This article has economists warning the RBA against going further with lowered interest rates. And it's pretty weird because the underlying assumption seems to be that eventually interest rates will head back to what have been historic averages.
Merrill Lynch senior economist Alex Joiner said that households who take on too much debt in the low rate environment could be caught out once rates rise.
"Inevitably rates will move back to a more normal level and that is when we see the debt servicing ratio-income used to service debt, moving higher - households they will be much more sensitive to upward moves in interest rates," said Dr Joiner.
Mr Montgomery noted in a website post on independent publishing service, Cuffelinks, that eventually "the price of those assets (stocks and property) will be pushed way too high," said "After that, a large number of investors will, sadly, suffer financially again – from buying too late and paying too much."Basically, they're worried about asset bubbles. They're the same economists who weren't worried that property market was bubbling, not that long ago. It is true that if you borrow money and buy high in an asset class, you stand to lose a lot of money when prices go down (like, duh). Yet it doesn't seem like that is what is fuelling the ASX; it's the yield of the shares that, even at 3%, sit higher than the 2.6% offered on term deposits. I'm sure the elderly with their nest eggs would rather not be there, but they're forced to be there for the yield. If the RBA cuts rates some more, it's not going to change that calculation. The point at which they had to take that risk came a long while back; way back when the RBA and these economists were busy denying there was a bubble in property.
Go Figure that one out! They suddenly noticed everything is looking a bit peaky rather than say, rosy?
The problem is that in the long term, we are likely headed for a ZIRP regime in Australia because once the mining boom is truly finished and run its course, and commodity prices fall to historic norms - which is more inevitable than interest rates in Australia - then we won't have an economy worth investing in, which will reflect itself in the low to zero interest rates. ZIRP is - in extremis - the capitalist end game where winner takes all. This is what is not understood by this current Federal Government, which is quickly losing revenue and unable to make the cuts it wants to make on ideological grounds and not on practical grounds (and won't compromise either, which is an even worse story).
Yes, in theory a lot of people would be in trouble if they borrowed money and thought interest rates would never go back up to say, 6-7%. but we haven't had the kind of economy to justify 6-7% interest rates since when Kevin Rudd was PM the first time around. we'd love that kind of economy compared to the post-GFC "new normal". Worse still, the RBA is never going to raise interest rates just to scare off speculative investors when it thinks it needs to cut to stimulate the economy. I mean, when has that ever happened? If it's true the RBA won't be raising interest rates to scare off speculators, then it's only going to raise the rates if the figures are genuinely looking like the economy is overheating. For that to happen, unemployment needs to drop to under 5%. Again, that hasn't happened since Kevin Rudd was PM the first time around, and it would be a nice problem to have.
You can only conclude these economists have got it ass-backwards. The Bust - the mining bust that follows the boom - has already set in. The economy is sliding downwards in growth and facing deflation. The Federal Government is crazy, clueless and crap. Industries are closing or declining and unemployment is rising. Older people have been forced to stick their term deposit nest eggs into shares (for dividends) and property (to collect the rent in cash) - the only two ways that pay better than the term deposits. Credit can hardly expand any more. China can't buy any more because they've crashed against the debt limit too. For various reasons the economy is already in much worse situation than say, even 2 years ago when Julia Gillard was still fending off Kevin Rudd the second time around.
The markets might look bullish today, but it's against a stark backdrop of a long term secular bear market. Nobody is getting out unhurt; but for the older generation, they have to be in it just to pay their way in retirement. In that scheme of things, cutting the interest rate again is hardly the problem. The real problem is that we have a boatload of problems and this Fe'ral government hasn't go a plan except tax the poor and punish the poor and spread the misery amongst the poor.
Importing Delfation
Nobody really talks about it much but you can get some amazing things at Daiso. Yes, the chain store that sells Japanese designed generic stuff for $2.80 each. From kitchen utensils to handkerchiefs to pens to hammers, they sell all kinds of things for $2.80 each. And it's not all crap; in fact far from it.
I bought a kitchen knife from Daiso about 3years ago and it sees daily use. I compare it to the $25 (pre-GST I might add, English steel with 25year guarantee) thing I bought in the mid-90s and have to report that the Daiso knife is probably even more useful as the day-to-day kitchen knife. Forget the hundred dollar Global knife, this thing rocks. So essentially the kitchen knife cost has dropped 90%, if you're willing to use a Daiso knife. Bowls, ditto. Plastic containers, the same. Crystal glass wine glasses, handkerchiefs, LED torches, glass jars, the list goes on and on. Unless you're hooked on branding for your goods, you can outfit a house on $2.80 stuff from Daiso and get decent use value. Heck, I even got a pair of ebony chopsticks. Ebony! For $2.80!
Which all goes to show how much produced goods have been commodified. True, one can show off with one's Global knife set but everything one paid above $2.80 is suddenly suspect as marginal value. Yes, the Global is sharper and more durable. Yet I can sharpen the Daiso knife and when its edge is totally spent I can go get another one for $2.80. The value added on the Global knife has got stiff competition if all one does is slice vegetables, peel some fruit and cut up bits of meat. Getting value out of the value added in the Global knife is going to take serious skill and dedication. Which is fine if you're a chef, but I'm just not one of those guys.
They haven't yet started selling electric guitars at Daiso, but even electric guitars have collapsed in price thanks to manufacturing in South Korea, China, Indonesia and Vietnam. You can get an archtop for $500. Think about that, and the price tag on a Gibson ES-175 (around AUD$5500) and you can see it's 90% down. They're building cars in India to be sold for $2000.00. They're still crap but it won't be long before they perfect it and it would be road-worthy here, and suddenly it would be 90% down on the Toyota or Ford or GM offering. Eventually you'll get a choice of a branded car with all kinds of extras or something for 10th of the price that gets you from A to B and not much style. It's not that far into the future, and it's going to kill branding.
So deflation for goods is everywhere thanks to globalisation. It's pulverised our manufacturing sector in Australia. It's going pulverise a lot more. When I go out on weekends I see lots of people shopping furiously. But if they're buying bargain goods in huge quantities, I can see how retail would be having a difficult time, trying to grow profits. Margins would be flattering and you'd have sell a truckload of stuff before you made good profits. But that's just a problem for today and tomorrow.
Here's what I can't figure out. What happens if China crashes, and the excess capacity for production dries up? Would that wind up the Globalised market in such a way as to deny us these cheap goods? If so would inflation suddenly kick in? It may well do. Or maybe China with all its state interventions never crashes, in which case everything is just going to keep deflating. That just doesn't seem feasible though, does it? Can we really have a world economy that produces more and more for less and less profit? In any case, I watch the Daiso effect of deflation with a certain amount of trepidation. The picture it paints about the globalised world of paper slim margins is quite frightening.
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