Tag: Reserve Bank


The Reserve Bank has created $30b in new money out of thin air. Here’s how


Australia

There’s a big garage door very close to the corner of Martin Place and Phillip Street in Sydney’s CBD.

If you stand on the other side of the street long enough you’ll see an armoured truck, with a large police escort, pulling into the driveway.

It’s like a scene out of the Italian Job, but it’s actually a pretty standard Reserve Bank procedure — the truck is delivering cold hard cash to the central bank.

That’s the image you might summon when you think of the Reserve Bank printing money: a truck chock-full of cash arriving from the Mint with brand new money, the Reserve Bank unloading it and then pushing that money out into the economy.

But now the Reserve Bank is creating money out of thin air instead.

It’s literally creating the money on computer screens.

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Reserve Bank confirms ‘money printing’



Photo:

Governor of the Reserve Bank of Australia Philip Lowe. (ABC News: John Gunn)

In recent weeks the Reserve Bank has been buying government bonds. It may do this via an agreement with one of the big four banks, or maybe with a fund manager — anyone that has been holding the bonds in bulk.

It’s been doing this by “expanding its balance sheet”.

It sounds technical but it’s actually really simple.

Coronavirus questions answered
Breaking down the latest news and research to understand how the world is living through an epidemic, this is the ABC’s Coronacast podcast.

Most households have a budget. And if you wanted to, you could create your own balance sheet. Your car would be listed as an asset and your credit card debt would be a liability.

The thing is, your cash is fixed. You have income coming in every fortnight or every month and, unless you get a pay rise, it doesn’t change.

What if, however, you could create money? You’d just sit at home, go to your balance sheet and change your $10,000 in the bank to $100,000. Easy. You could buy more stuff then using your debit card — no need to print your own money.

This is what the Reserve Bank has now done.

In its explainer on Unconventional Monetary Policy the Reserve Bank says:

“Asset purchases — also known as quantitative easing (QE) — involves the outright purchase of assets by the central bank from the private sector with the central bank paying for these assets by creating ‘central bank reserves’.

“This has been popularly referred to as ‘printing money’.”

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Reserve Bank wrestling all interest rates onto the floor

Now that the Reserve Bank has a licence to print money, it is going into the three-year bond market and buying up bonds.

I understand this might sound incredibly dull and irrelevant, but it’s actually quite interesting.

You see the Reserve Bank is now buying billions of dollars of government bonds from the commercial banks.


Infographic:
The Reserve Bank has now injected over $30 billion into the economy through its purchasing of government debt.
(Supplied: RBA)

This is what’s known as buying bonds in the secondary market.

If the RBA bought bonds directly from the Government it would, in effect, be directly funding the Government. And that’s clearly not on.

So how does this affect me?

As the Reserve Bank buys up government bonds their price goes up and the yield, or interest rate, on those bonds goes down.

This means the Reserve Bank can influence the interest rates on three-year government bonds. This in turn lowers the interest rates on other debt securities.

The Reserve Bank has said it is targeting three-year bonds in the hope of lowering the entire regime. But it has said it will buy across the spectrum of bonds too.

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The 10-year rate is the common benchmark or risk-free rate. That’s still elevated, but about half what it was midway through March.

The Reserve Bank has already bought tens of billions of dollars of bonds, but by the time it’s finished, both variable and fixed rate mortgages, as well as business loans of all shapes and sizes, should all be even lower than they are today, and, most importantly, will remain low for years.

It will have also give the Federal Government a once-in-a-generation opportunity to splurge on the economy at obscenely low interest rates, to help pay of things like the JobKeeper payments.

This is because it’s government debt that the Reserve Bank is ultimately making cheaper by buying its bonds.

Reserve Bank’s cash rate setting becoming tricky

There’s also another highly unusual phenomenon taking place right now.

RBA slashes interest rates to 0.25pc
The Reserve Bank cuts interest rates to a record low and announces a quantitative easing program for the first time in its history to help prevent a coronavirus-driven recession.

The Reserve Bank meets every month (apart from January) to announce the rate at which it’s going to set the cash rate “target”.

Reserve Bank representatives literally buy and sell securities at the bank’s headquarters in Martin Place on a daily basis to ensure the cash rate, or overnight money rate, sits at roughly 0.25 percentage points (where the cash rate currently stands).

But HSBC has told the ABC that on several days in the past few weeks, the cash rate has actually dropped much lower than that.

This won’t lead to a drop in your mortgage repayments, but it does give you a sense of the rough and tumble in the money markets right now.

What the experts are saying about coronavirus:

The bottom line

The point of all this is to ensure the Federal Government can borrow more than $200 billion as cheaply as possible, and that businesses can pay back money with more ease.

It’ll also ensure mortgage repayments, for those who are not on a repayments break, are as low as they can feasibly be.

One constant in all of this though is that the Reserve Bank hasn’t changed the rule of when it will start raising rates. That will happen when Australia reaches full employment (set at roughly 4.5 per cent).

You can see why EY, AMP Capital, the NAB and HSBC all think record low interest rates are now likely to be with us for a considerable period of time.

What you need to know about coronavirus:


Video: Norman Swan looks at the Federal Government's coronavirus modelling

(7.30)

Source: https://www.abc.net.au/news


Over $200b in stimulus will increase net debt by a third. Where’s the money coming from?


Australia

The Morrison Government’s $130 billion wage subsidy package is massive.

For the next six months, the Federal Government will be paying the equivalent of half of the country’s total wage bill to prevent over a million workers losing their jobs.

Australia has never seen anything like it — and it will be very costly.

In the mid-year budget update, Australia’s net debt was forecast to peak at $392.3 billion in 2019-20, or 19.5 per cent of gross domestic product (GDP), before declining.

But the emergency wage package will see Australia’s net debt increase by a third, swelling to roughly $507 billion by the end of June, to hit 26 per cent of GDP.

And that won’t be all — there’s more debt on the way next financial year.

Coronavirus update: Follow the latest news in our daily wrap

How will the Government pay for it?

Essentially, the Government will pay for the stimulus package by creating the money and racking it up as debt.

Officially, it will raise the money via the Australian Office of Financial Management (AOFM), which borrows money on behalf of the Government by selling Australian Government bonds.

Why stocks have further to fall If ever you needed convincing that financial markets have become completely divorced from reality, just look at Wall Street’s wild swings, writes Ian Verrender.

Institutional investors (foreign and local banks) will buy the bonds, which promise to pay regular interest payments and repayment of the principal at a set future date.

The bonds will be traded with other investors, such as superannuation and pension funds, insurers, hedge funds, and private banks and central banks, which like to hold interest-bearing financial assets in their portfolios.

The ultimate buyer of the Government bonds could be the Reserve Bank, because at the moment, the RBA is stepping into the market regularly to purchase as many Australian Government bonds as necessary to keep the interest rate, the “yield”, on three-year Government bonds around 0.25 per cent.

“The Government will have to increase its debt by about 40 per cent, but issuing debt is not a problem, they could issue five times that and it still won’t be a problem,” ex-Treasury official Steven Hamilton told the ABC.

“Usually the AOFM holds a bond auction every week, where it sells around $1 billion worth of bonds — but the value of its bond issuances will skyrocket over the next few months to pay for these stimulus packages.”

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The AOFM says there is strong demand for three-year, five-year and 10-year bonds at the moment.

Investors no longer want to carry the risk of purchasing 15-year and 20-year bonds when the global economy is so fractured.

How much are the Government’s emergency stimulus measures worth?

The Federal Government is spending far more than the $130 billion wage subsidy package announced on Monday.

RBA makes extraordinary intervention The Reserve Bank is trying to stop the financial system melting down and telling us to brace for impact amid fallout from coronavirus, writes Gareth Hutchens.

In fact, it has announced $213.7 billion worth of stimulus across three packages:

First package of $17.6 billion (announced March 12)

Second package of $66.1 billion (announced March 22)

Third package of $130 billion (announced March 30)

It has also asked the Australian Office of Financial Management to extend $15 billion in special loans to smaller banks and non-bank lenders so those lenders can continue to finance small businesses during the crisis.

The Reserve Bank has also opened an emergency $90 billion funding facility to encourage banks to extend credit to small and medium-sized businesses.

Combined, the Government’s stimulus packages and the Reserve Bank’s emergency lending measures are worth $318.7 billion, which is roughly equivalent to 16 per cent of GDP.

How does it compare to the Rudd government’s stimulus packages?

Australia has never seen a stimulus package of this size.

It dwarfs the size of the Rudd Labor government’s stimulus packages across 2008-2010, during the global financial crisis, which were worth $67 billion.

The Rudd government began in November 2007. At the time, Australia’s net debt was -$22.1 billion, meaning it held $22.1 billion more than it owed.

In the final months of the Rudd government in July 2013, Australia’s net debt position had risen to $159.6 billion, due in large part to its stimulus spending during the GFC.

It left Australia with a debt-to-GDP ratio of 10.4 per cent.

Sharp rise in unemployment could trigger house price crash
The spread of coronavirus across Australia could see unemployment reach about 10 per cent and house prices drop 20 per cent, says one economist.

The Morrison Government, by comparison, has announced stimulus packages worth $213 billion so far.

When the Coalition Government replaced the Rudd government at the 2013 election, net debt was $174.5 billion, having risen by $15 billion in the three months leading up to the election.

In December last year, Australia’s net debt position was estimated to be peaking at $392.3 billion this financial year, before slowly reducing in size.

That’s an increase of $217.8 billion since 2013.

But the net debt position is now likely to jump to $507 billion this financial year.

It could see Australia’s net-to-GDP ratio it 26 per cent — well above the Rudd government’s 10.4 per cent.

Your questions on coronavirus answered:

What do economists think?

Cherelle Murphy, a senior economist at ANZ, says the Government’s $130 billion wage subsidy package will “undoubtedly” prevent the unemployment rate rising as much as it would have otherwise.

Coronavirus questions answered
Breaking down the latest news and research to understand how the world is living through an epidemic, this is the ABC’s Coronacast podcast.

She had been assuming that, with a widespread shutdown of economic activity of about six weeks, followed by a progressive lifting of restrictions, more than 1.1 million workers would have lost their jobs in coming months, swelling the number of unemployed to 1.8 million.

That meant the unemployment rate was going to jump from 5.1 per cent to 13 per cent in the June quarter, before dropping back to 8 per cent by the end of the year when the economy starts to recover.

But she says the Government now appears to be planning for a longer, harsher shutdown, because it thinks 6 million Australians will be accessing the fortnightly JobKeeper payments over the next six months.

That complicates her unemployment forecasts, but she thinks the payments will prevent a huge number of people from becoming unemployed.

“We think the size and reach of the JobKeeper payments should reduce the peak in unemployment — the economic version of ‘flattening the curve’,” she said.

What the experts are saying about coronavirus:


Video: Under the microscope

(ABC News)

Source: https://www.abc.net.au/news


Australia is now a nation in self-isolation — but are we ahead of the curve?


Australia

There’s new official lingo about tackling COVID-19’s economic challenge. A “bridge” is being built to take us to the other side of the crisis.

Meanwhile, the government is preparing a “cushion” for businesses and individuals who are already or soon will be its casualties.

Reserve Bank governor Philip Lowe came up with the bridge metaphor, Scott Morrison loves it and Treasurer Josh Frydenberg is using it.

The Reserve Bank on Thursday unveiled its bridge-building package. It cut the cash rate again, to 0.25 per cent. It will also put a staggering $90 billion into the banking system, with the government injecting another $15 billion, to encourage low interest lending targeted at small and medium sized businesses.

But the bridge requires constructing a foundation of confidence, at a time when many businesses and consumers feel only fear.

In present circumstances, normal economic incentives have a much lesser effect. The market signals don’t work properly. If small businesses have their customers disappear and don’t expect them back any time soon, owners won’t be too interested in cheap loans.


Video: Scott Morrison and Josh Frydenberg announce latest coronavirus measures

(ABC News)

The nation self-isolates

Morrison has stressed Australia is not in shut down. Not officially. But out of a combination of alarm, caution and government measures to contain the virus’s spread, many activities have shut down and more do so every day.

Less than 90 minutes after the Reserve Bank produced its measures, Morrison announced the government was closing Australia’s border to foreigners, which will take effect late Friday.

As a health measure, this is sound, given the spread of the virus overseas and the extent to which arrivals have driven its early stage in Australia.

But it will be yet another brake on the economy, even though foreign arrivals have already fallen drastically.

Two days earlier, Australians were told not to leave the country. Australia is in national self-isolation. And unlike for individuals, there is no set end point.


Video: TWU boss Michael Kaine slams Qantas for forcing workers to bail out airline

(ABC News)

Qantas has stopped international flights and stood down 20,000 staff. It is hoping flexible leave arrangements will preserve jobs, but for how long?

A measure of the strange times is that Qantas is talking to Woolworths about some of its employees working there. The hoarding frenzy has become a job creator.

A trade-off

During this week, Morrison seemed on top of his messaging and the pioneering “national cabinet” of federal and state leaders was showing there is such a thing as “co-operative federalism” (albeit it has taken a national emergency to put it on display).

But federal and state governments and the community are a long way from having any certainty what measures — health or economic — might eventually be needed.

In circumstances unprecedented in living memory, difficult judgements are being made day by day that juggle health, the economy, and public sensibilities.

Devising rules for nursing homes pitted health against the humane. COVID-19 is lethal for the frail aged. But this week the government decided visits to these facilities should be restricted rather than stopped.

It was a trade off. A ban would have been safer in medical terms, but for residents a devastating isolation from family.

A ban could have carried another danger. Families are often watchdogs on how people in these institutions are being treated. Even after the royal commission’s indictment, constant eyes are needed.

The balance struck was sensible and has been generally accepted as such.

What the experts are saying about coronavirus:

The school question

In contrast, the debate about schools has been fraught and is unfinished in the public mind. The government advanced several reasons for not closing them (at this stage). Few children are affected by the virus. If kids were not at school, many would be minded by grandparents in the most at-risk age group.

And shutting schools could mean a 30 per cent hit on the health workforce.

The last is crucial in the government’s thinking. The health system will be under enormous pressure in the next few months, with no guarantees about how well it will cope, despite the reassuring words.

Rejecting the arguments of health officials and governments, certain schools have closed and some parents are removing their children from others.

If the schools are eventually closed under public pressure, it could be devastating for many students in their final year.

Anger and bad behaviour

Clearly, the bad behaviour the crisis has triggered has not abated — the out-of-control supermarket scenes, and the abuse of shop staff, health workers at some testing places, and even teachers.

Deputy chief medical officer Paul Kelly went to the length of highlighting the last by referencing the experience of his sister, a teacher.

Country town residents are angry at their shop shelves being stripped by non-locals.

On Thursday, restrictions were announced for the dispensing and sale of drugs by pharmacies.


Video: Scott Morrison's comments came as supermarkets struggle to cope with shortages amid the coronavirus pandemic.

(ABC News)

Is the binge buying just panic? There is a great deal of that, with people unreceptive to the indisputable point there would be plenty of supplies if everyone behaved normally.

Morrison had a strong message for the hoarders: “Stop it”.

But anecdotal evidence also suggests some of the “hoarding” may be for other reasons.

Home Affairs Minister Peter Dutton (who is still quarantined with COVID-19) claims some people are “profiteering”; he declared the police are in pursuit of them.

“They’re hoarding, not for their own consumption — I think they’re either sending some of the products overseas or they’re selling it in a black market arrangement in Australia,” Dutton told 2GB.

Are we ahead of the curve?

The government maintains that on the health front it is keeping ahead of the curve, although critics says it has been tardy and should even now be doing more.

On the economic front, however, it knew it was behind the curve immediately after announcing last week’s $17.6 billion stimulus measures.

Coronavirus questions answered
Breaking down the latest news and research to understand how the world is living through an epidemic, this is the ABC’s Coronacast.

Now it is finishing its second package, which could dwarf the initial one; the combined measures will be legislated by the “mini” Parliament early next week.

Last week the imperative was to keep growth going to try to avoid a recession; now the goal is being cast differently.

“What this second package will be designed to do is to cushion the blow for Australians, particularly those who have lost their jobs, but also for those small businesses who are facing this very, very difficult moment,” Frydenberg told the ABC on Thursday night.

Earlier, after the bank announced its measures, Lowe said in his speech, “At some point, the virus will be contained and our economy and our financial markets will recover”.

At what point and at what cost? That bridge could need to have a very long span.

Michelle Grattan is a professorial fellow at the University of Canberra and chief political correspondent at The Conversation, where this article first appeared.

What the experts are saying about coronavirus:


Video: Dr Norman Swan answers some of your questions about the coronavirus outbreak

(7.30)

Source: https://www.abc.net.au/news


The Government has the power to save struggling households. Here’s how


Australia

The Federal Government’s second COVID-19 economic rescue package will focus on supporting businesses and households that are likely to take a hit to their income in the coming months.

This is the right economic response. Doing it well will not come cheaply or without controversy. But as with the public health response, speed and scale must trump perfection.

Two policies should form the centrepiece of Stimulus Two: wage and rental relief for businesses and cash for affected workers.

For business, the biggest challenge will be keeping the lights on during a prolonged but ultimately temporary collapse in revenue.

“Social consumption” businesses will be on the economic frontline: airlines, accommodation and food services, tourism, retail services and arts and recreation will all take a significant hit to their cashflows. And many other businesses that provide supplies to these sectors will also be hit hard.



Photo:

Some airlines may not survive the coronavirus. (Reuters: Kham)

The first stimulus package provided some cashflow relief.

The $25,000 income tax write-off for businesses with turnover of less than $50 million is effectively a cash bonus for all small and medium businesses with staff.

The Government has also offered deferral of GST, income and other tax payments for four months on a case-by-case basis, in effect an interest-free loan. These will help, but more will be needed.

What should be on the stimulus hitlist?

The biggest costs for most businesses on the frontline are rents and wages. A well-designed assistance package would give businesses some breathing space on both.

State governments should enforce a rental holiday or discount for businesses during the worst-affected months, effectively asking landlords to share the pain.

Some landlords are already offering these types of rental discounts. They’ve realised keeping their existing tenants afloat is better than an empty shop.

But we can’t rely on the market getting to the right answer quickly enough: landlords in denial could force small businesses to the wall.

The consequences of a short-term haircut for landlords aren’t insignificant, but they are a lot smaller than the economic hit from losing a swathe of restaurants, retailers, gyms and hairdressers.

Rental discounts are a matter for the states, but the policy will work best if it is coordinated nationally. The national ‘war cabinet’ arrangements give us an opportunity for federalism at its best.

Many firms will be struggling with wage bills in the coming months. The policy response should focus on supporting businesses that would otherwise retrench staff to put them on leave without pay, a better result for both business and workers. But this can only happen if workers have access to government income support.

How will businesses cope?
Businesses are struggling with questions such as who will pay workers forced to self-isolate in a coronavirus outbreak.

Stimulus Two should provide this support. Ideally this would mean offering short-term assistance to any worker who is sick or does not have paid work or leave during the crisis. This will be a large group.

More than one third, about 37 per cent, of Australian workers do not have paid leave entitlements, including 2.4 million casual employees and 2.2 million people who are self-employed.

Many more will exhaust their leave entitlements. And the lowest paid will be hit hardest: half of Australians who earn less than $800 a week do not have paid leave entitlements. And many workers with leave entitlements but in the employ of severely affected industries could otherwise see their employers go bust before they’re able to claim them.

‘Claim now, ask questions later’

We could support these groups via the welfare system, offering broad-based “claim now, ask questions later” access to Newstart-level insurance payments for anyone not working.

But there are legitimate concerns about Centrelink’s capacity to get this rolled out quickly and to cope with the volume of demand in a period when their own workforce will be under pressure.

The US experience is telling: in Massachusetts, more people filed for unemployment benefits on Monday than in the entire month of February.

Rate cuts can’t cure COVID-19
Reserve Bank interest rate cuts will do little to keep Australia out of a deep recession if coronavirus becomes a severe pandemic, but there are some unconventional policies that could help save the economy.

A less targeted (and therefore more expensive) but far easier and faster approach would be to give means-tested cash payments to all working households during the worst months of the crisis.

For example, the Government could give payments at the Newstart rate of $1,200 a month to all employees with incomes less than a threshold of, say, $100,000 last financial year, covering nearly 10 million workers.

This would cost about $12 billion a month, or 7 per cent of Australia’s monthly GDP. But it would be the best way to ensure that working households get timely support to manage the hit to their income.

Fast-tracking early access to superannuation or offering HECS-style loans to workers could help ‘top up’ the safety net for those who need extra cash to stay afloat.

These policies are bold, but they need to be.

The Government has shown it will take the necessary steps to manage an unprecedented health crisis. Let’s hope it is willing to do the same for the unfolding economic one.

Danielle Wood is Budget Policy Program Director and Brendan Coates is Household Finances Program Director at the Grattan Institute.

Source: https://www.abc.net.au/news


New York Stock Exchange will temporarily close trading floor, move to electronic trading


United States

The New York Stock Exchange says it will temporarily close its trading floor and move to electronic trading because of the coronavirus pandemic. All electronic trading will start on Monday.  

Overnight, US stocks deepened their sell-off and the Dow Jones index erased the last of its gains since the inauguration of President Donald Trump, as the coronavirus threatens to plunge the world into a global recession.

Key points:

  • The Dow Jones Industrial Average fell nearly 5 per cent in morning trade
  • The Trump administration is planning to send US$1,000 cheques to Americans
  • The US Senate vowed to pass even stronger stimulus measures

The Dow Jones Industrial Average fell 1,338 points, or 6.3 per cent to 19,899, the S&P 500 lost 131 points, or 5.2 per cent to 2,398 and the Nasdaq Composite dropped 345 points, or 4.7 per cent to 6,990.

Massive government and central bank stimulus failed to stem the panic.

Mr Trump’s request for Congress to approve $US500 billion in cash payments to taxpayers, along with $US50 billion in loans for airlines, did little to stem the rout.

Trading in the S&P 500 was halted for 15 minutes at the open after it dropped more than 7 per cent.

The S&P 500 has lost more than 30 per cent since its record closing high last month.

The Dow Jones index fell more than 10 per cent earlier in the session but ended off its lows.

Shares in airline maker Boeing fell after it called for a $US60 billion lifeline.



Photo:

The market has seemingly shrugged new measures to stem the coronavirus collapse. (AP: Richard Drew)

The price of oil plunged by nearly one quarter to its lowest level in 18 years.

US crude oil fell 24 per cent or $US6.58 to $US20.37 a barrel.

Spot gold was also caught up in the selling, falling $US30 to $US1,498 an ounce.

European share markets were also hard hit.

The FTSE 100 in London lost 4 per cent or 214 points to 5,081.

The pound plunged 5 per cent to its lowest level against the greenback in more than three decades.

The Australian dollar fell 3.6 per cent to 57.79 US cents as the greenback surged on promises of more US stimulus.

In futures trade, the ASX SPI 200 has come off its lows to 4,834, down 80 points or 1.6 per cent.

Later today, the Reserve Bank is expected to cut interest rates to a new record low and commence a government bond buying program to help the economy cope with the economic impact of the coronavirus.

UK, France stimulus measures

In addition to measures in the US, Britain launched a 330-billion-pound ($666 billion) rescue package for businesses threatened with collapse.

France, which went into lockdown on Tuesday, is to pump 45 billion euros ($74.4 billion) into its economy to help companies and workers.

Still, forecasters at banks are projecting a steep economic contraction in at least the second quarter.

Governments are taking draconian measures to combat the virus, restricting movements, adding to market concerns.

US Senate digs in to formulate ‘bolder’ relief

Meanwhile, US Senate Majority Leader Mitch McConnell expected the chamber on Wednesday to pass an economic relief bill already approved by the House of Representatives.

Coronavirus questions answered
Breaking down the latest news and research to understand how the world is living through an epidemic, this is the ABC’s Coronacast.

He also said the Senate would then work on legislation aimed at aiding small businesses, giving Americans money directly and helping some industries during the coronavirus crisis.

“So while I will support the House bill in order to secure emergency relief for some workers, I will not adjourn the Senate until we have passed a far bolder package that must include significant relief for small businesses all across our country,” he said.

“Everybody understands we aren’t leaving until we deliver it.”

Senator McConnell said the bill that senators were drafting would provide an “historic injection of liquidity and access to credit” for small businesses, while loosening the bureaucracy for lenders working with the federal government.

What the experts are saying about coronavirus:

The senators are also looking at the “best pathway to put money directly in the hands of the American people … as quickly as possible” and “targeted relief for key industries that are shouldering an outsized burden from the public health directives,” Senator McConnell said.

He said the bill will include measures to get “more tools in the hands of healthcare providers, removing barriers to treatment, and helping researchers develop therapeutics and vaccines”.

To prevent the spread of the virus amongst themselves, he urged senators to enter the chamber later on Wednesday, vote on the House bill, and then leave so “we don’t have gaggles of conversation here on the floor.”


Video: Dr Norman Swan explains coronavirus terminology

(ABC News)

ABC/Reuters

Source: https://www.abc.net.au/news


Super funds could be the surprise secret weapon we need to bag a raise


Australia

When grappling with a complex issue, there’s that moment when the heart sinks, and you accept defeat. The problem can’t be fixed.

Over recent years, many ordinary Australian workers struggling with low wages growth may have felt that sinking feeling.

The Government is consistent with its messaging on wage growth. It says the more jobs that are created, the tighter the labour market will become and the more upwards pressure there will be on wages.

That’s entirely consistent with economic theory.

The problem is that well over one million jobs have been created since the Coalition came to power and wage growth remains stuck around the low-2 per cent mark, well below the long-term average of 3.2 per cent.


Infographic:
Wages growth over time
(Supplied: Australian Bureau of Statistics)

What if there was another way?

The productivity argument against wage growth is also hard to defeat.

Is more productivity really what we need?
The Reserve Bank says productivity is the key to workers getting a pay rise, but might that mean leaving 20 toddlers with a frazzled childhood educator?

Some economists, and government policy makers, argue that workers need to be more productive to have any hope of bagging a pay rise.

That is, do more, with less, boost your firm’s profit, and then share in the spoils.

The governor of the Reserve Bank, Philip Lowe, is big on this idea, saying in mid-2018: “…lifting productivity is the key to building on our current prosperity and ensuring sustained growth in wages and incomes.”

Unfortunately, the latest Bureau of Statistics figures show that on the basis of hours worked, market sector multifactor productivity (MFP) fell 0.4 per cent in 2018–19, the first decline since 2010–11.

So, no chance of a pay rise there.

What if, however, there was another way?

Super funds are becoming agents of change

Superannuation is a $3 trillion industry in Australia, owning roughly 40 per cent of the companies listed on the stock exchange.

As such, superannuation funds are becoming increasingly effective as agents of change within corporate Australia, for the simple reason that they’re significant shareholders of these companies.

Australian bosses have started caring about climate change
Australian company directors nominate climate change as the number one issue they want the government to address in the long-term, in a survey of more than 1,200 business leaders.

In the lead up to last year’s G20 meeting in Japan, for example, AustralianSuper, Colonial First State, and HESTA, to name few, joined the Global Investor Statement to Governments on Climate Change.

They called on world leaders to phase out coal production to limit global warming to 1.5 degrees Celsius, and demonstrated a powerful show of unity to enact change.

And make no mistake, super fund members not happy with their progress are poking and prodding them into action too.

The ABC recently reported 24-year-old ecologist Mark McVeigh is taking his fund to court, claiming it hadn’t factored the issue of climate change into how it invested his money.

The outcome could set a precedent for how the superannuation industry handles climate change risk.

So what about lifting pay packets?



Photo:

Ecologist Mark McVeigh is taking his fund to court claiming it hadn’t factored the issue of climate change into how it invested his money. (ABC News: Michael Slezak)

The answer is community pressure

Well, when it comes to wage growth, similarly to pushing for action on climate change, super fund boards need to present ASX-listed companies with a compelling argument.

Something along the lines of: “You lift the wages of your workers, and the economy will lift as consumer open their wallets, and your share price will soon follow”.

Why is wage growth so low?
Why is Australia experiencing its slowest wages growth since World War Two? There are countless theories, but many come back to a shift in power between workers and employers.

Again, the Reserve Bank governor is on board, at least with the broader need for higher wages, repeatedly saying: “…some pick-up in wages growth would be a welcome development”.

The big question is, what on earth would incentivise the power brokers of a multi-billion super fund to wrangle with an ASX-listed company board to boost its workers’ wages?

The answer is simple: community pressure — just like action on climate change.

Shareholder activist Stephen Mayne says it’s entirely possible to do.

“We’re seeing record levels of engagement between super funds and public companies,” he said.

“The super funds all have websites and engagement programs and members simply need to contact the super fund and say we’d like you to engage with corporates on these issues.”

Higher wages can lead to higher productivity

But what about the productivity problem?

Business groups would no doubt argue that if wages rise, and productivity remains flat, or negative, profits will fall and jobs could go. That’s a fair point.

However, there is evidence that higher wages do in fact lead to higher productivity, as a 2015 study by the UK’s University of Warwick found.



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There is evidence that higher wages do in fact lead to higher productivity. (ABC News: Claire Moodie)

“In three different styles of experiment, randomly selected individuals are made happier,” the paper notes.

“The treated individuals have approximately 12 per cent greater productivity.”

Of course we all know more money doesn’t necessarily lead to greater happiness, but in this study, participants were offered more money as part of the experiment.

At the very least, you could argue that workers struggling to pay the bills find it difficult to turn up to work each day bright-eyed and bushy-tailed.

And, if nothing else works, there’s always naming and shaming companies into paying workers more.

Wouldn’t it be better to build a case in everybody’s interests?

The US has adopted a model, following The Wall Street Reform and Consumer Protection Act, where every corporation publishes the ratio of CEO pay to workers’ average pay in the company.

Crucially too, the US Securities and Exchange Commission says it helps inform shareholders when voting on “say on pay” — meaning the SEC happily provides investors with the hard numbers to take to boards.



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The US has adopted a model where every corporation publishes the ratio of CEO pay to workers’ average pay in the company. (Pexels)

Australian academics believe the embarrassment suffered by firms here when publishing this data would encourage them to distribute their profits more equitably too.

Wouldn’t it, though, be better to achieve significantly higher wage growth across the board by building a strong case that it’s in everybody’s interests?

Because the evidence shows it most certainly is just that.

Source: https://www.abc.net.au/news




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