At its heart, the miracle Australian economy is a simple houses and holes mechanism.
We dig up commodities and sell them to the world to make income. Then our big banks leverage that income in global markets in order to issue giant mortgages at home.
The resulting asset price inflation drives the consumption of services.
What happens when commodities fall?
In some cases, such as the 2008 and 2015 global commodities busts, we were able to borrow more to cover our shrinking incomes as interest rates crashed.
As a result, house prices rose, and that supported the consumption of services. The economy slowed a great deal but it was OK.
However, today, we face much tougher circumstances. The war in Ukraine has triggered enormous demand for our energy commodities. Normally, that would lift Australian income and trigger more borrowing plus asset inflation.
But, because our evolving energy markets have been so poorly structured by politicians over the past 15 years, it is doing the opposite. Foreign energy cartels are selling us our own energy fuels at huge mark-ups and that is helping drain Aussie incomes via inflation.
In its November “Statement on Monetary Policy”, the Reserve Bank of Australia (RBA) was unequivocal about the inflation challenge ahead.
“The trajectory of inflation is also uncertain due to the ongoing evolution of supply shocks,” it said. “Some factors that have boosted inflation over the past year are reversing … However, energy prices remain much higher than they were at the beginning of the year.
“The effect of this on domestic electricity and gas prices is expected to be much greater than had been envisaged earlier in the year, and a further significant lift in utilities prices is now expected in 2023.
“How far and how quickly this flows through to retail bills, and how large the second-round effects on businesses’ costs and prices will be, is hard to predict.”
The prices of gas and coal are still so high that they will add in the order of 3 per cent to the consumer price index (CPI) in 2023. As businesses pass on these costs and the RBA is forced to chase the CPI higher, the next shoe to drop will be the consumption of goods and services as households recognise how swiftly their purchasing power and wealth are shrinking.
A negative feedback loop of rising inflation, falling wealth, and rising unemployment can sink property prices much further than mainstream economists care to imagine.
How to prevent a house price crash
The irony of this is that the RBA can’t directly affect globally set energy prices. What it is doing instead is crushing the price of other stuff, like houses, to fit the energy shock into its inflation averages.
By doing so, the RBA is delivering a huge income and wealth transfer from Australian households and businesses to foreign-owned energy cartels exploiting the Australian resource endowment.
Does it make sense to allow a foreign war to do this to the local economy? Did the energy companies invest on the basis of this war? Do they deserve the windfall gains and Aussie households the windfall losses?
No.
This is especially the case when the answer to the problem is so simple. Fiscal authorities must intervene so that the RBA’s primary goal of controlling inflation is not distorted by energy war profiteering.
This intervention can take one of three forms:
1. Domestic reservation of gas and coal volumes, with price caps if needed, to crash electricity prices.
2. Export levies that achieve the same end while collecting the windfall gains for the budget.
3. Super profit taxes.
Or some combination of the three could be used to guarantee low-cost local energy and higher returns for Australians from international prices.
There are virtually no downsides to these policies. Arguments that they come with “sovereign risk” are self-serving. There is no security of supply for Australian export customers while there is none for Australians. The real risk to Australia and its export customers is war profiteering.
Whatever policy mix is used, sensible price benchmarks of $10/Gj for gas and $120/tonne for coal will not deter investment. These prices lock in large margins for both, and are more than high enough to develop resources in NSW, Victoria and NT.
Conversely, if the energy war profiteering is not stopped, the Australian economic model itself is going to break as a global recession arrives but energy prices do not fall.
And house prices just keep on falling to fit them in.
David Llewellyn-Smith is chief strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geopolitics and economics portal. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
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