Is the RBA really ‘smashing the economy’? September 6, 2024

26:44don't be someone who's got a lot of debt i guess um be someone be someone in like that's easy to sort of say yeah right exactly you know it's like yeah but i want a house we really are in a possible situation there's no good outcomes here there's there is no there is less worse outcomes I would say. But we're going to have to take our medicine at some point. And I think politically, to our earlier points, it's so untenable. It's seen as untenable these days. I think it was more of an acceptance in the past. I mean, Keating, you mentioned him before, was famous for saying the recession we had to have.

27:23Told the truth and got smashed for it. Yeah, exactly. By the way, I mean, it gets pilloried all for that comment. But there was a rationale to that there. But the landscape these days is different. It's like, no, we shall not ever do that. And in trying to engineer that, we will distort things and we'll make things worse is my view. So what does this mean? I think we'll see the RBA roll over. There's way too much pressure for them not to. And now they've got a bit of cover, I think, too, with GDP not being as strong, which is going to mean easier conditions, which is going to mean that now that we've sort of like we put too much stimulus in, we knocked everyone in the guts to take it out, and now we're going to – you know, it's such a psychopathic relationship.

28:17It's such a poor – what's the word I'm looking for here? It's an abusive relationship. It was like we're going to lift you up and then we're going to knock you down and then we're going to lift you up. I'm like, can you just stop helping for a second here and just back off? Yeah, it's hard. I mean, look, I'm less cynical. I'm more interventionist than you would be. But on a GDP number, I think, so here's the challenge, right? There's people now at the end of two years of, more than two years, almost, well, more than two years of government, but more than two years of inflation as well, saying, well, what should the government do now?

28:51It's like, that's kind of missing the point, right? If you're going to act. And again, you're very generous in letting me kind of say, I hear what you're saying, but let's work with the system we've actually got. And I know that's something that you very kindly at least allow me to talk about. The reality is that the problem should have been dealt with 30, 24, 18 months ago at a time when you could have actually dampened demand without causing negative GDP growth because you had a higher number to start with. The time to buy umbrellas is not when it rains, right? You go and buy them when it's sunny.

29:26You buy straw hats in winter, right? You set yourself up. So you say, well, hang on. This could get bad. We've got a problem now. Let's act now. Well, we can. GDP growth might go from 0.9 to 0.6 or 0.9 to 0.2. But we'll actually have the impact we want. We'll dampen demand. And we'll do it at a time when we can afford to absorb that dampened demand. Instead of that, they've let two years of, again, as a government, four and a half years of inflation, for example, The government's done absolutely, effectively, exactly zero to help. There's a couple of things around the, quote, cost of living. What they really mean is subsidies and handouts, not actually dealing with inflation.

30:00They're trying to paper over the inflation problem by - Which, by the way, is kind of like a bit of fuel on the fire. Of course it is. I'd never heard, because I'm ignorant and close-minded, but I'd never heard you're putting out a fire by throwing petrol on a thing before, which I've stolen repeatedly since with attribution, but I have used since. um the the yeah i i think it's right to deal with inflation i think it's right to deal with inflation more quickly otherwise would be the case if you left it go and do its thing i think it's probably less damaging now i absolutely agree with you on the poor application of keynesian economics which is exactly why for example we should have a structural budget budget balance that if you believe in keynesian economics you believe in a structural budget balance if you don't have a structural budget balance you either believe in keynesian economics and have the guts to do it properly or you don't care about doing it properly or you misunderstand standard none of those are good things i just it's an ideology that just gives cover to to rampant spending is basically what i would argue again i know that's super cynical but it's like hey there's a menu of different philosophies out there which one allows me to sort of spend beyond my means oh that one i'm gonna go for that one right yeah and i and i just think i'll ignore the core part of it that that sort of is is that is sort of meant to sort of keep things in check with check which is your point of a balanced budget so it's like i want my cake and eat it too i want to be able to I spend however I want, but I don't like that part of it, but I don't like the balanced budget part of it.

31:21And frankly, it's kind of modern monetary theory by stealth, right? Because you kind of get to say, no, I don't believe in MMT. I'm a Keynesian, but I'm never going to pay the debt. So hang on. Isn't that kind of – so you're right, man. And this is where you and I do agree. Your viewers don't do it at all. My viewers do it properly. But either way, we both agree on being bastardized. So GDP per cap – we should stop talking about GDP. we should only talk about GDP per capita it's fundamentally my first point right why because I've said a million times if you've had someone if you had a staff meeting and said guess what guys good news the salary budget is being increased by 10 % and if I cheers the bad news is we're increasing the workforce by 20 % you're all getting a pay cut oh that's not quite as good it's exactly the situation it's exactly the situation right so that's why per capita GDP is the only thing that matters we should talk about distribution of course you know if Jenny gets all the money and I get nothing just because GDP per capita goes up still doesn't matter so there's that we need to talk about other non-economic uh components of standard of living uh leisure time happiness welfare well-being health those things really really matter and we we we do ourselves a massive disservice by pretending the economy is the only thing that matters um as you said before the economy isn't even really a thing but the sum total of our economic activity is not the sum total of our life experience happiness hopes dreams um all very very zen and and you know hippie but that's that's life it's true um so i think that kind of matters mate in terms of the the gdp result i the only thing that's bad about the only thing i shouldn't say that the only time a capital r recession rather than a per capita recession matters is frankly the the newspaper responses right we we seven out of the last eight quarters as you said not an opinion fact we have a per capita recession but if you ask 95 people 100 people 96 percent of 96 of them would say we haven't got we're not in a recession why because the newspapers haven't said we're in a recession yet so you get this weird kind of it's not quite pretense because that's real again it's real data we're not in a recession that is also a fact so it's true um we've just have been a condition to believe that's the thing that matters and i don't think police did it on purpose but i think once they realize like well hang on there's more per capita recessions than actual recessions so if i'm in power i'll take the good number the the easier target to hit if i'm an opposition i'm probably not going to make too big a deal of it because i'm going to be a governor at some point and then if i do that i'm going to be hoisting my own batards i'm not gonna do that either and so i kind of think i don't think it was ever deliberate but i think they've kind of both lucked into oh oh that's good they don't care about the per capita stuff oh thank god we can get away with that then i don't think that's how it's how it's happened but i think that's the only thing that matters i think um sorry the only other the other so capital R recession why does it matter two things one is it actually does hit confidence.

34:03Because we don't talk about per capita recessions, when the newspaper screams, Australia are in recession, we will close our wallets a little bit more tightly. Businesses will hire a little more cautiously and actually will make things worse rather than better. Pure psychology, no math, just pure psychology, but that's probably true. The one area where it does matter, total GDP, is actually employment. And that is simply because if businesses are selling more stuff overall, they probably will need more people to sell that stuff or make that stuff or import that stuff or export that stuff. So that kind of matters a little bit.

34:32There is a question about, I don't want to get population, but there is a question about if we didn't have too many people, there'd be more jobs to go around and maybe it doesn't matter in total employment sense, depending on what you do with population growth. But at a stable population level, for example, not that I'm saying we should have it, but at a stable population level, per capita GDP still wouldn't include the overall kind of businesses hiring, firing, the kind of growth of their revenues and profits, which would mean more employment. So there are two reasons why you might add total GDP to the maths or to the conversation.

35:02But the first five paragraphs of any reporting on economic output should absolutely be per capita. And then you might tack on the, oh, by the way, total GDP kind of matters a bit. Here's why. Here's what it meant. That's how I do it if I was in charge. Yep. The other thing I wanted to pick into too as well, because it's a word that's come up a lot in reading the coverage from this latest set of figures, was the word demand. And I thought that deserved to be picked into a little bit, just as I think one of my greatest bugbears is with the word productivity, because that gets thrown around a lot.

35:35And I don't think politicians really understand what they're saying, but it's fundamentally kind of important. Productivity, as we've sort of said, is everything, which is just a fancy way of saying, can I do more with less? Go chop down that forest of trees, Scott. Here's an axe. I'm going to go use a chainsaw. Who's more productive, right? Who's got more leisure time? Who's got more capacity to produce? And that's not to get weighed into the environmental consequences of that analogy. I'm not trying to say we should cut down forests. I should have said widget. I realized that we triggered some people just then.

36:14But demand, demand. I would say this. When people say we should take demand out of the economy, I just, I want to unpick that a little bit. Like, what do you mean by that? And I think it's probably fruitful to sort of dig into it a little bit. So I would posit this to you, and I'm keen for your response. I would say a well-functioning economy meets increased demand with increased supply. So let's say that, and I've used this example before. Or demand falls because supply can't. The money could be then spent somewhere else because the supply doesn't come on stream. There's a natural substitution effect.

36:57Either there's more supply or demand goes somewhere else because the price is too high. Yep. I mean, I think a great example here is electronics and what a lot of us would have seen over our life. I remember when the first mobile phone came out, they were expensive, right? I remember when like the first PCs came out, they were expensive. The flat screen TVs, super expensive, right? And they've come down and down and down and down and down in price at a time when demand only went through the roof, right? So why was that? And again, it comes back to, well, we had in those parts of the economy, it was very well functioning that people, producers went, oh, people really like this stuff.

37:37I'm going to build more factories. I'm going to improve the supply lines. Other people looking from the edge, this is capitalism. This is the beauty of capitalism, right? It's like, hey, that person over there is making heaps of money doing that. I'm going to do it too. So they do it. And then there's more products online. This is normal. This is good. You know, demand will ebb and flow depending on whatever thing that you or I and the rest of us want in aggregate. It's not a bad thing. We've got to stop. You know, your life is miserable and less comfortable than it was a year ago. Why? Because you demanded too much.

38:11Like, well, A, that doesn't make any sense to me whatsoever. B, that demand and the resultant increase in price is a very potent and important and crucial signal to the economy to produce more. So I really want to make that point. It's good. And likewise, if demand falls away, it's everything. It mediates everything. So it's super important. And then you get to things like milk and bread, which I would say. Now, look, I know there's people out there, some people who don't drink milk or bread. But I think it's probably fair to say that most of us will have that in our kitchens. Now, I would also say, whether the economy is booming or whether we're in a depression or whether I'm employed or whether I'm, you know, whatever.

39:00If I won Powerball this week, I'm not going to go to Woolies and go, you know what? Stuff it. Let's get eight loaves of bread. I'm just not going to do it. I could be the richest man in the world and my consumption of bread and milk is not going to change. Likewise, I could lose my business, my job, everything, and I'm still going to want the basics that are there. So it's sort of like when I look around and go, wait a second, the price of basic commodity, you know, kitchen items have gone up substantially in recent times. And then some idiot politician or economist turns around and goes, yeah, because you've demanded too much.

39:34My demand doesn't change. There is something deeper and more fundamental that's going on there to my mind. And I think where things get broken is when a do-gooder steps in to try and fix it by command economy kind of control kind of stuff, which just patently doesn't work. And you can point to 4 ,000 gazillion different examples throughout history of this. And so I would argue, housing might be a really good example here. Like people will always demand a nice place to live, right? As we've talked about before. Prices have gone up and up and up and up and up. Why is that? Has the demand for housing increased?

40:19Actually, in aggregate it has because we've just put far more people in. So in terms of overall, there's just that demand has definitely increased. and we have distorted the market where we have prevented the proper supply response that you may argue could have been more appropriate had there been less sort of hurdles and vested interest groups and whatever in the way. And again, I always hesitate a little bit and I'm stammering because it sounds as though you're advocating for laissez-faire, just whatever, anything goes. Libertarianism, yeah. And I'm not. I'm really not. There's got to be guardrails in place, but at the same time, it's a spectrum.

41:01And I would sort of say it's more people getting in and fiddling with things that distort it. It's like, well, part of the reason there was, quote, unquote, too much demand for housing is because we made it super easy for everyone to get credit. And we made the price of that credit super, super cheap. And we allowed a gazillion people into the – and again, it's not an immigration thing. I don't want to – get stuffed if you're going to level that criticism at me. It's nothing to do with that. Actually, it kind of is immigration. It's just not racist immigration. This is where we can't be scared of saying growth in population has been a contributing factor.

41:35That's true. You don't have to therefore say, because I think all immigrants are bad or I hate people who have brown skin or who come from that country. Thank you. Yeah, absolutely. I mean, I've actually, you and I chatted before. I'm in favour of a big Australia. Bring it on. 100 million people in Australia, fantastic. I think we're smart enough to do that. I'll be on the side of the barricades on that one. But either way, neither of us are talking about it from a racial or xenophobic perspective. Yeah, it feels so annoying in this. You've got to point that out. I'm going to point it out because I know someone is going to sort of level that.

42:07But my point remains, right, that we have done everything to overstimulate demand. And those same people that overstimulated demand are now turning to us and going, hey, you demanded too much. We're going to punish you for that demand. And I was like, it's anyway, I've just thrown a whole word salad at you there. No, I think you're largely right. I think the difference, I mean, we are, there are differences in our agreement rather than disagreeing. And to me, you're absolutely right. You know, price signals are, as you say, everything. It's one of the great benefits of capitalism, which means that resources get used in the most efficient way.

42:46We don't make extra bread just because we can. When people stop buying the bread, the price goes down and we go and make cakes instead of bread with the flour. And I buy one bread and one flour. I don't want two breads. And that's exactly how this works. But that said, I think the difference is the dislocation you mentioned at the end. And to me, I guess there's two related things. One is the dislocation. Supply takes longer to catch up with demand. Supply takes longer to change than demand takes to change. That's what creates those price signals. if you have, the greater the magnitude of this location, either in size or speed, the greater the unwanted side effects.

43:25Yep. And side effects are never wanted. No one wants to stop making bread and start making cakes unless they have to because you'd rather keep making bread because it's easy, right? Yeah. But at some point, the economic dislocations, the recessions of periods past are effectively that, right? The 90s recession came about because everything got too excited. We made bad investments. We spent money we couldn't afford. The bill came due and went, oh, bugger. okay just got to pay the bill uh now i i am someone who says if we could have and and again we're back to the keynesian kind of if you can you should but if you can't don't try i'm like we'll try harder and that's kind of where you and i will always probably disagree until one of us changes our mind um but you know in hindsight could we have done a better job of preventing the 90s recession i don't know with perfect hindsight of course you could tell exactly what you should do differently and that's that's wonderful um where i you know i just for a little bit just i'm happy to be more interventionist when you see larger dislocations, which is kind of what we've gone through now, right?

44:18The RBA could have said, not changing interest rates, leaving them exactly where they are, not dropping them in the first place, by the way, equally. Would we have seen 15 % unemployment and then a massive boom? I don't know. No one can know. The counterfactual is unknowable, right? I think it is sensible, smart, and a worthy endeavor to try and lop off the tops of booms and fill in the bottom of troughs because it minimizes human misery. Now, maybe that's not doable at all, which might be your view. I'm not sure. Certainly true that it hasn't been done as well as it could have been. And so do you not try if you can't do it well enough?

44:50And where do you draw that line? That's kind of where you and I have this grey, fuzzy disagreement. Excuse me. And I don't think we'll ever resolve it because you can't know in advance or after the fact. But I think that to me, that's the difference, right? I think price signals are really, really, really vital. The excess demand, I think, is – I think – What I want you to do is, and I'm not going for a gotcha here. I'm actually asking. No, do, do, do. Yeah, please. I'm asking because I want to know the answer. I feel as though I've got an answer, but I'm not confident of it, which is I get it for certain things, but why has something like bread that we as a species have been making for 10 ,000 years, we know how to do it.

45:38It's really basic. How has that gone up? How has that gone up? been and like even if there has been excess demand like well then can't we can't we just make more bread like can we build another oven can i order some more wheat like what i i suspect the answer is just like yeah but it's the ancillary things it's the labor it's the fuel it's all of those other things i think it's entirely cyclical though i think is the answer and i think this is never going down though again like i'm never going back to a dollar sorry it was the wrong word actually i mean software enforcing that's it thank you um yep yep honestly it goes back to hours worked per loaf of bread is the answer because because the money that's exactly i will say the money isn't really matter you'll say of course it does and we'll get back get it back into a bitcoin conversation um it doesn't really matter if you pay me twice as many shekels and charge me twice as much for bread it makes no difference i i'm still as as well off as i was bread is still as cheap or expensive as it was, the nominal number of shekels I get and loaves of bread I buy, it's the same thing.

46:41So that's kind of where we get back to. My suspicion, mate, is in a world where inflation is a thing, it is entirely self-reinforcing because the flour is made from wheat. The wheat seeds cost something. The nitrogen costs something. The farm worker costs something. the farm worker wants to get paid more because they have to pay more for their bread uh the machine cost more this year they did last year because yeah i think i think it's kind of cyclical i think it's kind of sorry so for reinforcing i don't mean up and down i just mean kind of feedback loops feedback loops is even a better way to put it um i suspect that's it what you know why why can't you make another machine well you can but the machine cost more than last year because what they did the year before why is that will the parts cost more why do the parts cost more because my bread costs more why does my bread cost more because the machine costs more and we're back to it.

47:27There's a hole in my bucket, dear Eliza. You know, it's kind of, I think that's not even, I'm not even saying it's justified theoretically. I think that's the reality. Why is flour more expensive? Because the input costs are higher. Why are the input costs higher? Because the input costs for those are higher. It is to some degree just that self-reinforcing. I agree. But you keep going down a level and down a level and it's like, what's the turtle at the bottom of this stack of turtles? Well, that's the point, right? Because it's entirely... I think there is. It goes back to the same... Because if money is only nominal, which it is, then it goes back to...

48:04That doesn't even matter, really, because the final turtle has its own input costs. Someone else's prices are my costs. There is no absolute bottom line single cost that doesn't change that I can therefore reset my economy on the basis of, because it's all a function of the input cost for that thing. Even if it's just water on... We were talking about gardening before. The water costs me more. The fertilizer costs me more. The seeds cost me more. The mulch costs me more. Okay, so therefore I'm selling my peas for a higher price. And around it, peas go into someone's – what do you make peas into?

48:35I don't know. Soup. Soup. So soup costs more. I don't think you can get back to a – there is no such thing as a single unchanging cost item because everything has an input cost. Yes, I actually agree. But the one bedrock that is changing is the actual money. So the RBA published a chart pack last month, and they do a chart of credit and what they call broad money growth. So it's complicated. It's really fascinating. So it's funny that credit and money growth, when you look at that chart, it's lockstep. It's like, oh, yeah, it's because money is credit in our system. Like that's kind of, that's what it is.

49:19When the bank gives you a loan and you use that to buy a house, that goes into someone else's bank account and that money didn't exist before. Again, it's just how it kind of works. But what is interesting and what that chart shows you is since the turn of the century, well, the chart just goes back to late 90s, but you can go back to year dot, is that each and every year there's more and more and more shekels in the economy. There's more Pacific pesos flowing around. And that's the thing that's changing. That's the thing that no one sort of seems to acknowledge. I think that's the thing that guarantees that there will always be an inflationary impulse that is there.

49:52And that's where the buck stops, so to speak, in the sense that whenever you've got, there is only so much bread bakeries out there. Yeah. Right. Yes, correct. And yes, you keep going down and down and down a level, but there's just like, if I've got, again, we're on an island, there's a hundred of us there. There's so much stuff. We've all agreed that we're going to trade these nice little pretty pink shells that we found. And then I go around to the other side of the island and find, oh, just double the quantity because I just found a bunch that no one else did. And everything else is the same.

50:23Nothing else has changed. And all of a sudden, I'm putting more of these, you know, discreetly, into our little island economy. And guess what? It's just like, oh, there's a lot more units of account that weren't here before. The only thing, logically, the only thing that can change is prices. But as long as the price – my only – and you and I will probably never agree on this, because it's an ideological, philosophical thing. I don't care. I truly don't care, because as long as – I mentioned before, if my wage doubles and the cost of bread doubles, the nominal unit of account is completely irrelevant.

50:57In fact, if we stop talking about dollars and just made everything into cents, everything would cost 100 times more. I'd be paid 100 times more, and we'd say, look, 100 % inflation. But as we said last week, only if your pay rise is in lockstep with prices. And it never is. It lags. So you get – that's why. It's like, why am I getting poorer? I was like, well, because prices go up. And then at some time later, after a whole bunch of negotiation, you might get a pay rise. And that pay rise won't – it will give you a nominal increase, but it won't make you whole relative to the costs of what's happened.

51:30Except that over history, maybe this time it's different. living standards have improved because we've been more productive. And that's where we kind of get back to GDP. Well, I do agree with that. Which is our issue is actually – because it is. How many hours do I work for a loaf of bread? If I can work harder, the bread might double, but my pay might triple, in which case I'm ahead because I've added more value. That's what makes it so hard. Right. I think my – I guess my – I was going to say, what's the word for it here? my opinion because that's all it is really um i want to be clear on this but uh

52:13no i've lost it you go i've got a great articulated we'll move on from gdp because we've been we've been here it's really i hope i hope i listen to enjoying the conversation because if if they're enjoying as much as you and i are enjoying discussing it then hopefully it's been useful um so it's i just find it so fast i think that that's what i would want more of in the coverage is to go down a level. And no one wants to because it makes you feel like an idiot. There's this guy, I don't want to be the journalist at the press club lunch who asks the guy. Can you explain that to me? Exactly. Yes.

52:47I'm all tied up in knots trying to express myself, and I can't. It's just frustrating. Motley Fool Money. For more, subscribe to the free newsletter at fool.com.au forward slash listener.

53:03I want to come back to productivity because I, productivity is one of those words. Well, that's what I was, sorry, mate. Sorry, I'm going to interrupt you one more time and I'm going to shut up. That was my point here is that the reason it's so messy and so hard to see is because in, especially in the last hundred years, the productivity gains have been so historically abnormal. Like insane, insane. like civilization is just hockey sticked yeah you go you know whether you're living in the year 1253 or 1053 life is exactly the same right and then in the last hundred years productivity has exploded and that explosion has been so insane that we have improved our standard of living in spite of all the tomfoolery in spite of all the silly buggers with the money and with the system And I think that's where I think people find it very hard to find common ground in this debate because they'll go, well, my ideology is supported by this data point.

54:05And the truth of it, I suspect, as I say, it's just an opinion. I suspect the truth of it is it's actually like both are true. it's just that when you've got one phenomena that is so incredibly phenomenally powerful and maybe we're going to have more of this with with an AI revolution is that that we just somehow managed to have a higher quality of living in spite of that and maybe that the people on my side of the ideological fence would say while that has been true the gains should have been far better had had we not interfered as much in other words yeah life got better but life could have been so much better like there was there was serious debate in the 50s that what's everyone gonna do like work four hours a week correct yeah we're gonna all work four hours and actually it's kind of crazy but it's like well if you if you wanted to maintain that stand 1950s standard of living actually we we should have been able to do that and all work four hours a week and there's a decision or discussion there to be sort of had it's just sort of like well i still like my internet and smartphone and my you know satellite enabled wi-fi etc etc but but at a point i think this is this is the thing that i think we all feel in our bones and we all like including me of clearly struggle to sort of articulate is despite our miracles of technology and productivity it's like i feel as though i'm not getting ahead i feel as though life is harder and it's like why Why is that the – shouldn't that be in a world of technological marvels and miracles where I can now run a 300-acre farm with three people, you know, and produce more food than I would ever need, right?

55:47And, like, why aren't I working 20 hours a week or 10 hours a week with that same standard of living? That's probably where the economy has failed us. Yeah, kind of. So here's – can I push back on that? Yeah, yeah, please do. Because I don't, again, it's not a money thing. I have a very, very, very strong suspicion. I could work happily four hours a week now and live like my parents did in 1970. And I think that is the issue. When we think about standard of living, what we've said is actually I want the two-story house. I want the second car. I want not only color television but three LCD televisions.

56:28I want an overseas holiday at least once a year and a ski trip once a year. i'm not a skier by the way i haven't been overseas in years but you know um i think our and this is you know i talked off air about the rat race right we do it you know context of the gardening thing we've just kind of decided we want to be rats with with blingier things i don't honestly think that if i lived like my parents in 1970 i'm pretty sure that i could work a hell of a lot the cost of my life would be lower now part of that is the ongoing slow auction of house prices which is the big elephant in the room that we don't really i was gonna say that's that's the massive i agree with you except for housing which is kind of fundamental but even that even that we've kind of not individually but collectively chosen to make housing more expensive the only reason housing is more expensive other than population which is when we want to get into but pre-population boom of the last five years let's go back let's go from 1980 to 2020 just for fun right over that period of time housing didn't get more expensive.

57:26I mean, it was a little more expensive to build thanks to inflation, which is kind of your point, but let's put that bit aside. The growth in house prices ex-inflation was just our collective desire to outbid each other. There is no reason that housing outside population growth, back to demand and supply, by the way, needs to be that much more, double every seven years for that 40 years. Why? Because we all decided we wanted to. We all decided to pay more. And we were enabled to. Oh, yeah, but we - We couldn't before. Our parents didn't do it because mum's income wasn't considered. Yes, true. So it was like we couldn't do it.

58:00Yes. And also banks, rightly, had a more prudent perspective on things as well. But being allowed to, back to your point. So we did it because we were enabled to do it. Yeah, but allowed, yes. But again, that's the same in anything, right? We buy more Maccas because the ads are on TV. I mean, you're right. We could have stopped it happening. Well, do you want to go back to only considering one income in a house and telling women until they can't work. I mean, this is where it's tricky, right? Yes, I do. Not that last part. But that's kind of what you're saying, right? No, I'm not. I'm saying that I don't – so you're in a different – you're a man of a certain age, I was going to say.

58:37Let's go with that then. Let's just say – let's go with this. We're Gen X. We're Gen X. So we just skip – unless you were dumb like me and intentionally chose to run. We just scraped in generationally where we had affordable housing. And so you're, and you know, you, you just did the prudent thing that everyone has always done. And you're at a situation where you're right. You could live your parents' lifestyle and work a lot less because you, because you've got a house, which a good deal of which has paid off. Someone who's 20 today entering the workforce, I would say that, that, that they can't make that choice.

59:09It's like, well, listen, I, I don't need three cars and the four stories, et cetera, that you said, but I just want to work 20 hours a week. because for me personally, I prioritise time and freedom and that. And I would say that's just not an option for them. No, can I be clear then? We as a society could do it. If we, and I take, it's difficult. You and I come from a different perspective on a couple of things. If we chose to collectively spend less on housing, we could tomorrow and live better lives. Now, individually, we can't by definition. You're absolutely right about that. But equally, we weren't made to.

59:44There's no government policy which made us spend more on housing or made housing more expensive. Again, you can argue about planning relative to the population. We'll leave that aside because that has changed the last five years. But that's why I deliberately said that 40-year period. Why did my house cost me what it cost when I bought it? Not because the production cost went up or the replacement cost went up because there were two other people who wanted to buy the house. So either I buy the house or I don't at the prevailing price. That's why this is the hardest. Housing is really stupidly hard to solve for.

1:00:14outside population and supply or planning sorry for exactly that reason we all chose to have bit each other and and no one chose to be the the top bidder no one chose the amount they paid a top bidder but they all wanted the house and like it is it's one of the one of the most knotty problems i reckon in australian economic circumstances is that bit far more than frankly even the other some of the other stuff we're talking about you know the fact why is housing as expensive as it is because we all want to about bit each other at auction why did we because we could we said the bank manager how much can i borrow we said this much we said okay well i really want the house with the fifth garage and the 85th room and the you know media room and the three in-ground pools and and so you know are you sure i can borrow four million dollars yeah you can okay i guess i'll do that because i really want the house a few people saying the bank manager you borrow three million no thank you i'd rather go and buy a you know eight hundred thousand dollar fibro in berk not that i'm saying you should want to or not want to i'd like berk for what it's worth nice town but um you know there's it is a real this is a this goes miles outside where we started but But I reckon that the psychology and economics that intertwined on housing, I reckon it's just absolutely fascinating.

1:01:18Yeah. Yeah. It just, again, look, we'll move on, but it's just, I come back to my bread analogy too, because housing is also a technology that we've had for 10 ,000 years. I mean, we may have underfloor heating and air conditioning and stuff, but, you know, basically when you look at a house, cement, timber. Yeah, that's what I'm saying. That's exciting. My point though is why are we all paying more? Because we all want the house more than the other guy or girl. Yeah, but my point is that we haven't had that supply response. Like, you know, because, you know, do people demand a house and will they bid what they have to and will they're enabled to relative to the credit options that have been presented to them?

1:01:55And, you know, we know what has happened to lending standards and all the rest. So that's a little bit of fuel onto it. But again, a robust, well-functioning economy would go, huh, turns out people like houses. Oh, okay, well, I'll build a house. I can get my hands on some cement and some timber, et cetera, et cetera. And, oh, I'm making some really good money. And then other people go, hey, I could do that too. And then I'm going to compete and I'm going to offer a lower price and so on and so forth. We drive margins back to a little bit above the cost of production. And there's ample, ample housing relative to the size of the population that we might desire.

1:02:28Do you know what I reckon is weird about that, though? See, I think this is where we're not going to finish anything like the agenda we set for today. No. Do you know what I think is fascinating about that, though? is I think that's right, except that land is different because the supply is largely immutable and it's geographically specific. I think markets work. You already talked about markets. We talked about times when government should step in and what the guardrail should be and stuff. Because we've chosen a side to centre our commerce around CBDs largely and larger population centres, you don't have to pay$4 million for a house in Mossman.

1:03:05you can literally pay half a million bucks for a house in burke and so there is there is there's more than enough supply this is the other problem right there's plenty of supply or plenty of supply optionality you can take any farm in the middle of anywhere in australia and i'm sure if i would happily sell you up you know a quarter acre of that land and you could probably put a container on it and you could probably live in that container and do it for 100 grand maybe the land cost you another 100 grand we could all live for 200 grand a pop but we don't because i want to live in a certain place in a certain area and that there is there is a geographic immutable immutability can i say that i think i can immutability about how you know the desirability the functional you can't add you know we can do more more loaves of bread or cakes you can't build more houses in mossman i mean you can build smaller ones you can build units but there's kind of it's kind of at some point this is this is it goes back to population to some degree and and town centers or CBDs or spread of population.

1:04:02To a huge degree. I really, really think that housing is a very, very, very different market for exactly that reason. It is not fungible. It is not easily substitutable. It is not relocatable, which again is probably a better economic word than that. I think there are some really specific interesting things about that, which is the place on the waterfront in Bondi is going to be more expensive next year and the year after the year after that for no reason other than there are more people who want to live there than there are opportunities to live on the beach at Bondi. The places in Bourke or in, pick your regional town in whatever part of Australia you're in.

1:04:34I drove through Kununurra on my holiday. I'm sure I could buy a place in Kununurra for a fraction of the cost of my house. Not because it's not a wonderful place, just because no one else wants to live there either. And there's plenty of... I drove, where did I drive yesterday? Oh, through the back of Campbelltown area. Blocks of land. This is in southwest Sydney. I'm sure I could buy one of those for whatever price. Not enough people want to live there yet. They will at some point. I don't know. I just think housing is a very, very, very complex, difficult market to unpick for a lot of those reasons.

1:05:03No? Gosh. No, no. It's just so many different directions to go in. It's complicated. It's simply complicated. Yeah. But I guess what you would probably say is that all of that is true, but then that's a fun – why? Why don't I want to live in Bourke? Yes. Totally. Well, I don't have the same access to medical services. I don't have the same entertainment options. But the market could solve for that. I don't have the same variety of food. So I think this is where we, if the market is the answer, the market is the answer. I think that's, you know, you'd buy in Burke and enough people would do that.

1:05:32You know, a cinema would prop up and a medical center would be built or you pay more for the privilege or the utility of living somewhere where those things already exist and everyone else wants to do that as well. I don't know. I think sometimes we, I don't know the housing should be a market in the same way that the markets are because it's shelter, right? And we've talked about the financialization of housing before, but I kind of think it's kind of, it is or it isn't, right? It's at some level, It's like, if I want to pay that much and you want to pay that much, that's what the price is. We say pricing is the cure for inflation.

1:06:01If that's the case, we should back off and say, well, the housing market is rationally or fairly or freely priced. That's what it costs. That's what it costs. Back the hell away. Stop your whinging. I'm not doing it, you personally. But the flip side isn't, as you also say, a container on a quarter acre of a farm in Burke isn't also necessarily the solution. Maybe the answer is this isn't a market or shouldn't be a market in the same way. what's interesting there is gosh we've really got to at least move on no we're not we're you keep saying interesting stuff and i and i'm more this is more like as people haven't worked out by now more thinking out loud instead of like well considered trying to work it out as we go but what what we've got is we've got lots of test tubes around the world so everything you say is kind of true but that that was also true in seoul yes you know it's also true in paris you know uh i don't know if you've been to the south of france i have it's flippant beautiful it's unbelievably beautiful and you've got all of the and if you want to go to paris it's not a big drive right like in australia we kind of we we forget how big a country we live in here it's not that hard you know or i could live up in in in um northern england i can get to london you know on a train pretty easily and really, really quickly.

1:07:19Are they desirable places to live in? Yep. Do people want that? Yep. So why is it that our, and again, let's standardize everything in units of hours worked to achieve it. Why is it that in Australia I have to work for twice, five times as long as someone in, by the way, these trajectories aren't great in these other places as well, but just to randomly pick somewhere like Frankfurt, you know, like first world country, lots of things. Last time I looked, I think the average house there was about six times annual income, something like that. We're at 14 times now in Sydney. So why? There's everything in terms of human desire and a willingness to outbid the other person where appropriate is also true, but for some reason we topped the league tables here.

1:08:05Yeah, I agree with that. So I don't know what the answer is, except there is, well, there's something that's different. My guess is that we've just had far worse planning, far more easy access to capital, I would suggest. And part of the planning is sort of the immigration side of things as well. So it's just sort of where, I don't know, or what? Maybe it's something else I'm not thinking of, but clearly there's something that's different, right? If I was going to spitball, mate, I think, and this is, it's trade-offs, right? It's all trade-offs. And I think there is, I think it's cultural. i think the the there is a i'm not gonna use the word ponzi because people do and they use it badly and it doesn't work very nicely and it's just you know it's a nice easy majority i would have backed you if you had but well i think it is right because it's not like there's kind of the idea of a ponzi is that kind of you add more the chain letter kind of style it doesn't maybe it actually frankly works with population which is a different thing but outside population the kind of the number of australia doesn't grow you kind of the ponzi only works if you kind of got more people being added to the thing right doesn't doesn't quite fit anyway um but i think there is so i think it's cultural i think uh for as long as we all think the price is going to go up they will keep going up until they don't and i think part of it is that i think this you you you start it's like it's like i've been listening to a book about world war ii and you kind of think how did how did germany get to that point by the way the first person to say hitler was always one who loses the argument i'm mindful of that um but you think how how did how did nazism take over in germany but not France or not somewhere else.

1:09:33And I only raise that's kind of a bit of a horrible example to raise. But I guess my point is that culturally, psychologically, different countries exist and develop different cultures. Why does the U.S. have no issue with, you know, massive gun deaths and Canada doesn't? They're literally, you know, side by side. Apparently, they've even got roughly the same gun access or ownership, apparently, I heard recently. What's the difference? Probably cultural. Is it government? Kind of, but then government's a function of culture and around and around you go. So I think part of it's cultural. I think part of it probably is density or lack thereof.

1:10:04You think about Seoul or Paris or Tokyo, the average square feet of housing per person is dramatically lower. Is that good or bad? Well, it's good for prices. Is it good for, we mentioned lifestyle before, what would you choose for yourself or for others? Are there some in Seoul or Paris who would say, you know, I'd like a quarter acre block and I'd like a backyard and that'd be kind of nice, but I don't have the option or I don't feel like I can choose the option or culture, I don't want it. Those things are all cool too. So, I don't know, mate. I think it's really, really difficult. I am mindful, and this is kind of population, kind of not.

1:10:35If you think about the Australian continent, right, and where the habitable areas are, people want to build big inland cities. Like, well, getting the water and infrastructure and everything else there, that's an expensive exercise which may or may not pay itself back. And doing it just for the sake of it, so you can house people you don't need to necessarily house if you didn't have them. There's an ROI that needs to be done on that. I don't really have a strong view. My suspicion is it wouldn't be a positive ROI, but I might be entirely wrong. For now, though, if you look at people say, oh, we had X million in World War II, and then we took on Y million as a percent.

1:11:07Think about all the green space we had that was easy enough. If you're 10Ks out, you're on the outskirts. You know, my parents, speaking of my parents when I was a kid, they bought in the Sutherland Shire of Sydney, for those who know that, and it was the boondocks. It was the furthest out southwards development of suburbia. You couldn't get any – it was just bush after that, right? That was it. and that was a million miles away and they didn't want to move out there and one of their parents lived somewhere else and they were unhappy they were moving further away, all that way away and all that kind of stuff.

1:11:34These days the shire was a squillion dollars a house and you're another 25 minutes out from there. I just think the sprawl was doable when we had enough space to sprawl into. Part of it, I think honestly, particularly in Sydney, a little bit less in other cities, but they have their own geographic issues, but Sydney's kind of bounded, right, by particularly the mountains on the west. Like you've got to go up and over the mountains to get anywhere else after that. You know this well. I don't know, mate. I don't - Stay away. Stay away from the mountains. You don't move up here. There's no space.

1:12:02Get off my lawn. Get off my lawn. Yeah, I don't know, mate. It's fascinating. I think there's a supply response somewhere. There is legislation somewhere. I do think there's population somewhere. I think, you know, if we get the 100 million that you want, it's going to have to be either massively high density or new urban centers built or populated, either existing ones or brand new ones. We built Canberra. Maybe there's another Canberra we can build somewhere where there's enough water and proximity and roadworks and other things. I find it really, really hard, mate. There's a new housing development being built between me and the city and drive past it.

1:12:39And I don't know how many houses. I don't want to try and estimate because I'll get it wrong. It might be a couple hundred maybe from the look of it. They built a brand new overpass over the highway, which has got to cost tens, probably hundreds of millions of dollars. How easily. And you can't do the math to go, hang on. Let's say there's 1 ,000 houses there. How much did you spend per house? That's probably 100 grand a house on the infrastructure. Now, hopefully it's long-lasting. Hopefully it's multi-decade infrastructure. But by the same token, think of the ROI there and thinking, if I start with, to put a new house there, I have to spend 100 grand per house on the overpass and the sewerage and the local roads and electricity.

1:13:16I don't know. I've not seen anyone do the ROI properly on Greenfield. But I'd be fascinated to see it because I don't really know how it can make any economic sense. I think where it does make sense is so for people who live close to the center of big capital cities, you're using pipes that were dug decades ago. You know, the sunk cost, yeah, yeah, cost a lot. But I do, and I don't know the answer. I'm not pushing back against it other than to say I wonder what the true amortized cost is over the life of the asset. So it's like, holy moly, we're spending$10 billion on this. But then again, in the year 2130, that's still being used.

1:13:59If they're long enough, life is absolutely great. I will say, by the way, on pipes, I have a family member who will remain unnamed for their own sake. But they're involved in some of this infrastructure stuff. Some of those sewage pipes, mate, can I tell you, not a lot of headroom left by your report. So there are natural limits, artificial limits, I suppose. but artificially kind of imposed, historically imposed limits to some of these things. When you mentioned pipes, I remember this conversation I had with them. It's going to be an interesting next 10 or 15 years, I've got to say. Well, again, it comes back to distortions of money probably.

1:14:39But, I mean, there are aqueducts that the Romans built that are still in use. That's right. Now, okay, they use slaves, right? Plus, I don't know that we want to open air sewers anymore. I think we've realized that's probably a bad idea. But yes, I take your point. But the point is that when you build good infrastructure, and it's not just the payback and the return on investment isn't obvious. One, something that lasts for 200 years is much cheaper than something that lasts 50 years. But there's the incidental – this is why you get the – don't ever do this if you're a government. You can't help yourself, so you will.

1:15:17But this is where you get the KPMGs of the world to do some modeling, right? And they'll say, what answer do you want? And we'll give you exactly the model that will tell you. Have you said that on Utopia, by the way? Yes. That's a great episode. I mean, I'll just make the point again. The only reason it's funny is because it's true. If it was just complete, it was not true, it wouldn't be funny. But yeah, my point is that even I think a reasonably objective, well-structured sort of modeling of things would at least try and factor in things like that aren't directly measurable like i can just get to the city much faster something that was untenable before is now tenable so now that increases the available pool of labor within this particular demographic that's that's really cool this now means that this this existing hospital infrastructure can service a wider catchment area because we've got better infrastructure and access.

1:16:08So it's just, I'm struggling in real time to think of good examples here. You know what I mean? Like there's the non-direct economic benefit. So when you fold all of that in and it's sort of like, so there's nowhere to build a big city in the middle of the Nullarbor, but randomly pick a place, you know, Coffs Harbour, plenty of water, beautiful beaches, you know, midway between Brisbane and Sydney to two of our loveliest capital cities. Like, you're telling me that that couldn't – and again, I'm not saying that you necessarily want to. But you could, right? You could build incredible infrastructure there.

1:16:48Now, we've just spent a gazillion dollars on some submarines that we may not ever get and may be completely unfit for purpose. It's like, here's something that, like, the multiplier effect – As an economic – yeah, exactly. You know, could be massive. And it's like – and I tell you what, so places like – I'm sorry to be so – I know this is a podcast that goes everywhere. So we're being very sort of New South Wales and Sydney-centric, but we're just more familiar with it. But I know – you go back 10, 15 years, I know a lot of my cohort was going out to Newcastle and Wollongong because Sydney was unaffordable.

1:17:26Yeah, that's right. And Newcastle and Wollongong are beautiful, right? And guess what? They're still beautiful, but you can't afford it. Correct. They just fall again. Yeah, yeah, yeah. And it's sort of like the – but it shows you what can happen. And I would say that there will be people, younger people, who will move to – I have to pick on Coffs Harbour for the sake of it and people are listening at Coffs Harbour. No, no, no, we don't want all you cities folk here. But there will be plenty of people who would go there if the infrastructure was there. They'd look at the housing and go, wait a sec, I can live in Stanmore and pay$2 million for this rundown old, you know unit or i can go to coffs harbour and spend a half of that and have you know two acres of land and a four-bedroom house with a double garage and they've all they've got world-class hospitals and etc etc etc there's a chicken and the egg problem i get it i'm not saying it's super easy i get it but it comes back again it was like turns out that long-term thinking and savvy investment is really really really potent and and maybe we should be focusing more on that you know at least trying to go in that direction rather than, oh, God, I can tell you what, let's let everyone tap their soup up.

1:18:35Oh, God, okay, let's relax the lending standards. He's just like, you know, I'm not saying that these are the magic bullets, but I can tell you that they're a thousand times better than the solutions that are being offered. And particularly with working from home, working remotely, I just think it's – we do a finance podcast. We're investors, right? This is about the tokens we use to measure progress increasingly in society. But I'm sure I speak for you when I say that the other thing is we're kind of – part of it is kind of like what do you actually want out of life? And, you know, how hard do you really want to work for the$4 million house in Mossman rather than, as you say, the million-dollar two-acre place in Coffs Harbour?

1:19:17And what could you, frankly, do for work? How else could you work? What else could you do? And as a society, that kind of the questions of, you know, the ungodly rush back to the office for the sake of middle managers getting to say, ah, now I can get my eye on you.

1:19:34Humans, for all of our brilliance, the rush back to the office, having had the, you know, relative, I want to say utopia, but the relative improvements of, you mean I can start work a little bit earlier because I don't have to travel. I'm happy. I get more leisure time. I'm probably more productive because I'm not being distracted by colleagues. because I'm not going out for coffee five times a day. But you're walking back to the office just because you kind of can't imagine how it could work differently. I'm talking about stealing defeat from the jaws of victory. That one, again, it's just an example, but you think about what could have been locked in as living standard improvements, quality of life improvements, if we'd all gone, great, let's keep doing more of that rather than, oh, thank God that's over.

1:20:14I think that problem will solve itself, honestly, in giving enough time. I do too. I've said so many times, if I could buy a basket of flexible work companies and sell or short a basket of mandatory office companies, I would do it tomorrow. Not because every company will work out well, but if you put that list, the flow of talent from inflexible to flexible, it's going to look after itself, as you say, isn't it? Yeah. And even the economics of it. So it's just like I can save as a business a whole bunch on leases and office equipment, all of that. So that's much better. I can hire from a much broader pool of talent.

1:20:54Like I said, that's much, much better. You know, people look at the entire package of their employment. It's not just the paycheck. It's a big one. But it's like, I reckon a lot of people listening to this would say, you know, I would happily take 10 % less if I had far, far better conditions. You know, if I'm able to duck off and see my little kid, you know, give a speech at book week or something like that, which I just can't do normally. It's just, you know, it'll fix itself. It'll fix itself. And those companies that try and push against the wind will find what happens. Did we say last week, I tell you, there's two offers of towers in the city that aren't going to be built and one that's being converted to residential housing?

1:21:32It's an interesting time. Mate, we're going, I will say way over time just because we have this idea that maybe the podcast won't be four hours long every now and again. So let's assume we've gone slightly over what we should have done time-wise. Will you come back and answer some listener questions on Sunday instead? Yes, I sure will. Try and stop me. Try and stop you ranting or try and stop you joining us? Good luck either way. I am into that. Until Sunday morning after Andrew's marathon, full on. Cheers. The Motley Fool and people appearing in this program may have positions in the companies mentioned.

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