Hedge Clippings | 03 February 2023

This week Treasurer Jim Chalmers penned a 6,000 word essay in The Monthly entitled "Capitalism after the crises" in which he argued for "the place of values and optimism in how we rethink capitalism," which as you can imagine drew a variety of responses.

Steven Hamilton in the Sydney Morning Herald described it (among other things) as "an incoherent assortment of kumbaya capitalist thought bubbles - the kinds of ideas you might expect from a bunch of virtue-signalling CEOs attending a wellness retreat." We're not quite sure who should be more offended, the Treasurer, or the CEO's, although we're also not sure if that's Steven's real life experience, or what he imagines such a group would conjure up if they made it to a wellness retreat.

Graeme Samuel however, writing in the AFR, describes the essay as "deeply insightful" and urged anyone interested "to read the essay carefully and with an open mind" and concluded his opinion piece with "Chalmers has outlined an evolution of capitalism that is both necessary and inevitable." For convenience, and if you have both the interest (and the time) here's a link to the essay so you can judge for yourself.

Meanwhile, Charlotte Mortlock on SkyNews admired Chalmers' commitment but suggested the essay was far too long, proposing that a couple of hundred words would have done the trick. (Hopefully, someone gives ex H.R.H. Harry the same advice when he sits down with his therapist (sorry, ghostwriter) to pen his sequel to Spare. Come to think of it, maybe someone should have done that before he wrote Spare?)

Hedge Clippings did have a crack at reading the article, but time didn't permit a full analysis, and space doesn't permit a summary of it here. We did try asking ChatGPT for a 500-1000 word summary (we thought a couple of hundred was a little ambitious) but it seems they're on Charlotte's side, as we received the following response:

The message you submitted was too long, please reload the conversation and submit something shorter.

That suggests to us that Chalmers, who admitted to writing the essay over his Christmas break, could have cut out some of the waffle, but old habits die hard for politicians, just like the rest of us.

Our view is that while capitalism is not perfect, neither is socialism, or communism - or as Churchill once famously said, "democracy" (with which capitalism co-exists) "is the worst form of government - except for all the others that have been tried." One of the keys is that capitalism works in a democratic system, and as such, when individual values change, governments change, and so do corporate values. Each constantly evolve. The capitalism of today, much like the social and political values of today, are different than they were before each of the economic crises that Chalmers writes about. Greed, for instance (while it will always exist) is not good - or at least not exalted as such. Corporations, more than ever before, are subject to shareholder and community values, and where, when (and sometimes when not) necessary.

Enough of the soap-box! Back to the major concern for individuals and businesses alike, the real world of inflation and interest rates.

This week the Federal Reserve in the US decided to ease the pace of interest rate hikes and focus on inflation control, which can be seen as a sign of cautious optimism. Fed Chairman, Jerome Powell, expressed confidence in the economy's progress and his belief in being able to curb inflation without causing a recession. However, the Fed's future monetary policy remains a topic of discussion, with Fed futures projecting at least one more interest rate increase, followed by a decline in inflation, and interest rates falling in 2024 as the economy slows - hopefully with a soft landing.

In Europe, the European Central Bank (ECB) made a clear statement of its commitment to controlling inflation by raising its interest rate by 0.5% and announcing plans to shrink its bond portfolio. President Christine Lagarde acknowledged the improving outlook for inflation, but still indicated that another increase of the same size is likely in March.

Across the Channel, the Bank of England raised its benchmark lending rate to 4%, the highest since 2008, in spite of its indication that the fastest pace of interest-rate increases in three decades may be drawing to a close, and a sign that the end of the rate-rise cycle may be near. Governor Andrew Bailey's outlook for a shorter and shallower recession this year, combined with lower inflation, suggests that policymakers may not need to raise rates much more, albeit that the damage may already have been done.

In Australia, economists were surprised by a 3.9% fall in retail sales in December, which might change expectations for the RBA's meeting and tightening plans next week. The market is suggesting that the RBA will raise interest rates by 0.25% to 3.35% on Tuesday, but that another increase possibly won't come until May. However, some economists still believe that interest rates will have to go higher despite the data, while National Australia Bank predicts that the RBA will possibly pause next week.

For individuals with mortgages coming off fixed loans later this year - reportedly 800,000 are due to switch to a higher variable rate in 2023 - the RBA's decisions over the next few months will either dampen the shock to their household budget, or exaggerate it further.

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