Two Schools of Thought

Conclusion: Call us dogmatic, but we continue to stand by our belief that currency debasement in the form of deficit spending, debt buildup, and Indefinitely Dovish monetary policy is not supportive of the long-term prosperity of America.


Ahead of the “free” world awaiting word of more Fed “stimulus” out of Jackson Hole, we thought we’d take the time to give you a brief glimpse at what sober and proactive monetary policy looks like.


During three hours of questioning today, Reserve Bank of Australia governor Glenn Stevens had the following to say regarding the RBA’s current monetary policy stance: 

  • “In terms of macroeconomic ammunition, there would be not that many countries who could say they had more than us in the event of a really big episode.”
  •  “If we did see a very dramatic change for the worse in the global economy, certainly we have plenty of interest rates to play with if need be.”
  •  “Our banks are strong, our currency is sound and our sovereign credit position is in the international top tier.”
  • “If we are entering another period of weaker international conditions, this is a pretty good starting point from which to do so.”
  •  “Consumer ‘caution’, while making life hard for the retail sector, is also building resilience in household balance sheets.” 

Australia, which has the developed world’s highest benchmark interest rates at 4.75% (nominal) and 1.15% (real) and is on track to deliver a fiscal surplus in the upcoming fiscal year, has a lot of ammunition left indeed should it need to react to a potential European banking crisis or a prolonged period of slow global growth. Contrast that with the U.S., where both the Fed and Congress are running out of bullets and the last shot fired (QE2) largely resulted in Sticky Stagflation as a result of higher commodity prices.


Two Schools of Thought - 1


Another thought: rather than do all that he can to entice overleveraged Australian consumers (155% of disposable income vs. 133% for U.S. households prior to the financial crisis) to re-lever, Stevens is welcoming and respecting the move up in Australia’s household savings rate, which accelerated to 11.5% in 1Q. This is in stark contrast to the Fed’s official policy stance, which, for the last 3-plus years has been trying aggressively to suspend the gravity that accompanies both the economic cycle and structural changes in the economy.


It’s no secret that we’re fundamentally opposed to Keynesian monetary and fiscal policy. And as the global economy continues to slow, we think the number of people willing to evaluate U.S. monetary and fiscal policy for what it truly is will grow. Whether Republican presidential candidate Rick Perry teams up with Dallas Fed President Richard Fisher and gives the U.S. a Ronald Reagan/Paul Volcker-like shock in 2013 is something we don’t have any edge on at the current moment. It is, however, the biggest risk to anyone buying “cheap” U.S. equities for the “long term” because Heli-Ben told them too.


Darius Dale


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