A Fool and His Money Are Soon Partying – RBA Governor Philip Lowe

The title of this article owes its origin to a bumper sticker.

It’s one we saw in Detroit, Michigan. That was back in 1986, when we were studying economics. And the bumper sticker earned a prominent spot in our university dorm room.

That bumper stickers has long since been buried beneath the sands of time. But it still rings true. Just look at the world’s central bankers.

You may have caught the latest from RBA Governor Philip Lowe. He spoke at the Australia–Canada economic leadership summit in Melbourne last Thursday.

It’s quite likely we’re going to be in this world of low interest rates for years, perhaps decades, because it’s driven by structural factors in the global economy…

We’ve made choices which give us structurally high housing prices and structurally high levels of debt relative to our income. That’s what we’ve done and it’s created a vulnerability because we’ve got a lot of debt on our balance sheets relative to income.

Let’s pause to take this in for a moment.

The RBA made choices that have given us ‘structurally high’ — or perhaps more accurately ‘insanely high’ — house prices. Those same choices have encouraged Australians to take on mountains of debt and thus ‘created a vulnerability’.

Vulnerabilities, like, the 22.5% leap in the average mortgage in New South Wales over the past 12 months. That’s according to the ABS, which reported a jump from $500,000 to $612,000.

Yet Lowe envisions these same policies will endure for decades.

And he’s not alone.

Over in the US, Fed Chairman Jay Powell is reading from the same crib sheet.

Speaking to the Senate Banking Committee last Wednesday, Powell said, ‘Low rates are not really a choice anymore, they are a fact of reality.’

Here’s a dose of reality…

At some point there’s going to be so much cheap money sloshing around the system that the housing and stock markets can no longer absorb it all.

When that happens, prices throughout core areas of the economy — food, clothing, labour — will go up.

When people realise the value of their currency has been undercut for years, the process could spiral quickly. And today’s ‘stubbornly missing’ inflation is likely to suddenly be very much in attendance.

This, in turn, will mandate a backflip on interest rates.

That may come as long overdue, welcome news to cashed-up savers. But the majority of Aussies — many carrying record mortgages — could be pushed over the edge.

PS: The Rum Rebellion Editor, Vern Gowdie has had a wary eye on low rates pushing investors into stocks for years. He now sees the entire Aussie stock market as overvalued. And there are five stocks in particular he believes you should sell today. Without delay. You can get the details in his free special report here.

Bernd Struben is an Editor of The Rum Rebellion. In this capacity, he has access to one of the most intriguing and powerful networks of practical investment insight anywhere in the world.

Bernd has worked on four different continents, and has more than 20 years of professional finance, editorial, and management experience. He holds a degree in economics.

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