My object with this blog is to bring easy access to free and trustworthy financial education, economics opinion and theory to girls and women (others are welcome to read too!). I am a Master of Economics student. I'm interested in research in inequality, and sustainable investing. I have a strong interest in markets and investing and I am interested in working as an Equities Research Analyst or in Investment Management.
“Sometimes, money. Just. Stops” said Warren Buffet, billionaire investor, in May at the Berkshire Hathaway Annual Shareholders meeting. The phrase “money stopping” refers to ceasing of trading of money for goods and services between people. Effectively the flow of money dries up, much like water in a drought. This is what happens in recessions and depressions of the economy. Money. Just. Stops.
This year, nations around the world have been plunged into recession due to the pandemic — but recessions hit some cities and regions harder than others (Day and Jenner 2020). In countries like Australia and the United States, small towns can be most affected (Lawrence 1982). I should know, I grew up in a small country town in Australia during the 1990s recession.
With many people out of work, residents stop spending — putting pressure on local businesses to close (Fishback, Haines, and Kantor 2007 cited in Fishback 2012). Local businesses are crucial for employment in a small town, especially if the town is relatively isolated (Lawrence 1982). Consumer spending is a vital part of our economy, typically making up about 55% of the total economy in Australia and 60% in the United States (CEIC Data 2020). If consumers don’t spend — businesses close — end of story.
During the Great Depression the federal and state governments in Australia and the US offered relief funds (Fishback 2012), but relief can be difficult for some local governments to access. What if there was something we could do to prevent “money stopping”? In the onset of a recession or depression — could a town just print its own money?
During the Great Depression of the 1930s, one town in the United States came up with a novel solution to this problem. That town was Tenino, Washington: estimated population 1865 (United States Census Bureau 2020). Small towns like Tenino cannot issue federal currency, that is they can’t issue United States Dollars — but there is nothing legally stopping them from issuing their own local currency — and so, in 1931 the “Wooden Dollar” was born.
Photo: One printed Tenino “wooden” W$25 dollars exchangeable for $25 US (City of Tenino).
Tenino is a relatively isolated town in between Portland and Seattle. According to the Mayor Wayne Fournier (interviewed on Bloomberg’s Odd Lots 2020) when the 2020 pandemic hit, for about 3 months, people, cars, and traffic disappeared from the local streets. Shops in town closed their doors, and there was almost no economic activity in the town other than the local supermarket.
Ingeniously, the Mayor decided to bring back the wooden dollar to inject a flow of money into to the town. Wooden dollars (W$) were circulated by the local government, who gave W$300 to each negatively affected town resident. Wooden dollars can only be used as currency in participating local businesses, so the benefit of the extra cash stays in the town. If the local government had just given US $300 to citizens, much of it might have been spent online, and not helped the local economy. Restrictions on the Tenino dollar mean it can’t be used to pay for alcohol, gambling, cannabis, or lottery tickets.
The residents of Tenino have taken up the wooden dollar enthusiastically, some Tenino businesses offer twice as many goods for Tenino dollars as they would for US dollars (Fournier 2020). The mayor believes there may be a future for Tenino dollars in the town post COVID-19 (Fournier 2020). The city of Tenino is liable for the wooden dollars it prints; however, it will not pay more than US $1 for a wooden dollar (Fournier 2020). A peg on the exchange rate of the Tenino dollar for US dollars limits the liability and risk on the local authority.
Photo: One printed Tenino “wooden” W$25 dollars exchangeable for $25 US (City of Tenino).
The wooden dollars were printed using the original printing machine from the 1890s, used to print the first wooden dollars in the 1930s (Fournier 2020). The press had been housed at a local museum for almost a century (Fournier 2020).
Since the Great depression various forms of wooden dollar have been used around the world both in good times such as the ‘Ithaca Hour’ in New York (Meckley 2015, Rietz 2019), and in times of crisis, such as Argentina in 2001 – 2002 (Colacelli and Blackburn 2009). My hometown of Maleny created its own local currency called ‘Bunyas’ in 1987. Community Exchange System (2020) stated there are a total of 38 local exchange groups operating in Australia. Exchange trading systems are particularly useful for people who are unemployed, underemployed, self-employed, or retired (Sunshine Coast LETS n.d.).
Australian politician Peter Baldwin, Keating Government Social Security minister, encouraged the use of exchange systems like ‘wooden’ dollars because they allow unemployed people to borrow to make purchases or to start their own businesses (Wilson 2015). In Argentina alternative currency use was found to increase monthly income by over 15% (Colacelli and Blackburn 2009). Just like conventional income, taxes apply to income earned through exchange systems (Australian Taxation Office 2020). As Milton Friedman says, there is no such thing as a free lunch.
My thoughts after reading the article ‘Diversity and inclusion is a class issue – even in Australia’.
I think class and inequality in Australia is a really important issue. When I was in my senior years of high school my family fell on hard times and became socially and economically disadvantaged. I grew up on a small farm in rural Queensland, and although we were not rich, I never really felt poor, because our family was well established and we had so much space and always had enough food. When my parents separated, my father became a sole parent. We stayed on the farm for a few years, but as my parents interactions took a turn for the worse, and started to involve lawyers and property settlements, the dispute over finances meant he felt we needed to move away from the farm.
First my father took my sister and I to the Netherlands, which is where he was born. We lived there for around 8 -9 months, we were meant to go for 12 months, but by the time we reached the end 8 months it had become apparent that we were hemorrhaging money and would not be able to sustain ourselves any longer. My father took a job in a factory, but he quit shortly after because he didn’t feel secure, and thought they might not pay him, he also thought the OH&S there was terrible and he might die of a lung disease if he stayed due to the fibres in the air. My father thought we could not return to the farm, and the only person he though might be able to help us was his sister who lived in Sydney. We arrived at my aunts house shortly after and stayed with her for a few months while dad tried to find a suitable apartment in Sydney.
Many of the apartments in our price range had mold on the walls or only one bedroom, or were in unsafe neighborhoods, so it took him some time to find a place for us. We always struggled with having enough money in Sydney. Buying enough food to eat was a difficulty. My father did as well as he could putting healthy food on the table, but there was a definite lack of things like fresh juice, and a variety of fruit. There were little to no sweets, like biscuits or ice cream. No frills at all. I remember not having enough money to buy things like new underwear or even a bra. I remember wearing singlets because I couldn’t afford to buy a bra and being 16 and worrying they might be see-through. I remember getting really upset one day about it and yelling so loud to my father about it that my neighbor heard. The next day, my neighbor Cynthia, a woman with a beautiful heart, gave my sister and me a bag of her daughters old clothes — I was eternally grateful for her kindness. I felt so guilty for yelling … I felt undeserving. I knew that I should not have been so angry over something so out of our control. I was a teenager, I was anxious … stressed. Overwhelmed. I never let myself yell angrily about not having enough again. If I felt angry, I would allow that feeling, but I would reflect on it, and not let it negatively impact others if I possibly could.
By this time I had missed over 2 years of formal education. I enrolled in the local state high school, and they kindly turned a blind eye to my lack of school report cards and paperwork. We literally had nothing. We packed a suitcase of clothing each when we moved to The Netherlands, thinking it was a lengthy vacation and not a permanent move. No one had thought we might need report cards. I hadn’t been attending school for much of the 2 years mainly due to bullying in Queensland, and then later in The Netherlands my father not being able to afford school fees.
Photo: A photo I took at the sandcastle competition at the famous pier at Scheveningen, The Hague, The Netherlands (c. 2001).
I was admitted to The University of Sydney on a social equity scheme called the Broadway Scheme. Despite The University’s elite reputation, The University of Sydney was founded upon the principle of being an equitable institution for all, where people could be offered a place based on academic merit and not their parents bank account. At that time about 5% of students were quietly admitted via the Broadway Scheme. It was a great opportunity of which I am thankful. The only downfall of it was that once I was in I was very much on my own. There was no network for students in the scheme or extra support. I had to manage to buy things like expensive text books (there were no ‘free’ PDFs or virtual bookshelf hire options online back then), pay mandatory student union and sports fees , which were very expensive (at that time about AU$700 a year at Sydney Uni), find access to a computer in the library to access my course content (I didn’t have the internet at home).
I remember asking my chemistry lecturer if he could put the lectures on a disc for me. He was a great lecturer, but an old and grumpy guy, and kind of put out by my request — but he did it for me. I got a disc of files. He said something along the lines of ‘I am only doing this once — so don’t loose it’. Because I didn’t have the internet at home, I was often behind on things like online pre-lab quizzes if I couldn’t get to the library to do them, so I let a lot of marks just slide because it was hard to stay back late after 5 pm to go to the library after class. Some nights I would stay at the library until 10 pm, but I felt safer studying at home. In the first year it was okay because I was still living with my father. But after he moved back to Queensland, I felt abandoned. I was really on my own, surviving on Youth Allowance as a full time engineering student. The coursework was intense, long contact hours, and I did about 5 hours a night homework. I was exhausted and didn’t feel I could also work. I struggled to eat enough. I had a flat mate but money was definitely a lot tighter. Probably a factor in this is that the cost of living had increased, but Youth Allowance hadn’t. I previously wrote a post on how difficult it is to survive on Youth Allowance as a full-time student. Post available here: Affordable accommodation for disadvantaged university students?. Back then I was always hungry, it was hard to afford enough food to eat. I was used to being hungry. It was not until I was more financially secure that I realised … all those years … that gnawing ache in my stomach — was hunger.
I wasn’t close with my aunt, who by that stage had re-married, and I didn’t feel I could go to her for help. I knew my parents didn’t have the money to help me out — so I just persevered and struggled on. When I turned 18, I had inherited a small amount of money, about $2000, from my great aunt. I had saved it for university expenses, and I used up almost all that money on purchasing my course materials, and the fees I had to pay to the union and the sports centre. I remember feeling so upset about the university sport fees, because even after paying about $250 – $300 a year to them I wasn’t allowed to use the gym or anything like that … it really was fee for no service. I felt robbed of the small amount of money that I had.
Photo: My friend Vicky (left) and me (right) when we were first year Engineering students at The University of Sydney (c. 2004).
I remember I realised at one point I needed to work if I was going to survive. I once had a job interview in Bondi, but on the day I couldn’t go to the interview because I literally couldn’t afford the bus ticket. I had no money at all. On the day of the interview, I had taken the train to Bondi Junction, I got off the train and went to catch the bus to Bondi Beach to the shop where the interview was. I saw I had no money in my wallet. I went to the ATM and did not have enough money to make the minimum withdrawal of $20. I remember trying to make a phone call from a payphone to let them know I couldn’t attend, but I didn’t have 50 cents. By that time I was 30 minutes late for the interview. I gave up and went home in tears.
I think a lot of people don’t even think of something like being able to afford enough food, to make a phone call, buy a bus ticket, or access the internet at home. Australia has just shifted so much in the last 20 years and left so many people behind.
So much of finding a job in Australia is about not only having the skills and knowledge — but knowing the right people and networking. What many people of privilege or even moderate wealth don’t realise, is that it is also about having the economic and social resources available to find a job and attend a job interview. People from disadvantaged backgrounds and circumstances just face so many more hurdles than the average person. I feel it should be taken into account not only when getting into university with great schemes like Broadway, but also through support networks at university, and later in dignified support actually getting into work that is specialised for economically or socially disadvantaged students, perhaps run through partnerships between universities and TAFE careers centres and employers, or a dedicated government lead organisation partnered with employers, rather through Centrelink JobActive providers, which many of these students do not have access to on the Youth Allowance payment, and is not in my opinion set up for these students unique needs.
A recession is the name we give a downturn in the economy that has lasted at least 2 consecutive quarters. Usually an economy is in a recession well before the official statistics are released that prove it. In a recession, many people loose their jobs. We have seen huge job losses this year here in Australia, and abroad in places like the United States, and our respective countries are indeed in recession. When an economy enters a recession, people don’t feel as confident to spend, or they may have lost their job and they don’t have the means to spend as much as they once did.
This reduction in spending causes a vicious cycle of downturn in the economy, as about 60% of the economy is made up of consumer spending. As an individual it is arguably more important to save money and reduce spending when faced with a job loss or an economic downturn, but for the economy this is painful. If people don’t spend in shops, then there wont be work for people in retail. If people stop buying goods, then there wont be demand for goods, and this can lead to further job losses all the way down the supply chain.
So what can you do as an individual in these times? My best advice is to first make sure your finances are in order. Step 1: Pay down your debt and don’t acquire additional debt you don’t need. Step 2: Make sure you have a good financial safety net in savings in cash to cover any emergency expenses that come up. Step 3: Save for purchases rather than borrowing, and enjoy spending some of your own money. Step 4: Insure what you love.
Step 1: Pay down your debt
It’s a recession — it is a bad idea to borrow money because we don’t know what is going to happen. No-one has a crystal ball and we cant see into the future to know how long these times will endure. The last thing anyone should be doing is taking on bad debt in a recession. So what is bad debt? Bad debt is taking out debt for things that give you no return and that you will have to pay back whether or not you can afford it. Bad debt is credit card loans, payday loans, loans on platforms such as AfterPay, ZipPay and similar, housing loans, new car loans, margin lending loans and similar.
A recession is not the time to take on additional debt. What happens if you loose your job? How will you service the loan? It’s so easy to rack up huge debts on credit cards or payment deferring platforms, but it is not financially savvy. What might have once been easy to pay off recurring debts when you were fully employed can become painful or even impossible once underemployed or unemployed. It is much better to save for the things you want.
If you do already have credit debt, try to pay it off as fast as you can manage. Be very wary of seemingly cheap balance transfer credit cards, because often the interest rate reverts back to a much higher rate after a set period. If you need a balance transfer because your credit card interest rate is unacceptably high, look for a card with an ongoing low rate and a low or zero annual fee, which means you will have predictable repayments and no shocks. Some examples of no annual fee, ‘low rate’ cards with their base interest rates quoted at time of writing this article in brackets, are the ING Orange One card (11.99% p.a. on purchases, 9.99% p.a. on installments), Heritage Gold Low Rate Credit Card (10.80% p.a.), or ME bank Low rate credit card (11.99% p.a.). Note these are base interest rates, and are often compounded daily by the bank. My advice is don’t take on extra debt with the card. Once your balance is paid off and you have a cash safety net saved up close your credit card account and chop up your credit card(s).
You shouldn’t need a credit card or payment deferring platform to live happily.
So bad debt is a thing, is there a such thing as good debt? Good debt can probably be reduced to education loans, such as HECS in Australia, and reasonably priced housing loans for somewhere to live in retirement — but only if you can afford to make the ongoing repayments. You can further your education, improve your mind, keep occupied, and you don’t have to pay them back until you are earning over a certain amount, currently about $46,000 each year. My advice is if you are considering higher education, really think hard about what are your best skills, what do you enjoy doing, what were your favourite subjects in school, how you picture yourself in the future, what job or industry you want to work in (if you know), and how you can get there through education (if education is the answer to that question). If you are not sure, it might be good to take some time off to really think about what you want before you spend any money. Perhaps take a few free courses and see what you enjoy before enrolling into an expensive university degree.
There are lots of freely available online degrees put out by top universities. They are called Massive Open Online Courses or MOOCs, and many of the worlds top institutions give out free or very cheap materials online, so that wherever you are in the world, and whatever your financial position, you can access great courses and education.
Universities like MIT, Yale and Stanford as well as many others, offer these cheap or free courses. A simple internet search for MOOC and the type of course you are interested in, say, Bachelor of Finance, should bring up a range of options. It’s true some employers wont recognize these free courses, but many employers are beginning to accept them, because they acknowledge that not everyone can afford an ‘Ivy League’ or ‘Group of 8’ education. Some businesses offer a structured platform for these courses on a paid subscription, such as Coursera.com. I have trialed an introductory Russian course from Saint Petersburg State University on Coursera.com and I have to say I enjoyed it and the modules were well designed. I do prefer the free courses though put out by places like MIT, I think they are much more accessible. I also think it is wise to be a little weary when signing up for subscriptions. Look for things like early exit fees.
Step 2: Create a financial Safety Net
‘We don’t want to be dependent on the kindness [of strangers or] of friends even… There are times when money almost stops…’ — Investor Warren Buffet, speaking at the Berkshire Hathaway 2020 AGM, paraphrasing Blanche DuBois in A Street Car Named Desire.
In times like we are seeing, in financial crises, in deep recessions — for example Greece during the GFC, in times like the Great Depression, or during times of war — money just stops. It’s not possible to get a line of credit because banks do not want to loan out money, or cannot loan out money. It becomes impossible for normal people, and even large businesses to borrow money. For many people, it doesn’t need to be one of these crises times for it to be difficult to obtain credit, for many people, such as those on low incomes or unemployment benefits, not having access to credit is just a daily reality. It is important to try to save some kind of cash safety net for yourself for emergencies, so you won’t need to rely on the kindness of others. An extreme example of what can go wrong when you have no safety net (and no social security in France in 1815), is the character Fantine in Victor Hugo’s Les Misérables, who sold her teeth and hair to pay strangers to care for her child.
If you don’t have a safety net, it is a good idea to start saving for one now, even if you just start with $1 in a dedicated zero fee bank account, preferably with a good interest rate, and always in a bank you trust. Set a goal for how much you need in your safety net. This might be the money you need for a rental-bond, or a new fridge or washing machine.
It is good to start with a goal that is attainable, so if you currently have no savings, setting a goal like $1000 is a good place to start. Putting a little away each week, for example $20, and making a rule for yourself that the money in that account money is only used in the case of a real emergency, will help motivate you to save your safety net and not spend it.
Start to think about how much cash you might need in an emergency if you didn’t have access to credit. Set a goal to save a safety net in cash of that much. For me, it is at a minimum the excess on my insurance policies and the cost of a bond for a new rental apartment.
An easy way to boost your savings is to immediately add any bonuses you might receive, for example a one off stimulus payment or a bonus from work. The best way to save however, is putting a little aside each time you are paid and then not touching that saved money.
Zero fee bank accounts I can recommend are ING Bank Savings Maximiser, which has a current variable interest rate of 1.80% p.a. — if you can afford to open a transaction account with ING that you deposit at least $1000 into a month. Or the Suncorp BankeOptions Savings Account or Everyday Options Account which allow you to access what Suncorp calls a ‘flexi rate’ which is like a no-minimum term deposit, currently the 12 months term is 0.95% p.a. I do think at times like these, when interest rates are falling it is good to ‘lock in’ an interest rate you can rely on, so I do lean towards the Suncorp accounts for that reason.
If you are in a good financial position and have your safety net sorted out then it is possible to start also setting a little aside for purchases if you can afford it. This will bring a bit of happiness, since being able to occasionally have a coffee or meal out with friends is a lovely thing. Occasionally buying yourself a special treat with money you saved yourself can also bring a lot of satisfaction. Also knowing that even by spending a little here and there on these little luxuries or buying a coffee from a cafe you like, you are helping the economy and helping keep others in jobs. It’s good to spend a little, but only so long as it is not placing yourself into potential financial hardship.
It’s a good time to take a look at your spending and see if there is room for savings. If you have time have a look at your transaction history for the past 3 months, and try to categorize your spending into different areas, such as rent, bills, groceries, health, school, and entertainment. Is there any unnecessary spending that can be reduced? Can you switch to a cheaper electricity or gas provider, or a cheaper phone and internet plan to save you money? Can you substitute some purchases of groceries for lower cost items of the same product? For example switching from brand names to ‘no-name’ or generic brand items, like Black and Gold or Homebrand in Australia. Can you afford to start buying in bulk to save money at the grocery store? Trimming a few dollars here and there can really make a difference. My main transaction account is with ING Bank, and they recently introduced something called ‘everyday roundup’ which transfers the difference between any card purchases you make and the nearest dollar to a linked ING savings account. You can choose this automatic saving to round up to the nearest dollar or $5, depending on what is more suitable for you. This way every time you spend, you save a few dollars or cents.
Another good way to save is to set up an automatic savings transfer that will transfer money from your transaction account, say on the day you are paid or the day after. Just be sure before setting this up there is money in your account and there are no ‘dishonour fees’ if there are insufficient funds in your account. I remember being charged $35 by a bank years ago for a dishonour fee, and I was only $20 overdrawn, completely ridiculous. Most banks in Australia have been forced to get rid of unfair fees such as this after the Banking Royal Commission, but be aware there are still plenty of fees around.
Step 4: Insure what you love
If you have set up a bit of a safety net for yourself, it might be a good idea to also think about insurance and your superannuation [in the US I think this is called 401(k)]. Check your super balance and see how it is going. For information about how to check your super in Australia click here to visit the ATO website info page on super. If you have more than one super account, decide which one is best and transfer your balances from your other funds to that one, and close off those unwanted accounts. When deciding which fund is best, look at their fees (lower is better), insurance (more cover is better), and returns (higher return on the ‘same’ balanced portfolio product is generally better). When you get a new job, make sure to give your new employer your superannuation fund details, so they don’t just make you an new account in their default fund. This process is called consolidation. It reduces your fees and means you will in the long run get higher returns on your super, which is what you want because it is your savings for retirement and it is really important. If you have a lower balance it can be eaten away by fees. The minimum amount a super account can have before it is transferred to a low fee government super holding account is about $100, so you could potentially loose hundreds of dollars or more if you don’t act on it early. I think from 2019 on-wards if there is period of inactivity in a super account, the super balance needs to be transferred by the super fund to a holding account for the individual at the ATO. This was designed to reduce losses to individuals caused by inactive accounts accruing fees.
Decide if you can start making a fortnightly payment to your super, even if it is only $10. This will make sure your superannuation account stays open even if you loose your job and your employer no longer pays contributions. It is important, because for many people super is how we are also insured in case of terminal illness or permanent disability. If you are on a low income in Australia and meet the eligibility criteria, the government will make a co-contribution of up to $500 each year if you make voluntary contributions to your super account. That is even more motivation to save, because it’s a huge free boost for your super savings.
If you stop paying your contributions into your super, and your account is closed, for example due to a low balance (because fees are often still deducted even if you don’t make contributions), you won’t be covered by that insurance anymore. I admit, a lot of super insurance policies are not the best, but some insurance is often better than no insurance. We never really know when we might be struck down by some terrible event, so it is much better to be covered by a life insurance policy, and superannuation often offers very affordable policies compared to what else is available.
Outside of super, you can have a look at things like home and contents insurance. If you lost everything, could you afford to replace or rebuild from your savings? For most people the answer to that question is no, definitely not. Even if you are only renting it is a good idea to have contents insurance to cover your possessions, especially if you are well established or have children. It’s a good idea to shop around for home and contents insurance policies, until you find one that suits you best. Some are very low cost, for example ING Bank contents insurance for tenants, which is around $25 a month for cover of up to $120,000 in contents (with $500 excess), but they don’t have the more extensive of the cover of other policies. The ING insurance is basically a no-frills insurance, which is actually really good value for renters, because typically you are not going to need things like ‘motor-burnout’, but you might want to think twice about it because it doesn’t include pretty standard things like ‘flood cover’. Personally I went for a more expensive policy that also gives me more extensive cover and optional cover on items like my laptop and other valuables away from home (which you can also get with ING), and up to 10% of my insurance cover for temporary accommodation for up to a year should something happen to my home that makes it unlivable. ING Bank does also offer 10% of total insured as temporary accommodation. The insurer only pays the difference between your regular rental payments and the cost of your temporary accommodation. I think this is quite standard across insurers covering temporary accommodation, they only cover ‘costs actually incurred’. ING Bank contents insurance also pays for storage of ‘some’ items while you are in temporary accommodation.
This type of temporary accommodation policy under a home or contents insurance policy is also available from insurers such as St. George Bank and Suncorp Bank for around $50 a month for $120,000 of cover (and $2000 excess). The policies differ slightly and have different levels of excess. Often you can reduce your monthly or annual premium by increasing your excess, just make sure the excess is an amount you have in cash easily covered in your safety net account, as you will have to pay the excess before the insurer pays a dime. You will also need to start keeping itemised receipts for every purchase you make. It is a good idea to keep an electronic copy of these receipts, saved to ‘the cloud’, in case your home is destroyed, your receipts will be saved.
It is a great peace of mind to know that if my house burns down, my child will have a roof over his head and I will have most, if not all, of any additional rent paid in temporary accommodation for a year by my insurer.
I guess my advice is it is good to think about possible scenarios that life might throw at you, think about the future and prepare for it. Once you are prepared, it’s a huge weight off your shoulders to feel financially more secure and safer in the event of some undesirable outcomes. Then you can go out and enjoy the world, worry a little less, and enjoy the little pleasures in life.
Please read this blog knowing that the advice I give is general in nature. I don’t know your individual financial circumstances, and this advice might not be suitable for you. If you are going to make any big financial decisions consider taking financial advice from an independent financial advisor.
Disclosure: I only recommend products that I either use or would consider purchasing for myself or a loved one. I currently am a customer of Suncorp bank, St. George Bank, and ING Bank Australia. I own shares in Suncorp Bank.
I’ve had an interesting life with many twists and turns, but I have always been curious about the world and asked questions. I am passionate about building a better world for all Australians and for a long time seen that this would be best achieved through investment. I studied three years of civil engineering, had a baby, then went back and studied science while working and being a parent. Now I’m completing a Master of Economics, and have never felt it more possible, that in the not so distant future I might help shape and implement ideas make positive change in the world.
I have long believed that to grow a strong economy for future generations, to continue to be one of the richest nations per capita in the world, vision of the future and direction for investment is needed. Future wealth needs to come from the industries and infrastructure that we invest in to make Australia strong, so we have a future — and this is what I am passionate about.
I am excited about some of the amazing new industries like renewable energy and solar tech, carbon capture tech, and quantum computing, that could bring huge returns for Australia in the future. I am passionate about getting the right infrastructure and housing mix, to support our industry, people and cities. To foster creativity and build future wealth.
I love to read about companies, follow markets, and macroeconomic news (read: world, national, business and political current events). I invest my own money and although I know I have made mistakes, overall, I have made money on my investments and I have learned so much by actually investing some of my own savings. I am learning about building a resilient and diverse portfolio. At this point in history, there have been so many challenges. Just in the last few years we have had the US-Sino Trade War, Escalations of tensions around the world, between Russia and Europe, The Middle East, and South America. There have been wild fires that ravaged the globe, the omnipresent threat of climate change, the coronavirus pandemic, and now internal tensions over police and state treatment of African American people in the United States, that have led to solidarity protests echoed around the world just this last week.
I had thought about investing for several years, probably I first thought about doing it when I was in year 11 or 12 studying economics at high school, but back then I had no idea really how to even make an investment. There was a stock market game my high school economics teacher, Mr Young, tried to get me involved with but I felt quite overwhelmed by the task with out any additional guidance, even though it wasn’t real money, the whole idea stressed me out! Finally after many years debating with myself, I took the plunge, the market had been strong for several years, I had watched stocks have returns wildly above what I was earning in bank savings account interest. I felt I should at least try the stock market, now I had educated my self a little. The week after I made my first ever investment in the Australian Stock Exchange (ASX), was the last week of September 2018…you might not even remember now, but it was just before the stock market suddenly dived due to trade tensions and tariffs put up between the US and China. I lost 6 – 10 % in a couple of weeks and was pulling my hair out trying to salvage the situation. I was thrown into the deep end and I had to pull out everything I had learned to pull my investments out of dire straits.
It was both exhilarating and terrifying. I used everything I knew, listened to the best advice and managed to make back everything I had lost and more. At one point I was up about 30% but I had to learn the hard lesson of not locking in my gains when the market began to falter. Although I was ahead, I had losses that diminished my possible gains. During the crisis this year I had learned something from experience and pulled most of my investments as things got ugly, in hindsight I would have pulled them much sooner and done a few things differently. Presently, my return since I started investing sits approximately 8.12% above XAO, and 8.37% above XJO. If I had invested in an ASX-200 ETF tracker, I would today be 8.37% worse off. I am proud I have achieved that with the little experience I had going in.
Looking back, we would laugh to think I thought 6– 10 % was a big loss! The ASX with most markets around the world, fell almost 40 % this year between 24 February and 23 March this year, after it became apparent that coronavirus Covid-19 was unstoppable and would turn into a worldwide pandemic. The Australian stock market All Ordinaries fell from a peak of around 7230.445 on Monday 24 February, to a low of around 4564.129 by Monday 23 March (Figure 1). This was a loss of 36.89%. Those numbers ‘7230.445’ and ‘4564.129’ are the index numbers, indicating the relative ‘height’ of the stock market as a total weighted average of al listed companies.
Figure: AXO Australian Stock Market Pandemic Dec 2019 – June 2020, source: ASX charts (1)
To calculate this stock market loss mathematically, first we divide the ‘new low’ by the ‘old high’ or (4564.129/7230.445) = 0.6312, meaning the market was at 63.12% of its previous height. This is basically like buying a glorious gelato in a cone, your favourite flavour too, walking outside the shop, and being immediately bumped by someone passing you in the street. The gelato scoop falling on the pavement, leaving you holding just the cone. Well, over those few weeks, the world was left just holding their respective cones, gobsmacked. Gelato splattered all over the footpath. The loss is found by taking the size of the ‘gelato cone’ away from the original size of the gelato scoop and the cone, which has been normalised in this case to ‘one’ , so the amount of gelato lost is equal to ‘One gelato minus the Gelato Cone’ = 1 – 0.6312 = 0.3687 = 36.89%.
As you can see in the chart the market has partially recovered from it’s lows, but it is a very uncertain time, and anything can happen, it’s not necessarily a real recovery. We could be in for a prolonged downturn that could stretch for years, and we just don’t quite see it at this stage. It took a few years to reach market bottoms in the past after stock crashes, after 2008 and 1929. It’s likely I think this will again happen this time. We have seen so many events together that some people wouldn’t see in their entire lifetime. Or at least once in a lifetime events. It’s a time to come together (virtually or over the phone of course) with friends and love ones. Take care of yourself, your family, friends, and show care about your community. Humans are communal creatures, and we can get through this if we pull together and work in unison, rather than letting our differences divide us.
What Australia needs going forward is a decent and fair welfare safety net. Not a punitive one. We need to take care of each other and not allow people to live in relative poverty in Australia. The JobSeeker rate should be permanently raised to its current coronavirus #covid19 level. We don’t know that all those jobs that were lost will be recreated. We don’t know the economy will reset. What I do know is that people cannot live above the poverty line in Australia on ~$300 a week if they have to pay rent. That is just a reality. If we return JobSeeker to the previous Newstart rate, we will I think, risk much higher homelessness, inequality, and relative poverty of young people, and increasingly families and children in Australia.
If you are living in poverty — how are you to find your way out of it without a helping hand? I hope that if coronavirus has taught us anything is that these social safety nets were created after the war for a reason. We should work as a society and care about each others welfare. Every person is important. Every job is critical. Government and super funds should be investing now in the 350,000 to 500,000 affordable housing needed in cities across Australia. People need a safe place to live and they need work.
We are currently building only 3000 affordable dwellings a year (1). A flaccid and weak attempt to deliver what the nation and it’s people need. A failing on our people. Impotence in the investment into affordable housing over the last 25 years across the the nation has a created a shortfall of 433,000 homes (1). Just mull on the number for a while, 433,000. That is almost half a million homes that should have been built already. Homes we needed yesterday. Homes that would help millions from falling into poverty. Homes that would raise hundreds of thousands, maybe over a million, in this country out of poverty (2). Just before the pandemic hit, there were 3, 000, 000 — that’s 3 million people — in Australia living in poverty, that is 1 in 8 adults and 1 in 6 children. Living. In. Poverty (2). With another 1 million unemployed now, that number could rise substantially, maybe by a quarter or even double if something isn’t done soon.
The nation needs stimulus — right now — at this moment. What better thing could we as a nation do than secure the future safety of shelter to our young and at risk populations? I can’t think of a better way to stimulate the economy. Much better return in the long run than tax cuts to big companies that we, at this time, can’t afford.
The picture I chose for this article is a wonderfully beautiful Art Deco — Depression era building in Sydney. An example of one of the many fine structures built back then. We can build to stimulate our economy. We have done it before. We just need to prioritise what we need.
In a recent interview with The Bloomberg podcast OddLots, economist Nouriel Roubini predicted that the US would have a bad recovery from the Covid-19 pandemic, inflation and then a ultimately a depression (1). That outlook is bleak. Perhaps not over-reactionary. Over 20 million people were newly unemployed in the US last month. The US has by far been the hardest hit country by the pandemic. It was arguably still somewhat fragile, with low interest rates and high federal debt leading up to the pandemic. In recent days, large companies like Neiman Marcus have filed for bankruptcy. I think it wont be much surprise if in the coming weeks and months weak businesses will continue to go into administration or file for bankruptcy.
In my native Australia we have also seen a worrying trend over the last year of established businesses going into administration or filing for bankruptcy in the midst of increasingly low consumer confidence. Virgin Australia, Jeans West, EB Games and Kikki-K just to name a few. Many retailers, such as department store Myers and airline businesses such as Qantas have closed their doors and stood down tens of thousands of employees as a consequence of the pandemic. In Australia it seems the pandemic has been the straw, all be it the hay bale, that has broken the camel’s back for these retailers that were already struggling beneath the surface, especially after the tough Christmas we had with bush fires ravaging the nation.
Is recession in the US and Australia likely? Yes, it is imminent. Is another Great Depression likely? Nouriel Roubini described the possibility of the “I” as opposed to the “V” or “U” shape “recovery”, by “I” shape that refers to straight down into a depression. There could be over 2 million unemployed in Australia right now (2). When I saw the queues outside Centrelink (the jobless office) here in Sydney, that stretched for ~100 m or more — I seriously worried depression was around the corner. But, the outcome likely depends greatly on government policy and how well it works to alleviate the stress on the economy caused by the pandemic — arguably the biggest economic shock on record. Definitely the biggest shock in the last 100 years. Why government? Because government (rightly) shutting down the economy, has been the force that has stopped so much economic activity. Shutting down or partly shutting down huge sectors of the economy such as tourism, retail, airports and transport. Business can only try to hold out at this time, but it is government pulling all the strings, and for that reason, like it or not we are more reliant than ever on good government economic fiscal policy.
In Australia, quantitative easing policy set out by the RBA should help finance government debt and prevent liquidity drying up. JobSeeker and JobKeeper payments will help people afford their living costs during the pandemic, stay engaged with their employer where possible and hopefully to spend a little to boost economic activity, however spending is probably a pipe dream, with the Australian Bureau of Statistics releasing statistics that over half of people saved their $750 stimulus payment rather than spending it (3). A strong indication in my opinion that people do not feel confident to spend even additional money coming in from a stimulus payment and that consumer confidence is probably still about as low as in April when it walked off a cliff.
Job advertisements in Australia have also walked off a cliff in May. Unemployment, consumer confidence and job advertisements have, to paraphrase Greg Jericho of the Guardian Australia, broken the scale by which we measure them (4). The same can easily be said for the numbers out of the US. As Greg Jericho has said, the scale is broken.
But can governments of the US and Australia hold things together when they have spent so much effort over the past decades dismantling social security and making government smaller? Australia is in a better position considering it has achieved less dismantling than the US, but even we in Australia have put ourselves in a precarious position through the past three decades of policy that targeted cuts to welfare payments, education and healthcare.
Simple interest is the most basic type of interest. Simple interest is just the interest rate percentage times the original capital (see diagram below). Some term deposit accounts are calculated using simple interest. In term deposit accounts the interest is usually calculated at the end of each year.
Under a simple interest loan, if I borrow $1 and the interest rate is 10% p.a. then I will need to repay $1.10 after 1 year.
Total repayment = Principle + Interest
= $1 + ($1 x 10%)
Some term deposit interest rates are instead calculated using compound interest. This also goes for credit card interest, personal and home loan interest or even the interest you get on most regular savings bank accounts. The interest on these types of loans and savings is calculated using compound interest. That is interest that is compounded. With compound interest, you pay interest on not just the principle but on interest you haven’t paid off yet from the previous times interest was calculated.
Another way of saying compounded is two things added together or something made bigger. This means that when compounded the interest is made bigger.
Compound interest is calculated more often than simple interest, sometimes daily. In principle it could be calculated every second! A compounded interest rate will generally be higher than the equivalent quoted interest rate using simple interest. Sometimes a lot higher. Banks usually quote the base interest rate and not the total compounded rate which you actually pay.
I am going to use “powers” in this definition. A power is simply when a number is multiplied by itself by the number of times specified in the power. For example 2 to the power of 3, which can be written as 2 x 2 x 2 (= 8) or in short hand as 2^3, which is the same as 2 x 2 = 4 and then that answer, 4 x 2 = 8. Technically this shorthand is only used in software packages like Microsoft Excel, the formal way to write a power is by writing a small superscript of the “power” to the top right hand side of the the number you are taking to the power, as you can see in the figure drawn below. When powers are used numbers can get big pretty fast – so when interest is calculated this way it can have quite an effect on the amount you end up paying on your debt or receiving on your savings.
If I borrow $1, and the interest rate is 10% p.a. but this time compounded daily. In the formula for compound interest (see diagram bellow), the interest rate, r = 10% or 0.1, the number of times compounded in the year or period, n = 365 days, the years or period, m = 1 year.
In the formula, n and m can refer to days, years, months, quarters, half-years or really any break down of a year. Interest rate, r is always a percentage.
At the end of one year I now have to pay $1.105.
Total repayment = ( 1 + 0.1/365 ) ^ (365 x 1)
= 1.00027397 ^ (365 x 1)
= $ 1.105
By compounding every day, the 10% interest rate is actually higher than 10% after 1 year. I am actually paying 10.5% interest.
This means the effective annual interest rate of 10% p.a compounded daily, is 10.5%.
If you have a bank account that pays interest, you want it calculated an paid as often as possible to get the highest possible interest on your savings. So you can earn interest on the interest you receive.
Most credit card interest is calculated daily. Interest is often also added to the account balance daily so you are quickly charged interest on your interest. This is why credit card debt can get so big so quickly.
I really wouldn’t recommend getting a credit card unless it’s a low-to-zero annual fee and low interest card. It’s much better to save up for what you need, that way you don’t pay any interest and best of all the bank actually pays you interest on your savings (if you are lucky enough to live in a country where interest rates are not zero that is!). Of course everyone’s circumstances are different, that’s just my own personal preference. Unfortunately sometimes it is difficult to pay for large cost items without a credit card because some retailers don’t like to accept large cash payments or a prevented by law from accepting such payments. For those types of purchases I do use a low interest rate, low fee credit card and pay the money back onto my credit card balance almost right away out of my savings so that I am not in any debt and do not owe large amounts of interest (if any).
Last year I decided to go back to university to study a Masters of Economics after several years working as a Teaching Assistant. At first it was really overwhelming. There is so much to read, write and think about and many new concepts to get my head around. It’s been really interesting and it’s been rewarding.
One of of the challenges I faced was learning how to sit and exam again. I hadn’t sat for a written exam since mid 2012 when I completed my Bachelors degree in science. I was incredibly nervous for the first few exams I sat. In one exam I ran out of time because I was too slow and being very careful. I remember in 2012 being so happy, thinking I would never sit another university exam again. How wrong I was!
I’m happy to finally be studying economics in depth rather than just having a layman’s interest. I studied a little economics in my undergraduate degree but wasn’t able to do as much as I would have liked. Previously the subjects I took were in Political Economy and economics for project managers, like cash flow (future value, present value) calculations. I studied economics in high school and I had a great teacher who was great at explaining concepts. I will always remember those classes.
Now I can study topics that really interest me like macroeconomics. It’s also good to go back and relearn all the math I’d half forgotten! Learning it a second time has also filled up many of the little holes in my knowledge that were present the first time I studied university math. I’m still teaching, so it’s also good to share new tricks I have learned for the topics I do use regularly with my students who might be struggling.
I’ve just got through my mid semester exams for this semester but I’m feeling positive about the rest of the year ahead.
So if we are not using Tariffs to artificially boost our competitiveness, how are we meant to make money with international trade?
Competitive advantage is the principle that a country will produce something it better at producing than anyone else. It could be a pricing advantage. Maybe the country has low wages and can make goods cheaply. It could be a technological advantage. The country could have advanced technologies that other countries do not know how to use as well.
In the Perfect Capital Market, a place with no taxes, government and free trade (think Capitalist), countries produce what they have a competitive advantage in. The country will sell some of those goods as exports to other countries. The other countries will trade goods that they have a competitive advantage in.
For example, imagine a world of only two countries. They are called the United States and Australia. The United States is really good at making computers. The United States makes the best, most advanced computers in the world. Far better than what Australia can make. The United States has a competitive advantage in computers. Australia has a competitive advantage in solar panels. Australia’s solar panels are the most efficient in the world.
Australia produces solar panels at a cost of $10 and exports them to the United States. The solar Panels are sold to the United States for $20. The United States uses those solar panels to make it’s computers at a cost of $10. The United States exports it’s computers to Australia who buys them for $20. Australia in turn designs even better solar panels. Both countries are trading where they have a competitive advantage. Both countries benefit. In this case they benefit equally. Each country makes $10 profit.
What if there was a third good? Wheat. Both the United States and Australia are good at producing wheat. Australia is really efficient at producing wheat. The United States wants to trade it’s wheat with Australia instead of computers. Australia has cheap wheat because it is so efficient at producing wheat. Wheat costs $5 to produce in Australia and is sold for $10 in Australian shops. Australia will only pay the United States $10 for it’s wheat.
Wheat in the United States costs $6 to produce. The United States will only make $4 profit in Australia but Australia will make $5 profit. Australia has a competitive advantage for wheat. But it is small. The United States can try to sell it’s wheat to Australia, but it will never make as much money selling wheat as Australia. Eventually Australia will be ahead as all those dollars start to add up.
What would the United States be better off producing to make the most possible profit? Computers. Because that’s where the United States has a competitive advantage.