Ahh the old blame game… you see it all the time.

Today it was Coles’ CEO’s turn… as he looked to try and explain why the Australian consumer is on “struggle street”

We have been talking about this very topic all week… citing examples in the US and asking the question if the same could be said for some Australia households?

And if not now, perhaps sometime in the next few years…

First up, trading “fresh food for cheap groceries” (eg packaged crap) is a bad deal.

Before I continue, short amusing (Singapore) story:

The other day I went to a local Hawker Centre. It’s where many of the locals eat… largely noodle type dishes… all kinds of sugary sauces and cheap oils… fried vegies… with a small smattering of chicken or beef. Typically a meal sells for about $4-$5.

As someone who lives on fresh vegetables and meat (and rarely touches processed foods) – I asked the vendor how much to (a) get rid of the rice or noodles, (b) get rid of the sauce; and (c) and add some fresh broccoli and few other greens to the dish. But it had to be fresh. The price want from $4 to $15!!


I wasn’t surprised and paid the $15 for a tiny bit of chicken… no noodles… and some steamed broccoli. A meal for $15 is cheap in Singapore. To eat anything fresh here is super-expensive.

Everything is imported (mostly from Australia). They have no arable land. It’s a concrete jungle… a bit like a giant ant-farm. You won’t see too many cows grazing! (ps: 2 litres of milk is between $6-$7; or a beer after work on a Friday is $20)

But fresh food is something I am not willing to compromise on. However, if you cannot afford it, then what can you do?

You are almost forced to eat “cheap groceries” (eg packets of pasta, two-minutes noodles, baked beans (what I call ‘sugar beans’) – ie stuff which somehow passes as “food”).

Here’s Coles CEO as to what he thinks is happening to the average Aussie punter:

Mr Durkan, who recently directed close to an extra $200 million into lower prices for Coles customers, said over the past few years, wages growth has languished on the back of a soft labour market.

“And despite some better news on the jobs front in the past few months, there are still a lot of people either looking for work, or currently in jobs and wanting to work more hours. This spare workforce capacity is contributing to low wages growth and low income growth across the country.”

He said that ten years ago, household disposable incomes in Australia, on a real per capita basis, were growing by more than 5 per cent per year.

“Today, this growth is flat or even negative. However, at a time when incomes are not growing much, many households are having to confront large price rises in other areas of their everyday living.

“Within the consumer price index basket some components — including utilities, childcare, health and education — have risen substantially faster than the overall rate of inflation.

Over the past six years, childcare costs have risen by 58 per cent; household utilities prices by 35 per cent and health and education costs by more than 30 per cent.”

This is quite uncanny… as I literally just talked about this yesterday and the dire situation facing most of middle-American.

But here’s the thing:

Mr. Durken failed to touch on perhaps the most important factor of all… household debt.

For example, he says that 10 years ago our wages were rising about 5% per year.

And this was largely driven by the mining boom. But guess what… look at where personal debt was 10 years ago as a function of our GDP:

In 2007 – it was somewhere between 80% and 90%.

Yes, that is still very high in historical terms. But it wasn’t a terrifying 120%!

But it gets better dear reader….

Whilst Australia childcare costs have risen by 58 per cent; household utilities prices by 35 per cent and health and education costs by more than 30 per cent since 2011… interest rates are also at record lows.

6 years ago the cash rate was 4.75%. Today it sits at just 1.5%.

And yes, despite rates never being lower, consumers are still struggling!

Again I will ask the question:

What happens when interest rates rise opposite the debt we carry (given they are struggling today)?

Not surprisingly, our Coles CEO didn’t even go there.

He knows that’s potentially lights out for his business (not to mention the ‘slight’ impact of an unknown outfit called Amazon)

Who to Blame?

There’s going to be a lot of finger pointing in the coming years about why we are in this pickle… trust me.

“It’s your fault Turnbull… you have run this country into recession. We didn’t have a recession for 25 years until you took power”

“It’s your fault Labor government… our country didn’t have debt until the Liberals took power. And then you blew all of our savings… and delivered us record debt. No wonder we are broke”

“It’s your fault RBA… setting rates at near zero… tricking consumes into believing it’s a good time to borrow”

“It’s your fault banks… recklessly lending to folks who could not really afford a $500,000 mortgage at 8%”

<insert your own blame example here!>

It’s fair to say everyone has played a hand in this debacle… including the individual.

But for the most part… I look at the central bank and monetary policy.

I say that because if rates were say left at 5% (and no lower)… I can guarantee you we would not have seen credit become so distorted.

Ahhh but that’s easy to say Adrian…

Why the RBA Did What they Did

Simply leaving rates at 5% may sound easy in practice.

And I am oversimplifying things…

In reality it was never going to happen.

For example, interventionists will argue how else do you stabilise the dollar? Or ensure full employment? Or stimulate the economy. Or achieve stable but moderate inflation etc etc.

After all, the RBA just has one tool at their disposal… it’s a tough gig right?

Let’s back it up and try and explain (in plain english) why the RBA “did what they did”.

First up, the RBA looks to set the rate at a level that it believes has the best chance of achieving the following three primary objectives:

  1. the stability of the currency
  2. full employment; and
  3. the economic prosperity and welfare of the Australian people

Point 3 is a new one… something they updated only a couple of weeks ago. I thought it was interesting… and perhaps a good discussion for another time (eg isn’t that more a government function?) Moving on…

They aim to do all of these things with one blunt instrument: interest rates.

For example, when prices iron ore and coal collapsed last year (in turn seeing more joblessness and lower wages etc etc) — their natural reaction was to cut rates.

And with mining falling off a cliff… their thinking was cheaper access to credit would help spurt a building boom.

And it did (sort of).

Housing construction seems to be our biggest employer (apparently because we need so many more houses!) and that kept unemployment low.

But as our Coles CEO told us — the lower wage growth had an impact. I guess laying bricks doesn’t pay as well as driving a truck in central WA filled with resources.

But given the choice of high unemployment or low wage growth – most economists will opt for the latter.

Some job is better than none at all… right?

Now many will argue that low rates have starved off a recession.

I am less convinced…

I think government spend starved off the recession.

For me, the private sector has been in recession for years. It’s just that government spend is considered a positive contribution to GDP (not matter how it’s spent).

Dig a hole in the road. Positive GDP. Fill it in again. Positive GDP. Buy pencils for the ABS. Positive GDP. Sharpen the pencils. Positive GDP. You get the gist.

Whether anything is actually produced is completely arbitrary… government spend is positive GDP (note: last year we bought a bunch of helicopters and Hep-C drugs… positive GDP)

But here’s the trade with lower rates:

Whilst the central bank have been anxious to slash rates… the private sector did not invest.

And this is why I argue that it’s the government who have held off a “technical recession”…

Now with the central banking thinking that low rates are working (otherwise why keep them there)… what we found was housing speculators were feverishly keen to take the money…

We know the RBA recognised this…

And they touched on it several times in their various monthly meetings over the past few years – however did nothing about it.

Instead, they felt it was best to keep rates low as it was encouraging business investment and greater job growth etc etc.

Wrong. Dead wrong.

So here we are… 2017. And our central bank is like a deer in the headlights… a problem which Coles CEO called out front and centre.

The Australian consumer is struggling.

And it’s showing up exactly where you might expect it would… on our biggest retailers shelves.

If that’s not a proxy as to the “health” (pardon the pun) of your economy – I don’t know what is?

Putting it All Together…

Of course, it’s not all the RBA’s fault.

The banks, government and speculators need to accept responsibility. They have all played their hand in this mess.

The banks will relentless chase profit. That’s what they do. If they can lend a dollar at a profit (with a certain risk tolerance) – they will.

The government have not helped by encouraging folks to speculate on property with tax rorts such as negative gearing.

No bloody wonder Australian’s are going further into debt… in their minds this gives them more money in their pockets opposite the tax relief.

What were we saying yesterday about financial literacy… case in point right there.

Now as to the child care centres, energy companies, health facilities and schools which ratchet up their prices by at least 7% each year… well a lot (not all) of their increases are driven by the costs of real-estate.

Typically when real-estate prices rise… so do all the services which sit on top of it. Makes sense. Costs are passed on.

And of course we have uneducated speculators…. and the old “money in and money out” equation.

“What do you mean – the bank said we could afford it?”


With wages falling and costs increasing every year with respect to education, health and utilities — we still saw the need to increase our borrowing on housing because money was cheap.

And we wonder why “packet pasta” is now the viable option over fresh meat and vegetables. Things which make you go hmmm…

Sure, we can blame the RBA. But we also must take responsibility for our actions.

… trade the tape

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2 thoughts on “The Blame Game”

  1. Hey Adrian,

    Personal private debt is at record levels. Is the Aust government debt at record levels as well?
    We have inflated property prices, mining and car industry going/gone.

    What else do we have to hang our hat on? What is there to look forward to?

    1. Australian public debt-to-gdp sits between 40% to 45%.


      By international measures – that’s not high.

      The US, Europe, UK and Japan are all above 100% (however we more than make up the total difference with private debt)

      Many commentators are arguing the government has scope to use more of the “national credit card” to help stimulate growth.

      And they will…

      What’s more troubling is our debt has gone from $0 (ie with John Howard / Peter Costello) to almost $700B in a very short space of time. And very little to show for it.

      I am very confident this will push closer to $1T within the next 5 years (eg welfare etc). Time will tell.

      Yes, our car industry is gone. But we don’t need to make cars to be successful.

      And property prices will fall. They have to.

      However, the mining industry will come back in time. We are fortunate to be blessed with a lot of natural resources. Problem is this cycle is a long one. And we blew the incredibly prosperity we had the past 20 years…

      We need to pivot the economy towards productive debt and investment. But that won’t be without pain. We will have to work through the massive misallocation of capital (which will involve losses).

      I would personally like to see Australia become more of a “knowledge based” economy. Create our own “Amazon, Google, Facebook, Microsoft” etc… but each time we create an awesome company (eg Atlassian) – it finds a better home in the US. Mmmm…

      For now, for Australia it’s two sectors: property and mining. And not much else.

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