Times are tough - They are far worse than the 17% rates of 1990 on any metric.
"We had 17% in our day..."
I’m getting tired of hearing (but I’m sure people aren’t tired of saying) “you think you have it tough, we had to pay 17% interest rates in my day.” This is heavily repeated in conversation and on the legacy news daily. For the most part, the only matter of fact relating to this one liner is that once you ask a follow up question, any follow up question, no one can seem to explain why it was tougher in those days; we just agree that 17% is much higher than 6% and imagine a 17% interest rate in today’s circumstances.
These one-line mainstream talking points, on any topic, aren’t helpful to society at large. We should be having robust conversations, in this instance on the then, the now, and the why; educating the masses, so we are aware of what the government, the Reserve Bank of Australia (RBA) and International Reserve Banks are trying to achieve, so we can keep them honest and doing what is best for the majority of people living in this great country we call home.
It is hard to hold anyone’s attention for too long these days, so first I will present the summary of the situation today compared to the infamous 17% rates of 1989-90. After the RBA’s 10th straight increase to the cash rate in March 2023; moving 3.50%, to now 3.60% causing the home loan average to be now over 6%, I can assure you on any metric, today’s situation is already far worse. The summary will be followed by an in-depth, referenced summary, for those who want additional knowledge and perspective.
As statistics go, for anyone holding average household debt or higher, as well as those without a house at all with rapidly rising rents and rapidly reducing borrowing capacity, times are hard-hitting and the future was looking consistently bleaker on the 1st Tuesday of every month upon the RBA decision announcements, up until the respite of the April 2023 decision to pause.
This course of action is not sustainable. After this period there is the real likelihood that a large percentage of us will own nothing, but will we be “happy”? as the unelected members of the World Economic Forum so eagerly proclaim, first publicly announcing the idea in 2016.
If you don’t own your own things, then who does? Joe Rogan and Aaron Rodgers have a point in their 2022 conversation everyone needs to hear and consider.
Here is the breakdown of economic statistics, then 1990 vs now in 2023.
Key items from our findings to keep in mind.
The RBA (Reserve Bank of Australia) controls the interest rates, since taking over in the late 1980’s. At least for now. The Labor Government appear to have plans to change this.
The average current home loan rate today is over 6%. In 1990 they were at 17%.
There are roughly 25.7 million people in Australia, but only 14 million of the 19.3 million in the working age cohort of 15y.o+ actually work.
The labour force in Australia has almost doubled the percentage of the working population, and tripled in the number of people working since 1990.
Australia has had birth rates below 2 children per woman since 1978. Migration is the cause of our population increase.
Australian Government Debt (Federal, State, Local) is around $1,100,000,000,000 (trillion).
The interest cost to the taxpayers with a cash rate at 3.60% is nearly $40,000,000,000 ($39.6 billion)
For every working person (14 million) there is $2,829 of tax required to cover the interest on government debt.
There are 13.5 million (over two thirds of adults 15+) earning $68k or less and every dollar of income tax from this cohort is required to pay the interest on the RBA debt.
Tax on the average population income has decrease by 2% from 1990 to today. But we have since introduction many other taxes, the most costly being the 10% tax (GST) on a majority of goods and services.
Cost increases on essential item are far outpacing income growth over the last 3 decades.
If you take the time and look hard enough, you will find that a few commentators have been pointing out that times are harder now than in the 89-91 era for several years. Below is a Sydney Morning Herald example when housing rates were advertised at 5.25%. Keep in mind as at April 1st 2023 we are now at an average home loan rate of over 6% and the debt holdings are significantly higher.
Back in 2007 when rates hit 8.3%, things were again already worse off with significantly lower average debt levels of $319,000 as summarised and reported by 9 news at the time.
For those of you who want to drill into the why, first let’s set the scene with 10 items of base line data and historical information which everyone should know; after all money is what drives our day to day lives. I don’t remember being taught any of this at school or university even when studying commerce, finance, accounting, and law.
1. Cash Rate vs Home Loan Rate vs Long Term Interest Rate
2. Who controls the interest rates?
3. Current home loan rates and sizes
4. Household debt
5. Who is working and how much?
6. Cultural trend of population growth with household size decline
7. Rate rises & the cost of debt to the Australian tax payer
8. Earnings Data
9. Average equivalised disposable household income
10. Cost of essential living
The news we are dealt.
Articles like this Mortgage Magazine article stating that total required mortgage payments are expected to reach “9.5 per cent of household disposal income later this year” are ridiculous and worded to confuse and dial down the issue.
To quote the article “on the other side, though, interest payments are increasing quickly at a time when inflation is also high; based on the interest rate increases that have already occurred (including March 8, 2023 ), total required mortgage payments are expected to reach 9.5 per cent of household disposal income later this year, which will be around a record high.”
These commentators do not look at the bigger picture, and don’t seem to care about the detail. Let’s do the maths.
- Average after tax income $58,448
- Average loan size $618,000
- Average repayment rate 6%
- Annual interest on average loan $37,080
Compared to home loan rates back at 2.4% just a year ago, interest on the average loan was $14,832. That is already $1,750 more a month.
Another way to look at it is every 0.25% rise in interest rates, equates to an additional $1,545 a year that the average mortgagee needs to find, in their family budget, to make ends meet. Essentially, on the average equivalised net income, there is a 10% encroachment on the household income for every 1% rate hike.
We are up to 3.5%, which is a 35% encroachment on the average household’s net disposable income, on the average households loan size, up until this point.
“Expected to reach a 9.5% encroachment?” How did Mortgage Magazine get to this number? What is it based on? An in-depth assessment clearly shows that this is not correct.
Yes, 35%; and then add the burden of the increasing cost of energy and living essentials.
The fact is, the average households’ disposable income has been hit harder than ever before, and in ForgetTheBanks day to day operation it is proving to be devastating for more than half of the clients we see. How are you tracking with your spending and saving? If you are struggling, you are not alone, but unfortunately this is not unexcepted. Back in October 2022 the officials pulling the fiscal levels knew that in Australia at the time of there publication, there was “…around 15 per cent whose spare cash flows would turn negative.” Since October, when this was known, we then had 5 further rate hikes, or another 14% encroachment on disposal, after tax income.
That’s right, the RBA and the government have known now since October 2022 that 15% of Australians are already in financial hardship and yet, they have continued down this path.
Why are they doing this? I’ve never heard this information presented on the news? I’ve never heard the reason for this explained, and more importantly, where does the $39.6 billion go?
Concluding notes
Nothing about this data is new to me, but it is likely new to you.
It is the reckless speed of the rate rises this past year which raises my eyebrows the highest. The treasury and government are certainly aware of all of the above information as it is their data, so what is their reasoning? I’m yet to hear of an explanation that makes sense.
Like anything you are trying to crash, think about a car; the faster the speed, the worse the impact, and the more severe and long lasting the potential damages. That is the point, we all know what happens when you raise rates. A recession follows every time, so why do it so fast? As painful as it is for some people to accept, Trump called it again. He told us several times that if you put the wrong person in the Whitehouse we will have a severe global recession, possibly worse than 1929 and, sure enough, with the wrong person at the wheel in America we are on the verge of a crash, which they are finally admitting.
With all this in mind, the next question is; if every western government printed excessive cash, inconceivable amounts, for stimulus while they all in lockstep, locked their citizens in their homes and shut down global supply chain for a virus that turned out to be no more deadly than the flu. How did I, and many others, know that inflation would run rampant in the proceeding years, but our governments and economical advisers didn’t?
When I say inconceivable amounts, at the top of the printing tree, the USA printed over $5 Trillion for COVID alone on IOUs to their federal reserve, and a whooping $13 Trillion in total for further quantitative easing and infrastructure.
How did these entities, being the RBA here in Australia, the Federal Reserve in the USA and the rest of the private western central bank leaders, who control the global currency supply and inflation, do nothing to stop this huge inflation wave - even denying it as a fact in early 2021, and them claiming it was just transitory in mid 2021, when anyone who was paying attention to fiscal policy was preparing for this.
And then rather than address the root causes and focusing on fixes like slowing government spending and increasing global energy supply to reduce cost, the Reserve Banks of the world have now led the world into the fastest rate hike cycle in modern history.
Now we are at the precipice of a financial crash with large banks internationally, like Silicon Valley Bank (SVB), becoming insolvent. Luckily for the banks, here in Australia, fixed rates aren’t that common, and the banks just pass their costs onto their borrowers.
The real and lasting question is, what are Central Banks and the Governments of the west going to do fix the problems they themselves have caused? Did they learn anything after the global financial crisis in 2009?
What do you think they will do? Here are 2 possible directions this could go…
1. As transparently as possible, they could engage in a heavy spending review and implement plans to reduce government size and spending, cut regulatory tape and increase energy production (to ease the energy cost which is adding further fuel to the money printing problem) and quickly steady and slowly reduce rates, to ease the pain on family’s budgets. And commit to releasing annual budgets which aim to reduce our national debts.
OR
2. Print, print, print. Backstop banks. Shut down fossil fuel production and skyrocket living costs. Exacerbate the fiat paper currency value problem (inflation) beyond repair. Then attempt to transition the national currency systems into one with global control.
I know what I would rather happen. What would you prefer?
If they do print again, we are sailing deeper into uncharted waters, and unfortunately, it looks as though the people in charge don’t understand simple economics and are heading down the path of option 2.
It takes time to become informed
For those interested, below is important information coming from the USA on global monetary policy that you won’t see on the legacy news.
First is the USA 2024 senate budget testimony March 2023. https://www.finance.senate.gov/hearings/the-presidents-fiscal-year-2024-budget-with-treasury-secretary-janet-l-yellen
Here are some highlights.
Second is the House Rules Committee Meeting - Feb 2023
https://rules.house.gov/video/rules-committee-hearing-hr-1-2
Here is the main highlight on money printing, but the entire hearing is worth the watch to take a birds eye view of government bureaucracy.
And third is the Federal Reserve’s Semi-Annual Monetary Policy Report.
https://financialservices.house.gov/calendar/eventsingle.aspx?EventID=408623
Lastly, further to these valuable resources, here is some more evidence that since the terrible fiscal global C19 response, the reckless unchecked spending continues.
Times are tough. And unfortunately, with the people in charge both abroad and here in Australia, it may get worse before it gets better considering the reckless and unsustainable fiscal policies continue. A recession is nearing, and it make no mistake, it is on purpose the head of the of the central bank of the USA admitted as much on a leaked prank call. Looking at global news and global data, it is likely already here.
Make sure you aren’t paying too much on your mortgage. Contact Forgetthebanks.com.au today.