Everyone wants the same dollar

Cheap money was never the natural order of things. It was a decade when the world’s savings had few takers. That decade has ended, and the queue is long.

Between 2009 and the pandemic, Australia’s cash rate averaged 2.66%. In the decade before the GFC it averaged 5.57%. Most of us filed the first number under “normal” and the second under “history”. It may be the other way around.

On 29 September the Reserve Bank lifted the cash rate to 4.6%. It was the fourth rise this year and took the rate to its highest level in 15 years. The obvious explanation is inflation, which reached 4.0% in August. The more interesting explanation is that money now has a great many more suitors.

The queue

Economists name five claims on the world’s savings, all arriving at once: the energy transition, the infrastructure needed to run AI, remilitarisation (defence spending), de-globalisation and ageing populations leaning on government budgets. None of them is about to stop, and none of them is uniquely Australian. Every Western economy is chasing the same five things at once. And when more borrowers compete for the same pool of savings, the price of those savings goes up.

The numbers aren’t subtle. Microsoft, Alphabet, Amazon and Meta have guided to roughly US$745 billion of capital spending this year. The big tech names sold about US$159 billion of bonds in the first five months of 2026, compared with around US$28 billion a year across 2020–24. Alphabet has sold a 100-year bond, which is either supreme confidence or a very long wait for an answer. Governments are in the same queue. The Budget calls it “Commonwealth payments”; the rest of us call it government spending. Either way, it’s forecast at almost $830 billion this financial year, or 26.8% of GDP, up from around $500 billion in the last pre-COVID budget. Gross debt passed $1 trillion in August and is forecast to reach about $1.05 trillion by June 2027. The result is a Reserve Bank braking while government spending is still growing, which leaves interest rates doing most of the work on inflation. Borrowers feel it first.

Bond markets have noticed. In late September and early October the US 10-year yield hit its highest level since 2002, and Australia’s 10-year was above 5.4% by early October, near its highest level since 2011.

The price of dearer money has even reached the Reserve Bank’s own books. It lost $8.5 billion last year, taking its negative equity to $11.3 billion, largely because the pandemic-era bonds it bought lost value as yields rose. A central bank cannot go broke like an ordinary company, but the loss is real enough: it has paid no dividend to Canberra since its 2020–21 payment of $2.7 billion.

Partying like it’s 1999

Here’s the comparison hardly anyone is making. In the late 1990s the world went all in on the internet. Money poured into cables, servers and anything ending in “.com”, the economy ran hot and inflation crept up. So the Fed started lifting rates: 1.75 percentage points between June 1999 and May 2000, while the US 10-year bond yield climbed from around 4% to almost 7%. Then the boom ate itself. The S&P 500 fell 49%, the Nasdaq fell 78%, and America got a recession for dessert.

Swap “internet” for “AI” and the outline looks awfully familiar. The mother of all capex booms is running straight into rising rates. Australia’s 10-year yield started this cycle at about 4% and is now above 5.4%, with every chance it drifts higher. Higher rates work like a python: no sudden strike, just a slow, steady squeeze. House prices slip: down 5% from the peak already, and AMP’s Shane Oliver expects Adelaide to be among the hardest hit. In plenty of suburbs agents will tell you sales haven’t just slowed, they’ve stopped. Businesses fold, people get nervous, wallets close and activity slows. That’s how the last boom ended. Not with a bang, but with a bond yield.

So is it exuberance? Partly. US shares are priced about as richly as they were at the top of the tech boom (see Markets in 5 Charts). The good half: this boom is legit. AI is genuinely revolutionary, and it’s already showing up in US earnings. The bad half, and the real lesson: so was the internet. There was plenty of bulldust in the 1999 forecasts, and there’s some in today’s. The Nasdaq still took 15 years to get back to its 2000 peak. A revolution can be right about the future and wrong about the price.

The “Dan Andrews” effect

The popular story is that this is a supply problem: war in the Middle East, the Strait of Hormuz, fuel, fertiliser. Those shocks are real, and they pushed August’s headline figure up. But supply shocks fade, and this hasn’t. Underlying inflation, which strips out the wildest price swings, has sat at 3.6% for three months running. What’s genuinely new, and unlike anything in our lifetimes, is that the whole queue is pushing the same way at once, on top of population growth set in Canberra and flat productivity at home. And governments are still spending as though money were cheap. The supply shocks are the weather. The rest is the climate.

That habit has a name: the “Dan Andrews” effect. When money cost next to nothing, politicians everywhere, of every persuasion, borrowed as if it was free. Build the NBN, build the NDIS, build the Big Build. Happy days. Victoria is the poster child, with net debt more than tripling since 2019–20 to about $164 billion, but it’s hardly alone. In 2008, Canberra kept around $50 billion of bonds on issue, mostly so the bond futures market had something to trade. Compare that with the trillion in the queue. The pandemic sugar hit came under one side of politics. Today’s spending levels have come under the other.

And here’s the rub: the money isn’t free any more. Add up every level of government, as the Parliamentary Budget Office does, and gross debt is forecast to rise from 55.4% of GDP this year to 58% by 2029–30, higher than the pandemic peak. Interest is set to swallow 6.2% of every revenue dollar, up from 4.1% in 2024–25. Not one cent of that builds a new hospital.

The fixes aren’t a secret, and none of them belongs to one party. A leaner public service. Migration set at a pace housing and infrastructure can absorb, chosen on merit, without starving the building sites and aged-care homes that already run on it. An NDIS on a footing the country can afford. A tax mix that leans less on income and company tax and more on consumption, a case economists have made for decades. And a hard look at whether money parked in government funds “just in case” earns more than the debt it could pay down. What’s been missing isn’t ideas. It’s nerve. Give Australians the right settings and we’ll compete with anyone – we love to win.

Economically sound is the best thing a country can be. Get that right and a lot else falls into place.

So, recession?

Maybe not, on the technical definition. The RBA’s October Financial Stability Review finds most households and businesses well placed to handle softer growth, and the banks well capitalised. Deloitte Access Economics thinks the economy may avoid a near-term recession, then adds the line worth remembering: for households caught between high inflation, rising rates and weak growth, “it will feel like one”.

The feeling shows. Westpac’s consumer sentiment index fell to 80.4 in October, a level last seen in the early 1990s recession. Among people surveyed after the September rate rise, it was 67.2. Unemployment has risen to 4.7%, its highest since late 2021. When Governor Bullock was asked whether a recession might be needed to tame inflation, she said: “I hope it’s not needed.” Central bankers rarely hope out loud.

Here’s the uncomfortable part. On the numbers, the economy isn’t growing too slowly; it’s growing too fast for its engine. Economists put the “speed limit”, the fastest the economy can grow without stoking inflation, at about 2% a year. Even on that generous estimate, an economy growing 2.1% with productivity going backwards has no room to spare. That’s why rates are rising in an economy that feels like it’s in recession.

It’s also why you won’t hear the word “recession” from Canberra. Recessions are politically fatal, and more people and more public spending keep total GDP ticking over. But the recession doesn’t disappear. It just moves house: into declining living standards, real wages going backwards and sentiment at early-1990s lows.

What we’d do with that

None of this calls for a forecast, which is just as well. As Paul Samuelson observed, the stock market has predicted nine of the last five recessions. What it does call for is a few habits that hold up whichever way the next year goes.

• Assume money costs something. Any borrowing decision worth making should still stack up if rates land 1% either side of where they are today.
• Let defensive assets do a job again. With some savings accounts paying above 5%, cash and fixed interest are earning their place rather than just waiting for something better. Bonds had a poor year precisely because yields rose. That’s also why they pay more from here.
• For business owners: ask your own business the question from Markets in 5 Charts. Could it grow if its market didn’t? Cash flow, pricing power and productivity count for more when money isn’t cheap.

The cheap decade was lovely while it lasted. It just wasn’t normal. Money has a price again. Truth be told, it always did; we were simply living through the stocktake.

What to watch

Interested to hear more? What do the AI boom, a 100-year bond and your grocery bill have in common? Andrew Creaser will connect those threads at the Behind Closed Doors Economic Outlook webinar in November. If you’d like a copy of the recording please let us know.