It’s Debt, Debt, Debt for Australia!

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Last weekend's Sunday Telegraph pointed out a new record for Australia: our ratio of household debt to GDP is now higher than the USA's. I've written the following commentary on this dubious "gold medal" (or is it really lead?) for the ABC's The Drum.

In all the self-congratulations over how Australia has managed to sidestep the GFC, an inconvenient truth has been overlooked: the crisis was caused by too much debt, and Australian households have had a stronger and longer love affair with debt than even the Americans.

As of the latest RBA figures, Australian households now owe the equivalent of an entire year's GDP—3% more than Americans ever owed. We grew our debt pile much faster than Americans did. We are continuing to go deeper into debt, while American households have started to reduce theirs. And in one of the great travesties of our GFC sidestep, the most recent growth in household debt has been deliberately engineered by government policy.

Back in 1990, American households had twice our level of household debt—60% of GDP versus 30%. But after just 15 years, Australians had caught up: by 2005, both countries had household debt to GDP ratios of 86%. Just as the media started to focus on the Subprime Catastrophe in the USA, American household debt began to stabilise, while ours continued to grow—peaking at 99% of GDP in March of 2008, versus the USA's all-time high of just under 97% one year later.

We actually began to reduce our debt levels before America—with household debt falling from 99% to 96% of GDP in March 2009. but then the federal government's First Home Owners' Boost began to kick in (it was introduced in October 2008, and I railed against it at the time—see "Res­cu­ing the Econ­omy or the Bubble?”). This enticed new entrants into mort­gage debt in record num­bers: dur­ing the life of the Boost, over 1 per­cent of the Aus­tralian pop­u­la­tion took the government’s addi­tional $7,000 bribe down to the bank, and lev­ered it up five or more times with a mort­gage. Even though house­holds were reduc­ing other forms of debt, total house­hold debt rose until it cracked the mark of 100% of GDP in the last month.

The good news—for the rest of us—from this First Home Buy­ers debt binge was that their bor­row­ing was one of three domes­tic con­trib­u­tors to Aus­tralia avoid­ing a tech­ni­cal reces­sion in 2009 (China’s own stim­u­lus pack­age was an impor­tant fourth fac­tor). The addi­tional $40 bil­lion of mortgage-backed money com­bined with the $30 bil­lion impact of Rudd’s stim­u­lus pack­ages, and the close to $40 bil­lion boost from the RBA’s rate cuts, to dra­mat­i­cally increase both house­hold incomes and spend­ing. Ger­ard Minack from Mor­gan Stan­ley, who esti­mated that the last two fac­tors increased house­hold dis­pos­able incomes by 9% last year, com­mented that “If that’s a reces­sion, bring it on!”

The bad news is that spend­ing boost from addi­tional mort­gage debt is, in the immor­tal words of Paul Keat­ing, a souf­fle that is unlikely to rise twice. There just aren’t that many more First Home Buy­ers who can be enticed into the mar­ket in 2010, even if the Fed­eral Gov­ern­ment fol­lows NSW’s lead and extends its Boost for another six months. Prop­erty spruik­ers may be con­fi­dent that the Great Aus­tralian House Price Bub­ble is back, but the mar­ket is unlikely to fly in the absence of delib­er­ate gov­ern­ment manip­u­la­tion of demand and a renewed reluc­tance by buy­ers to go into debt.

That’s not to say that the banks and the prop­erty lobby aren’t doing their best to keep the bub­ble fly­ing. Thanks to Kris Sayce from Money Morn­ing mag­a­zine for bring­ing the fol­low­ing to my atten­tion some months back: many lenders are now offer­ing loans of 110% of the value of a prop­erty, so long as there’s a guar­an­tor. Need­less to say, the fol­low­ing excerpt from Home Loan Experts is not a prod­uct endorsement:

Guar­an­tor home loan

Guar­an­tor loans are now the only way to bor­row 100% of the pur­chase price as no deposit home loans have been with­drawn from the mar­ket. Did you know that there are stark dif­fer­ences between the guar­an­tor sup­ported loans offered by dif­fer­ent lenders?

With the help of a guar­an­tor you can bor­row over 100% of the pur­chase price which will allow you to buy a home and con­sol­i­date debts or ren­o­vate the prop­erty at the same time.
How much can you borrow?
  • First home buyer guar­an­tor loan: 110% of the prop­erty value.
  • Sec­ond home buyer guar­an­tor loan: 110% of the prop­erty value.
  • Refi­nance guar­an­tor loan: 100% of the prop­erty value.
  • Debt con­sol­i­da­tion & pur­chase guar­an­tor loan: 110% of the prop­erty value.
  • Investor guar­an­tor loan: 105% of the prop­erty value.
  • Con­struc­tion guar­an­tor loan: 100% of the prop­erty value & cost of construction.
  • Low doc guar­an­tor loan: Not avail­able with a guar­an­tor mort­gage. See below for our 80/20 method of financ­ing low doc loans with the help of a fam­ily member…

Shades of Japan’s “99 year mort­gages” at the height of their Bub­ble Econ­omy back in 1990! While this could surely help boost the bub­ble, prac­ti­cally I doubt that there will be many tak­ers. So one of the four props that kept our econ­omy up in 2009 is unlikely to work in 2010. The inter­est rate prop is now work­ing in reverse, as the RBA resumes its eter­nal fight against the con­sumer price infla­tion dragon, leav­ing only fis­cal stim­u­lus and China to coun­ter­act the decline in credit-based spending.

This is the real folly of boost­ing the econ­omy by entic­ing house­holds to take our more debt. Since spend­ing is the sum of income plus the change in debt, increas­ing debt lev­els pro­vide a strong boost to the econ­omy. But that same process can work in reverse if house­holds decide that they’re car­ry­ing too much debt: then their attempts to reduce their debt—“deleveraging”—necessarily reduces their spending.

When debt lev­els are low—as they were back in the 1950s and 60s—this isn’t a major prob­lem. But when debt is as high as it is now—literally 100% of GDP for house­holds and another 60% for businesses—then delever­ag­ing can cause a dra­matic fall in demand.

This is the force that is dri­ving the down­turn in the rest of the OECD, and by adding to house­hold debt, we have sim­ply delayed its arrival here—we have not stopped it.

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122 Responses to It’s Debt, Debt, Debt for Australia!

  1. Alan Gresley says:

    Oddly enough, debt, debt, debt for Aus­tralia seems to increase waste, waste, waste for Australia.

  2. Ftoomsh says:

    I get annoyed by that “Steve Keen is wrong” prompt on Google search. Fact is, Steve Keen will soon be proved right. What peo­ple don’t under­stand about macro pre­dic­tions is that the micro behav­iours and tim­ings are not being and can­not be pre­dicted in detail but rather the macro event in total. The macro event can be pre­dicted with axiomatic certainty.

    It is axiomatic that end­less growth (in pop­u­la­tion, energy con­sump­tion or debt for exam­ple) can­not con­tinue idef­i­nitely in a finite sys­tem. Why do most peo­ple find this con­cept so dif­fi­cult to grasp? I think the answers are (a) they do not under­stand the power of expo­nen­tial growth and (b) they think “big” equals “infi­nite”. Deep down they think, “The earth is so big, we’ll never run out of resources.”

    Since debt growth can­not con­tinue indef­i­nitely and since debt money is keep­ing eco­nomic activ­ity robust then a crash or some kind of con­trolled crash land­ing must hap­pen. It is axiomatic. When one guy (Steve Keen) talks about mea­sur­able quan­ti­ties and empir­i­cal cor­re­la­tions and ties it together with a coher­ent the­ory while another guy talks about neb­u­lous phe­nom­ena like “busi­ness con­fi­dence”, I know which bloke I will believe.

  3. Ftoomsh says:

    What is the way forward?

    Empir­i­cal evi­dence to date indi­cates that nei­ther a pure com­mand econ­omy nor a pure free mar­ket econ­omy can gen­er­ate the best socioe­co­nomic out­comes. Some form of mixed or hybrid econ­omy is required and in fact always arises nat­u­rally because the polit­i­cal sphere con­stantly obtrudes itself to some extent onto the eco­nomic sphere. Con­comi­tantly, the eco­nomic sphere, in an open soci­ety, always man­ages to quasi-escape efforts at regulation.

    We need to;

    1. Fur­ther develop the new het­ero­dox eco­nomic the­o­ries which are already clearly supe­rior in descrip­tive and pre­dic­tive terms to the neo­clas­si­cal eco­nomic prac­tice which gave us the GFC.

    2. Re-introduce suf­fi­cient finan­cial reg­u­la­tion to curb spec­u­la­tive excesses with­out unduly hob­bling inno­va­tion and entre­pre­neur­ship. This would involve recog­ni­tion that there is a the­o­ret­i­cal opti­mum level for reg­u­la­tion as both too lit­tle and too much reg­u­la­tion carry avoid­able costs. Highly spec­u­la­tive finan­cial instru­ments ought to be severely cur­tailed or pro­scribed out­right. The frac­tional reserve sys­tem may also require tighter con­trols to avoid excess debt creation.

    3. Neg­a­tive exter­nal­i­ties need to be costed or taxed. Per­verse sub­si­dies (for exam­ple neg­a­tive gear­ing, fos­sil fuel sub­si­dies, first home owner grants, busi­ness and mid­dle class wel­fare and so on) need to be with­drawn pro­gres­sively from the sys­tem. Even wel­fare for the poor ought to be pro­vided on a self-interested cost-analysis basis only. The ques­tion ought to be about how much wel­fare tax­pay­ers are pre­pared to pay through taxes to both insure them­selves against ulti­mate per­sonal mis­for­tune and to avoid the very real disu­til­i­ties of social ills such as poverty induced crime and poverty induced dis­ease epidemics.

    The struc­tural prob­lems in our econ­omy have arguably arisen, in part, out of progress in labour sav­ing tech­nol­ogy but have been greatly exac­er­bated by inap­pro­pri­ate poli­cies. Per­verse sub­si­dies, indus­try assis­tance (cor­po­rate wel­fare) and anti-worker laws dis­tort our econ­omy in ways which arti­fi­cially and dele­te­ri­ously increase the profit share of the econ­omy and reduce the labour share. The result is market-failure/policy-failure unem­ploy­ment and under-employment which are in actu­al­ity much higher than the men­da­cious offi­cial measures.

    Cap­i­tal gets a greater pro­por­tion of the cake but the cake is smaller over­all because 10% of the bak­ers are not work­ing. Eco­nomic activ­ity and growth is only stim­u­lated by ever increas­ing debt to under­write con­sump­tion lev­els. Return­ing a greater share of profit to pro­duc­tive labour and pro­duc­tive inven­tion will assist in cor­rect­ing our economy.

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  5. utilitarian says:

    For those who haven’t seen it, “Mary Pop­pins on British Bank Stability”:

    http://www.youtube.com/watch?v=C6DGs3qjRwQ

    The user that posted has edited it slightly, but not too hard to put up with in a short clip.

  6. TruthIsThereIsNoTruth says:

    mahaish @86

    Thank you that is a nice sim­ple start­ing point to anchor down your thoughts.

    I think again it is an exam­ple how some­thing so intu­itively sim­ple gets very com­pli­cated in prac­tice. First thing if assets were to equal lia­bil­i­ties both sides have to account for these posi­tions in exactly the same way. Then I think these assets and lia­bil­i­ties can be passed on in many ways to dif­fer­ent places which roll up in terms of report­ing to dif­fer­ent accounts which may or may not report into CAD or trade bal­ance etc. Throw in inter­est rate swaps and cross cur­rency swaps.

    So I think I agree with you and bb, the­o­ret­i­cally it should bal­ance out but in prac­tice the account­ing in the sys­tem makes it impos­si­ble to rec­on­cile every­thing. I think this is an impor­tant thing to con­sider espe­cially when look­ing at com­par­isons between dif­fer­ent countries.

  7. spooky2009 says:

    Its ok,
    no one worry any­more.
    Every­thing is fine.
    Hous­ing prices are going to con­tinue to go up.
    And the econ­omy is recov­er­ing nicely all in 2010

    Cri­sis Over
    http://www.news.com.au/business/recovery-to-gather-pace-in-2010/story-e6frfm1i-1225814879826

    Im run­ning out now to buy some Bond corp shares before they boom, i hear they are very good value now.

  8. spooky2009 says:

    Its ok,
    no one worry any­more.
    Every­thing is fine.
    Hous­ing prices are going to con­tinue to go up.
    And the econ­omy is recov­er­ing nicely all in 2010

    Cri­sis Over
    http://www.news.com.au/business/recovery-to-gather-pace-in-2010/story-e6frfm1i-1225814879826

    Im run­ning out now to buy some Bond corp shares before they boom, i hear they are very good value now.

  9. bb says:

    Alan @ 100, and TITINT @ 106,

    Thanks for your thoughts.

    The bot­tom line is that the CAD (deficits) and CAS (sur­pluses) should bal­ance. The fact they do not cuts to the very heart of all econ­imic debate. If we can’t mea­sure the data cor­rectly, how do any of these ratio’s mean anything.

    I asked Steve ear­lier in this blog a cou­ple of ques­tions. I know he is very busy, so I will open it up to everyone.

    1. With regard to Steves first chart, why has US house­hold debt / GDP been flat over the past 2 years, despite +US$1.0t of debt for­give­ness (write-downs) which is roughly equal to 7% of GDP

    2. Again with the first chart, why had the house­hold debt / GDP been increas­ing since 1960’s while the US sav­ing ratio was positive?

    3. How do the national accounts adjust the Cur­rent account sur­plus for losses / gain on equity invest­ments. Ie: Japan­ese losses on Aussie real estate duing the early 1990’s.

  10. BrightSpark1 says:

    Alan Gres­ley

    I know Australia’s raw mate­ri­als are of value but even in the mid­dle of the “min­er­als boom” Australia’s CAD was in excess of 50 bil­lion dol­lars per year.

    Also many min­ing assetts have already been aquired by for­eign­ers in our “for­eign invest­ment” binge, soon we will not own any, or very few of them.

    We now depend on imports to keep our retail sec­tor going even many food items are imported. Our dein­dus­tri­al­i­sa­tion is almost at the end point with our TAFE and Uni­ver­sity sec­tors gut­ted. These insti­tu­tions are now mainly edu­cat­ing into non wealth cre­at­ing voca­tions and tak­ing over­seas stu­dents who enrol to gain per­ma­nent redi­dency not an education.

    Re indus­tri­al­i­sa­tion will take sev­eral decades and the tran­si­tion will be very painful.

    The notion of a “post indus­trial” era is a totally stu­pid con­cept. His­tory shows that the only way to gain real wealth is through being industrious.

  11. TruthIsThereIsNoTruth says:

    bb,

    another anom­aly hap­pens in the first chart in 1989 then the same anom­aly seems to hap­pen in the sec­ond chart in 1990 for Aus­tralian debt.

  12. BrightSpark1 says:

    Philip @99

    Once again sorry about the confusion.

    MVH Mar­ket Value Hypoth­e­sis a term that I thought you had used in a pre­vi­ous post.

    For the cur­rency to self adjust as these idiots claim that it would, you would need con­stant inter­est rates and hon­est bankers at the very least. Fat chance!

  13. The Outback Oracle says:

    Hi Mahaish
    Always good to read your posts.

    I was actu­aqlly agree­ing with you. Latvia has lit­tle choice but to tell every­one out­side Latvia to go and jump in the lake. I just thought it was sim­pler if they straight out told every­one so rather than go through the trou­ble of adjust­ing debt into Lat­vian cur­rency. Frankly I don’t know how they would achieve that any­way but I’m igno­rant in the niceties of such mat­ters. Ango­phera pointed out that there may be two legal out­comes depend­ing on which one adopted.

  14. The Outback Oracle says:

    bb

    We’ll have to agree to dis­agree I think re CAD’s, debt and Cap­i­tal Sur­plus’. My think­ing is rather ‘old fash­ioned’ and I guess a bit ‘Aus­trian’ in mod­ern par­lance. As I’ve said before i’m old enough to have existed before ‘Aus­trian’ became a theme and more call myself ‘a realist’.

    I would make one last com­ment on the sub­ject which is not meant as a win­ning shot in any form. I feel that much mod­ern think­ing is dis­torted by con­sid­er­a­tion of the fact that we have economies that are so deeply in debt that, for most com­men­ta­tors, a pos­i­tive after tax, real inter­est rate is regarded as impos­si­ble from a prac­ti­cal view­point. There­ofe the idea that neg­a­tive inter­est rates are the basic cause of the prob­lem is not con­sid­ered at all. My view starts from a long time ago before we had all this damned debt. I can see quite clearly that had we had pos­i­tive real inter­est rates much of our cur­rent prob­lems would not have occurred.
    I do run into a prob­lem with the value of the $A if other coun­tries had adopted the debt fuelled growth model that in fact has been the fun­da­men­tal mech­a­nism of the years. So some­how we have to hold down the dol­lar while at the same time hav­ing higher inter­est rates. There are bet­ter brains than mine that might come up with pos­si­ble solu­tions to this problem„,hehe includ­ing yours!!!

  15. Goldilocksisableachblond says:

    bb @ 109 :

    why has US house­hold debt / GDP been flat over the past 2 years, despite +US$1.0t of debt for­give­ness (write-downs) which is roughly equal to 7% of GDP

    Just a guess , but with cash-for-clunkers, home buy­ers cred­its and such , there may have been off­set­ting cre­ation of new debts. Mean­while , GDP has been pretty flat.

    I agree that the ris­ing sav­ings with ris­ing debt is coun­ter­in­tu­itive. Maybe they should cat­e­go­rize those sav­ings as ” debt-service reserves”. :)

  16. Alan Gresley says:

    @BrightSpark1 110

    I know Australia’s raw mate­ri­als are of value but even in the mid­dle of the “min­er­als boom” Australia’s CAD was in excess of 50 bil­lion dol­lars per year.”

    Very true. If it wasn’t for the rise of China and the Asian Tigers which lead to the resource boom, we would have had our Banana Repub­lic but strange that should come from the per­son that also allow Glob­al­iza­tion to sweep across Australia.

    Also many min­ing assets have already been acquired by for­eign­ers in our “for­eign invest­ment” binge, soon we will not own any, or very few of them.”

    And this should be reversed. Our cur­rent cream of polit­i­cal and finan­cial elites has sold us out and seem intend on inten­si­fy­ing this process. The could be stopped buy our real estate bub­ble burst­ing and Debunk­ing Eco­nom­ics being taught at school.

    We now depend on imports to keep our retail sec­tor going even many food items are imported. Our dein­dus­tri­al­i­sa­tion is almost at the end point with our TAFE and Uni­ver­sity sec­tors gut­ted. These insti­tu­tions are now mainly edu­cat­ing into non wealth cre­at­ing voca­tions and tak­ing over­seas stu­dents who enroll to gain per­ma­nent res­i­dency not an education.”

    Aus­tralian gen­er­ally didn’t real­ized the atten­tion of the Hawke and Keat­ing gov­ern­ments (Fabi­ans) by allow­ing glob­al­iza­tion which accel­er­ated the trend of dein­dus­tri­al­i­sa­tion and didn’t real­ize the con­se­quences of the Howard gov­ern­ment sell­ing off our pub­lic infra­struc­ture or gut­ting pubic edu­ca­tion. It is the hid­den coup of the finan­cial and polit­i­cal elites.

    http://en.wikipedia.org/wiki/Australian_Fabian_Society

    Re indus­tri­al­i­sa­tion will take sev­eral decades and the tran­si­tion will be very painful.”

    We usu­ally have to learn the hard way. The young gen­er­a­tion of Aus­tralians do not know of the reces­sion of 1989–1991. I talk to my son and he is in total denial that a reces­sion can hap­pen. He con­sid­ers it ok, to get a mobile lose it, and buy another one.

    The notion of a “post indus­trial” era is a totally stu­pid con­cept. His­tory shows that the only way to gain real wealth is through being industrious.”

    I liken the con­cept of Post-Industrial to Post-Human since they seem to have emerged from the same schools. Julius Hux­ley was the first to use the word ‘tran­shu­man­ism’. We know what his brother Aldous Hux­ley wrote, ‘Brave New World’.

    http://en.wikipedia.org/wiki/Transhumanism

    Sound to me like eugen­ics. Charles Dar­win wrote about the accent of Man while the Dar­win­ist wrote about the descend of Man back into feu­dal­ism. If this is what is termed progress, they can take their New World Global Feu­dal­ism and shove it.

  17. bb says:

    Goldilock­sis­ableach­blond @115,

    I would have thought the cash for clunk­ers pro­gram would have reduced debt — maybe I just don;t under­stand how it works.

    Yes some new debt would have been taken on as a result of home buy­ers incen­tives, how­ever at the same time the sav­ing rate has gone through the roof.…

    Curi­ous.

  18. Jason Murphy says:

    bb *35 point 2

    Obvi­ously to deter­mine if a par­tic­u­lar set of cir­cum­stances is “good” or “bad” depends on the objective.

    Most peo­ple argue from their per­sonal perspective.

    For exam­ple, some­one with a mort­gage is unlikely to argue that higher interesr rates are good etc etc.

    If I see a num­ber that is out­side of what we have seen in the past I ask this ques­tion. Is there some­thing dif­fer­ent this time that will not meke it return to the pack over the term that past epce­ri­ence would indi­cate that it would?

    If you loook at the charts you don’t have to be WB to see house­hold debt seems to map to mort­gage debt, and that GDP has done noth­ing our of the ordinary.

    There­fire mort­gage debt is the thing to consider.

    With­out bor­ing you with the cou­ple of pages of think­ing to get from there to the con­clu­sion the way I am think­ing is this:

    The extent to which the ratio of GDP can or will stay at the num­ber it is now, or move higher, or move lower, has as one of the key terms in it’s func­tion the amount of trade sur­plus, and the extent to which trade sur­plus is the hands of fewer enti­ties, and the rela­tion­ship is that of direct proportion.

    Not deter­mini­tive, just one driver.

    Maybe?

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  20. foxbat101 says:

    Is debt the issue or ser­vice­abil­ity of debt??
    Oh i am reduc­ing my debt posi­tion.
    Always have.
    Any loan i take out is fully amor­tized over the term of the loan.
    So is it debt that is the issue or the abil­ity of the par­tic­i­pants (bor­row­ers) to pay that debt.
    Or unwill­ing­ness to pay, after all if some­one will lend you money at 0% inter­est why not take it?
    I sup­pose it is like hav­ing a full set of sails head­ing on a yacht towards a cyclone. A wise cap­tain will trim the sails right down.
    An even wiser cap­tain will avoid the cyclone all together.
    An even wiser per­son would not own a boat at all.
    Peo­ple need to learn not be told.
    So lets not worry about the teenagers hav­ing their first party, most of them will sur­vive. The ones that get hurt will lick their wounds recover and do it bet­ter next time.
    After all money is only col­ored pieces of paper other peo­ple value:)
    Peter

  21. dippa says:

    Sadly, the Aussie hous­ing bub­ble looks just like the Irish one, albeit per­haps a year or two away. In Ire­land, in the space of less than 2 years we have seen in excess of 40% wiped off the value of houses and it won’t be over until sig­nif­i­cant debt delever­ag­ing hap­pens. Cheap money was the rea­son and it’s inter­est­ing to see exactly the same thing hap­pen­ing now in Aus­tralia with 110% mort­gages and gov­ern­ment grants. The com­ing down phase is going to be pro­longed and painful for peo­ple and banks. At least you will have the option of devalu­ing your cur­rency which Ire­land doesn’t being tied to the Euro…

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