Dear Reader, What Does Your Spending Look Like?

Here’s what we need…

We need our government to spend more money it doesn’t have on infrastructure. It should create new jobs, and the income from that needs to be spent in the economy, spurring on businesses to borrow more at record low interest rates to increase production.

This is the solution according to Reserve Bank of Australia (RBA) governor, Philip Lowe.

The mainstream seems to think Lowe has already signalled an interest rate cut in the coming days. Cited by the Australian Financial Review, Lowe said he would be ‘advising all governments to make sure they’re investing in infrastructure that creates jobs and gives us increased supply capacity.

It’s all in an effort to increase spending.

Lowe wants to see consumers spend, businesses spend, even the government. All this spending is supposed to get us out of the economic rut we find ourselves in.

But it won’t happen. I don’t believe Lowe will get the level of spending he wants. Maybe he can encourage the government to spend. But good luck getting Aussies and businesses to follow.

It won’t happen. And you know why? Because they’ve got debt anvils hanging above their heads…courtesy of the banks.

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How’s a 30% pay cut sound?

In my biased opinion, Melbourne is the best city in the world. Sydney is good too. But living in either doesn’t come cheap.

While they might not be Manhattan-level expensive, they’re certainly up there.

I bring this up because I want to draw some comparisons. I also want to conduct a little experiment, for which I’ll need your help.

We’ll get to that soon…

First, I want to tell you about a video my wife shared with me last night.

While the video was from Glamour and is probably not entirely accurate, I found it intensely interesting. The video repeated survey answers.

Glamour asked the women from New York city how a 30% pay cut would affect their lives. They got answers from a whole bunch of different women of varying ages and incomes.

The video highlights 13 answers, with all of them read out by actors.

I’ve copied out the answers in the table below…

Money Morning

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What can we learn from these answers? Other than the fact that we should all be business executives so we can pull in more than half a million a year, of course.

A lot of the women living in NYC would either have to move out or take a second job just to meet their debts or rent and basic living expenses.

Even the 35-year-old police officer making US$85,000 a year said she could not afford to live in NYC with a 30% pay cut.

Now, the similarity I want to draw between a 30% pay cut and higher debt burdens in Australia.

As you know, Aussie property was on quite the run over the past few years. Banks were willing to lend, and buyers were willing to follow prices up all the way.

Most borrowed as much as they could. Some were able to borrow a little bit more than that even.

It’s why Australia’s average household debt now almost triples incomes. Take a look at household debt-to-income ratios, curtsy of the RBA as at September 2018…

Money Morning

Source: RBA
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That’s the median debt-to-income ratio.

How is this similar to a 30% pay cut? Well, the more Aussies borrow to fund the dream home, the higher their repayments and the less they have to spend on other things.

While their pay hasn’t been cut by 30%, their disposable income (the income they spend on non-essential goods and services) has gone down dramatically.

I want to hear from you!

I think if you ask the families of Australia how increased debt has changed their lifestyle, you might get some similar responses to the above.

Okey, so maybe they don’t have to move out of Melbourne or Sydney. But Aussies now have to pay down more debt than ever. And it’s limiting their ability to spend on other things, the stuff the RBA would like them to spend on.

Now, for our experiment…

I’ve just assumed this all. Maybe debt is manageable. Maybe there is room for more spending. But I want to hear it from the horse’s mouth. This is where you come in, dear reader.

I want to know if your personal level of debt or your level of income is affecting your spending in some way. Maybe you just don’t go out to eat as much. Maybe you put off large purchases for a later date.

Or maybe you’ve been unaffected completely.

Whatever your answer is, I want to hear it!

So please write in to and tell me whether your debt burdens or income levels are affecting your spending in any way.

If your answer is what I expect, then Lowe’s plan is useless.

Flooding the system with more money won’t get people spending. I expect most Aussies will use any extra cash to pay down debt, trying to create equity and improve their personal financial balance sheets.

Your friend,

Harje Ronngard,
Editor, Money Morning

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Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

Money Morning Australia is published by Fat Tail Investment Research, an independent financial publisher based in Melbourne, Australia. As an Australian financial services license holder we are subject to the regulations and laws of Corporations Act and Financial Services Act.

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