Interest rates and economic growth

Low interest rates kill off economic growth. Australia has maintained high rates over most of the period since the GFC, and even with the recent cuts our rates remain higher than the international standard. And how are we going?

The Australian economy is expanding at a much stronger clip than anticipated, with one analyst saying the latest GDP figures put doomsayers firmly in the corner as expectations of another rate cut were trimmed.

Meanwhile, back in the US of A, the land of near-zero rates: Shock Report on Jobs Signals Obama Economy Is on Brink of Recession.

If you step back and look at the whole business sector, a case can be made that the United States has been in a mild business recession for as much as a year, if not longer.

Take business fixed investment in equipment, software, plants, buildings, and so forth. This has been slowing for six straight quarters. It even went negative in the first quarter on a year-on-year basis. . . .

Core capital goods, including orders, shipments, and backlogs, have turned negative over the past three months and across the past year. This is a proxy for business investment, and it’s not a good omen.

Finally, the closely watched ISM reports for manufacturing and services are barely above 50. In other words, they point to the front end of a recession. On the manufacturing side, key indicators like production and employment are below year-ago levels. New orders are flat. On the services side, the overall index is below year-ago levels, as is employment and new orders.

The entire article is incoherent to an exceptional extent. In fact, economic policy is incoherent to an exceptional extent. But if you are looking at incoherence, this part of the Australian story is hard to beat:

JP Morgan chief economist Sally Auld questioned the [Australian] growth indicators and expects the RBA to cut rates to a new record low in August.

She said domestic final demand, which is the total amount of spending in the economy, only rose by 0.1 per cent in the quarter and 0.9 over the year.

Ms Auld said all price indicators in the quarterly release were very weak, vindicating the Reserve Bank’s decision to cut rates to 1.75 per cent last month.

“The headline GDP numbers are going to continue to be flattered by very strong net exports. Which will mean that GDP looks good, but it’s not the sort of growth that actually generates any inflation for you,” she said.

She wants inflation! Inflation is apparently good for growth. These people will ruin us yet. With Glenn Stevens gone, there is no certainty that we any longer have a steady hand on the monetary tiller. A rate cutter Glenn was not, but I suspect that even though they all watched him operate, and can see his success before their eyes, they are now going to bring rates down. Mistake, mistake, mistake if they do. If you would like to understand what’s wrong with artificially lowering rates, you would have to go back to economic texts written a hundred years ago or more, unless you would like to read my own, which is about to go into its third edition next year.

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