The RBA doesn’t want you to be rich. They need you to be rich.
I don’t know if you’ve picked up on it, but there’s a drive to make you richer.
Are you feeling it?
Gina Reinhart is. All the rich-listers are. Their wealth has jumped a staggering 24% in the past twelve months. Gina’s has double. Doubled! According to the AFR:
Despite a global pandemic dominating global economies the top 200 richest Australians increased their collective wealth by 24 per cent in 2020 to $424 billion.
Australia now has a record 104 billionaires, including seven people in the elite “ten-digit club” with a wealth exceeding $10 billion.
Mining magnate Gina Rinehart is once again Australia's richest person, having increased her wealth two-fold in just 12 months.
Ms Rinehart topped the Australian Financial Review Rich List for 2020 with a personal wealth of $28.89 billion, a figure up 109 per cent on last year.
Partly that’s a mining story and it’s related to the mining boom. But most rich-listers aren’t from the resources sector, and their wealth is booming too.
No, it’s a cheap money story.
Money is so cheap (I say cheap. It’s practically free!) But it’s so cheap these days that those with deep pockets are making a motza.
And while the 1% always make out like bandits in a crisis, there’s a push to make ordinary Australians wealthier too.
And it’s working.
In fact, household wealth hit fresh record highs at the end of 2021, and the quarterly increase in wealth was the biggest in 11 years!
Household wealth is now up a pumping 7 percent on a year ago – despite the worst recession in decades.
That’s not bad.
Even the young’uns are feeling wealthier. At least one study of Gen Z and Millennials found that four in five are wealthier now than they were pre-Covid:
Gen Z-focused money education platform Flux surveyed 807 of its followers on social media site Instagram in February, finding the crisis has had a positive effect on the personal finances of many young Australians, notwithstanding the broader economic downturn.
The vast majority of respondents (82 per cent) to the poll indicated that they were in a better financial position now than before the pandemic hit early last year.
Government stimulus, financial returns from investment markets and an ability to save income amid the state-imposed lockdowns were among the key reasons identified.
Ahh. Investing Gainz. I know that one.
So Australians, despite the Covid recession, are feeling a lot wealthier.
But none of this is an accident.
This is exactly what the RBA wants to happen.
It’s something called ‘The Wealth Effect’.
When Aussies feel wealthier, they go out and spend more, and that’s good for the economy.
It’s a virtuous circle. The wealthier we are, the more we spend and consume, and the wealthier we all become. That’s the wealth effect.
And the easiest way to help Aussies feel wealthier is for house prices to go up.
(Over half the gain in wealth in the last quarter of last year was due to rising house prices.)
So the RBA is very happy to see house prices rise. A couple of years ago, the RBA published research that found that a 1 per cent increase in the value of housing wealth will lead to a 0.16 per cent increase in the long-run level of consumption.
So that’s a pretty decent bang for your buck.
And this is also why house prices and share prices tend to move together.
When house prices rise, they spend more, which boosts revenue and profits, which in turn boosts share prices.
This is the wealth effect in action.
And so this is why the RBA is more than happy to run the economy very hot over the next few years.
And they’re happy to see house prices soar too, because they know a lot of that is going to feed back into the economy and boost growth.
The wealth effect is in full effect.
So I wouldn’t be on the other side of this bet – of this push to make Aussies richer. There’s a saying in America: “Don’t fight the Fed.”
Don’t rumble with the RBA.