Lunatic RBA “created a monster”

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 herehere 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.

Graph shows housing prices, red, and household debt, blue, former rising and falling, latter rising with time.

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.

Graph shows list of countries with inequality rising depending on wealth for poorest, middle, richest percentage of households.

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.

Comments

      • Join the rest of the world in banning cash so we can go NIRP. Maybe then we can hookup all payroll systems directly to the RBA so they can flip a switch and give everyone a 10% payrise every year.

        A minus 20% real interest rate will teach those pesky savers a lesson. How dare they destroy our economy by refusing to get into massive debt?

      • I do actually have a question – what are we going to pretend to compete on *anyway*? It’s not like we’re producing anything of value other than raw ore.

      • Ino – we compete on all those things that we invented and designed during our Innovation Revolution, but have been unable to manufacture domestically for export because our exchange rate was 0.75 instead of 0.65. That extra 15% was just killing us!

      • proofreadersMEMBER

        And a plus (?) of getting the rate down is that more savers can finish things off?

      • Ino,
        more foreign students and tourists from third world countries, and higher AUD profits for foreign owned mining companies. Chances of us becoming a manufacturing export superpower on the back of an AUD crash pretty near to zero.

      • Unfortunately, I think we need to torch the economy before we can regrow it. I still can’t see the lazy majority who are speculating types somehow develop a penchant for working hard, taking a risk and developing globally competitive businesses. Not without first spending some time on the cheeks of their behinds anyway.

  1. Yuh. Dropping them rates was the problem. Dropping them further can’t be the solution.

    It’s the same refrain that has been sung since at least 2008. And yet, and yet…. somehow this time, like each other time, is said to be different.

    “If we just lower the rates a bit more. Just this once. Just a little… then we are sure to get the benefits and not cop the costs.”

    You’ve gotta be kidding me!

    • Of course it can be. They didn’t do MP then stupidly. Now we have it and everything else toppling house prices. It would be twice as stupid to not cut rates now and get the bloody dollar down ASAP.

      Housing crahsnics are every bit as bad as housing spruikers.

      • Get the exchange rate down without cutting interest rates.

        I’m sure it can be done.

        Surely that would be way easier than cutting rates again and (1) hoping it will work {it won’t, because commodities} and (2) hoping to contain/prevent the debt-buildup-monster WHICH HAS NEVER BEEN DONE SUCCESSFULLY.

        P.S.: thanks for transferring me from the housing spruiker bucket to the crashnik bucket. It doesn’t smell as nice, but feels more comfortable.

      • “Housing crahsnics are every bit as bad as housing spruikers.”

        And AUD crashnics, what are they like? Providing unbiased commentary and opinion, or talking own book like the rest?

      • “Housing crahsnics are every bit as bad as housing spruikers.”

        hear, hear!

        An arrow to the heart of brenten and his ilk! (or more fittingly – a big pineapple up their prolapsed rectums)

      • Houses should of been “as safe as houses” instead of “pumped and dumped” like they have been. Steady inflation tracking returns with it being a store of value only. I don’t think a crash would be good for anyone – the prudent battler included. Even without debt people still need an income. The question in my mind is how do we (and the rest of the world for that matter) get ourselves out of this monetary mess?

  2. It’s nice to see this discussion entering into the mainstream. It’s a shame that it too little too late to create the pressure required for preventative measures to be used.

  3. When ir go up, many who think they are under the radar as debt slaves
    will be fully exposed as naked as the tide ebbs for the next 20 years
    they will lose their re investments and opportunities, lifestyle and family
    it is this fear which is driving the ir down brigade

  4. “the Reserve Bank, effectively, snookered itself Back in 2012, when debt and housing prices already were elevated”
    Indeed.
    Low interest rates have their place; for a short time in an emergency and WHEN the object of those rate cuts is specifically targeted at ameliorating the emergency – productive investment, in other words.
    To have ‘cut’ and ‘cut’ and simulated speculative fever to ‘get us out of the emergency’ was negligent.
    Negligent it was then and it will be now IF the objects of rate cuts are squandered on more malinvestment.
    But when you’re snookered I guess you play of any cushion you can find. And even if you hit the object ball you’re still likely to have handed advantage to the opposition.
    It’s all lose-lose from here….

    • To your comment above about ‘savers’:

      One of the unintended consequences of reducing savings rates to almost nil is that motivated savers save even MORE in nominal terms than they were beforehand because they feel like they’re swimming upstream. The corollary of that is that even less is spent in the economy so the economy (as measured by GDP, at least) suffers.

      Manipulate teh rates they (the RBA) said: that’ll fix the thing! Dumb as a box of hammers, every one …

      • Astute
        My call is that a dollar saved today, will buy the equivalent of 3 to 5 dollars worth in 3 to 5 years.
        Annualise that?

      • Not so sure, WW.
        Depends whether you’re backing inflation or deflation. While the present forces are deflationary, inflation must win to keep the current debt-based money system going.

        Not too much inflation, however. Too much = kaboom! Game over.

      • I save in precious metals. The polymer notes we use have their place too, they make a good snuff tube.

      • Even StevenMEMBER

        @Wiley

        That is an extraordinary prediction. No chance. At all. Stay on MB for the next 3-5 years. We’ll know the outcome within 2.

      • Dominic (Just a thought – not a prediction although I do think this is the most likely outcome)
        Ka-poom was Eric Janzen’s pet theory. First the will be deflation then massive inflation. He got the GFC right and we sort of did get inflation – in asset prices. I think he missed the fact that we can print money wildly and, as long as we ignore the Current account, that flood of money can actually result in lower inflation as more and more stuff is imported from cheap sources.
        We are going to print wildly in amounts heretofore unthought of. The first bout of inflation will be looked through – perhaps justifiably as this cannot be fixed with higher rates but they will be throwing petrol on the fire.
        WW’ might be right in REAL terms but not in nominal money which is what we deal with.

        (or he will be exactly right!):) We are walking a knife edge in my view – we go off one side or the other eventually.

  5. Load up on as much debt as possible, rates never going up, dont put debt into housing, too many costs,……when world debt collapses, you wont pay em back…as long as u have wage just accumulate gold the demand there will intensify in coming years as people/companies etc realize there’s no escaping the world debt and gold becomes wanted again…

      • Yes agree there, always said that as well but time is right now, reckon it was manipulated thro the GFC as CB’s and US panicked and thot people would lose faith in paper currencies, it shud have gone above $5k an ounce but was “mysteriously” held down….this time it wont be stopped…

  6. Meh, they’ll cut rates because they have too.

    1) austerity – remove regressive taxation policies and cut corporate welfare
    2) debt defaults/restructurings – wrap up bad debts in a Big Bank and Genworth; sacrificial lambs
    3) debt monetization/money printing – QE, rates to zero; AUD sub-50
    4) wealth transfers (i.e., from the haves to the have-nots) – allow shareholders to wear the losses, effectively tax the big end of town and/or restore wage pressures

      • Competition and profits (of any kind) ensure business in some form will fill the gap. Any corporation willing to give-up market share will merely be replaced, hopefully by a domestic business (I know…. an alien thought).

        Re: employment, those hits are coming either way.

    • The idea is that we can rebuild/repatriate some manufacturing. We have so much misallocated capital in this country, it would be nice to see some of it (what’s left) redirected to rebuilding the productive economy.

      Seems like a whole heap of economic nihilism in this thread. We’ve been handed a sh!t sandwich by past Governments/Central Bankers, now what do we do about it?

      • C.M.BurnsMEMBER

        okay, but that requires more than just lowering the AUD, either as the primary objective or as a welcome consequence of lowering official interest rates

        that requires broad and sweeping changes to Industry policy, wages policy, tax policy (how to incentivize R&D, investment), education/labor policy (re-training, what skills are needed in the workforce and what lead time do we need to develop them), etc etc

        this idea that lower AUD = increased manufacturing (given the earth has been leveled and the skills base salted) seemingly by magic is retarded

      • Exactly, all those things need to occur.

        A weak AUD is merely the fertile soil within which we can grow this new manufacturing base.

      • I actually think it goes to a more fundamental issue than that. What you’re referring to is a symptom, not the cause. Australians have ceased to understand that innovation and productivity at a global level are a prerequisite to sustainable prosperity. Over the past 20+ years, like clueless wastrels, we’ve allowed ourselves to be fooled into thinking that the growth in living standards delivered by a grotesquely inflating debt balloon is the same thing as prosperity. That’s why we could calmly put our industry to the torch when the rentiers told us to. Well now it’s done. And a delusion of perpetual motion needs to be wound back. That requires a kind of national “come to Jesus” moment that only a fiery crash can bring. It’s simply too painful to face the truth (ie. that the entire national narrative and self-image is a lie) unless it is rammed down one’s throat with extreme prejudice.

      • Jumping jack flash

        its going to take a lot of public debt to dig us out of this hole. Maybe it is impossible, but we don’t have a lot of options.

        You see, back in the 90’s we were sold, and we bought, the idea that public debt was bad. It was stupid, but it was the only thing the eyebrow man could come up with. So the governments in their quest to be “better economic managers” sold everything they owned to repay it.

        But the problem is that public debt isn’t bad, in fact it is the best debt to have. At least public debt is generally spent on useful things, even if they are usually infrastructure projects, the most glorious, yet least useful of all the useful things.

        So in order to make the “new economy” owned by profit-taking corporations work we still needed debt, so everyone “was forced” to get their own private stash of debt so they could live. Now we’ve reached the end of that party and all we have is a ton of useless shiny crap, a ton of debt, and not much else.

        So in order to get us out of the mess we need to employ something that works – government investment in the means of production to boost GNP, GDP and all the rest, to see whether we can repay this gargantuan pile of private debt somehow.

        The problem and its solution is not actually that hard, and it has been done before, very successfully. The trick, as with most things, is to not to go too crazy and try to take over the world.

      • St JacquesMEMBER

        CM Burns, so very, very well put. Manufacturing was hard to build in this country in the first place. And also we’ve got to change the whole supporting financial system so it favour productive over the usual FIRE favourites. But hardest of all is the poltical system and mietality it feeds on.

      • JJJ
        Investment to boost GDP will just make the actual debt situation worse. Government needs to invest in projects that boost exports or reduce imports. Instead it will reinforce our city FIRE parasites with huge infrastructure that boosts REAL debt even more. If they fund real beneficial infrastructure they will be immediately voted out. There is no way out.

    • I’m not a fan of lower AUD means repatriation of manufacturing etc. Once it’s gone, it’s generally gone for good, which is why Trump is whistling Dixie when he promises MAGA. When you lower your domestic currency you effectively make everyone poorer i.e. the income they earn doesn’t buy as much abroad and must, by definition, not buy as much at home either (esp. imports and of course oil impacts the price of virtually everything at home too).

      Sure, the dirt exporters may get a boost from a weaker currency for a while and the national accounts too (but only measured in domestic currency — strayan GDP measured in USD becomes a different issue).

      The best thing Govt can do is create an environment in which innovation and entrepreneurialism can thrive (must thrive). This necessarily involves: stable Govt (we have a new leader and/or Govt every 5 minutes, it seems), slashing red tape so that small business can get going quickly and not be bogged down by dotting i’s and crossing t’s, reforming tax policy to make innovation and small business investment an attractive avenue for capital and finally, (and extremely urgently) removing emergency monetary policy which simply encourages bubble activity and draws scarce and valuable capital away from productive endeavour.

      That list is not exhaustive — just off the top of my head. I don’t think there’s a lack of talent or intelligence here but conditions need to be right otherwise the talent will go start up elsewhere. Right now our governments are thinking short-term only: policy is centred on ‘How to keep the various ponzis / bubbles aloft’. Nothing more. At this point it will take a full blown crisis to engender material change — I can’t see change happening voluntarily at all.

  7. “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.”

    Hallelujah brother, yo finally cut tru de crap.

    • Even StevenMEMBER

      Why stop there? I predict All Ords at 500 points by next week. Why? Just because. Or maybe because I didn’t like like the way my coffee mug looked at me this morning.

    • Rates are at emergency levels but no one is talking about the why they are at emergency levels – even though its been 10 years since the GFC.

  8. Jumping jack flash

    “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.”

    Maybe, just maybe, finally, someone gets it.

    It is blindingly obvious what the problem is, and what the solution must be, but that won’t stop the bankers from dodging it at every opportunity to continue to peddle their poisoned debt to us, and convince us we are all banks, and their debt is actually good for us – it makes us rich and healthy and strong, all that other nonsense they tell us and we happily believe.

    • TailorTrashMEMBER

      Read that quotation from Mr Verender ( who at least makes an effort to present thought out pieces ) and thought someone had plagersied Houses and Holes ………..
      Hat tip lads ( HH and UCE ) …the chaps picking up a regular salary are starting to echo you……..it took some time but it’s lovely to see ……..

    • “It is blindingly obvious what the problem is, and what the solution must be” – What’s the solution JJF? The problem is easy to understand; the solution well there’s been a variety suggested. None of them great IMO.

  9. the pace of debt has accelerated as the inherent value of money has depreciated, now we need more debt to justify high prices for everything. Shit is retarded, we’re in the upside down!

  10. I know how to fix this.

    1: A new visa, the subclass 666 Nüberstart visa. Capped at 950k per year, indexed to increase
    at the same rate that hydroponic skunk grows. Applicants must be on Newstart AND be driving Über with 1 day of arrival.

    2: Grocery code of conduct. Because it is awesome.

    3: See number 1, but bring in family and friends.

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