Charlie Munger is one of the investment world’s true characters. He says it like it is and doesn’t care for political correctness.
For those of you unfamiliar with Munger’s work, he’s best known as the chairman of Berkshire Hathaway Inc. [NYSE:BRK]. He’s also the right-hand man to Warren Buffett.
A great example of Munger’s reasoning is his thoughts on the 2008 financial meltdown. In his view, it wasn’t greedy bankers that loan far more to people than they could afford on risky terms that were to blame. Rather, it was the person who created the incentive system for bankers at the time.
Bankers, like many of us, will do what benefits them most. So, if getting as many loans through the door is what increases your take-home pay packet, why wouldn’t you do it?
The same blame should go to anyone who creates a harmful incentive system.
Australia’s record debt levels
So who do you think is responsible for Australia’s record debt levels?
According to The Australian:
‘Debts across the country have hit a record high of double household incomes and are still climbing, making it difficult for the Reserve Bank to raise rates and increasing the risk to the economy from any downturn in housing prices.
‘Reserve Bank analysis of the latest national accounts shows debt is 99.7 per cent higher than the total earnings of all households, having risen from 67 per cent greater three years ago. Households are still adding to their debts as new home buyers enter the market for the first time, established homeowners upgrade their houses and investors add to their property portfolios. Housing debts rose $110 billion, or 6.9 per cent, in the year to November.’
Low interest rates
Of course, there are many factors at play. But it’s probably not just the Reserve Bank of Australia’s fault. Sure, the RBA kept interest rates at record lows, encouraging potential borrowers. But a lot of the blame also goes to those who set up the incentive system to increase the amount of loans each year.
So, what happens now? Do we continue to accumulate debt until the pressure crushes us?
In my mind, as long as bankers continue to offer extremely low interest rates, debt will continue to climb. There are only property buyers in the market because they can comfortably service their loans by buying and renting it out.
Until interest rates pick up, it’s hard to see a slowdown in household debt.
Junior Analyst, Markets & Money
PS: Commodities prices came back in 2016 and rallied hard in 2017. Could they continue to rally in 2018?
Our resource analyst Jason Stevenson thinks so. Jason is one of the sharpest minds when it comes to the resource sector. And he’s written a report about what he believes to be the top 10 mining stocks trading on the ASX right now. Click here to read his report.