Your InFinance Publication

FINSIA’s InFinance keeps you up-to-date and in-the-know. 

Why we need fear

by Matthew Smith | 19 Apr 2017
Fear, it could be argued, is the single biggest factor influencing humans’ behaviours relating to money.
Fear is what drives people to engage with the banking and finance industry, and it’s also what drives people away.Why we need fear
Fear derived from uncertainty is why some companies trade way above their intrinsic value, and why others trade way below.
Fear dictates whether people are compelled to use their cash to go out and spend, or whether they instead use it to fill their socks. 
Fear is as inevitable as it is omnipresent, but it’s how we as a community – and indeed as a group of professionals – address this fear, which will define the kind of society we ultimately create.
“Uncertainty is corrosive, but it’s not absolute. You can fight uncertainty with better information. Once you do - once you look more closely at alternative futures - they become somewhat less scary,” says Chris Richardson, an economist and Deloitte Access Economics partner.
Speaking in Canberra at the National Press Club Address on the eve of the Federal Budget, Richardson highlights some of the biggest uncertainties the Australian economy faces and agues we’ll be better off as a nation if we’re facing those fears head on.
“Measure the risk premiums built into global money markets and it’s clear that measure has been consistently high.
“We've let ourselves become too worried,” Richardson says, to a room full of journalists and – hopefully, as his speech is televised and available on ABC’s iView to an extended audience of policy makers and politicians.
“We know the GFC can occur, we know populists can storm the wheelhouse of governments, we know there are new risks – we know technology can turn big businesses into small ones… but thinking through the alternatives, shining the light on those alternatives with the detail is important. It allows us to be less fearful of fear itself,” Richardson says.
It’s in this context Richardson unpacks the area Australians have most reason to be fearful in the economic context, and that is the uncertainty relating to China.

The China factor

Everyone knows the Chinese economic boom of the last decade, fuelled by the Chinese government’s fixed asset spending, has served the Australian economy well, while other global economies have endured hard times and even recessionary periods.
We know China’s influence will be as influential as it has in the past. We also know whatever influence China exerts, the ramifications for Australia will be unavoidable.
What’s lesser known is the dependence the local economy has developed on China and the risk that represents should China’s direction change.
“The last decade of our great run hasn’t been so much around courage, it’s been more about our ability to slipstream with Asia. And to be clear this is the right thing to do, but there are genuine risks… we now have those extra eggs in the China basket,” Richardson comments.
Indeed, Richardson points out, we haven’t been as economically reliant on a single country since we were on Britain in the 1950s.
But what else is perhaps also under-appreciated is how vulnerable the Australian economy is to a Chinese-linked disruption.
As recently as the 2008 global financial crisis (GFC) the Australian economy has had risks around recession and it has managed to motor through. What’s different now is we have fewer defences to draw on should the unexpected arise.
“We’ve used a lot of our amo already,” Richardson highlights.
“Ahead of the GFC, interest rates were quite high, now they’re at record lows. The exchange rate was quite high, now it is substantially lower than that.”
If a China-linked economic crisis is to occur, a few things would likely happen, Richardson explains.

The Australian dollar would likely fall, the RBA would want to cut interest rates, the government of the day would start stimulus spending.
The problem is, though, none of it would stop a recession, Richardson says
Of course the biggest single difference between now and before the GFC is the level of household debt in this country.
“Australians have borrowed up a storm,” Richardson points out. 
“We don’t forecast a China crisis, but this is something that’s entirely plausible and we need to think about it… If it did happen, our world-beating run of growth comes an end, unemployment goes up, house prices go down and we’re in a recession.”
Richardson’s view is that government should forge ahead with reforms including tax reform and other reforms to enable the economy to capture some of the opportunities particularly relating to the rise in other parts of Asia, including India and Indonesia.
Fear can be used, particularly by central banks and monetary authorities, to curb spending and push investors to safety during times of extreme uncertainty.
However, now is not the time to be fearful to the point of inaction, Richardson points out.
Uncertainty has the business world worried; people are sitting on their cash, there's less being spent on investing in future prosperity today than a decade ago across the world, Richardson says.
“We're worried about what could go wrong and not thinking enough about what could go right,” he says.


Share this