Cuts still there, but thrust is gone
It seems the once-powerful Glenn Stevens aura has lost its glow of late, writes Ian Verrender.
It seems the once-powerful Glenn Stevens aura has lost its glow of late, writes Ian Verrender. HAS Glenn Stevens really lost his mojo? There was a time, not so long ago, when the Reserve Bank chief held a kind of magical hoodoo over financial markets and consumers alike.Perhaps it was the monotone delivery, those cold piercing eyes and the unmistakable aura of one who knows more than mere mortals.Any utterance from the chief was examined, dissected, shuffled and reconstituted, as the witch doctors of local finance determined the exact meaning of the omens emanating from on high.From May 2010 until the end of last year, our monetary policy boss had a medicine in his conjure bag far more potent than even interest rate movements. It was called the jawbone.Whenever the Stevens jawbone moved, markets immediately responded and consumers duly paid homage. Even the vaguest hint from the chief that a change in interest rates was being considered was enough to alter behaviour by the desired amount, negating the necessity for any actual change to rates or policy.It worked a treat. During that period, interest rates barely moved. But the markets and consumers responded on cue to the possibility that rates might be altered. It was monetary policy by decree.Not any longer. Suddenly, the hoodoo guru's powers have waned. For despite all the buoyant national statistics, the absolute proof that this is about as good as Australians will ever have it, the entire nation appears to be in a funk and determined to stay there.How could this be? National growth is sitting at a tearaway annual rate of 4.3 per cent, unemployment has stubbornly remained close to what economists consider full employment at 5 per cent, inflation has receded and interest rates are just above all-time lows.Some blame domestic politics. The government is useless. The opposition is even worse. Others point to the possibility of impending global economic doom as European leaders enter their third year of dithering over debt, threatening to cripple global banking and international trade.Whatever the reason, two normal 25-basis-point slices late last year, a double whammy in May and another ordinary 25-basis-point cut in June, have failed to excite anyone in consumer land while big corporations are about as gloomy as the weather.This week, Stevens has tried to regain the magic with two mesmerising appearances, both of which were designed to reassert his control over a nation's emotions that have begun to spiral out of control.His first speech, to be forever known as The Glass Half Full address, didn't exactly inspire any great surge in consumer spending, even though it was hard to argue with what he was espousing. Then he delivered another, even blunter, missive to the nation, his Adapt or Die address.The strong dollar which had helped spread the wealth from the mining boom was here to stay, he pronounced. So get used to it. Or get out. They are sentiments that fit neatly into the economic philosophy that has governed the nation for more than 35 years.As a nation, we've signed up to a regime of minimal regulation and maximum exposure to the primal economic forces of supply and demand. It's a set of principles that has transformed our nation and our way of life ever since the economy was deregulated in the 1980s.But for all the logic employed by the governor, and his big-picture approach to the national economy a path that he must take it would be foolish to underestimate the terrible impact of the economic forces sweeping across the land right now.Call it the two-speed economy, or the patchwork economy, or even deny the phenomenon exists, but there is no argument the fruits of the resources boom naturally are being felt most in the resource-rich states, while the resulting strong dollar is weighing heavily on vast swaths of our industry. Academics may argue this is merely a painful process of readjustment, that it is not a recession. And they are right. But in New South Wales and Victoria, the former engine room of the economy and the place where most of the population resides, the distinction is simply that academic.For 20 consecutive years, Australia's economy has grown. No recessions, no serious downturns. During that period, our wealth has expanded, our asset values have ballooned and we've borrowed more than ever to fund our consumption.And that is the missing element from all the talk about what a wonderful time we are having right now. For we are now in a reverse cycle, with declining property and sharemarket values that have left consumers feeling all the poorer and less willing to borrow at exactly the time they fear for their future employment prospects.Those 20 years of debt-fuelled consumption have caught up with us. And the amazing thing is, we instinctively knew about the problem, long before it was pointed out.As soon as the first round of the global financial crisis took hold in 2008, corporations and households targeted their debt levels. Our public companies raised more than $100 billion in just a few months in 2009 to restore their balance sheets. And consumers decided it was more important to pay off the credit card and reduce the mortgage than keep on spending.But for all the advantages of good housekeeping, there is also a downside.Less spending means companies earn less money. Share prices drop. In fact, our sharemarket is now about 40 per cent lower than its 2007 peak which, in turn, hits our superannuation and retirement balances.The greatest impact, however, is on real estate, the traditional area where Australians make their biggest investment. People borrow less for housing, and so real estate values decline. Those paper profits, the imagined profits Australians were making based on a two-decade-long boom in the housing market and that many borrowed against to fuel consumption are no longer.Prices have eased for two years in most cities and that situation is likely to continue. The stronger dollar may be empowering us to buy cheaper imported televisions, but our deflating assets are making everyone cautious. And as traditional industries strive to reduce costs and remain competitive, they inevitably will lay off workers, further spooking consumers.None of this makes the Reserve Bank's job any easier. It has one blunt weapon, interest rates, to wield across the nation. The fact that eastern Australia is hurting while the west is booming is something that cannot be factored into its national policy settings.But the pain being felt in the east is real. Longer-term, it may jolt the nation into a new phase of reinvention, as in the 1990s. But it is a pain that no amount of statistics or even the jawbone can ease.