Someone will ultimately pay

Delivered on By Justin Pyvis

Good morning! The political circus had its sights set on the Coalition’s proposed housing policy yesterday, which would see first home buyers access up to 40% of their superannuation, capped at $50,000, to buy a house.

And for good reason.

While ScoMo claimed the overall effect would be “quite marginal” when considered along with his Home Builder stimulus package (which finished in April 2021), his Minister for Superannuation Jane Hume conceded that it “will probably bring forward some of their decisions to buy a house earlier and for that reason it will probably push prices temporarily”.

There are two issues at play here. The first is compulsory superannuation: is it one of the three pillars of Australia’s retirement income system, or is it a pool of savings that individuals should be able to consume on whatever is politically in favour (housing is a durable consumer good)?

It can’t be both things. If a house is an acceptable use for superannuation then why not a car to get to work, a new washing machine, or any other durable good people might struggle to afford?

If owning these things is more important than retirement income, then perhaps it’s compulsory superannuation that needs to be re-examined.

The second issue is the policy itself: it’s demand-side stimulus into a supply-constrained market, meaning it will almost certainly – as Senator Hume confessed – increase prices and do little to improve affordability. As former Coalition Finance Minister Mathias Cormann described the idea back in 2014:

“Increasing the amount of money going into real estate by facilitating access to super savings pre-retirement will not improve housing affordability. It would increase demand for housing and… would actually drive up house prices by more.”

Housing policy needs to focus more on supply, less on demand. Unfortunately both major parties have now tabled policies focusing exclusively on the latter (here’s Labor’s).


Reading the tea leaves

Daily % change

AUD/USD

69.7

+0.6%

AUD/CNY

4.73

+0.4%

AU Bond

3.35

-1.0%

US Bond

2.88

-2.0%

ASX200

7,093

+0.3%

S&P500

4,008

-0.4%

Brent (bbl)

114.3

+2.4%

Gold (oz)

1,822

+0.8%

Iron ore (t)

129.8

+2.2%

Bitcoin

29,751

-5.0%

Ethereum

2,022

-5.8%

Note: Brent oil, gold bullion and iron ore prices are the second futures contract. Bond yields are 10-year Treasuries.

The US S&P500 fell -0.39%, led lower by growth stocks which fell following poor economic data from China in April amid the Shanghai lockdown and Beijing lockdown-in-all-but-name, adding to worries about a global slowdown.

China’s industrial production was down -2.9% from a year ago, retail sales were down -11.1% and fixed asset investment rose 6.8% in the first four months of the year, a slowdown from the 9.3% notched up during the first three months. All three figures were well below consensus expectations.

A notable mover was again Twitter (-8.2%), which fell even further after Elon Musk said a deal at a lower price was “not out of the question”.

Locally, the ASX200 edged up 0.25% with industrials (+2.4%) and tech (+2.1%) leading the way, while materials (-0.5%) and health (-0.6%) were the main drags.

A notable mover was Brambles (+11.2%), which shot up after it confirmed “preliminary engagement with CVC [Capital Partners] in regard to an unsolicited proposal to acquire all of the shares in Brambles”.


Food for thought

"The federal government’s fiscal responses to the Great Recession of 2008 and the Great Depression of the 1930s were similar as fractions of GDP."
"The federal government’s fiscal responses to the Great Recession of 2008 and the Great Depression of the 1930s were similar as fractions of GDP." Source

How is Australia’s unprecedented pandemic debt going to be repaid? If evidence from the US is any indication, future taxpayers are likely to bear most of the burden.

In a recent paper titled Three world wars: Fiscal–monetary consequences [PDF here], economists Hall and Sargent compared the pandemic fiscal and monetary response to the two World Wars, all of which relied on three primary financing mechanisms: “taxing, borrowing, or printing money”.

Their analysis is important because the “War on COVID-19” shares many similarities with both World Wars:

  • Negative labour supply shocks, i.e., converting civilian workers to soldiers during the twentieth century world wars, and lockdown mandates that diverted workers into unemployment and voluntary withdrawals from the labour force during the COVID-19 pandemic.
  • Extensive government restrictions on domestic and international travel and trade.
  • Surges in federal government expenditures mostly financed by issuing interest-bearing debt and base money.
  • Federal Reserve support of federal bond prices and an expanded Fed balance sheet.

After examining the evidence they concluded that unlike the two World Wars where direct taxes played a major role (20.8% and 30.2% for Wars I and II, respectively), higher taxes have been all but absent (3.5%) in the “War on COVID-19”:

“It is striking how little of the War on COVID-19 has thus far been financed by explicit taxation, even compared to World Wars I and II.18 Harry Truman’s advice about how to pay for a war has temporarily been ignored.”

That decision has consequences. The financing mechanism of choice in the “War on COVID-19” has been the issuance of bonds (67%) and inflation (18.5%), the latter of which Keynes (1919) famously described as a process where governments “confiscate, secretly and unobserved, an important part of the wealth of their citizens”.

In terms of the large bond issuance – which was also a feature of both World Wars – it’s not entirely clear on whom the burden will fall. During the Wars, the debt was paid primarily by “private owners” through lower bond returns. However, that won’t be as easy this time because:

  • The maturity of total federal debt outstanding is much shorter today.
  • Private investors today hold mostly long-term debt, while the Fed holds short-term debt. This is the reverse of post-WW2.
  • Today, government bonds face greater competition – private investors are free to buy a much wider range of domestic and foreign securities.

Essentially, repaying the huge pandemic debt without significant fiscal spending austerity and/or persistent inflation will require higher taxes. Politicians and voters will decide which option(s) are selected but as always, “someone will ultimately pay”.


Chewing the fat


Bits and bytes

🤦‍♂️ An advert for the United Australia Party makes “unsubstantiated claims that an airport at a WA mine could aid a Chinese invasion [but] ignores that the mine is party founder Clive Palmer’s main source of income”.

📈 The head of South Korea’s central bank warned that 50-basis-point interest rate rises are a possibility, depending on “more data by around July and August”. Korea’s cash rate is already 1.5%.

🎮 Researchers at Karolinska Institutet “found that the children who spent an above-average time playing video games increased their intelligence more than the average, while TV watching or social media had neither a positive nor a negative effect”.

🔓 Until the next outbreak: An official revealed that the Chinese government is aiming for Shanghai “to reopen broadly and allow normal life to resume” from 1 June.

📝 Sweden’s government said it was in favour of joining NATO and “We will inform NATO that we want to become a member of the alliance.” If it comes to fruition it would end more than 200 years of neutrality.

🧐 Russia’s President Vladimir Putin said if Sweden and Finland joined NATO it would pose “no direct threat for us… but the expansion of military infrastructure to these territories will certainly provoke our response”.

🦠 Flu season is here: 50 kids contracted the flu at a single Melbourne birthday party, with cases already at their highest level since 2019.

👨‍🌾 India, the world’s 8th largest exporter of wheat, restricted exports in a move “set to reverberate through global agricultural markets”.

🌿 For medicinal purposes only: Thailand’s government will give away “one million free cannabis plants to households across the nation in June to mark a new rule allowing people to grow cannabis at home”.