B Invested

The RBA’s Announcement of a $100 billion market boost: How does it affect you?

There has been some positive news lately about the economy. Property markets set for a national boom, record monthly growth, a much better than expected economic recovery post-COVID, but how could this be possible?
We all remember the dire predictions in the aftermath of the first lockdowns, the queues of people outside Centrelink, the soaring unemployment rates and the talk of a serious property downturn.

Well now that’s all seemingly forgotten as we head towards double digit price growth for property. More restrictions are being eased, public transport is filling up again as we head back to the CBDs and suddenly, there’s cause for optimism.
So then, why did the RBA decide to continue printing money through its quantitative easing program right through until September; adding an extra $100 billion into the economy?

Not quite peaches and cream

Australia’s current unemployment rate is 6.6%, which is its highest in 20 years. Inflation is also stuck below the RBA’s target of between 2% and 3%. The official interest rate is at 0.1% and the RBA has already said it won’t consider a rate rise for at least 3 years until there has been a big improvement in wages growth. Let’s not forget that at the beginning of 2019, the RBA warned of a probable rate rise midway through that year. So how did that go? Well since that warning, the rate has actually been lowered 6 times!

And it’s not all COVID. We weren’t hitting the RBA’s economic targets before COVID either, and hadn’t been for some time. Wages growth has been below 3% for the last seven years, for example, while interest rates have not gone up once in the past decade.

What happens when we print more money?

Whenever countries simply print more money, the obvious outcome is that money becomes less valuable. Just look at Germany in the early 1920s. Unable to pay off reparation debts from World War I, the government printed more money and hyperinflation took hold, resulting in prices doubling every couple of days. People wallpapered their homes with money as it was cheaper than wallpaper, while kids flew kites made from banknotes.

More recently, in Zimbabwe around the time of the GFC, political upheaval, land redistribution and drought saw inflation hit 489 billion% at its peak in 2008.

And the worst ever was post World War II in Hungary when reparation payments again sparked an economic collapse. Late in 1946, the entire value of all Hungarian banknotes in circulation was estimated to be 1/10th of a US penny.

In all these scenarios, cash became worthless. That’s what happens when you keep printing more money.

Dude, where’s our inflation?

As mentioned earlier, our inflation is below the RBA’s target of 2 to 3%. So all this extra money being printed, where is it going? It seems that inflation is turning up in our property markets. Analysts are saying the whole nation is primed for property growth, which is most unusual. Traditionally, as one market is on the rise, another is plateauing or entering a correction phase, but on this occasion, all capital cities and major regional centres are simultaneously primed for a year of value growth of more than 10%, even by conservative estimates.

We love property in Australia, but we also have no faith in cash at the moment. There are no returns to speak of in cash assets.

Wealth gap

That’s all wonderful if you own or are paying off a property or two, or three, or 10. Those people with property assets will see big capital gains this year. But this also means the gap between the wealthiest property owners and everyday people is widening and the little guys out there are being screwed over. If you haven’t bought a property yet, but are saving to do so, the target just got further away.

Cash is trash, so what can you do

Get yourself some quality debt. Property is the obvious one. Interest rates are super low, property has never been cheaper to pay off, even if it is going up in value, and it is an asset that will deliver cash flow and equity growth. If you can’t afford to buy in the property market you want to, look elsewhere. Get a foothold, earn some equity, acquire more and build your wealth that way.

Aside from property, a lot of people are looking at gold and silver. Precious metals are a traditional safe haven against economic volatility. The other big one is cryptocurrency. Bitcoin and other versions are decentralised, can’t be manipulated by banks or governments and are therefore seen by some as a hedge against inflation.

Get help

Unless you’re a seasoned professional, times like these can be hard to navigate. If you need more information, or help building your investment strategy, reach out to the team at b Invested.