Share on Facebook Share on Twitter Share on Reddit + - Australia’s FIRE economy burns By Leith van Onselen in Australian Economyat 7:07 am on February 27, 2012 | 38 comments Login to access MacroBusiness Members special reports. If you are not a member, sign up here. Please fill in the following form to login Username: Password: or Please fill in the following form to subscribe * Username * Email * Password About Latest Posts Leith van OnselenLeith van Onselen is Chief Economist at the MB Fund and MB Super. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs. Latest posts by Leith van Onselen (see all) Weekend Reading 11-12 July 2020 - July 11, 2020 Westpac: Looming downside risks for US economy - July 10, 2020 Victorian Treasurer unveils $6b emergency stimulus package - July 10, 2020 Share on Facebook Share on Twitter Share on Reddit + - YOU MAY ALSO BE INTERESTED INVictorian Treasurer unveils $6b emergency stimulus packageVictoria has received a grim economic forecast asCOVID-19 a "middle-class disaster"Middle-class professionals in inner-city suburbsMelbourne's COVID-19 infections explodeMelbourne's COVID-19 infections have turned intoTAFE: the forgotten victim in higher education warOver recent weeks, we have witnessed incessant Comments Terry McFadgen February 27, 2012 at 7:25 am Dead right and on the button.So it’s all our chips on China isnt it?(gulp) LBSMEMBER February 27, 2012 at 7:38 am Very much so Terry McFadgen. Years down the road we will look back at the time period and wonder why did your govt put all their eggs in one basket. JPKMEMBER February 27, 2012 at 11:44 am I am stating the obvious here but since we are not the only nation betting on China’s demand for resources there is a lot of new supply coming in over the next few years. Even if China doesn’t crash land it seems rather unlikely that they can maintain the level of demand that we witnessed when they stimulated their economy through fixed asset investment. Once our mining investment boom slows down it will not be followed with an equal mining export boom. In short the risks to the resource part of our economy are to the downside. Rusty Penny February 27, 2012 at 11:47 am A: Because it was easy. 3d1k February 27, 2012 at 1:58 pm and there was no alternative. Lori February 27, 2012 at 7:57 am It is very strange and make me wonder what kind of economists and politicians we have. I have a friend, who is an water engineer in a consulting industry and he was talking about those problems since 2001 and he is not an economist, he doesn’t have any idea of macroeconomics, but all his predictions and views about the economy turned out to be very true. What an irony indeed. coolnik February 27, 2012 at 8:34 am Lori: “It is very strange and make me wonder what kind of economists and politicians we have.” Ignorant, opportunists and short-sighted. Just like the rest of the population. The Prince February 27, 2012 at 8:36 am An element of truth in that harshness coolnik. Ignorance and apathy (I don’t know and I don’t care) seem to be a popular pastime for Aussies. As does confusing Big Brother with politics. coolnik February 27, 2012 at 9:11 am True. I despair: when are we going to learn to stop blaming pollies, economists, xyz (insert whatever you like here) for what ails us and realize that we truly deserve what we get. The BurbWatcherMEMBER February 27, 2012 at 10:29 am Agreed. Stop blaming them quite so much (still systemic issues!!), and put the spotlight back on to us that chooses our values, what will we and won’t do, will and won’t spend on, etc, etc. At the end of the day, if we don’t swallow the pill, we didn’t take the medicine. Anton February 27, 2012 at 2:26 pm The average voter, or ‘punter’ as the pollies like to call us, cannot change the system. The power of the political parties is too great and they have the money behind them. To change would I feel need something like a revolution and at present there is not reason to revolt as long as the system gives us bread and circuses. And boy what a circus we have just had. No its the pollies that have and are causing the problems and there is nothing we can do. JacksonMEMBER February 27, 2012 at 2:15 pm No irony at all, we’re bloody smart people! Good looking too. Seriously, there is a certain level of pragmatism required to ensure that when you turn on the tap, (a) water comes out and (b) it doesn’t breach the 400+ chemical quality guidelines. I’d never hire any of these jokers, I can’t afford people to be wrong, especially when it’s consistent. winanga February 27, 2012 at 9:13 am Great article, thank you. Could somebody please give the definition of the household savings rate? Does it include forced superannuation deposits, home loan repayments, etc? Are there any more detailed data points (savings rate by age group, state, etc) published? GB February 27, 2012 at 10:31 am ABS definition household saving ratio: “the ratio of household net saving to household net disposable income. household net saving is calculated as household net diposable income less household final consumptioon expenditure. household net disposable income is calculated as household gross disposable income less household consumtion of fixed capital” in other words, it is whats reffered to as a “risidual item” in the national accounts. due to the inputs can have several different meanings. i.e are people really saving or are they paying down debt? both would show up as an increase in the savings ratio. very good post UE, cheers, DrBob127MEMBER February 27, 2012 at 1:33 pm That’s right GB, To say that is measures ‘savings’ is not true, what is being measured is how much income is not being spent on consumption. Which as you say could either be savings or paying down debt. Special Ed February 27, 2012 at 6:26 pm This really makes me sick to say that we are saving using paying down debt as the metric. Paying down debt is reducing money we owe to someone else. Debt is simply money we have spent that is not ours to begin with. Or can I clasify a line of credit i havn’t spent as savings. Maybe I’m too simplistic? flawse February 28, 2012 at 10:11 pm The savings rate of itself is not really much of a measure. Indicator maybe. If the Govt is running a bigger deficit than the household sector previously did then we are not saving anything. Marcomarco February 27, 2012 at 10:14 am I welcome anything which weakens industries based on shuffling paper around and extracting wealth from the many for the few. The FIRE is just that- it has become the engine when it should be the caboose at best. jgmellMEMBER February 27, 2012 at 12:03 pm Well said Marco. We need these guys in our economy but they are not and never will be the engine of the economy. Somebody has to create real wealth, not just clip tickets. velocity February 27, 2012 at 4:29 pm Agreed, they are supposed to lubricate the economic engine, not fuel it. 3d1k February 27, 2012 at 10:15 am Good post. Echoes my own long held concerns in regard to the rise and rise of the FIRE sector and my equally long held belief that it was a by-product of the momentous growth and ease of credit experienced by developed economies, alas not really underpinned by anything! Emperor’s New Clothes. Also of interest – rise of the FIRE sector has been accompanied by decline in other more traditional sectors such as manufacturing. All that good advice by the FIRE sector as to economies of scale and promotion of cheaper input costs encouraging relocation to countries that could provide just that. After all, no FIRE sector kid was every going to work in a factory – we’re the Clever Country now! In a globalised world. But as I posted elsewhere today, even the FIRE sector cannot escape the independent force of internationalisation… As to those that despair of the position now apparently materialising, why – we’ve all enjoyed the ride. Very few have voiced concerns over the years I have been interested in this transition to the FIRE sector, such is life. Transition to something other will be inevitable. psyke777 February 27, 2012 at 10:24 am Bankcard came out in 1972. From that point people saved less and less. We have now reached the point where we have (generally speaking) run out of spare money and credit. Add in dome GFC1 and 2 fears. March 20 can’t come soon enough. Will Greece exit the Euro, will they default? Add in energy costs price rises (peak time electricity cost 9.7c about 10 years ago, now costs 40c) Each time oil spikes the world economy ends up in recession since about the 1980s. Throw in the US/Israel-Iran conflict. Not to mention rising demand and falling supply. There are many good reasons to be a saver and hunker down at this time. Unconventional Economist February 27, 2012 at 10:40 am “There are many good reasons to be a saver and hunker down at this time.” Except that the world’s governments are hell bent on financial repression whereby savers are punished by low/negative real interest rates. Otherwise, I agree with your sentiments. cyrusp February 27, 2012 at 11:24 am You’re not forced to save in fiat. You can always opt for a hard currency like gold or silver. Of course it’s probably only a matter of time before governments start confiscating gold. Rusty Penny February 27, 2012 at 11:50 am You’re not forced to save in fiat. You can always opt for a hard currency like gold or silver. So save via a speculative vehicle? Isn’t one of the central tentants of money that it contains a degree of trust? I think that trust should be maintained. cyrusp February 27, 2012 at 2:16 pm Maybe it’s time people realised that fiat is also speculative. Especially when banks are able to create money out of thin air. flawse February 28, 2012 at 10:23 pm RP Yes! But the trust is being destroyed and it is a process that will accelerate to a blinding speed over the next few years. GB February 27, 2012 at 12:23 pm savers arent being punished UE, they dont need or deserve higher interest rates. there is so much spare capacity is why interest rates are so low and due to this inflation is not a problem and in many things there has been considerable price deflation so why do savers need higher interest rates? if people want to save in a low interest rates environment at the bottom of the cycle then that is their choice. its not punishment. flawse February 28, 2012 at 10:27 pm UE was correct. Interest rates are low because we are trying to save economies by printing more and more money to create lower and lower interest rates. Even if this generates a turnaround in our economies it will not generate any change. We will just amplify the problems this policy has already caused. It has nothing to do with spare capacity. It’s due to peop[le who believe that economics can defy reality and all we have to do to correct fundamental changes in the whole world is print a few more Australian dollars…we just change the rules a bit…fixes everything!!!! I keep wondering why it doesn’t occur to you to ever ask ‘So why hasn’t it been successful so far?’ velocity February 27, 2012 at 4:36 pm Perhaps UE, but at least the low/negative real interest can be more or less calculated and anticipated so you know where you stand – unlike other investment vehicles such as shares, property, commodities. Comedian Will Rogers’ advice: “I’m more concerned about the return OF my money than the return ON my money.” flawse February 28, 2012 at 10:31 pm You’re assuming low inflation velocity…which is NOT part of the future. It will accelerate and accelerate all the time with lagging negative RAT rates. No one will pull the depression lever. Inflation targeting will be forcibly removed from CB’s charter. Everything descends into mayhem. It’s just a mater of ‘how bad?’ The BurbWatcherMEMBER February 27, 2012 at 10:27 am “As an aside, the first chart above also looks curiously familiar to the below chart tracking the growth of house prices against rents. Cooincidence?” Indexed chart of exactly those series together would be smashing, Leith! Diogenes the CynicMEMBER February 27, 2012 at 11:21 am If we have a severe recession then that savings rate could well go higher than 10% try 20-30%. Templeton used to say that you should say half your income and only spend the other half – that is depression era thinking. Velociraptor February 27, 2012 at 3:24 pm Great Post. FIRE and Retail underpinning the economy, go Australia!! Time to toll out the 1973 XB GT Ford Falcon Coupe (Black and Supercharged). velocity February 27, 2012 at 4:37 pm I always chuckle that it’s called FIRE. Isn’t fire something that kids are always taught to never play with since it’s dangerous, unpredictable and capable of rapid and extreme destruction? 3d1k February 27, 2012 at 4:40 pm Great observation! flawse February 28, 2012 at 10:32 pm ‘extreme destruction’? Nah! Complete destruction Explorer February 27, 2012 at 6:03 pm Steve Keen has done a lot of work on the impact of debt growth on house prices and some of the US sites have done a lot of work on consumer sales and house prices. Steve talks about the mortgage pulse, but maybe the household debt pulse or credit card pulse is even more/just as relevant. If our house prices fall, or their is a bust somewhere else like Canada, then we can expect even more saving and lower retail sales, even if rates fall. Formerly long term employed workers (as opposed to new entrants who might be considered never employed full time or for only a short time) are more likely to have mortgages and be unable to pay them if retrenched. Those who can move their families back in with parents who haven’t downsized might be able to rent their home to cover the mortgage until they are reemployed. Those that don’t have supportive family or friends will be stuffed. Rarely has full time employment growth YOY been as flat as the last few months without tipping into recession. While low employing resources project might keep us out of a GDP recession, I believe we are about 50/50 for an employment recession in Sydney and Melbourne. I hope Julia and Swanee have some public hospital renewal/relocation projects mapped out with the NSW and Vic governments in areas where there is likely to be increased unemployment in the construction industry given the falling trend in approvals (even worse in real terms with even more impact on employment if there has been any improvement in productivity over the last 5 years).