Oh dear. WhenÂ Nassim Khadim from The AgeÂ asked me to comment yesterdy on the electoral assertion being made by the Liberal Party–that rising State debt was putting upward pressure on interest rates–I responded thatÂ the assertionÂ was:
“Total, total bullshit. It’s like saying that somebody dropped a pebble into the ocean and that caused a tsunami. And you can quote me on that.”
Well, I expected just to see the “pebble and tsunami” analogy turn up in the report. Instead, I saw the first two sentences of the above–and learnt the hard way that editorial standards at Australia’s major dailies are no longer as reserved as I took for granted:
Named in mock honour of America’s greatest swindler, a Ponzi Scheme is a financial ruse that, for a time,Â generates apparently great returns from an investment that in fact produces nothing. Ponzi Schemes initially appear to work because the promoters pay early entrants seemingly fantastic returns, by the simple expedient of giving them money deposited by later entrants. So long as the Scheme continues to grow, it can appear successful–and indeed individuals who get in and out before the Scheme collapses can become fabulously wealthy.
Prior to the NASDAQ crash in early 2000, American commentators were fond of describing their economy as being in a “Goldilocks” phase–with all economic indicators being “just right”.
That phrase dropped out of circulation after April 2000, but a level of complacency still ruled when that stock market crash appeared to have little impact on the real economy.
Complacency dramatically left the building today, with the release of the Bank of International Settlement’s (BIS) 77th Annual Report.Â The BISÂ turns the Goldilocks story around, and sees it not from Goldilocks’ perspective, but from that of the Bears. Just as the Bears’ domestic idyll was disturbed by Goldilocks the Home Invader, the apparently neat global financial system has been put at risk by out of control speculative lending.
It’s not yet the main topic of debate between Liberal and Labor, but some of the arguments in Debtwatch have at least made their way into Hansard courtesy of a speech by Laurie Ferguson. The full extract from the speech is shown below.
“This makes a mockery of the claim by the Prime Minister that we have never been better off. Whilst the Howard government crows about the success in the economy, which was largely inherited from Labor and fuelled by the raw materials demands of India and China, there is an alternative reality of an out-of-control personal debt spiral. Steve Keen from the University of Western Sydney writes:
Jessica Irvine from the SMH has written an excellent piece with this headline in today’s SMH. I’ve linked it on the blog roll, but it’s linked here too for quick reference.
Â My Debtwatch report will be very brief this coming month: I’m off to the USA tomorrow for some conferences, and I’m “under the gun” to produce papers and presentations to suit. I also won’t be available for comment at the time of the RBA’s next meeting–which is of course highly unlikely to move rates in either direction.
Will Budget tax cuts fuel inflation?Â (click here for the MP3 file)
PM — Wednesday, 9 May , 2007Â 18:14:52
Reporter: Stephen Long
MARK COLVIN: Now, will the tax cuts in the Budget cause inflation?
Some leading economists argue that the Reserve Bank could be forced to lift interest rates down the track because Government spending and tax cuts will increase consumption and prices.
But others disagree. They argue that debt levels are so high that many people will be handing their tax cuts straight to the bank.
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.