The Aussie dollar continues to go backwards after the Reserve Bank of Australia indicated that it would carry on slashing interest rates and that it would not do anything to try to fix the dollar at any given level.

The Aussie lost further value immediately after the release by the RBA of its November policy meeting minutes. This came on the back of a fall to a four year low of 64.32 US cents and the tumbling of the local share market to a four year low.

Clearly the RBA is quite pessimistic about the general outlook. They seem much weakened economic conditions and they have made it clear that there will be some big rate cuts to come.

Currency traders dumped the Aussie after the RBA cautioned that its policy of buying dollars over the past few weeks as the dollar slid towards 60 US cents was designed to improve liquidity and not intended to defend any particular level of the exchange rate. At a five year low of US 60.1 cents last month the Aussie has depreciated by more than 30% this year. It was about US ten cents below its US 70 cents post float average

If one considers the minutes of the Reserve Bank of Australia’s November board meeting it is very difficult to see how our economists can be so optimistic that Australia will not have a recession.

It is quite obvious that the Australian economy will have at least two quarters of negative growth over the next year.  Whether these follow each other thus meeting the definition of a recession is neither here nor there.  What is clear is that we are in the middle of the worst slump in twenty years with household wealth sharply down and levels of debt much greater.

Many believe that the RBA’s interest rate cuts, the fiscal measures by the government and the low Australian dollar will come to our rescue.  But the fact is that interest rates are still much too high, being only at neutral levels at best and the weak Australian dollar will take a while until it makes us more competitive.

The government’s $10 billion spending package (if it is not simply saved by worried households) will have only a short term effect.

The burden has now fallen on the government to boost spending on public infrastructure but this will not happen before at least six to twelve months.

At the same time we have collapsing export prices, a very weak export market since at least the early nineties, much reduced credit availabilities, rapidly slowing business investment and a huge cut to household wealth.

All of this is happening before unemployment has even started to rise.

Despite all of this the RBA feels that “the most recent information suggested that the risks to the outlook remained to the downside”.

If this is not a recession then what is?

Indeed, the first hint that the economy could actually slip into a recession was the October National Australia Bank business survey issued last week.  That showed that business confidence had slumped to levels even lower than during the early nineties recession.

The RBA has wisely picked up that “given the changing balance of risks there was an advantage of moving the setting of monetary policy quickly to a neutral position”.

This is incredible.  The RBA only considers that official interest rates are back to a “neutral” setting.  Since we are teetering on the brink of recession it just highlights how much further the RBA has to go.

This is why it will cut rates by at least 75 basis points at the meeting early next month and in my view the rate cut should be closer to a whole percentage point if not more.  In England rates were cut by 1.5% this month.

It is absolutely imperative that we push business and housing interest rates to below long run average levels as soon as we can.

While many of us have been hoping that after another black October for world stock markets, November might mean the beginning of a US and world stock markets bounce.

But those hopes are disappearing quickly even though there are a few die hards who are still hanging onto the forlorn hope that Santa Clause may deliver a few goodies to the stock markets.

Across the world markets are down by savage percentages up to around 50% in some cases.

The kind of falls that we have experienced are as bad as any that we have seen before.

With the ongoing doubts about the stability of American’s financial institutions, its property markets and its financial services industry generally the chances of a massive downturn of indeterminate length are huge.

Add to this the possibility that the Regulators and decision makers guiding financial policies and markets will make a mistake and we can understand why there is no certainty that we have yet reached the end of the downward slide.

That said, there are those few brave ones out there who are tempting fate and putting their money where their views are.

For those who are moving back into the markets their attitude is that there is no certainty that markets can’t go down further but on balance the greater danger is in not getting back into the markets because the long term view must be that markets will increase and start increasing soon if not now.

Recent actions by the RBA do not inspire a lot of confidence in me that the RBA is “on top of it”.

Until as recently as around the middle of this year the RBA was raising interest rates and threatened more increases because of the need to “fight inflation”.  This is a most interesting proposition.

The credit crunch and general economic slowdown was well under way in the middle of the year when the RBA was threatening such increases.  Did it completely misunderstand what was happening in world markets and the impact that things would have on Australia?

The Australian economy was already slowing down significantly and there were many who warned against the RBA’s repeat interest rate rises when the Australian economy was clearly slowing down so quickly.  The property sector particularly warned against these increases in rates when activity in the property market had slowed to a virtual standstill, yet the RBA kept at it.

It seems that it is only now that the penny has finally dropped and that the RBA is making a rapid about turn and taking interest rates downwards at the most significant speed in the memory of most.

What does this all say about its handling of monetary policy and its ability to make wise decisions which have an impact on so many people?

Clearly interest rates need to get down to as low as 3% or even less to avoid a major economic catastrophe.  Why should our interest rates be sitting at 4% and 5% when the interest rates in the other major developed economies are at fractions of these amounts?

Is it time for the RBA to wake up to itself and get on with the job of doing what it is meant to do and that is keeping the economy on an even keel rather than being asleep at the wheel?

According to the Governor of Reserve Bank, Glenn Stevens Australians should have “quiet confidence for the future”.

Mr. Stevens also says that we should not give in to gloomy talk about the economy.

“The biggest mistake we could make would be to talk ourselves into unnecessary economic weakness.  Yes, the situation is serious.  But ……… the long run prospects for the Australian economy have not deteriorated to the extent that might be suggested by some of the gloomy talk that is around.

We ought to go forward with some quiet confidence in our own abilities and in the opportunities that are on offer”.

Things are definitely looking better on some fronts.  Official inflation figures are beginning to show that the inflation rate is dropping quickly.  For example petrol prices are moving backwards at quite a pace and are getting close to a dollar per litre.

Falling oil prices reduce inflationary pressures and make it easier for the Reserve Bank to lower interest rates.  It is expected that the Reserve Bank will cut interest rates by between .75% and 1% when it meets next month.  According to Mr. Stevens the bank has to continue to strike the right balance between containing inflation and stimulating growth.

According to Mr. Stevens too, despite falling interest rates consumers would do well to adopt a more conservative attitude to debt build up.

There is pressure on the Federal Government to announce further spending measures in addition to the $10.4 billion spending package it unveiled in October.  Since then the government has announced a $6 billion car industry assistance package that economists have criticized for propping up an ailing industry.

This week the government announced $300 million in grants for local council projects provided the money is spent by next September.  Mr. Stevens said that it was important that the government continued to support worthwhile public investment.  “That said it is still important for fiscal measures to pass the good policy test.  Poor public policy proposals should not be accepted simply because they are presented as boosting short term aggregate demand.

There is plenty of gloom and doom talk about right now.  Stock markets are crashing around the world, jobs are being lost everywhere, company profits are tumbling and consumers are feeling very insecure and have radically reduced their spending.

The fact is though that things are not nearly as bad as they seem and the long term outlook is still good.

What are the positives out there right now?

Interest rates are falling rapidly and this will put more money in the consumer’s pockets to spend or to save and pay down debt.

Oil prices have fallen dramatically.  A few months ago there was talk of oil prices hitting $200 US per barrel.  They are now closer to $50 per barrel and this has resulted in petrol prices coming down from close to $2.00 per litre to $1.00 per litre with the potential for it to go even lower.

This will all have the effect of taking pressure off inflation and make it even easier for the Reserve Bank to cut and maintain lower interest rates.

The recent spending packages announced by the government will also have the effect of stimulating the economy.  The danger though is to avoid unnecessary spending which.