Sharemarket boom with money surplus Printing US dollars

While you weren’t looking, Australia stumbled upon an investment nirvana where it’s almost impossible to lose money.
By · 6 Nov 2013
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6 Nov 2013
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While you weren’t looking, Australia stumbled upon an investment nirvana where it’s almost impossible to lose money.

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.

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