The life blood of any fiat-based economy is its ability to print money. Banks, as we know, just print money into existence. If you buy a home and borrow one million dollars, then the seller (if he is not repaying another loan) will deposit the funds into his bank account. This increase in the bank’s deposits reflect the growth in Australia’s money supply. One person has a $1m asset and another person has $1m liability, with the banking system standing in the middle. We never complain about too many investments, we only complain about too much borrowing, yet they must mirror each other.
Relative high growth in money supply is associated with booms and precipitous falls are associated with busts. Even after the October 1987 crash, the money supply kept on growing and home prices boomed up until mid-1989. Then Keating gave us the recession we had to have, which lasted to 1993/4. The golden years of growth were the mid-1990’s until 2007. Because the private sector was prepared to borrow on a compound basis over a long period of time, the Government sector didn’t have to. The Government ran balanced budgets and Peter Costello claimed the credit.
When the crash happened in 2008, the Government stepped in as a borrower to replace the retreating private sector. The growth model of a modern economy is that either the Private Sector or the Government Sector or both are borrowing. Remember, for every dollar borrowed there is an investor. The money supply figures published for the end of September show the both the Private and Government sector borrowings are retreating to a point below the GFC growth figures.
Today we have interest rates at 1.5% and not 7%, a chastened banking system burdened by a Royal Commission, and a Government promising and on target for a balanced budget by year’s end ie. No more borrowing.
The annual growth in money supply was $42 Billion at the end of September. The Government’s increase in borrowing over the same period was $37 Billion. A balanced budget means that that borrowing level will reduce to NIL. Can money supply growth go negative? That means, on balance, that people are repaying borrowings. That doesn’t sound good for asset prices. Politically they should call an election, so they can blame the current opposition party.
The Government has to promote borrowing, There is not much left in interest rate incentives and pump priming the First Home buyers has probably run its course. Hence Josh Frydenburg announced a $2 Billion lifeline for small business borrowers. The Government cites that the banking system does not properly finance small business, with business owners relying on personal loans and borrowing against a home. Mr Frydenburg is looking to establish an Australian Business Securitisation Fund so that once the funds are lent they can be securitised, with process then repeating to lend more funds.
In July last year the economy increased the broad money supply by $148 Billion in twelve months. With the latest annual growth at $42 Billion and falling, there is quite a large task ahead to bring stimulus back into the economy. The rhetoric may always be against more borrowing but, lets face it, the economic system is hooked.