The Australia and New Zealand banking group, ANZ, released their half-year results yesterday, and the picture was pretty bleak with regard to Australian property and mortgage stress. ANZ boss Shane Elliott spoke of the deepening mortgage crisis that is sweeping across Australia. He said, we saw 500 or 600 families in this half get themselves into difficulties in terms of not being able to keep up with their payments. That's a lot higher than we've seen in the past. So the question is, is this a trend? Is this a blip? If we take a look at the data, it certainly looks like a trend to me. This is a chart of Australia home loan 90 plus day delinquencies. It shows that over the past three or so years, delinquency rates have been stepping up in pretty much every state and territory. In Western Australia, it certainly looks like a very worrying trend. Thanks to a slowdown in mining, WA's economy has been slowing over recent years. This has led to rising unemployment and mortgage stress. In 2012, WA's economy was growing at almost 14% year on year. The unemployment rate was under 4%. According to ANZ, the mortgage delinquency rate was only 0.5%. Jump forward eight years in 2018-19, and the state economy is growing at a rather poultry 0.3%. Unemployment has jumped to over 6%, and mortgage delinquency rates have soared to almost 2.5%, a five-fold increase. Using Western Australia as a guide, it doesn't take much imagination to realize what would happen if unemployment rates increased in the Eastern states. Mr. Elliott commented, it was the best of times, it was the worst of times. Unemployment is low, interest rates are low, inflation is low, but wage growth is stubbornly low. So we are worried about families doing a little bit tough out there. In three months to April, ANZ home lending has fallen 3%. However, it's not the cost of borrowing that is causing people to become delinquent. Looking at this chart, we can see that mortgage rates have been travelling along at historic lows. The RBA's cash rate has been sitting at 1.5% since August 2016. That's more than two and a half years. It's not lack of cheap mortgages that it's hurting Australians, it's falling house prices. The RBA have recently raised negative equity as a growing concern. Negative equity is a big problem for both the borrower and the lender. If borrowers are forced to sell when they can't repay their mortgage, they'll remain in debt even after the sale. Lenders will probably be selling at a loss thanks to falling property prices. It's not ideal for anybody, except for new buyers, of course. There's lots of evidence suggesting that a sudden loss of income in households will lead to a huge increase in defaults. We can see in this chart that unemployment edged back up to 5% in the March quarter. Is this just a blip? Or is this a growing trend as well? When it comes to interest rates, many economists are predicting that the RBA will be forced to cut the interest rate to historic lows this coming Tuesday, 7th of May 2019. Why do people think that they will be forced to cut interest rates? Because Australian Bureau of Statistics data shows that inflation ground to a halt in the March quarter. After the consumer price index, CPI was 0.0%. Prices have not risen this year. Cameron Kusher, head of research at CoreLogic, said that persistently low inflation is what will force the RBA's hand. He said, the RBA has undershot its inflation target for four years. The latest CPI data was much lower than they expected. The rhetoric from the RBA has been inflation will gradually drift back to the 2% to 3% and, but the latest data shows it's drifting away from it. They've held rates for 30 months now expecting inflation to tick up and it hasn't. People look at low rates as a great thing. When the reality is, it's trying to encourage people to spend. Higher rates means wages are growing and the economy is doing well. It is a little bit concerning that we've already got record low rates, and we're talking about taking them lower. Rate cuts are a very blunt instrument. It helps mortgage holders, but it doesn't help people trying to save. They're always going to be winners and losers. And that's the biggest problem with rate cuts. Their only purpose is to encourage people to either get into more debt, because lending rates are low, or to save less of their income and spend more, because it's not worthwhile keeping your money in the bank. But the RBA have no other tools at their disposal. The only thing they can come up with is to encourage people to do the wrong thing. That is, get into more debt, or to spend more money. It's a worrying trend. There is an alternative, however, apart from dismantling the entire financial system. The big investment bank, City, argues that the RBA should be better off embracing the unconventional policy of helicopter money. City's chief Australian economist, Paul Brennan, stated, It could take the form of government cash handouts to households for spending, financed by a permanent increase in RBA money supply. Unlike negative interest rate and quantitative easing policies, helicopter money can be designed to boost economic efficiency, for example, lower unemployment, whilst limiting negative spillovers to other areas like financial system stability, for example, asset bubble risks, and distributional equity, for example, wealth inequality. So basically, helicopter money is used by a central bank to drive up inflation and a stagnant economy's output. Where would this money come from? City suggests that the money could be raised by the RBA buying perpetual bonds from the federal government that would not need to be repaid and the proceeds would then be given to households. It's not a new concept. It has been used before in Australia. In 2008 and 2009, the federal government made cash handouts totaling $20.8 billion, which helped households through the global financial crisis. Mr Brennan stated, Cash payments to households are less likely to encourage greater leverage and asset price inflation than would negative interest rates. Handouts get a bigger bang for their buck. The historical low RBA cash rate of 1.5% is testament to the limited space currently available under conventional monetary policy, UMPs, in the event of an economic downturn. This begs the question of unconventional monetary policies like helicopter money, measures which tend to be characterized by a permanent increase in the money supply. While on the experimental end, we think it deserves serious consideration by the RBA, which with the benefit of hindsight have observed both advantages and disadvantages to other UMPs like quantitative easing. What are your thoughts? Are we doomed to another interest rate cut? Are savers like myself being punished for not spending enough? Should we all become less frugal and spend all of our earnings and get into more debt? Just so the government can say that the Australian economy is doing well? Are the RBA running out of options? Is helicopter money a viable option? Will people actually spend the helicopter money or stick it in the bank like I did back in 2008? Are more flat screen TVs really what the Australian public need? Is our system broken?