How Central Bankers Blew Up the Global Economy

Why rates can’t — and won’t — rise.

By Ian Verender and cross-posted from ABC

We humans are a social lot. We just love being part of a pack, a member of a team.

We crave acceptance, to the point where isolation or banishment ranks among the worst forms of punishment.

Even when it comes to the dodgy art of forecasting, everyone seems to cluster around a central position, which kind of defeats the point of forecasting.

And so, in July two years ago, when the groundswell of opinion began to shift — that the Reserve Bank would be raising interest rates — arguing otherwise was a fairly lonely position.

As time went on, almost everyone shifted position as we dug in herehere and here.

To be fair, most of the highly paid, well-heeled professional market economists were being egged on by the authorities, and particularly the Reserve Bank, which was spinning the line that the next rate move was up.

In the past fortnight, however, the pack suddenly has turned on its tail as fears about the global economy and a sudden slowdown in our own growth forced a rethink. The switch to a rate cut has turned into a stampede.

Why rates won’t rise

Put aside all the complex formula. Forget the high-level macro-economic analysis. There’s a very simple reason the Reserve Bank couldn’t and can’t raise interest rates.

There’s too much debt.

Australian households are among the world’s most indebted when compared with their income. And we’ve spent most of it on real estate.

Graph shows housing prices, red, and household debt, blue, former rising and falling, latter rising with time.

What these two graphs show is how the Reserve Bank, effectively, snookered itself. Back in 2012, when debt and housing prices already were elevated, it fired up the east coast housing market, and construction, to take up the employment slack as the mining boom unwound.

But it created a monster

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One thought on “How Central Bankers Blew Up the Global Economy

  1. Well documented article on an inconvenient truth that no one wants to hear. This has been my primary reason for saying for months that the U.S. Fed would not intentionally increase interest rates significantly. And if you think the consumers have a problem, think about the government debts and the interest rate changes on them.

    Like

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