Furthermore, economist Chris Richardson expects further declines in real incomes until mid-2024 before tax cuts reverse the decline.
Mr. Richardson is then quoted with one of the most enlightened pieces of commentary I’ve read in a long time.
Mr. Richardson said the tax cuts were a “Band-Aid”, and higher productivity growth would be needed to drive better living standards in the long run.
“In Australia these days, we spend our time grabbing bits of pie from each other rather than growing the pie, and at some stage we get what we deserve, and we’re getting the politicians that we deserve,” he said.
Well said, sir!
The picture is no better in other advanced economies. Because of weak growth and high inflation, living standards are falling in lots of places.
The cost-of-living crisis has now become a hot political issue. Which means that governments will be expected by the electorates to intervene to sort this out. In Australia and elsewhere.
Which means this isn’t going to end well for anyone. They’ll devise all sorts of policies to sort out the issue, but none of them will work.
Here’s why.
If you want to solve a problem, you need to understand it first.
The way that governments will try and frame their response to this issue will be to demonstrate how much of an effect the various crises, beginning with COVID, have had on this issue.
Nothing to do with us, they will say.
They’ll point, as they do in Australia, that a range of goods that households buy have become way more expensive.
They will blame things like the war in Ukraine to explain why food and drink has gone up 5% each year.
They’ll blame the trade tensions with China to explain the rising cost of home interior things such as furniture – which are up by a fifth.
They’ll blame COVID and problems in the aviation industry to explain why the cost of your holiday is 30% more expensive.
All this underpins the cost-of-living crisis that we’re experiencing.
They’ll pin the blame on everything they can. And design measures to sort it out.
But they won’t ever talk about the one really big culprit.
That’s right, something else is at the heart of this cost-of-living crisis. Which makes the idea the same governments can sort this out as lunacy.
What’s the key component of a household budget? It’s something that is massive and, unlike other items, you can’t avoid it. With most of the other things you buy, you’re able to do something about costs: you could delay your purchase or buy a cheaper alternative.
Or forgo it altogether.
But this one thing you can’t avoid: the cost of your rental payment or your mortgage.
You must live somewhere. And when times are tight, your only choice of doing anything about it is to go through a massive disruption of moving to a much worse location or much smaller space.
Hardly the same level of change as forgoing a holiday or buying cheaper food at the supermarket.
And your housing costs are very likely to have grown massively in the last few years. Not just since COVID but since the start of the present cycle in 2011/12.
Housing costs are the most significant spending item for a household (unless you’re in the enviable position of having paid off your mortgage).
They are a big reason for the inflation we are presently seeing.
So, has anyone talked about sorting that out as part of tackling the cost-of-living crisis? Of course not.
So, incredibly, this means the single biggest item related directly to cost of living pressures is either deliberately or deviously ignored by everyone. Particularly as interest rates have gone up.
If governments and central banks everywhere are simply going to ignore this then the problem will not/cannot be solved.
One doesn’t need to go too far back in recent history to see the utter folly of government intervention to “fix” something.
The playbook was simple. Within the middle of economic lockdown in 2020, rates were lowered to support the bank’s loan books.
This was quickly absorbed by the land and thus house prices rose. Normal working people choose to move away from the cities in their hundreds of thousands globally.
This caused land in more regional areas to rise quickly. Those same workers now demanded higher wages to cope with this increase.
Business needed to increase the cost of their goods and services to consumers to afford this.
Thanks to generous government stimulus during the lockdown, which led to record savings levels, consumers were apparently happy to pay it.
However, as soon as normal economic activity resumed, it sparked one of the most sustained interest rates rise campaigns in living memory. Despite so-called commentators saying this would lead to a housing collapse, a small blip in late 2022/early 2023 aside, house prices kept rising.
Which brings us to today.
My view is that headline inflation rates might well fall as the cost of energy, food and travel stabilizes. It is inevitable that this would happen at some point.
But does this mean the real crisis here will also dissipate? No.
Because we are in the ‘Winners Curse’ phase of the cycle.
This means that housing costs will not come down. The move to more marginal regional areas to buy up every and all vacant lots will accelerate.
And high house prices will squeeze household spending again, even when everything else seems cheaper. Simply because it’s your single biggest expense.
Between now and then thousands of ordinary people just like you will succumb to the temptation of the easy credit now available. Simply to help make ends meet if nothing else.
By borrowing to make up the difference in your purchasing power, you are potentially setting yourself up for financial catastrophe instead.
The best way to avoid that is through knowledge. Knowledge of the real estate cycle is what can set you free.
Here’s how you learn it; with membership to the Boom Bust Bulletin (BBB).
Let me guide you through the final few years of the real estate cycle. Years that will be volatile and very emotional.
Use our research to make the best possible investment decisions that can help keep you safe in such markets.
Governments today totally understand the true culprit here, high land prices. The real solution though is politically impossible.
So, land prices will be allowed to continue to rise higher. Instead, they will fall over themselves to blame everything except the real reason for the crisis.
Don’t believe their lies and counterfactuals when they tell you they know how to solve this.
Cost of living pressures are not going away.
And now you know why. You must come to grips with this truth and invest and borrow accordingly.
The secret key to success is in the timing.
And that’s what the BBB is designed to teach you.
So, sign up now.
