Australia is Flooding the Systems with Money

Australia is Flooding the Systems with Money

Remember when shelves at the supermarket were mostly empty?

When people would queue at 6:30am in front of the supermarket for a chance to get their hands on some simple everyday items, like toilet paper?

Food retail sales jumped over 24% in March as Australians panic bought toilet paper but also pantry items like pasta and rice.

Oh, how things change…

Sales collapsed the following month when people hunkered down and stayed at home.

Today, supermarket shelves look very different. In fact, there is so much toilet paper around, it’s on sale.

Port Phillip Publishing

Source: Selva Freigedo

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I took this photo a few weeks back.

At the time of panic buying, I wasn’t too concerned about the food supply. As I wrote in The Rum Rebellion:

Australia only imports 15% of the food we consume regularly, and we even export about 50% of what we produce agriculturally. So, I don’t think there is much need to panic about running out of food.

What I’m more concerned about is liquidity. It’s a rush to cash as the global economy comes to a standstill.

As soon as there are problems, liquidity drains from the system.

There were some signs of this happening already.

We saw stock markets drop by close to 30% in March as investors sold. ME Bank also cut the amount people could redraw from their home loans.

Well, as it turns out, in the second half of March banks also saw more withdrawals than normal. As the Reserve Bank of Australia admitted in their Financial Stability Report:

This included a small number of customers making very large withdrawals (more than $100,000, and in some cases into the millions of dollars).

It’s not over.

As The Australian reported yesterday:

‘[A] banking system insider says there’s been another spike in demand in the past two weeks, not quite as big as in March, coming from banks and their customers.

“We are seeing banks are getting extra cash in anticipation of COVID restrictions easing, and retailers, pubs and clubs wanting their floats back, while people aren’t making as many deposits,” he told AAP, speaking on condition of anonymity.

“Also when people are more uncertain about things they tend to hold more liquidity around them. No one’s suggesting there’s any concern with the banks — people just do that.”

Before the virus came around, we had low inflation, low growth, and high asset prices. There was also a lot of easy credit with interest rates low.

But risks too were building along with high debt. Anything could have brought in a crisis: a Chinese economic collapse, corporate debt, Brexit, trade tensions between the US and China…

The virus was definitely an unexpected surprise…the worst kind.

I mean it’s pretty incredible when you think about it, the virus has closed down entire industries in a matter of weeks. Car sales, real estate, health insurance, and tourism are among the top 10 industries in the world by revenue, all which will be affected by the virus.

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We are between a rock and a hard place

With economies in lockdown, central banks and governments have now flooded the system with money to increase confidence but also to tie us over until we find a vaccine and we can reopen. We are between a rock and a hard place, if we don’t do it, the system collapses.

So far, governments in the G20 have provided US$9 trillion to fight COVID-19, as you can see below.

Port Phillip Publishing

Source: IMF

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It’s quite an emergency payout.

Just to give you an idea of how large that amount is, the global broad money supply in 2017 — physical money circulating in the economy along with other assets that can be changed easily into cash, like bank deposits — was around US$90 trillion. We’ve just increased that by 10% in the last couple of months. US$9 trillion is half the amount the US, the largest economy in the world, produced in 2018.

All that money just to keep things going. But, it doesn’t even look like it will be enough.

Risks are already building, even with all that money pumped into the system. Unemployment is increasing, and the shutdowns, the decrease in tourism and consumer spending are already affecting businesses. The ASX may be recovering from the March collapse, but, as you can see below, the debt at risk from listed companies is increasing.

Port Phillip Publishing

Source: RBA

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According to the RBA, 25% of businesses do not have enough liquid assets to cover one month of expenses and 50% could not pay three months in expenses.

So far, there is a lot of cheap cash around, toilet paper is on sale.

We are flooding the system with money but it’s all to keep the system running. We don’t know how long this will last, and don’t expect much growth from that for now.

As I said, we are in between a rock and a hard place. Take advantage of this time to set your finances in order, instead of increasing risk.


Harry Dent Signature

Selva Freigedo,
For The Daily Reckoning Australia

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