After the global financial crisis of 2008 the Australian government responded with a large fiscal stimulus.
Initially worth about $10 billion, it soon grew by $42 billion by February 2009. Out of this total about $21 billion came in the form of direct cash payments to households.
At the same time the RBA reduced the cash rate, which flowed through a decline in variable rate mortgages from nearly 9% to around 6%. That 3% interest saving on the balance of mortgages at the time was worth around $30 billion per year.
In total, we are looking at about $70 billion in total economic stimulus.
This scale of this stimulus effort was widely regarded to be appropriate for the circumstances of a large global macro cycle shock.
So how big has the 2020 stimulus spending for the global COVID shock to the economy been compared to this reference point?
Early estimates of the combined fiscal and monetary stimulus were around $180 billion, or about 2.5x larger than the 2008-09 Rudd stimulus.
On the fiscal side we have around $150 billion.
- Initial welfare boost = $18 billion
- JobSeeker and JobKeeper and second welfare boost = $66 billion
- Business cashflow boost = $32 billion
- Early super release = $35 billion
On the monetary side, we have again around $30 billion in annual interest savings to mortgage holders. We also have the RBA intervening to lower all sorts of interest rates across the board.
Just these items get us to nearly $200 billion, most of which came in the form of cash payments. In cash terms, rather than total value of government spending terms, the COVID stimulus measures are enormous.
Instead of $21 billion in cash payments we are looking at nearly $130 billion in cash payments.
Since there have been few spending options for all that extra income, the household savings rate has boomed. Households have spent $121 billion less than they earned so far this year. We can see just how much the income to households from stimulus spending has exceeded declines in incomes in the chart below. The orange bars are how much non-labour income, which includes government payments, contributed to growth in total household income. In short, disposable incomes are up massively and the main reason is the stimulus cash given to households. 
This out-sized stimulus package will have lasting effects throughout the next cycle. We have loaded up households with spending money. We have decreased the interest costs on their mortgages and encouraged them to borrow more money. We have turned off the immigration tap, meaning labour market demands can be more effectively channelled towards wage and salary growth.
To me, it seems obvious that the only thing that can happen is a massive economic surge coupled with rising asset prices. There is even a chance of a “surprise” rise in inflation.
All of this could be seen in advance. Back in May I argued that house prices are more likely to rise than fall, and that most people had under-estimated the scale of the stimulus.
Here’s an interview were I explained my reasoning.