Managing Money and Debt

Managing money and debt is one of the key responsibilities of governments. The management of money and debt is an important consideration for investors and for the broader economy.  The money available and in circulation in the economy is in the control of governments and the central banks; and debt is of interest for investors wherever it is held – by government, business or households.

Governments around the world have responded to the COVID-19 unprecedented health crisis with an unprecedented (at least in living memory) fiscal response.  Each government has focused their stimulus according to their perception of the needs of their citizens: in the case of the Australian government, the multi-targeted approach has meant that employees, sole traders, small and large businesses alike have all been supported ‘to get to the other side’ of the pandemic with minimal scarring. 

Their intention has been to save as many existing jobs as possible, to save as many businesses as possible so that when we get to that proverbial ‘other side’, employment can restart, and to ensure that essential services – particularly in the health environment – are able to manage the pandemic until we arrive at that destination.

Managing Money

How have they managed to find the money to achieve all these goals when up until six months ago, the main focus of the government’s fiscal policy was the elimination of Budget deficits and the reduction of government debt?  The short answer is that, with the support of the Reserve Bank of Australia (the RBA) and temporary abandonment of the ‘debt and deficit’ reduction policy, they have ‘borrowed’ the money needed – from future generations.

australian bank notes flying through the air having been dropped from a helicopter in managing money effortThere are two terms that have been discussed and debated during these recent times, that will be with us for a very long time: they are ‘helicopter money’; and Modern Monetary Theory (or MMT).   And for helicopter money to be available, MMT is seen as its source.

In a Sydney Morning Herald article published on 2 July 2020, Jessica Irvine wrote an entertaining explanation of MMT that is helpful in gaining an understanding about what this somewhat maligned, oft hotly-debated, economic concept is all about.  In very short, simplistic terms, the article explains that governments should be able to print money as they see the need, without regard for how it is to be ‘repaid/ repatriated’ from circulation.  It continues that with appropriate settings, such a process shouldn’t create inflation as of itself – and taxation should, whilst still a necessity, be able to be ‘contained’ from excessive growth.

In a speech delivered to Anika Foundation (also in early July), the Chairman of the RBA talked about the call for helicopter money to be used to overcome the economic crisis that arose out of the measures adopted to control the pandemic.  The appropriate extract from his speech is linked under the title: ‘helicopter money’ – and the full speech can be read on the RBA website (see https://www.rba.gov.au/speeches/2020/sp-gov-2020-07-21.html).

Managing Debt

It will be fresh in the minds of most of our readers that the Australian government response to the Global Financial Crisis (the GFC) was also referred to as ‘helicopter money’ policy when cheques for $900 were issued to all eligible ‘residents’ (including some who were by then, living overseas; and others who had passed away).  We are still living with the consequences of the fiscal stimulus of that time, enacted around the world in a range of measures, flooding the world economy with ‘money’, cheap money because of the volume of it and its ready availability.  From that era, the term ‘lower for longer’ was crafted in reference to the yield that can be generated from Cash and Fixed Income products such as Bonds, Credit Notes etc.

Prior to the COVID-19 pandemic, there may have been some hope that economic activity, increasing middle class populations (spending more) and increased mobility would lead to some inflation, increasing interest rates and higher levels of employment.  Even if that was ‘a pipe dream’ for some, it is now a distant memory that may not be realised in the working lifetime of many of our current readers. 

graphs showing change in australian household debt and how well it is serviced over thirty years to June 2020 by managing money availableA regrettable concern for Australians, is that whilst the government debt is growing substantially at this time, the personal debt of Australians has been escalating for a number of years – and household debt in Australia is considered to be the highest per capita in the Western world!  As will be read in the two articles linked above, governments, like their constituents, will have a day of reckoning when debt will have to be paid down: and at the least, serviced with interest payments.  And the more that is spent on paying interest, the less is available for those essential services in health, education, policing and for providing infrastructure.

One of the consequences of ‘lower for longer’ is that highly graded investment Bonds (mainly sovereign, government issued) are yielding very low return for investors.  These Bonds are the typical benchmark for a ‘risk-free’ rate when evaluating investment risk; and as a consequence, borrowings via lesser-grade securities (corporate bonds, hybrid notes and credit notes amongst them) are also issued at lower than ‘normal’ interest rates.  This encourages investors – and businesses/ corporations – to borrow while rates are low (and set to stay so for a long time) to acquire assets.

Prior to the pandemic, the average dividend return on the ASX-listed companies was a little over 4% and, with franking credit effect added on, the yield was in the range of 6, to 7% per annum: Bank Term Deposit rates were less than 2% per annum.  It was not surprising to find that some ‘investors’ (using that term loosely in some cases) chose to borrow money at low rates to buy into that yield.  Genuine, long-term investors working to a goals-based strategy are also now caught up in the aftermath of these monetary and fiscal actions by central banks and governments, with uncertainty about how long dividend yields will continue – and whether some of the dividend-paying companies will actually survive the pandemic. (…think Virgin Australia, Hertz Car Rentals, Flight Centre, and so on).

We anticipate further volatility in the marketplaces (equities, bonds and property) for several months ahead: investors will need to stay focused and true to the strategies they have in place.

ContinuumFP offers Money and Debt Management services

The start of your wealth management journey is the development of an understanding of how money, lifestyle and debt interact: to be in a position to invest for future financial independence, the level of financial outgoings (expenses) needs to be less than that of the incomings (income).  The experienced advisers at Continuum Financial Planners Pty Ltd have many years’ experience in working with clients to identify potential surplus cashflow and by managing money and debt, starting the wealth accumulation journey.

To meet with one of our team, call our office on 07-34213456, or complete the Contact form on our website.  We look forward to working with you.

(This article was posted in July 2020.)