Today’s Profit Watch begins with the obvious.
Australia’s weak point is the level of private debt in the financial system. It’s over 120% of GDP.
You know this. I know it. So does Bernard Salt.
The biggest component of Australia’s debt is linked to property.
That makes the policy response from the government obvious. Protect the property market at all costs!
The NSW government is proving this right now…
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Wobbling, shaking, about to fall, until…
Greetings from my writing cabin. The lockdown continues.
My four-year-old daughter hasn’t seen another kid her own age for over a month.
She sings the song from Frozen II repeatedly throughout the day.
I hate that movie.
Our baby, Luna, is oblivious to it all.
Melbourne is under a wave of grey clouds and rain. We might even see the coldest day in April since 1996.
2020 just keeps breaking records.
A writer’s cabin is as good a spot as any to watch the governments and centrals banks hold their rickety financial system together.
It reminds me of an episode of LegoMasters earlier in the week.
The contestants had to builder a tower that could withstand a floor that shook aggressively.
COVID-19 is shaking the foundations of the financial system the same way.
The idea of the LegoMasters episode was to crank up the violence of the shaking until the towers collapsed.
COVID-19 would do the same thing to the financial system.
Except there’s a force that comes into play to stem the wobbling: government spending and debt.
NSW gov reveals new strategy
Here’s a taste from the Sydney Morning Herald yesterday:
‘The Berejiklian government is considering a $500 million property spending spree, snapping up unsold apartments and fast-tracking construction as part of its coronavirus economic recovery plan.
‘A cabinet briefing paper, prepared by the government’s Land and Housing Corporation, says a “housing-focused stimulus package” would accelerate development and boost employment in NSW.’
Indeed. This is a logical response.
There’s also an absurdity to it all.
The reason we, as a society, have to be constantly building, buying, demolishing, rebuilding, shopping and consuming, is because we base the monetary system on debt.
And the economy breaks down if we all stop working and generating income to pay these debts.
A free market would likely wipe out a lot of this debt by millions going into default.
If millions can’t pay their mortgage, banks can’t pay their bondholders, either.
That would bankrupt them. It would wipe 20% off the Australian share market in a heartbeat.
No politician wants to preside over such a scenario. It was the same situation in 2008.
Different time, same playbook
Enter the central banks. They can print up as much funny money as they like.
They can, if they care to, buy bad debt off the banks and take it onto their own balance sheet.
The government can fiddle with the accounting rules so that bad debts don’t appear as bad as they otherwise would.
They can protect mortgage payers so they don’t go into default before crisis has run its course.
The government can run up the national debt to bail out industries, companies and even states.
And these strategies work.
That’s why they appear at times like these.
But what’s always left unsaid is that this was always designed to keep the unjust financial and economic system in place as it was and will remain.
There’s no natural law that says we should allow private, profit seeking banks the privilege of money creation.
Early colonial America used debt-free money to help create a new society. JFK tried to reintroduce this idea. Then came Dallas…
Or, if banks are to retain this right, we could demand they only use it in a way that enhances the social good.
Financing real estate speculators with interest only loans would not fall into this definition.
Encouraging society to treat housing as a ‘financial product’ does not help, either.
Why bring it up?
COVID-19 will likely prove a temporary aberration. Crises come and go.
They’re urgent and scary at the time.
Think like an investor. In two–five years, I’m sure the world will still be turning.
And then I’m sure I’ll still see lots of people loading up on mortgage debt to pyramid into the housing market on the assumption they can get rich without working.
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