The new age of speculation

Not even record low interest rates can turn us from our love affair with low-risk assets. That’s because the Reserve Bank is facing an unshakeable change in the Australian psyche: fear of unemployment.

There is also continuing evidence of a shift in savers' behaviour in response to declining returns on low-risk assets.” – Reserve Bank of Australia governor Glenn Stevens announcing last week’s monetary policy decision.

Suppression of savers is the policy of the age.

It has long been true that the price of credit is imposed, not discovered, and by that means central banks manipulate demand for it. Normally central banks try to encourage prudence; the spirits to be restrained are the animal ones that lead to inflation and bubbles.

But now, with economic growth vexingly dismal, it’s the savers who must be restrained, or rather encouraged to spend and speculate. At 10 per cent, the savings rate is now too high to sustain an economy that relies for its growth on consumption and gambling.

Between 1950 and 1983, the savings in rate in Australia averaged 15 per cent of household disposable income. Between 1983 and 2003 it declined to zero as the baby boomers reached borrowing age.

As the savings rate declined, so household wealth increased (or was it the other way around?) – from 350 per cent of income in 1977 to 700 per cent 2007, whereupon it collapsed back to 550 per cent and is now 600 per cent.

The savings rate has now stopped responding to measures of wealth, perhaps because households now understand its illusory nature.

Real per capita spending growth is zero, so that in the most recent national accounts real consumption slowed to a three-year low of 1.8 per cent. Since then the Reserve Bank has redoubled its efforts to stop us saving, pushing the interest rate to a new low of 2.5 per cent.

In the most recent decision to leave it there, the governor celebrates the evidence of a “shift in savers’ behaviour” that he is engineering through the suppression of their incomes.

But while the “wisest place for savings” survey from Westpac and the Melbourne Institute now reports that “repay mortgage” has slumped in popularity from 26 to 14 per cent, “deposits” have slumped as well. That’s the problem with the suppression of interest rates – it works on both sides of the balance sheet.

The big mover in the “wisest place for savings” survey is real estate, up from 14 to 28 per cent.

Consumer sentiment has improved but consumption remains low: the “shift in savers’ behaviour” has so far translated only into a new love affair with real estate rather than goods and services.

Why is this? Because the other big mover in the consumer sentiment hit parade in the past few years has been Fear of Unemployment. The unemployment expectations chart is back to where it was in 2001: it rose 50 per cent in 2011 and stayed there.

Meanwhile the employment expectation index in the National Australia Bank business survey has declined steadily since the beginning of 2011 and is now also at its lowest non-recession level.

Occasionally, some things change permanently rather than in cycles. Peoples’ faith in getting and keeping a job may be one of those things, and it may be something that central banks, with their manipulation of the levers of credit and savers’ behaviour, are unable to shift.

Automation and digitisation is what I have in mind. Trains now operate without train drivers, cranes without crane operators, assembly lines without assemblers, newspapers without reporters, and cars, I read, can speed along highways with no one behind the wheel.

The world is changing, and employment is no longer to be taken for granted.

Consumption is a function of employment, not credit. Yes, there was a brief crazy time when we borrowed to consume, but no more. We learnt the error of those ways.

Reduce interest rates and, yes, the masses will eventually tire of saving for interest alone. But unless they are sure of employment, they will merely find another way to save.

That means taking more risk, since the single tool in the hands of the central bank is the return from low-risk saving – the cash interest rate.

So it is that the collision of automation and monetary stimulus may be leading to a new age of speculation rather than consumption.