People who value their sanity try not to think about economics. The brave and the bold try to understand them. Everyone else gets buried by them. A recent statement by the IMF on interest rates in Australia is an illustration of this adorable rustic pastime.
If you hear a wincing sound coming from Down Under, your hearing is fine. Aussie interest rates are major components in the nationwide game of Monopoly we haven’t yet learned how to escape.
These gigantic portfolios of increasingly shaky debts like mortgages and credit are of course very interest-rate sensitive. If those portfolios crash and burn, so does the country. After 20 years of incredibly low rates, nobody’s used to more normal rates. Property prices went ballistic decades ago (thanks so much somebody) so any rate move turns into expensive costs for borrowers.
Lenders are also paying a price in the most literal sense. The demand for money to cover increased costs has naturally gone up. The only houses getting built now are houses of cards in the finance sector. Any crash could be one the economy will have to be stretchered away from.
This is how economics becomes such fun.
The IMF has graciously said we need to raise rates and cut government spending. The logic is conventional to the point of being funereal, and it’s straight out of the 1970s. Margaret Thatcher, the economist’s alternative to Shakespeare, could have written this.
Wages are of course the eternal problem in this mindset. People don’t need money to pay for things, obviously. According to the patron saints of the Church of Unaffordability, that’s a big issue. It’s unreasonable that they should spend 40 hours or more working and get paid for it. You’d think it was a democracy or some sort of free enterprise.
If you can’t cost the value of wages for your own business, you shouldn’t be in business. You should be in a monastery or a China hutch. Just go away and stay there.
Government contracts employ a lot of people and maintain a lot of services and should therefore be cut. (You have to wonder what would happen if the US government stopped doing government contracts like the Republicans want. Their donors would lose billions.)
“Disinflation” is supposed to be achieved by doing these things. Apparently, that means prices will go down, in a cash-strapped economy that has almost gouged itself out of existence. Sure, they will.
The IMF’s predictions are arguably even worse and less related to living human beings. Unemployment will go up, says the IMF. Inflation will “moderate”. That’s the good news. It means the next rises above the incredibly steep previous rises of the last two years will be a bit less than before.
The predicted inflation will waddle in at a demure 4%. That’s on top of all those price rises people already couldn’t afford.
Not mentioned in this glorious recital by the IMF are:
The housing crisis is barely mentioned. Homelessness like Australia has never seen before. This is an absolute disgrace. Never mind the endless waffle, it’s a social failure on a colossal scale.
Rent prices that are far beyond belief. (In the early 2000s you could rent just about anything for around $200 -$300 per week in Sydney. Now a room in a shared house costs that much.)
The devaluation of incomes and assets as these prices bite into savings and future income does get a mention. That mention is nowhere near on the truly catastrophic scale these horrors deserve.
Wages and incomes always lag far behind. These constantly rising costs erode any future capital base on an almost hourly basis. It’s impossible to save for a house. It’s almost impossible to predict your costs from month to month.
Even your assets may generate more dollars, but not more value in a hot market. If you sell in a hot market, you have to buy back into a hot market. In the 90s, if you had a million dollars, you could have bought a couple of freestanding houses. You can’t now. Your million bucks is worth that much less and buys that much less. More to the point – This massive devaluation of money has happened almost overnight.
Raising rents doesn’t help. It’s suicidal in one way. Say you have a million-dollar loan, and the rates go up by half a percent. Are you going to cover the rate rise by raising rents? Probably not. A lot of people are getting evicted for no appreciable gain. You might break even, but maybe not.
As usual, the problem is regulation. If we had a national regulation that said rents could only rise 1% per year, this disaster wouldn’t have happened. You’d also shut down a nasty, useless, source of inflation.
The overwhelming stench of ideology in the fossilized views of the IMF and other institutions is appalling. At no point are real human needs addressed at all. The need is to fix this mess, not merely accept it and drivel and dither off into the sunset.
