Bugger the surplus. Households hate life without RBA insurance

MB often works with international hedge funds on the Aussie economy. I recall the reaction of one from the US when he discovered that, unlike US fixed rate mortgages, Australian mortgages are all floating rate. He declared immediately:

“Households must all pray for the next recession!”

Why? Because that meant cheaper repayments for the overwhelming majority, rising disposable income and an increase in living standards.

Westpac’s exceptional Red Book this month is a study into what happens when that RBA insurance policy is terminated by the zero bound for interest rates.

This is a very important lesson for fiscal authorities seeking to reboot household borrowing and house prices by holding back fiscal spending and forcing the cash rate as low as it can possibly go.

They have just come up against the structural hard limit in Aussie household leverage. The reassurance provided by a fiscal surplus is dwarfed by the ripping away of the RBA insurance policy, leaving households no choice but to bunker.

This will mean that although house prices rise for a time, the economic follow through will be much more muted than previous cycles, leaving the entire model struggling for breath and vulnerable to swift reversal.

― The Westpac–Melbourne Institute Consumer Sentiment Index fell 5.5% to 92.8 in Oct from 98.2 in Sep, marking the lowest read since Jul 2015.

― The fall comes despite a further 25bp cash rate cut from the RBA in Oct – the third since Jun taking the cash rate to a new historic low of 0.75%. The Index has fallen 8.4% since the easing cycle began.

― Concerns about what the very low level of rates is saying about the economy appear to be outweighing any rate cut sentiment boost. Some of the deterioration in sentiment likely also reflects global developments and domestic issues including: slow growth; a diminished pass through from the RBA cuts to key lending rates; the absence of more substantive fiscal stimulus; and persistent weakness in wages growth.
― All components have recorded material declines since mid-2019 but the biggest falls have been around expectations for family finances and the economy. The sub-group detail underscores the widespread nature of the deterioration since Jun with 95% of the sub-groups we monitor recording declines.

― Risk aversion has continued to ease slightly but remains at elevated levels. The Westpac Risk Aversion Index has edged down from a peak of 51 in Dec to 43 in Sep but is still well above the long run average of 14.7.

― CSI± our modified sentiment indicator that we favour as a guide to actual consumer spending, has seen a slightly milder decline but is very weak nonetheless, 16pts below its long run average and at an 8yr low consistent with outright falls in per capita consumer spending. While we continue to expect some uplift from recent policy measures, the signs from sentiment so far are not promising.

― Consumer attitudes towards major purchases have also seen a milder weakening, the ‘time to buy a major item’ index down only 4.4%yr and, at 114.5, still at a reasonably positive level overall. Spending on durables has been much weaker, with the biggest annual decline since the GFC. The combination suggests other factors such as budget pressures, tighter access to finance and risk aversion are over-riding sentiment when it comes to purchase decisions.

― Just over 16% of consumers reported receiving a payment, 69% reported no payment and 15% responded “don’t know”. The mix suggests a little over half of those eligible for a meaningful off set payment had received one by early Sep. However, the low raw fi gure – just 16% of consumers – is a reminder of how limited the scope of the measure is and, in turn, why off set payments seem to be generating little traction with wider consumer sentiment. Amongst those that had received a payment, 29% planned to spend it all, and a further 16% planned to spend over half. The remainder (53%) planned to spend less than half including around 25% who planned to save the full payment. The results point to about half of the tax off set payments being spent – slightly higher in NSW and WA and amongst the middle income group that is set to receive the bulk of the payments. That is towards the lower end of the range we considered in our initial impact assessment back in July. All up, the eff ect of the income boost appears to be a little smaller and may be coming through a little more slowly and diffusely than anticipated.

― The ‘time to buy a dwelling’ index has had a mixed few months, initially extending on its strong annual gain in Aug before posting a notable pull back in Sep-Oct. At 116.6, the Oct read is down 5.3% on Jul and a touch below the long run average of 119.7 but still up strongly on a year ago (+13.7%) and its mid-2017 low (+30%). The detail suggests affordability concerns may be creeping back into the frame in Sydney and Melbourne.
― The Westpac-Melbourne Institute Consumer House Price Expectations Index has continued to surge over the last 3mths, rising a further 16.6% to be up a spectacular 54.4% since May. At 138, the Index is at its highest level since May last year and well above the long run avg of 126.

― Despite the wider loss of confidence, consumer labour market expectations have seen little change. The WestpacMelbourne Institute Unemployment Expectations Index declined 1.9% over the three months to Oct, holding slightly above its long run average (recall that lower readings indicate that more consumers expect unemployment to fall in the year ahead). Even with a more stable few months, the index nationally has still deteriorated by 9% since the middle of the year, consistent with cooling labour market conditions.

It is the MB view that the consumer needs not just more fiscal spending, but an entirely new economic narrative that gives her hope that living standards can rise in the future via some mechanism other than falling interest rates which can go no further.

Josh Recessionberg has no idea what he is dealing with.

David Llewellyn-Smith
Latest posts by David Llewellyn-Smith (see all)


  1. A few people I’ve spoken to (hairdressers, physio, etc) have told me these opinions-
    – the RBA doesn’t slash interest rates because things are going well. Things must be going bad.
    – the last interest rates cuts made no difference to the size of the mortgage repayment
    – interest rates can really only go up from here.

    Very pessimistic.

    • Are the barbers afraid of being replaced by “skilled” immigrants on $10/hour?

      Are they worried that their kids will not be able to get a full time job because an unlimited number of foreign “students” are allowed to come here?

      • Didn’t ask… although my hairdresser has commented that the cheap migrant staffed hairdressers in the mall will be out of business long before he will, because of their poor quality. I think he’s right about that, though not every Legacy Australian salon would be so confident.

        • Cheap hairdressers in the mall are killing it.

          If you think people will keep paying $150 for a cut,colour and dry when they can get it for $80 your kidding yourself.

          Australians are the cheapest and the nastiest.

          There is a REASON cheap hair dressers are everywhere.

          • Leo,


            It must be your glorious curls. Does that include a perm?

            Rarely pay more than $20. $25 if feeling fancy.

          • F*ck… no wonder they’re going out of business… I do my ‘luscious curls’ (👨‍🦲) for the price of a Gill*tt* III head every 3 weeks. Have no intention to change. When I will finally lose my hair (mom’s half of the family has it in the genes) there won’t be anything to lose, because it was never there…

            Still …. $150 for a job…. eiighhh! Hell, even $80 is a lot.

            I guess I’m not one of ‘the beautiful ones’ …

          • +1 Ino. Bought a set of Wahl clippers 20+ years ago for about $100 bucks (4x haircuts worth). Paid for themselves many times over and still going strong. The Mrs is so adept now if I’m not in the mood for a straight out number one and it grows, she can even high fade it. Does the kids too. Love this tightrse, fire minimalist sh1t, to hell with the services economy!

          • Jumping jack flash

            The wifey spends almost $200 every few months on her hair. Easy.

            I get the $10 special from the migrant barber down the road who works out of their house. They offer massages too. Maybe not at the same time tho…

          • “The wifey spends almost $200 every few months on her hair. Easy.

            I get the $10 special from the migrant barber down the road who works out of their house.”

            Sounds like one of those gender discrimination/gap thingies.

        • I’ve been getting “Big Ethnic Barber” haircuts for the last few years and never really been happy. Got my last cut at a blokes hairdresser run by non-vibrant blokes, and my partner said it was the best cut I’ve ever had and it cost the same as having Mohammad and his crew do it….about $25 IIRC.

          • Back in the 80s, my “big ethnic barber” used to have Penthouse mags in the waiting area. He knew his (mainly highschool boy) audience. I was an insanely loyal customer.

        • Diogenes the CynicMEMBER

          My total hair spend for the year is $60 which is $10 every two months – I communicate in my basic Mandarin or in their broken English. My wife would spend double that on one haircut and definitely more if you include product.

        • Since becoming a pensioner, I have gone back to a Mullet.
          I may be 70, but if you’ve got it , flaunt it.
          Saves a bit on hair cuts too.

    • 10yr – 3mth spread has broken its downtrend line. Keep an eye out there for potential inflationary steepening. Rates INcreasing? No way ..

      ‘Not QE’ producing $60bn brand new digital dollars per month as Fed funds burgeoning gubbermint deficit.

      Only a matter of time before everyone’s doing it

    • proofreadersMEMBER

      ” – interest rates can really only go up from here.”

      Other than in an outright financial crisis, interest rates here are only headed in one direction – every central banker enjoys financial r.pe of savers to shore up the financial system and our RBA happy clappies are no different, but rather they have just prolonged the process?

    • I’m hearing similar things all around me A2 & in Goulburn – it’s becoming a preoccupation on whether to bunker or not & they’re even tossing things around with me now, as opposed to shaking their heads previously.

      At a BBQ on the weekend where most were PServants – there the preoccupation was early retirement & their exodus to the coast with their obscene super balances, & whether they could flip just one more house…. Also an amusing theme from a few who’ve already moved & are thinking of moving again as Canberrans (their own) have crowded ‘their’ new place out…… They couldn’t see that coming….?

        • No mate, sorry I’ve been buried in Algo’s & necessarily to the exclusion of most anything…… it’s been a steep curve, so trying to establish a confident base around 6th class before looking up. Some look pretty darn good till the forward test……. & then the fragility of curve fitting shows…..

      • That’s the one Colin

        I’m kinda hoping they will all have to sell their coast houses again in a decade when the lack of hospitals and services become an issue. Then I will “snap one up”! Gotta get a regular house in Canberra first though. Ain’t nobody paying me to fish and drink beer unfortunately.

        • They usually move just out of town & start telling the old neighbouring farmer what he should be doing……
          The new Hospital is just a Mess already! A lot of work is done via trips to Canberra or Melbourne – Typical rural issue of underresourced/underfunding/understaffing. Regarding timing, if it’s all go at the time, try & get in before the next herd is due to start snapping them up & rent it out till you’re ready to move. There’s a pattern of a usually small, fast frenzied window followed by a long plateau – they don’t seem to fall much, well so far…… although they were the Canary in the coal mine early 90’s – probably more investors/holiday homes at that time though….

  2. Risk aversion is up…. Joke right.
    unemployment expectations up slightly…… That’s going to be other people problem…

  3. I, you are now realising how well lower teh rates works.

    If it doesn’t works enough, just need to lower teh rates lowerer.

    Lowe is the right guy to have in charge for this. His promise to do negative interest rates the other week was awesome.

  4. “It is the MB view that the consumer needs not just more fiscal spending, but an entirely new economic narrative that gives her hope that living standards can rise in the future via some mechanism other than falling interest rates which can go no further.”

    Huh? How can Straya’s already bloated living standards rise any further without fundamental restructuring of the economy?

  5. How does fiscal spending benefit the man in the street unless his job is directly linked to the spending concerned?

    And if his job isn’t linked to the cash spigot surely all he has is a debt accruing in his name?

    Asking for a friend

    • I guess if enough cash is splashed for long enough, then some will dribble to everyone eventually…?

      But you’re implication is right: such splashes are never evenly distributed, not even close.

  6. Jumping jack flash

    “…the consumer needs not just more fiscal spending, but an entirely new economic narrative that gives her hope that living standards can rise in the future via some mechanism other than falling interest rates which can go no further.”

    Everyone has been fooled into believing that creating debt, attaching it to houses and then enjoying their price rise as a result of that debt is a productive undertaking but in actual fact it is anything but productive. Rising house prices due to the debt watered onto them then surely does create additional debt capacity, capital gains that can be “extracted” by using them to create more debt, and so on, and that debt is spent and everything looks awesome…

    The problem is that everyone forgets about the interest, and indeed we see the effect of this with plummeting cash rates – the only interest rate that can be controlled by the RBA, and the furthest removed to having any real effect on consumers, but it will do no good. The interest rates charged by the banks to those who owe the debt will never be zero. Not even close to zero, and that’s a huge problem because the more debt there is to keep the economy running, the more interest there will be.

    There must be interest, otherwise the banks would simply stop working.

    The interest must be extracted from actual productive activities in order to repay it. Using new debt to repay the interest on the last pile of debt is just not going to work. We need real productive activities that will earn the country additional money that can be used to repay the interest on the debt.

    This was the only solution to the great depression, and it will be the only solution now.

    “Josh Recessionberg has no idea what he is dealing with.”
    Not at all. Everyone is all “gently, gently” and “this time its different”, but it just isn’t.

    • “debt will never be zero.(%)”
      Surely, all that matters is the spread? As long as lenders can fund themselves at a net positive yield, then the game continues? ( If they borrow at minus 5% and lend at minus 1%, then the game goes on?)
      Why could interest rates go to minus 5%? Because the price that today’s money exerts will be better in the future ( eg: What $1 buys today 95 cents, or less, will buy when a term deposit of any length can buy at maturity)

      • Dammit I knew I’d eventually pay dearly for falling asleep during that negative integer lecture in first year uni.

      • Jumping jack flash

        yes.. but the effect of that is still actual money being taken out of the economy to repay the interest and the debt. It has to be taken from *somewhere* and debt doesn’t earn money, it consumes money, even if it takes it from savers.

        They’d surely love debt to earn money, but that’s the foundation of our economic system – debt must be repaid in full plus interest.

        just because they call it something else or put it into a different cell on the spreadsheet doesn’t change what it actually is.

        Well, that doesn’t mean negative interest rates can’t happen of course, but its very simple – its either a case of the debt earning interest (and extracting it from actual productive activities to repay to the banks), or the banks paying out interest on debt by taking it from savers, and then going broke as savers run on the banks, slowly at first and then faster and faster.

        • But at minus 1%, is there any interest payable? The idea, I guess is that : “No, there isn’t! Get as much debt as you can because you’ll not only have no interest to pay, but the principal outstanding will be eaten away as well” What that fails to note is that it will be ‘eaten away’ by deflationary forces and that continues what we have today – lower interest rate continuing to destroy the productive economy.

          • Jumping jack flash

            “What that fails to note is that it will be ‘eaten away’ by deflationary forces and that continues what we have today – lower interest rate continuing to destroy the productive economy.”

            There’s no magic pudding. The debt must be repaid with actual money. Money that banks can use.
            They’re only giving out the debt to make money from it, and that money needs to come from somewhere.

            If the banks aren’t earning their money through interest receipts, then how are they earning their money? Government handouts/taxes? Savers’ deposits?

            Will the final play in this game be a merger of banks and governments, where banks collect taxes instead of charging interest? It might as well be. Banks already run the economy, the task that a government should do.

            Who knows. But in order to keep this thing ticking over for any length of time into the future there’s going to need to be a lot more thought given than “lower the rates and open the gates” which seems to be the mantra du jour. (And has worked very well so far)

    • Yes, the ability to extract equity relies almost solely on someone else willing to go into debt to make it happen.

      So, um, a ponzi scheme then.

  7. It is the MB view that the consumer needs not just more fiscal spending, but an entirely new economic narrative that gives her hope that living standards can rise in the future via some mechanism other than falling interest rates which can go no further.


    • MB wants more fiscal spending and lower rates. Can we have a list of the resources farms and businesses we are planning to sell to foreigners to fund the inevitable consequences in the external account?

          • bolstroodMEMBER

            That seems to be what Scooty and Josh have in mind going on quotes intoday’s SMH.
            More deregulation, more Privatisation, Josh calls them “Strucural Reforms.”

          • SupernovaMEMBER

            Joshy and his mates great at transferring the wealth….especially on ZIRP/NIRP backed up by QE….that’s QE by another name. Structural reform in a deregulated financial financial system is legal stealth and if it fails socialise the losses by transferring them to the tax payer.

  8. The interest must be extracted from actual productive activities in order to repay it
    Why? genuine question
    What does Productivity have to do with debt repayment?
    And btw who said this debt would ever be repaid?
    Don’t get me wrong I understand the simplified model of any economy which would produce these conclusions, but we’re no longer operating our Economies or for that matter our Banking systems in this purely Mercantile manner.
    If all debts are created (backed by) by Asset prices than Asset prices must increase in lock step with the debt creation machine. If the true driver of our economy is Debt creation than we all understand what must happen to Asset prices. Productivity plays absolutely no role in this system as a matter of fact any attempt to ever repay the debt through Productivity would need to unwind this Debt/Asset insanity…..that’s not going happen willingly.

    • Diogenes the CynicMEMBER

      The alternative to debt being repaid is bankruptcy or debt jubilees. I would have thought debt jubilees would be investigated as an option as otherwise the system is headed for a crisis.

      • Diogenes
        Our debt is reflected in the external account where we owe money to foreigners. The debt jubilee thing is BS. We would still be faced with our foreign debt. The Jubilee, besides penalising the prudent and rewarding the profligate, would just result in setting consumers up for another spending spree and increased consumption which, in this economy, would mostly be spent on imports making the foreign debt even larger and requiring an even greater sell-off of assets to foreign control.
        P.S. The system is headed for an inevitable crisis that results from 60 years of misallocation of resources as a result of moronic economic thinking resulting in a self-entitled populace. There is NOTHING can be done that will avoid a crisis. The only question is do we face it or kick the can down the road to an ever bigger crisis.

    • Interest isn’t paid by more consumption. It has to be paid by the funds being invested wisely and producing more than the interest. That’s how a REAL economy works.
      The current model is that savings are not required so we just print money at negative RAT interest rates – money for nothing and chicks for free .In our economy this simply results in external debt which we cover by selling assets to foreigners.
      On a planet scale it amounts to an unlimited demand on finite resources and the earlier death of the planet

    • Jumping jack flash

      productivity MUST play a part.

      If you take the perspective that debt availability causes house prices to rise and that creates capital gain and equity then capital gain and equity is the “productivity” of that debt.

      But it is false productivity because the only way to realise that “productivity” is to use it to take on extra debt. Extra debt that requires repayment, plus more interest.

      Interest must be repaid. Banks don’t hand out debt for fun. They do it to make money. (Unless there’s a more attractive option to make money than interest receipts, maybe QE?)

      Don’t get me wrong, the new economy can go on for quite some time before it can’t anymore. (And that was the idea of this article, no?)

      But if we’re talking “simplified models” of economies, then the simplified model of the new economy is perpetual credit card debt – obtain a credit card, max it out by spending it all, then take on another, bigger one, to repay the first one. Then max that one out because you need to keep spending of course, and then take on yet another one that’s even bigger than the last to repay that one, and so on and so forth.

      • I’m a little lost.
        I don’t think anyone likes being forced to make this decision but it is the best pragmatic decision for many.
        Personally I have nothing but respect for anyone that makes the decision to deny a landlord specufestor rent.
        Denying them rental income (return on investment) is the best way possible to keep investors out of the residential housing market and return some sanity to the Sydney housing market.

  9. “Josh Recessionberg has no idea what he is dealing with.”

    To be fair, it doesn’t seem like we have treasurers who do.

    Joe Hockey
    Wayne Swan.
    Peter Costello.

    All 3 are dunces, I’m not sure it’s a coincidence.

  10. Guess Sir Frank and his boys must know Aussie retail and when is a good, no scotch that, great, time to get out