I keep wondering why the heck all these sages think Aus MUST run a Current Account deficit. The RBA, the Treasury and the Chartalists all take this as a given. You had Assistant Governor of the RBA, Philip Lowe, yesterday saying the CAD is CAUSED by the fact we have to borrow money form external Banksters! Great Scot!!!
Aus has run a CAD for 50 years because the Credit and resulting Debt levels here are so badly managed at all levels…including Government Fiscal policy, the RBA and the Banks. I think it takes the work of a lot of geniuses together to take a country, which is probably the richest in the world in terms of resources, and turn it into one of the most indebted nations on the planet.
Let’s not forget the Academia role in this…present company excluded!!!

All the politicians are LYING or stupid. We can end all of Australias problems tomorrow simply by creating out own money. Now, idiots out there will say “oh no inflation”…..wrong, governments would rise and fall based on their ability to manage the money system, which is THE MOST IMPORTANT ROLE a government has. Right now ALL MONEY is borrowed from banks and must be paid back plus interest, but where does the interest come from? IT MUST BE BORROWED! Imagine if the money just went round and round to service the nation! Right now money is sucked out of the country in interest payments. When the banks stop “lending credit” the nation grinds to a halt, when they give money away the nation booms, and inflation soars. The banks do this on purpose because they KNOW when they will row the economy and place their bets in the stock market (casino). It is a RIDICULOUS SYSTEM for we Australians to be living under. Eventually the bankers own everything, and we become nothing but slaves to them (if we are not already).
Google “Money as debt 2, promises unleashed” and watch the video.
No matter how you try to juggle the economy as it is, you will never win. The system MUST BE CHANGED permanently and forever. International bankers should have NO SAY in how we run our country. Anyone working against a truely Australian owned and operated money system should be seen as a traitor to Australians.
Don’t be fooled, we DO NOT OWN OUR MONEY SYSTEM, no matter what garbage they try to tell you. The fact is our government BORROWS money when we could create it ourselves. Why should “bankers” be able to make money out of nothing then lend it to us? Maybe its the threat of TERROR by the banks against us if we ever try to break away? Is that the dirty secret? Is that why politicians talk tough to bankers but never do anything? Are they put there by bankers to ensure that their little scam is kept safe?
Kevin Rudd said very clearly before being elected that “I will fight to keep the reserve bank independent!!”…..
The road we are on right now is a DEAD END. The only way to keep it moving forward is mass immigration so new suckers out there can get house loans and the country gets more in debt. Thats the plan. Thats why they announced Australia will have 50 million people by 2050.
Australia is a BUSINESS, owned by bankers, and you are the slaves.

Lets kick out the bankers and take our country back!

That was well spotted. As Benjamin Disraeli is attributed to have said (but popularised by Mark Twain), “There are three kinds of lies: lies, damned lies, and statistics.”

Most forms of ‘market infomation’ seem to represent all three!

It’s remarkable how radically statisical results can change when the sample is taken from a less than representative population. Even more remarkably, otherwise sound statistical information can be interpretted in radically different ways depending on what side of the fence the commentator sits on.

The old (cynics) rule of thumb is that a real estate agent will always think of a reason why it’s a good time to buy property, a stock broker will do the same with stocks, and so on. And everyone is happy with themselves while the self-fulfilling prophecy holds true, except that it never lasts.

Some of the popular dogma about investing kicks into play and we hear burned investors consoling themselves with “It’s okay, I’m investing for the long term”. How long is a piece of string?

As J.M. Keynes said, “In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is past the ocean is flat again.”

And of course the finance industry has a classic which they must state as a legal requirement, after justifying why investing in their product is a good idea based on a chosen window of past performance they say that “past performance is no indication of future performance.”

(Apparently I’m in a quoting mood today)

Distorted information, like that you drew everyones attention to, simply serves to muddy the waters further, so it’s a shame that more people in the general community aren’t aware of this farce.

Mulrax

http://www.sqmresearch.com.au/article.php?base=news&a=1

The Chartalists think that they have the answer to your question:
“what causes private debt to GDP to rise? Is it running a persistent current account deficit in excess of GDP growth? Or is it simply due to a mis-pricing of credit?”

According to prof Mitchell it is because of budget surpluses combined with the Current Account Deficit.

“We often read that the appropriate fiscal stance is to balance the federal budget over the business cycle. Some economists claim the goals should be to run a surplus on average over the cycle allowing for deficits in extreme downturns.

Both goals would be fiscally irresponsible in Australia’s situation where our current account is typically in deficit. If the government balanced the budget on average and the current account deficit was in deficit over the business cycle then the private domestic sector would on average be in deficit (dis-saving) over that cycle. The decreasing levels of net private savings financing the government surplus increasingly leverage the private sector. The deteriorating debt to income ratios which result will eventually see the system succumb to ongoing demand-draining fiscal drag through a slow-down in real activity. In other words, adopting a growth strategy that relies on increasingly leveraging the private sector is unsustainable.

The only way the private domestic sector can save if there is a current account deficit is for the government sector to run deficits up to the desired private saving. Government deficits “finance” private saving by ensuring that aggregate spending is sufficient to generate the level of output and income that will bring forth the private desired saving levels.”

http://bilbo.economicoutlook.net/blog/?p=5194

Referring back to your earlier post regarding the tax treatment of debt on principal residence vs other real estate, I agree that more consistency in the rules would (if nothing else) simplify our tax laws and leave less room for misinterpretation.

I am not confident that the majority of homeowners would direct the proceeds of any progressively applied tax benefit to purposes such as paying down debt, though. They would be more likely to simply add it to their disposable income and spend it arbitrarily. Even if you or I might use every opportunity to reduce liabilities, it’s a cruel fact of life that people often do not act rationally. If we look at the behaviours that people frequently share when it comes to investment property, they are willing to gear to such high levels that in cash flow terms they are trading at a deficit, purely because there’s a tax deduction that will result. They justify this with the expectation of high returns from capital growth. In actuality, because the investment is neither cash flow positive or neutral they must make a capital gain equivalent of AT LEAST their average cost of carrying the investment just to break even in simplistic terms.

Personally, I do not object to the idea of people being able to deduct interest expense for income producing activities. This puts the rules more or less in line with deduction rules for business expenses. My concern about deductible debt on investment property is that the deduction is permitted even when there is no reasonable expectation of the investment ever becoming cash flow positive purely because the loan balance is often never reduced (for fear of reducing their deduction entitlements). For a business to be able to claim tax deductions there must be a reasonable expectation that a profit will be made at some stage. To be considered a bona fide ‘business’ in the first place, there are also some other requirements like minimum revenues (as opposed to profits) and so on. There are some really annoying rules actually, but the objective is clearly to inhibit people calling particular activities a “business” purely in order to justify a swag of tax deductions that they would not otherwise be entitled to.

I think any change to the tax treatment of the principal residence in Australia should encourage debt reduction, rather than encourage interest expenditure. Allowing deductible interest on home loans would really be doing the latter.

To my way of thinking, interest and other deductions on investment property (and other passive investments) should be subject to similar (not exactly the same) rules as those used to qualify as a business – in particular I think there should be a reasonable expectation that the investment will be cash flow positive (generate a profit) within N years to discourage putting it on the ‘never-never’. This would not exclude people from ‘getting into the market’ but it would require them to make some concerted effort to pay down the loan to a reasonable level and therefore lenders may take some interest in only lending quantities for investment purposes that will satisfy the deductibility rules.

Mulrax.

I am an Australian living in the UK, married to an Englishwoman.

You are doing Australia a great service by trying to highlight the massive Australian housing and credit bubble.

I am shocked when I talk to my family, about their level of complacency about this. I suspect this is fairly typical in Australia. Although the UK seems to be in an even greater credit fueled mess, there is in the UK a growing realization that there is going to a tough couple of decades to get out of this.

So to my request, I for sometime have been trying to get a good analysis of private debt to GDP ratios across a large range of countries. So I wonder if you would be able to put together an article comparing and contrasting private debt to GDP across the western nations. I suspect it would attract lots of readers as I have not been able to find anything about this on the web.

Could you also explain clearly for non-economists about what causes private debt to GDP to rise? Is it running a persistent current account deficit in excess of GDP growth? Or is it simply due to a mis-pricing of credit?

Thanks again,

Scott Murray

To illustrate how far the shifting sands of the ecconomy can move, here is an article that suggests that Australians are about (or currently) returning to their profligate ways.

I think the title should have been : “More Australians ‘looking to increase debt’” but I’m preaching to the converted on that.

http://au.biz.yahoo.com/091016/2/298au.html

One wonders why, even if the ecconomy was really on the up, after having such a close call with disaster people aren’t throwing themselves into reducing their debts while rates are still relatively low and things are looking relatively rosy.

Also, there is a growing sentiment that the rising AUD is a good thing. Check this article out.

http://au.pfinance.yahoo.com/b/julia-lee/172/time-to-head-overseas-what-to-do-with-the-high-aussie-dollar

I should point out that most of Julia Lee’s articles degenerate into references to trend analysis techniques which I don’t approve of, but the message she sends is sure to be representative of what mainstream financial advisors are telling their clients so it’s worth using this as an early warning for investor behaviour etc.

The short story is that the strong AUD is great if you are:

* paying down foreign debt
* making contractual payments or importing goods
* purchasing foreign assets, including commodities that are denominated in USD (provided the AUD depreciates against foreign currencies again in the future).

But there is no free lunch. The flip side of all of this is:

* local debts will increase from their already high levels to service consumption at these ‘bargain’ prices
* consumers will increasingly spend money on imported goods or overseas reducing local demand in some industry sectors (the travel agents and airlines could do well out of it though)
* the motivation to outsource to foreign countries will increase at the expense of local industry and employment
* exporters (eg: resources companies) will have lower revenues but the same overheads if they continue production at current levels. It’s true that these companies usually engage in currency hedging to manage the risk that the AUD will appreciate but they are rarely fully hedged because of the costs involved.
* a cowpat is still a cowpat no matter what country you buy it from, so you need to pay cowpat prices to make it at all worthwhile (and have a use for a lot of fertiliser).

Mulrax