In 2009, in response to the global financial crisis of 2008-09, Australia put in place one of the largest fiscal policy packages [9]in the developed world one which amounted to 4.6% of its 2008 GDP. Among the various fiscal stimuli passed by Australia were:
- Pensioner payments of $1400 for single pensioners and $2100 for pensioner couples.
- Carer payments of $1000.
- Child payments of $1000 per child.
- Tax Bonus for Working Australians of $900 for individuals with taxable incomes of $80,000 or less.
- Back to School Bonus: $950 per child for low-income and middle-income families
- Single-Income Family Bonus: $900 per family
In other words, Australia engaged in what was effectively a helicopter drop of money designed to stimulate spending and boost inflation.
Since then, things got better for a few years courtesy of the relentless money printing machine in China (where the latest bank "asset" count was fast approaching $30 trillion), which however over the past year has sputtered, pushing Chinese GDP to its lowest annual growth in modern history and dragged Australia's economy, which is merely a derivative of Chinese commodity imports, down.
In response the RBA has engaged in a series of rate cuts designed to boost investment in non-mining businesses as a hope of diversifying the economy from relying solely on China. These have achieved little.
Then overnight Citi's Paul Brennan had a modest proposal for Australia. do another fiscal stimulus for households. From Brennan. In the note, lamenting the "limits to the effectiveness of monetary policy", Brennan says that "the RBA Governor has said he is open to further easing, but noted that of households, government and corporations, “it is households that probably have the least scope to expand their balance sheets to drive spending.”
Actually he is spot on, which is curious why if this is indeed economics 101 do most "western" central banks persist in creating a wealth effect solely for the benefit of the banks, i.e., QE/ZIRP/NIRP, instead of for the people?
Cit continues:
Companies are waiting on households to spend, so that leaves the government. Government debt is low, borrowing costs are low and there is scope to stimulate given that public sector demand fell in the last 12 months. If public sector demand was growing at its average rate, this would push growth in the economy close to trend.
It is true that by comparison with some of its more "developed" peers, Australia debt is lower which is why there will be mass sovereign defaults before anyone even cares about Australian CDS. Especially if Citi's idea catches on elsewhere.
So what does Citi recommend? Simple: making it rain.
Fiscal stimulus to households was successful during the financial crisis. Cash payments to households of around 1% of GDP (half of the size deployed during the GFC) could help lift economic growth close to trend, particularly if the accompanying political message was “confidence enhancing”. By increasing activity and therefore revenue, it would not add materially to the medium term fiscal consolidation task.
Because nothing boosts confidence that "all is well" like the government paradropping money.
As for adding to the "consolidation task", it would because one thing economists don't realize is that consumer around the globe have learned from the crisis and refuse to forget. As such instead of blindly spending all the newly paradropped money, they save a substantial majority of it having realized long ago just how fake and manipulate the artificial sense of calm in the global markets is. Which is why Australia's experiment with paradropping money will almost surely be a failure in the long run unless the money handed out has an expiration date in which case the long desired "core" inflation will finally emerge. In any event, it would be a start to diverting money away from the banks, which use the reserves as collateral against which to buy equity futures and push stock markets to ridiculous levels even as the global economy grinds to a halt.
The real question is how long before others join Citi in calling for comparable moneydrops no just down under, but around the entire world. Because people's patience with record class and wealth disparity is getting very thin, and if anyone should be concerned by this it is politicians, and of course bankers.
