There's No Place Like Home

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[Music]

Hello, I'm Alan Kohler, Editor-at-Large of Intelligent Investor and Finance Presenter, Columnist and Podcaster for the ABC.

And I'm James Thomson, Senior Chanticleer Columnist at The Australian Financial Review.

And we are The Money Café. G'day, James, good to be back from a couple of weeks off.

Yeah, welcome back, Alan, we've missed you.

How'd you go with Stephen, all right? Everything fine?

Fantastic. We had a great conversation. We talked about the World Cup and all sorts of stuff, so he was in fine form, as always.

That's good. Well, look, just to get straight into it, I thought your piece on CSL and CBA previewing their results this morning was terrific.

Thank you.

You pointed out that there was a huge fall in the CBA price of 10 per cent back when their quarterly came out and they've recovered all of that; and CSL is down even more and has not fully recovered, but is up 39 per cent, from the bottom. Everyone's kind of falling back in love with these two big companies, right?

I think for different reasons, yeah. CBA, basically we have this thing that the big institutions in Australia, which includes the super funds, they just keep buying the banks. I think institutional ownership of CBA is up to 30 per cent. Retail punters, mums and dads, have actually been selling, but the big instos have been buying and that sort of just keeps lifting the price, not automatically, but the price of the banks just keeps grinding higher, even though everybody knows they're overpriced and overvalued.

Do we call that the smart money's buying, or what?

[Laughs] I don't know.

Or is it the dumb money? What's going on?

Well, the banks are a big part of the index, so passive strategies have to hold the market weight, but what we've seen is that super funds need to be pretty index like in their allocation to Australian equities. There's this thing called the Your Super, Your Future performance test and that basically tracks the super funds against the benchmark index. The super funds don't want to get too far away from that, so that means they have to be a little bit passive-like in their strategies when it comes to big companies. Most of the money, most of the flows into equity markets go to the biggest companies and there's no one bigger than the banks, so that's what we're seeing there.

To be clear, it's the dumb money, really.

Well, in a way, yeah. I wouldn't call it dumb necessarily, but it's unthinking, it's really just following rules rather than making a considered bet on the fundamentals of CBA, it's just really following other money, it's money following other money, is the way to think of it. The story around CSL is different. Obviously, CSL has been - there was a moment there that CSL actually had a bigger market cap than CBA, but that's long past. The stock's down 60 per cent in two years, there's been a series of profit warnings and other disappointments and that's all sort of culminated in May when the stock fell 21 per cent in a day, which is unheard of for a big company and unheard of for such a loved stock like CSL.

The interim CEO is an old CSL hand, Gordon Naylor, and he and Ken Lim, the CFO, the Chief Financial Officer, have been doing the rounds of investors, trying to reorientate the culture internally. Basically, CSL has become middle-aged, a little bit fat, a little bit lazy, a little bit complacent and they need to sort of shake it out of that stupor and get it fired up again. That's the story they've been selling to investors and investors are starting to see CSL as a sort of value play, I guess. The stock price just got too low and investors have weighted back in. The stock's up 39 per cent, but the risk here is that CSL has disappointed in the past and investors have got badly burnt. I think that's the interesting thing as we head into reporting season.

But what do the analysts say about its basic business of plasma and all that, is it still a good business or not?

Yes, it is. CSL's really only got one business that counts and that is the US plasma business and what's happened over the last few years is that the plasma industry is still growing at something like 7 per cent, but CSL's market share has been going down and this is the problem, its basically taken its eye off the ball in the US, expected that it would continue to build market share almost irrespective of whatever it did and it's competitors have come in and stolen a march on it.

This business is where they pay people to give blood, right?

Yep.

And they extract the plasma and sell it?

Yeah, well, they turn it into treatments for immunodeficiency diseases, a range of diseases. So, yeah, basically what's happened, is that CSL's let its competitors in, it's now fired up again and going out and trying to defend its position and build up the market. Fundamentally, that market's pretty good. So, if CSL can get its groove back in that market, then that really helps and that can go out and find some other growth areas. Finding those other growth areas isn't easy. It can take 10 to 15 years for a big drug discovery. But the market has a bit of faith that CSL is telling the right story again, it's recognised its problems and they're trying to fix them.

Speaking of earnings, we should talk a little about SpaceX, which had its first quarterly earnings report last night. The shares were up during the day by 9 per cent and then fell 8 per cent in after-hours trading. Obviously, well, nil-all draw, I'd say, on the share price for the day probably. But I've just been reading a piece this morning saying why SpaceX will be the first 10 trillion dollar company, which is obviously very bullish about SpaceX, more bullish than the market is. But it's interesting and it's worth noting, this guy, Peter Diamandis, says that it's basically five companies in one. It's the first truly global communications company because it's got Starlink, which connects 8 billion

I listened to the call this morning. Elon Musk was at his sort of blue sky best, promising all sorts of things, "There's going to be boots on the moon by 2028..." apparently. These data centres in space, they're a year away. He said, "It's not out of the question that Starlink could deliver the majority of the world's internet in less than 10 years." The results were actually not too bad, strong revenue growth across all its divisions, the loss was narrower than expected, the capex was higher than the market expected and that's not a good story to be telling at the moment, when everyone's a little bit sceptical about capex in the AI world.

What was really interesting to me, Alan, was the backdrop couldn't have been any better for SpaceX. Wall Street absolutely surged on Tuesday night, it hit a record high after basically going sideways for three months. The Philadelphia SOX Index, it was roaring; Palantir, the crazy AI company, they were up 29 per cent in a single session... The backdrop for Elon to go full blue sky was pretty good and yet, the stock's been whacked, as you say, down almost 9 per cent in after-hours trade. I think investors are going to take a fair bit of convincing. This is a 10-year story.

What are you going to write in your column? Presumably, if you listen to the call, you'd be writing about it today.

Well, I think that's the point, the backdrop for the market to just eat up Elon's sort of blue sky talk was fantastic. It couldn't have actually been better and yet, he still hasn't managed to get through. That says to me there's just a lot of scepticism around SpaceX. This is a 10-year story and Musk makes no secret of that. But the markets aren't great at thinking in 10-year cycles, it's really hard to do. Markets react - well, in some cases they react in 10-minute cycles to whatever the latest social media post or comment from Trump is. Trying to think 10 years out, what's the world look like, it's just very hard to do so I think that is the challenge for SpaceX.

Now, Musk has managed that quite well with Tesla, but the thing produces something tangible, cars roll off the production line, you can see them driving around your cities... At Tesla, the blue sky is sort of balanced off against hard metal, that's not quite the same as SpaceX. The idea of boots on the moon in two years, yeah, okay, sounds pretty good, does it happen? I've got no idea.

How do they make money out of boots on the moon anyway?

The thing that brings SpaceX together is really this starship reusable rocket. Unless the starship reusable rocket works, it's hard to see SpaceX reaching its great promise, because a lot of what SpaceX wants to do relies on that reusable rocket sending stuff into space, whether it's data centres or satellites or whatever it is, at a relatively cheap price. Have they nailed that? Of course, they say that their test flights are going well and they're on track and all that sort of stuff...

The key to that is landing them safely, isn't it?

Exactly, yeah.

Without breaking them...

And look, they've had some good success. I think there was a test in July a couple of weeks ago and they brought the rocket down in the sea and it's done exactly what they intended. But yeah, this is a long, long, long-term story. I just think the markets aren't good at long-term stories, particularly at the moment.

Okay, we better talk about Iran, what's going on there, what's your view?

Well, Scott Bessent, part of the reason markets rallied is the US Treasury Secretary, Scott Bessent, came out and said, "We'll have a deal today or tomorrow," and everyone went, "Beauty." Oil fell, went back below $80 bucks a barrel US. He was almost immediately contradicted by Marco Rubio, the US Secretary of State, he said, "Well, yeah, look, the big deal which is the one we need to do with Iran on de-nuclearisation, that's a long way off... But yeah, maybe we'll get a deal to reopen the Strait of Hormuz or open it further in the next little while..." Rubio sounded a lot less definitive than Bessent, but look, can you believe anything that's coming out of the White House on all this?

I feel like, no, I don't think you can and I feel like there's two parallel things going on here that are not really in connection with each other. One is the White House and Trump and all that and he's kind of - every second day, he kind of says, "We're going to obliterate them..." or last night, the other night, he said, "We're going to decapitate them..." and, "We're negotiating, they're so keen on negotiating and they're so worried about us hitting them again and we're going to hit them so hard, you can't believe how hard we're going to hit them, it's like World War II again..." all this... Iran's saying, "Oh yeah, whatever..."

What Iran has said, is that, "We're not negotiating with The United States at all, we are negotiating with Oman to have a secure temporary passage through the Strait of Hormuz and we're going to eventually come up with an agreement with Oman." That seems to be the reality of what's going on and meanwhile, Trump and Bessent and the rest of the White House are kind of thrashing around on the outskirts of that, pretending that they've got some role in it, which they don't seem to have any role at all anymore.

Yeah and the market just eats all of this up. The market, which is so sceptical about everything - the market just wants this to be over and so every sniff of a deal is sort of a cause for oil to fall, stocks to rally and bond yields to... Then sometimes within hours, usually within days, we're back to square one of, "Okay, we're going to bomb them again."

It's hard to imagine what the deal can involve though. The deal, presumably, is America promises to stop with empty threats in return for Iran completely opening up the Strait of Hormuz, which they're not going to do.

Well, they may open it up, but there'll be a fee.

That's right. Iran has clearly now decided that it controls the Strait of Hormuz, it's possibly prepared to share that with Oman on the other side, but that's not clear either.

Whether the fee is called a toll or a tariff or an environmental protection charge, there'll be some sort of fee. It's just hard to see what the alternative is. The remarkable thing, we've all sort of been forgotten, but didn't we have a memorandum of understanding that was signed in the Palace of Versailles, six weeks ago?

Yeah.

Even if we get a deal, can we trust it? Will it hold? I don't think there's any chance. This conflict has sort of reached the steady state it's going to remain in. The US and Iran just sort of take swings at each other, the oil price gyrates between $80 bucks and $100 bucks and the world sort of hopes that the energy sector can adjust.

We probably should note that when we talk about the oil price, we're talking about the oil futures and the actual price of petrol and diesel that we're paying is going up still, even though the price of oil is coming down, or at least the price of oil futures is falling and part of the reason for that is because, if not the main reason, is that crack spreads are at a record high and that's the margin that refineries make between the oil they buy and the petrol and diesel and jet fuel they sell, which is what's called the crack spread and they're all cashing in, these refineries, around the world, including those in Australia, they're all just making tons of money. Because it's a global industry, there's no regulation going on, nobody's really getting involved and saying, "Hang on, what are you guys doing?"

Ironically, the only person who's done that is Donald Trump, he said on, I think it was Sunday night, "I'm unhappy with how much the oil companies are making."

But has he done anything? No. He can say he's unhappy about it, sure. We're unhappy about it, but that's what's going on.

Alan, I know we've got several questions about house prices, but do you want to say anything off the top about what's happening in the market and well, I don't know, is it a whiff of panic in the community?

The panic is all on the front page of The Australian newspaper, it's unbelievable, they're just going berserk about it and was calling it a massive crisis and yesterday's front page was that there's $230 billion dollars wiped off the value of Australian housing. Today, it's that the Albanese Government doesn't care. It's actually a 1.8 per cent fall in house prices from the peak that's occurred. I mean, really, it's absolutely driving me crazy, this. Sure, house prices are coming down, now they're falling in all capital cities, not just Melbourne and Sydney. Melbourne and Sydney prices are down 5.5 per cent roughly from the peak, less than 1 per cent in other capital cities. National fall is 1.8 or 2 per cent roughly.

This morning's crisis piece from the Australian said that the NAB economists are predicting a 10 per cent fall in house prices. Well, that's a prediction, maybe it'll be true, who knows? But I think we've been on about housing affordability for a while now and how it needs to improve and what a terrible thing it is that house prices are so high, so suddenly now they start coming down and affordability improves, everyone's running around that the sky's falling.

This is the political problem with falling house prices, isn't it, which we've talked about before, that it's difficult for a politician to sort of say, "Falling house prices are good." Tanya Plibersek, the former Housing Minister and now I think, Social Services Minister, she came pretty close on Monday when she said, "It's the best time in her lifetime..." I think she declared, "...for a first home buyer to enter the market."

That's not true. House prices fell 7 or 8 per cent in 2022 when interest rates started going up, 7 per cent in 2017 when APRA cracked down on investment lending... I don't know, let's see what happens. I do think we're in a period now where housing is becoming more affordable, which I'm perhaps biased because I wrote a book about it, I think it's great.

Yes, the sky is certainly not going to fall in.

Okay, let's move onto questions, before we do that, let's have a quick word from our sponsor.

[Recording]

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[End recording]

And don't forget, this is general advice only, not personal advice. If you need any personal advice, please go and see an adviser.

Don't just take our word for it, what would we know?

Henry says, "Love the pod, keep it up!" Righto, we will, Henry... "Just thought I'd add some more fuel to the generational hardship fire on top of and in contrast to what Lincoln sent in on the AI AGMs and overworked directors pod a few weeks ago..." I don't know what that is, do you know?

I think Lincoln was saying, "Is it really that hard for the younger generation or do they just need to start saving a bit more and not spending as much?"

Oh, I see. Anyway, Henry says, "Another difference, on top of interest rates, house prices versus wages and smashed avo, is that the world we live in is now so much more effective at getting the consumer to part ways with their savings. I'm thinking of targeted ads, FOMO, manufacturing technology creating so many more wants, so give us young'uns a break!"

It's a good point, Henry. The world is good at extracting money out of consumers. I don't quite know what we do about that, but I think marketing and advertising has always been a big part of the world. Maybe it is better now in the digital age.

I think it's only going to get better, to be honest.

Yeah, well, perhaps soon your agent will be doing all your shopping for you. Maybe that will help, you can tell your agent, "I'm looking for the best price, don't be swayed by these offers and the latest...!"

Yeah, maybe AI will help us get the best prices always.

Well, it definitely will. Coles is talking about this already and it's not that hard to imagine that if you have a family sitting around the kitchen table, they say to their AI agent, "Hey, can you do us a meal plan for the next week and can you turn that meal plan into a shopping list? Can you then go and contact Coles or Woolworths and do the shopping for us and then have it delivered? We'll bring it in from the front porch." That's not that hard to imagine, but think of the things that don't happen, you don't walk the aisles of the supermarket and see the sale stickers, maybe the AI makes much better decisions for you because you're not swayed by, "Oh, I'd love a packet of biscuits..." or whatever it is. Perhaps that age of agentic commerce helps people to streamline their spending a bit, I don't know.

A golden age of consumer power is just around the corner.

Maybe. All right, Curtis says, "Love the show. Would like to hear your thoughts on a 2 per cent wealth tax on assets above $100 million dollars, to help alleviate pressure on income-reliant tax system. For clarity, say you had $101 million dollars in your net worth, you pay 2 per cent on the value of $1 million dollars, so just the bit above the $100 million dollar threshold. For all of Australia's 178 billionaires and a few thousand centi-millionaires, I'm sure they'd love the opportunity to give back a little to the nation. This is currently being debated in countries like France and the UK."

Curtis for Treasurer, I say! I think that's fine, it's not going to happen, but yeah, some sort of wealth tax I think is a good idea. The main problem with wealth taxes is that if it's a percentage of static wealth, it may not be that the taxpayer has the cash to pay the tax, so they have to sell stuff, which is arguably unfair. But look, a lot of countries do have wealth taxes and they kind of seem to work, everyone whinges about it, but I think Australia could do with some kind of wealth tax. We have a wealth tax in the form of the land tax at the moment and council rates are kind of a wealth tax.

Yeah. I had a chat with a guy, Paul Donovan, he's the UBS Wealth Management Chief Economist, a couple of weeks ago and unprompted, we were talking about - I said to him, "What's the biggest thing happening in the world that people aren't thinking enough about?" And he said, "Well, Government debt is surging and household wealth is surging." He said, "Well, the obvious thing that Governments will do is find a way to relieve people of a bit of household wealth and help alleviate the debt crisis." But his point was that wealth taxes and inheritance taxes are actually not that effective and part of it is, as he said, having the ready-cash to pay the wealth tax isn't easy. Inheritance taxes, they don't raise that much money. Guess what he said the best form of wealth tax might be?

What?

Capital gains tax.

[Laughs]

Because you know the value of the asset, it's just been sold, and the person has the money ready to go.

That's right, it's always better to tax a transaction, isn't it?

Yeah, so I thought that was a very interesting - I said, "Funny you should say that, Paul, maybe Australia's ahead of the pack in this area."

Well, yeah, maybe... Nathan says, "I'm especially interested to get your take on how you see established apartments performing after the Federal Government's recent tax changes. I bought my 1970s one-bedroom apartment in a Melbourne Bayside suburb a few years ago. Despite being able to negatively gear, new buyers of similar stock won't be able to, as it stands. Will this see investors like myself experience significant falls in our property's value, or will apartments in a suburb like mine where there are no buildings allowed above three storeys be relatively immune?" Interesting question and I think there's something in this, isn't there? The negative about, as it were, the negative gearing changes, which says that negative gearing is going to only in future be available for new dwellings, does mean that even though your existing dwelling is grandfathered, the price of it will tend to fall because people won't want to necessarily buy it if they can't negatively gear it, that's fair enough isn't it?

Yes, in theory. There's lots of other factors, of course, like what's happening to the state of demand more generally. If the population's growing, there's probably still going to be demand for that sort of property, perhaps that outweighs the impact of the negative gearing change. Do first home buyers who couldn't have had a look at Nathan's apartment, suddenly get a look in and that helps support the price? There's other things to think about. The interesting part of that question for me, Alan, is that Nathan says in suburbs like his there are no buildings allowed above three storeys.

That three-storey bit interests me because the Productivity Commission came out with a set of recommendations around planning for housing and how that could be improved or changed to get supply going. One of them was that basically every block in Australia, regardless of what's on it now, should be open to having a three-storey building on it. I'm not sure that's going to be picked up, but that's another factor that we need to consider, is there a sharp increase in the supply of apartments that has a bigger impact on the value of Nathan's current abode? I don't know...

Nathan must not live near a train station because I think what's going on in Victoria at least, train stations are getting 20 storeys around them.

Yeah, absolutely.

Particularly in the suburbs that are near the Suburban Rail Loop, which may or may not go ahead, we'll see what happens.

Luke says, "I'm a regular listener to the show." Thanks, Luke! "Picking up on Alan's call to nationalise childcare, how about piloting this in the regions. We live in Kununurra in the Kimberley and there's a two-year waitlist for childcare. Our family will have to make do on a single income. If there was a Government run centre, it could focus on providing childcare for hundreds of Government workers up there, this would free up spots in the private centres for the rest of us."

I don't understand why a private operator hasn't opened another childcare centre in Kununurra to mop up the two-year waitlist, what's going on?

Well, I don't know, perhaps it's a bit of a risk, it's probably a mining area. I don't know, maybe they can't attract an operator up there. It's a good question, but in some regional areas, even though there's demand, you've still got to find someone who wants to fill it, don't you?

Yeah, but I think Luke has highlighted another reason why it should be nationalised, so it's provided as a Government service, rather than leaving it to the market, which obviously fails in some places.

Nick says, "On last week's podcast, James and Stephen discussed how high Australia's income taxes are and that they are high internationally. This is a misleading metric. Most OECD countries have a variety of taxes related to social security contributions that are covered by our general tax revenue, including income taxes, making our income tax rates look high, but they're not really." Anyway, he goes on to provide some details of that, is that fair enough, James?

Yeah, that's a fair enough way to look at it.

It's certainly true of the US as well, they've got social security contributions on top of their taxes.

We don't get many correspondents writing in saying that the tax take is suitable, so that's always a good perspective to have. Percy says, "After One Nation's recent rise in the polls, I recreated a Facebook account, having deleted in 2020, to quietly observe some of the more polarised Australian communities, sovereign citizens, climate sceptics, Make Australia Great Again and similar groups to better understand what's driving their political views. The predictable opinions weren't what surprised me.

What did surprise me was the sheer prevalence of conspiratorial thinking, particularly around the recent AusAlert emergency test. It made me wonder whether we're facing not just a growing polarisation due to inequality, as James has argued, but also a growing crisis of democratic legitimacy, distrust of politicians has always been part of Australian culture, but it increasingly feels deeper than cynicism. Segment of the population seems to believe that the political system itself is no longer responsive or representative. If you could redesign Australia's democratic institutions, what constitutional or structural reforms would you prioritise to restore public trust?

I do think a lot of this - maybe I'm a broken record - I think a bit of this has to do with housing, because for 25 years house prices have risen relentlessly, pretty much; and made it very difficult for young people to get a house. All that while, politicians have been saying they're worried about it, they're going to do something about it and they never do. I think that has really undermined the legitimacy of Government, to some extent. Housing is such a fundamental need and basically a human right, but it's been sort of taken away, I think.

Yep and that's been worsened in recent years by inflation, which makes daily life harder, so you've got that challenge on top of the housing challenge. Is there a redesign of democratic institutions or the constitution that could help that, or that's more of a plea for structural reform, isn't it, Alan?

Percy's wondering about citizens' assemblies, term limits or other institutional reforms, so he hasn't listed them. I talked to Luca Belgiorno-Nettis sometimes and he's pushing for citizens' assemblies and he's got an organisation going and I kind of think there's something in that. Some other countries, including Ireland, have got these citizens' assemblies which make decisions, like having a large citizens jury to consider big decisions. I think there's something in that. There's no sign of Australia having a look at doing that, but I think that would help. Term limits, I don't know what that means, we've got a term limit of three years. Do you mean term limit for a Prime Minister, he can only go for two terms, like the US President? I'm not sure that's going to help.

I don't have a solution to this, but I was struck by a conversation recently with some business people who said - a few of them have reached a stage in their life where they're looking for other things to do and one of the thoughts was, "Should I go into politics?" These were exactly the sort of people, experienced business people with lots of life experience and lived in different places that would be great in politics, but their conclusion was, going through the sort of machinations of parties, either party, to get preselection and etcetera, it's very different to what you see in the US where people are called out of industry, come and serve for a period in some sort of role, sometimes elected, but not always, and make a contribution for a brief period that is sort of manageable and at the right stage of their life. We don't seem to have anything like that, which I thought was interesting.

That's true. I also think the media has tended to make politics a very, very unpleasant business.

Totally.

I don't think it's entirely the media, but I do think the way that politicians now have to behave and to watch everything they say and the media is constantly kind of doing 'gotcha' at them, trying to trip them up and all this... There's this sense that politicians cannot be themselves ever. I've just been interested to watch Ben Carroll, who's just become the Victorian Premier, he's suddenly transformed into this kind of robot. Before he became Premier, when you saw him on TV and he was doing either an interview and a presentation or something, he seemed quite natural. Now, he's absolutely robotic, he can't say anything and they always have these photo ops, where there's a little group of people standing around behind them...

The 'nodders', I hate the nodders.

The nodders, honestly, come on! I yearn for Paul Keating's natural - just saying what he thinks. I do think that politicians don't do themselves any favours because they look like, they behave like they're not saying what they think. You look at them and you don't believe them, I think. Anyway...

No, good point.

Vincent says, "Sorry, please explain to me one simple question, the game is you cannot put out the boring response of, 'It's no good because people will be inclined to save and not spend money'. The question is, why is deflation so scary to economists?" And he then lists a whole lot of advantages of inflation, which is fair enough. "Just to respond with the lame old answer, people must spend because money is how we live..." I mean, Vincent's saying the usual answer from saying as to why inflation is bad, is because people tend not to spend because things are going to be cheaper next week or next month and they'll wait. But that's true, isn't it?

[Laughs] I was going to say... I think, Vincent, don't think of it so much as that people will be inclined to save and not spend. I think you need to think of it as people will be inclined to save and what are the flow-on effects from that? It means that there's less investment going on in the economy. He's listed a list of advantages, everyone gets rich by doing nothing, the value of assets simply don't go up endlessly, prices go down, we don't get inflation reverses. That's good for a period, you might be happy with that for a couple of years, but if everybody stops buying stuff, how do businesses operate?

The trap that countries are falling in - and we're seeing a bit of this in China - the savings rate gets so high, everybody stops spending because they expect things will be cheaper next month or next year of whatever it is. Then you get the economic activity starts to drop off, investment starts to drop off and you create a whole bunch of other problems. So, deflation, okay for a little period, but you can enter what economists call as deflationary trap and that is very hard to get out of.

I think possibly the main reason that central banks and economists and Governments all want inflation rather than deflation is because of debt, because what happens in deflation is that the value of debt goes up and the whole hope of everybody who's fully in debt, in Governments included, is that inflation takes the debt away. In inflation, the value of debt declines and the fact is that we're in a world of vast quantities of debt, everyone's in debt. Governments, households, companies, everyone's in debt hugely and everyone wants that to be inflated away.

I think that's the main reason central banks have a 2 per cent or 2.5 per cent inflation target rather than a zero inflation target. I think deflation is probably not great but there'd be nothing wrong with zero inflation, prices not changing, that'd be fine, in my opinion, wouldn't you say?

Well, unless you fall into that trap of people - if inflation was zero, does that hold off spending? Does it cut down and crimp activity? I think a bit of inflation is probably where you want to be, not too much...

That's what central banks think.

Yeah, that's right. Hopefully we weren't too lame there, Vincent. Kate says, "I love Julia's book recommendation, The Wealth of Nations, maybe your listeners will enjoy a lighter take, On the Wealth of Nations, by PJ O'Rourke?" And Kate says she's a, "Sydney mum and marketing executive who loves the podcast - what about a Money Café book club? It'd be fun to have listeners recommend and share their favourite books." Alan, can you take that under advisement?

Yeah, I guess. I'm in a book club and this month's book - and I've got the meeting tonight, in fact - is Plato's dialogue. Crikey, we don't want to have that, do we?

That sounds heavy for us, but maybe we could do an episode, maybe some recommendations at Christmas time of books we've enjoyed about business over the years, I don't know...?

Are you reading any books at the moment?

Well, I'm always reading a book. I'm reading a novel called, The Peak, a new novel which is quite interesting about espionage in Canberra and China and beyond. I just finished - this is not business related at all - but the book, Dylan Goes Electric, which was about when Bob Dylan started playing electric guitars for the first time at the Newport Folk Festival.

Oh, I want to read that, that'd be great.

I'll lend it to you, Alan, and we can have our own book club discussion.

I'm trying to read Jonathan Swan and Maggie Haberman's book about Donald Trump regime change - I'm trying to read it, I'm just trying to get to it, I'm well into it, but it's very interesting.

Yeah, that sounds good too, I might borrow that one off you.

John says, "I heard you talk about Governments forgiving debt or just not paying and I got a bit confused, generally. Doesn't Government debt come from loans from real people, super funds, etcetera? How do they cancel the debt? Am I missing something?" Come on, James, were you talking about that?

Well, I think where Governments forgive debt is - I mean, yes, the debt still has to be paid, but I think - correct me if I'm wrong, but where Governments forgive debt now, what would be an example? Where Governments forgive debts to an emerging economy or something like that, it just means that the debt is sort of cancelled, what the other party owed is cancelled. But yes, we have extended - real people, super funds, pension funds from other countries, have extended the loan from the Government to do that. Do you think that's what John's talking about?

John's right, Australia couldn't just cancel its debt that it owes to super funds and real people, that's true, you just couldn't do that, but it could cancel the debt that is owed to it by another country if it wanted to, just to forgive it.

Yes, we've partially forgiven some HECS debts recently.

And the other debt that I've spoken about in the past that could be forgiven, is what is owned by the Reserve Bank, that is, owed by the Government to the Reserve Bank, where the Reserve bank has bought Government bonds as part of monetary policy, that could be basically just cancelled because the Reserve Bank is part of the Government. They could do that.

Yeah, okay. It is slightly confusing, John. Government's forgiving debt and cancelling debt are two different things, that's probably the best way to think about it. Should we finish with one with Kai, which I think is interesting? "Did you catch the news about Daniel Grollo declaring personal bankruptcy following the Grocon collapse? It really highlights how brutal the commercial construction business is, operating on razor-thin 2-3 per cent margins, while carrying 100 per cent of the liability for project delays, legal disputes and supply chain spikes, is a recipe for disaster and a single major project going wrong like Barangaroo development in Sydney in Grocon's case can send everything sideways.

What strikes me most though, is the family dynamic when the Grollo empire was split back in 2012, Daniel took 100 per cent of the high-liability construction arm, while the rest of the family held onto the safe income-generating commercial real estate holdings. Looking back, it almost feels like Daniel was set up to be the ultimate bag-holder for the toxic high-risk side of the family business."

I think I spoke to Daniel at the time and he was happy about it, I don't think he was unhappy, he was fine. But yeah, my dad was a builder and he went bankrupt in 1962 when I was 11, we lost the house, because building is a terrible, brutal game, no doubt about it. As Kai says, the problem is that these builders have got a skinny margin and they generally have a fixed term, fixed contract for the price, so they wear problems in the meantime, project delays, also supply chain problems and price increases, they wear them. I think it's a terrible business.

Yeah, it's a shocker. Was Daniel sort of set up to fail? It's the high risk part, when you get it right, it can pay off, but yeah. The problem is, you've always got to look for the next bit of work and it strikes me in construction that when the music stops, if the music stops, if suddenly you can't get that next bit of work, that's when things get dangerous. That's why people bid on these razor-thin margins, because they just can't afford for the music to stop. It's a national problem though. We're really down to, for big projects, there's only two or three large construction contractors.

Because it's just such a crappy business, everyone else has abandoned it. I know the construction and engineering sector have talked about this for a long time, just better risk sharing. The 100 per cent of the risk can't be carried by the construction company, it's got to be shared. Everyone's got to recognise that things happen over the course of a building project and that risk needs to be shared. The remarkable thing to me, Kai, is that this has been obvious for a long time, no one seems to have ever done much about it, the silliness continues.

We did a renovation a few years ago and I told the builder that I would do cost-plus, not fixed contract, fixed price. So we agreed, every cost including the renovation, he added 20 per cent to and I just paid the bill. He couldn't believe his luck, it was just great. He was so happy and it was a wonderful project, it worked out well for the builder, it worked out really well for us. He was a fantastic builder and it was a terrific process. I didn't begrudge giving him 20 per cent because he did a great job. I actually think there's a case - I don't think it's going to happen, but I think there's a case for legislating that all construction should be cost-plus and not fixed price. As I say, I don't think it's going to happen, but I reckon that would transform construction into a proper business that people wanted to go into.

I think there's swings and roundabouts. The certainty of fixed price contracting is important. Your builder, I'm sure, was completely scrupulous. You could understand there'd be situations where costs suddenly become inflated in a cost-plus world. There's got to be a happy hunting ground.

I saw every invoice, I knew what was going on at every point, it was fine. But you're right, maybe there's crooks who will rip people off with cost-plus, I don't know. They do that with fixed price as well, because in fixed price there's always amendments and adjustments along the way which turn into a nightmare. I've had previous renovations where this happened and that happened, it was just terrible.

Anyway, there you go, good to talk to you again, James, good to be back from leave. I'm delighted to be back at work and thanks, everyone, for listening to today's episode of Money Café, I'll be back next week with Stephen Mayne. Send in your question to themoneycafe@intelligentinvestor.com.au and we'll get to it. Until then, I'm Alan Kohler, Editor-at-Large of Intelligent Investor and Finance Presenter, Columnist and Podcaster for the ABC.

And I'm James Thomson, Senior Chanticleer Columnist at The Australian Financial Review.

See you next week.

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Got a question for next week? Please send it to themoneycafe@intelligentinvestor.com.au.