Between Scylla and Charybdis

The Australian Economy is quite hilarious. In a sad kind of way, I think having 'survived' a recession we are coming to appreciate our unpleasant dilemma.

Let me oversimplify, the major battlefield of our economy is the property market. You let the property market correct (like the US, England, Ireland etc.) you have a depression on your hands.

Having high property prices means that just about everyone has something they can borrow money against, for example, if you have $30,000 in debt but are sitting on a $180,000 property, worst comes to worst you sell the property to pay off the debt and you have $150,000 in your pocket. So really, you don't have a problem being $30k in debt, you have an opportunity to be $150k further in debt. You can use the property as collatoral to borrow money to spend in the economy stimulating demand.

Now if your property fell by 40%, or more, this would effectively half the demand in the market place, driving up unemployment, which would catch up with the property market pushing prices down further. This economic whirlpool we can call Charybdis.

Alternatively, you have to think of high prices like a balloon, not a helium balloon, just a regular arse balloon. House prices and valuations are based on what similar properties are being sold for, it's based on recent history, simply put again you need continuous sales - at profits - to hold house prices up. That or you choke down the supply so that barely any houses go through on sales, you can't liquidate your asset and realise your gain, but on paper it can look that way.

The point being that just like a balloon filled with plain old air, if you take away the hand holding a balloon up, it's just going to fall down.

How do you hold up a property shaped balloon? You need to stimulate demand, demand costs money, you need to basically pay the difference between what consumers are willing to pay and what the going price is. For a widget factory this involves cutting your margin, or the wholesaler cutting their margin. For a government this means going into debt and putting out First Home Buyers Grants and shit.

It costs money, furthermore, having high house prices costs us money, either in mortgages, rents, taxes etc. These basic living costs put pressure on wages, which puts pressure on goods and services and leads to inflation. A mountain of inflation.

In Australia if you think back two or three years, what was all the economic talk about - the government denying inflation particular as regards Petrol and House prices. Flash forward a year or two, petrol prices are off the radar, housing affordability has become a joke, people want affordable housing but they don't want their houses to get any cheeper. Inflation be damned interest rates must go down, and down they did, now inflation is up and interest rates it seems must go up.

We can call the interest/inflation dilemma the rock known as Scylla. Thus thusly, we can go down into the whirlpool of deflating house prices (Steve Keen's Debt Deflation). Or break up on the rock of inflation.

It seems we can't have 'neither' but damn if they are not trying. I imagine over the course of the next year we will have one (the Charybdis) or both.