Via Ian Verrender at the ABC:
We humans are a social lot. We just love being part of a pack, a member of a team.
We crave acceptance, to the point where isolation or banishment ranks among the worst forms of punishment.
Even when it comes to the dodgy art of forecasting, everyone seems to cluster around a central position, which kind of defeats the point of forecasting.
And so, in July two years ago, when the groundswell of opinion began to shift — that the Reserve Bank would be raising interest rates — arguing otherwise was a fairly lonely position.
As time went on, almost everyone shifted position as we dug in here, here and here.
To be fair, most of the highly paid, well-heeled professional market economists were being egged on by the authorities, and particularly the Reserve Bank, which was spinning the line that the next rate move was up.
In the past fortnight, however, the pack suddenly has turned on its tail as fears about the global economy and a sudden slowdown in our own growth forced a rethink. The switch to a rate cut has turned into a stampede.
Why rates won’t rise
Put aside all the complex formula. Forget the high-level macro-economic analysis. There’s a very simple reason the Reserve Bank couldn’t and can’t raise interest rates.
There’s too much debt.
Australian households are among the world’s most indebted when compared with their income. And we’ve spent most of it on real estate.
What these two graphs show is how the Reserve Bank, effectively, snookered itself. Back in 2012, when debt and housing prices already were elevated, it fired up the east coast housing market, and construction, to take up the employment slack as the mining boom unwound.
But it created a monster.
As housing went on a tear, the short-term sugar hit turned toxic. Employment took off. But housing became unaffordable to almost everyone under 35. And our household debt levels reached for the stars.
The end result? It couldn’t cut rates if it needed. That would add heat to a dangerously inflated housing bubble. And it could never raise rates, because that would kill household spending.
Household consumption makes up 60 per cent of GDP. Whack a rate rise on to debt-strained households and you’d be guaranteed to tip the economy into a deep recession. That’s a central banker’s worst nightmare.
Cheap cash and inequality
If it’s any consolation, our situation pales when compared with problems in the world’s biggest economies caused by easy cash and ultra-low interest rates. Central bankers across the developed world have painted themselves into a corner.
Decades of deregulation and trade shifts made the world a richer place. The riches, however, weren’t equally shared as heavy industry decamped to the developing world, leaving large communities underemployed and facing a bleak future.
Then came the global financial crisis. Vast amounts of cash was printed, conjured up from nowhere. It fired up debt levels among central banks, corporations and households. Rather than encourage investment or boost wages, however, it mostly helped the rich become even more wealthy.
In a paper delivered to the US National Bureau of Economic Research last month, Gabriel Zucman argued that wealth concentration has grown dramatically since the 1980s.
Back then, he estimated, the top 1 per cent of the population controlled between 25 and 30 per cent of the US wealth. By 2016, it had risen to 40 per cent.
It’s not just America.
“Evidence points towards a rise in global wealth concentration: for China, Europe and the United States combined, the top 1 per cent wealth share has increased from 28 per cent in 1980 to 33 per cent today, while the bottom 75 per cent hovered around 10 per cent,” he wrote.
The trend seems to be accelerating. And the driving force now is easy money. For those with assets — real estate, stocks and bonds — ultra low interest rates have been a bonanza. The cash flood has pushed asset prices into the stratosphere.
For those without, the dream of becoming self-made, or even owning a home, is increasingly elusive.
It wasn’t supposed to be this way. Zero per cent interest rates and trillions of dollars of cash injections were supposed to be a temporary fix, a massive jolt to the heart of capitalism to revive the global economy.
The problem is that no-one has figured out how to remove the medicine, how to unwind the stimulus without causing a major downturn and economic chaos.
The US Federal Reserve at least tried. Until late last year, it was determined to push rates higher before Wall Street began to melt down, threatening to plunge the economy back into recession.
Global rates are heading lower
Mario Draghi raised the white flag last week. The European Central Bank boss shelved his long-awaited plans to raise interest rates in an announcement that had the whiff of panic about it.
With Italy in recession and Germany barely avoiding one, growth in the Eurozone is the slowest in four years. Mr Draghi blamed the slowdown on forces beyond his control.
“We are aware that our decisions (new stimulus) certainly increase the resilience of the Eurozone economy, but actually, can they address these factors weighing on the Eurozone economy and the rest of the world?” he asked at an ECB press conference on Thursday.
“They cannot,” he answered.
China’s economy is stalling, hammered by the ongoing trade war with America. There are indications the US growth spurt has seen its best. And here at home, the latest GDP scorecard indicated our economy is not travelling at all well.
No surprises then that the Reserve Bank has dropped its insistence that the next rate move would be higher. Markets now are pencilling in two cuts this year.
Overjoyed stock traders dived in and the market enjoyed a stellar couple of trading sessions. When it comes to markets, bad news has become good again.
Politicians are promising, but not delivering
Low wages, job insecurity and a sense the game is rigged tends to quickly follow through to the political arena.
Voters across the developed world increasingly are shifting away from the centre and toward the extremes. Brexit, unrest within the European Union, the rise of Donald Trump and our own revolving door of prime ministers all bear witness to that.
That’s likely to persist and worsen for as long as the debt mountain grows and continues to prop up asset prices, as central bankers ponder just how to escape the mess.
At least it should make life easy for forecasters.
