Considering the recent discussion and announcements from the United States Federal Reserve surrounding increasing US interest rates and decreasing Quantitive Easing (Money Printing) has me thinking about what this means for Australia and where we are headed.
The Following Trend
Traditionally the Australian economy walked down a similar path to the US economy. Their economy tanked in the late 80s, ours followed suit. Interest rate graph comparisons show a similar story. It’s easy to conclude if their interest rates are headed up so are ours.
Points of Difference
That said our house prices didn’t tank like theirs did. Additionally, we also have a mining sector flogging off minerals to a growing China and necessities seem to be going up in price. So where are we going?
Hidden amongst all the economic excitement and uncertainty was a little known snippet that the price of fruit and vegetables increased by 8% in the December quarter. Admittedly, I only looked into the figures after seeing the price of carrots rise in my weekly shop last week.
8% what’s the big deal, you might ask? Carrots are still only $1.50 a kilo, who cares you might think? Well I ask and I care. Because fruit and vegetables used to be in abundant supply in Australia coupled against an elastic and limited demand whereby we are all happy to switch out broccoli for zucchini and can only eat what we can fit in our stomach has kept food ridiculously cheap in this country since I have started buying my own.
In such circumstances how can the price of carrots jump so much. My simple answer, successive governments have turned the tap off on the water in the riverina restricting supply, coupled with increasing demand from a growing population and perhaps a healthier aware population then previously.
If fruit, vegetables and other necessities (I’m thinking electricity, petrol etc) continue to cost more and more for less and less, the RBA has two options; follow our American friends and head interest rates north to curb inflation. Alternatively, just let inflation run its natural course and keep interest rates down.
If Interest rates go up then house prices stagnate and potentially fall. If inflation goes up, then there’s less money to spend on shelter leaving house prices stagnate and potentially fall. That is of course if house prices move on purely household income.
What if household income is taking a battering but people still think house prices are the best place to store their money. Then house prices are still going to grow as much as household finances and bank lending will allow. But will people really think houses are the best place to store their money when carrot company shares and term deposit rates are high?
You would think as an insolvency practitioner I would be wearing a counter cyclical smile right now. However, most of the insolvencies coming through my firm’s door are due to personal factors not economic factors. For insolvencies to occur I need people to feel confident enough to sell ice to eskimoes, to start businesses, to run with the wolves and are not happy with their low paying job living at home with their mum. That said if you know a carrot company in trouble let me know.
* For a more technical analysis on money printing and the global economy Google Jeremy Grantham.
** Note – since first drafting this article your author notes that carrots were $1 a kilo again on the weekend. All is well in the world again.