It’s Time to End the Stimulus Bubble

To paraphrase Crocodile Dundee, “That’s not a test, THAT’s a test!”

That’s what we thought after reading the following headline from Bloomberg News yesterday: “China Said to Test Banks for 60% Home-Price Drop”.

Ooh, imagine that. Surely that would have to be pretty painful.

And it puts to shame the Australian Prudential Regulation Authority’s (APRA) stress test that used a 25% drop in house prices in its scenario.

Considering how housing is funded in the respective nations you’d think they’d have those numbers the other way round.

According to Michael Klibaner, head of China research at Jones Lang LaSalle, China’s housing market is “cash-driven” rather than debt driven.

We’ll have to take his word for that. But we know one thing’s for sure, the Australian housing market is anything but cash-driven. It’s debt driven. Debt driven to the tune of about $1 trillion.

Or to put it another way, roughly one-third of the entire value of Australian housing is in hock to the banks. And that’s based on the current inflated values too.

Even so, Dr. Luci Ellis at the Reserve Bank of Australia (RBA) doesn’t believe Australia has a “credit-fuelled” housing boom. In that case it must be a cash-fuelled credit boom then.

But even cash-driven housing booms aren’t immune from a crunch. According to Klibaner, “We actually expect a very healthy correction, something in the order of 15 or 20 percent in terms of price correction.”

[Spits coffee across table]

Sorry about that! [Wipes keyboard] A “very healthy correction… of 15 or 20 percent.” If that’s what you get with cash, imagine the carnage with a credit-fuelled housing market… which apparently Australia doesn’t have.

Look, we don’t even take Dr. Ellis’ comment about the lack of a credit-fuelled boom with a pinch of salt. We just disregard it. It’s a daft comment. One that further encourages the idiotic rationale that Australia is somehow different.

Take a look at the chart below and tell me that doesn’t look like a credit-fuelled boom to you:

Just between 1998 and today there’s been a nearly five-fold increase in the size of the housing debt.

And yet still the RBA boffins say there’s no bubble. Bless ‘em.

But that’s not the only bubble you’ve got to watch out for. There’s the stimulus bubble too.

That’s the one where the government takes all your money in order to spend it on stuff no-one really wants or needs. Or if they do want it, it’s something they’ve been quite able to live without.

But when the stimulus bubble pops, as it has done in the US and UK, the results are terrible.

All the money that’s been spent and wasted now has to be repaid. Only because the money was wasted on projects that don’t generate a profit, there isn’t a new income stream to repay the debt.

The result is that governments are forced to inflict even more paid on their citizens. Again, such as that which is happening in the US and UK where taxes are increased while government spending remains largely unchanged.

As an aside, I hope you haven’t fallen for the spin about the new ConLib coalition in the UK and its plans to cut government waste and spending. Rearranging deckchairs on the Titanic would be a better way of looking at it…

What then happens is that the economy collapses. A stimulus bubble is like any other bubble. It inflates, causing the economy to expand in all the wrong spots, and then once the stimulus flow stops, it slumps.

Unless the likes of Joseph Stiglitz and his Keynesian cronies get their way and the stimulus spending continues. Of course, all that does is make the problem worse and the resulting crash even bigger…

Anyway, the local Australian press has gone gooey-eyed with the presence in Australia of the aforementioned Nobel Prize winning economist Joseph Stiglitz. Especially the Fairfax owned newspapers.

Last week we suffered through an interview of Stiglitz by Chris Zappone at The Age, and today we opened the Australian Financial Review to an article by Alex Millmow, senior lecturer in economics at the University of Ballarat.

Stiglitz is praised as being an “outspoken critic of market fundamentalism” who “favours more, not less government intervention in the economy.”

This is the same Stiglitz who told Bloomberg News yesterday:

“It’s absolutely clear that you need a second round of stimulus. It needs to be better designed. It needs to be focused more on returns on investment, education, infrastructure, technology. And if you do those kinds of high-powered investments, the long-term national debt will be actually lower and the growth in the future will be higher.”

It’s the classic argument from the interventionists. That government spending leads to a lowering of debt and longer term growth of the economy.

The reality is that it does no such thing.

Simply because government spending is always misdirected. Here’s a perfect example. Stiglitz is a big fan of the Australian government’s stimulus packages – the insulation programmes, the school building programmes, the $900 bribes, and the home buyers bribe.

Now, let’s see which of those caused a lowering of debt and an increase in economic growth…

Call us an old stick-in-the-mud, but none of them have decreased the debt, and none of them will contribute to economic growth. In fact debt has increased. It’s increased in two ways, first off by taking the government debt from around $50 billion to above $150 billion in the space of a year.

And secondly it has increased private debt. Because that’s gone up by $113 billion during the same period.

Of course Stiglitz does say the debt is reduced over the long-term rather than short term because of these measures. Well, let’s look at them again and see if we can figure out how that works.

We can’t see how using taxpayer money to pay for private homes to have housing insulation helps decrease a national debt. It certainly doesn’t help the economy. All it does it help those in the insulation business at the expense of those not in the insulation business.

The same for the school building programme, that has cost billions and they’re still not done. It’s going to cost more money to complete, but where is the payback? How will building new school halls, gyms and libraries decrease debt?

How does that generate a net income? It doesn’t, it generates an additional cost.

Now that all those buildings have been completed they’ll need to be furnished – that’ll cost money. They’ll need to be heated or cooled – that’ll cost money. They’ll need to be maintained – that’ll cost money.

So, schools will either need to cut costs elsewhere in the school, or they’ll need to ask for more money from the government (taxpayers) or by asking parents to contribute more directly.

Either way it hasn’t done anything to boost the economy. All it has done has taken money that taxpayers and parents could have spent or saved elsewhere.

None of them reduce debt at all. Yet every last Keynesian will trot out the line saying that increased government spending helps to reduce debt. Even the most simple of people could see that’s not the case.

All that really happens is that the debt is shifted. Even if the government pays off its debt – $150 billion at the moment – how will it do that?

That’s right, through increased taxes.

Remember, the government doesn’t have or generate any money independently of what it takes in taxes or levies or any other form of burden on the public.

Even the $300 million dividend the government received from Medibank can’t be counted as a genuine profit because the public is coerced into buying private healthcare. Private health insurance is just a tax through the back door – front door actually, now we think of it.

If you don’t take out the insurance and you earn above a certain wage then you have to pay the Medicare surcharge. So either way the public is coerced to make a payment to government that they may otherwise not have chosen to make.

Anyway, the cost of stimulus programmes is never good in the long run because the government can’t allocate the resources efficiently. It can only give favours to those it believes it can influence more than others.

So while there is all the talk about Australian government debt being small and not a problem, and an example to the rest of the world, the reality is different.

The reality is that the debt burden has just been shifted on to individuals. Individuals who have been encouraged to spend, and who have been forced to go into debt will now have the added burden of paying back $150 billion of wasted government spending.

That’s on top of the more than $1 trillion individuals are already in debt for. How are either of those numbers a good thing?

It means that taxes will therefore be higher than they otherwise would have been, and individuals may be forced to increase their debt levels even further in order to pay for it.

Here’s a good exercise for you. Take a look at the total amount of debts you have outstanding – home, car, personal, credit card… now take a look at your latest group certificate to see how much tax you and your family have paid during the last financial year.

Now add in all the other taxes that you’ve paid, such as GST, that don’t show up on your group certificate.

And now consider how much better off you’d be if you didn’t have to hand over 20%, 30% or 40% of your hard earned cash to the government.

The nonsense about Australia’s debt levels being fine because it is private debt rather than public debt really needs to stop. And furthermore, the misinformation about government stimulus spending and it’s supposed positive impact on the economy has to end too.

But it doesn’t help when you get the likes of Stiglitz coming to Australia and praising the government for what has been a monumental waste of money.

Cheers.
Kris Sayce
For Money Morning Australia

It's Time to End the Stimulus Bubble, 8.7 out of 10 based on 21 ratings

Tagged as: boom, bubble, debt, house, housing, price, stimulus