RBA Speech 17th Sept 2008

Snippets from Glenn Stevens (Govenor of the RBA) recent speech

(my bold)

We are living through challenging times for decision‑makers in both private and public roles. The past year has seen a major change in international economic and financial conditions. Global economic growth, having been well above average for a string of years, has slowed noticeably, especially in the major industrial countries – yet inflation rates remain a concern. Large losses have been incurred by major international financial institutions. Several household names in global investment banking have disappeared. Appetite for risk – which had been strong to the point of recklessness in some areas – has given way to risk aversion. Credit is harder to obtain, and more expensive. Australia has been affected by these forces, but much less than the countries at the epicentre. Our financial system is weathering the storm well.

Amid all that excitement, it is useful occasionally to step back from the high‑frequency detail to focus on the bigger picture. Today, I propose to talk about four low‑frequency, big‑picture themes – all of which are nonetheless amply demonstrated in the course of events over the past year or two.

The themes are:

  • the emergence of China;
  • the economics of a fully employed economy;
  • the end – perhaps? – of the long period of households leveraging up their finances;
  • shifting perspectives about the regulation of the financial sector in the economy.

Snipped all except bit about household balance sheets

Household Balance Sheets

A feature of the economic landscape of the past decade and a half has been the long gearing up of households. In the early 1990s, household gross debt in Australia was equal to about 50 per cent of average annual household disposable income. This year, it reached about 160 per cent. Households’ assets rose generally in parallel, though not quite as fast, with total assets rising from about 460 per cent of income in 1990 to over 800 per cent at the end of 2007. (Assets have fallen somewhat since then, with the decline in the share market and some softening in housing prices.) The ratio of debt to assets rose from under 10 per cent in 1990 to about 18 per cent in 2008. The ratio of housing debt to housing assets reached about 27 per cent.

Very similar trends have been seen in a number of comparable countries around the world, so in thinking about the causes, we should not look exclusively for domestic causes. But in summary, the main factors behind this big increase in the size of the household sector’s balance sheet were:

  • the general tendency for financial activity and wealth to grow faster than income, which has been a feature of most economies since at least as far back as the 1950s;
  • an increased pace of financial innovation – and, in particular, a lot more credit has been available, particularly over the period since the mid 1990s, to households. In recent years around the world, anyone who was creditworthy – and some who were not – have been able to access ample amounts of credit;
  • the big decline in inflation. This lowered nominal interest rates dramatically.2 This happened in all countries, though the timing differed. In Australia it was a big factor after 1992;
  • a period of pretty low long‑term interest rates globally, which encouraged borrowing around the world, though this was a bigger factor in the United States than here. This had a lot to do with the build‑up of savings relative to investment in Asia;
  • a desire to devote a higher share of a rising income to acquiring housing services. As people’s income increases, certain goods and services will take a declining share of total spending – food, for example, or products, such as electrical goods or clothing, which have large falls in their relative prices over time. But other types of products take an increasing share of income. Housing has tended to be in that category. As we have become wealthier, our aspirations for housing in terms of position, quality and size have naturally enough increased. But for various reasons the supply is not very elastic – there is only so much well‑located land, and other factors have affected the supply price of dwellings more generally. In the end, a lot more of our income is devoted to housing, acquired by servicing mortgages, than was once the case.
The question is whether this long period of gearing up by households might now be approaching an end. Certainly household credit growth is much slower at present than it has been for some years, running roughly in line with income growth. Might we see this conservative approach to debt among households persist?

It is hard to know the answer to this question. There is much more of the household balance sheet that could, in principle, be turned into collateral, so gearing up might resume once the current turmoil has passed.

But there is also a good chance that households will for some time seek to contain and consolidate their debt, grow their consumption spending at a pace closer to income, and perhaps look to save more of their current income than in the recent past. It is possible that we are witnessing the early part of a new phase where the household spending and borrowing dynamic is different from the past decade and a half.

Time will tell. But if that is the trend of the next several years, the growth opportunities for businesses and financial institutions will be different. And whereas the household balance sheet has been the big financial story of the past 15 years, some other financial trend will probably be the bigger story of the next decade. There are some developments that suggest the balance sheets of governments might well be expected to expand a good deal. The need for support of the finance sector in countries like the United States and the United Kingdom is one. The build‑up in public infrastructure in Australian cities and regions may point in the same direction, though to a lesser extent. If the sudden aversion to these sorts of assets by private investors continues for any length of time, governments may have to choose whether to fund the projects themselves, or defer them. Fortunately, public balance sheets in this country are in a very much stronger starting position than those in most other countries.

The bottom line is that the RBA doesn't know will happen next.....
 
But there is also a good chance that households will for some time seek to contain and consolidate their debt, grow their consumption spending at a pace closer to income, and perhaps look to save more of their current income than in the recent past.

Pfft as if.
 
we are. we haven't consciously been tight, but just not spending (not on reno's and petrol mainly!). i was really shocked at how much we were saving when i finally sat down and worked it out.

nothing to spend it on in whyalla! :rolleyes:
 
There are some developments that suggest the balance sheets of governments might well be expected to expand a good deal. The need for support of the finance sector in countries like the United States and the United Kingdom is one. The build‑up in public infrastructure in Australian cities and regions may point in the same direction, though to a lesser extent. If the sudden aversion to these sorts of assets by private investors continues for any length of time, governments may have to choose whether to fund the projects themselves, or defer them.

How funny. Remember when governments used to own banks and airlines and roads and stuff like that. Another cycle.
Scott
 
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