“The world is awash with money.”
That phrase was repeated several times by former Federal Treasurer and current chairman (and founder) of the Future Fund, Peter Costello, in his Keynote Address to the 2017 AADA National Dealer Convention, at the International Convention Centre in Darling Harbour on Tuesday.
Speaking to the theme of ‘How The World Is Changing’, Mr Costello meant it as a warning that although we live in a time of low inflation, low interest rates, when cars have never been more affordable and money never easier to come by, things can and will change, and when they do, it will pay to be prepared.
Mr Costello spoke of growing political instability, not just in Australia – where we had five prime ministers (Kevin Rudd twice) in a six-year period after the fall of the Howard Government, and where 20 of our 76 senators represent minor parties or are independents – but also in the wider world that has seen Britain exit the European Union, and voters in the United States elect as president a property developer with zero prior political experience. The time of political instability is already upon us, with shifts to both the Left and Right extremes.
“Politics is polarising, and that might make it harder and harder to get stable government, and to get things done,” Mr Costello said.
Although many economic indicators seem strong, the average person is actually less well-off in real terms than they were a decade ago. Wage growth has not kept pace even with the two per cent inflation rate. Consequently, people are taking on greater debt, because money is currently cheap.
“The world is awash with money,” Mr Costello repeated.
“This last decade, central banks have been creating money on an unprecedented scale. It’s called quantitative easing, and the US Federal Reserve has created 3.7 trillion dollars. The European Central Bank has created 2.4 trillion dollars. We don’t know how much the Chinese central bank has created, but a conservative estimate is over the last eight or nine years, 10 trillion dollars has been created by central banks, and it’s washing around the world, looking for a home.
“The corollary of that is that interest rates are at historical lows. Money is like everything else: the more money you’ve got, the lower the price of money. The less you’ve got, the higher the price. Interest rates are at historic lows. Now, the benchmark that sets interest rates in this economy – in any economy – is the ten-year sovereign bond, which the Treasury issues. We used to always say, Ten-year sovereign bond, long-term average six per cent’, and everyone was priced off six per cent. Loans were priced off six per cent, depending on duration, credit risk, everything else.
“That bond rate at the moment is 2.8 per cent. In fact, the Australian Government is now issuing 30-year money for 3.3 per cent. That is, people are prepared to lock up money for 30 years, in order to get a return of 3.3 per cent. Do you know what the economy’s going to be like in 20 years’ time? Do you know what it’s going to be like in 2047? Yields are so low that people are now locking up to get 3.3 per cent over 30 years. The world is awash with money, and that is driving asset prices. House prices are going up because the world is awash with money and interest rates are at historic lows. And here is the question: for how long?”
Mr Costello said both governments and individuals were funding themselves via debt, which “is not a problem when the world is awash with money and interest rates are low. But that is a problem when interest rates turn. This is the world of the last eight years but it’s not going to be the world forever, and a prudent person would make sure they’re preparing for the future.
“Wages growth has stopped. When I left government in 2007, wages were growing at about four per cent per annum. Inflation was about two per cent. In real terms, people were getting richer two per cent, year after year after year. But wages in the private sector today are growing at 1.8 (per cent) and inflation is still two per cent. People are going backwards. Household disposable income over the last five years has grown slower than inflation. You know why people feel poor? They are. Their disposable income has gone backwards. That’s not good for retail, I hate to tell you. You’ve probably figured it out. If people’s incomes are not growing that makes it tougher to get a sale.”
Inflation remains ‘stubbornly low’, Mr Costello said. He spent the first part of his career trying to reduce inflation, but now the world’s central banks were trying to increase it.
“You know why it’s low? In the traded goods sector, prices are falling. I collected statistics from the ABS over the last five years. Major household appliances have been falling 0.7 per cent per annum for the last five years. So your fridge is becoming cheaper, year by year. I don’t know if I need to tell you this: according to the ABS, on average, motor vehicles have been falling in price 1.3 per cent per annum for the last five years.
“This might cheer you up: computer equipment has been falling 11.9 per cent per annum for the last five years. If anyone goes to buy a computer they expect the price to be less than the one they bought before, and they expect the computer to have more memory. And they’re expecting when they go into car Dealers, the price of the car is going to be less and it’s going to be a better car. In fact, according to CommSec, car affordability is at the lowest on record. It’s got to be a problem in this industry. It’s got to be affecting margins.
“There are some things you will be able to influence and some things you won’t. You won’t be able to influence the price of vehicles. It’s largely going to be set by global manufacturers and supply. But the on-costs in Australia, whether they’re taxes or whether they’re regulations, that’s going to be an increasing part of the discretionary cost that’s left. And that’s why it becomes increasingly important for your business. That’s the discretion that’s left, that’s the non-tradeable sector, and that’s a cost to your business.”
Technological change affects all
Mr Costello is also the chairman of Nine Entertainment, which operates in an industry that has seen massive change over the past decade.
“There are people selling cars through Gumtree, Carsales, I’m sure Amazon’s going to come into the selling business. I’m in the television business now. Nine years ago, the competitors for the TV stations were Seven and Nine and Ten. But television’s an advertising business. Who are their competitors today? Google. Amazon. Streaming television. Youtube: streaming video, and taking advertising for it. Apple, with a new TV service.
“The world changed. We barely noticed and the world changed on us. And so the television networks now, they don’t consider that their competitors are the Australian television networks, they’re internet behemoths. It happened in that industry, it’s happening in your industry, the world is changing.”
To illustrate how quickly things change, Mr Costello recounted the story of meeting an American businessman in the 1990s with crazy ideas about computers and this new thing called the internet.
“In 1996 John Howard rang me, he said, ‘There’s an American businessman in town. I don’t have time to see him, will you take the meeting?’ I said, ‘Yeah, that’s fine. What’s his name?’ He said, ‘Bill Gates’. I said, ‘What does he do?’
“He came around to my office and he gave me a little lecture about the internet, and about how there would one day be a computer on everybody’s desk. Which I thought was a bit far-fetched, actually. I didn’t have a computer on my desk in those days. I had to ring up the Treasury to find out the value of the Australian dollar, because they had a computer – but I didn’t have one!
“And he was right, there’s a computer on everybody’s desk – but it’s more than that. There’s a computer in everybody’s pocket. I don’t think Bill saw that one coming either, back in 1996.”
Technologically and economically, the world is still changing at a rapid rate. Mr Costello’s lesson was that although we can’t see everything coming, we must do our best to be prepared.