Do you remember when we were told that if we signed up to net zero emissions by 2050 that our interest rates would be lower? Well, we fell for that lie and signed the nation up to this crazy and unattainable net zero idea in late 2021. Since then the RBA has raised interest rates 12 times, and the average Australian homeowner is paying $1200 more per month on their mortgage.
Thanks net zero!
Our net zero by 2050 commitment is just a promise, and a promise by a bunch of politicians at that. The claim made by the net zero zealots was that a 2050 commitment would attract more international capital to Australia and thus lower our interest rates. In the real world investors do not allocate billions of dollars based on the promises of politicians.
In the long term, interest rates are set by more fundamental things like the size of government debt, economic growth and inflation.
Over the past week the world’s central bankers met for the annual jamboree in Jackson Hole, Wyoming. A paper (by Barry Eichengreen and Serkan Arslanalp) at this conference argued convincingly that we are now in a period of high and persistent government debt. The dual shocks this century of the global financial crisis and the coronavirus pandemic have taken average government debt levels from 40 per cent of GDP to 60 per cent of GDP. Australia’s debt is now slightly above this average at 62 per cent of GDP.
Higher global government debt increases the supply of debt, lowering its price and increasing the interest rate needed on that debt to attract buyers. As the economists conclude “Real interest rates, having trended downward for an extended period, now show signs of ticking back up, if for no other reason than that more public debt must now be placed with investors.”
Inflation can lower the burden of government debt but this can only help in the short term. If inflation persists investors will demand even higher interest rates ultimately making a bad situation worse. While we have enjoyed subdued inflation in recent decades that was thanks to the end of the Cold War and the integration of China into the global economy. The globalisation dividend we enjoyed is now ending if not reversing.
On the other side of the world, another meeting took place between the BRICS nations (Brazil, Russia, India, China and South Africa). At this meeting they agreed to expand their group to include 6 more nations. The new group would represent almost half of the world’s population and a third of the global economy.
Among other things this group is developing plans to move away from the use of the US dollar in global trade. If they succeed that will push interest rates in western countries higher as demand for US dollar-denominated assets falls.
Some view this risk as only small but we would be crazy to ignore it as the current global financial framework is only 60 years old, when Richard Nixon took the US off the gold standard. Hardly anyone predicted the massive financial changes that occurred in the 1970s. Like the 1970s we live at a time of high energy prices so another financial revolution may be on the cards.
It is no coincidence that these BRICS+ countries are also those that are not taking their net zero commitments seriously. China and India are building more than 2 coal fired power stations a week.
Our new RBA Governor admitted this week that our push to renewable energy risks higher power prices and higher inflation for longer. Energy prices are so crucial to any economy that higher prices will reduce productivity and our economic growth.
The only viable way out of the high debt, high interest rates spiral we are in is to grow our economy. If our economy grows at a rate above interest rates, government debt as a share of our economy will fall even without the need to run a budget surplus.
The implication of the RBA Governor’s point is that our net zero commitments are making interest rates higher. With other countries doing nothing to reduce their carbon emissions, it is high time we drop this mad idea of net zero emissions and get back to focusing on economic growth for Australians.
Dumping net zero emissions would increase economic growth, help people pay their mortgages and it would bring down the interest rates on those mortgages too. That seems a much better idea than Australia continuing to live under the delusion that we, and we alone, can change the temperature of the globe.
