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RBA Begs You to Take On More Debt ... Just Don’t Buy a House!
Topic Started: 24 Aug 2014, 04:19 PM (2,745 Views)
Kris Sayce
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Oh shit...Oh shit...Oh shit

http://www.moneymorning.com.au/20140823/rba-begs-take-debtjust-dont-buy-house.html

RBA Begs You to Take On More Debt…Just Don’t Buy a House

Written on 23 August 2014 by Shae Smith

C’mon people, don’t you know the Reserve Bank of Australia has done enough?

The entire economy is resting on your shoulders.

All that matters is your actions.

Buy a house.

Scratch that. Don’t buy a house. That’s already the elephant in the room.

Instead, start a business.

Take a loan.

Take some risk.

But for crying out loud, just do something debt driven, will you?

I know that’s an odd rant to start your weekend. But I reckon that’s really what RBA governor Glenn Stevens meant. He spoke at a parliamentary committee on Wednesday and he had one message for the crowd:

‘What I mean is we need more of the sort of so-called “animal spirit”, or confidence if you like, that is needed to support not just a repricing of the existing stock of assets, but the investment that adds to that stock of physical assets.’

The point Stevens is trying to make is that he wants more entrepreneurial risk taking place in our economy.

After all, the historically low interest rates haven’t spurred Australia into new business investments outside of mining.

But it doesn’t stop there. Stevens telling-off for not taking on more cheaper-than-your-Nana’s-day type of credit gets, well, weirder:

‘From my perspective our society is becoming too risk adverse…and we are not paying enough attention to return and we are paying too much attention to risk.

‘I come back to what set of arrangements and what set of conditions are going to give people who are the risk takers the right set of incentives and confidence to say “I’m going to take that risk, I’m going to get that cheap money and build that plant, the factory, the whatever, employ the people.”’

Instead of investing in new ventures, we’ve driven dividend paying stocks higher.

Rather than use debt productively, people have taken the low interest rate debt and stuck it into houses.

Monetary policy isn’t and shouldn’t be a driver of economic growth.

For too long, these interest rate illusionists have fooled themselves into thinking that’s all it takes. Fiddle the rates up and growth slows…tweak the rates down and things speed up again.

Greg Canavan, editor of Sound Money. Sound Investments. summed up Stevens’ take on the economy best this week:

‘Without going into too much detail, interest rates are too low for financial markets and too high for the real economy. But central bankers don’t like to see this. All they see is “accommodative” financial conditions, and then scratch their heads as the economy remains sluggish.

‘But I take [their] point…we are not taking a risk on developing new products, new industries or competing on a global stage.’

The problem the Reserve Bank of Australia don’t see is that they’ve already distorted the market. A small boardroom of suits mistakenly thought cheap credit was all the incentive people needed.

Will Stevens’ stern talking-to suddenly encourage banks to lend to risky start-up ventures with nothing more than a brilliant idea?

I doubt it.

There is something that worries me though.

If we aren’t taking the cheap cash and investing, who do you think will?

For reasons I don’t understand, politicians love numbers. And right now those numbers aren’t as rosy as they had been…you know, during that mining boom we had.

So if the Australian people won’t stimulate the economy, then who will? Chances are the number-loving pollies will step in.

The statement from Glenn Stevens this week proves again how fractured our economy has become.

We rely on credit driven growth. This means we must increase the debt to achieve what we did in the past.

It reminds me of what Richard Duncan said at our World War D conference in April this year.

Duncan said that was the answer: more government spending using cheap money.

First off, Duncan explained how the US landed themselves in over $50 trillion of debt in 43 years. Then he said the obvious. There’s nowhere to go from here. The horrible reality for America was credit driven growth.

In fact, credit must expand at 2% per year after inflation to avoid a recession.

In other words, credit in the US must expand by US$2.4 trillion per year to stop the economy falling over.

However, the private sector can’t take any more debt. But Duncan said the government can.

Rather than build bridges to nowhere and ‘pave the country roads’like they did in Japan, America should invest in tomorrow, he told the audience.

Duncan said the US government should take US$2.4 trillion and spend it on solar, biotech, and radical new technologies. New cutting tech edge. The sort of stuff that could lead to a new era for Americans.

Duncan’s idea is controversial for sure.

The point he was making was the reliance on debt to fuel the economy is the problem. Now, according to Duncan, it might be the only way to ‘fix it’. I have my doubts that the way to fix a debt problem is through more debt.

The RBA can try to encourage private enterprise to take on more debt. However, it only adds to the idea that economic expansion comes only from credit.

As Greg Canavan signed off this week, he noted this was our problem. ‘When combined with poor policy, over reliance on it will eventually run the economy into the ground.’
Money Morning Australia
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Bardon
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Good post, but at the end of the day it is a debt fueled system that we live in.

As for Aussie, you only need to look at the ASX lackluster performance to see how risk adverse we have become.

Many private Australian companies are now seriously considering the Singapore Stock Exchange for an IPO and listing. This exchange favours and rewards entrepreneurial companies unlike the ASX.
Edited by Bardon, 24 Aug 2014, 04:43 PM.
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silverman47
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not that anybody working at the RBA would know the first thing about entrepreneurial risk !!!
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Lou Ellen
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Commodity prices and the terms-of-trade are falling, crimping the tax take from profits, and workforce participation is entering a structural decline, brought about by the large scale retirement of the baby boomer generation. Already, the Budget has a revenue problem, which will be exacerbated by the expected significant rise in aged-related expenditure.

The Budget sell has turned rancid because the May Budget focused too much on cutting direct expenditures, which inevitably harm lower income earners, rather than shoring-up the revenue base by closing Australia’s inefficient and inequitable tax tax expenditures, which are the highest in the developed world.

In hindsight, the Government should have announced that it would significantly wind-back superannuation concessions, which have increasingly become a mechanism for richer older people to avoid paying tax, rather than a genuine means for Australians to pay for their own retirement and avoid drawing on the Aged Pension. It should also have announced that it would quarantine negative gearing losses, so that they can only be applied against income from the same asset, as well as removing the capital gains tax concession on investments (why should they be taxed at a lower rate than income?), as well as a range of other poorly targeted and inequitable tax concessions (e.g. fringe benefits on ‘company cars’ used for private use).

Reforming these concessions, which cost the Budget many billions of dollars in foregone revenue and are skewed towards the wealthy and high income earners, would dramatically improve the progressiveness of the tax system and would have countered concerns that the Budget is fundamentally unfair and places the burden of adjustment unfairly on lower income households.

Tax revenue is required to fund the public services that the community both expects and needs. And I personally wouldn’t care if taxes were increased a little if it meant that important social programs remained (or were expanded), along with the provision of well-targeted infrastructure.

What is of most importance is ensuring that the tax base is broadened and built around more efficient and equitable sources. This requires a shift in sources from productive effort (e.g labour) towards taxes on land, resources, and consumption, along with adequate compensation for the poor (in the case of raising/broadening the GST).

An adequate tax take is a vital element for a civilised society. And a high tax take is not an issue provided it is raised in an equitable and efficient way, along with well-targeted expenditure.

Relying on never-ending increases in personal income tax via bracket creep, while the base of workers shrinks as the population ages and the proportion of retirees rises, is neither efficient, equitable or sustainable in the long-term. We need fundamental tax reform and we need it sooner rather than later.
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Bardon
24 Aug 2014, 04:37 PM
Good post, but at the end of the day it is a debt fueled system that we live in.

As for Aussie, you only need to look at the ASX lackluster performance to see how risk adverse we have become.

Many private Australian companies are now seriously considering the Singapore Stock Exchange for an IPO and listing. This exchange favours and rewards entrepreneurial companies unlike the ASX.
It became a debt fuelled ponzi society throughout the western world by mindless governments leaders and has now run its course. The result is the surfacing of the GFC( global finacinacial collapse), is the more appropriate term .You could also call it the global financial correction.How about , greatest financial collapse, as that is the end result .

As far as financial crissies go, this dwarfs the great depression on a mind boggling level.

It is the debt fuelled system that is the exact cause of the problems the world is facing right now, but i would not expect a teenager such as yourself to understand much, even though its been clearly explained over the years.

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Bardon
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Oh can you just get with the program rather than obsessing on the past?

The GFC is just so much yesterdays news.
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van
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For the majority of people, they would be starting a small business, to get a business loan, you need equity of the loan amount which would mean putting your house on the line. Also 85% of small businesses fail, anyone who wants to borrow money to start a business is at a disadvantage to competing businesses that are not built on debt as they are more robust and flexible.



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ThePauk
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Bardon
24 Aug 2014, 07:56 PM
Oh can you just get with the program rather than obsessing on the past?

The GFC is just so much yesterdays news.
So QE and austerity ended, did I miss that?
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Bardon
24 Aug 2014, 07:56 PM
Oh can you just get with the program rather than obsessing on the past?

The GFC is just so much yesterdays news.
Could not have put it better myself

And yes the GFC is old news, old news still going strong with interest rates still at zero six years later and the US alone now owe an extra 10 trillion on top of the 8 trillion they already could not pay back in 2008, bring the total to 18 trillion in debt now and with 50 million now on food stamps instead of the 17 million in 2008. Like I said , old news still going strong, never looked worse here, our jobs and businesses are dissapearing overseas or altogether as our wages can now longer compete.

Stop obsessing on the past alright, the future here is nothing like the past.
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Bardon
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ThePauk
24 Aug 2014, 08:51 PM
So QE and austerity ended, did I miss that?
Yes the GFC is ancient history now, not interested in you introducing more things to what I was initially responding too, are you the guest?
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