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 Hats
off to Barnaby Joyce for having a crack. Maybe when his political career is
finished, and he's yesterday's nobody, we could offer him a job writing
newsletters. He certainly knows how to write a good headline!
If you missed it, in an interview with the ABC Barnaby Joyce said:
"We're going into
hock to our eyeballs to people overseas. And you've got to ask the question how
far in debt do you want to go? We are getting to a point where we can't repay
it."
ABC reporter, Stephen Long's response? Well, here it is:
"The polite way to
describe that comment - nonsense. It's not true, plain and simple. The credit
ratings agencies don't always get it right; the global financial crisis showed
that. But they've got a lot of experience in rating sovereign debt."
And then the little reporters scurry off to interview the usual suspects:
Standard & Poor's, Fitch Ratings, and Citigroup.
Hmmm, the ABC relies on two ratings agencies that rated subprime mortgage debt
as triple-A, and an economist from a bank that was partially nationalised by
the US government.
Not surprisingly they give the Australian government coffers the stamp of
approval.
You can click here to read the transcript, but the gist of it is blah,
blah, blah... Australia did better than everyone else, etc...
According to Citigroup economist Josh Williamson, asked whether Joyce's
comments were irresponsible he answered, "Absolutely."
So, is Joyce's comment nonsense? Well, it is in the sense that governments have
one advantage that no one else has. And that is the ability to print extra
money to pay off debts.
As we've mentioned before, if you crank up the Canon inkjet printer and run off
a few thousand $50 notes, you'll find yourself in the Slammer before you know
it.
The fact is, most governments are too sneaky and dishonest to openly default on
debt. Their first response is always to inflate the money supply to devalue the
currency. That way, while the debt is repaid it's done with a devalued
currency.
But that's the disappointing part about the mainstream media's response to
Joyce's claims. It doesn't take much effort to look beyond his statement to see
there's at least an ounce of truth in what he's saying - not that he's the
first to say it of course.
And the other disappointing point is Josh Williamson's comment that "We have an excellent debt to
GDP position." Because that's only true of the government
debt.
The household debt to GDP position, and income to household debt position is
nowhere near as good. In fact it's terrible.
And worse is that unlike government's, households can't simply print out extra
$20 notes to pay off their debt. So the real problem isn't the possibility of
the government defaulting on debt, it's the scale of the household debt default
when that happens.
Of course, we frequently hear the argument that inflation is the friend of
debtors. That over time the amount of debt reduces when adjusted for inflation.
We have to say, that's one of the biggest furphies going around. Along with the
idea that a house is a hedge against inflation.
As we've written before, in all cases inflation is bad for you and your wealth.
Inflation is never good. At the extreme, ask Weimar Republic Germans, or
Zimbabweans, or even look at your own position.
Has inflation really helped you out over the last twenty years? Didn't think
so.
The simple reason is that inflation forces you to work harder.
Let's be honest. No one wants to work. We work because we have to. But imagine
how much better it would be if there was no inflation. Or if there were periods
of deflation to counteract the inflation.
Inflation devalues the dollar in your pocket which means you have to keep
working harder and longer. Your ability to devote more time to leisure lessens
the more inflation eats away at your income and your savings.
I mean, if your dollars weren't devalued and prices didn't rise then your
savings would really grow, and without much effort either. Whereas now,
as an investor you have to run just to stand still.
Look at the risks you need to take as an investor. Even a 10% or 12% annual
return from taking big risks on the share market probably isn't enough to beat
inflation. And I mean the real cost of living increases not the phony numbers
the Australian Bureau of Statistics (ABS) come up with.
And as for the idea that a house is a hedge against inflation, well, that's
more twaddle. It's no such thing. In fact, in an inflationary environment
houses become nothing more than a 'White Elephant.'
If you want to know the origin of that phrase, just head over to the Lazy Researcher's Handbook.
You see, inflation appears to help by showing a correlation with rising house
values. Yet there's no evidence that there's a causal relationship.
Just on that point, we've seen plenty of people say, "Look at the chart, inflation
has gone up over the last thirty years, so have house prices, therefore housing
is a hedge against inflation."
Not so fast. You can't take two data sets, compare then and then just announce
a correlation.
If it was that easy then you could compare house prices to a chart of your
editor's age over the last thirty years. You could conclude because both have
risen that your editor is a hedge against inflation!
What utter nonsense.
Inflation inflicts greater harm on the homeowner due to higher maintenance
costs.
Fuel bills go up, electricity bills go up, replacing furniture, fixtures and
fittings all go up. And generally just keeping the home in good nick incurs
higher and higher costs. The cost of moving goes up, the cost of downsizing to
a smaller home goes up, and so on.
You only have to look the popularity of reverse mortgages. Old timers borrowing
money in their old age because they've spent so much on maintaining their home
for the last thirty-odd years. And because high taxes have robbed them of the
chance to save, they've got no other choice than to put themselves into hock
just to cover the weekly shopping.
Or another example. The relish with which a twenty or thirty year old home is
advertised as a "renovate or detonate" property. How is that either
an investment, or a hedge against inflation?
It isn't.
That's house price inflation for you.
Then at the extreme look at the number of Victorian stately homes in the UK
that are falling apart. Lords of the manor having to rent out their 500
year-old ancestral home to bucks parties and corporate dinners because they
can't afford to repair the leaky roof.
Or if they're really strapped for cash they have to flog it to National Trust
and then live out their days in the Gatehouse because they can't afford the
heating bills or maintenance costs.
And they can't sell them to private owners, because no one else is foolish
enough to lumber themselves with such a White Elephant.
As I say, that's the extreme, but the reality is, housing isn't a hedge against
inflation.
In fact if you compare it to something else which is claimed to be a hedge
against inflation - Gold - they have nothing in common.
Gold is divisible, a house isn't - you can't sell it brick by brick and get the
same proportional return.
Gold is transportable, a house isn't - unless it's some crappy weatherboard
home no one wants and you're prepared to pay for transport costs. Or, unless
your home is a caravan! But then of course, according to Saul Eslake and his
crew at the National Housing Supply Council, if you live in a caravan you're
homeless anyway, so that doesn't count.
Gold is durable, a house isn't - see the examples above.
Gold can be hidden from the government if they try to confiscate it like the US
government did in the 1930s. Try hiding a house! Good luck with that one.
Plenty of people will tell you Gold isn't a hedge against inflation anyway,
that it's a hedge against political instability. We're prepared to consider
that argument. But we'll also say that if Gold isn't a hedge against inflation,
then housing most certainly isn't either.
The fact is, while Barnaby Joyce may not be 100% correct, he isn't 100% incorrect
either. Record high household debt levels have indebted the Australian
population.
So even though the odds of the Australian government 'honestly' defaulting on
its debt obligations are near to zero, the odds of Australian households being
forced to default under the pressure of the White Elephant of housing is better
than evens.
Cheers.
Kris Sayce. This article is contributed by Money Morning. Click Here to Subscribe to their free newsletter.
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