Debt­watch May 2007: Boom­ing on Bor­rowed Money

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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.

Debt­watch April 2007: Who’s hav­ing a hous­ing cri­sis then?

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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.

Debt­watch goes blog

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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.