Other economics

We’re rolling in cash – well some of us are

Australians have been improving their liquidity – that is, the amount of cash or near-cash they can quickly gets their hands on. Twenty years ago the median Australian household had liquid assets (cash, deposits and equities) equal to about 15 months of disposable income. Even before lockdowns associated with the pandemic forced many households to stop spending and start saving, the median household liquidity had risen to around 20 months of disposable income.

Two staff of the Reserve Bank, Gianni La Cava and Lydia Wang, have analysed this trend in a research discussion paper The rise in household liquidity. Their conclusion, supported by their research, is that because houses are more expensive, potential house buyers are having to save more to accumulate a deposit, and that indebted households, when they have an opportunity to save, are doing so as a precautionary measure.

Their paper is richer in data than is suggested by those rather unsurprising conclusions. It describes the financial situations of two sub-populations – those over 40 or 50 who are saving because they are well-off, and younger Australians who are saving because they have to if they have any hope of buying a house. Also many households are living “hand-to-mouth” without any liquid assets.

Another finding is that lower interest rates have helped many households with mortgages to pay them down faster.

Although there is a great deal of data on household income, and a reasonable amount of data on household wealth, there is not much data on liquidity. Liquidity is important, however. Someone with a reasonable amount of liquidity can avoid the cost of having to borrow to buy a car or household goods, doesn’t have to buy expensive first-dollar insurance (i.e. without front-end deductibles), and doesn’t incur credit card debt. Also he or she is in a stronger position to walk away from a bad job. These aspects aren’t discussed in La Cava and Wang’s paper, but it provides a good base of evidence for those interested in liquidity.

(Almost) everything you wanted to know about cryptocurrencies but were too embarrassed to ask

On Saturday Extra last week Geraldine Doogue interviewed Jason Potts of RMIT and Phillipa Ryan of ANU on the question are cryptocurrencies coming of age?

Geraldine kicked off the discussion by asking whether cryptocurrencies constitute a new class of asset or simply a new form of money. The response is “both”: it depends on whether it is used for speculation (think of people who buy gold they never fashion into jewellery, paintings they never display, and old wine they never drink), or for exchange (another convenient currency).

Some financial institutions (The Commonwealth Bank and PayPal) have cryptocurrency platforms, for exchange only (similar to a foreign currency account), but not for investment or speculation. Ryan explains present Australian regulations applied to cryptocurrencies: they are all rather clunky.

Like gold, cryptocurrencies have become a safe haven in times of uncertainty. Potts and Ryan made that point but they didn’t get on to other parallels with gold, particularly the fact that both are scarce and expensive to “mine” and therefore cannot be created by governments “printing money” – a benefit in some aspects, a dysfunctional limitation in others. (20 minutes)

The rise in unemployment – frictional (good) or structural (bad)?

On November 11 when the ABS released its regular monthly labour force figures the media made much of the rise in unemployment from 4.6 percent to 5.2 percent. Both the unemployment rate and its rise were higher in New South Wales, Victoria and the ACT than in the five states and territories still effectively free of Covid-19.

This rise in the unemployment rate isn’t the result of layoffs or business closures. The survey reveals that the number of hours worked, a more robust indicator of the state of the labour market, was almost unchanged. There has been a rise in the participation rate, as some people who had been out of work during lockdowns, and hadn’t bothered looking for work (some had promises of re-employment) came back into the labour force. Some found work – but not necessarily as well-paid or with as many hours as in jobs they previously had – and others were looking for work.

The ABC’s Rachel Pupazzoni has a short video clip illustrating what has happened to people coming back to work: Unemployment jumps but jobs recovery is underway. She identifies the rise in unemployment as a sign of economic health. That’s a reasonable interpretation if it means people are moving around in a more dynamic labour market. Unemployment as people move from job to job, or are reasonably expecting to land a good job, is known as frictional unemployment, and is indeed an indicator of economic health. But if people cannot find work that matches their qualifications and experience, that is structural unemployment – a serious indicator of a lack of skills needed in a competitive economy, or of a backward industrial structure.

Is inflation making a comeback?

On ABC’s Breakfast Monday Finance segment Peter Ryan and Steve Koukoulas discuss the implications of a surprise 6.2 percent annualized inflation rate in the US. So far economists have been guessing that there was simply a one-off surge in inflation associated with supply-chain bottlenecks as worldwide Covid-19 restrictions eased, but perhaps inflation is more established. They also note that in the US wages are rising at an annualized rate of 4.9 percent. (About time, many would say.) That means US interest rates will almost certainly rise, and countries like Australia, even though they may wish to keep their exchange rates low, will have to follow. (7 minutes) You can also read Koukoulas’s views on likely US and world interest rate moves on his Fear and Greed website.

If we too experience inflation in coming months the Reserve Bank will be under even more pressure to raise interest rates. (That is, assuming inflation should be suppressed, and that the only policy instrument to use is monetary policy.)

The ideas expressed by Ryan and Koukoulas are all in line with standard economics, but Ross Gittins doesn’t put too much faith in the textbook theory of wages, inflation and interest rates, because money markets are driven by gaming and speculation based on scant information. All he will say is Interest rates definitely to rise – sometime, maybe.

In an address to the Australian Business Economists – Recent trends in inflation – Reserve Bank Governor Philip Lowe disputes the idea that inflation is becoming established. His argument is based on recent patterns on household expenditure, which has been more directed to goods than to services. Goods have been subject to temporary problems in supply: prices should fall back once supply problems are fixed. Services are generally labour-intensive, but there has been no increase in wages in Australia. Apart from the US (mentioned by Koukoulas), economists in most countries expect inflation to settle back to low levels n 2022.

We needn’t bother with people like Ryan, Koukoulas, Gittins, or Lowe, however. What would they know? Morrison can confidently assure us that interest rates and inflation will definitely be higher if we elect a Labor government.