If you ever wanted a demonstration of how dangerous experts can be, you needed to go no further this week than observe the Reserve Bank of Australia raising interest rates again -- this time by 0.25 per cent to 4.75 per cent.
The central bank's decision meant that mortgage rates would go up by at least as much. This, in turn, would depress consumer spending. In effect, the Reserve was applying aversion therapy to consumers and exporters.
The authorities had decided they needed to impose a 'restrictive' monetary policy. What, you might ask, were they trying to restrict? It couldn't have been inflation, because that remains below 3 per cent, which is within their comfort zone, and is even tipped to drop in the near future. It couldn't have been housing prices or new-house building approvals, because both have been dropping. It couldn't have been retail spending, because that has been weak and getting weaker.
The only possible conclusion is that they were worried that the huge inflows of income from the continuing mining boom would eventually increase inflation to an unacceptable level. So they were engaging in a pre-emptive strike. This means, effectively, that the rest of Australia has to suffer more than it is already is because huge mining companies are making unimaginable fortunes by digging very large holes in the ground and shipping what they find there to China and India.
On paper, the nation shares in the mining boom by benefiting from the balance-of payments benefits it brings, and the taxation revenues it extracts from the companies, and the employment it generates. But the current-account improvements are also driving the local currency higher -- as is the imposition of higher interest rates -- thereby reducing the incomes of exporters and companies that compete with imports. The taxation revenues are far too low (but that's another story). And the employment is moderate, given the scale of the enterprises and activities.
So, who gains, apart from the miners? Importers certainly do, as their costs come down and their prices don't come down as much. But they have to try to sell their goods to shell-shocked consumers, whose disposable income and confidence is slashed each time that interest rates are raised.
Which brings me to the nub of the problem. Readers of my most recent blog will know that I've described the book industry and retail trade in general as being in a parlous condition. I'm convinced that the latest rate rise will make conditions much worse.
I spoke to several booksellers last week -- each of them very experienced and very good at what they do -- and they all spontaneously described conditions as the worst they'd ever known. One of them has been a bookseller for 35 years; the others had been in the industry for decades. A publisher's sales representative I spoke to said that this has been the worst year in her career -- and she'd been in her job for 25 years. One bookseller told me he'd never had so few staff, or so little stock in the shop, at this time of year.
All of them were in double jeopardy: they had fewer customers, and those they had were spending less; and they were losing business to offshore online distributors, who were benefitting both from the high Australian dollar and the fact that they don't have to pay GST on their sales. All of the booksellers were very worried about their prospects for Christmas sales, which is the only time of the year the industry makes a profit.
Multiply these examples across the country, and apply it to most retail businesses, and you'll get a sense of how weak the real economy is. Beneath the soothing rhetoric of politicians and the myopia of the financial sector, Australia is already in the grip of a growth recession. And it's now guaranteed to get much worse.
I have no doubt that the authorities have got it wrong. They and their supporters may think that an economy with around 5 per cent unemployment is always going to need pre-emptive reining-in. They may even comfort themselves by thinking that consumers always complain when interest and mortgage rates go up, but that rates have been much higher in the recent past, to no ill effect. This argument is spurious. It misses the point that the real economy is extremely weak -- in a precarious condition following the global financial crisis -- because consumers are very hesitant.
There are three main reasons, I think, for this: there's been an understandable blow to confidence, amid a heightened sense of the dangers lurking in the global economy; there's been a real loss of wealth for anyone who was invested in the stockmarket, with retirees especially badly affected; and the house-price boom of recent years has meant that the average level of mortgage loans is very high, so that the repayments of such loans consume a dangerously high proportion of mortgagees' incomes.
The Reserve Bank's behaviour means that the book trade, retail businesses in general, and participants in the non-mining part of the economy -- that is, most of the country -- are being treated as collateral damage. Even worse, the government continues to allow offshore retailers and distributors to avoid the 10 per cent Goods and Services Tax that all local companies must pay. So Australians are now being disadvantaged twice in their own country: once by the creation of an artificially high dollar, and again by a tax policy that discriminates in favour of foreigners.
The latter is unconscionable, and I have never heard any government minister or bureaucrat try to defend it. I've heard mutterings that it's too hard to fix, but this is nonsense. It would be easy to require Australia Post to collect GST, and doing so would have the additional benefit of generating extra local employment. The lack of official interest in the need to create what is otherwise a much-beloved level playing field makes me suspicious. Is there a secret codicil to our free-trade agreement with the United States? Or do we only believe in a level playing field when large corporations and the financial sector benefit from it?
In the meantime, the Reserve Bank is on course to turn the current growth recession into a real recession. Businesses will go broke, unemployment will rise, and the government will add to the problems by trying to compensate for the drop in its tax revenues by cutting its own spending. By then, of course, the government will be out on its ear, the authorities will have changed tack, and the results of their handiwork will have nothing to do with them.
Maybe we should just dig smaller holes in the ground in the first place. You know what they say: when you're in a hole, stop digging.
Henry Rosenbloom