Waiting for the safety bubble to pop
The end of 30 years of living high on debt is nigh. Unfortunately, when everyone has run for the exits there is nowhere left to hide.
Australian bankers are quite a rare species in the banking world, in that they can still deliver lectures to rooms full of business people without being booed off the stage. Cameron Clyne made a lot of sense and was heard in respectful silence yesterday as he decried the lack of confidence in Australia, before returning to his office to watch the cash roll in (Australia a 10-speed economy: NAB chief, 31 July).
He would, of course, rather his customers borrowed. It’s hard being a banker in the era of deleveraging.
So would the Governor of the Reserve Bank, Glenn Stevens, who also delivered a lecture last week on how lucky we are and how we ought to buck up. It’s those cursed Europeans, and their tragic comedy making everyone worried. If, like the citizens of North Korea, we weren’t reading about such wretchedness, Australia would be an island of golden happiness.
Perhaps. But Australia rarely manages to invent its own miseries and the current glumness is no exception. The world is in the grip of a drought in confidence and a bubble in safety.
The two-year debt securities of a handful of AAA-rated European nations yield less than zero and the lower-rated US debt is paying just 0.22 per cent – a bubble if ever I’ve seen one. The Australian government, meanwhile, must pay the usurious rate of 2.7 per cent for its 2-year money.
Withdrawals from Spain in May were €41.3 billion and are now up to €163 billion in total. Switzerland, meanwhile, is buying €3 billion a day with newly printed Swiss francs to try to keep its currency down because of all the money flooding into Zurich.
Risk is off because the future has turned opaque. Potential returns from risking one’s money in a low-growth world are no longer enough – it is not simply a matter of low confidence, but reality of low growth and heightened risk.
There are several consequences of this.
Self-managed retirement saving is booming because the professional sort is too balanced. Specifically, big super funds don’t have enough cash (it used to be they didn’t have enough equities – balanced funds just can’t win).
Mining projects in Australia are being cancelled because investors aren’t really interested and boards can’t persuade them to be. Money might have to be given back to the owners, God forbid.
On this subject, it feels a bit like 1981 again, when there was last a resources boom. As then, wage rises are expected by way of sharing in the bounty; productivity offsets are spurned by workers and unions because the benefits of the boom being accumulated by the wealthy must simply be shared with those who are merely trying to be wealthy.
Business people are blaming the ALP industrial legislation, but in my view it has more to do with the culture of resources wealth redistribution that was set up by the Labor government’s hamfisted attempt to impose a mining tax and Wayne Swan’s continuing attacks on wealthy miners (including today). He has made relieving the miners of some of their supposed colossal gains respectable: the workers and their unions are only too happy to oblige.
The greatest consequence of the bubble in safety is that there is a global shortage of consumption and a result that is that there are now few, if any, industries that are growing.
Retailing certainly is not, and nor is banking because, as discussed above, borrowing is at a crawl. Media is going backwards, energy is at standstill because of the confusion about climate change and a sudden, unexpected, glut of oil and gas in America. Mining is past its peak.
Only the health business is growing because we are all taking longer to die. But human repairs are largely paid for by taxes and since the retirement age is now roughly halfway through the average working life, there are as many people absorbing the taxes than are paying them.
How did all this come about? Because for 30 years or so, consumption was financed by debt, something encouraged by politicians and central bankers pushing cheap money. A generation of bankers and borrowers discovered the glories of leverage in 80s before coming unstuck in 1990, and then a new generation reinvented leverage after 2000, before once again coming unstuck.
The reckoning in the west after 1990 was brief (as opposed to Japan, which is still in the reckoning 22 years later) because the Federal Reserve made money ever cheaper. It did it again in 2000 when the next bubble burst, and again in 2008.
Leverage upon leverage upon leverage, until finally the world is exhausted and there are no more bubbles in risk; only a bubble in safety and a deficit of consumption.
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