It would be very useful to find out what ‘war gaming’ exercises RBA and APRA have conducted to assess what they would do if the demand for debt dropped sufficiently to produce a 50% fall in house prices.
The thing that is overlooked in the ZIRP forever approach is that while the RBA can set the target rate and that will influence the mortgage rates, it cannot FORCE people to take out loans and buy property.
So what do they plan to do if fear strikes the herd and people simply refuse to borrow anything like the amounts of money they have been borrowing to date – regardless of how low the interest rates are.
For example: The property markets in Sydney and Melbourne have been pumped up on hot money flows from off-shore, SMSF money and lots of hoop-la. What if the off-shore flow of capital into our property markets slows, SMSF grow an appreciation of risk and leverage, and the general “the GFC can’t touch us” festival mood changes?
One of the things that has been remarkable over the last few years is how few people in the broader community have the faintest idea what is going on economically.
Most of our politicians have no idea either. Or if they do have some idea they lack the courage or capacity to lead debate and instead prattle on about maintaining ‘confidence’.
If anyone has ever posted a Macrobusiness or any other article that talks about the growth of private and public debt, money creation etc to their Facebook account they will know exactly what I mean – even my most politically ‘interested’ acquaintances will avoid any discussion of economics like the plague.
Asylum seekers, the environment, buying property, gender equality, gay marriage, animal welfare, dancing cats…. you name it – they all get likes etc.
Anything to do with economics or the risks we are running with extraordinary monetary management measures like ZIRP – boom – it is like someone farted.
So what happens if the herd finally clues on to what is going on and they FREAK? By FREAK I mean nothing more than they decide that they will not take on a mega mortgage and instead will simply give up and get by without mega debt.
Collapsing demand for new loans in the community in the context of record of private/household debt (with an interest bill that needs to be paid each year) means one thing – a debt deflation bust of mammoth proportions.
What do the RBA and APRA plan to do in that circumstance? Standby and do nothing and watch the money supply collapse as the demand for loans shrinks?
Will they suddenly announce that the government must run a massive monetized deficit and that despite 30 years of advice to the contrary – deficits do not matter?
Somewhere there is a file in a glass cabinet marked – break in a debt deflation emergency.
An FOI request may reveal it.
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