Something we discuss quite a bit on MacroBusiness is the balancing act that the RBA is attempting in adjusting the economy away from credit driven housing and into resource sector led business investment. We also have many off-line conversations about this topic, mainly focusing on what could be going wrong and what our own personalities and ideologies lead us to believe is actually happening. I must admit I seem to be a little more “glass half empty” than many of my counterparts on MacroBusiness.
When I visualise the economy, I see a four seat seesaw. In each seat you have various parts of the economy that are opposing. Housing market, inflation, business investment, retail and manufacturing and the AUD just to name a few. Standing in the middle is Glenn Stevens with a giant mallet trying to keep his eye on all of them at once and madly beating on each stem of the seesaw. Every now and then the government likes to hop on one of the seats and bounce up and down.
Obviously the mallet is interest rates, the bluntest of tools that can effect all corners of the economy. However, that is the only tool that Glenn possesses so the ride was never going to be smooth.
As H&H discussed yesterday, the inflation and mining cheer squad are at it again. They insist that interest rates must be raised because of the inflationary pressures from the coming mining boom. I don’t totally disagree but these commentators are focused on only one side of the seesaw. There is a giant sitting in the opposite seat, private sector debt, and it continues to grow, even if the rate of that change is now at 30 year lows for some of the parts.
I am still baffled by this ignorance in commentators because it is exactly the thing that recently destroyed the US economy, and when I visualise it I see Godzilla sitting there on the seesaw. He isn’t easily ignored.
I am sure, however, that the RBA governor is well aware him too, which puts Glenn Stevens in a very difficult situation. As I said quite some time ago now.
That is the problem with the introduction of incentivised debt driven speculation with no ROI (to the productive capacity of the country) into your economy. The current situation is that the RBA is coming very close to losing control of its own tool set because of the systemic risk created by lopsided fiscal policy.
If you look at the RBA website it states:
It is the duty of the Reserve Bank Board, within the limits of its powers, to ensure that the monetary and banking policy of the Bank is directed to the greatest advantage of the people of Australia and that the powers of the Bank … are exercised in such a manner as, in the opinion of the Reserve Bank Board, will best contribute to:
a.the stability of the currency of Australia;
b.the maintenance of full employment in Australia; and
c.the economic prosperity and welfare of the people of Australia.’
Once there is high levels of risk in adjusting interest rates up or down then this mandate is impossible to deliver. This is the situation it is now in, lowering interest rates will set off more borrowing and higher inflation, upping them will lead to unmanageable debt pressure on the public and lower the asset market that holds the massive securitised value for the banking sector.
As I stated above it seems to me, however, that Godzilla has disrupted the RBA’s ability to achieve this balance. With such onerous private debt, how does the RBA raise interest rates to contain inflation without unleashing the beast on the economy? Conversely, how does it cut rates when the resources economy threatens to overheat?
The RBA itself does not appear to view it this way. It has a fairly benign view of Godzilla, arguing that much of the debt is within the households that can most most handle it. On any number of occasions, RBA boffins have argued that the debt is concentrated in high-income, older workers who can handle the repayments. The corollary, then, is that if push comes to shove on inflation, they can raise rates and despite some pain, the economy can take it.
But there is another way to view the debt Godzilla. That it is widespread, not least amongst the wave of first home buyers lured into the market by a reckless government, and that the banks who have fed the beast are sitting on very thin reserves of capital to keep it contained. No guesses for which view I subscribe to.
Recently I posted about the latest Dunn & Bradstreet report which told a very different story to the one you are hearing from the cheer squad.
One third of Australians expect to experience difficulties meeting their credit commitments over the next three months and nearly 40 per cent anticipate having to use their credit card to cover otherwise unaffordable expenses.
And yesterday, from news.com.au came this,
More than 1.1 million Australians were late paying their utility bills in the past three months as soaring electricity prices put pressure on household budgets.
“It’s a really worrying situation because there is clearly a growing group of people having difficulty with utility bills as the costs continue to rise and it doesn’t look as though things are going to get any easier,” said Chris Gration of Veda
The figures come from a survey by credit information agency Veda Advantage and show the number of customers who missed a payment in any given quarter has risen by 40 per cent in the past 12 months.
Average arrears on utility bills have hit a record $500, said credit and collections agency Dun & Bradstreet.
The figures have been described as bordering on a national crisis, and are likely to get worse. Pricing regulator IPART has already said that NSW customers will be slugged with an 18 per cent price rise from July 1.
Capital city home prices continued their downward slide in March, posting their worst slump in at least 12 years as the property market showed more signs of sagging demand. Brisbane and Perth fell the most.
Godzilla is angry.
This does not read like a private sector bathing in national wealth. It reads like a private sector struggling under the weight of debt and a falling housing market. The RBA may have the confidence to whack Godzilla with its mallet again, indeed it will probably need to. But the risk that Godzilla will run amok through the economy is rising with each new blow.