When confidence trumps facts

When confidence trumps facts

Thankfully, the federal election is over for another three years.

Yet our government still has the same old problems as before.

One of those problems is that the broader Aussie economy is heavily reliant on commodity prices staying the same.

Then, our Prime Minister must ensure that consumption grows slightly each month. Even marginal monthly growth in consumption will only keep things exactly where they are.

It’s like running on a treadmill only to stand still.

To stave off an economy going backwards, the immediate answer is not only making debt cheaper but more accessible.

And it turns out, confidence trumps facts….

Facts don’t matter if you ‘believe’

The day after the federal election, the Australian Prudential Regulatory Authority (APRA) dropped the loan assessment rate to 2.5% above the cost of lending, rather than the 7.25% it was supposedly insisting on earlier.

The immediate mainstream reaction was that this meant people could suddenly borrow up to $100,000 more.

And over the weekend, I heard through my contacts that some real estate agents were receiving more enquires than they have in months.

Plus, word on the street is that the Reserve Bank of Australia is about to cut interest rates next week.

Once again, the mainstream ran with this as good news.

All hail the debt machine resuming!

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Apparently, the same old government, a lower loan assessment rate and lower official interest rates mean confidence is back.

Is that really all we need to wade back in? Believing everything will be okay because the cost of debt is cheaper than before?

More debt the new band aid

The problem with all this confidence is that it doesn’t actually fix anything.

APRA’s decision to lower the assessment loan rate simply allows people to borrow more.

Then, if the Reserve Bank of Australia does cut rates, there is no guarantee the banks will pass the rate cut on in full.

Furthermore, rate cuts become less and less effective the deeper they go. Consumers won’t magically start spending more because of low rates.

Mix together APRA’s changes and the RBA’s efforts to trickle rates down to 1%, and all we will have is people taking on more than they can probably afford.

None of this solves our problems.

Worse still, the solution of ‘more debt’ isn’t just an Australian phenomenon.

As Jim points out today, the US economy is experiencing the same thing.

There is a desperate attempt in the US to ensure that the economy is growing. But according to Jim, the US economy might not be growing…but just piling on more debt.

Read on for more.

Until next time,

Shae Russell Signature

Shae Russell,
Editor, The Daily Reckoning Australia