Will Australia experience a recession?
What will happen to interest rates?
I have answers, and a new favorite economic theory: “F*** it” money.
Recently, the banks have begun to reconnect with journalists, as they had not done in the past three years.
Eating meals together was largely suspended during the early years of the COVID pandemic. Now here we go: with a lot to catch up on.
Over the past few months, I have rubbed shoulders with top bank executives, influential fund managers and renowned economists. These conversations have not been recorded or attributed to any individuals.
But I’ve condensed the main things I learned below.
Markets operate on two things: greed and fear.
Much of the fear is centered on global banking giant Credit Suisse. The Swiss company’s share price has halved this year after internal unrest and a series of scandals.
That’s a generous assessment. The bank suffered big losses, hired private detectives to spy on employees, laundered money for a criminal organization in Bulgaria, faced lawsuits and paid a fine of more than half a billion dollars for facilitating corrupt loans in Mozambique.
New chairman Axel Lehmann says he will reform the company after a “horrible” year, but his name underscores the problem.
The shock bankruptcy of independent US company Lehman Brothers helped blow up the US economy in 2008, leading to the Global Financial Crisis, or GFC.
It was a hammer blow with immense consequences: the key index of our stock market took 12 years to regain its pre-GFC level.
But Lehman Brothers had overpaid for its assets and used accounting tricks to make its books safer than they were. When the crisis brought down the curtain, other banks were also exposed.
No one I spoke to claimed to have insider knowledge of Credit Suisse.
But they insisted that the conditions of 2008 – when other global institutions had similar problems over overvalued assets – were simply not there.
They don’t see GFC Mark II. But they see problems.
The challenges of the global economy are as vast as the world is vast.
In the UK, the Bank of England predicts a recession that will continue from the end of this year and through 2023. It would be the longest recession since the GFC.
In the United States they are more optimistic, but maybe that’s just the weather.
Their central bank, the Federal Reserve or “Fed”, tries to slow down inflation.
But the way it does it – raising interest rates – has many other impacts. A Bloomberg Economics report indicates that a recession will hit within the next 12 months. Normally they give a percentage of the probability.
This figure is now 100%.
The bank’s figures agree with that view for both nations, although they disagree on depth or length.
And some of my conversations predate the September 23 announcement by (now former) British Prime Minister Liz Truss of an unfunded tax cut plan so savage it caused the value of a pound and cost her a job she had only had for a few months.
Recession in Australia?
What people I’ve talked to agree on is that our problems aren’t that bad.
Inflation is a problem, but unemployment is extremely low, which means that more people than everyone else have a salary that can help them get by.
Bad debts and “arrears” – people in arrears – are nowhere near levels that would make the bankers I was dining with sweat.
Interest rate expectations published by various banks are broadly in line. And those at the top are bashing some of the outliers who fear the Reserve Bank is raising rates too steeply.
Australians have big mortgages, and if people can’t pay them… we won’t have any savings. Instead, they see smaller increases ahead of cuts to stimulate the economy next year to avoid the worst impacts of the global slowdown.
Salaries are slowly rising, except for staff they try to hire or retain in hot areas like information technology and project management. For these roles, even “throwing money at them” – jacking up salary offers sky-high – can’t bring them enough staff.
And most are pleasantly surprised by the stable and “reasonable” decisions of the new federal government, after years of rapid and unforeseen political changes compared to the previous one.
If there is the danger of a recession – two consecutive quarters where the economy shrinks – they think the government will release “both barrels” of spending on social programs and infrastructure to try to avoid it.
What’s going on?
But one question persists: why is household spending still high?
With inflation soaring and interest rates soaring – hitting mortgages and rents – people have less money to spend.
Wages do not rise rapidly, so even though most people have built up a reserve of pandemic savings, their purchasing power is diminishing and they would normally cut spending as costs rise.
But that’s not what they’re doing – much to the astonishment of some banking personalities I’ve spoken to.
This shouldn’t be a surprise. An economist I sat down with put it simply: using psychology and an expletive.
‘F*** it’ money
There are still unequal levels of wealth in the community, and people with lower wages – or on our pitifully low social benefits – are seeing their lives turn backwards. So-called “non-discretionary inflation,” on basics like food, fuel and housing, is on the rise.
The standard consumer price index (CPI) used to denote inflation is 7.3% for the year ending September. For non-discretionary inflation, the things we have to buy is much higher.
But for those with a better box office, expenses remain high. Why?
The answer is simple – and explosive.
We’ve had two years of restrictions and unpredictability that have cut travel, big events like weddings, and general spending on restaurants, clothes, and nice things.
Now, many give a simple answer when evaluating a purchase they don’t need to survive, but want to make.
And that might be enough to save us from recession.