Australians may not realize exactly how much they have out of pocket when the economy falters. Now the real cost to each of us has been revealed.
Of course, rising interest rates cause asset values to fall. It’s like synchronized swimming. As the central banks pop their heads, the markets pull theirs down.
Australia’s central bank, the Reserve Bank of Australia (RBA), raised interest rates by a hefty 0.50 percentage point this month.
The US central bank, the Federal Reserve, did even more and raised interest rates by 0.75 percent. Central banks are sneaking around trying to crush inflation, and asset prices are collateral damage. Crypto is down, housing is down and stocks are down.
All over the world, people are queuing up to sell assets they’ve had a lot of fun with over the years, and they’re finding few willing buyers. Prices are falling left and right. That hits Aussies right in their center of prosperity. As the following chart shows, we have an average of $3500 out of pocket. And that’s a conservative estimate. Let’s look at the past three months.
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Local stocks are down 8.7 percent. That’s bad news because we have an average of $21,000 each in pension invested in local equities. We lost an average of $1837 there.
International equities are estimated to have fallen 6.3 percent. We invested even more of our super into this, averaging $23,760 each. Those are estimated to have fallen $1,504.
So we lost over $3000 in super alone, per person. This is a conservative estimate because equity investments represent only slightly more than half of super. It’s likely that many of the other investments have fallen as well, but they’re harder to account for, so we won’t include them.
We also do not include stocks that are held outside of super.
Crypto is not a huge asset class – only 20 percent of Australians own one cryptocurrencies, and it’s not much – worth a few hundred dollars on average. But when an asset falls as crypto has done for the past three months, i.e. spectacularly, even a small asset can generate a significant loss.
We’ll simplify things by just looking at bitcoin, a 41 percent drop in AUD terms over the past three months. That equates to a loss of $347 per Australian on average. (Of course the average is a funny way to look at it. The reality is that people who own bitcoin took a bigger hit, while the average Australian lost absolutely nothing because they don’t own crypto. Still, the average per person is helpful in helping us compare how purchasing power per person might have dwindled.)
House prices have fallen just 0.1 percent on average for Australia in the past three months, although prices have fallen slightly more than in Sydney (-1.8 percent) while they have risen in Adelaide (+5.6 percent). A 0.1 percent drop on our approximately $10 trillion worth of homes results in a loss of $40 per person over the past three months. Not so much. What happiness is, really, because housing is by far our greatest asset. But watch this space. Major banks are forecasting significant falls in home prices that could make the average Aussie feel significantly less wealthy.
But why now?
All of these asset price declines are making Aussies poorer. If a stimulus payment of $750 per worker on the road to the pandemic was supposed to revive the economy, then sucking $3500 per person could certainly help cool the economy.
That’s how monetary policy should work. They want us to feel a little poorer, spend a little less, so stores have fewer customers and less reason to raise prices. That’s one of the ways raising interest rates cools inflation.
Put water in the gas tank
I like to explain the economy as a car. Income and wealth are like how fast the car goes while inflation is just an accidental byproduct of going too fast: it’s like the heat of the engine. The RBA is trying to manage engine health in the really long term. Not by looking at the speedo (the growth of our income and wealth) but by the temperature gauge (inflation). When the economy gets too hot, the RBA cools things down by raising interest rates. It’s painful to slow down in the short term, but it prevents us from getting into an inflation spiral (at least in theory).
The good news
The good news is that recent asset declines are quite small compared to the buildup during the pandemic. Let’s look at bank accounts. There was an absolutely huge tidal wave of money being handed out during the pandemic, and it ended up in bank accounts, as the following chart shows. This is the money that will fund higher grocery bills and higher mortgage payments in the near future.
That’s just an average of course. Not everyone has that much money. The RBA Governor Philip Lowe went on TV last week to talk about how interest rate hikes are hitting and he said this:
“We already know that some households are struggling.”
His message to those people though? It was basically: sorry not sorry, we have to do this.
“Ultimately, however, our responsibility is a national one. We want to ensure that inflation is low and stable, that the country has full employment and that the country’s financial stability is maintained,” he said.