Interest rate hikes

IS AUSTRALIA HEADED FOR ECONOMIC ARMAGEDDON?

Remember in 2020 when EXPERTS told us that, contrary to what we were all taught in the past, mountains of government debt was actually a good thing?

It was called Modern Monetary Theory (MMT) and it all hung together beautifully in the models.

Well you don’t hear much about MMT anymore.

Not since inflation started skyrocketing and central banks began hiking their interest rates.

This month, Australia’s RBA raised interest rates to 0.85% and Goldman Sachs says it could hit 2.6% by year’s end.

Which makes RBA’s actions incredibly reckless, in my book.

Property and household debt are pretty much the only thing still driving this country’s economy.

We generate no real wealth, create no productive jobs, while private investment and wage growth have been stagnant for decades.

Where is the national productivity agenda?  There is none.

Australia is now a ‘service’ economy – ‘services’ and the longest running property bubble in history!

In 2020, the Treasurer said gross government debt would be $1.1 trillion by June 2024.

According to Treasury’s models, the total interest payable on all that debt was predicted to be $113 billion by June 2025, or close to $20 billion each year.

There’s just one tiny problem.

The  models were calculated on the ‘assumption’ that there would be A STEADILY FALLING INTEREST RATE ACROSS THAT PERIOD!

Which as everyone knows, didn’t happen. Instead of falling, interest rates have tripled.

So instead of having to pay around $20 billion in interest each year, the federal government could be looking at $60 billion.

And despite what MMT theorists believe, governments absolutely MUST pay their annual debt interest payments – or the whole house of cards collapses.

Imagine if interest rates do hit that 2.6% Goldman Sachs has predicted.  We could be looking at an annual interest bill ten times the amount predicted in 2020.

Even at $60 billion, Australia’s interest bill would be the Government’s third largest expenditure item behind health and aged income support, according to the IPA.

And remember! Australia’s Big Four Banks are 60-70% exposed to the property sector.  Even a moderate run of defaults could finish them.

And here’s the kicker.

Under the Financial Claims Scheme Guarantee, deposits of $1 million or below with Australian-owned banks, building societies, credit unions and even Australian subsidiaries of foreign-owned banks are automatically guaranteed by the Federal Government!

That means if the property market collapses and some or all of the banks crash, guess who’s on the hook to bail them out?  The Federal Government.

It would bankrupt the country.

Let’s hope the RBA knows what its doing!