Reserve Bank of Australia governor Glenn Stevens gave a headland speech today about the global economy and its challenges.
One of his key themes was confidence, and the monetary policy boss released his inner shaman in talking about the “animal spirits” of humanity when it came to innovation and confidence.
Business confidence has been wavering since the federal budget and the banking head suggested that he’s worried about self-fulfilling prophecies, saying:
If people think, for whatever reason, that returns for future possible investments will be low, or subject to high risk, then they will be reluctant to invest even if past and current returns are quite satisfactory. Conceivably, this could be a self-reinforcing equilibrium.
Stevens pointed to the fact that patents in the US had grown by nearly two-thirds over the last six years as an indicator that innovation was alive and well, but warned:
If the process of innovation that is a precursor to productivity growth is impaired, or if research and experimentation simply has periods of fewer discoveries, just by chance, that could also lessen the perceived opportunity to deploy capital profitably.
Dr Stevens had a diagnosis” “subdued ‘animal spirits’ – low levels of confidence. After all, the natural rate is an expected rate.”
One of the problems, he believes, is that they way we think about investment has been inverted:
businesses in many places are much more conscious of risk, relative to return, than they were in the pre-crisis period. At some stage, hopefully share market analysts and the investor community will ask fewer questions about risk reduction, and more about the company’s growth strategy.
And he’s worried about the patient’s state of mind.
I would argue for realism, as opposed to either naïve optimism or determined pessimism. Certainly earlier expectations about risk and return were too optimistic. We have been through a period of adjustment. But it’s doubtful that the desire to experiment and innovate has entirely disappeared. And it seems unduly pessimistic to think that everything that can be invented has been, or that every improvement to existing ways of doing things has already been implemented.
So get away from the screen and step away from those HFTs, chaps, because Dr Stevens wants you in his drumming circle:
Unless we think the tendency for human optimism has been completely drummed out of us, animal spirits in the ‘real economy’ will surely improve at some point.
The question is what might be done to help that happen more quickly. It is highly unlikely that the answer will come, in any country, from monetary policy.
Here’s where it gets really interesting, especially with the G20 Summit coming up in Brisbane in four months’ time. Stevens says “the G20 agenda on growth can, if it is well used, be of considerable help”.
He wants the world’s economic leaders to inject confidence back into their people, tackling issues such as risk and governance on new infrastructure in a bid to unlock the
“huge potential for both public and private investment” and to get cracking on supply-side reforms, which will then “impart a sense of dynamism and opportunity”.
And there’s a little test in there for Joe Hockey and Matthias Cormann, with a call to finalise key financial regulatory initiatives in order to provide both safety and greater certainty.
Steven doesn’t mind taking a dig at “free trade agreements” either, asking simply that they should “mean what their title suggests”.
If the G20 can get its act together, the RBA boss can see the economic sunshine returning, saying:
highly accommodative financial conditions will then have a more powerful effect in engendering real growth. A rising confidence dynamic could unfold. The prospects for profitable investments by businesses would be significantly improved.
Those animal spirits will be free range again.
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