Debtwatch No. 25: How much worse can “It” get?

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Last month closed with some far from comforting news about the state of the US housing market (sales and prices still falling), US financial institutions (Fannie Mae and Freddie Mac in need of rescue), Australian banks (NAB's 90% write-down of its US CDO portfolio). Then ABS figures showed that retail sales had fallen "unexpectedly" by one percent in June. The recent rally in stock markets came to a sudden end, and after a brief period of renewed confidence, the question "how much worse can "It" get?" is once again doing the rounds.

My answer is: a lot worse. The empirical grounds for this assessment are:

  • The ratio of asset prices to consumer prices--or the inflation-adjusted asset price index;
  • The ratio of private debt to GDP; and
  • Japan

In short, global asset markets have a lot further to fall, and a serious recession--the worst we have experienced since the Great Depression--is inevitable. Let's first look at what the recent drop in retail sales implies for the economy.

An "unexpected" fall in retail sales

Retail sales fell sharply in June, taking most economic commentators by surprise. Even perennial optimists, such as Shane Oliver, were forced to consider that the odds of a recession were "at least 40 percent".

In reality, the fall in retail sales was inevitable. Spending in Australia has been driven by the biggest debt bubble in our history, and when that bubble peaked, spending had to fall. Since households had taken on a far larger share of debt than business during this bubble, the impact was bound to be seen first in retail sales, rather than investment spending, as I pointed out in November 2006:

"If households reduce their debt levels smoothly, they will have less disposable income to spend and retail sales will slump. If bankruptcies become widespread, the sales downturn will be overlaid with a financial crisis." (Debtwatch, November 2006, p. 18;


The suddenness of the turnaround is also no surprise, when you look at the data from a financial point of view. Just as your personal spending each year is the sum of your net income plus the change in your debt, aggregate spending for the economy is the sum of GDP plus the change in debt. As debt rises, the contribution made to spending by any change in debt also rises. Private debt--and household debt in particular--has risen so much in Australia that, at its peak, the change in debt was responsible for almost 20 percent of aggregate demand.


As is obvious in Figure 1, debt's contribution peaked at the end of 2007, and it has been falling ever since. The monthly figures make this even more obvious (Figure 1 records change in debt over a whole year). The monthly increase in total private debt peaked at $30 billion in mid-2007, and trended up to $27 billion by the end of 2007. It has since fallen to a mere $5 billion in the month of June (see Table 1 and Figure 2).

Table 1

Figure 2

At some point, it will turn negative, and change in debt will therefore substract from aggregate demand rather than adding to it. Given that at its peak, debt financed almost 20 percent of demand, even stabilising debt at its current level--$1.85 trillion, compared to a GDP of $1.1 trillion--would result in a 20 percent fall in aggregate demand.

This hit will be felt by both asset and commodity markets: asset prices will fall, as will output and employment. The government's attempts to counter this--by running a deficit rather than a surplus--will initially be swamped by the sheer scale of the turnaround in debt-financed spending. Even if the government runs a deficit of A$20 billion--the same scale as this year's intended surplus--it will make up for less than a tenth of the fall in debt-financed spending.

The current "credit crunch" is, therefore, only the first act in a long-drawn out process of reducing debt levels. The second act will be "the recession we can't avoid". That recession--which will affect most of the OECD, since all major OECD nations bar France have suffered a similar blowout in private debt levels--will only add to the current decline in asset prices.

The USA: Double Bubble

While the Dow has fallen substantially in the last year, its inflation-adjusted value is still three times its long-term average, and more than 4 times its average prior to the start of this bubble.  Even if the index falls merely to its long term average, it still has another 62% to go (in real terms)  from its current level. If it reverts to its pre-bubble average, it has another 73% to go.

Figure 3

If those figures seem ludicrously pessimistic and unrealistic to you, take a look below at the CPI-adjusted Nikkei--which fell 82% from its peak at the end of 1989 to its low in 2003. At the time, most commentators blamed Japan's Bubble Economy and subsequent financial crisis on the opaque and anti-competitive nature of its financial system. We were assured that nothing so ridiculous could happen in the transparent, competitive and well-regulated US financial system.

Yeah, right.

Fig­ure 4

The story for the US hous­ing mar­ket is lit­tle bet­ter. The index has already fallen 23% from its peak in 2006. A rever­sion to the long term mean implies a fur­ther 38% fall in the aver­age house price in Amer­ica; while rever­sion to the pre-Bubble mean implies a fur­ther 41% fall.

Write­downs by US finan­cial insti­tu­tions cer­tainly haven’t yet fac­tored in that degree of pos­si­ble fall in hous­ing val­ues, and as Wil­son Sy pointed out recently in two bril­liant research papers (1 2), the banks’ “stress test” mod­el­ling greatly under­em­pha­sises the impact of such asset price falls on their finan­cial via­bil­ity. House price falls in the USA are far from over, and like­wise “unex­pected” write­downs by US finan­cial institutions.

Fig­ure 5

Over­all, if US mar­kets fall back to their pre-Bubble lev­els, the stock mar­ket will plunge about 80% from its peak (much the same degree of fall as applied in Japan) and the hous­ing mar­ket will fall 55% (rather more than hap­pened in Japan, where aver­age house prices fell 44%–but less than Tokyo, where they fell over 70%).

The unique fea­ture of this US asset bub­ble is that it affects both stocks and houses. There have been three Stock Mar­ket Bub­bles in the USA in the last cen­tury: the “usual sus­pects” of the 1920s and 1980’s, but also one that doesn’t nor­mally rate a men­tion: a ‘60s Bub­ble that peaked in 1966, and was fol­lowed by a slump that only ended in mid-1982 (see Fig­ure 6).

As Fig­ure 6 indi­cates, this dual bub­ble has no prece­dent. Not only is it a bub­ble in both asset mar­kets, both bub­bles dwarf any­thing pre­vi­ously expe­ri­enced. Even the great Roar­ing Twen­ties stock mar­ket bub­ble barely pokes its head above the long term aver­age, com­pared to the 2000s Stock Mar­ket bubble–and in the 1920s, as Fig­ure 6 shows, the hous­ing mar­ket was rel­a­tively under­val­ued. The over­val­u­a­tion of today’s hous­ing mar­ket far exceeds the now com­par­a­tively minor bub­ble when Keat­ing (Charles, not Paul) was on the loose in the USA.

Fig­ure 6

While the Aus­tralian Stock Mar­ket is not as severely over­val­ued as the Amer­i­can, it is still sub­stan­tially over its long term trend. Even after the recent falls, the inflation-adjusted All Ordi­nar­ies Index exceeds its level before Black Tues­day in 1987. It has another 30% to go before it will have reverted to the mean of the last 25 years (see Fig­ure 7).

Fig­ure 7

The prog­no­sis for the Aus­tralian hous­ing mar­ket is sub­stan­tially worse. Even on short term data–covering only the last 22 years–the mar­ket could fall 40% if it reverted to the mean, and 50% if it reverted to the pre-bubble mean. Nigel Stapledon’s research into long term house prices in Australia–which is not shown here–implies an even greater poten­tial for a fall in house prices.

Fig­ure 8

Of course, such talk can seem non­sen­si­cal and alarmist. Espe­cially if you ignore what hap­pened in Japan.

Japan: the world’s most recent debt-deflation

Japan clearly under­went a debt-deflation after its “Bub­ble Econ­omy” spec­tac­u­larly burst in 1990. In its after­math, house prices across Japan fell on aver­age by 42%, and by over 70% in Tokyo (though they have since recov­ered slightly).

Fig­ure 9

Fig­ure 10

What has hap­pened there can hap­pen in Aus­tralia, the USA, and the rest of the OECD–especially since our Bub­bles, while smaller than the Tokyo bub­ble, are larger than that for Japan as a whole (see Fig­ure 11).

Fig­ure 11

The killer behind the Bub­ble: Debt

The level of over­val­u­a­tion of asset mar­kets reflects the unprece­dented scale of pri­vate debt, both here and in America–since the vast bulk of that debt was under­taken to finance “Ponzi” spec­u­la­tion on shares and hous­ing. This is the rea­son that this reces­sion will be so severe–as will the asset mar­ket bust.

Every “recov­ery” from a debt-induced reces­sion since 1970 has involved resump­tion in the ten­dency for debt to grow faster than GDP (see Fig­ure 12, where the once seem­ingly major debt cri­sis of the late 80s is now just a pim­ple on the upward trend of the debt ratio to its cur­rent unprece­dented level).

Yet today the debt to GDP ratio is more than twice that of the Great Depres­sion. It is sim­ply can­not go any higher. Who else, after all, can banks lend to, now that they have exhausted the “sub­prime” market?

The only way for the debt to GDP ratio now is down (unless we’re unlucky enough to expe­ri­ence defla­tion, in which case the ratio will rise fur­ther, as in the Great Depres­sion), and as it heads down, so will out­put and employ­ment. A seri­ous reces­sion is inevitable.

Wel­come to “the reces­sion we can’t avoid”.

Fig­ure 12

About Steve Keen

I am Professor of Economics and Head of Economics, History and Politics at Kingston University London, and a long time critic of conventional economic thought. As well as attacking mainstream thought in Debunking Economics, I am also developing an alternative dynamic approach to economic modelling. The key issue I am tackling here is the prospect for a debt-deflation on the back of the enormous private debts accumulated globally, and our very low rate of inflation.
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72 Responses to Debtwatch No. 25: How much worse can “It” get?

  1. Lord Kelvin says:

    Dear Out­back Ora­cle, I have a friend labour­ing in one of the big name legal firms in the Perth CBD. A cou­ple of years ago he told me that his work­load con­sisted pre­domi­nently of doing the legal foot­work required to trans­fer title of min­eral / min­ing assets to Chi­nese own­er­ship. There has appar­ently been a steady stream of Chi­nese acqui­si­tions in WA as they seek to secure access to min­er­als. The buy­ing only makes the papers when a big move is made, such as the 9% increas­ing to 11% block­ing stake in Rio Tinto.

    The sale of assets has been one way we’ve bal­anced the books. It can’t be good for us — we’ll end up as ten­ants com­mer­cially and maybe res­i­den­tially. The last two com­pa­nies I’ve worked for have been pur­chased by over­seas con­glom­er­ates. We really, REALLY need to develop the self con­trol required to live within our means. This is the first step to being able to con­trol our des­tiny. A debtor is in a weak position.

  2. Bullturnedbear says:

    The Japan­ese came to buy Aus­tralia in the late 80s and the cries were much louder than now. We now look back and see that they over paid for nearly every­thing they bought and left with their tails between their legs. A few years later the guys that sold, bought it all back some­times for a frac­tion of the cost.

    It’s always safer and eas­ier to buy on your own patch.

  3. Bullturnedbear says:

    I also meant to say. The best time to sell assets is dur­ing a boom and the best time to buy them back is when the bot­tom falls out. Don’t worry about for­eign­ers buy­ing our assets. It’s when they take it by force that we all need to stand and fight.

  4. The Outback Oracle says:

    Hello Bull­turned­bear.
    I don’t want to stray too far from teh sub­ject here as the “Debt Watch is the impor­tant topic which might pro­vide us with action­able strategies.

    I know the Japan­ese got burned in Real Estate. They’ll get burned financ­ing our CAD by accept­ing to give us loans in a$ as well. How­ever the sale of our resources, and our food chain, has been con­tin­u­ous over my life­time and i’m now 59 (bug­gar!. Some­hoe Aus­tralians have believed that these for­eign­ers just loved us and they keep send­ing us money. They don’t want a return on it. Well the bad news is now they do! A huge part of our CAD is repa­tri­a­tion of inter­est and div­i­dends and the prob­lem is now pretty well insolv­able. It is part of the “Debt” story.
    I find it amaz­ing that almost nobody realises we have this enor­mous inter­na­tional debt. Every­one I try to beat some sense into says “but we have no debt…just ask Johnny and Pete!!! They fixed it all!!!!“
    Any­way, the RBA pub­lishes the fig­ures for how much we owe inter­na­tion­ally. How­ever I can find no source for the For­eign own­er­ship of our com­pan­mies and resources. I hoped some­one might be able to help me.
    I for­get who it was…but thanks for the noe on trans­fers to Chi­nese own­er­ship. I’m sure it con­tin­ues apace.

  5. The Outback Oracle says:

    Given our huge CAD and Inter­na­tional debt, will Aus suf­fer a “Cap­i­tal” cri­sis as the Global credit crunch tight­ens? It occurred to me this may well prove the trig­ger that sets in motion the events Steve out­lines. Of course the solu­tion cur­rently prof­fered by Politi­cians and the MSM is to keep sell­ing off the coun­try at an increas­ing rate. Can we sell it fast enough? Have we got enough we actu­ally own left to sell?
    I keep think­ing about debt and the inter­ac­tion of events, and pretty soon my brain feels like it has been through a blender! And i seem to be no wiser than when I started!!

  6. BrightSpark says:

    Firstly Bull­turned­bear the big dif­fer­ence you cited in the effect of the CAD between the 1980’s and now I see as only one of the mech­a­nisms in play. You describe only one type of pri­vate bor­rower, a cor­po­ra­tion bor­row­ing in for­eign cur­rency. There are also for­eign cur­rency debts taken on by Banks with the asso­ci­ated $As being loaned to home buy­ers and “investors” inflat­ing the debt bub­ble and asset prices. Also there is an atti­tude around that the for­eign cur­rency inter­face is non con­se­quen­tial even though the exchange rate varies. We have been bor­row­ing to pur­chase and con­sume both essen­tials and con­sumer goods from over­sees because we are unable (even in a min­ing “boom”)to cre­ate suf­fi­cient wealth to pay for them. We are a men­di­cant soci­ety or have been for more than a generation,the last 33 years.

    We have dis­carded our tech­no­log­i­cal capa­bil­i­ties and our econ­omy now closely resem­bles that of a “devel­op­ing” coun­try includ­ing the debt. Our con­tin­ued pros­per­ity is depen­dent on our line of credit which appears to enable us (until now) to bor­row to pay inter­est. I know the pri­vate debt is meant to be good, but surely our slide into men­di­cancy in spite of the fis­cal dili­gence of suc­ces­sive gov­ern­ments proves this propo­si­tion to be fal­la­cious. It mat­ters lit­tle that the debt is “pri­vate” or “gov­ern­ment” we will all have to pay.

    My argu­ment is that the pri­vate nature of the debt is just one of many mech­a­nisms which are in play and to under­stand the behav­ior of the sys­tem we must take every one of the mech­a­nisms into account not just one. From my read­ing neo­clas­si­cal eco­nom­ics seems to spec­ify a lim­ited set of fac­tors to be to be con­sid­ered and in a dog­matic doc­tri­naire man­ner ignores every­thing else. Surely all of these fac­tors have some influ­ence and we need to mea­sure the extent of this influ­ence before we can fully under­stand the system.

    Ken, Yes there is no prof­itabil­ity in local man­u­fac­tur­ing par­tic­u­larly when we can take advan­tage of skilled Chi­nese work­ers being paid around $60 per week who are work­ing in a heav­ily con­trolled com­mu­nist econ­omy. They pro­duce con­sumer goods and more and more food for us at at very low prices. But still we can not afford to pay at these prices, we need to bor­row, we may soon be beg­ging. Now we get Chi­nese Engi­neers com­ing to Aus­tralia to be trained as Hair Dressers so that they can get Per­ma­nent Res­i­dency and jobs as Taxi Drivers.

  7. Bullturnedbear says:

    Hi Guys,

    You have mis­read me. Firstly I was say­ing that it is smart to sell assets that are over val­ued. Even if they are mines/farms/productive busi­nesses. Because when the tough times come again (and they will) the mines, farm, etc will sell for much less. In some cases we will walk in and take them for noth­ing. That’s the exten­sion of what Steve has been say­ing. All assets are presently over val­ued because of bal­loon­ing lev­els of debt. Sec­ondly I was say­ing that when busi­ness, banks and indi­vid­u­als bor­row and fail the debt is writ­ten off. The con­se­quences of that fail­ure will be far reach­ing and painful. But after the pain, the debt will be gone. As dis­tinct from Gov­ern­ment bal­loon­ing gov­ern­ment debt.

    I still totally agree that the sys­tem of money/debt cre­ation is flawed and ulti­mately must fail. The sys­tem cre­ates the debt, but not the means to pay the inter­est on the debt.

    A fac­tor I have taken heart from recently is that Aus­tralia has an enor­mous amount of infra­struc­ture, land, resources and a small pop­u­la­tion. When either peak oil or debt defla­tion take hold we will suf­fer much less than Europe or Amer­ica. That’s not to say that the tran­si­tion to a steady state econ­omy will not be extremely painful.

  8. BrightSpark says:

    Yes Bull­turned­bear I take your point.

    I am con­cerned about the pre-collapse sit­u­a­tion and for this the government/private nature ques­tion seems to be of min­i­mal influ­ence. Yes the sys­tem is very non lin­ear and in post-collapse the dif­fer­ence may be greater, but what if the exchange rate free falls.

  9. Bullturnedbear says:

    Yes a free falling cur­rency is likely and will make the debt ser­vi­ce­ing sit­u­a­tion much worse. On the flip side though a lower cur­rency will be sup­port­ive of our pri­mary producers/exporters.

    The thing that puz­zles me out of all this, is why the bond mar­ket keeps func­tion­ing. Why would peo­ple keep end­lessly lend­ing to the USA, Europe, Aus­tralia, etc. I know that yields have risen. As a bor­rower, one should alway be con­cerned that one will get their prin­ci­pal back. How risky does it have to get before the bond mar­ket col­lapses. I thought it would have col­lapsed well and truly by now.

  10. Lord Kelvin says:

    I’m much less relaxed about the sale of assets than Bullturnedbear.

    Cer­tainly, it makes excel­lent sense to sell an over-priced asset. With luck you can buy it back later. I remem­ber that in the 1980s a Japan­ese real estate com­pany ran into dif­fi­cul­ties and dropped a six fig­ure sum when it resold a devel­op­ment site in Surfers Paradise.

    One also recalls that Kerry Packer pro­vided a bit of ven­dor finance to Alan Bond when the lat­ter bought Ch9 from KP. KP said some wise things like all assets are for sale if some­one wants to pay you too much, and also that Alan Bond only comes along once in your life­time. (So you need to take advan­tage of it.)

    It was also ear­lier writ­ten that loans go bad so we’ll get out of jail by not pay­ing them. This is not quite right. When Bond Corp failed, Australia’s over­seas bor­row­ings fell dra­mat­i­cally by about 10%! How­ever it did result in cred­i­tors seiz­ing assets. The Bond Corp brew­erys ended up being over­seas owned. So it’s not as if the nation just ben­e­fit­ted from a no oblig­a­tion trans­fer of cap­i­tal as a result of the failed loans. Some prop­erty changed hands too as a result.

    But these are iso­lated instances, and most assets once sold, stay sold. We seem to have pretty much lost our listed gold min­ers for exam­ple and they are not com­ing back. The Big Aus­tralian itself was about 40% Aust owned last time I heard. It is coura­geous to assume that even at today’s high val­ues, min­ing assets and food assets are over-priced, given the increas­ing pop­u­la­tion and ris­ing per capita con­sump­tion and the finite nature of high grade min­eral deposits and good farm­ing land.

    In the real estate and Ch9 exam­ples I gave, the assets were resold in a weak mar­ket by dis­tressed ven­dors. If the Aus­tralian min­ing assets are to be recouped in such a man­ner, it would prob­a­bly imply that the Chi­nese Gov­ern­ment itself would be in finan­cial strife, as most Chi­nese com­pa­nies seem to be govt owned or at least govt backed. How likely is that to occur?

    No, it seems to me that the pro­gres­sive trans­fer of com­pa­nies and their ongo­ing profit streams out of the coun­try, just increases the tide we have to swim against. It is not a good thing. It is not even a neu­tral thing.

  11. BrightSpark says:

    Your state­ment about cur­rency moves being sup­port­ive of “our” pri­mary pro­duc­ers and exporters is inter­est­ing. They may be in Aus­tralia but more and more they are not “ours”.

    Lord Kelvin
    Just one obser­va­tion, we are not just tan­gling with the “Chi­nese gov­ern­ment” here, we are tan­gling with the Chi­nese Com­mu­nist Gov­ern­ment which is not shack­led by the rules, the­ory and doc­trine of Neo-Classical Eco­nom­ics. Instead they are using their knowl­edge of this to their advan­tage. How they will react post-collapse is an unknown quan­tity. I don’t think they will accept losses lightly.

  12. The Outback Oracle says:

    I thought BHP was only 16% Aus­tralian owned but it SEEMS I have that wrong and 40% is the num­ber. I still can­not find any author­ity which has a num­ber for For­eign own­er­ship of resources but the Mayne report runs through a few major projects–2040-8377.html
    Rio is only 15% Aus­tralian owned.
    I do find it amaz­ing inview of the fact that the repa­tri­a­tion of inter­est and div­i­dends is now becom­ing an issue in the CAD that there are no offi­cial num­bers on this nor any com­ments in the MSM. I sup­pose all mod­ern Econ­o­mists are part of the “deficits don’t mat­ter brigade”. It took me about 6 years and the cur­rent US shake­out to con­vince my not-intellectually impaired son (a pretty smart Econ­o­mist) that deficits did actu­ally matter.

  13. Bullturnedbear says:

    Hi All,


    GDP for the last quar­ter was just announced in the US as an annu­al­ized rate if 3.3%. I checked and their annual econ­omy is about $14 Tril­lion. There­fore $3.5 Tril­lion for the quar­ter. Dur­ing that quar­ter though, the Gov­ern­ment pumped $168 Bil­lion into the econ­omy via extra tax rebates and one off pay­ments. $168B over $3.5T is 4.8%. There­fore their econ­omy shrank by a mas­sive amount if you excluded the Gov­ern­ment pump­ing. Am I read­ing this cor­rectly? No reports I have read have referred to this?

  14. The Outback Oracle says:

    Bullturnedbear.…I hope you don’t mind. I took the lib­erty of post­ing your ques­tion on Itulip with appro­pri­ate credit to you. There are a lot of blokes with a lot of brains and tech­ni­cal exper­tise in there so hope­fully some­one will answer for us.

  15. Keith says:

    Hi Steve,
    Thanks for your com­ments.
    I have just noted your com­ments about super­an­nu­a­tion, and being 100% in cash. I was sim­i­larly in 100% in the cash option of my fund, but then I tried find out what ‘cash’ meant. The fund’s web­site informed that the cash option was com­posed money mar­ket secu­ri­ties. I attempted to cor­re­spond with my fund to find out what this meant, but I was never favoured with an answer. Given the times in which we now live, this seemed like a pretty clear sig­nal to move to another fund that could give me answers.


  16. BrightSpark says:

    Con­sider also that in the same quar­ter the US ran a Cur­rent Account Deficit of $180 Bil­lion. That is they imported another $180 Bil­lion worth of goods that they did not pay for (about the same per capita as us). If you take this into account the shrink­age is even more. Any “growth” that they have had has been bor­rowed! Or per­haps recent “growth” (in the US and here) has always been an illusion.

    I have the same con­cern, the “inter­est only” option in my super fund could be “third tranche” CDOs for all I know! This Could be worse than the “growth” option! I do not know and I cant find out what IS going on! How can we find out?

  17. Steve Keen says:

    Inter­est­ing obser­va­tion about the size and tim­ing of the US $168 bil­lion stim­u­lus pack­age being all and more than the mea­sured growth in GDP for the quar­ter. I can’t con­firm your intu­ition, but it is fea­si­bly correct–and that casts a very dif­fer­ent light on the sur­prise result.

    On super, I checked and the same applies to me–my 100% cash is a range of money mar­ket instruments.

    I expect there is “no cause for alarm” here–I cer­tainly hope so. The notional def­i­n­i­tion of cash here should mean “highly liq­uid instru­ments” at the very least, and that should include things like 90 Day Bank Bills rather than CDOs.

    But I would be delighted if one of you could spare the time to grill your super fund and find out what their cash port­fo­lio actu­ally is right now.

  18. The Outback Oracle says:

    Any­way folks…there is no problem…I watched Alan Kohler last night on the ABC news…we’re rolling in it (I pre­sume he meant cash but bulls..t might be closer to cor­rect) The CAD was down from 16 Bil­lion for Q2 to $12.8B…whoopeebloodydo!!
    How can any­one with any brain what­so­ever, let alone one with (pre­sum­ably) some Eco­nomic train­ing, think that is good?

  19. The Outback Oracle says:

    Bull­turned­bear I see Steve has inter­vened and given his opin­ion on your obser­va­tion. What itulip feed­back i got was the same as Steve’s opin­ion. (nat­u­rally enough)

  20. Keith says:

    Brightspark, Steve,

    Sorry this is a late reply, so might not be read.
    After the above, I was able track down, via the AGEST (my old super fund) web­site, that the ‘cash’ option was invested in “Mac­quarie Trea­sury Plus Fund“
    and “Mac­quarie True Index Cash Fund”. Amaz­ingly, since I looked this up, the super fund web­site page has been changed to reflect the fact that the Trea­sury Plus fund is no longer used in the cash option…
    I was able to access the PDS for these prod­ucts at the Mac­quarie web­site.
    The PDS for True Index fund listed risks of con­cern to me, like “swap coun­ter­party risk”, “liq­uid­ity risk”, “spread risk”, etc.
    I won­dered if these risk were generic to other offer­ings, but they are not.
    In each case the PDS cor­rectly points out that Mac­quarie is only the man­ager of the fund, and any deposits you place in the fund are not a lia­bil­ity of the Mac­quarie Bank.

    Hav­ing just read about the implosion/bailout of AIG and Lehman, the above risks become pretty per­ti­nent. As an exam­ple of some of the fall-out of the Lehman bust, one of the old­est money mar­ket funds in the US has just lost $785 mil­lion in Lehman debt paper that sud­denly became worth­less. As to why they were hold­ing such paper was prob­a­bly due to the secu­ri­ti­za­tion morass that is the US finan­cial sys­tem. In any case money mar­ket funds are sup­posed to be safe.

    I don’t want to worry any­one unduly, but if you don’t know what you own in terms of your super hold­ings, I think you should take res­olute steps to find out.

    Let me know if I can be of any assistance.

  21. Anton says:


    Your research into the AGEST cash fund sends alarm bells to me as I am with AGEST and have just read the Mac­quarie PDS which in effect says “no care, no respon­si­bil­ity“
    I moved across to the cash fund about 6 months ago think­ing it was 100% safe. I sup­pose nowa­days noth­ing is safe
    Keith, have you cam­pared any other cash funds?

  22. SEO Training says:

    A very inter­est­ing and pre­dic­tive post. I read an arti­cle in the Fin Review last week that pre­dicted 2.8 mil­lion mort­gage defaults in the USA in the next 12 months. That is very, very scary indeed.

    It wouldn’t sur­prise me if Rus­sia, Iran, or North Korea take advan­tage of this cri­sis and the upcom­ing US elec­tion to launch some sort of attack or grab for territory.

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