July 2020
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Australia: Defying the Precipice

It has been eight months since the blog post, Australia: On the Precipice time enough for an update. At the time of writing that article I was making a prediction that money supply growth would reach negative territory by mid year, based on trends emerging last last year. This has not eventuated, as you can see by the graph below total M3 did dip for a little while, but has again increased in the last six months.          


Data Source: RBA Statistical Tables

If we look at M3 in annualised growth terms, again the last six months have seen what may be a bottoming out after a large fall. The big question is what will the next movement be?        


Source: RBA Statistical Tables

So why didn’t the prediction come to pass? Has something profound changed in the Australian economy to prevent M3 from shrinking? We can get some idea of what has been happening by looking at what makes up M3. The RBA defines M3 as constituting the total of currency, current deposits with banks, certificates of deposit issued by banks, term deposits with banks, other deposits with banks and deposits with non bank ADI’s (Authorised Deposit-taking Institutions). One of these types of ‘liquid’ money has been acting differently to all others in recent times.           

In the last three years the amount of money in term deposits has doubled. There is now an extra $200 Billion locked up in term deposits compared to pre GFC times. Obviously interest rate rises and flight from riskier asset classes has meant that money has been pouring into term deposit accounts. In fact this growth alone has prevented M3 from entering negative growth territory. If you look at M3 growth without term deposits the growth rate is currently flat and falling.           

Source: RBA Statistical Tables

If this trend continues even further growth in term deposits might not prevent overall negative M3 growth.           

The credit market in Australia has undergone a revolution in the last twenty years, but more on that later. If we look at the growth rate of total credit in Australia  it just touched zero growth only to rebound since the start of 2010 to around 2% growth at the present time. Once again to get an idea about what might happen in the future it will help to look at the constituent parts of total credit.       

Source: RBA Statistical Tables

Business credit in Australia is quite volatile, the last serious reduction in business credit was in the early 1990s recession. A similar event is occuring now except that it has not been associated with high unemployment. The slight recovery (still in negative territory though) seen since looks good but the overall number is still falling, just falling less quickly.       

Source: RBA Statistical Tables

If we look at the growth of credit for investment housing we find the reason behind the recovery in credit growth rates. Almost incredibly, credit in investment housing grew at an average annualised rate of 22.5% from 1991 to 2005, fourteen years of simply crazy exponential growth. The economy basically gorged itself on investment housing credit and it was sustained with a combination of favourable tax conditions and sustained capital growth in the price of housing in Australia. I’ve been trying to think of what might have turned around the growth of investment housing credit since that start of 2010 and am slightly mystified. Could it have been the reports of 20% and upwards house price rises in some Australian capital cities in 2009? Are housing investors jumping on for one last binge? There has been a very long and sustained fall in the growth rate since 2004, time will tell if the current upsurge breaks that trend.      

Source: RBA Statistical Tables

On the flip side we have what is happening with the growth of owner occupied household credit in Australia. The average growth rate over the two decades shown  in this data set is 13.2%, once again almost unbelievable sustained exponential growth.  There is another trend happening here as well, a steady decrease in growth rates since 2004 and the mirror effect of what is recently happening with investor credit, for owner occupiers credit growth has been steadily declining over 2010.      

Source: RBA Statistical Tables

If we lump all housing credit together (investor and owner occupied) the trend is even clearer, steady falls in growth rates for nearly six years.      

Source: RBA Statistical Tables

The steady fall in housing credit growth is significant now because housing credit now makes up nearly 60% of all credit, so any movements in housing credit are going to have substantial effects on the overall credit growth figures. This graph goes some way to explaining why in 2010 a big fall in business credit has not been associated with high unemployment, in the early 1990s recession business credit made up over 60% of the ‘market’, therefore it had a big effect on the economy. Now in 2010, business credit makes up only just over 30% of the credit market so it is much less influential.     

This is probably my favourite graph because it very simply shows the transformation of the Australian economy in the last twenty years. In 1990 we were an economy prepared to use over 60% of the credit available to finance business in infrastructure, invention and innovation and allocate just over 20% of our credit to enable the people to purchase and invest in housing. Now in 2010 we only like to allocate just over 30% of our credit to help innovation, instead we much prefer to allocate our available credit, nearly 60% of it now to the pursuit of buying and investing in houses.     

We have basically completely switched our focus from business to housing.     

Credit is a precious thing and should be used on activities that can bring long term benefits to the citizens that use it, on real investment in new enterprises that create new markets and new products that allow the economy to expand and for that credit to be paid back.     

Instead we now spend most of our credit buying and selling houses.  The trouble is, these markets and products are all dependant on one thing, that the price of houses keeps growing. If prices fall the whole edifice supporting the buying and selling is under threat along with the only way the credit can be paid back.     

The next large unemployment episode in Australia will be unique as it will not be associated with a fall in the growth of business credit, it will be instead associated with the fall of housing credit and the fall of house prices.     

Source: RBA Statistical Tables

As discussed in an earlier article there seems to be a relationship between changes in Net Foreign Debt  (NFD) levels and changes in M3. NFD seems to be a leading indicator for changes in M3 with a positive correlation, when NFD expands M3 will follow some months later. NFD is at historically very high levels currently in Australia. Everything will be fine as long as our creditors have confidence in us, when that confidence fades as a nation we will need to service higher interest rates on our debt as risk premiums are allocated to our bottom line. We have to hope as a nation that we can get our net foreign debt down to more historically normal levels before anything untoward such as a property crash shakes the confidence of our overseas creditors.          

Source: RBA Statistical Tables


Finally, my 2010 invention, M3 Inflation. I have already commented on this graph in previous posts, little has changed really in the last few months. I propose that this is a true indication of inflation in Australia. We used to have short inflationary episodes followed by short deflationary episodes to cool  things off and the pattern repeated. This stopped after the early 1990s recession, Australia has had an unprecedented (based on this data) run of inflation.  

If the pattern continues, deflation will follow inflation, and because the run of inflation has been so long and significant the next bout of deflation will also be unprecendented in its severity and length. It will take the form of low or negative money supply growth along with higher interest rates.  


Data Source: RBA Statistical Tables

I still maintain that Australia is about to enter a period of sustained deflation, it might just take a while yet to surface. In my opinion we will see a situation in the short to medium term of several things happening at once, the property market cooling then devaluing, commodity prices returning back to and possibly beyond long terms trends, China cooling and having a simultaneous property market correction with Australia.  

All of this will put tremendous downward pressure on the Australian dollar, so much so that the Reserve bank might be forced to increase interest rates to support the dollar rather than its previous use of suppressing the Reserve banks definition of inflation.  

Property values will return to long terms trends, debt will return to long term trends, but it will take years and years of belt tightening and will be associated with high levels of unemployment and a lot of pain for ordinary Australians. Classic deleveraging.  

We might be lucky, if China keeps booming for another decade, commodity prices stay high, the property market flatlines rather than fall. Then over say a decade we could rebalance our internal and external debt situations with much less pain in terms of unemployment. It is possible but it depends solely on China.

  • Perfidious Rex

    Nice follow up Jamie.

    Another RBA+ rate rise from the CBA today. If there is no China implosion it looks like the punters are due to suck up the foreign debt problem 20 basis points at a time….

  • fitzroy

    Congratulations once again, and many thanks for the obvious work that goes into this blog.


    Hi Jamie

    The change in the ratio of of M3 / Broad money creation that you have described and is also shown here http://www.rba.gov.au/speeches/2010/images/sp-ag-151210-graph10.gif that begain in 2007, is almost certainly retirees downsizing into this overpriced housing and credit bubble. Interpret this as the bubble collapsing from the top down i.e. broad money (large home equity becomming monetized into bank deposits) as M3 growth fades. The high priced end of the housing market to downsize is moving the whole market into disequilibrium fairly quickly.

  • http://s4.zetaboards.com/Australian_Property/blog/main/3192297 Peak Debt

    Indeed, it’s a pity the commonly reported CPI doesn’t take into account *real* inflation – i.e. inflation of the money supply, M3 growth, and the big one – house price inflation! The latest RBA financial aggregate data (see chart below, 8th chart on the page)…

    Real Inflation – RBA Financial Aggregates Chart

    …shows these forms of real inflation running well above the RBA 2-3% inflation target, meaning we should really have much higher interest rates, and wouldn’t that pop the bubble and bring house prices back to sensible levels!

    The source data for that RBA financial aggregates chart can be found on the RBA site here…


    Cheers, PD.

    Australian Housing Crash Blogs

  • fitzroy

    Jamie, Median House price down by 28% in South Yarra in the last 3 months. You’ve picked it again!


    Australia is now in a deflation by this definition… A drop in general price levels, usually caused by increased demand for money that isn’t offset by an increased money supply, or a drop in the money supply that isn’t offset by a drop in the demand for money.

    At every level in the RBA D02 accounts, ‘national’ ‘business’ ‘household’, the demand for money exceeds the supply of money.

    The demand for money is the interest rate payable on deposits + bank margin, the supply of money is the quantity of new credit created to pay the demand.

    This resources boom is the export of iron ore, coal, minerals etc in exchange for USD deposits that already exist in the account of the PBoC. The USD in the PBoC account came into existance when US households created USD credit [which creates a USD deposit] using their houses as the collateral and the USD deposits ended up in the PBoC USD deposit account when the US household spent the USD to import goods from China. When Australia exports mining resources to China these USD deposits are transfered from the PBoC USD account to the USD accounts of Australian mining companies. The Australian mining companies may swap some USD deposits for AUD deposits but that does not create AUD money.

    Only credit creates AUD money deposits [or AUD money printing]

    Australia is presently in an AUD dollar money shortage = Deflation    

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