Chief economist update: 'Paradox of Thrift' in action

Like the fable of the "boiling frog" - put a frog into boiling water, the frog will jump out, put it in cold/tepid water and bring the water slowly to a boil and it will be cooked to death - the Australian economy is slowly being boiled ... to death.

The latest Westpac-Melbourne Institute consumer sentiment survey is case in point. Australian consumer sentiment declined by 1.7% in September to a reading of 98.2 in September - pessimists outnumber optimists - from 100.0 in the previous month and has trended lower since hitting the high of 106.1 back in July last year.

This is the slow boiling of the frog. Contrast this with the "frog dropped in boiling water" during the Great Recession of 2007 to 2009 - when consumer confidence dropped sharply in the same 14-month period (from a high of 123.9 in May 2007 to 79.0 by July 2008) - the frog was dropped into boiling water.

That got Kevin 07's (then Australian Prime Minister Kevin Rudd) attention, didn't it?

As headlined in The Age (14 October 2008): "Rudd unveils $10.4b stimulus plan" that "includes pre-Christmas payments of $4.8 billion for pensioners, $3.9 billion in support for families, and $1.5 billion for first-home buyers..."

This was topped up with a second fiscal spending package amounting to around 4.2% of GDP.

This is in tandem with the Reserve Bank of Australia's (RBA) series of interest rate reductions that took the official cash rate from a high of 7.25% in 2008 to 3% by May 2009.

It worked! Australia was spared from the recession our peers had and that we were also supposed to have.

Fast forward to yesterday's consumer sentiment data and the NAB business confidence survey released a day earlier - both showed continued deterioration.

While the RBA had already sounded the alarm bells and is already preparing for the contingency that it might have to resort to QE, the government of the day remains obsessed with bringing the Budget back into surplus.

Besides, it's already done its part with its tax rebate payment of up to A$1080 for low and middle income earners from 1 July this year.

But as September Westpac-Melbourne Institute consumer sentiment survey revealed: "Just over 16% of consumers reported receiving a payment. We estimate that around 30% of households are likely to receive a meaningful rebate so this survey indicates that about half of eligible consumers have already received a payment. Amongst those that had received a payment, 29% planned to spend it all, and a further 16% planned to spend over half. The remainder (53%) planned to spend less than half including around 25% who planned to save the full payment."

Should the same stats hold when 100% of consumers receive their payments - suggesting more will be saving their tax offset payments rather than going shopping - then Australia, we'll have a problem.

Sure, saving and austerity is good for individual households ... but not if every sector in the economy is doing it, for one sector's spending is another sector's income. This is what we call in the dismal science as the "Paradox of Thrift".

A penny saved might be a penny earned. But not when everyone is saving every penny.

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