A ray of sunshine? Green shoots? You’d like to think that after weathering years of economic storms, surely there must be good times ahead.
It started with the pandemic era shutdown of the global economy, quickly followed by the most serious inflationary outbreak in half a century that fed into a cost-of-living crisis and then a brutal round of rate hikes.
With inflationary pressures receding, Reserve Bank of Australia governor Michele Bullock this afternoon is expected to deliver Australia’s second interest rate cut in the cycle, delivering cash-strapped households some much-needed relief.
Michele Bullock will front the press this afternoon, after a decision that is expected to deliver the second interest rate cut this cycle. (AAP: Bianca De Marchi)
Even the chaotic spectacle of US President Donald Trump’s green light, red light, and U-turn on tariffs has been shelved, at least temporarily, allowing investment markets to brush themselves off and act as though it was all just a bad dream.
There is even speculation that America’s sudden capitulation on its tariff and trade war with China may end up imposing only a tiny increase in its import duties, possibly even less than the 30 per cent temporary tariff agreed to in Geneva a week ago.
Such a shift — from a total trade embargo to a calibrated lift in tariffs — while still enormously damaging, would greatly diminish the chances of an impending liquidity crisis and global economic meltdown.
It’s also good news for Australia, given our dependence on China as a source of income.
Nevertheless, for the past few days, Bullock and her newly reconstituted interest-rate-setting board would have been wargaming the potential for things to quickly turn pear-shaped given the erratic nature of the American president.
On the domestic front, the deceleration in price rises coupled with sluggish economic growth has money markets convinced of a second RBA rate cut. At least another two cuts are pencilled in for the remainder of the year.
But storm clouds once again are building internationally.
Bond markets are now openly questioning America’s place in the global financial system and remain unconvinced about Washington’s ability or commitment to strike a lasting peace in its trade wars.
Loading…
Moody’s blue with White House
The Moody’s announcement, downgrading America’s debt, came after the market closed on Friday night and more than a year after it warned Washington that its AAA credit rating, in place since 1917, was under review.
The White House wasted little time in dismissing the action as “political”, criticising economist Mark Zandi, who works for Moody’s Analytics and not Moody’s Ratings.
“Nobody takes his ‘analysis’ seriously,” a White House spokesperson posted on X.
“He has been proven wrong time and time again.”
But if Moody’s is guilty of anything, it’s being late to the party.
Rival agency Fitch slashed the debt status of the world’s biggest economy three years ago while Standard & Poor’s removed its gold plate endorsement in 2011.
Stock investors took the news in their stride. Since the upheaval six weeks ago, after Donald Trump’s Liberation Day tariffs were announced, Wall Street is back within striking range of record levels.
The Trump administration is planning tax cuts that could blow out the already existing $36 trillion debt deficit by another $US9 trillion over the next decade. (Reuters: Brian Snyder)
But not bond markets. These are the markets that, within a week of launching his tariff war, forced Donald Trump into a humiliating backdown. And once again, they appear to be on the warpath.
While the US president is demanding Federal Reserve chair Jerome Powell cut interest rates, the markets are pushing interest rates higher, as concern about the inflationary impact of the tariffs continues to weigh on sentiment.
In the past few weeks, the yield or interest rate on 10-year US government debt — the global interest rate benchmark — has risen from below 4 per cent to more than 4.5 per cent.
The US dollar, meanwhile, remains under pressure after falling more than 9 per cent since the Trump administration came to power in February.
America’s debt dilemma
Trump officials have long argued the greenback is overvalued because of its role as the world’s reserve currency, and that its strength has been a deciding factor in the hollowing out of America’s manufacturing base.
Bringing industry back, they’ve argued, would be aided by weakening the currency.
Normally, that would be achieved by engineering a gradual decline in the US dollar via monetary policy.
Instead, the White House has panicked financial markets, sparking a “sell America” run that appears to be regaining momentum.
It has undermined confidence in the independence of the US Federal Reserve, attacked US courts and learning institutions and bypassed the authority of Congress, all while raising trade barriers against long-standing allies and downgrading security pacts.
More than $US9 trillion ($14 trillion) worth of transactions take place each day and, of that, about 90 per cent are in US dollars.
That creates a huge demand for greenbacks, which inflates the value of the currency.
What Trump officials have failed to acknowledge, however, is that it also lowers the cost of American debt, given the rest of the world throws money at America.
In his latest book, Our Dollar, Your Problem, economist Kenneth Rogoff estimates that the reserve currency status delivers American consumers a rate cut of between 0.5 and 1.0 percentage points.
America, Rogoff argues, has been smart and lucky during recent decades and has been allowed to rack up deficits with no discernible extra cost.
But successive administrations have abused the exalted position, running ever-bigger budget deficits that have now left the US with $US36 trillion in debt.
Now the Trump administration is planning tax cuts that could blow out the deficit by $US9 trillion over the next decade without reining in spending, which is why Moody’s finally acted on Friday night.
According to Rogoff, trashing America’s status, institutionally and financially, comes at a cost and you can’t expect the greenback to be unaffected.
The only defence for the US dollar as the global currency is that there is no viable alternative.
At least for now.
Domestic bliss, offshore diss
When she delivered the rate cut in February, the RBA boss had a bounce to her step. For the first time since taking on the job, she was the bearer of good news.
And things were looking up. While there was a lengthy lecture about not getting too far ahead of ourselves and that the rate cut decision wasn’t a fait accompli, the RBA was still factoring in market speculation of further rate cuts that saw inflation continue to drop.
Loading
From the RBA’s perspective, inflation is moderating, employment remains strong and growth, while still insipid, appears to be on the mend.
The problems mostly exist outside of the RBA’s control.
Armed conflicts in Europe, Africa and the Middle East continue to threaten fragile alliances and evolve into broader disputes.
But, disturbingly, the greatest uncertainty overhanging the global economy is America, once the bedrock of global financial stability.
Loading…
