The idea that we may be half way through a two-year period of the lowest cash rate since the Melbourne Football Club’s last premiership could be seen as alarming, sobering at least.
There have been a few periods of 12-14 months of stable rates in the past, but this time 12 months is already a lock, and it looks like the current run of 2.5 per cent overnight cash will pass previous records at a canter and end, perhaps, in mid-2015.
This extraordinary state of affairs rather belies the tranquil commentary in the Reserve Bank’s monetary policy statements, including yesterday’s. In fact the monthly bleat about the exchange rate after every meeting is beginning to look a little pathetic, not to mention disingenuous.
The RBA has deliberately arranged a carry trade that is holding the exchange rate at US94c (and it even tipped above US95c overnight), and is whining about it at the same time. If it were serious about “balanced growth”, as it says it is, then it would have kept cutting rates till the exchange rate fell.
One way of looking at it is that there has been a currency war and America won. Australia lost. Savers are the cannon fodder in this war, sent over the trenches of retirement into the pitiless gunfire of low yields and high costs.
But the RBA dare not raise rates despite a 3 per cent headline inflation rate and 10 per cent national house price growth because the exchange rate would crush what’s left of manufacturing.
The US dollar, meanwhile, is weak because there has been a massive increase in supply and a zero price put on credit -- the opposite of a carry trade.
That 100 per cent growth in US money supply since 2008, as measured by M1, plus zero interest rates has resulted in a huge boom in asset prices. Over the same six years, the US stockmarket has doubled in value, but since there is twice as much money in existence, how real is that increase in value?
Anyway, in direct contrast to this nominal asset price inflation, there is simultaneously a consumer price disinflationary spiral that is proving very difficult to escape.
But whereas there is one cause of the asset price boom -- low interest rates -- the consumer price deflation has many causes. Tighter credit rules and post-GFC caution are prompting households to save, not spend -- because they have to in order to qualify for a mortgage these days -- and also because they are still scarred, and scared. Governments are doing the same because the GFC left them with massive deficits.
But as the Bank for International Settlements pointed out this week, there is a global savings glut and shortage of demand, and at the same time debt has continued to rise since the GFC. Too much debt causes individuals to stop spending and businesses to cut prices to stay afloat.
Not only is there still too much debt, and a global glut of savings as well, there are too many factories, so goods are in oversupply. And more and more factories are full of robots, which are cheaper to run than people and are helping to drive down prices.
The one thing that’s definitely in short supply is safe assets to invest in, and the President of the Federal Reserve Bank of San Francisco, Narayana Kocherlakota, made a telling comment on this subject in a speech earlier this month:
“… the FOMC [Federal Open Market Committee] is confronted with a greater demand for safe assets and tighter supply of safe assets than in 2007. These changes in asset markets mean that, at any given level of real interest rates, households and businesses spend less. Their decline in spending pushes down on both prices and employment. As a result, the FOMC has to lower the real interest rate to achieve its objectives.”
And then there’s an argument that quantitative easing itself is deflationary. The BIS says that while super-loose monetary policy might be expansionary in the short term, it may be dangerously contractionary in the longer term.
But what is the only way central banks can respond to falling prices? By keeping one of the most influential prices of them all -- for credit -- as low as possible for “a considerable period of time”, to quote Ben Bernanke, or a “period of stability”, to quote Glenn Stevens yesterday.
US economist Larry Summers argued last year that the world may be entering an era of “secular stagnation”, because central banks can no longer respond to downturns by cutting rates (since they are already at zero, except in carry trade heaven -- Australia).
That’s what the BIS is worried about too: that the next global recession will be even worse than the last one because central banks will be watching in dressing gowns from the stands.
And what can the Reserve Bank of Australia do about all this? Nothing. It’s had the dressing gown on for a while.
Like most countries, Australia has been forced to outsource its economic policy to the US.
And the US, needless to say, doesn’t care about us.