Nothing is so permanent as a temporary government program, Milton Friedman once said. And he should know, as President Reagan’s economic advisor.
Under Reagan, the US government’s debt passed US$1 trillion and tripled to US$2.7 trillion.
President Trump has borrowed that much so far this year alone…
Fighting COVID-19 is expensive. As is fighting the consequences of fighting COVID-19. Whether it’s lockdowns, or welfare for the locked down, the bills are mounting. But we covered debt levels last week. And the ‘solutions’ to it.
My worry is that ending the current government programs will trigger the onset of something far worse than the sovereign debt crisis we’re headed towards. The withdrawal will be worse than the pain which the drugs masked.
What sort of crash am I talking about? Well, consider this from Mozo Research:
‘[…] more than a quarter of workers currently relying on JobKeeper and JobSeeker won’t be able to afford their rent or home loan repayments if the government support ceases.
‘This amounts to approximately 1.3 million Australians potentially unable to keep a roof over their heads.’
The data gets more concerning as you read on:
‘[…] approximately 42% of Australia’s 12.1 million-person workforce is being supported via these government schemes.
‘Mozo’s data showed the vast majority of these people (92%) require this support to remain financially stable. In addition to the worrying housing situation, a third of surveyed income support recipients said they would not be able to afford to pay their bills if the payments stopped, with a fifth also unable to cover the cost of groceries.’
Consider that much of the government financial aid is going from the Treasury to the homeowner to their bank…
In a world of debt financed everything, any rescue is banker welfare too. Strangely enough, it’s those who borrowed most who complain about this.
No doubt negative gearing enthusiasts are extremely happy on the other hand. At least, they should be according to their own weird logic where loss making investments are a good thing. After all, the losses on their properties are mounting fast.
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Digital Finance Analytics estimates more than half of property investors with a mortgage are now losing money, month to month.
Mozo also explains just how big the jump in empty rental properties is in some parts of Sydney and Melbourne:
‘A joint ANZ-CoreLogic report has recorded drops in rental prices as high as 7% within inner city Sydney and Melbourne. It attributes these reductions to the sharp increase in advertised rental properties in these suburbs (more than a 50% jump between March and June).’
Of course, many of those homeowners were able to defer mortgage payments. But does deferring prevent default or just delay it?
We should find out soon, when all this assistance is rolled back. What’ll it reveal? Nothing good, if you’re asking me.
For May, APRA reported about 11% of home loans in Australia were deferred in some way. APRA is also reporting on the makeup of those with loan deferrals. As of May, 8% had a loan to value ratio greater than 90%, 14% were interest-only mortgages, and 34% investor mortgages.
Even with these deferrals, mortgage stress is maxing out at 39% of households with a mortgage according to Digital Finance Analytics. I don’t know if the negative gearing crowd are counted as stressing over their mortgage or not…
Strangely enough, while many of the nation’s homeowners are struggling, the government is trying to encourage more people to join the strugglers with tax incentives for buying homes…if they renamed the property ladder the mortgage debt ladder instead, less people would be in trouble now.
Governments are conducting an extraordinary reshuffle of debt
All of this relates back to our old haunt of the pointlessness of rising property prices. It generates wealth for bankers, but nobody else, on a net basis.
That’s because the higher prices are a transfer of wealth to the property owner from the future owner. A zero-sum game between those two, at best, with the net benefit accruing only to the lender in the form of a larger loan and more interest. No other part of society benefits, as a group.
Higher house prices just mean more debt. That’s why our banking sector is so bloated.
Of course, if the property owner sells out, the property they buy has also risen in price. So, the net benefit to them is iffy too. They must downsize or move somewhere less desirable to profit.
But while the music is playing, the mortgage debt ladder feels like an escalator instead. And fortunes are made by some at the expense of others. I suppose that’s the sort of fortune some people really enjoy. But it’s not good for the overall economy.
Back to our real topic.
Right now, governments are conducting an extraordinary reshuffle of debts and obligations around the economy. In a very arbitrary way.
The question has become how those reshufflings will be…unshuffled. And how long the government’s plans can continue to operate.
The cost is of course immense. Adam Creighton’s back-of-the-envelope calculations at The Australian suggest ‘a budget cost of between $30m and $60m for each life saved’ in Australia.
I better not say anything insensitive about that…
But our debt-to-GDP levels are nowhere near the nations we mentioned last week. So why not spend big and save lives?
Well, we don’t yet know if it’ll end up being wasted. Those at risk may die anyway, or others will die in greater numbers as a result of lockdowns. The economic and health carnage could be delayed, but still hit.
There are those who believe in the ability of governments to keep goldilocks happy. Politicians will provide just enough stimulus and debt dodging opportunities to keep things looking good.
But the gold price says otherwise, approaching new highs faster than even our gold stock picker Shae Russell could hope for.
Gold knows something is going to go badly wrong at some point.
It could be an attempt to impose epic austerity to get the budget under control. Or a misguided stimulus package. Perhaps inflation and Modern Monetary Theory.
There is of course another option in all this. One not spoken of, even if it has happened about six times in the last 100 years.
That’s just rare enough to allow people to forget about these extraordinary events and their impact.
When I say that ‘nobody speaks of these events’, well, the Davos crowd just began mentioning it. They added a mid-year event to their usual annual global meddling powwow. It was called The Great Reset and set up the agenda for January 2021’s actual Davos event.
Reset what?
Well, just about everything according to their website. But there’s one reset especially worth focusing on for investors. The currency reset which Jim Rickards has been predicting.
If he’s right, the world will fundamentally change. And I think that Davos 2021 will be the moment that financial markets realise this.
Until next time,
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Nickolai Hubble,
Editor, The Daily Reckoning Australia
Nick Hubble is also the editor of Jim Rickards’ Strategic Intelligence Australia, a financial advisory newsletter designed to help you protect your wealth and potentially profit from unseen world events.
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