Listen, RBA, to Money Morning Readers

There you have it…

Last week, we found out why ScoMo defeated the Bill Australia couldn’t afford.

Voters went with the Liberals for economic reasons.

In a JWS Research survey of 1,000 voters, 39% of them said economic issues were a key factor for their vote.

One Morrison voter later said, ‘Bill Shorten is no prime minister.

He would have sent us broke. He had no clue what climate change would cost or how long to charge an electric car. He looked incompetent.

While I agree with the passionate voter, I’m not so sure Morrison had — or has — much of a clue either.

The Reserve Bank of Australia (RBA) must be happy, though. They want infrastructure spending and that’s what they’re going to get under Morrison.

But it won’t help…

FREE report: Why ‘Nano Metal’ could soon be Australia’s most valuable export.

Promises Phil’s taking to the bank

Cast your mind back, dear reader, to Friday.

I asked you to write in with your answers about debt and income and how they’ve affecting your spending.

I’m delighted by all the answers you sent it. And I’ll get to them in a moment…

I also highlighted RBA Governor Philip Lowe’s proposal to fix unemployment and get inflation back on track.

Here’s what Phil thinks…

He wants governments to spend more money they don’t have on infrastructure projects. That spending will boost jobs temporarily. And the income from those jobs should find its way into the economy. Businesses might respond by increasing production, but not before taking on more debt to do so.

And there…the economy’s fixed.

It solves the unemployment problem by getting people into jobs. It also puts pressure on inflation to pick back up into the RBA’s target range.

Judging from ScoMo’s election promises, I’ll bet Phil is pretty happy with things so far.

When jostling again Labor, the Libs put forward a $100 billion infrastructure plan. Take a look:

Money Morning

Source: Australian Financial Review
[Click to open new window]

Now, IF ScoMo lives up to any of these promises is anyone’s guess. I’m not holding my breath…

We’ve all seen governments start projects for them to turn out to be utter failures…NBN anyone?

Yet even if ScoMo does see his plans through to the end (three years), it likely won’t do all that much for Australia’s economy.

Which brings me to your answers.

A lot of you who wrote in confirmed my initial thoughts. Debts are high, but comfortable for some.

Any increase in disposable income isn’t going to make most of you spend more. Rather it might just make you pay off your loans faster.

Here’s what reader Ben said:

Hi,

My wife and just bought an apartment. Aside from the numbers working out favourable for us to buy, sensing the  bottoming of the Brisbane inner city apartment slump and the chances of a rate decrease (which you guys have said was more likely than the at-the-time consensus of a rate rise) was factored in to give some more upside to the deal. 

We already live pretty frugally and have a solid relationship with money : I save/invest 50% of my income and my partner saves about 40-50% as well. A rate decrease will mean we can put more towards paying our apartment off quicker or just more money for investments. 

Just because cash is cheap, I’m not suddenly going to go buy stuff I don’t need. 

Cheers, 

Ben.

Reader Aaron was of the same mind…lower rates are going to do diddly squat for those Aussies under mountains of credit card debt and personal loans…

Hi Harje,

Interesting read this morning.

Yes, debt burdens have pushed our spending way down.

We’re in the unfortunate position where we have defaulted on some debts, so we’re royally screwed. If you ever want to see an example of how discrimination is alive and well, simply tell anyone that you have defaulted on a debt.

We’ve been struggling along with reduced spending for a few years now, to no avail. Since third party debtors aren’t really interested in is paying them off.

Lowe can do all he likes with interest rates, but they’re not going to impact people’s spending or debt repayments. It might save a few bucks on the mortgage, but credit cards and other debts won’t change.

Reader Tim was concerned with the unsustainability of incomes levels for average Aussie Joes. Here’s a snippet of what he wrote:

We believe the continual cost of living increases are not sustainable for the “average joe “ with a mortgage so our focus is get rid of debt, any increase in salary or increase in profit, or decrease in interest rates will be used to get rid of debt as fast as possible, so in the future as the cost of living continues to increase we can handle it without having to make major adjustments to our life and where we live and we are country based in a town of 1000 people.

It is only Government and large business with monopolistic or in dominant markets that can pass on at least a minimum CPI increase in wages and salaries or more if in public service, in the real world of small to medium business were competitiveness is being eroded passing on CPI increase in wages and salaries comes at the expense of profit and it must be recouped in increased productivity or cost cutting, all of which effect the business’s being able to spend , reinvest or importantly create more employment opportunities.

Even In this low interest rate environment we are very care about our spending and have put off major purchases for the time being.

Cheers

Tim.

And readers Alan and John brought up a good point. They shed light on the situation from a retiree’s perspective. Here’s what John wrote:

I am retired and have no debts but if interest rates drop so will my income which will mean much less spending as most of my savings are currently in term deposits earning about 2.85%.

I do not want to be forced into taking on high risks investments in the stock market at this time even thou Greg Canavan has recommended many good investments.

I also have a PM account at the Perth mint which has proven to earn me 6% yoy return.

So if interest rates were to drop any further I would transfer my cash from the banks and buy more PM’s. I cannot see how this help banks as they lend my money out 10x my deposits. And if everyone did this then the banks would be in serious trouble.

Regards

John.

Of course, there were a few readers that feel their spending has been and will be completely unaffected. Largely because they had no debt to begin with.

This was the situation for succinct reader David…

Hi,

I am unaffected completely – 0 debt.

Cheers.

Same for reader Richard…

Absolutely zilch.

No debt, enough income, decent lifestyle, try not to spend money on rubbish anyway…

Best

Richard.

For the majority of you however, it seems pretty obvious. Lower rates won’t affect your spending. In fact, it might encourage some of you to spend less.

Are you listening RBA?!

The foreman’s salary ain’t bad

But not only does the RBA want to see higher levels of spending, they want to see lower employment too.

Yet how will that work when automation and robotics eliminate jobs over time.

Of course, there will be jobs in the future.

But the transition from being laid off, reskilling and entering a whole different industry takes time. Far more time than the RBA is willing to wait.

Largely this is happening to manufacturers. Nations like China, Japan and Germany.

These factory workers are being pushed off the factory floor to make way for automated machines and robotic arms.

It’s why Japan has a massive workforce loading goods onto trucks and not on the production line.

Luckily, we don’t have this problem Down Under.

While there might be a few factory jobs, it’s not as if 40–50% of our population will soon need to reskill and enter a whole new industry…

But maybe I’m wrong.

Robots are kicking us out of factories. They’re also showing us they can do other tasks just as well if not better than we can.

Just look at what’s happening to the US’ largest port…

Pier 400 in Los Angeles looks like the future for driving. Bloomberg writes:

…electric motors replacing gasoline engines, autonomous software replacing human workers. The company says the changes are necessary to meet California rules requiring container terminals to reach zero emissions by 2030 and to keep business from leaving for other coasts.

The Los Angeles terminal has already ordered an electric, automated carrier from Finnish manufacturer Kalmar, part of the Cargotec Corp., that can fulfil the functions of three kinds of manned diesel vehicles: a crane, top-loader and truck. With enough of those, APMT could eliminate 65,000 miles driven daily by diesel trucks and cranes.

There would be fallout, though. The move to a robotic, emission-free operation may cut the need for workers such as Anthony Armijo, a part-timer who has spent 15 years picking up leftover dock shifts. “I just don’t understand what we’re going to be doing in the future,” he said. “I’m an American citizen. You would think they would have a way for us to make a living.”

This is great for employers by the way.

A dockworker might take home US$183,000 a year, whereas the foremen earns US$281,555.

Add that up among a couple hundred guys for decades and that’s a lot of money with very little productivity growth.

But spend say US$1.5 billion to fully automate a port, eliminate most of those wages and see productivity double by 2021…that doesn’t sound so bad.

And that’s what the Long Beach Container Terminal is currently working towards.

This will likely be the biggest problem facing our economy in the coming years: the displacement of jobs because of productivity.

Don’t worry. There will be jobs in the future. They’ll just be different.

What I’m far more worried about is how central bankers will respond.

What happens next…

Circling back to the RBA and their decision, we’re a little over a week away from another rate decision. Will they or won’t they cut rates?

I know what property investors would like them to do…

I don’t have an opinion on the matter, though. But if the RBA continues to look at unemployment and inflation as leading indicators for the economy, we could see far lower rates than 1.5%.

All they need to do is listen to Money Morning readers to see this won’t work anyway.

Jobs are being lost. People need time to transition. And in this time, our system might be pumped with a whole lot of cash…again.

And you know what’s going to happen next?

Nothing. The economy won’t get better. People and businesses won’t want to get even deeper in debt. All it will do is ramp up speculation, people looking to get rich quick from property, stocks and bitcoin.

Please can we let the economy just sort itself out…however painful that might be.

Your friend,

Harje Ronngard,
Editor, Money Morning

PS: Four-Step Guide to Small-Cap Success. Download your free report now.


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 Port Phillip Publishing, 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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