“Frankston is dead” declared the missus to your editor yesterday afternoon.
Not literally of course. We know the bayside suburb has a reputation for being a bit rough.
But the idea the whole suburb could have succumbed to a drug overdose or a drive-by shooting seemed extreme.
Anyway, we like Frankston. We’ve lived in and around the area for the past twelve years. And we’ve no intention of moving anywhere else.
Thankfully, the missus clarified her statement, “There was hardly anyone at the Bayside Shopping Centre. The shops were empty.”
We’ll have to take her word for that. Sure, it was later in the day – about 3pm on Sunday. But you’d think that retailers would be doing a roaring trade on the last shopping weekend before Christmas.
You’d be wrong.
The retailers are copping it.
And who’s to blame? Naturally it’s a combination of their lack of initiative, and government intervention.
We wrote a few weeks back suggesting you should boycott the Harvey Norman stores. Company chairman Gerry Harvey had called for online shoppers to be slugged extra taxes. For the crime of buying goods overseas.
Well now someone else has joined him. Today’s The Age newspaper reports:
“Retail billionaires Solomon Lew and Gerry Harvey yesterday revealed that they are speaking with sector colleagues about mounting a campaign against the government over what they claim is an uneven playing field.”
Mr. Lew was quoted as saying:
“The fact that offshore online retailers aren’t required to levy duty or GST creates an enormous competitive advantage for foreign businesses selling into Australia. These businesses don’t pay our taxes, employ our people or contribute to our economy.”
Do foreign retailers really have a competitive advantage over Australian retailers?
Foreign online retailers may have a price advantage, but not a competitive advantage. I mean, online retail sales only accounts for 3% of all retail sales.
And surely Aussie retailers have a competitive advantage of being here, rather than being on the other side of the world.
But as I’ve pointed out before, it’s not all the fault of the lazy and arrogant retailers. The government has a lot to answer for too – red tape, minimum wages, and import duties.
What the billionaire retailers Lew and Harvey should do is lobby the government to reduce or eliminate import duties. That would be better than lobbying the government to increase your taxes.
Besides, in the end, asking the government to apply GST to overseas online sales will be a case of Australian retailers shooting themselves in the foot.
Consumers don’t buy stuff from overseas because it’s 10% cheaper. It’s just not worth it. Most wouldn’t bother buying something for $45 overseas and wait two weeks for delivery if they could buy the same item down the road for $50 and get it now.
The reason most buy online is because prices are 20%, 30% and even 50% cheaper.
The last time I wrote to you on this subject many Money Morning readers wrote in saying they bought all sorts from overseas – computers, bikes, fridges!
Anyway, as I say, slugging a 10% GST on online sales will do more harm to Aussie retailers than good. If you’re able to buy an item for $25 overseas at a 50% discount to an Australian store, then a price increase to $27.50 isn’t going to stop you buying it.
But what it will do is leave you with $2.50 less in your pocket. That’s $2.50 you’ve been forced to give to the government in tax rather than $2.50 that you could have spent at an Aussie retailer.
Even for bigger ticket items, if you buy something for $800 online, an extra $80 isn’t going to stop you buying it if the alternative is paying $1,500 or more at an Australian store.
All it means is $80 being transferred from the pocket of the consumer into the ravenous pocket of the government… and $80 less to be spent at a local retailer.
But according to News Ltd, “Debt binge is in the past for shoppers”.
The article claims:
“Australia’s retailers have been doing it rather tough. Despite the spectacular growth in employment and strongly rising aggregate household income, retail sales have been surprisingly weak.
“While the retailers are screaming, in the longer term what has happened is something very positive for our economy. There has been a very fundamental change in our economic behaviour.
“It is not so much that we have stopped shopping, rather it is all about our savings habits and use of debt.”
Of course, the article is relying on the Australian Bureau of Statistics (ABS) national accounts which supposedly show “we are back to saving 10c in the dollar of income.”
As we mentioned last week, the ABS advises caution when using the household savings rate. Simply because it isn’t measured directly. It’s only deduced by taking away total household consumption from total household income.
What remains is called savings.
We’re sceptical about this sudden supposed thriftiness. If it’s true then it’s great news, but something doesn’t quite seem right… although to be fair we can’t quite put our finger on what it is.
We’ll keep thinking about it…
Until then, here’s a chart of lending commitments over the past twenty-odd years, shown in millions of dollars:
Source: RBA
Followed by a chart of bank liabilities since 1989, also in millions of dollars:
Source: RBA
And the supposed household saving rate since 1985, likewise in millions:
Source: RBA
So, are households really saving all this money? Or is there something the figures aren’t showing?
I mean, take a look at the household consumption numbers covering the same period:
Source: RBA
The economy hasn’t seen an almighty drop off in consumption. In fact, the level of consumption has remained reasonably constant. Even during the global financial meltdown in 2008 and 2009.
But is it about to stall? Is it about to fall off a cliff?
So, what can explain it?
Our initial guess – and it’s only a guess – is that what we’re seeing is the consequence of the lop-sided Australian economy. Not that the charts above necessarily show this. We’re just drawing a line (maybe a long bow if you want to be critical) from these two contradictory charts to consider what’s really happening in the economy.
Remember that an economy built on credit only appears to work. It makes you believe the economy is growing. But it’s only growing when credit grows. It’s false growth.
This can flow across the entire economy because banks are willing to lend on the basis that the booming parts of the economy will subsidise the non-booming parts of the economy.
Businesses and households who benefit from being subsidised are able to meet their commitments thanks to the subsidies and continued lending by the banks. Businesses make profits and people earn income.
But it’s all subsidised income. Everyone is living off the subsidies of each other. And of course, everyone is living off the wealth of the only truly profitable sector of the economy… at the moment that’s the resources sector.
Which, in itself is living off the subsidies from the Chinese economy and its bailouts.
Hence why many businesses continue to roll-over debt into the future rather than paying it off.
And why many households do the same.
Simply because they can’t afford to pay it off. Not without downgrading the lifestyle or business revenues they’ve become accustomed to.
But when credit markets tighten – as they have – the growth in credit declines. Even though in nominal terms it may still increase. But the slowing growth of credit is bad news for a Ponzi economy.
A Ponzi economy needs to continue growing at a rapid rate. Debt needs to be rolled over, plus those borrowers need to increase debt in order to make new purchases – to maintain their lifestyle, remember.
Finally, the Ponzi economy needs new borrowers to spend otherwise the growth rate drops.
But when banks are worried about the debt they’ve already got on their books, they might be reluctant to take on any more exposure.
So, perhaps it can be argued that the increase in the household savings rate is just a result of banks not lending as much of depositors’ money as it is to do with people saving more.
In other words, what we’re wondering is that perhaps the actual savings rates haven’t changed. The genuine productive parts of the economy are still saving, but the unproductive – or subsidised – sector of the economy is no longer spending.
Australian’s haven’t become more frugal out of choice. They’ve become more frugal – if at all – out of force.
Rather than the savings having increased maybe what’s happening on the other side of the ledger is what has changed. The rate of credit growth has stalled.
Borrowing has ground to halt because of bank nervousness and because the debt binge was brought forward due to government incentives such as the first home buyers bribe.
In that case, savings will build up. But only from those that were already saving. Those that didn’t save because they were too busy borrowing are now finding it more difficult to finance their lifestyle.
They aren’t saving more. They’re perhaps just not increasing their spending as much as before. The Ponzi economy is slowing down. The retail sales figures show you that.
Spending will slow not because they’ve chosen to, but because they’ve been forced to. They’re being forced to downgrade their lifestyle. Not because the economy is booming, but because they can’t get the finance to keep growing their spending forever and maintain their lifestyle.
The recent increases in interest rates wouldn’t have helped either.
But whereas the News Ltd article claims that savers are stocking up for future spending, if we’re right then that’s not the case at all.
It’s merely payback time for years of credit growth that’s grown on the back of a lopsided economy.
Does that make sense?
We could be wrong. We’re only guessing.
But to us it looks as though the household saving rate is giving the market a false signal. A red herring. Savings haven’t increased, it’s just the supply for new borrowing has dropped thanks to the bringing forward of borrowing due to government incentives.
Cheers.
Kris Sayce
For Money Morning Australia
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