Wages/assets deflation

 
  HeadShunt Chief Train Controller

sustainable 6 -7% growth in the Chinese economy
DirtyBallast
How long do you think 7% growth could be sustained? At that rate of growth the economy would be doubling in size every ten years. How many more doublings in real terms does China's economy have left in it before various market limits are reached? 10% growth is gone and I'm wondering how long 7% will last. The other thing is that China's growth over the last decade (on top of the previous 20 years of growth) did not exactly happen in isolation.


the US economy is slowly looking better than it was a couple of years ago
wn514

As for a real recovery of the US economy and return to the previous "norm", I don't think so. It might be looking better by some measures, but don't let yourselves be fooled by the cooked figures being pumped out by the government and other groups who want you to believe that the system ain't broke. The future is going to be smaller than the present and the adjustment will not be pleasant for a lot of people, as many ordinary Americans already know.

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  don_dunstan The Ghost of George Stephenson

Location: Adelaide proud
Headshunt - you are right on the money.  The boom that we have seen in the last 10-12 years was historically unprecedented and it can't be repeated.  The Chinese have now industrialised and substantially urbanised as much as they can afford to at the moment anyway, demand for things like iron ore (in particular) will go back to normal historical averages.  The boom that made Gina Rinehardt and Twiggy Forrest multi-billionaires will not be repeated - if anything the Chinese will stop building for a few years while the population catches up with all the overbuilding that's occurred.

If you don't believe me have a look at this story on "Chinese ghost cities";

http://www.cbsnews.com/video/watch/?id=50142079n

A friend of mine who is knowledgeable about China says that the situation is very difficult to assess; they don't like talking about problems their rapid growth has caused and any negativity can be perceived as dangerously unpatriotic.
  HeadShunt Chief Train Controller

If you don't believe me have a look at this story on "Chinese ghost cities";

http://www.cbsnews.com/video/watch/?id=50142079n

A friend of mine who is knowledgeable about China says that the situation is very difficult to assess; they don't like talking about problems their rapid growth has caused and any negativity can be perceived as dangerously unpatriotic.
don_dunstan
Yes those ghost cities, idle factories and other activities funded by stimulus are part of China's "fake" GDP growth. Having said that, China is not the only country with "fake" GDP figures; the US is suffering from it too because it includes government spending as opposed to "real" demand. If QE4ever (currently something like $85 billion per month) came to an end and consumers could not continue taking on cheap debt the economy would practically shut down. This is not normal.

The word on the street is that several major Chinese banks are in big trouble and at least one has recently suffered a technical default on debt.


China's growth over the last decade (on top of the previous 20 years of growth) did not exactly happen in isolation
HeadShunt
Expanding on that, the peg of the yuan to the USD meant that when the US went into crazy money printing mode with its cheap credit boom, so did China, and the effects of the easy money policy of course filtered through globally. For the last 30 odd years we have been transferring our factories to China to exploit cheap labour (meanwhile Western economies were becoming less and less productive, personal debt levels skyrocketed to make up for a lack of real growth and so on); that programme has more or less run its course now because there aren't many factories left in the West to swallow up. What are they going to do to maintain their expectations of high real growth now? This economic system does not plateau very well, it's either growing or in trouble. There is also the often ignored link between energy (oil) and economic growth that was mentioned in a previous post and into which I have delved deeply in other threads.
  don_dunstan The Ghost of George Stephenson

Location: Adelaide proud
Headshunt - it will be interesting to see the reaction that the Party has to a slowing/problematic economy... remember, we are NOT dealing with a liberal democracy here, China is a totalitarian one-party state.  As with our own country, there's a whole generation that doesn't understand recession and they have no experience of a tight job market and/or stagnant house prices.  As I mentioned earlier, I've had a number of conversations with 'young' people in their twenties who have no idea that things can get tough - and I believe it will be the same in China.

They are also getting 'affluent' problems like we are; too many graduates and not enough jobs (for example).  Apparently nearly a million people in China have engineering qualifications but can't find work in their fields; we have problems here that are similar.  Some professions are getting into chronic over-supply like nurses, teachers, psychologists, social workers, pharmacists, engineers and (recently I've heard) dentists.  I feel that 'westernised' economies are going to have to deal with a wave of highly-educated, under-employed people in the future - there simply isn't the demand for them that was anticipated.  That's where I'm forever angry at people like bloody Bob Hawke and Joan Kirner because they shut down tech schools anticipating that everyone would have a degree... we just can't practically absorb the number of graduates that are being pumped out at universities, there simply isn't the work.
  RTT_Rules Oliver Bullied, CME

Location: Dubai UAE
But the factories don't just shift from West to developing, they move as the developing become more developed and costs rise (read Japan, Tawain, Sth korea, HK and now China). India is also seeing same with its call centre domination now shifting to cheaper countries with bette english accents like Phillipines. And then of course you have new countries that have draged themselves out of the civil war/closed border what ever turmoil and now opening their doors.

China will catch up to its growth quickly, but yes its outgrew itself. China is now also fixing it past wrongs with regard to pollution (India continues to ignore this). So they are spending money there.

China also grew to feed the Western Monster with cheap goods. The western monster don't like their goods falling apart as they open the box. A few manufactures have found that by the time they inforce the required quality costs, there are other options open to them in their home country or close by. China's labour force is rising in costs to eat further into the gap. Then there is IP theft as seen by Billabong shirts openingly for sale in China manufactured in the same production line, after hours off the books.

I believe its been estimated that an Iphone made in US would cost $30-40 more. If the production line is so automated, the labour costs have little impact. People in US as starting to question the likes of Apple with some smart phone production heading home using the "MADE IN USA" as their promotional slogan. just like India has lost the Call centre race, China I feel is losing the manufacturing race,

Oil production has leveled, but so has demand at $100/b. There is no cap, just demand matching supply at the higher price for which the middle east has no interest in lowering. Its also not about just oil, most other commodities apart from aluminium are also elevated above inflation on 2000 prices.
  HeadShunt Chief Train Controller

Headshunt - it will be interesting to see the reaction that the Party has to a slowing/problematic economy... remember, we are NOT dealing with a liberal democracy here, China is a totalitarian one-party state.  As with our own country, there's a whole generation that doesn't understand recession and they have no experience of a tight job market and/or stagnant house prices.  As I mentioned earlier, I've had a number of conversations with 'young' people in their twenties who have no idea that things can get tough - and I believe it will be the same in China.
don_dunstan
I think most people are going to learn this and other lessons that could be on the horizon the hard way because they will not hear or see the warnings/be able to do much about them. It's hard to say what effect that will have on the relationship between populations and their former representatives-turned rulers (in the emerging Western Police States) or totalitarian rulers (China etc) but somehow I don't think it's going to be a smooth ride.


They are also getting 'affluent' problems like we are; too many graduates and not enough jobs (for example). Apparently nearly a million people in China have engineering qualifications but can't find work in their fields; we have problems here that are similar. Some professions are getting into chronic over-supply like nurses, teachers, psychologists, social workers, pharmacists, engineers and (recently I've heard) dentists. I feel that 'westernised' economies are going to have to deal with a wave of highly-educated, under-employed people in the future - there simply isn't the demand for them that was anticipated. That's where I'm forever angry at people like bloody Bob Hawke and Joan Kirner because they shut down tech schools anticipating that everyone would have a degree... we just can't practically absorb the number of graduates that are being pumped out at universities, there simply isn't the work.
don_dunstan
A lot of people got caught up in the "New Services Economy" mania and other BS of the 1980s and 90s as economies and economic policy went through major changes (read: were financialised, de-industrialised and de-democratised), the religious belief in the merits of tertiary education and by extension that everyone could enjoy highly paid professional careers in the land of milk and honey etc. They are slowly realising the reality of the economy and the flaws/limits to those ideas.

Having a degree is all well and good, but for practical purposes it has to be a means to an end, that end being not just your survival but your thriving in society. There's no point having a degree if it doesn't get you a job, preferably one that pays good money and ideally that adds real productivity to the economy because in the long run many of the unproductive jobs (and there are an awful lot of them) will not survive - again I think the fake printing press GDP growth is now propping up a lot of this rubbish. Of course the education "industry" - the for-profit industry - doesn't care about employability as long as it makes its money.

Also if "everyone" has something the edge of scarcity is lost, creating an employers' market and putting downward pressure on salaries for those who are lucky enough to get a job. I think ordinary Americans have been hit harder by the oversupply of highly qualified university graduates than we have at this point, and there are many articles and videos on YouTube covering the problems they face. Thousands of lawyers and other highly qualified young people working as waiters, professors telling students to run away from college as fast as they can because they won't get a job in their field of study and won't be able to pay off their debt. College debt exceeding credit card debt. There are videos of kids throwing their degrees in the fire because they are convinced that they have no hope of getting their dream job, and they are probably right. While they burn their degrees they cannot burn their debt away - that will be for the government and central bank to inflate away by printing press. Then there are the Western universities that have campuses in Asia where virtually everyone passes no matter how bad they are. Some of these substandard graduates then head to the West and compete with the locals for what little work there is available.


China also grew to feed the Western Monster with cheap goods. The western monster don't like their goods falling apart as they open the box. A few manufactures have found that by the time they inforce the required quality costs, there are other options open to them in their home country or close by. China's labour force is rising in costs to eat further into the gap. I believe its been estimated that an Iphone made in US would cost $30-40 more. If the production line is so automated, the labour costs have little impact. People in US as starting to question the likes of Apple with some smart phone production heading home using the "MADE IN USA" as their promotional slogan. just like India has lost the Call centre race, China I feel is losing the manufacturing race,
RTT_Rules
Yeah, the return of manufacturing to the West is not always the great thing it might seem at first, especially if it can only come back because of automation or, in the case of labour intensive work, because the local economy has been devastated, with high unemployment and people willing to accept peanuts for pay because there is nothing else. It's better than nothing but subsistence wages and continuing debt-fuelled lifestyles are not the way to the mythical land of milk and honey, either. Automation and overproduction are issues that will be corrected eventually.
  don_dunstan The Ghost of George Stephenson

Location: Adelaide proud
This has evolved into an interesting and varied discussion about the state of the economy in general, thanks to all who have contributed, I always enjoy hearing other people's points of view provided they are well thought-out and argued.

China in particular is such a vexed question because we just don't know what's going to happen and our fate is very much intertwined with theirs. You don't know how the Party will react to challenges to it's power structure in the form of a slowing/problematic economy.  If the handles really fly off then the whole country could possibly collapse into a screaming heap - historically they have had a lot of revolutions and upsets - there's no reason why it won't happen, it's happened before.

That's why the Party is very vigilant with squashing any dissent from things like forced land acquisition.  In the future with a more educated and more affluent population it's going to be much, much harder to get their way every time.
  RTT_Rules Oliver Bullied, CME

Location: Dubai UAE


Yeah, the return of manufacturing to the West is not always the great thing it might seem at first, especially if it can only come back because of automation or, in the case of labour intensive work, because the local economy has been devastated, with high unemployment and people willing to accept peanuts for pay because there is nothing else. It's better than nothing but subsistence wages and continuing debt-fuelled lifestyles are not the way to the mythical land of milk and honey, either. Automation and overproduction are issues that will be corrected eventually.
HeadShunt
I work in UAE were govt policy is that only people born from at least 50% citizen (previously father only) can indeed be a citizen and hence without this bit of paper you cannot stay here unless you have a sponsor and the sponsor for adults is normally your employer. Self funded is possible for about $5000 a year if you set up a shelf company in a free zone. Outside the free zone's all business must be 51% locally owned, ie most business owners find a national to have 51% ownership of their company for which the National contributes nothing and gets paid for the privalege. Govt policy gives nationals higher salaries and preference in employment especially in govt run enterprises. Private companies also give Nationals jobs real or not just to look good with govt. All the basic jobs are done by expats on cheap labour.

Whats this all mean? Bascally this is the only arrangement I can see where 100% employment and wealth for all citizen's of a country can have well paid "jobs". Every economy must have the working poor as welll as the wealthy and middle class. In the 21st century, you cannot manufacture basic/low skilled goods on high salaries indefinitly if you want to retain that industry. If you keep loosing industry, eventually the lower paid jobs the working class had will be gone and they quality of life and standard of living will be even lower. The important thing is to ensure the lower paid employees don't become slaves and are looked after and given the same opputunities at school and health care and not discrimated against (unlike the UAE). Not everyone can be a IT guru and its irrelevent anyway as you can pay IT guru's in India to do the same job for less, with 10's millions of IT graduates, its not hard to find a few good ones.

Degree wise, most Australian universities have good to excellent world standings. In Australia there is little discrimination from one uni to the other and usually within 2-3 years of leaving uni few give a smeg anyway and like me, most never even have to show their paperwork (UAE was first job in 20 years I had to find my transcript, even India didn't care).  I think the skills shortage has woken most employers up to the BS degrees (and trades) from the sub-continent and others. I work with an Indian guy that was kicked out of a Australian manufacturing site and he and famiy sent home after 6mths for this reason. We are hearing more employers for remote regions of the world chasing EXpat in oil and gas would rather western expat from any heavy industry and train them than hire Indian O&G because the CV's are usually (but not all) so much a work of fiction. Once you get out of Australia you also quickly realise your passport says more about you than anything else when applying for a job. Should the mining boom/skills shortage occur again (it will, one day), I cannot see Australian employers again rushing for sub-contients like last time. Probably target Eastern European, better fit cultually (a large part of Indian's do not travel well due to diet and expectations on job, promotion and working with women etc, juniors and non-degree qualified people), often better standard of education. Fillopino's can be hard workers, food wise are easy and have culture that is more western orientated. Usually a great source for trades but lack the skill levels of many Aussie trades and often better english standards. But degree wise Pillipines is a bit lacking.

I don't believe the artificle GDP's is a major issue. The world needs to catch up to the boom of the 2000's. The debt levels and budget deficits is keeping us treading water until we again fall back on the longterm growth curve. China drove much of the 2000's boom due to shift of jobs from west to east and the fast recovery, normally on developed country influence only, the boom would not have lasted as long as it did, the crunch would have been softer for many economies than it was and it would be more behind us. Manufacturing will return to the west, although differently, the workers/trades/professional salaries in Australia needs to return to something sustable. The number of new SUV/4x4's in Australia will slow and age, the number of houses built with pools, 4-5 bedrooms will also decrease and along with it the abilty to go OS for holidays. The dollar will go down making local manufacture more profitable and hence the cycle will begin again. We have been here before. 60's boom (driven by mining), 70's debt and loss of maufacuturing, 80's payback, late 90's recovery and return to manufacturing, 2000's boom. The recession correction Australia needed in early 2010's didn't happen, it has to come, we cannot all live in $100,000 salaries.
  HeadShunt Chief Train Controller

The recession correction Australia needed in early 2010's didn't happen, it has to come, we cannot all live in $100,000 salaries.
RTT_Rules
I also think there is a correction on the way.

Interesting points about the fake qualifications...

I don't believe the artificle GDP's is a major issue. The world needs to catch up to the boom of the 2000's. The debt levels and budget deficits is keeping us treading water until we again fall back on the longterm growth curve. Manufacturing will return to the west, although differently, the workers/trades/professional salaries in Australia needs to return to something sustable.
RTT_Rules
As long as we recognise GDP for what it really is. I do wonder what that long term growth curve you mentioned is going to look like, in terms of real growth.

The number of new SUV/4x4's in Australia will slow and age, the number of houses built with pools, 4-5 bedrooms will also decrease and along with it the abilty to go OS for holidays.
RTT_Rules
And in the eyes of many people - the people who have been led to believe that things would get bigger and better forever - this "correction" will be seen as a step backward. The pool of energy and other resources available per capita is not growing at a rate high enough to allow the growing lower classes to live the postwar American or Australian dreams as it has done in the past. In other words, our share of the pie as average citizens is shrinking.

In the 21st century, you cannot manufacture basic/low skilled goods on high salaries indefinitly if you want to retain that industry. If you keep loosing industry, eventually the lower paid jobs the working class had will be gone and they quality of life and standard of living will be even lower. The important thing is to ensure the lower paid employees don't become slaves and are looked after and given the same opputunities at school and health care and not discrimated against
RTT_Rules
When industries start returning I think conditions for the workers will be very different to before they left for Asia. It's a whole new ballgame. Political power structures have changed. The unions have been smashed, although they could make something of a comeback after awhile.

This won't be popular but I think some industries are illegitimate and need to shrink or shut down - market forces may make that happen anyway. Also, there are many jobs, particularly outside of manufacturing, that are unproductive, bureaucratic and parasitic/rent seeking and will have to go. Since this is Railpage I'll add that Sydney's railways have plenty of employees who fall into the unproductive category, and not just blue collar "bludgers", probably more white collar.

Looking back to the early days of the industrial world many factory workers did 56-72 hours per week starting in their early teens, and lived in squalor to the ripe old age of about 40. They were literally wage slaves and did not have anything like the same opportunities as those born into wealthier families. I'm not suggesting we would end up in that situation again, but there is a general view that people will have to do more for less in the future, so we could be headed at least a short distance in that general direction.

Wages falling to levels supported by market conditions is one thing but I hope that does not mean an underemployed breadline existence for most while a small number get to bathe in liquid gold. As you said, the important thing is to ensure that doesn't happen, but who will be doing the ensuring? The corrupt Government of the rich? hmmmm I don't think so... The People? Maybe, but it would be a tough slog.
  RTT_Rules Oliver Bullied, CME

Location: Dubai UAE
I also think there is a correction on the way.

Interesting points about the fake qualifications...
HeadShunt
I actually don't think the correction will be too bad for Australia. Unemployment will rise to between 6-7%, which I think won't be a bad thing as it will basically supress wage rises and enable employers to offer lower wages to new starters and steadily bring down costs back to reality. House prices will I think be steady as long as unemployment doesn't rise too far. This should be good for local maufacturers as mass unemployment often doesn't help their case more than high $A.

World wide, US I think reading the various opions will retain its steady but slow growth, Europe is probably close to bottoming out this year.
  don_dunstan The Ghost of George Stephenson

Location: Adelaide proud
I actually don't think the correction will be too bad for Australia. Unemployment will rise to between 6-7%, which I think won't be a bad thing as it will basically supress wage rises and enable employers to offer lower wages to new starters and steadily bring down costs back to reality. House prices will I think be steady as long as unemployment doesn't rise too far. This should be good for local maufacturers as mass unemployment often doesn't help their case more than high $A.

World wide, US I think reading the various opions will retain its steady but slow growth, Europe is probably close to bottoming out this year.
RTT_Rules

If inflation takes off as a result of a falling $AU then the traditional remedy for this is a large increase in interest rates; think late 1980's when rates spiked to a huge 15% or so.

Lots of people alive now have never even seen double digit interest rates - can you imagine trying to service a $300,000+ mortgage with rates over ten percent?  Your interest bill would go from about $17,000 p/a (now) to $30,000 p/a or more.  Lots of people would be bankrupted - interest rates are historically extremely low and we already have people surviving from week to week barely able to make payments.  Friends of mine recently sold an investment property in Melbourne on the basis of the rent going nowhere near the cost of the (remaining) mortgage and capital gains being extremely unlikely in the future; they calculated that the tax savings weren't nearly enough to compensate.  I think they were sensible to get out now rather than waiting until it's chronically unaffordable.

Residential property speculation has been an enormous part of our economic success story in the last ten or twelve years; it's hard to know what would happen if property started going substantially backwards.  Panic selling?  Who knows.
  don_dunstan The Ghost of George Stephenson

Location: Adelaide proud
.....

A lot of people got caught up in the "New Services Economy" mania and other BS of the 1980s and 90s as economies and economic policy went through major changes (read: were financialised, de-industrialised and de-democratised), the religious belief in the merits of tertiary education and by extension that everyone could enjoy highly paid professional careers in the land of milk and honey etc. They are slowly realising the reality of the economy and the flaws/limits to those ideas.

Having a degree is all well and good, but for practical purposes it has to be a means to an end, that end being not just your survival but your thriving in society. There's no point having a degree if it doesn't get you a job, preferably one that pays good money and ideally that adds real productivity to the economy because in the long run many of the unproductive jobs (and there are an awful lot of them) will not survive - again I think the fake printing press GDP growth is now propping up a lot of this rubbish. Of course the education "industry" - the for-profit industry - doesn't care about employability as long as it makes its money.

.....
HeadShunt

This more or less describes my situation.  I have a degree and two postgraduate qualifications from three different leading universities - in fact I got first class honours for the last postgraduate qualification I did - yet I can't find work even close to what my qualifications are in because it's saturated.  There are people with my level of qualification who are answering telephones and stuffing envelopes because none of us can get work.  What do you do?

Certainly I have a greater understanding of the world and my chosen field but as you say, if it's not leading to an enhanced vocational outcome then really it was a waste of time/money.

I went to careers counselling recently at the last university I attended (one of the 'big five') and they had nothing to say to me except "maybe you need to do Masters".  FFS, I've already thrown away years of productive capacity and tens of thousands of dollars and you're telling me I need more of the same?  The definition of insanity is doing the same thing repeatedly expecting a different outcome so I'm not buying into the whole tertiary qualifications thing any more, in fact, I'm thinking about becoming a welder (the money is really good and I have some industrial experience from working in steel fabrication factories while I was at uni).

I've also come to the conclusion that you made above, universities are after your money - they don't give a sh*t that the qualifications they sell you are completely useless.
  RTT_Rules Oliver Bullied, CME

Location: Dubai UAE
If inflation takes off as a result of a falling $AU then the traditional remedy for this is a large increase in interest rates; think late 1980's when rates spiked to a huge 15% or so.

Lots of people alive now have never even seen double digit interest rates - can you imagine trying to service a $300,000+ mortgage with rates over ten percent?  Your interest bill would go from about $17,000 p/a (now) to $30,000 p/a or more.  Lots of people would be bankrupted - interest rates are historically extremely low and we already have people surviving from week to week barely able to make payments.  Friends of mine recently sold an investment property in Melbourne on the basis of the rent going nowhere near the cost of the (remaining) mortgage and capital gains being extremely unlikely in the future; they calculated that the tax savings weren't nearly enough to compensate.  I think they were sensible to get out now rather than waiting until it's chronically unaffordable.

Residential property speculation has been an enormous part of our economic success story in the last ten or twelve years; it's hard to know what would happen if property started going substantially backwards.  Panic selling?  Who knows.
don_dunstan
Good reason why property prices rose so much in such a short space of time. During Howard's tenure, rates dropped and eventually extra spending power drove up competetion for better houses. That and I think 2 income famiies become standard for signing up for a loan and easy to get near 0% deposit finance.

Interest rates went up in 80's because I thought of govt spending driving inflation. Had the govt over last 3 years reduced spending perhaps interest rates would have dropped and along with it $A??? and hence made life easier for exporters.
  Graham4405 Minister for Railways

Location: Dalby Qld
Interest rates went up in 80's because I thought of govt spending driving inflation.
RTT_Rules
You were to blame? I'll send you a bill...
  don_dunstan The Ghost of George Stephenson

Location: Adelaide proud
Good reason why property prices rose so much in such a short space of time. During Howard's tenure, rates dropped and eventually extra spending power drove up competetion for better houses. That and I think 2 income famiies become standard for signing up for a loan and easy to get near 0% deposit finance.

Interest rates went up in 80's because I thought of govt spending driving inflation. Had the govt over last 3 years reduced spending perhaps interest rates would have dropped and along with it $A??? and hence made life easier for exporters.
RTT_Rules

The dollar got hit really hard in the mid-80's; recall Keating's float in 1984 shortly after Labor was elected and then the subsequent jokes about it sinking like a stone?  Fraser had the dollar fixed relatively high and by the mid 1980's we were in serious trouble around the 60 cent mark; it later improved in the late 1980's but I think the damage was done in terms of imported inflation.

I think we are in for the same thing Mark 2.
  HeadShunt Chief Train Controller

Friends of mine recently sold an investment property in Melbourne on the basis of the rent going nowhere near the cost of the (remaining) mortgage and capital gains being extremely unlikely in the future; they calculated that the tax savings weren't nearly enough to compensate.  I think they were sensible to get out now
don_dunstan
I agree they probably did the right thing. The majority of any future capital gains are likely to come from the fiat currency printing press rather than real growth, just as they already have been for years. In other words, they would be mostly inflationary gains, not real gains. Now that sort of inflationary environment can still be used to the benefit of an investor, but it's not the great thing it's cracked up to be.

Rent might be dead money, but so is the interest on the mortgage of an overpriced property....


Residential property speculation has been an enormous part of our economic success story in the last ten or twelve years; it's hard to know what would happen if property started going substantially backwards. Panic selling? Who knows.
don_dunstan
Like all bubbles it has to implode sooner or later, but while cheap money is still being pumped in here and there it will continue on life support, fooling people into getting on board rather than risk "missing a great buying opportunity". Then there is one analyst saying we are at the beginning of another 14 year property boom. I really can't see how as the real economy continues to go backwards but I guess the money expansion will no doubt go on like a continuous adrenaline line to the economy, which will have some impact... Despite such predictions, I don't think that bubble popping process has run its course yet, but have no idea when it will or how bad it will get. There are other economists saying Australian housing is already 50% overvalued and headed towards a major correction.
  Speed Minister for Railways

Interest rates went up in 80's because I thought of govt spending driving inflation. Had the govt over last 3 years reduced spending perhaps interest rates would have dropped and along with it $A??? and hence made life easier for exporters.
"RTT_Rules"

At different times in the 80s:
  • The Hawke Government lifted some regulations, so the interest-rates for home-loans were no longer fixed low. Just like any other borrowing, home loans became subject to "monetary policy", where the Government set a base interest-rate by controlling the supply of money.
  • After loosening monetary-policy around 1986 in response to a stock-market crash, the Government chose to raise interest-rates in late 80s, because Australia's economy, like other western countries, was going a bit too fast and was likely "to overheat". It overheated anyway, was slowed down too much anyway and we lead the world into "the recession that we had to have".
  don_dunstan The Ghost of George Stephenson

Location: Adelaide proud
....

Like all bubbles it has to implode sooner or later, but while cheap money is still being pumped in here and there it will continue on life support, fooling people into getting on board rather than risk "missing a great buying opportunity". Then there is one analyst saying we are at the beginning of another 14 year property boom. I really can't see how as the real economy continues to go backwards but I guess the money expansion will no doubt go on like a continuous adrenaline line to the economy, which will have some impact... Despite such predictions, I don't think that bubble popping process has run its course yet, but have no idea when it will or how bad it will get. There are other economists saying Australian housing is already 50% overvalued and headed towards a major correction.
HeadShunt

In the last few years we've also had the rise of the cashed-up Chinese buying property over here as a hedge; residential property speculation is much harder in China so wealthy Chinese have been buying up here and in places with good legal and social systems like Vancouver and Auckland.  There's also this relatively new development of people putting their self-managed super funds into residential property; this was strictly forbidden until about three years ago (as far as I recall).  Real-estate spruiks and developers have been flogging this new 'investment product' quite heavily to the extent that ASIC has recently been warning people to be careful about sinking their whole super into property.

But don't worry, mate, property only ever goes up!

As you say cheap money is the key, while we have mega-mortgages that are easy to obtain with very little collateral then we will probably continue to see the phenomenon of half a million dollar two-bedders in Melbourne and Sydney.  Once either bank wholesale funding costs get very unaffordable OR the Reserve tries to head of inflationary pressures by hiking rates then the cheap money era will be over.

Also, as far as a correction goes, we are probably already in the process of it in some parts of the country.  I have mentioned the Adelaide property market before: If you look at the data, the median house price for Adelaide has been stable or slightly declining since late 2010.  Taking into account inflation, this means it's actually been shrinking by 2-3 percent annually.  So the average residential property speculator in Adelaide would probably be slightly out-of-pocket if they had bought in the last three years; once these kind of losses are actually realised and permeate the public consciousness then we could be setting ourselves up for a 'run' on residential property.

It could get very ugly, especially for those with their life-savings in property.
  cootanee Chief Commissioner

Location: North of the border!
You were to blame? I'll send you a bill...
Graham4405

Interest rates were globally high during the 80's (even Thatcher's UK). As with most things economic Australia pretty much reflects how other countries are doing. Of course now China has become a driving factor.

US market is up overnight... SPI is showing a good lift this morning...  the world turns.
  HeadShunt Chief Train Controller

US market is up overnight... SPI is showing a good lift this morning...  the world turns
cootanee


Before we crack open the bubbly in celebration of another daily rise, remember that in the last five years the Dow Jones Industrial has risen 32.42%, the S&P 500 is up 26.19% and NASDAQ has skyrocketed 46.91%. As far as asset prices are concerned, it's great... until you realise it's mostly just inflation.

Amazing things, those printing presses...

Meanwhile, what has been happening in the real world?

Take the number of Americans on food stamps, for example. In 2008: 28 million. Now: 47 million; 76% of Americans living from "paycheck to paycheck", 27% with zero savings, 50% with less than a three month "cushion", and many have either racked up a lot of debt or gone through bankruptcy/foreclosure... oh, but the markets are up this morning! Rolling Eyes Somehow I don't think they're enjoying that "growth".

Market performance is not a reliable measure of the performance of the overall economy, especially when Bernanke is injecting $85 billion per month.
  RTT_Rules Oliver Bullied, CME

Location: Dubai UAE
[quote=Speed]At different times in the 80s:[*]The Hawke Government lifted some regulations, so the interest-rates for home-loans were no longer fixed low. Just like any other borrowing, home loans became subject to "monetary policy", where the Government set a base interest-rate by controlling the supply of money.[*]After loosening monetary-policy around 1986 in response to a stock-market crash, the Government chose to raise interest-rates in late 80s, because Australia's economy, like other western countries, was going a bit too fast and was likely "to overheat". It overheated anyway, was slowed down too much anyway and we lead the world into "the recession that we had to have".[/quote]
Q, who actually rose interest rates? Govt, I think not. Reserve bank (which is supposed to operate independently to the govt) did the job due to govt inaction on the overheating economy. As P Keating said, "I have the reserve bank governor in my back pocket." They could have slowed the economy by withdrawa of govt spending. Had Howard gone on a infrastructure spending spree or other from 2004 onward he would have caused the same. There was other actions which such as middle class welfare and tax cuts, much of which should have gone to sovereign wealth fund/
  don_dunstan The Ghost of George Stephenson

Location: Adelaide proud
....There was other actions which such as middle class welfare and tax cuts, much of which should have gone to sovereign wealth fund/
RTT_Rules

We do have a sovereign wealth fund but it's exclusively set aside for the indexed and defined future pension benefits of public servants and politicians.  Everyone else can burn...

Defined benefits are a bigger problem in the USA where local governments are going bankrupt in part because of the stupidly generous schemes for retiring police and garbos (the most heavily unionised workers in the US).  Whether or not they'll be able to continue to pay out on defined benefit schemes remains to be seen... I doubt our own capacity to do it in the longer term.
  Speed Minister for Railways

Q, who actually rose (sic) interest rates? Govt, I think not. Reserve bank (which is supposed to operate independently to the govt) did the job
"RTT_Rules"
The most precise answer is "the banks who lent the money".
In the 70s, interest-rates for home-loans were subject to strict limits on the rates that they could charge. In the mid-late 80s and later, they weren't. Banks could set interest-rates as high as the competitive market-place would allow.

In most of the 80s and 90s, monetary policy was set by Treasury / the Treasurer's office. That meant Paul Keating (who had also set monetary policy in the 80s), John Kerrin, John Dawkins, Ralph Willis and Peter Costello, during their respective periods as Treasurer. Of course, each of them may have been influenced by other members of the Executive Government, especially the Prime Minister. Whomever the Treasurer was, they announced any changes in monetary policy in Parliament, just like any other minister would announce a change in policy (getting hears and jeers more loudly than most ministers).

Ian Macfarlane was the first Governor of the Reserve Bank who had the authority to set monetary-policy independently of the Executive Government.

When Andrew Peacock said in 1990 that Paul Keating was raising the interest-rates, he was telling the truth. When John Hewson said in 1993 that Paul Keating had raised the interest-rates and then brought them down again, he was telling the truth. When John Howard said in 1995 that Paul Keating had raised the interest-rates, had brought them down again and now Ralph Willis was raising them again, he was telling the truth. When  John Howard said in 2004 that Mark Latham would raise interest-rates, he was talking nonsense. When Mark Latham signed his big no-high-interest-rates pledge, he could promise no such thing. In 2004, monetary-policy decisions were made independently by the Reserve Bank.

You keep saying "correct me if I'm wrong" with your statements about interest-rates. You keep getting corrected with a truthful history of the regulation of interest-rates. You post the same rhetoric again. It's starting to resemble an Aaron-style lie.
  don_dunstan The Ghost of George Stephenson

Location: Adelaide proud
Speed (or anyone else for that matter) - would it be a matter of changing policy to get the Reserve back under political control or is the independence of the Governor somehow enshrined?  I'd be interested to know.

Also, it's interesting to reflect now that Johnny Howard was wrong - interest rates actually got lower under Rudd/Gillard than they did under him.
  HeadShunt Chief Train Controller

would it be a matter of changing policy to get the Reserve back under political control or is the independence of the Governor somehow enshrined?  I'd be interested to know.
don_dunstan
Hahaha... well.... yes, of course, it is just a matter of "government policy" and these things can always be changed. But what steers "government policy"? Twisted Evil


Also, it's interesting to reflect now that Johnny Howard was wrong - interest rates actually got lower under Rudd/Gillard than they did under him.
don_dunstan
Yeah they did, although not for good reasons I'd say, not that I supported Little Johnny and his version of big government crossed with neoliberal BS either. As long as we understand the effects of interest rates, their relationship to inflation, and don't automatically equate lower interest rates with a better standard of living as politicians seem to want us to when they talk about what they will supposedly do with rates and the economy to make our lives better. Tying this to the title of the thread, people are being fooled into thinking that inflation makes their assets worth more by politicians who take the credit for things over which they have little control. Look how much my pieces of paper are worth! Correction, which will involve deflation and destruction, is to be avoided at all costs, so that the fall will be much greater when it can be avoided no longer.

To delve into the real reasons why control was transferred from government to the bank and even in the movement of the rates themselves, irrespective of the body supposedly in control of them, is to move into controversial territory.

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