Economists And Soothsayers: Skin In The Game
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Ancient royal soothsayers used to predict the future by throwing sticks and knucklebones on the floor and seeing what kind of patterns they formed. Today, we have economists to perform the same kind of thing but with formulars in dusty textbooks to guide them. There are strict rules around economic behaviours and outcomes like inflation. Different parts of the economy are linked, in their minds, like the unemployment rate with the level of inflation. They have been taught by their professors and textbooks to abide by calculations and processes considered to be carved in stone. Economics is fundamentally about human behaviours in the marketplace. The history of humanity tells us that there is only one thing that you can rely on and that is the unreliability of humans. Economists and soothsayers: Skin in the game.
Economists & Central Banks
The concept of a central bank was thought up by a bunch of wealthy business people and their bankers. They wanted to establish a body which would help create more certainty in the financial realm.
“The story of central banking goes back at least to the seventeenth century, to the founding of the first institution recognized as a central bank, the Swedish Riksbank. Established in 1668 as a joint stock bank, it was chartered to lend the government funds and to act as a clearing house for commerce. A few decades later (1694), the most famous central bank of the era, the Bank of England, was founded also as a joint stock company to purchase government debt. Other central banks were set up later in Europe for similar purposes, though some were established to deal with monetary disarray. For example, the Banque de France was established by Napoleon in 1800 to stabilize the currency after the hyperinflation of paper money during the French Revolution, as well as to aid in government finance. Early central banks issued private notes which served as currency, and they often had a monopoly over such note issue.”
Banks are about creating wealth out of money. Out of yours and my money to be exact. Banks created paper money out of promissory notes or bank notes to represent specific amounts in bills of exchange. This function in regard to the issuing of paper currency was taken over by the central banks, like the Bank of England, from private commercial banks.
Royal mints and government mints produced coins and later banknotes under the authorisation of the central bank.
Economists, Housing, & The Gold Standard
“The gold standard, which prevailed until 1914, meant that each country defined its currency in terms of a fixed weight of gold. Central banks held large gold reserves to ensure that their notes could be converted into gold, as was required by their charters. When their reserves declined because of a balance of payments deficit or adverse domestic circumstances, they would raise their discount rates (the interest rates at which they would lend money to the other banks). Doing so would raise interest rates more generally, which in turn attracted foreign investment, thereby bringing more gold into the country.”
- (Michael Bordo, 2007, Fed. Res. Bank of Cleveland)
These days, there is no gold standard to worry about and in the digital world money is a bunch of figures on a screen. Therefore, when you borrow all that money for something like a home loan – no real money changes hands. Your bank or financial institution just ‘hey presto’s’ it by punching up numbers on a screen. This liquidity is injected into the economy and is by its very nature inflationary. In Australia, the inflation rate for the last 30 years in the property sector is at around 382%. Nobody talks about this because increasing the dollar value of property makes individuals, banks, and states wealthy. Thus, house prices have been going up on steroids non-stop and this inflates the entire Australian domestic economy. Property prices push up rents both commercial and residential. High rents on shops push up the prices on whatever goods or services the store sells. The boom in property prices has impacted throughout the domestic economy.
The sustained inflated property prices in Australia have made those who invested in the market many years ago rich by middle class standards. It has made the big 4 banks very rich on the back of the interest rates earned on the loans doled out to local and international investors.
The Economic Price Of Living In Australia
The upshot of all this is that Australia, as a place to live, has over the last couple of decades become unaffordable for around a third of the adult population if not more. Renters have been copping it in the neck financially since the pandemic and there is no letup in sight. New home owners with mortgages are on the brink of going under due to rapidly rising interest rates. The kind of home loans we have in Australia are very favourable to the banks and financial institutions. In the US, they have 30 year fixed- mortgage rate home loans, thanks to FDR’s new deal, back in the 1930s.
This is one of the reasons why house prices in American cities are considerably lower than in Australia.
“Here in Australia, an extra 1 per cent on a $600,000 mortgage means $6,000 a year more in interest payments. And these are post-tax dollars. So if you earn $100,000 and hence pay an average tax rate of 25 per cent, that’s like taking a roughly $8,000 pay cut. Ouch. A 3 per cent rise in official rates over two to three years is not impossible. On a $600,000 mortgage that would mean an extra $18,000 a year in interest payments.”
Successive Australian governments have created wealth for investors in property via their generous tax benefits for things like negative gearing and no capital gains tax on the family home. You can own hundreds of houses in Australia and still benefit from negative gearing – the sky is the limit.
“While making a loss on an investment property or shares might initially seem counterintuitive, some people are willing to do this in the expectation that the capital gain (sale price minus cost of asset) when they sell the asset will more than offset that loss. Some people might also find themselves unexpectedly in a loss position, if they incur higher expenses or lower returns than anticipated. Only 50 per cent of the increase in the value of the asset (when it is sold) is subject to income tax, providing it has been owned for more than 12 months.”
The domestic housing marker in Australia has reached the ‘too big to fail’ level in terms of its impact on the economy. Currently, we are seeing a slew of building companies go bust under the double whammy of fixed priced contracts with clients and sky rocketing costs of construction materials from China. Labour costs are rising too, as the Australian economy deals with inflation and a rising cost of living. Everything is going up in regard to building a house and running a construction business. The RBA and banks are making everything more expensive in the bid to dampen demand to fight inflation. A perpetual shortage of supply when it comes to housing stocks in Australia makes prices and rents go up despite the best efforts of the RBA. Fingers are now being pointed at local government for its role in limiting the density of housing in neighbourhoods. There are those who live in paradise who don’t want it to be spoiled by sharing it with too many other Australians, it seems. Economists and soothsayers: Skin in the game matters when it comes to shifting the dial on housing.
Obviously, the current migration intake of a 1 000 per day is just making the whole situation worse. Business, however, wants these new migrants to fill the labour hire vacuum that has existed since the pandemic. They want the more malleable skilled workers from other countries to boost productivity. It, also, makes the economy look better when a whole lot of cashed up new arrivals enter the system.
We now live in an Australia where only the rich can afford to live; we can thank 10 years of Coalition government policies for the acceleration of this economic state of affairs. Lowering and flattening the tax rate for the top end of town means the rich get richer and the poor – you know what always happens to the poor. We have a housing crisis for the disadvantaged and the young – who can no longer afford to live in Australia. How is this a good example of governing? The upshot is that more and more economically shafted Australians will push governments to listen to their plight via the ballot box. Peter Dutton’s LNP will not be elected anytime soon on the basis of their track record and his current political stratagems. Albanese will need to sharpen the performance of his own government around these issues or see more Green stains ruining the tone of his time in office.
The future will be further populated with independents and Greens in coming years. Right now it is a race between an economic crisis eating up the lives of poorer Australians and what actions governments can take to make any real difference.
Economists don’t listen to the poor, as they generally work for financial institutions, governments, and corporations. Economists and soothsayers: Skin in the game on behalf of the rich. Central banks are operating in the interests of these big players rather than you or me. The RBA turns the dial on monetary policy and inflates the wealth of banks, businesses, and governments at the expense of the little people being crushed beneath the wheels of high finance. The Commonwealth Bank of Australia just made a $10 billion profit, whilst a third of Australians can’t afford to pay their rent. This is the new Australia, a land of corporate concentration with bugger all competition. What has the ACCC been doing for the last decade? Why do we have the Big 4 banks, the Big 4 consultancy firms, 2 giant supermarket chains, Qantas the corporate welfare case, News Corp controlling the media, and in just about every industry and sector there is very little market competition in Australia.
It is a failure of government that has squeezed the economic life out of us ordinary Australians. When will we wake up to the facts and demand better.
Read the new book Money Matters: Navigating Credit, Debt & Financial Freedom by Robert Sudha Hamilton
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