Sharemarket boom with money surplus Printing US dollars
If that’s what a slowing economy does, bring it on.
Think property is hot? Shares have been doing even better.
While median property prices have been climbing 8 per cent or better in some places, the sharemarket has returned about 25 per cent in the past year if you count dividends, and even more with the 30 per cent tax credit from franking.
This when the economy was deteriorating.
Not that you want to look a gift horse in the mouth but you’d have to wonder how long this twin boom can last.
Nor has that stopped incomes growing, either. ‘‘The net worth of Australians has increased by around 15 per cent, or more than $800 billion, since the end of 2011,” Reserve Bank governor Glenn Stevens said the other day.
If you don’t feel 15 per cent better off then you’re just not trying unless, that is, you’re one of the growing number of unemployed.
Even retirees hit by falling interest rates are doing better than it probably feels, since inflation is running at only a bit over 2 per cent.
But as the dollar’s new lease of life shows, this good fortune has next to nothing to do with what’s happening in Australia. We’re just going along for the ride.
You can thank the US Federal Reserve and more recently the Bank of Japan, though truth be told they’re also responsible for the strong dollar, so no need to grovel.
Considering their respective banks can borrow at almost zero interest in US dollars or yen, why wouldn’t they invest the money here where they can get a higher – hey, even a positive – return?
To keep rates down the big central banks are printing more money – in Japan’s case to pull itself out of a deflationary spiral and in America’s to stop falling into one.
This is done by buying back government bonds and is officially known as quantitative easing which, bearing in mind they have zero official interest rates and runaway budget deficits, is the only economic pick-me-up left in the cupboard.
The consequences have been brilliantly described by economic historian and strategist Michael Power of Investec who calls all this liquidity Waterworld – not the theme park but the otherwise forgettable Kevin Costner movie.
Global markets have been drenched with cheap money, driving interest rates down and asset prices up.
But unlike other commentators, Dr Power argues this high water mark, so to speak, will be here to stay because of ageing populations in the biggest economies. And so the US Federal Reserve might, in its words, “taper”, but won’t completely stop, its bond buying.
It’s Economics 101: a shrinking workforce depresses demand, lifts the debt burden as more become dependent on the state, and threatens deflation by constraining spending. This demographic drag has been a killer for Japan and is starting to make itself felt in the US and Europe, where labour participation rates are falling precipitously and creating a bigger burden on those who work.
Twitter@moneypotts
Frequently Asked Questions about this Article…
The Australian sharemarket is booming due to a combination of factors, including global monetary policies like quantitative easing by the US Federal Reserve and the Bank of Japan. These policies have flooded global markets with cheap money, driving interest rates down and asset prices up.
The Australian share market is experiencing a boom due to global economic conditions, particularly the actions of the US Federal Reserve and the Bank of Japan. These central banks are engaging in quantitative easing, which involves printing money and buying back government bonds, leading to lower interest rates and higher asset prices.
Australian shares have outperformed property investments recently, with the sharemarket returning about 25% in the past year, including dividends and franking credits, compared to an 8% increase in median property prices in some areas.
Quantitative easing affects everyday investors by increasing liquidity in the market, which drives down interest rates and boosts asset prices. This can lead to higher returns on investments like shares, making it an attractive time for investors to be in the market.
Quantitative easing, which involves central banks buying back government bonds, has played a significant role in the current investment climate by keeping interest rates low and increasing liquidity in the market, thus boosting asset prices.
A strong US dollar can impact Australian investments by making them more attractive to foreign investors. With central banks borrowing at low interest rates in US dollars, they are more likely to invest in markets like Australia where they can achieve higher returns.
The net worth of Australians has increased by around 15%, or more than $800 billion, since the end of 2011, according to the Reserve Bank governor. This increase is attributed to the booming sharemarket and rising property values.
The sustainability of the current investment boom in Australia is uncertain. While the market is benefiting from global monetary policies, there are concerns about how long these conditions will last, especially with demographic challenges like ageing populations affecting major economies.
A strong Australian dollar, influenced by global monetary policies, can affect the economy by making exports more expensive and imports cheaper, which can impact domestic industries and trade balances.
Recently, the Australian share market has outperformed the property market. While median property prices have increased by about 8%, the share market has returned approximately 25% over the past year, including dividends and tax credits from franking.
Central banks are printing more money to keep interest rates low and stimulate their economies. In Japan's case, it's to pull out of a deflationary spiral, while in the US, it's to prevent falling into one.
Central banks play a crucial role in the current economic climate by implementing policies like quantitative easing to stimulate growth. By keeping interest rates low and injecting liquidity into the market, they help drive up asset prices and support economic activity.
The long-term effects of current economic policies, such as quantitative easing, may include sustained low interest rates and high asset prices due to demographic changes like ageing populations, which depress demand and increase the debt burden.
An ageing population affects global economies by reducing the workforce, which can depress demand and increase the debt burden as more people rely on state support. This demographic shift can lead to deflationary pressures and economic challenges, as seen in Japan and increasingly in the US and Europe.
An ageing population affects the economy by shrinking the workforce, which depresses demand, increases the debt burden as more people become dependent on the state, and threatens deflation by constraining spending.
Retirees face potential risks in the current market due to falling interest rates, which can reduce income from savings. However, with inflation running low, the impact may be less severe than it appears, and retirees might still benefit from rising asset prices in their investment portfolios.
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