their official interest rates virtually to zero in their efforts to stimulate demand, avert a depression and get their economies moving again.

When this didn't seem to be having much effect, but being unable to cut their official rates below what economists pompously call "the zero lower bound", first the US and Britain, then Japan, then the euro zone resorted to an unorthodox practice known as "quantitative easing": central banks buying bonds from the commercial banks and paying for them by creating money out of thin air.

The main way this stimulated their economies was by pushing down their exchange rates relative to the currencies of those countries that didn't resort to QE - us, for example.

The Europeans got so desperate to get their economies moving their next step was to do something formerly believed impossible: they cut their official interest rate below zero - meaning the central bank charges its commercial banks a tiny percentage for allowing them to deposit money in their central-bank accounts. In a few cases, the commercial banks have passed on this "negative interest rate" to their business depositors.

As Lowe says, the present global monetary environment is "quite extraordinary". There's been unprecedented money creation by major central banks, official interest rates are negative across much of Europe, long-term government bond yields (interest rates) in most advance countries are the lowest in history and lending rates for many private-sector borrowers are the lowest ever.

Had anything like this much stimulus been applied in earlier decades, economies would be booming and inflation would have taken off. Instead, though the US and British economies are now growing moderately, Japan and the rest of Europe remain mired, with considerable idle capacity. Inflation rates are low almost everywhere and inflation expectations have generally declined, not increased.

But why have things changed so much? Lowe says it's partly because the GFC was the biggest financial shock since the Great Depression and so has required a much bigger dose of monetary stimulus than usual, which is taking longer than usual to work.

But it's also partly because monetary policy is less effective. "Economic activity does not appear to have responded to the stimulatory monetary conditions in the way that occurred in the past and inflation rates have been very low," he says.

The single most important factor causing the change, he says, is the very high levels of debt now existing in many advanced economies.

One of the "channels" through which stimulatory monetary policy works is by the lower interest rates encouraging people to borrow so as to bring forward future spending. This has worked well in the past, but the high stock of debt acquired from past episodes has left many households, businesses and banks (and even in some cases, perversely, governments) unwilling to add to their debt.

Rather, they're using the low interest rates to help "repair their balance sheets" by paying down their debts.

One aspect of easy monetary policy that is still working normally, however, is the rapid rise in the prices of assets such as property and shares.

Another thing that's different is the flow-on from demand to prices. Both workers and firms seem to perceive their pricing power to have been reduced. More worried about keeping their jobs, workers are accepting much lower wage rises. More worried about losing customers, firms are more cautious about putting up their prices.

So how is all this affecting us in Australia? Lowe says one big effect is to leave us with an exchange rate that's higher than it should be; that hasn't fallen as much as the fall in our mineral export prices implies it should have.

This has required the Reserve Bank to cut our official interest rate by more than it thinks ideal. It's done this partly to reduce our interest rates relative to other advanced countries' rates and so put some downward pressure on our dollar, but mainly to make up for the inadequate stimulus coming from the still-too-high exchange rate.

The big drawback to our very low interest rates is the boom in asset prices: for shares and, more worryingly, houses.

Second, Lowe says, the same factors affecting global monetary policy are evident in Oz, although to a lesser extent. Our banks, businesses and governments don't have excessive levels of debt, but our households do. So, many are using the fall in mortgage interest rates to step up their repayments of principal rather than increase their consumer spending.

Retirees living on interest earnings seem to have cut their consumption rather than eat into their capital.

Our wage growth is surprisingly low, contributing to low inflation.

Lowe's conclusion, however, is that our monetary policy is still working. And once the major advanced economies have fully recovered from the Great Recession - which could take as long as another decade - global monetary policy will return to normal.

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How to get yourself more time

Had a little too much politics of late? Much prefer an earnest discussion about why we're having so much trouble getting the economy moving? No, I thought not. Let's change the subject. Let's talk about time.

Do you spend much time thinking about time? Most of us spend a lot of time thinking how little time we have, but that's not the same thing. We spend little time actually thinking about time, which I'm coming to think is a big mistake.


Time is an economic resource, so it's surprising even economists don't think much about it. Apart from Stephen Hawking and his physicist mates, it's probably psychologists who do most of the thinking, but even they don't do much.

People say time is money, which is true enough, but the fact that most of us get most of our money by exchanging it for our time is only half the reason time is an economic resource. Economics is the study of the problem of scarcity, and there's nothing scarcer than time.

No matter how rich or poor we are, each of us gets the identical daily ration of precisely 24 hours. So it's one dimension of life working to reduce the gap between rich and poor.

But time is an economic resource in another sense. When we exchange time for money we use time as a means to an end. We use the money to buy things we hope will make us happy. But time is also an essential part of the end itself. We need time to enjoy the things we've bought with the money.

And the more time we spend earning money, the less time we have to enjoy ourselves - including by doing things that don't cost much if any money.

In an article in the Journal of Consumer Psychology, Jennifer Aaker, Melanie Rudd and Cassie Mogilner, marketing experts at Stanford and the University of Pennsylvania, remind us of the ultimate reason why time is an end as well as a means: the way each of us chooses to spend our time and the experiences we accumulate over the years quite literally constitute our lives.

So let's forget money and focus on time. How can we maximise the "utility" - satisfaction or happiness - we derive from the limited, if unknown, quantity of time we've been allotted? The authors survey the psychological studies of time and distil them into a number of helpful hints.

Their first principle is: spend your time with the right people. Because we're social animals, the most satisfying thing we do is spend time with our nearest and dearest and close friends. We should allocate more of our time to being with them and enjoying the intimate conversations we have with them.

But if it's so satisfying, why do we need reminding? Because of all the time we need to devote to making money, but also because we seem to be programmed to worry more about getting money than about using our time in ways we find satisfying. We have an inbuilt bias to worry more about means than ends.

This raises the question of how we could get more joy from all the time we spend at work, but that's so important I'll leave it for a column of its own.

A less obvious principle is: enjoy the experience without spending the time. Research in neuroscience has shown that the part of the brain responsible for feeling pleasure can be activated by merely thinking about something pleasurable, such as drinking your favourite brand of beer or driving your favourite brand of sports car.

"In short, this research suggests that we might be just as well off, or even better off, if we imagine experiences, but not have them," the authors say.

If that sounds a bit whacky, try the next principle: expand your time. You can, of course, buy yourself more time by paying someone to do the household chores you don't enjoy (in my case, mowing the lawn and washing the car).

One way or another, the more discretionary time we can organise for ourselves, the more we're likely to enjoy our time. This is partly because of the two-way relationship between the scarcity of time and its value to us.

It's not just that having little makes it feel more valuable, the authors say. It's also that, according to research results, when time is more valuable, we perceive it to be scarcer.

Many people advocate focusing on the present moment rather than the future as a way of increasing happiness. This may work because research suggests being present-focused slows down our perception of the passage of time, allowing us to feel less rushed.

But get this: again according to the research, you can achieve a similar effect simply by taking long, slow breaths for, say, five minutes.

Having greater control over how we spend our time - or even just feeling that we do - makes us happier, less depressed and physically healthier. Freely chosen activities increase happiness, whereas obligatory activities lower it - unless, of course, we can get ourselves into the right frame of mind.

I've often thought that the way to feel more relaxed and rested after the weekend is to be less greedy about all the things you want to fit in. I think it, but I don't always do it.

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