Opposing Forces

  • 03 Feb 2021
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Isaac Newton’s third law of motion states that for every action (force) in nature there is an equal and opposite reaction.

The economy is far too complex, with too many interlinked variables for the precise mathematical rules of physics. However, you should never lose sight of the fact that everything which occurs, will lead to some sort of reaction. In the economy the reaction is certainly not equal or opposite, but the bigger the event, the bigger the likely response.

When it comes to economic policy, the direction of the reaction is related to the size of the shock and certainly in the opposite direction. Since the failure of policy in the Great Depression, we have learnt that big shocks need to be met with huge stimulus. Otherwise, the economy gets into a downward spiral that is hard to stop and causes too much pain.

It seems absurd that in a year where we experienced the greatest economic shock since the Great Depression, with lockdowns crushing economic activity, bringing economies to a shuddering halt, the broad financial impact has been far more muted than anyone expected.

While technically Australia’s world record run of an advanced economy without a recession has been broken, it seems like the recession that most people never had.

The reason being the largest global economic stimulus in history. Without that we would have seen a complete economic meltdown, but due to the huge injection of cash incomes amazingly increased during Covid. With Jobseeker, Jobkeeper and all the one-off payments, overall income rose. At the same time our limited ability to spend, such as our inability to travel and eat out along with rock bottom interest rates resulted in a sharp rise in the savings rate.  

Should we all go on holidays whilst the government borrows and prints money for us?

As you might expect, there is no free lunch.

If you have any queries or questions, please contact your Adviser via email or phone on (03) 9629 1100.