Stephen Long from ABC News brought to my attention the fact that the Reserve Bank of New Zealand appears to be contemplating a return to regulating lending.
This is only hinted at at present, but it represents a major shift in Central Bank thinking–and a welcome one, from a debt-deflationary point of view.
I’m interviewed about it on PM tonight; in the meantime, here are some relevant excerpts from the Reserve Bank of New Zealand: Financial Stability Report, May 2:
It goes without saying that I’m a Cassandra amongst the Pollyannas crowing about Australia’s current economic performance data. Low inflation, low unemployment, and no sign of a wages breakout, are the usually-quoted sweet economic indicators (admittedly with some strange bedfellows, including a relatively slow rate of economic growth for these conditions, and a huge balance of trade deficit despite the best terms of trade in history).
So how do I justify the stance of a Cassandra? Because things can’t continue as normal, when normal involves an unsustainable trend in debt. At some point, there has to be a break–though timing when that break will occur is next to impossible, especially so when it depends in part on individual decisions to borrow.
Who’s having a housing crisis then?
Global economic attention has been focused on the sub-prime lending crisis in the United States recently, and many local analysts have made soothing noises to reassure Australians that “it couldn’t happen here”.
The USA’s sub-prime market is indeed a peculiarly American phenomenon; but the level of Australian household debt (the sum of mortgage debt and personal debt) is every bit as extreme as the USA’s. And contrary to popular opinion, our debt binge dwarfs America’s. As the chart below shows, Australia’s household debt to GDP ratio has been growing more than three times as rapidly as the USA’s since 1990. The ratio has grown at an average of just over 2% per annum in the USA; it has grown at over 6.8% per annum here.
A subscriber to my Debtwatch newsletter suggested that I establish a blog. I plan to publish my monthly Debtwatch report here, as well as sending it out to subscribers.
Next month I will also start a USA version of Debtwatch. The recent panic on Wall Street can be seen as yet another “correction”, but it might also be the beginning of the unwinding of America’s long-running housing bubble, which has driven private debt levels there to over 160 per cent of GDP–higher even than Australia’s. While we definitely have enough debt “home brew” of our own to trigger a crisis, we are as always just minnows next to the USA; the old saying that “if the USA sneezes, Australia catches a cold” may come home very powerfully soon if the world’s largest economy actually comes down with the pneumonia of a debt deflation.