RBA should cut – the paradox of thrift is killing the economy.

April 3, 2012

RBA and Interest Rates

I’m only going to be quick today because readers know my view – the Australian economy is structurally and fundamentally weaker than the aggregate numbers suggest.

It is a long term weakness born of the debt binge between 1995 and 2009 which is so evident in the chart above from the RBA’s march Financial Stability Review. The truth is that if Australian Households were a European Country there would be all sorts of hand wringing and fears of default.

But, while there may not be this type of concern from a market perspective Australians have recognised their interests lie in trying to reduce their debt and so are cutting back. Cutting back on borrowing, cutting back on overall discretionary spending and saving more. So even in an economy of perpetually rising incomes restraint and caution are the key words.

This is the key thing that the RBA and the pundits got wrong. They thought Australians would be happy to see their debt burden stabilise and then with rising incomes they would just start spending again.

I have been talking about the paradox of thrift / tragedy of the commons since this GFC first started in 2007/8. Some clients listened and cut their clothe accordingly while others preferred to listen to the RBA and the punditry lead them down a dark alley and are only now coming to terms with the generational change that is the avoidance of debt and all its impacts on the Australian economy.

So when I hear people say that there are signs of weakness emerging as I heard one pundit on the Radio say this morning I urge them to look away from their Bloomberg screen, walk off George Street’s or Collins Street and wander into the real economy.

The big news in the economy for the past year has been the mining boom and the meme that it will save us. The RBA writes about the structural change that is being wrought on the Australian economy as a result of this.

There is another structural change that is not getting enough air-play and it is just as important. Australian’s new structural avoidance and pay down of debt means that in an economy who’s growth has in a very large part been fuelled by the accumulation of debt in the past decade/s must over the years ahead have a lower level of endogenous demand.

The RBA should cut today – not to reignite housing and property. Not to save baby boomers and older X’s from their too heavy debt burden but to put a little more money in the pockets of households and hopefully have that money flow around the economy. We know some will go back in the mortgage or be saved but Australian business needs the money flowing in the economy.

It might even help let the Aussie Dollar fall back a little – we need it below parity and as soon as possible.

Have a great day

Gregory McKenna


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One Comment on “RBA should cut – the paradox of thrift is killing the economy.”

  1. tristencosgrove Says:

    Just lately I have noticed how many places I go to and people I listen to that are talking about debt and how to get out of it. Frugality and being debt free is the new badge of honour. (Debt for a good purpose that is under control and reducing excepted).

    Top post Greg.


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