{"id":17863,"date":"2019-02-11T07:36:44","date_gmt":"2019-02-11T07:36:44","guid":{"rendered":"http:\/\/thepatientinvestor.com\/?p=17863"},"modified":"2019-02-11T07:48:30","modified_gmt":"2019-02-11T07:48:30","slug":"why-the-rba-shouldnt-cut-interest-rates","status":"publish","type":"post","link":"https:\/\/thepatientinvestor.com\/index.php\/2019\/02\/11\/why-the-rba-shouldnt-cut-interest-rates\/","title":{"rendered":"Why the RBA shouldn’t cut interest rates"},"content":{"rendered":"

There are growing cries in local media for the RBA to cut interest rates in order to avoid a recession. House prices are falling and shrinking finance commitments point to further price falls<\/a>. Declining housing values are likely to lead to a negative wealth effect, with falling consumption as household savings increase. Employment is also expected to weaken as household construction falls. Respected economist Gerard Minack<\/a> thinks \u201ca recession in Australia is becoming more likely\u201d.<\/p>\n

The threat should not be taken lightly, but is cutting interest rates the correct response?<\/p>\n

Let’s examine the origins of our predicament.<\/p>\n

A sharp rise in commodity prices in 2004 to 2008.<\/p>\n

\"Commodity<\/p>\n

Led to a massive spike in the Trade-weighted Index.<\/p>\n

\"Australia<\/p>\n

And a serious case of Dutch Disease<\/em>: the destructive effect that offshore investment in large primary sector projects (such as the 1959 Groningen natural gas fields in the Netherands) can have on the manufacturing sector.<\/p>\n

Business investment in Australian has fallen precipitously since 2013.<\/p>\n

\"Australia<\/p>\n

With wages growth in tow.<\/p>\n

\"Wages<\/p>\n

Instead of addressing the underlying cause (Dutch Disease), Australia tried to alleviate the pain by stimulating the housing market. Housing construction boosted employment and the banks were only to happy to accommodate the accelerating demand for credit.<\/p>\n

\"Leading<\/p>\n

But house prices have to keep growing and banks have to keep lending else the giant Ponzi scheme unwinds. When house prices and construction slows, the economy is susceptible to a severe backlash as Gerard Minack pointed out.<\/p>\n

How to fix this?<\/p>\n

The worst response IMO would be to pour more gasoline on the fire: cut interest rates and reignite the housing bubble. Low interest rates have done little to stimulate business investment over the last five years, so further cuts are unlikely to help.<\/p>\n

The only long-term solution is to lift business investment which creates secure long-term employment. To me there are three pillars necessary to achieve this:<\/p>\n

    \n
  1. Accelerated tax write-offs for new business investment;<\/li>\n
  2. Infrastructure investment in transport and communications projects that deliver long-term productivity gains; and<\/li>\n
  3. A weaker Australian Dollar.<\/li>\n<\/ol>\n

    Corporate tax write-offs<\/h3>\n

    Accelerated corporate tax write-offs were a critical element of the US economic recovery under Barack Obama<\/a>. They encourage business to bring forward planned investment spending, stimulating job creation.<\/p>\n

    Infrastructure<\/h3>\n

    Government and private infrastructure spending is important to fill the hole left by falling consumption. But this must be productive investment that generates a market-related return on investment. Else you create further debt with no income streams to service the interest and capital repayments.<\/p>\n

    A weaker Australian Dollar<\/h3>\n

    Norway is probably the best example of how an economy can combat Dutch Disease. They successfully weathered an oil-driven boom in the 1990s, protecting local industry while establishing a sovereign wealth fund that is the envy of its peers. Their fiscal discipline set an example<\/a> to be followed by any resource-rich country looking to navigate a sustainable path through a commodities boom.<\/p>\n

    In Australia’s case that would be closing the gate after the horse has bolted. The benefits of the boom have long since been squandered. But we can still protect what is left of our manufacturing sector, and stimulate new investment, with a weaker exchange rate.<\/p>\n

    I doubt that the three steps are sufficient to avert a recession. But the same is true of further interest rate cuts. And at least we would be addressing the root cause of the problem, rather than encouraging further malinvestment in an unsustainable housing bubble.<\/p>\n","protected":false},"excerpt":{"rendered":"

    There are growing cries in local media for the RBA to cut interest rates in order to avoid a recession. House prices are falling and shrinking finance commitments point to further price falls. Declining housing values are likely to lead to a negative wealth effect, with falling consumption as household savings increase. Employment is also … <\/p>\n

    Continue reading “Why the RBA shouldn’t cut interest rates”<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_mo_disable_npp":"","_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[40,31,45,46,10,3778],"tags":[536,4001,4000,3631],"class_list":["post-17863","post","type-post","status-publish","format-standard","hentry","category-australia-nz-countries-regions","category-the-fed-banks-interest-rates","category-debt-levels","category-deficit-spending-employment","category-housing-economy","category-international-trade","tag-business-investment","tag-commodities-boom","tag-trade-weighted-index","tag-wages-growth"],"yoast_head":"\nWhy the RBA shouldn't cut interest rates - the patient investor<\/title>\n<meta name=\"robots\" content=\"noindex, follow\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Why the RBA shouldn't cut interest rates - the patient investor\" \/>\n<meta property=\"og:description\" content=\"There are growing cries in local media for the RBA to cut interest rates in order to avoid a recession. 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A quick look at the RBA chart shows that consumption is slowing but at\u2026","rel":"","context":"In "Australia & NZ"","block_context":{"text":"Australia & NZ","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/countries-regions\/australia-nz-countries-regions\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":15280,"url":"https:\/\/thepatientinvestor.com\/index.php\/2017\/05\/14\/rba-stuck\/","url_meta":{"origin":17863,"position":3},"title":"RBA stuck","author":"ColinTwiggs","date":"May 14, 2017","format":false,"excerpt":"Great slide from the NAB budget presentation: The RBA is in a cleft stick: Raising interest rates would increase mortgage stress and threaten stability of the banking system. Lowering interest rates would aggravate the housing bubble, creating a bigger threat in years to come. The underlying problem is record high\u2026","rel":"","context":"In "Australia & NZ"","block_context":{"text":"Australia & NZ","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/countries-regions\/australia-nz-countries-regions\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":39471,"url":"https:\/\/thepatientinvestor.com\/index.php\/2022\/12\/10\/australia-hard-times\/","url_meta":{"origin":17863,"position":4},"title":"Australia: Hard times","author":"Colin Twiggs","date":"December 10, 2022","format":false,"excerpt":"You don't have to be an Einstein to figure out that 2023 is going to be a tough year. Australian consumers have already worked this out, with sentiment plunging to record lows. The bellwether of the Australian economy is housing. Prices are tumbling, with annual growth now close to zero.\u2026","rel":"","context":"In "Australia & NZ"","block_context":{"text":"Australia & NZ","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/countries-regions\/australia-nz-countries-regions\/"},"img":{"alt_text":"Australia: Consumer Sentiment","src":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2022\/2022-12-09-aus-sentiment.png?resize=350%2C200&ssl=1","width":350,"height":200},"classes":[]},{"id":18282,"url":"https:\/\/thepatientinvestor.com\/index.php\/2019\/05\/28\/westpacs-bill-evans-predicts-record-rate-cuts\/","url_meta":{"origin":17863,"position":5},"title":"Westpac’s Bill Evans predicts record rate cuts","author":"Colin Twiggs","date":"May 28, 2019","format":"video","excerpt":"Westpac's Bill Evans predicts that the RBA will cut the cash rate to as low as 0.75%. Cutting rates, especially from this low a base, is not a bullish sign. It will warn of RBA concern at the pace that the economy is contracting. Central banks are data-driven. They do\u2026","rel":"","context":"In "Australia & NZ"","block_context":{"text":"Australia & NZ","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/countries-regions\/australia-nz-countries-regions\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]}],"_links":{"self":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts\/17863","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/comments?post=17863"}],"version-history":[{"count":4,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts\/17863\/revisions"}],"predecessor-version":[{"id":17868,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts\/17863\/revisions\/17868"}],"wp:attachment":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/media?parent=17863"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/categories?post=17863"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/tags?post=17863"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}