Why Lower Interest Rates Won’t Boost Confidence in the Aussie economy

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The monthly ‘non-farm payrolls’ circus came to town in the US on Friday. It’s the piece of data that markets love to trade on. That’s because it provides a guide to the state of employment in the US economy, and employment provides a guide to the Fed’s interest rate deliberations.

The numbers were strong. According to Bloomberg:

A 257,000 January increase in employment capped the biggest three-month advance in 17 years and delivered the strongest wage gain since 2008, figures from the Labor Department showed Friday in Washington. The unemployment rate rose to 5.7 percent from 5.6 percent as the prospect of finding work lured hundreds of thousands into the labor force.

In response, the stock market was a little weaker while US treasury bonds slumped on expectations the Fed would start its tightening cycle sooner rather than later. Gold fell a large 2.3%, correcting lower from a recent strong run.

Closer to home, it’s all about politics this morning. Tony Abbott faced a ‘spill’ — a party vote to determine his future as the leader of the Liberal party — at 9am today.

He survived, but now it’s just a question of how long. The secret ballot revealed Abbott won the vote 61 to 39, meaning that 39 people voted against him. That’s not a picture of a party united behind its leader.

So it’s not the end of this saga. Remember, Julia Gillard won her first party vote before losing the leadership a short time later.

Abbott is a dead man walking. The only thing that can keep him in power is a reluctance for anyone else to take the helm. With the outlook for the economy worsening, and this realisation now dawning on politicians, the leadership position isn’t looking too attractive right now.

None of this is good for the nation’s confidence, that amorphous and elusive quality that, if we only had more of it, would see our economy on the road to recovery.


At least that’s what Glenn Stevens, head of the RBA, seems to think. He’s made many references to ‘confidence’ being the missing ingredient in Australia’s economic recovery. Business confidence, household confidence…it doesn’t matter.

‘I’ve lowered interest rates’, he thinks. ‘Now only if people and businesses had greater confidence they would borrow and spend more.’

That’s partly true. But this thinking doesn’t take into account the root cause of ‘confidence’ or the lack of it. Poor confidence is a symptom of a rotten system, not one of the causes of it.

People have reduced confidence when their debt levels are high. They have low confidence when they have job insecurity. And when they see ineffectual leaders and no clear policy direction, that doesn’t help matters either.

Lowering interest rates isn’t going to miraculously boost the economy. It does nothing for confidence. Arguably, as we go deeper into ‘record low’ interest rate territory, confidence will diminish further as people realise that something is not quite right.

Australia needs genuine political leadership right now, not a bunch of squabbling conservatives putting ideology over the nation’s interest. We need a leader to understand that we face genuine economic threats that can only be overcome by facing painful reforms head on.

Instead we have gutless ignoramuses…too afraid to tell the electorate how it is and what needs to be done to slowly improve the country’s long-term fortunes.

Regards,

Greg Canavan+
for The Daily Reckoning

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Greg Canavan
Greg Canavan is the Managing Editor of The Daily Reckoning and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails. For more on Greg go here.
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3 Comments on "Why Lower Interest Rates Won’t Boost Confidence in the Aussie economy"

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DB
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“Instead we have gutless ignoramuses…too afraid to tell the electorate how it is and what needs to be done to slowly improve the country’s long-term fortunes.”

That is the problem. Voters are like the grasshoppers in the famous fable by Aesop. Any attempt to adapt to the way of the ants will have the party being honest sitting out of power for a decade.

The voters memory is linked to their wallets. Take away the entitlements and they will swarm to the side that will protect their entitlements whilst enslaving their children to debt.

Sad but true.

scottoftheantipodes
Guest
Abbot is suffering from the down stream effect of too much Labour Government. That kind of binge spending inertia can not be overcome quickly and easily. I am rather infuriated that the press jumps on any kind of leadership weakness in government and then keeps at it until they achieve what they are after, a change of leader. They have been doing this for as long as I can remember. More infuriating is that this comes about as a result of the faceless cowards on the back bench. What we really need is greater quality in the people that we… Read more »
CommonSense
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The number one skill a leader has to have is solution building. The number two skill has be communication. Abbott is not going to restore anything with austerity. Look at the EU, 7 years since the crash has anybody seen green shoots? If he has a plan he’s not communicating it. Some austerity maybe needed but the vast majority are clueless when it comes to economics. It’s very complex with a lot a variables and requires years of study. As Abbott has a degree in Economics he should understand this. And he should be communicating this to the public. Remember… Read more »
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