"Intelligent Insight"
Another deeply philosophical discussion with Adam Stokes about how we see the world.
What defines “Money” and how does the likes of Bitcoin stack up?
Prepare for some mind-stretching conversations about how we look at the world (and why people often ignore new concepts and ideas).
The IMF just released a working paper* “Debt Is Not Free“. The evidence presented in this paper points to the risks, suggesting that public debt might not be free after all! In addition, low, or ultra low interest rates are not a get out of jail card!
The case for more public debt is being reinforced by weak economic activity across the globe, large investment needs, and increasing concerns that monetary policy may be reaching its limits particularly in advanced economies. And yet, the risk of fiscal crises still casts a long shadow. Therefore, as many countries remain riddled with mounting debt, one of the most pressing questions facing policymakers is whether current high debt levels are a bellwether of future crises with large economic costs.
The argument that “public debt may have no fiscal cost”is also gaining traction as many countries face historically low interest rates and the global stock of negative-yielding debt is hovering around $12 trillion by the end of 2019. The underlying rationale is that if interest rates are lower than the economic growth rate—that is, the interest-growth differential is negative—there is no reason to maintain a primary surplus as it would be feasible to issue debt without later increasing taxes.
This working paper contributes to the debate on the costs of public debt by revisiting its importance in predicting fiscal crises. In a world of ultra-low interest rates, it is tempting to believe that there may be no costs. For those that subscribe to that theory, the natural conclusion is that now may be the time to rely more heavily on debt to attend to worthy causes such as fixing a crumbling infrastructure all while propping up a frail economy. The skeptics point to history, noting that those that ignore high debt do it at their peril as excessive debt may force disruptive fiscal adjustments or eventually lead to costly crises.
They use machine learning models to confront these dueling views with evidence. Our results show that public debt in its various forms is the most important predictor of fiscal crises and it does matter always and everywhere. But public debt is not the only game in town as its interactions with other predictors also make a difference. Surprisingly, however, the interest-growth differential does not have much signaling value: it does not really matter whether it is highly positive or negative; moreover, beyond certain debt levels, the likelihood of a crisis surges regardless.
It is important to acknowledge that the machine learning techniques used do not allow us to establish causality. This is an area where computational science is still trying to make inroads. What they can confidently say is that there is a high correlation between public debt and crises and that this association is very robust. Therefore, at the current juncture, complacency about high debt levels would be ill-advised even if interest-growth differentials were to remain low. The underlying reason is that the dynamics of crises are highly non-linear and by the time the interest-growth differential may start flashing red, a crisis may well be underway catching policymakers off guard.
These findings do not mean that bringing debt down is always the right policy prescription. There are clearly cases where the use of debt for countercyclical purposes, to increase public investment, or to address other structural needs is desirable. However, the evidence presented in this paper points to the risks, suggesting that public debt might not be free after all!
*IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
A “Day In The Life of” show. Tomorrow, the 4th January is forecast to be a very bad bushfire day, so I have been concentrating on preparing my property as far as I can. Welcome to my roof top!
We discuss the latest APRA Banking Statistics.
We make some suggestions to ease cash flow.
Caveat Emptor! Note: this is NOT financial or property advice!!
APRA has released their monthly banking stats to the end of November 2019. They are of course in the process of a major revision of these statistics, but we are now beginning to get some trend data down to the individual ADI level. The data is based on gross balances outstanding by owner occupied and investment loans, but it does not show where new loans were added, or loans repaid. So little flow data can be imputed.
Total owner occupied loans rose 0.51% or $5.58 billion dollars in November to $1.09 trillion dollars, while investment loans fell 0.01% or $75 million dollars to $643 billion dollars. The share of loans for investment purposes fell again to 37%.
The trend movements show some improvement relative to earlier months. Total loans rose 0.32% in the month, which would given an annualised 3.8%.
The RBA data released before Christmas showed that total loan growth over the past year for mortgages fell to the lowest ever (2.9%), which suggests that non-banks may be lending less now. But we cannot be sure of this.
We can also look at individual lenders. The relative shares of the largest players hardly changed, with CBA the largest owner occupied lender, while Westpac has the largest share of investment loans.
However, the relative movements this month underscored divergent results from lenders. CBA and Macquarie both saw significant growth in loans in the month, with Macquarie writing net more investment loans than any other lender at $718 million dollars. Bendigo Bank and AMP Bank are also chasing investment lending. On the other hand, ING dropped their investment loan balances, alongside the other big lenders, with NAB down $661 million, ANZ down $263 million and Westpac down $602 million. Suncorp and Credit Suisse both dropped their owner occupied and investment loan portfolios.
Finally, the relative proportion of loans for investment purposes reveals that Macquarie has 44.8% of its loans for this purpose, Westpac at 44.5%, NAB at 42.6% and Citi at 37.7%. Bearing in mind investment loans are intrinsically more risky, this is worth watching.
So, some small uplift in net volume of loans, but not equally spread across the sector, which suggests different players have different underwriting settings.
And the growth in lending suggests the household debt ratio is set to continue to rise, despite its already stratospheric level.
CoreLogic released their updated data to end December 2019 today.
They confirm a 1.1% rise in national dwelling values over the month, and a 4.0% increase over the quarter to finish out 2019 on a positive note.
This result represents the fastest rate of national dwelling value growth over any three month period since November 2009. Darwin was the only region among the capital cities and ‘rest-of-state’ areas to record a fall in values over the month, with a -0.5% decline.
CoreLogic head of research Tim Lawless said, “Although the monthly capital gains trend remains fast-paced, the 1.1% rise in December was softer relative to the 1.7% gain in November and the 1.2% rise in October. This would suggest that the pace of capital gains may have been dampened by higher advertised stock levels or worsening affordability pressures through early summer.”
Despite a strong rebound over the second half of 2019, property values across most regions of Australia are still below their previous record highs. Nationally, the CoreLogic index recorded a peak in October 2017; dwelling values remained 3.1% below their record high at the end of 2019. If the current quarterly rate of growth persists into 2020, the national housing market will record a nominal recovery in March as dwelling values push higher to new record highs.
Tim Lawless said, “A nominal recovery in housing values implies home owners are becoming wealthier, which may also help to support household spending. However, the flipside is that housing affordability is set to deteriorate even further as dwelling values outpace growth in household incomes, signaling a set-back for those saving for a deposit.”
Comprehensive credit reporting will soon leave unprepared finance providers with unprofitable business models while it spurs those ahead of the curve to further success, says credit and risk consultant Andrew Tierney, via AustralianBroker.
The news that most consumers can now benefit from comprehensive credit reporting should come as a wake-up call to finance providers who have yet to embrace the digital era.
All four major banks are now providing credit bureaux with detailed customer transaction data relating to credit card usage, personal loans, mortgages and other financial commitments.
CCR is poised to reshape our industry. ‘Game changer’ may be an overused phrase – but in this case it’s accurate. For this reason, it surprises me that there are a large number of credit providers still stuck in the analogue era, who show no signs of wanting to change. They aren’t benefiting from CCR and don’t seem to want to.
For example, while talking to a subprime lender just last week about what he was doing to meet this new challenge, he said his company already treated all applicants as subprime, with an interest rate that reflected the level of risk. He didn’t need transaction data direct from the applicant’s current account to help him make a decision, so why fix something that had been generating profits for as long as he could remember?
I can’t imagine how those with this mindset, determined to carry on as they have done, will still be in business in 10, maybe even five years’ time.
While many don’t see it at first, there’s eventually a light-bulb moment that arrives once you spell out how CCR is going to impact their business.
For the lender I mentioned, all it took was me pointing out that legislation requires lenders to use all the tools available to understand the risk a loan presents to the client. Without tapping into CCR, is he really doing this?
What defence will he have for not utilising CCR when the regulator comes knocking on his door? Cost isn’t a factor. There is no need for any major investment in back-office infrastructure or IT when you can tap into CCR and open data at little cost via platforms provided by tech companies.
Was he prepared for legal action that he could face, as a result of not fully checking affordability?
Further, there is the risk exposure that comes from not knowing the size that your liability could be in the future. As we all know, the regulator has been moving the due diligence goalposts for us.
By the end of our talk, the time investment he was willing to devote to this had grown exponentially. Now, he is days away from taking full advantage of CCR.
However, CCR should not be viewed simply as a big stick when it poses many more business benefits.
As recently calculated by Kevin James at Equifax, $20bn in extra loans could be granted to consumers over just one year by giving lenders granular detail on customers’ debt and repayment habits. The real-time transaction history at the point of application gives lenders the data needed to allow loans that previously would have been turned down.
Suddenly, a slice of business that used consultantto be a ‘no’ could become a ‘maybe’, then a ‘yes’. Because this decision will be largely automated, it will be possible to use true risk-based pricing for the first time, with loan terms designed specifically for a borrower.
Those that lag in this business are undoubtedly going to be left behind.
It won’t be long before they see a change in demographic in their pipeline. The profile of hopeful borrowers they are used to dealing with will change, as previous ‘nos’ find they can go to more mainstream sources and become ‘yeses’. Why would borrowers be willing to pay a higher rate of interest when they can get a lower one that is specifically tailored to their situation?
Finance providers who stubbornly remain behind the times may also find the likely ‘nos’ will begin to target firms that do not use CCR or open data, because they know their transaction data will not stand up to the same level of scrutiny and they are more likely to sneak by to approval.
Those who do not embrace these changes are going to have the rug pulled out from underneath them in the not-too-distant future. Their business model that has always been profitable could lose its edge overnight.
If doubt remains, remember that none of us need to think very hard to come up with examples of analogue businesses that have long been left behind.
We had a number of viewers ask about the DFA Studio set-up, so today we explore the studio, from soup to nuts.
We highlight some of the main issues this year, and also our most popular posts of the year. Wishing all our followers a happy new year!
Our top posts for this year:
The Real Issues Behind The Cash Ban
Lynette Zang And The “Great Reset”
The Cash Ban Breakthrough – The Game’s Afoot!
Harry Dent LIVE: How To Survive And Thrive From the Volatile Times Ahead
Harry Dent Says The Bubble Still Has To Burst!
The “Good News” On Property Prices?
A Conversation With Steve Keen: Part One – The Debt Problem
A Conversation With Steve Keen: Part 3 – Ecology and Energy; The New Horizon
Four Corners 21 Aug 2017 – Betting On The House
The Reality Of Bank Deposit Bail-In
The Real Problem With Low Interest Rates