Another Quick Fix For Credit Junkies

It’s going to be a great week for interest rate fetishists. The Reserve Bank of Australia meets on Tuesday to decide what to fix the price of money at in Australia. The consensus view among economists, according to Bloomberg, is that the RBA will cut the cash rate from 4.25% to 4.00%. A lot of keystrokes will be wasted on keyboards explaining how this rate cut will ‘boost’ the economy and stock prices.

You can sometimes hear the desperation in the voices of credit addicts. When you need a hit, you need a hit. The people who make a living off perpetually expanding credit bubbles need a hit. The credit hit is what keeps financial asset markets expanding.

Two more notes about credit in the Australian economy. First, the RBA can cut rates all it wants, but it can’t make businesses borrow. This is a lesson learned by the Bank of Japan and the Federal Reserve over the last twenty years. Non-financial businesses (businesses other than banks, in other words) only borrow money if they’re confident they can use it to grow earnings and generate a return for shareholders. If they’re not confident about business conditions, they don’t borrow.

The Australian Bureau of Statistics (ABS) reported last week that businesses borrowed $29 billion in February. That was down from $36 billion in October. It was the fourth consecutive monthly decline in business borrowing. And on a month-over-month basis, commercial lending was down 8.4%.

There are only two ways to look at this. Either banks are being stingier with loans or businesses are more cautious with borrowing. It’s probably a bit of both. But our main point is that artificially lowering the price of credit doesn’t improve underlying business conditions. True, it might make a project easier to finance. But if your quarterly sales figures are telling you that the economy isn’t so hot, why would you borrow?

The final point about credit in the economy is more of a point about consumer price inflation (CPI). The hue and cry for a rate cut increased last week when the ABS reported that CPI rose just 0.1% in the first quarter of the year. On an annual basis, that’s just 1.6%.

If you’re a fan of higher prices, this is apparently bad news. Prices are not rising fast enough! They may even been falling! How do you know the RBA is in the business of undermining purchasing power? The bank targets annual inflation of 2-3%. That’s a true story. The Bank WANTS prices to rise a little bit each year.

In the end, the official CPI figures almost certainly bear no relation to the real world. Does your cost of living seem to be going down? The ‘trimmed mean’ method of calculating consumer price inflation routinely excludes items deemed volatile. This is a way of calculating inflation that excludes everything rising in price, which tells you pretty much everything you need to know about the calculation.

By the way, the volatile items usually include food and fuel. Though volatile, those items aren’t exactly discretionary. Excluding them because they ‘distort’ the picture of ‘real’ inflation doesn’t really measure ‘real inflation’.

What it DOES do is allow you to make the case that the RBA should cut interest rates. And THAT is exactly what people in the financial industry want. More free money to change your life! The more they can borrow, the more they can speculate with.

If you want an example of a market that’s on the life-support of low interest rates, take Japan. Over the weekend, the Bank of Japan (BoJ) announced it was expanding its government-bond buying program by ¥5 trillion, or $62 billion. The total budget for buying government bonds was also expanded to ¥40 trillion.

This is the kind of monetary stimulus only a drug dealer could love. It keeps the addict alive and delays his return to health, without provoking his actual death. Better an addicted borrower than a dead one. Central banks have turned investors into a bunch of junkies.

Both the Aussie and Kiwi dollars rallied on the Japanese news. Even if the RBA lowers the interest rate differential between the Yen and the Aussie tomorrow, official Japanese interest rates will remain low and the BoJ will keep pumping money into the financial system. This policy doesn’t promote ‘growth’. It prevents a further collapse in financial asset values, which is erroneously being called ‘deflation‘.

Lest you be under any illusions about the fundamental strength of the Aussie dollar, take a look at the ten-year chart below. This shows the Aussie versus the US dollar. What does it show you? It shows us that the US dollar is weak and that the Aussie dollar is the plaything of international speculators. It goes up. It goes down. It’s gone up. It will go down.


Source: StockCharts

A weaker Aussie dollar would be welcome news to exporters and manufacturers. But a weaker Aussie would most likely be the result of another major episode in this rolling global debt crisis. More on that possible episode tomorrow.

In the meantime, investors have plenty of evidence to review. All of the evidence points to slower credit expansion in the Australian economy. Businesses that profited the most from double-digit credit rates aren’t going to like the new world. And businesses that rely on credit expansion to increase earnings won’t much like it either.

What does that leave? It leaves businesses that are able to generate consistently high returns on capital without leverage. To do THAT you need to be in a business where demand is fairly reliable and where your cost of capital and of goods sold is stable. Hmm. Stay tuned.


Dan Denning
for Markets and Money

From the Archives…

How to Use Preference Shares to Become an Absolutist Investor
2012-04-27 – Nick Hubble

Why Politicians Can’t Solve Economic Problems
2012-04-26 – Bill Bonner

2012-04-25 – Greg Canavan

Investor Choices – Do You Have a Lifeboat or a Bottle of Brandy?
2012-04-24 – Tim Price

A Bankrupt Idea Whose Time Has Gone
2012-04-23 – Dan Denning

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

Leave a Reply

8 Comments on "Another Quick Fix For Credit Junkies"

Notify of
Sort by:   newest | oldest | most voted
Interesting read, however on the relative worth of the Aust$ it largely misses the point. The plain reality is the Aust$ is a global proxy for the value of the rocks we sell – Keep the rocks coming and the Aust$ will look Ok – Reduce the price of rocks, and the Aust$ will follow – And when the rocks are gone, as they will be in a few decades from now, then the Aust$ should settle to about the right price. “Say half”, given there’s not much left for the global currency boffins to tinker with. Proof lies in… Read more »
Yep we have to forget about the desirability of Austrianism/free market capitalism for sound, sustainable activity within a nation state economy. It’s a fine goal, I am just saying it’s absence does not and will not in the current time explain the trajectory of the Oz buck. Maybe in some years it may. The world for now is currently cooperatively printing money while central planners try to build their new world and in the meantime the AUD is a monster pile of commodities with just a handful of people and a cattle dog on patrol. Carry inflows will continue. Apart… Read more »

Referring to a Dow rally above. The compressed consolidation range on the asx200 reflects the weight of AUD strength/incoming carry as i see it.


I’d like to live and shop where the ABS lives and shops, It’s clearly not Aus, some sort of cost-of-living Utopia.
The claim that the RBA, or the “independant RBA” as Gillard and Swannie have re-badged it, acts independantly of government is nonsense. The RBA’s decisions on interest rates are driven by the ABS’s rubbery figures.


“” Though the RBA can make the currency look less attractive with a rate cut. So on the one hand we might have a stimulus for the parochial money go round, yet on the other the money boffins who stare at the $XAD won’t be as happy. “”

As suspected, the Aust$ fell by more than 1% on the news of a rate cut

Chris in IT
“As suspected, the Aust$ fell by more than 1% on the news of a rate cut” I know it’s not linear, but consider the fact that the foreignly owned and operated RBA only have the ability to drop rates(increments of 0,5%) on their AUD 9 times for a total of 9% AUD drop, I would say the AUD has quite a lot of speculative carry bloat. I have overall stated from observing carry unwind events suspected that the AUD is priced around double it’s historical trade worth. The recent sale of dirt to China over the past decade which itself… Read more »
Chris in IT

Lachlan , I’m also interested in your reasoning on the 1.25 value. I tried nutting out all the pro\con factors one day about a year ago. For every factor that should give rise to an increase there was an equal factor that would naturally limit that move.

My view is that the AUD can only rise as long as it doesn’t break business so badly that the carry traders themselves feel the need to reduce risk. PLus, as the rate crops the profitability of the carry itself reduces, and risk of loss of capital increases.

Chris in IT
As business drops, Aussies get themselves all unemployed, and high quality ‘safe as houses’ assets become impaired. IR drops, used to prop up the bank balance sheets (via currency unit PP reduction) achieve that, while keeping ‘prices’ stablish against devalued debt loads(providing wages rise!). That effect however, drops the capital value of carry trades, and make the carry returns themvelves (via LIBOR differentials) less attractive. Personally, I can not see it breaking out to a higher high, without the AUD being used as a temporary safe haven in a US (not EUR) based crisis. Maybe no QE4 post twist? Even… Read more »
Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.
If you would prefer to email the editor, you can do so by sending an email to