Never let a good crisis go to waste – The new evolutionary phase of the economic system.

Welcome to Finance and Fury –

1. Last year through September, October and November – was running through the future of the economy – was looking at this through a few episodes – interesting to see a lot of what was discussed playing out now
   1. In those episodes – went through a Big disclaimer – transformational markets are something that cannot be 100% predicted – no way to know where it will end up
2. But did look at possible outcomes proposed based upon what the economists and monetary officials were saying – they are who influence policy decisions after all- are recommending to implement
   1. What we went through is a new evolutionary phase of the monetary system – combining QE, government deficit spending, and ‘helicopter money’ – the nuclear fusion of monetary and fiscal policies – aimed to be the life line to the economy – regardless of the economies economic output –
   2. Also went through what would be needed to implement this – basics economic behind the policies – e.g. trying to stimulate inflation and avoid deflation (real increase in debts) at all costs, also greater control over the monetary supply – avoiding people using or hoarding cash,
3. Major proposals were permanent QE implementation, lowing of interest rates and the introduction of the cashless economy: To get that – the main components of the market economy going forward were 5 major policy steps –
   1. Permanent QE
   2. Lowering rates and moving towards cashless economy to avoid BOJ bank run situation
   3. Fiscal expansion – Government spending – redistribution
   4. Helicopter money – additional government payments to the population or lowering taxes
   5. Abandon the dollar – IMF SDR – new reserve digital currency – or Central bank/national government crypto
4. Episode names – if you haven’t heard them or cant remember them – and want a refresher
   1. Ep 1 – We are entering new economic and investment territory – An introduction to QE, what does it look like and what does it mean for investments?
   2. Ep 2 – What will be the next market interventions from Central Banks to achieve inflation targets?
   3. Ep 3 – How Government spending through fiscal expansion aims to help the economy today, for future generations to worry about repaying.
5. Where are we at now – Seeing a lot of these policies being rolled out
   1. fiscal expansion through abolished government debt ceilings and increase government spending, lowering of interest rates and the de facto implementation of the cashless economy, now the proposals of helicopter money policies (‘stimulus’ bonuses to people, cutting to taxes, universal basic income, and their like, all funded through the expanded fiscal spending) i.e. – giving money to the population as part of demand side economics
6. What was missing – a reason – there needed to be some form of economic panic and collapse to justify massive efforts – economic shutdown to government controls
   1. The Fed had no reason to cut rates – Places like the RBA were expected to in 6 months, but not cutting 0.5% in a matter of weeks
      1. announced extraordinary measures to help prevent a recession – The RBA said it would also provide at least $90 billion at 0.25 per cent over three years to banks if they lend that cash to small and medium-sized businesses
   2. Central banks had no reason to increase liquidity – QE – RBA will buy Australian government bonds as part of its first-ever quantitative easing program
   3. Governments had no justifiable reason to blow up debt ceilings and expand fiscal spending – especially in a time of asset price growth and reasonably predictable low economic growth rates – it is okay if numbers are low as long as they are expected

Today want to go through Reserve bank and government responses – Monetary and fiscal side implementation of the sort of policies covered in October last year – 5-6 months ago

Central banking side of things – Monetary policies

1. Lowering interest rates – cost of money goes down – interest repayments go down –
2. QE and repo markets –
   1. Quantitative easing – provides Yield curve control to keep the 3-year bond rate at 0.25%: we would have thought they would have gone out for 5 years, given banks need to issue debt with this duration to fill lending books. This will be achieved by purchases of Australian Government bonds in the secondary market, starting today, but the size and duration were not detailed; and
   2. QE – provide a three-year funding facility to provide cheap loans for Australian banks – A Term-funding Facility: allows banks to borrow 3% of their outstanding funding from the RBA at 0.25% for three years and given current outstanding credit of around AUD2.7 trillion, this provides around AUD90 billion in ultra cheap funding
      1. Facility that allows a better pass through of the rate cut for mortgages – but banks could keep it for themselves. They will be able to get even more funding from this facility if they lend more to small and medium-sized businesses
   3. purchases of Australian government and semi-government bonds
      1. Done directly to provide state governments with the ability to fund larger stimulus programs.
      2. However, the Central Bank and government bonds are supposed to be risk free and by lending to corporates, they no longer are – it’s a side point, but they are now exposing themselves to currency and credit risk. The key questions are not only what triggers an event, but also how do they decide where the line of going to far is?
      3. The key unknown is how impaired the transmission mechanism of monetary policy is with COVID-19 and ultra low rates, i.e. will cheaper funding be passed through to the real economy?
      4. Based around what occurred in the USA – No – just stays within the financial system –
   4. That said, if the supply side of the economy survives (rather than being bankrupt), there will be an initial bout of disinflation as supply is greater than demand (bad for equities in an earnings sense). Overall, we suspect the package reduces severe tail risks, but not recession risks, although they are doing what they can to minimise the economic dislocation of COVID-19.

That is why more is needed – Fiscal side as well as a flow through of expanded spending and helicopter money

Before this – Governments had no justifiable reason to glow up debt ceilings and expand fiscal spending – especially in a time of asset price growth and reasonably predictable low economic growth rates – it is okay if numbers are low as long as they are expected – had no reason to increase payments to the population

Fiscal side of things –

1. Package announcement – $17.6 billion across the forward estimates, representing 0.9 per cent of annual GDP. This package will protect the economy by maintaining confidence, supporting investment and keeping people in jobs. Additional household income and business support will flow through to strengthen the wider economy
2. Also – announcement of around $66bn in total

Increased government intervention – what are the proposals –

3. Delivering support for business investment – The Government is backing businesses to invest to help the economy withstand and recover from the economic impact of the Coronavirus
   1. two business investment measures in this package are designed to assist Australian businesses and economic growth in the short term
      1. Increasing the instant asset write-off – the Government is increasing the instant asset write-off threshold from $30,000 to $150,000 and expanding access to include businesses with aggregated annual turnover of less than $500 million (up from $50 million) until 30 June 2020
      2. Backing business investment – The Government is introducing a time limited 15-month investment incentive (through to 30 June 2021) to support business investment and economic growth over the short term, by accelerating depreciation deductions.
         1. Businesses with a turnover of less than $500 million will be able to deduct 50 per cent of the cost of an eligible asset on installation, with existing depreciation rules applying to the balance of the asset’s cost.
      3. Cash flow assistance for businesses – This assistance will support businesses to manage cash flow challenges resulting from the economic shutdowns – aims to help businesses retain their employees if incomes drop –
         1. two measures are designed to support employing small and medium enterprises and to improve business confidence
            1. Boosting cash flow for employers – The Boosting Cash Flow for Employers measure will provide up to $25,000 back to small and medium-sized businesses, with a minimum payment of $2,000 for eligible businesses. The payment will provide cash flow support to businesses with a turnover of less than $50 million that employ staff.
            2. Go to around 690,000 businesses employing around 7.8 million people.
         2. Supporting apprentices and trainees – The Government is supporting small business to retain their apprentices and trainees. Eligible employers can apply for a wage subsidy of 50 per cent of the apprentice’s or trainee’s wage for up to 9 months
      4. Stimulus payments to households to support growth This measure will assist around 6.5 million lower income Australians, which will support confidence and domestic demand in the economy
         1. Stimulus payments The Government will provide a one-off $750 payment to social security, veteran and other income support recipients and eligible concession card holders
            1. Around half of those that will benefit are pensioners.
         2. Assistance for severely affected regions – This measure provides $1 billion to support regions most significantly affected by the Coronavirus outbreak
      5. Support for affected regions and communities – The Government has set aside $1 billion to support those regions and communities that have been disproportionately affected by the economic impacts of the governmental control – including those heavily reliant on industries such as tourism, agriculture and education.
         1. Targeted measures will also be developed to further promote domestic tourism.
      6. The Australian Tax Office (ATO) is also providing administrative relief for some tax obligations for people affected by the Coronavirus outbreak, on a case-by-case basis.

Additional measures include:

1. Temporarily doubling the Jobseeker Payment, previously called Newstart
2. Allowing people to access $10,000 from their superannuation in 2019-20 and 2020-21
3. Guaranteeing unsecured small business loans up to $250,000
4. Reducing deeming rates by a further 0.25 per cent for Centrelink

The total economic assistance package is worth $189 billion, according to the Government, equivalent to 9.7 per cent of Australia’s gross domestic product

Central banks alone have a large challenge – this is something way beyond their control – Governments are driving the shut downs

7. Economic quarantines can’t be fought with interest rates and liquidity injections – this is a matter of confidence – look at how the markets initially responded the emergency measures – went down in price – market lost value –may have some thing to do with lack of initial confidence – things must be had if Central banks are doing this – so loss aversion kicks in
8. Central banks have found that they have run out of ammo – especially USA – become evident over the past 12 years
9. Governments as well set the public responses – so they are expanding their fiscal responsibilities as part of helicopter money under modern monetary theory
10. Interesting to see how things play out from her
11. Thank you for listening to today’s episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/