C’mon people, don’t you know the Reserve Bank of Australia has done enough?
The entire economy is resting on your shoulders.
All that matters is your actions.
Buy a house.
Scratch that. Don’t buy a house. That’s already the elephant in the room.
Free Reports:
Instead, start a business.
Take a loan.
Take some risk.
But for crying out loud, just do something debt driven, will you?
I know that’s an odd rant to start your weekend. But I reckon that’s really what RBA governor Glenn Stevens meant. He spoke at a parliamentary committee on Wednesday and he had one message for the crowd:
‘What I mean is we need more of the sort of so-called “animal spirit”, or confidence if you like, that is needed to support not just a repricing of the existing stock of assets, but the investment that adds to that stock of physical assets.’
The point Stevens is trying to make is that he wants more entrepreneurial risk taking place in our economy.
After all, the historically low interest rates haven’t spurred Australia into new business investments outside of mining.
But it doesn’t stop there. Stevens telling-off for not taking on more cheaper-than-your-Nana’s-day type of credit gets, well, weirder:
‘From my perspective our society is becoming too risk adverse…and we are not paying enough attention to return and we are paying too much attention to risk.
‘I come back to what set of arrangements and what set of conditions are going to give people who are the risk takers the right set of incentives and confidence to say “I’m going to take that risk, I’m going to get that cheap money and build that plant, the factory, the whatever, employ the people.”’
Instead of investing in new ventures, we’ve driven dividend paying stocks higher.
Rather than use debt productively, people have taken the low interest rate debt and stuck it into houses.
Monetary policy isn’t and shouldn’t be a driver of economic growth.
For too long, these interest rate illusionists have fooled themselves into thinking that’s all it takes. Fiddle the rates up and growth slows…tweak the rates down and things speed up again.
Greg Canavan, editor of Sound Money. Sound Investments. summed up Stevens’ take on the economy best this week:
‘Without going into too much detail, interest rates are too low for financial markets and too high for the real economy. But central bankers don’t like to see this. All they see is “accommodative” financial conditions, and then scratch their heads as the economy remains sluggish.
‘But I take [their] point…we are not taking a risk on developing new products, new industries or competing on a global stage.’
The problem the Reserve Bank of Australia don’t see is that they’ve already distorted the market. A small boardroom of suits mistakenly thought cheap credit was all the incentive people needed.
Will Stevens’ stern talking-to suddenly encourage banks to lend to risky start-up ventures with nothing more than a brilliant idea?
I doubt it.
There is something that worries me though.
If we aren’t taking the cheap cash and investing, who do you think will?
For reasons I don’t understand, politicians love numbers. And right now those numbers aren’t as rosy as they had been…you know, during that mining boom we had.
So if the Australian people won’t stimulate the economy, then who will? Chances are the number-loving pollies will step in.
The statement from Glenn Stevens this week proves again how fractured our economy has become.
We rely on credit driven growth. This means we must increase the debt to achieve what we did in the past.
It reminds me of what Richard Duncan said at our World War D conference in April this year.
Duncan said that was the answer: more government spending using cheap money.
First off, Duncan explained how the US landed themselves in over $50 trillion of debt in 43 years. Then he said the obvious. There’s nowhere to go from here. The horrible reality for America was credit driven growth.
In fact, credit must expand at 2% per year after inflation to avoid a recession.
In other words, credit in the US must expand by US$2.4 trillion per year to stop the economy falling over.
However, the private sector can’t take any more debt. But Duncan said the government can.
Rather than build bridges to nowhere and ‘pave the country roads’like they did in Japan, America should invest in tomorrow, he told the audience.
Duncan said the US government should take US$2.4 trillion and spend it on solar, biotech, and radical new technologies. New cutting tech edge. The sort of stuff that could lead to a new era for Americans.
Duncan’s idea is controversial for sure.
The point he was making was the reliance on debt to fuel the economy is the problem. Now, according to Duncan, it might be the only way to ‘fix it’. I have my doubts that the way to fix a debt problem is through more debt.
The RBA can try to encourage private enterprise to take on more debt. However, it only adds to the idea that economic expansion comes only from credit.
As Greg Canavan signed off this week, he noted this was our problem. ‘When combined with poor policy, over reliance on it will eventually run the economy into the ground.’
Shae Smith+
Editor, Money Weekend
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