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Kym Dalton, whose career in Australian mortgages spans four decades, believes the current economic environment of high inflation and rising rates is nothing new.
Rather, he said, it is part of the natural economic cycle.
“When you pump money into the global economy with quantitative easing programs, that money goes into the banking system,” Mr Dalton told Mortgage Business from New Zealand, where he lives. “What do banks do with excess liquidity? They lend it,” he said.
“Cheap credit has had a massive inflationary impact on asset prices since QE began in 2008. Which is fine, but the party had to end eventually. The hangover of more than a decade of QE has now set in.”
Mr Dalton cited the junk bond crash of 1989, the savings & loan crisis of the 1990s and the global financial crisis of 2008 as three events in recent history that stirred apocalyptic predictions that were ultimately unfounded.
“During the GFC, people thought the world was about to end. They thought the same in the 1980s and the 1990s,” he said.
“Economies expand and contract. In Australia, we’ve been expanding for so long that many people of working age have never experienced a contraction before. But it is nothing new.”
Mr Dalton’s comments come as Reserve Bank of Australia (RBA) governor Philip Lowe remains committed to slaying inflation with higher interest rates.
Speaking before the House of Representatives standing committee on economics on Friday (16 September), Mr Lowe described the increase in inflation as “an unwelcome” change that has absorbed central bankers since February.
“When the previous Committee met in February, underlying inflation in Australia had just reached the midpoint of the 2–3 per cent target range for the first time in many years,” he said.
“Seven months on, we are in a very different position. Inflation has very quickly gone from being too low, to being too high. Over the year to June, the headline inflation rate was 6.1 per cent. It is expected to increase further over the months ahead to peak at around 7.75 per cent later this year.”
Mr Lowe cut to the heart of the matter when he accepted that some people are questioning whether or not too much support was provided by the RBA over the past two years.
“Judgements on this will differ,” he said. “But in those dark days of the pandemic, the Reserve Bank Board judged that the bigger policy mistake would have been to do too little, rather than too much. If we had done too little and the worst had occurred, Australians could have paid a heavy price.”
But according to Mr Dalton, a pioneer in the domestic non-bank and mortgage securitisation market, we are now paying the price for years of easy money.
“It was always going to end. It was only a matter of time,” he said. “That time is now.”
Mr Dalton said he fears much of the excess liquidity of recent years has landed in emerging technology businesses.
“There has been a rash of fintechs and other start-ups pumped up with access to easy money,” he said. “While the opportunities in the digital landscape remain vast, every solution starts with a problem. Many of tech start-ups didn’t have a solid business plan: what problem were they trying to solve?
“As the economic contraction continues it will be interesting to see how new tech players go. Whatever real value they have often gets revealed when money gets expensive and investors grow nervous.”
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