A surge in unemployment will impact on the housing market which has been the mainstay of our false economy for decades. File photo / George Novak.
A surge in unemployment will impact on the housing market which has been the mainstay of our false economy for decades. File photo / George Novak.
COMMENT
Over the past decade I have often wondered what could topple our economic mirage - an economy largely based on artificially low interest rates, lots of debt and inflated house prices.
This nasty virus could be a trigger. I take no delight in it. It's more a question ofwhat is the best policy response from here for our fragile economy. Otherwise we will all suffer.
Industries such as tourism, logging, farming and horticulture are reeling. The problem is that the economic statistics that show this will have a significant time lag before we truly understand what is happening to our economy.
This means a further time lag in meaningful policy responses. Our politicians of most persuasions are hesitant to take decisive action. This is the downside of modern liberal democracies. Likely resulting in too little, too late.
The crucial statistic is the unemployment figures. A sudden surge in unemployment would suggest our economy is heading backwards quickly.
But most importantly, a surge in unemployment will start impacting on the housing market, which has been the mainstay of our false economy in recent decades. A technical recession is two consecutive, three-month periods of falling output in an economy. This means the economy is shrinking. As output falls, businesses lay off staff and incomes fall. Total demand in the economy falls and unemployment rises.
This can cause a nasty downward spiral. It is called a deflationary spiral because wages and prices fall. Unfortunately, debt levels remain the same. Japan has experienced a deflationary spiral for 30 years after a massive debt-fueled property boom in the 1980s.
If our unemployment rates start spiking, this government needs to respond quickly to prevent such a scenario. A key initiative would be to provide mortgage holidays for those made jobless by this viral crisis. If people can show their joblessness was a result of this crisis then they need to be supported in servicing their existing debts.
The alternative is debt deflation, which would prove very ugly for everyone, even those without debt. It's not about forgiving debt or being kind to the profligate. It's just common sense. It's about learning from history.
If someone with a large mortgage loses her job, she can't service her mortgage. She is forced to sell her house. If thousands of others are in the same situation, this drives down property prices. Yet the mortgage debt remains the same.
Our Reserve Bank is likely to cut interest rates again in the face of this sudden crisis.
Peter Lyons. Photo / supplied
This is almost laughable when it's considered: It is trying to get people to borrow and spend more when jobs are disappearing and uncertainty prevails. It is also trying to drive down the exchange rate. Unfortunately, most other countries are doing likewise. The Reserve Bank is reaching the 0 per cent threshold where interest rates have lost their potency to kick start the economy.
The essential economic policy response to this crisis is to fast-track the collection of important data, particularly joblessness. The Government must then ensure we avoid a debt-deflation trap particularly in the housing market. Accurate prompt data and smart policy responses are essential.
