Well he did warn everyone – did he not?
I am referring to one Glenn Stevens of the Reserve Bank of Australia (RBA).
In my prior article I explained that the primary purpose of negative interest rates was that a Country – in this case Japan – can introduce negative interest rates and export deflation to its major trading partners.
Australia is a major trading partner with Japan – hence the comments below by Stevens RBA – alluded to an interest rate cut to remain competitive.
“Overall, we remain concerned about the growth outlook in Australia. Notwithstanding, a reported improvement in surveyed business conditions, there is nothing in today’s update to comfort the RBA that this is translating to anything concrete on the investment front.In turn, we see material downside risks to the RBA’s forecast reacceleration in GDP growth to a +3.0% yoy rate by the end of 2016. To the degree growth continues to fall short of the RBA’s expectations, the prospect of further easing will remain on the table.”
The Qtr 1 – 2016 report by the Australian Bureau of Statistics revealed that consumer prices in the country fell by 0.2 percent – and increased by 1.3 percent on a year-over-year basis.
As Stephens (RBA) stated – his expectations of the inflation target was in the order of 2 to 3 percent – it was obvious that an interest rate cut was coming sooner than later.
Now taking this into consideration – one would have ‘assumed’ that currency traders had priced in the further easing by Stevens – nope – nein – nyet – no!
Chart 12 hour AUD:USD pair
Chart 1 month AUD:USD pair. Both charts from XE Charts
So we have the situation of the U.S. Federal Reserve and Yellen refusing to normalize interest rates – in the process inflaming a torrid currency war between all the major trading partners.
I cannot stress this enough – the procrastinations of the U.S. Federal Reserve – to normalize interest rates is the single biggest issue of these currency wars.
My question is at this juncture – do they know what they do – when it is blatantly obvious – as to the ramifications on low interest rates globally?
Yes – Stevens answered that – and this applies to all the clueless Central Bankers – in particular one Janet Yellen at the Federal Reserve.
The reduction of interest rates however – will no doubt inflame the existing real estate bubble.
Yes a stupid situation exists in the ‘land down under’ – it is taxation concessions that apply to real estate assets – as the country has the ‘Dutch Disease’ – ever reliant on commodity exports to hold the economy afloat – therefore reliance is placed on real estate ownership and the building industry.
When one looks at the statistics over half of Australian workers are involved with the construction industry.
The Government in its wisdom actually gives ‘first home buyers’ monetary concessions to acquire homes – that and a taxation advantage to hold investment properties – Negative Gearing plus Capital Gains Tax exemptions – the latter two tax driven incentives induce the real estate bubble to allow investors to buy off the plan – leave vacant and flip regularly.
The Banks finance these properties – usually with equity from other over-valued investment properties and are quite happy to take the risk – as the prior Australian Treasurer Swann – supplied a Government guarantee to cover the Bank’s mortgage debts.
This is advertised by all and sundry – as the wealth guide – inducing higher real estate values and over-construction of residential properties – all highly geared.
The record number of foreign buyers has pushed prices higher – lower interest rates will incite more to ‘invest’ and acquire another real estate investment – the bubble just keeps inflating.
The Australian Federal Government direct debt levels are already high – the problem for the Government though is the indirect liabilities – the implicit Bank guarantee on housing mortgages given to the Banks.
When the real estate bubble pops – and it will – goodbye Australia – as the impact will create a long depression and a lot of angst.
History is repeating – just with different players – and no – there is no Plan “B”.