Jobs and growth – the myth

Transparent Background

Desert islandUnless you’ve been stranded on a desert island (we should all be so lucky), you will undoubtedly have heard the term “jobs and growth” bandied about the place as the federal election draws near.

All sides of politics like to promise jobs and economic growth. People are generally reassured if they think that there will be jobs available for them and the economy is likely to grow.

But how realistic is this promise of job creation and economic growth?

JobsLet’s look at jobs first. Governments don’t create jobs. Businesses do. And no, creating more government jobs is not job creation. At best, governments can foster an environment that is conducive for businesses to create jobs.

Large infrastructure projects, even if they are public and private partnerships, are also not really job creators. These usually have a limited lifespan and do not create jobs for the long term. Once a project is finished, there are no ongoing jobs.

Compounding this is the fact that the whole jobs landscape is changing. Jobs are becoming more transient. Employers find they only need people for shorter periods and outsourcing has also changed the job environment. Businesses would rather put on casual or part time people than a full time person as it makes it easier to manage changing workloads. But this makes it harder for people looking for work and increases underemployment, something not being addressed by governments.

Mindset 5The nature of knowledge is also changing within the jobs framework. The amount of information in the world now is doubling every 18 months. To put that into perspective, 50 years ago, it took 25 years for information to double. It means that in some areas of knowledge, for a standard three year university degree there’s a distinct possibility that by the time the student graduates, what was taught and learnt in the first and possibly even the second year, is already obsolete. Many students will have degrees that are no longer useful by the time they graduate. There might not even be jobs in that industry. Our education system is not moving quickly enough to keep up with technological advances.

Experienced commentators and futurists are predicting that anywhere between 40 and 70 percent of jobs that exist today won’t exist in 10 years thanks to automation, artificial intelligence, robotics and virtual reality. It also means that there are new types of jobs being created now that didn’t exist a few years ago. Whoever heard of content marketers, social media engineers and virtual assistants until recently?

The focus needs to shift to entrepreneurism and innovation rather than the traditional job where a person works for someone else. People working for themselves, setting up micro or small businesses and solopreneurs are one of the few areas that is actually growing. Our education system needs to be more nimble and adaptable.

Downward graphAnd then there’s economic growth. A growing economy is good for the country and the electorate, as this indicates economic stability, guaranteed jobs and other indicators like wage growth. However, realistically, governments can no more increase or create economic growth than they can create jobs, particularly in the current global economic climate.

Let us look at some reasons why this is the case.

Firstly, we are in a global slow growth environment. Most developed countries are experiencing their slowest growth in decades. We are entering a deflationary period where asset prices are falling. I believe we are reverting back to the mean, as discussed in this previous post.

Most countries have tried various stimulatory measures. Central bankers use monetary policy by altering interest rates. In the past few years, most have reduced official interest rates to record low levels. In some countries, such as those in Europe, the interest rate is effectively zero and in others, such as Japan, Switzerland and Sweden, they have negative interest rates. This has not worked in stimulating their economies.

Interest rate 2Low interest rates are supposed encourage people and businesses to borrow more thereby increasing demand. But that will only work up to a point. Interest rates are now so low, that any person or company that has wanted to borrow has done so by now. Instead, many people are taking advantage of the low rates to reduce their debt levels.

Reducing interest rates has its biggest effect early in the cycle of rate reductions. Thanks to diminishing marginal returns, each subsequent rate cut has a lesser and shorter impact than those made earlier in the cycle. Eventually they have no impact at all. I believe we are already at this stage and this is particularly evident in countries with zero and negative interest rates.

People and businesses cannot be forced to borrow more, particularly when they are already up to their eyeballs in debt. Australia has one of the fastest growing debt levels and our borrowing is at record levels already.

Governments are also increasing public debt levels, and in many countries, a great deal of this debt is to meet welfare requirements. Hardly a productive use of money. This also affects a country’s credit rating and makes credit more expensive if and when they are downgraded.

In addition, low interest rates have the effect of reducing confidence in the economy. Interest rates are usually only dropped in difficult economic times, so continually dropping them sends the message to people and businesses that the economy is not well and there are bad times ahead. Subsequently buying and investing slows or stops altogether.

Also with every interest rate cut, people who rely on interest for income such as savers and self-funded retirees, earn less and so spend less in the economy as their income drops. It also makes it harder for those who are saving for things like house deposits who earn less on their savings, thus delaying their entry into the market.

Demand for things is also falling. Manufacturers and countries relying on export, such as China and Japan, are finding that there is less demand for their goods. This is partly because the weaker economy erodes confidence in the market, and people are concerned for their jobs. They therefore decide they don’t need as many “things” or “stuff”. Many countries, such as China, have invested massive (borrowed) amounts on increasing the capacity of their factories and manufacturing just as demand slowed. Many of these plants are now underutilised or sitting idle.

StimulusGovernments also don’t like deflationary periods. It reflects badly on them and their policies if the economy does not grow under their stewardship. In order to try and stimulate their economies, governments will use fiscal policies, or government spending. This gives the illusion of growth through increasing GDP figures, but this is at best a short term solution and rarely leads to long term growth and employment. Running stimulus or quantitative easing programs, more commonly known as money printing, presumes the money created will make its way to the greater economy by trickling through the banks to people and businesses.

The trouble with these programs is that very little of the printed money has actually made its way into the real economy. Instead, most of it has stayed with the banks or gone to large companies where they have used the funds to buy back their own shares. This increases stock market prices, but has not made a direct contribution into the economy.

Asset prices, such as real estate and stocks have been artificially boosted by people and investment funds searching for any yields they can find because they get nothing from holding cash. Unfortunately these asset price rises have nothing to do with productivity increases.

Debt 2As previously mentioned, this stimulation is increasingly done with borrowed money, as few countries now run surpluses. Public and private debt burdens keep increasing. Unfortunately, private debt is increasingly funnelled into unproductive endeavours and assets.

It doesn’t actually create jobs and has exponentially decreasing returns. In other words, it’s costing more money or debt, to create increasingly smaller returns. Where once every dollar invested might create greater returns than that initial dollar, now that invested dollar is returning less than the initial investment. These days the original dollar is debt, so we’re using more and more debt to create a lesser return.

This will ultimately create a drag on the economy and slow it down. We are already seeing the result of this with low growth, stagnating wages and low inflation and even deflation, because the economy is weighed down by this enormous unproductive debt hanging over it.

Population pyramidBut the biggest reason for the low growth and slowdown in jobs is demographic change in developed countries. Almost all developed countries have smaller generations following the baby boomers. This means that the welfare and handouts that everyone has come expect as an entitled right may not be able to be funded, as the burden of paying for this falls on the next generation.

The Australian birth rate is below replacement at 1.8 children per couple. Our current immigration levels are enough to increase the population at this stage, but is this a sustainable model? It could be argued that the continent of Australia is not able to sustain the Big Australia vision of most of our politicians, given the vast interior of desert not suitable for agriculture and we are the second driest continent on the planet. Food and water security cannot be guaranteed.

Unfortunately our current and growing welfare requirements, demanded as a right rather than a privilege, depends on succeeding generations being larger than the preceding ones. Everybody wants the “free” education, “free” healthcare, disability allowances, faster broadband, greater pensions, stadiums and everything else expected to be provided by bigger and multiple levels of government. The trouble is nobody actually wants to pay for it. We all want someone else to pay. Obviously this is unsustainable, and was only ever really possible during the baby boom years.

So the bottom line is, in our current slowing productivity, slowing population and slowing credit environment, more jobs and economic growth are unlikely to happen without some forward and long term thinking by both politicians and the populace and real action taken now.


Owl 1



Two big property myths

Transparent Background


Myth 1 – Property prices double every 7 to 10 years.

There are a lot of property myths out there about Australian property, but one of the most pervasive is that property supposedly doubles every seven to 10 years. But does it really?

Anybody who bought property in the past 45 or so years has been the beneficiary of the huge loosening of credit brought about by US President Johnson in 1968 and US President Nixon in 1971 decoupling and then severing the link between the US dollar and gold. Prior to this, under the Bretton Woods agreement in 1944 the US dollar was backed by gold. The world’s currencies were also indirectly backed by gold, by virtue of the fact that the world’s currencies were valued against the US dollar on the exchange rate.

That all changed when the gold link was severed. What that did, in essence, was to change the economy from gold backed to a credit backed and driven economy. This meant the economy would only grow if credit was increasing, so people were greatly encouraged to accumulate more debt by governments and central bankers. And many people were happy to oblige.

This was never going to continue indefinitely. And in this low inflation, low interest environment, it is now starting to pull back.

When looking at Australian house prices from about 1880 until late 1960’s/early 1970’s, prices were relatively flat, when adjusted for inflation. Once credit was loosened however, from the late 1960’s onward, house prices went parabolic over and above the inflation rates. The gains seen over the past 45 or so years are a product of this huge credit expansion.

Pretty much anybody who purchased a house in that time benefitted from increasing property values. Unless they were actually located over a mine shaft, too close to the edge of an eroding cliff, bought at the top of a local bubble, eg. Gold Coast real estate during the 1970’s and 1980’s or they simply paid too much in the first place (which eventually corrected due to increasing prices), prices generally went up far in excess of the inflation rate.

The people who benefitted from this windfall weren’t geniuses, they were just in the right place at the right time. But many thought they were because they made money each time they sold and because they didn’t understand the underlying parameters that allowed this to occur.

So the myth of property prices doubling every seven to 10 years was born. The fact that this had only happened over the past 45 or so years, didn’t factor into the thinking. “Just over the past 45 years” somehow became “Always”.

Myths graph

There were even pretty graphs with a starting year point and an ending year point to support this “fact”, but once again, the data was extrapolated and prices averaged out over the time frame, rather than show actual annual prices for the period in question. And more often than not, these were not adjusted for inflation. As previously mentioned, property prices stayed fairly flat from 1880 until the late 1960’s/early 1970’s. They certainly didn’t double, for example, from 1910 to 1920 or 1930 to 1940, but the graphs made it appear as though it did.

Now, however, in the current period of low inflation and low interest rates, I believe property prices are reverting back to the more normal mean of only increasing in line with inflation.

Changing demographics as baby boomers retire and change from spenders into savers, will impact on house prices as well, particularly when they start to sell their assets to fund their retirement. Not just prices for property, but shares and businesses as well.

The glut of flats being built in and around Australia’s capital cities will also have a dampening effect on housing prices, particularly in attached dwellings.

Property price corrections could happen as soon as the 2017-2018 financial year, if not even sooner. This glut is mostly investor style stock in the form of tiny one or two bedroom flats. Some are so small you don’t need to bring your cat with you on inspection to know that you won’t be able to swing it in there. This represents a finite and small market. There are not many that have been designed for owner occupiers or families.

Myths swinging cat

The largest Australian demographic is still families with children, making up nearly half of households, and household sizes are also increasing, not decreasing. Of the other half of singles and couples not all of  them necessarily want to live in a flat. According to Matusik the demand for this type of property represents a much smaller percentage than that for detached, semi-detached (with a garden) or small lot housing suitable for families with children and/or pets. And not a great deal is being built for aged care or people who want to age in place with single level, no stairs and no lift dwellings, although this is changing slowly.

I can see a time very soon when even those who have managed to purchase and settle on these flats, will tire of low, no or even negative capital gain, low rental yields and longer vacancies due to the glut. However they still have to fork out every month to pay for the expenses.

It doesn’t help that our greedy and lazy Councils and state governments are only too happy to keep adding more and more blocks of flats. The incentive for them is to keep this gravy train rolling on as long as it can as it represents the biggest return for them.

The key here is the long term. In the short term, prices may rise but they can also fall. Capital gain only really exists if it is a realised capital gain.

Which brings us to our next myth.

Myth 2 – Australia property prices never fall.

The way the global economies are at the moment, there is no guarantee that prices will remain stable, let alone increase any time soon. And with the glut of flats coming into the market in a number of capital cities, most likely just as the global market enters a serious downturn, falling real estate prices are a very real option, particularly from investors exiting the market. As previously mentioned, when they are not seeing any real capital gain (after inflation) and thanks to the glut, have very low yields and longer vacancy periods, but still have to put their hand in their pocket every month for expenses, they’ll start to sell.

Myths empty pocket

Real estate, after all, is a non-productive consumption item.

What goes up can also come down. What people don’t seem to realise is that unless any capital gain is locked in or realised (ie. sold at the highest valuation price), it’s not real capital gain. You cannot rely on the greater fool theory forever. This is the theory that a greater fool will come along and pay you more for your “asset” than you paid for it initially. The banks have been complicit in this, allowing borrowing against any increase in equity so the debt load is constantly increasing. This strategy is also pushed by property spruikers as a means of increasing your property portfolio. It’s amazing how many interviews I’ve heard where a guest is introduced as a property investor with an “X” million dollar property portfolio.

Yep, they might “own” $2m worth of property, but if it’s secured against a debt of $2.5m, that’s hardly a sound financial position to be in. If and when that happens, the friendly bank won’t be so friendly any more.

The problem is that, as previously mentioned, housing is a non-productive consumption item whose purpose is to provide shelter, but is being sold as an investment item. Refer to the aforementioned paragraph on investor quality blocks of tiny one or two bedroom flats being built in just about every Australian capital inner city. These are not attractive for families who generally require more bedrooms and prefer detached, semi-detached with garden or small lot housing.

I feel for those who have been suckered in to buying one of these off the plan “disaster waiting to happen” flats, particularly if they can’t settle when the time comes.

As well as property not doubling every seven to 10 years over a long period of time, so is it entirely possible that Australian property prices can actually fall. And this is even more likely at this particular juncture.

We are entering a deflationary period, a period of asset price falls. The reason the massive money printing or quantitative easing programs we have seen over the past few years by many countries including the US, Japan, Europe and UK, to name but a few, have not succeeded in increasing asset prices consistently, kick starting the economy or causing massive inflation or even hyperinflation is that this money printing has just stopped the deflationary forces from having their full effect.

There is a train of thought, particularly amongst politicians and central bankers that inflation is good but deflation is bad. But I disagree that inflation is bad. Before the turn of the last century, and incidentally before the proliferation of central banks, deflation was as much a part of an economy as inflation. Before the 1900’s periods of inflation was generally always matched with periods of deflation.

It was only when central banks decided that deflation was a bad thing and we should only have inflation, that we have had persistent inflation. Inflation has only been a feature of modern economies from about the 1910’s onwards (incidentally, the US Federal Reserve Bank came into being in 1913).

Why is deflation the enemy? Deflationary periods are useful to dampen mal-investments and bring the economy back into equilibrium.

Myths Japan 2

Japan is entering its third lost “decade” of deflationary period. Asset prices (property, stocks and businesses) are about half the value they were during the 1980’s and have never recovered those highs. The various governments of the day have tried desperately to stimulate inflation and asset price growth through massive quantitative easing (far greater than the US) and zero and negative interest rate policies. It hasn’t worked, the inflation rate is still negligible and asset prices are still languishing. And yet Japan is still ticking along nicely and they’re in no immediate economic trouble. Why? Because inflation isn’t needed!

And why are our politicians and central banks so desperate to see inflation? Because it increases asset prices, which brings about the so called “wealth effect”. When asset prices are rising, people feel wealthier and more secure and this supposedly makes people spend more. And why is this a good thing? Because under a fiat monetary system (pretty much all developed nations and most developing nations) in order for the economy to grow, we need to borrow more and get further and further into debt. In other words consume today with tomorrow’s income.

The markets can only be gamed for so long before they revert back to the mean. We are probably now entering an extended deflationary period and sluggish global economic growth, after more than 100 years of constant inflation. Get used to it, this is most likely the new normal.

Oh, and I’ve said it before and I’ll say it again. In a properly functioning economy, all assets, including property, only rise in line with inflation. Maybe we’re reverting to the mean on that too.

Myths inflation

Owl 1




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