We know Tony Abbott and Joe Hockey and Andrew Robb operate in a universe parallel to the realities of the marketplace, even though they are supposed to be the party of free enterprise.
From tax rises that aren’t tax rises to bone-headed arguments about cash for clunkers, the Opposition’s campaign is littered with economic fumbles or plain untruths.
Now its central claim, that the government’s debt and borrowing is wrong and will lead to higher interest rates and crowding out other borrowers, has been exposed as a crock by the very thing it claims to understand, the marketplace.
And the Opposition’s ignorance is being supported by lazy and partisan media, especially some economic and business journalists who should know better.
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A simple visit to the Reserve Bank website would reveal that since the election was called on the weekend of July 17, yields on 10-year bonds, the key indicator for the local market, have fallen sharply, down to less than 5%.
According to RBA figures, the yield on 10-year bonds was 5.12% on July 16. It rose to 5.27% on July 29 as the market panicked about inflation, but when the June quarter CPI was released, showing a sharp fall in underlying inflation, and then no rate rise by the RBA, yields started falling and ended at 4.92% on Monday and 4.94% yesterday (according to Bloomberg figures).
The last time the 10-year bond yield was this low was June 2009 when the cash rate was 3% and market concerns and confidence were more strained. Since then there has been a 1.5% rise in the RBA cash rate and yet the key market yield is now back under 5%.
According to the Liberals’ claims about government borrowing and its impact, there has been $3.5 billion dollars borrowed by the Federal Government (we don’t know what redemptions have been) and yet rates have fallen noticeably. Since last June more than $42 billion has been borrowed by the Federal Government, and yet rates are back where they were 14 months ago.
The fall in rates here and offshore (where it has been more pronounced) has happened for two main reasons: one there’s now a belief that inflation is not a problem, and, despite record borrowings in the US, UK, and Germany and Japan, bond yields have been falling for months now.
Despite the huge deficit and debt levels in the US, 10-year bond yields fell to a 17-month low on Monday (and rose slightly yesterday) of less than 2.6%. In Germany, the key rate is about its lowest ever (2.36% overnight), in Japan, likewise and in the yields on two-year government debt have hit an all-time low of 0.48% this week (0.50% overnight).
Now interest rates in Europe, the UK, Japan and the US are at near record lows, but the Liberals and their mates in organisations such as the Centre for Independent Studies ignore the economy and push their simplistic all-borrowing-is-nasty line.
Australian yields are being chased by yield-hungry foreign investors wanting a good rate and finding secure, AAA rated bonds paying close to double the US rate and the German yields. The 4.50% cash rate means the rally can’t go on like it has in the US and UK (we also have inflation levels, growth and employment levels the economies of Europe, the UK and Japan would kill for), but foreign investors will continue to buy as many government bonds, new or used without causing a blip.
Investors want to hold as much government debt as they can. The yields are better than returns from cash, from the stockmarket and most other asset classes. Australian government bonds are safe, gold-plated in rating terms and the country has low and falling debt and deficits. These things drive demand and affect rates and Australia has the added attraction of having sound banks, a solid economy and being a major supplier of raw materials to faster growing Asia and especially China.
A side issue is that this demand for Australian government debt destroys claims that the brawl over the resource rent tax had raised questions about “sovereign risk” in Australia. This simplistic, alarmist rubbish got another run this morning on page one of the Australian Financial Review. Bond investors know more about risk and security of various economies than mining industry executives or investors ever will. They buying of Australian bonds is a sign they are confident and relaxed about credit risk in this country.
Government bonds have produced gains this year of 10% or more for many funds and other investors in the US, UK, Germany and Japan, despite the record deficits and huge borrowing requirements.
But don’t tell Tony Abbott, Joe Hockey, Andrew Robb or their simplistic mates in some of the lobby groups and media; why ruin their day.
Someone who doesn’t understand what is happening to interest rates is Niall Ferguson, a recent visitor to this country and love object for Australian conservatives (think Centre for Independent Studies).
He came here to tell us that government spending was bad, debt worse and the stimulus useless.
His lack of knowledge has been exposed in an ongoing argument with Nobel laureate Paul Krugman about government spending, debt, stimulus (and reversing himself) and the idea that government borrowing crowds out other borrowers and drives up interest rates.
Krugman has argued now for more than a year it’s not where rates are going, or might be going, its all about what investors want to hold and their view on the health of the economy (aka liquidity preference).
But now the Financial Times’ Alphaville website (Professor Ferguson is a contributing editor to the newspaper), has pointed out that Krugman is right, and that Ferguson is wrong when he argues (as does Tony Abbott and Joe Hockey), that government borrowing crowds out the private sector and other borrowers.
“Krugman’s point was always that inflationistas, aka austerity enthusiasts — such as noted nemesis Professor Niall Ferguson — neglected the importance of “liquidity preference” when considering government deficits and stimulus spending plans. As Krugman stated on Tuesday:
“This was never a question of simply forecasting what was going to happen to rates. It was about what would drive rates. (Alphaville’s emphasis)
Krugman wrote on his New York Times blog site overnight: “The view of Ferguson and others, back then, was that government deficits would drive up interest rates, choking off recovery. I and others argued that this was bad macroeconomics: interest rates would rise if and only if recovery took place. More specifically, short-term rates would stay near zero as long as the economy was deeply depressed; long-term rates would depend on expectations about the future of short rates, and hence on prospects for recovery.
“So the key point is not the fact that rates are now considerably lower than they were when that debate took place; it’s the fact that rates have fluctuated very much with optimism about recovery, never mind the deficits.
“In fact, if you had a naive loanable funds view, you’d expect the recent downgrading of expectations to drive rates up, not down — after all, a weaker economy means bigger deficits. But the opposite has, in fact, been happening.
“The bottom line is that events have utterly confirmed one view, utterly rejected the other. Too bad such things don’t count in politics.”
This is an argument obviously beyond the likes of Abbott, Hockey and Robb, but not beyond some of our business and media economists.