Burying the hawks

Bill Evans of Westpac has certainly thrown a spanner into the interest rate debate. The papers all went nuts over the weekend, leading with stories of imminent rate cuts and there are more stories today of an ensuing housing boom. Meanwhile, pretty much every interest rate commentator in the country disagreed with him. Over the weekend Michael Pascoe reasoned that:

The European sovereign debt problem will be with us for years, as will dopey American economic policy and politics. Yet the key fundamentals for our economy remain on track – and by ”our economy” I mean Asia.

The drive of a few billion people to industrialise and urbanise to obtain greater prosperity isn’t going away. In the immediate future, that means continuing strong demand for bulk commodities, pushing hundreds of billions of extra dollars into the Australian economy. To get at those commodities, extra scores of billions of dollars are being poured into capital investment. That’s not about to suddenly change – spare me the usual chorus of China bears who like to focus on small problems within that bigger picture.

It’s that bigger picture that the Reserve Bank focuses on. For all the gyrations of consumer confidence, the RBA concentrates on the money: more people, more people in work, more people in work earning more money. There is a certain inevitability about the outcome that goes beyond present scary headlines.

Yes, the RBA has pulled back from the very bullish forecast it made in early May that Australia’s GDP would grow by more than 4 per cent this calendar year, but it’s only retreated to ”trend or higher” – meaning we’re still going to do better than we have averaged. That’s a nice thought.

Leading bullhawk, Chris Joye, described Evan’s call as “brave” and tweeted that anyone calling for a rate cut is a ” bloody nancy”. Fellow feathered bovine, Adam Carr this morning joined the the attack under the heading “rate cut madness”:

Consumer spending is running either at, or just above, trend and that’s with low confidence and rates that are mildly restrictive. Business investment has picked up strongly, as the RBA noted, and the services sector is strong while the unemployment rate is low. Both mining and agriculture are booming. Outside of lending, there are no signs the economy is weak. And we are having this conversation against the backdrop of some serious domestic and global disasters.

Most people don’t disagree that the service sector (80 per cent of the economy), mining, agriculture and investment are strong. Where people seem to be confused is in relation to the consumer.

The RBA hasn’t done itself any favours in this whole process. Some of the language they have used has only fanned the flames of fear. The idea that consumers are more cautious, while technically correct, has become synonymous with ‘weakness’. That’s the problem, they are different – but the whole debate has become skewed.

As I recall, it was Adam Carr that argued that the natural disasters would boost growth. Now, apparently, they’re the problem.

I’ve no issue with the insults. It helps spice up economic debate, which can get too dry for popular consumption otherwise. And, it’s understandable that bullhawks are upset. After all, Bill did agree with them in May (very briefly) before abandoning their persistently wrong outlook  in favour of the weak data flow (just as the RBA did).

So, let’s revisit Bill Evans rate call and see if he is the mincing crazy  that these commentaries would have us think:

Reasons for our rate view

The current period is being marked by financial turmoil in Europe where prospects of negative fallout to the real world economy are rising. Credit spreads have already begun to increase with,in the case of southern European banks, spreads now exceedingthe peaks during the global financial crisis. I recently visited fund managers and central banks in Europe and could not find anyone who expected the current crisis to be resolved without an extended period of financial market turmoil.

European Financial Risks

Fear within the financial system in Europe around the exposuresof counterparties are adversely affecting liquidity and look set tointensify. Sovereign defaults/major restructuring are likely to bethe only credible ‘solution’ for the weakest countries with theseevents triggering major losses for the European banks. The sizeand incidence of these losses will also be unclear but those banksexpected to be most exposed are likely to find credit more andmore scarce, imposing credit crunches across Europe.

Given the international nature of the European banking system,this may spread to other financial systems. Our view is that thedegree of international deleveraging that could be undertaken inthis scenario is less than what was seen in the 2008/09 episode,but it would still be material. We note that foreign commercialbanks, presumably mostly European, are holding unusually largeliquid positions in the US system. International banking claims onemerging Asia have recovered to pre-crisis levels. So there is capitalout there to repatriate heighting contagon risks. The spectre of2008 provides an ongoing concern for businesses globally.

The catalyst for the first rate cut is likely to be associated withthese European convulsions but further cuts will be driven by the combined negative impact of European events on confidence and specific domestic issues.

This is a nice piece of forensic analysis. Identifying the likely contagion effects of a European default, which I agree is inevitable. Back to Bill:

The Fragile Consumer

The consumer is of particular concern domestically. Previous rate cut cycles were at least partly associated with a weakening consumer. In the 1996/97 period the Westpac-Melbourne Institute Index of Consumer Sentiment averaged around 103 with slumping dwelling approvals and ‘post-recession fragility’ adding to the casefor cuts. In the early months of the 2001 cycle the Index averaged 91, with slumping dwelling approvals again adding to the case for cuts.

The Index averaged 88 during the 2008/09 period, a disastrouslevel by historical standards. The Index has been weak for sometime,particularly respondents’ views on the state of their ownfinances. In July the Index fell to 92.8 with consumer views onthe outlook for their own financial position sustained at extremelyweak levels only recorded on three previous occasions – during therecessions of the early 1980s and early 1990s and in mid 2008.

We do not expect to see a strong bounce-back in confidence in the immediate future.

Quite right. As I’ve said many times, we are not in the midst of a consumer meltdown, but we are in a structural shift toward greater savings that has caused an historic flattening in real growth in retail sales. Bill doesn’t mention the offset in higher mining investment, which is why the RBA has raised rates to the point where consumer confidence is suffering and marks this cycle out as different, but he comes to that later in the paper. Back to Bill:

Revised Growth Forecasts

Our research is now pointing to a much weaker profile for consumerspending than had been envisaged in the past.Where as previous easing cycles had been associated with major collapses in housing and business investment the key driver inthis cycle is likely to be an excessively weak consumer.

We have lowered our growth profile for consumer spending in 2011 from2.6% to 1.2% and for 2012 from 2.8% to 2%. With some associateddampening of housing and investment plans (outside mining) growthin domestic demand has been revised down from 3.8% to 2.5% in2011 and from 4.5% to 2.7% in 2012.

The unemployment rate is expected to rise from 4.9% in June 2011to 5.5-5.75% through 2012.

Sounds reasonable enough to me. All of the 4% or so growth forecasts of the  past year by Treasury, the RBA and private banks have proved way over-confident. As I asked recently, if rates are crushing the consumer at this current level, how can anyone be predicting a bounce back in spending in the next year? Back to Bill:

Fiscal Policy

Fiscal policy and house prices are also playing key roles in thisexpected slowdown.The Federal Government is planning to tighten policy around 3.5%of GDP over the fiscal years 2011/12 and 2012/13.

A capping of expenditure growth by the states also points to reduced support from other levels of government.

Concerns about the introduction of a price on carbon havecontributed to the recent slide in consumer confidence. The June sentiment survey included additional questions on news recallthat showed a sharp spike in ‘taxation’ issues only matched in thepast by the mining tax debate in 2010 and the GST introduction in1999-2000. In all three episodes news on tax was viewed as a big negative.

Current concerns on this front might subside. However, the experience of the GST suggests that is unlikely. According to our sentiment survey at the time, anxiety remained high for the whole year leading up to the GST introduction in July 2000 and concerns lingered throughout the rest of that year. With the carbon price notdue to be introduced until July next year it is likely to remain a drag on confidence for some time yet.

Also fair enough to me and to my mind matches the conditions we are seeing in the services economy. And that is a lot of fiscal tightening. Back to Bill:

Deleveraging of the Household Sector

Meanwhile we believe the economy is also going through a structural deleveraging by the household sector that makes consumer demand more susceptible to weakness. Whilst deleveraging is probably a long term desirable development forthe economy its short term impact on activity and employmentcontinues to be a significant drag. We have already seen the household savings rate rise to 10%, significantly underminingconsumer demand.

Although growth in consumer spending has been positive, and only marginally below its long run trend rate in the year to March, it has been lacklustre by historical standards. That is especially so giventhe weak spending in 2008 and 2009 and the backdrop of verystrong disposable income and population growth. These last two supports are now fading with employment growth moderating and migration inflows down sharply.

Despite the patchier income picture, there is a risk that consumers are becoming even more intent on restraining spending/lifting saving. Global financial turmoil will be reviving unpleasant memoriesof the 2008 financial crisis. Our consumer survey also shows households are becoming progressively more nervous about prospects for house prices. Housing is the major component of household wealth. Fears about falling wealth are likely to spurfurther increases in the savings rate. That will further undermine consumer spending with a more significant bottom line impact onspending growth due to the weaker income backdrop.

While we see the major drag on growth working through consumer spending and the household sector, spill-over effects on business investment and housing are inevitable. That is already apparent insurveys of investment intentions where growth is restricted to the booming mining sector.

Overall we would argue that for the interest sensitive parts of theeconomy – households and housing in particular – interest ratesare now too high. The Reserve Bank has indicated that the ‘neutral’cash rate is thought to be around 4.5%, with current rates seen as “mildly restrictive”.

However, you only really know where neutral is when you are there. Our assessment of the impact of rates on confidence, housing activity, credit growth, and (non mining) investment spending plans is that we are most definitely not at neutral and that the real neutral rate is likely to be significantly further below the 4.5% suggested bythe Bank.

A cumulative cut of 100bps will only move rates marginally into the stimulatory zone.

Given the Reserve Bank’s most recent set of inflation forecastshow could one possibly forecast rate cuts? Recall that the Bank indicated in May that if market forecasts for rates were correct (which at the time envisaged a rate hike nine months into the future) then the Bank would breach its inflation target by 2013. On that thinking isn’t it folly to forecast that the Bank would consider cutting rates?

However the Bank’s concerns were based around a much stronger growth profile for the Australian economy than we now envisage. The RBA Governor already noted in the statement accompanyingthe RBA Board’s July decision that “… growth through 2011 is now unlikely to be as strong as earlier forecast.” With time we expect the Bank will move towards growth expectations much closer to our own and with that allay its concerns about a blow-out in inflation.

And here we come to it. The truth that no bullhawk can face. Congratulations to Bill Evans for being the first mainstream economist to recognise the simple truth that Australian households are not immune to the symptoms of peak debt in Western economies. Of course, whilst some Australian households may be deleveraging, the nation as a whole has not yet begun to deleverage. Rather, we are disleveraging. Debt is still growing but at much lower than historic rates. And therein lies the risk, as Bill says, with another external shock there is a grave danger that will accelerate. Back to Bill:

Unemployment

Along with inflation forecasts the outlook for the unemployment rate is critical to any policy decisions. The RBA’s medium term tightening bias rests on the concern that we are already at full employment and the mining boom will drive the unemployment rate down to 4.25% by 2013.

Our forecast is that the unemployment rate is heading towards5.5–5.75% through 2012.

The dynamics of the economy over the course of the remainder of 2011 and 2012 will be dominated by the key channel of falling consumer confidence and global financial turmoil spilling over to business confidence which lowers investment and employment intentions leading to a fall in employment growth and an increase in the unemployment rate. In turn this rise in the unemployment rate feeds back to consumer confidence and spending, further impacting businesses’ employment decisions.

The Reserve Bank has made it clear that it welcomes softer activity in the household/housing sector to create capacity for the mining boom. We assert that it will see that it is ‘over- achieving’ given that consumer spending and housing investment represent around 60% of economic activity while mining investment is around 4%. In turn, the mining sector represents around 2% of total employment with, possibly, a further 5% benefitting indirectly through construction and business services to the mining sector.

Sectors of the economy where business confidence is weak are large employers – retail and wholesale (15%); manufacturing (9%);non-mining related construction (9%) and finance (4%). Severe cutbacks in these sectors cannot be adequately compensated by mining and associated services. In particular the links to the restof the economy from the boost to national incomes from the terms of trade are muted when governments; households and firms are saving rather than spending and investing.

The turning point in the labour market may have already been reached. A range of lead indicators, notably job ads and the Westpac Melbourne Institute Index of Unemployment Expectations are now turning.

In the last two months Westpac’s Index of Unemployment Expectations has surged by 24.9% – the last time we saw such a rise was immediately after the Lehman Brothers collapse in 2008. For now the level of the Index is still consistent with enough jobs growth to hold the unemployment rate steady but the sharp turn in the trend, which is consistent with our priors, is a significant signal. For policy, the two month shift is one that is from a position historically associated with ‘stable to modest tightening policy’ to one that is more consistent with a moderate easing.

This is all consistent with the data. In trend terms, employment growth has peaked. Outside of mining, capex is already showing considerable weakness too.

I have noted a muted stabilisation in credit aggregates over the past month. The shocks associated with the floods and Japan are passing. However, the stabilisation is at historically very low levels. If the RBA is confronted with no further shocks, I think it likely the economy will limp along and might eventually require another rate hike in 2012.

However, crucially, as Bill Evans notes, that is not what is in prospect. Another round of global instability and the consumer will bunker down further and the housing melt accelerate (as I noted earlier in the year in Disleveraging and shocks). In that scenario, it is eminently sensible to predict rate cuts and the scenario is eminently plausible.

If there is a risk to this outlook, it is the Fed and another round of QE earlier rather than later. That would send another inflationary shock through global commodities and make it very difficult for the RBA.

Bill Evans has muscled up with a fair dinkum scenario analysis of economic prospects. Those criticising his outlook have been wrong all year. They’re still wrong.

Houses and Holes
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Comments

  1. FrankieFourFingers

    The Money Markets were suggesting an interest rate cut more than one week before the Westpac article came out.

    I don’t like how these “experts” echo existing market sentiments and claim them as their “own” predictions.

    • FrankieFourFingers

      The money markets are volatile for small movements. The shift from predicting multiple rate rises to multiple rate cuts has not happened since the GFC.

      I say again, the “expert” has simply echoed what the Money Markets have already been predicting.

      Just waiting for someone from CommSec to “boldly” make the same prediction and claim it as their own.

  2. I wonder how much of Evans turnaround is because he has just ‘realised’ what is really going on in the Oz economy and how much of it is caused by a realisation that the public’s concerns about rising rates was killing their mortgage business.

    I also find it annoying that he can change tune so quickly without explaining why he has done such as massive about face. Nothing that has happened in past few months was really that unpredicatble…so he cant really blame his change on some unforeseen event

    • Wasted Opportunities

      I think you could be right Stavros, the truth is starting to sink in and some of these commentators seem to be looking elsewhere for explanations. Another case of “macrobation?”

      H&H’s point about disleverging is spot on. It ties in with Keen’s credit impulse theory that is disleveraging turns to deleveraging things will continue to get worse.

      Also is it just me, or has bank advertising increased in volume and in desperation of tone over the last few weeks? The recent efforts by ANZ (Simon Baker wtf?) and Westpac (“leave those money issues up to us”) in particular are horrendous, from a pretty low base to begin with.

      • May I say that I reckon those Simon Baker ads are completely out of step with the environment. I mean, in this ongoing GFC environment, why would you talk up your spirit of innovation and modern saviour faire?

        Wouldn’t ‘we’re solid, you can trust us’ work better?

        • Agreed…I though the NAB ad was horrible too though, and it won awards and apprently was succesful in capturing market share.

          The CBA ads (where they continue hiring incompetant advertising firms from the USA) was also strange, as it seems to suggest they waste their profits paying for wasteful ads…not what I am looking for a bank

    • “it is caused by a realisation that the public’s concerns about rising rates was killing their mortgage business.”

      Spot on. But someone should ask Bill if Westpac plans to pass on any rate cuts to their customers.

      Also, Bill has let the caged RE monkeys out. This may have the unintended consequence of forcing the RBA to act, instead of merely scare-mongering about an impending rate rise.

    • agreed. no coincidence evans makes this about face just after publishing WBC sentiment surveys. WBC know exactly whats going on. they know no one is lending from them, they know their borrowers are defaulting at record rates, they know the house prices that they hold as “security” are tumbling, they know SME’s are going to the wall in huge numbers. Im surpised its taken them this long to come out and state the obvious.

      • Fair enough HnH, but Steve Keen was the only economist to pick the direction of rates at the beggining of 2011. If he was wrong in 2008 due to Government intereference, it seems he is the one people should be turning to now…not the chief economist of a bank neck deep in dodgy mortgages.

        I do like thought that Evans has the guts to go solo on this, as that Craig James is apparently clinging to his idea that proeprty is just about to make a comeback…hold on, its coming, any minute now!!

        • The mind boggles at the crass ignorance of someone that can write something as patently biased as this.

          Where to begin on context, duration or intent of “forecasts” or predictions, especially macro ones which is where Steve Keen tends towards?

          Actually, why bother, you are clearly too ignorant to get it.

          • Um, this comment was directed at Jimbo Jones regarding his comemnts on Steve Keen which now appears to have been deleted.

            I am very of the same view as Bill Evans so maybe you should delete my original too to avoid confusion.

        • Birdy Num Nums

          The difference b/w steven keen and a toilet is a toilet actually adds value to scoiety.

          The similarity between you and a toilet is what you are both full of.

  3. Good article HnH, thanks.

    And good on you Bill for sticking your neck out, and saying what you think.

    Flat and then down, pulled into the vortex that is a slowing housing market (ie. that which has most significantly and structurally defined the Australian economy for ~20 years).

    Structural changes indeed.

    My 2c

  4. BullHawks will ignore all data and even poke fun at RBA for cutting rates and will probably say something on the lines of “If we were the RBA , we would have raised”.

    It could potentially be that the some sectors of the economy are using Westpac and Robert Gottleibesen in trying to jawbone the RBA into reducing rates. I mean look at what Gotti remarked in 2009 at the peak of FHOG induced boom

    http://www.businessspectator.com.au/bs.nsf/Article/house-prices-RBA-interest-rates-hike-pd20091104-XFQY5?OpenDocument

    “Then a few days later Meriton chief and the largest owner and developer of apartments in Sydney, Harry Triguboff, emailed me and others with a startling conclusion – higher interest rates are more likely to put long term dwelling prices up rather than down (Rate raises may backfire, November 2)”

    Now he is running the tape the other way, that high interest rates are killing the housing sector.

  5. If there is weakness, it is in the credit numbers.

    Lending to business has been stagnant for many months now and in May was still 11.4% below it’s pre-GFC peak. Meanwhile, consumer credit is also basically flat. Taking credit card debt, for example, to the the extent it is growing at all, it is because of accumulating interest on existing credit rather than any sign of vibrant new spending. In fact, spending on credit cards is falling in real terms.

    At the same time, household savings rates are in a vertical climb, enabling banks to pay down their external (foreign) liabilities at a quite rapid clip.

    These are the kind of things you expect to happen when an indebted population collectively decides it has to reduce its liabilities and the risks that excessive debt poses to household welfare.

    So we have an economy that is growing largely on the strength of external demand rather than debt creation. These are large adjustments in behaviour and will probably last for a protracted period. Intuitively, they make a lot of sense.

    At the same time, the debt service: household income ratio is not at a particularly high level, so interest rates by themselves are not likely to be at levels that cause distress to household budgets.

    That is, the current level of interest rates are not likely to induce an economic contraction, but they are clearly helping to re-balance the economy by steering income growth into savings/debt reduction and away from consumption.

    In this context, you would have to think the RBA is still much more likely to hold rates rather than cut them. The task of re-balancing the Australian economy is by no means complete, and as long as external demand remains buoyant, the RBA is likely to maintain its “mildly restrictive” stance.

    It all adds up to more of the same.

      • Yes, compared with a 20-30 year time-frame, the debt-service:income ratio is high. But it is in the range that has applied in last 5-6 years. I guess it shows that eventually the absolute level of debt and the task implied in paying it off affects people’s state of mind.

  6. I agree. But Bill Evans has assumed another external shock, which will push housing and consumption towards a disorderly weakness. If that happens, the RBA will cut. As I said in the post, without this, yes, it’s more of the same.

  7. As word-pictured
    Evansdance on the ‘Inside of Lending’ see’s Bullhawks close to a Hungry Bear..
    in a Hibernation of their supports..

    Thanks H&H ..JR

  8. If the recent media reports of mortgage rate discounts are true, then there’s a defacto monetary easing underway now, albeit a slight one. With the number of refinancing loans growing substantially over the last 2 ABS reported months it would seem that there are enough good deals around to keep the remaining mortgage brokers busy. But it does seem that there’s an acceptance by Westpac at least that current mortgage rates are “tight” as far as demand is concerned. Maybe this projection of falling rates matches Westpac’s need to keep the loan books growing, and a fear that the RBA may be too focused on the FutureBoom to ignore the Banks’, sorry, households’ financial pain? Or is it a shot over the RBA’s bow to let them know that a rate hike this year would strike too strong a blow to the Big 4’s profits?

    My impression is that the RBA still wants to tighten, and was hoping that punters would have been borrowing more to purchase in expectation of their imminent future wealth. Obviously the Carbon Tax is a bit less Future than the FutureBoom and therefore influencing consumer sentiment much more (even though its a year away). I can’t see any way the Bullhawks won’t continue to be surprised and disappointed as the year goes on.

    I thought it was interesting that in a Channel 10 report on this report that Bill Evans call that rates would fall meant he was “an optimist”, and Craig James was therefore by default a pessimist! The MSM eh?

  9. As I said on a previous post, a cut has been my position since January – my conclusion was based simply on the sectoral balances.

    This of course includes the external sector which is tightening their expenditure (when they should be spending) and the classical interest rate rise to contain inflation in most of the BRICs. All these things are driving demand down and our government’s de facto austerity by aiming for a surplus isn’t helping either.

    A Current Account Surplus might save us but I doubt it.

    • No cut.

      Bill Evans and Westpac made a fantastic PR ploy last Friday. Make the papers all weekend with words many punters want to hear. Low rates + Westpac!! PR and marketing genius!

      Inflation in NZ just hit a 21 yr high. Welcome to the world of de=leveraging. Inflation and wealth destruction.

      RBA will not be able to drop rates, as inflation starts to move up.

        • S&P 500 and Euro Indices will be at new highs by year end.

          Bull market is not yet finished.

          News similar to last year.

        • I agree they will cut…but if Euro blows up due to defaults, then the cost of funding alone will sky rocket and this could require a Government bail out of the banks (Big 4). This Government has shown that they are interventionists and if the Banks are going down, then we will have nationalised banking sector by 2013 and Steve Keen will be Chairman of the RBA ; )

          on a serious note…

          I think what is being revealed by the Bullhawk commentators going all over the place in recent times, is that they realise ANYTHING could happen (potentially very bad) over the next 6 months. The idea that the 2008 financial crisis has ended is now dismissed as total crap and there has never been such uncertainty. The ability of Governments to delay the reckoing has passed and the decisions now will all cause pain.

          The world is so loaded with debt that cannot be paid back, how it all unfolds is impossible to determine – it will be decided by politicians and voters…or rioting citizens

          Keep at Macro Business bloggers, this site is part of a movement against the established media powers that have allowed this credit crisis to form and failed to ask the hard questions. It is not too dramatic to say that the nation benefits greatly from your ability to get more and more readers by producing good and fair analysis

    • Hmm…I thought if any Liberal Party leader was going to post under the name of Sidelined it would have been Malcolm…

  10. The RBA could reduce rates 200bps and it would make SFA difference to the highly leveraged part of the market.

    The problem is debt, too much of it. It is in Bill’s dreams that they would reduce 100bps to his defined stimulatory level. The RBA does not want to stimulate, it wants to contain and is doing so effectively. And should continue to do so. That consumers are not splurging is not a bad thing, as Cameron Murray said retailers need to get smarter and refine their operations to pull through what is likely to be an extended shift in expenditure patterns. Spending of the past decade or so is unlikely to return, so much of it enabled by the credit/wealth effect of ever increasing property values.

    Banks fear it, retailers hate it and the consumer is practicing it. Restraint. Preferable to austerity.

    Most indicators to date are soft. Apart from financial catastrophe elsewhere, RBA should hold (I still have the view they would not be averse to a 25bps raise). A reduction in rates now would be of small benefit to consumers, but possibly of proportionately bigger benefit to the banks. I think there may be more than a little corporate self-interest in Bill’s view.

    Fallout from a credit bubble collapse:

    “Compare that with what gets left behind after a credit bubble bursts: No physical infrastructure, innovations or research breakthroughs; just soul-crushing, economy-sapping debt. And not just regular old balance-sheet obligations, but huge piles of counterproductive consumer and government liabilities.

    Credit bubbles produce the exact opposite of productive resources. Deleveragers — those folks formerly known as consumers — spend the next decade paying down these obligations, rather than buying additional goods and services. And heavily indebted state and local governments are similarly thrifty, adding further pressure to the post-crisis economy.”
    http://www.ritholtz.com/blog/2011/07/wapo-column-wall-street-economists-have-this-recovery-all-wrong/

  11. I can understand why Westpac might want to drop rates as counter to defaults at the expense of profits. I’m not sure what their default rate is, but if things get tougher with rising living costs then more will face mortgage and other debt stress.

    Given the big four have a sizeable wholesale foreign borrowings, what will the news in the WSJ or ZH do to interest rates if that all unravels?? Likewise if the US has a similar problem, then I doubt if wholesale rates will drop.

    If this is all true and I don’t doubt the WSJ, but it will add to the sovereign debt problems, and just who is going to buy corporate debt at a low rate given all the impending risk??

    http://online.wsj.com/article/SB10001424052702303661904576452253786898470.html

    http://www.zerohedge.com/article/true-elephant-room-appears-trillions-commercial-and-retail-loans-europes-insolvent-countries

  12. consumer spending and housing investment represent around 60% of economic activity while mining investment is around 4%

    Doesn’t that say it all?

    • Yep – massive debt splurge on consumer items and housing – now it’s time for the productive sector to shine. Only 4% and of such significance to the nation! Extraordinary. Gotta love it.

      • Nonsense Fanboy. Four percent is four percent, and its an even smaller share of the employment market. All it brings us is high interest rates and an uncompetitive exchange rate.

        Bill goes on…

        Sectors of the economy where business confidence is weak are large employers – retail and wholesale (15%); manufacturing (9%);non-mining related construction (9%) and finance (4%). Severe cutbacks in these sectors cannot be adequately compensated by mining and associated services.

        There it it in black & white. Mining cannot compensate for the slowdown in the wider economy.

        The RBA is killing the economy so mining can prosper. The big miners borrow overseas anyway FCOL!

        Spread the word: Miners get rich while you struggle.

        • Birdy Num Nums

          …by which I mean you are sounding very much like Adam Carr does re: interest rates.

          Miners getting rich. Can’t have that. Lets switch to communism — or the modern day equivalent — watermelonism

        • Truth is a lot of the other sectors were in for a tight time anyway – remember – the credit party is over, the consumer is not spending. So the difficulties many are in would have happened regardless – even to some extent in tourism and education (beset with crises of its own making).

          Treasury and RBA have conceded that there is going to be pain, many businesses may end – that is a natural part of any business cycle.

          Miners take risks, invest huge sums and deserve every penny of profit they make.

          • Yeah whatever Fanboy. At every opportunity you place 100% of the blame on the “credit party”. Now even tourist operators and educators. You think the rapid appreciation of the AUD hasn’t had an impact? That’s a stretch even for you.

            Birdy Num Nums: Miners reap a one-off bonanza from resources that belong to all Australians. We should tax the bejesus out of them, because we’re gonna need the cash when China implodes.

          • Lorax, I do put the bulk of the downturn due the end of the credit party – happened elsewhere (eg US, UK, Ireland) largely because of that – why not here? We’re lucky as we have the natural comparative advantage of resources.

            Rapid appreciation of the dollar has had impact, think of what we’d be paying for petrol right now if the dollar was at 70 cents – and those costs would flow-on at every turn – inflation would be unleashed.

            Why tax the bejeezus out of one sector only – minerals are the province of the States and the States receive royalties. I have long been a proponent of a SWF but we’ve missed the boat, aint gonna happen. And you reckon any taxes would be saved – no way, Julia has to fund her over-compensation of the carbon tax from somewhere. No money from any form of MRRT will be ‘saved’ – anyway Shorten is confident of the powers of superannuation – there’s your ‘savings’.

          • I should add that Montgomery Burns/Breaking Bad have thrown a spanner or two into my SWF thinking!

          • Birdy Num Nums

            I should add that Montgomery Burns/Breaking Bad have thrown a spanner or two into my SWF thinking!

            I’m Birdy Num Nums this week. 🙂

            …And until someone can show me how a SWF can be funded in a country that runs a current account deficit I think it just doesn’t add up.

          • Damn – you’ve done it again!

            BTW Birdy, never did hear anymore on the questionable Treasury modelling…

          • Birdy Num Nums

            Nope. Adam Smith from memory implied he was waiting on additional holes to be exposed before commenting further and the coyote hasn’t gone there yet.

            Haven’t heard anything in the media, but exposing these flaws would require them to do some analysis — not part of their standard repertoire. How about the 12 mill advertising to “explain” it to us. Frak have you seen the ads! And will sit and and make daisy chains in my living room.

          • Well, Lefty, with a name like that what do I expect!

            What do you think the RBA should be doing then. I have asked Lorax this before when he comes out with his simple ‘miners are bad/evil/greedy/deserve no profit….whatever’ spiel – he has yet to offer some concrete suggestions, perhaps you would care to?

            Cheers.

          • I was agreeing with Lorax’s comment via the 4% issue – ming can shine all it likes but it will be a truly extrordinary day if it ever generates enough employment to make up for a serious slump in non-mining areas.

          • Fair enough – you quite right – mining employment levels are tiny in comparison – construction related employment is substantial but for limited periods.

            Nonetheless, we are still close to full employment and some way from historically average unemployment levels and as all economies are experience cyclical change it would not be unexpected to move to higher rates of unemployment, unfortunate definitely, unanticipated, no.

          • Jumping jack flash

            You can’t believe the unemployment figures. An hour a week means employed?

            More people on DSP than unemployment benefits.

            Nope, 5% is ridiculous. That % will be maintained even during the strongest downturn because of two reasons:

            Employers will keep staff on but reduce shift times. DJs have a huge % of their employees as part time. Doing this would have no effect on the rate.

            As people are laid off, long term unemployed are churned onto DSP. Doing this means it has no effect on the rate.

            5% unemployment forever until the country goes broke.

          • If employers en masse reduce the income of employees/consumers with widespread cuts in working hours, the impact on demand would invariabley cause unemployment to start rising though I would presume JJF.

  13. the americans have tried rate cuts and it didnt do anything for anyone except banks. unless people want to borrow, which they dont because they have borrowed for 3 lifetimes, you cannot get the money to the general population without helicopter drops which will only create higher inflation then come back to square 1. the problem is debt, if i cannot service my current debt how can i borrow more???
    unless of course i wanted to bankrupt myself.

    • Jumping jack flash

      Couldn’t have said it better.

      If low rates are the key to prosperity why not set at 0 and sit back and enjoy the never ending boom?

      Once that appetite for debt flies out the window everyone realises they don’t need everything today. They also realise that debt repayments are an anvil around your neck, sucking a huge percentage of your income each month that lasts long after the shine of the item bought with debt fades.

  14. Bill has some, shall I say, slightly odd ways of referring to economic measures.

    From his quoted comments:

    “We assert that it will see that it is ‘over- achieving’ given that consumer spending and housing investment represent around 60% of economic activity while mining investment is around 4%”

    “Economic activity” is an ill-defined term but is generally taken to mean GDP (or similar) but Bill appears to equate economic activity to investment which is quite unusual.

    Mining (based on the latest industry gross value added data, from ABS Cat No. 5606 for June 2011) is around 9% of “economic activity” (GDP) as it is popularly conceived. I’m still not sure what Bill is actually referring to, it’s as if he’s conflating two entirely different concepts but people are jumping all over the figures to say mining is tiny.

    The fact is at 9% of GDP (ie GDP is comprised of ‘added value’, that’s what it is and therefore is measured using gross value added) is quite substantial and constitutes the second largest single industry contributor to GSP after financial services.

  15. +1 to everyone pointing at the high levels of debt as being the main culprit of the malaise. 0.25% interest rates aren’t the answer either. Just ask Japan how that worked out.

    Anecdote – Bloke at my work (same pay as me) spends one days pay on fuel and tolls and four days on mortgage repayments. The 5 hours OT that he does is “his” money. Thankfully his wife has a full time job and that is used to pay the bills and put food on the table. This guy is so stressed it’s not funny and the stress is putting enormous pressure on his marriage. Me? I have zero debt and bank/save approx. 50% of my take home pay.

  16. Whether the Mining Industry is 4% or 9% doesn’t matter much for the sake of the argument. We can conclude that it is a small part of the economy if everything is measured by GDP.
    A better question would be ‘What would GDP be if there was no mining industry?’ Our GDP would be lot more than 4 or 9% lower that’s sure.
    As has been widely recognised here much of our GDP relies, not on production, but on increasing debt.

    As to the mining industry Lorax writes
    ‘Miners reap a one-off bonanza from resources that belong to all Australians. We should tax the bejesus out of them,’

    Australians have preferred to over-consume rather than invest for the last 50 years. We happily sold off our mining industry to finance a profligate life style. We dressed it up in terms of ‘Capital Inflow’ or some such rubbish. It was simply profligate indulgence that we had to finance somehow. This proposed solution now is to confiscate the private ownership. Great!!! I must say that seems to be a trend spreading through our society and economic system. ‘What’s mine is mine but, if you have something I don’t well, that has to be mine too’

    The mining industry is not causing the over-valuation of the A$. It is our willingness to happily sell off our mining and manufacturing and farms combined with a money printing all over the world that ends up washing up on our shores as a result of interest rates and a perception based on our natural resources per head of population.

    You want a lower A$? STOP the ‘Capital Inflow’ BS, RAISE domestic interest rates, start SAVING not just deleveraging, and start buying back our own country in a way that still respects the right to private property. Yes! Capital Outflow!

    As to SWF’s. Yes!!! You CANNOT have one without a Current Account Surplus. When we do have one, rather than invest in other countries, we should try to buy back some of our own mines, factories and farms hat we have so recklessly sold off over the last 50 years.

  17. As to whether the RBA should lower interest rates there is a massive disconnect between what WILL happen and what SHOULD happen.