Gov’t faces huge funding challenge as it puts economy on life support

The federal government’s latest rescue measure, the JobKeeper Payment, estimated to cost $130 billion, may well be justifiable, given social distancing measures have shut down large parts of the economy for an indeterminate period, and I recognise the need to act fast, but the government needs to provide further information to assure the public it is in control of the situation. One area of concern is how the government is going to pay for all these measures and how much public debt we’ll ultimately end up with. I expect it will be challenging for the Australian Office of Financial Management (AOFM), the government’s debt management office, to fund the government’s $194 billion of rescue measures (and to make up for a huge fall in revenue) and to ensure the money is available when it is required.

Until recently, the AOFM would promptly update the market on its borrowing program following major government announcements. It is no longer doing so, as it appears it’s all too hard given the rapid pace of policy development. The AOFM last provided an Issuance Program Update on 12 March, the day of the first $17.6 billion rescue package. It hasn’t provided an update on what measures since then mean for the amount it has to borrow each week, which now must be at least $3 billion per week for the foreseeable future, rather than the $1.2 to 1.6 billion per week it contemplated on 12 March. In its weekly Forthcoming Transactions update published last Friday, the AOFM acknowledged it needs to provide further information:

The Australian Office of Financial Management (AOFM) understands the need to provide updates on its funding program and will do this to the best of its ability. Further details on projected issuance rates and related operations will be released in the coming week.

In other words, the AOFM is scrambling to figure out how it’s going to fund the government’s commitments and the revenue shortfall. Let’s hope the AOFM does release those further details on projected issuance (i.e. bond sales / borrowing) this week. We need to have confidence the Government can borrow the money it needs to fund its commitments as they fall due.

In the worst case, the government could always ignore the RBA’s independence and instruct it to monetise the deficit, with all the long-term risks that involves. In the last two weeks, hitherto unthinkable policy measures have been introduced, so we probably shouldn’t be surprised if we ultimately end up with an experiment in so-called Modern Monetary Theory. As the PM said the other day, we are in “uncharted territory.”

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Businesses in “survival mode” says CCIQ Chief Economist Dr Marcus Smith

THis afternoon, I caught up via Zoom with CCIQ Chief Economist Dr Marcus Smith to discuss the extraordinary coronavirus-related developments since we last spoke on Sunday. As Marcus notes early in our conversation, which you can listen to below, things are now “absolutely disastrous.”

Use these timestamps to help you find the highlights:

  • 1:30 – reference to 3M+ unemployment claims in one week in US and discussion of how bad things could get Australia
  • 2:10 – Queensland “business owners are in tears” and are contacting CCIQ to help them figure out what assistance is available from government
  • 8:00 – “it’s going to be a bloodbath” across Qld’s small businesses
  • 9:00 – overview of recent Qld Gov’t $4 billion rescue package
  • 12:30 – CCIQ working closely with other industry associations (e.g. Property Council) and state and federal governments on additional assistance measures – lobbying for rental relief and wage subsidy
  • 16:45 – small businesses are “shocked” and are in “survival mode”
  • 18:30 – problem with jobseeker payment for sole traders as it’s means tested
  •  21:30 – discussion of how long it could take the economy to recover once we get to the other side

As I’m preparing this post, I’m listening to Steve Austin on 612 ABC Brisbane, and I am in full agreement with various interviewees expressing the strong view people should stay away from tomorrow’s local government elections.

Social_distancing

Well done Woolworths MacArthur Central for enforcing social distancing

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COVID-19 response with Nicholas Gruen – latest Economics Explained episode

Despite all the draconian measures already imposed by Australian governments, ABC health expert Dr Norman Swan thinks we still need to do more. Just after I woke up this morning, I heard him on ABC Breakfast suggesting an even wider shutdown: “If we want to get back to some semblance of normal life and economy, it’s got to be short, sharp, and today.” This is a view increasingly being shared by many Australians. In an excellent article PANIC IS OUR FRIEND! published earlier this week on Club Troppo, Nicholas Gruen argued:

The government didn’t take coronavirus seriously at first. As it’s amped up the seriousness of its response, it’s done so reluctantly and now it’s in no man’s land, with strong social-distancing measures that will cost the economy a bomb. But those measures are not strong enough to rid the country of the virus. So they’re with us until we gain herd immunity, which will take the best part of the year.

We’ve picked a scenario that is the second-worst for health (the worst being doing nothing) but it seems to me to be the worst possible option for the economy.

I spoke with Nicholas about his views on the coronavirus response in my latest Economics Explained episode.

Use these (approximate) timestamps to jump right to the highlights:

  • 4:00 – Nicholas discusses his recent article on coronavirus policy PANIC IS OUR FRIEND! which argues in favour of strong, early action on coronavirus, rather than the incremental ramping up of restrictions we have seen
  • 7:50 – Nicholas notes these decisions are challenging because panic itself has costs, as argued by Paul Frijters in his article The Corona Dilemma
  • 12:30 – discussion of John Quiggin’s Option value post on the benefits of early action
  • 14:05 – Nicholas suggests policy makers should follow Google’s example and experiment and AB test policy responses, generating feedback to improve policies
  • 15:05 – discussion of what Ben Shapiro calls The Un-askable Question
  • 26:35 – Nicholas observes “when things change they become highly unpredictable” in our discussion of what coronavirus could mean for our future economic system
  • 36:00 – conclusion of discussion with a quote from Nicholas’s article: “Right now, panic is the friend of anyone who doesn’t want to get this disease, which continues to surprise on the downside (i.e. the bad side).”

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Just announced shutdowns mean hundreds of thousands now out of work (hopefully only temporarily)

While we knew something like this was coming, it was still awful when it did come. To contain the spread of coronavirus, from midday tomorrow (Monday), pubs, bars, clubs, and gyms will be forced to shut, and restaurants and cafes will be restricted to providing takeaway items only (see this Brisbane Times article). Depending on how many people cafes and restaurants keep on to provide takeaway services, this one decision will put hundreds of thousands of people, at least 250,000 across Australia and 50,000 in Queensland I’d guess, out of work, hopefully only temporarily (e.g. consider the employment data from the ABS Census in the figure below). Of course, many of these people will end up out of work for longer than the shutdown period, as many of their employing businesses will no doubt shutdown for good due to the coronavirus shock.

Employed persons in affected industriesI should note a lot of the affected workers won’t necessarily show up as unemployed in the ABS Labour Force Survey because they won’t actively be seeking work during the shutdown period.

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New COVID-19 chat with Joe Branigan of Tulipwood Economics

I’ve recorded another interview on the latest COVID-19 rescue package from the federal government, this time with my good friend and former Treasury colleague Joe Branigan, Director of Tulipwood Economics. Joe provides important context for the massive rescue package. He suggests the designers of the package were implicitly assuming that, without it, Australia would experience an economic depression, not just an ordinary recession. You can listen to our conversation here:

You can use these timestamps (approximate) to find some of the highlights:

  • 4:45 – Joe thinks the size of the rescue package “looks about right”
  • 6:00 – Joe discusses the massive size of the fiscal impact of the rescue package – up to 5% of June quarter GDP and 7% of September quarter GDP – and suggests these are measures designed to avert a depression
  • 9:25 – discussion of super-sized income support for job seekers (and sole traders) and how the normal rules of public policy have (understandably) “gone out the window” in this time of crisis
  • 18:40 – Joe agrees with the PM in rejecting the suggestion from Grattan Institute CEO John Daley that we should have an almost complete shutdown of the economy for a short period to stop the spread of the virus
  • 22:40 – discussion of how Qld schools will probably shut this Tuesday (except for children of health/other key workers), but how schools may need another week to prepare for online learning in term 2
  • 28:15 – discussion of the need for Churchill-style political leadership in this time of crisis
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COVID-19 rescue package chat with CCIQ Chief Economist Marcus Smith

In both its scale and scope, the COVID-19 rescue package announced by the Prime Minister and Treasurer this morning is stunning. I spoke with CCIQ Chief Economist Marcus Smith earlier this afternoon regarding what he thinks about the package, and you can listen to our conversation here:

Use these timestamps (approx.) to jump to the highlights:

  • 1:25 – Marcus says it’s an “absolutely unprecedented” rescue package
  • 3:30 – “Things are getting really tough” in the Qld economy
  • 5:00 – I ask Marcus whether the unemployment rate could get up to 10%+
  • 7:30 – I mention the Australian Office of Financial Management (AOFM) will need to massively increase its borrowing program and ask whether the rescue package could be “over the top”?
  • 9:30 – discussion about allowing early access to superannuation (note audio a bit distorted in places but improves after Marcus switches to his landline)
  • 14:00 – Marcus is happy with the general composition of the package
  • 15:00 – “We know [coronavirus impact] is going to be bad…and it will have a lingering effect”
  • 16:55 – I ask Marcus what else the state government needs to do and he notes CCIQ wants additional payroll tax relief, as current deferral is just “kicking the can down the road”
  • 17:45 – Marcus notes Qld Government has so far only announced a “relatively small spend” compared with other state governments
  • 21:20 – what’s happening in the Qld regions
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COVID-19, machine trading & financial markets with Michael Knox – Economics Explained EP27

Why are financial markets swinging so wildly in response to the novel coronavirus, COVID-19? Yesterday I spoke with Michael Knox, Chief Economist of Morgans, who thinks it’s related to the machine trading programs which dominate financial markets. Today, I’ve published our conversation as the latest Economics Explained episode COVID-19, machine trading & financial markets with Michael Knox.

Use these (approximate) timestamps to jump right to the highlights:

  • 0:00 – discussion begins with me referring to Michael’s recent podcast/article The revenge of the machines which begins “The market is being sold down by machine trading programs focused on momentum.”
  • 4:00 – Michael says recent market gyrations have “nothing to do with fundamentals….we’re in a situation because of the epidemic, because of the emergency that only happened once every hundred years or every 50 years – you can’t build a model of something like that. So inherently, what those trading models are acting on is the momentum signal…”
  • 7:00 – beginning of discussion on market liquidity
  • 11:00 – Michael discusses the relationships between liquidity, price discovery, and market volatility
  • 15:10 – Michael notes re. COVID-19, “On this occasion, you had a change, which was caused by a once in 50 years shock or once in 100 years shock. The market doesn’t have that kind of memory of data to be able to price that in.”
  • 16:15 – discussion of valuation of shares/stocks
  • 18:15 – what is momentum?
  • 24:20 – discussion of fair value of Australian sharemarket and Australian economic outlook

Nothing in this podcast should be considered financial advice, and it contains general information only.

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