Australians may not realize exactly how much they are being shelled out as the economy falters. Now the true cost to each of us has been revealed.
Of course, rising interest rates cause asset values to fall. It’s like synchronized swimming. As central banks raise their heads, markets pull theirs down.
Australia’s central bank, the Reserve Bank of Australia (RBA), raised interest rates by 0.50 percentage points this month.
The US central bank, the Federal Reserve, did even more, raising rates by 0.75%. Central banks are prowling because they are trying to crush inflation, and asset prices are collateral damage. Crypto is down, housing is down, and stocks are down.
Around the world, people are lining up to sell assets they have happily held for the past few years and are finding few willing buyers. Prices are falling left and right. This hits Australians right in the middle of their wealth. As the following graph shows, we are short by about $3,500 on average. And that’s a conservative estimate. Let’s just look at the last three months.
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Local stocks fell 8.7%. This is bad news because we each have, on average, $21,000 in retirement invested in local equities. We lost an average of $1837 there.
International stocks fell about 6.3%. We have even more of our supers invested in these, $23,760 each on average. These were down around $1504.
So we lost over $3,000 in super alone, per person. This is a conservative estimate as equity investments are only a little over half of the super. It is likely that many other investments have also fallen, but they are more difficult to count, so we will not include them.
We also do not include stocks held outside of super.
Cryptocurrency
Crypto is not a huge asset class – only 20% of Australians own it crypto, and that’s not much – a few hundred dollars on average. But when an asset falls like the crypto has done in the past three months, that is, dramatically, even a small stake can generate a huge loss.
We’ll simplify things by just looking at bitcoins, which is down 41% in AUD over the past three months. This equates to a loss of $347 per Australian on average. (Of course, the average is a funny way of looking at it. The reality is that people who own bitcoin have taken a bigger hit while the median Aussie has lost absolutely nothing because they don’t own not crypto. Still, the average per person is useful to help us compare how the purchasing power per person might have gone down.)
Lodging
Housing has fallen just 0.1% over the past three months for Australia on average, although prices have fallen slightly more than in Sydney (-1.8%) as they have increased in Adelaide (+5.6%). A 0.1% drop on our approximately $10 trillion in nets for homes, resulting in a loss of $40 per person over the past three months. Not that much. How lucky, really, because lodging is by far our greatest asset. But watch this space. The big banks are forecasting major declines in property prices that could make the average Aussie feel considerably less affluent.
But why now?
All of these asset price falls are making Australians poorer. If a stimulus payment of $750 per worker en route to the pandemic was meant to kickstart the economy, then sucking in $3,500 per person could certainly help cool the economy.
This is how monetary policy is supposed to work. They want to make us feel a little poorer, spend a little less, so stores have fewer customers and less reason to raise prices. This is one of the ways that rising interest rates dampen inflation.
Put water in the gas tank
I like to explain the economy like a car. Income and wealth are like the speed at which the car is going inflation is just an accidental byproduct of going too fast: It’s like engine heat. The RBA tries to manage engine health over the very 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 is painful to go slower in the short term, but it prevents us from entering an inflationary spiral (in theory at least).
The good news
The good news is that recent declines in wealth are quite small compared to the accumulation during the pandemic. Let’s just look at bank accounts. There was an absolutely massive tidal wave of money being distributed 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 over the next few years.
Of course, this is only an average. Not everyone has that much money. 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 for some households they are struggling.”
His message to these folks, though? It was basically: sorry not sorry, we have to do this.
“Ultimately, however, our responsibility is national. We want to make sure that inflation is low and stable, that the country achieves full employment, that the financial stability of the country is preserved,” he said.
#lost #days