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.

Public Talk at UTS today 1pm

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I’m speaking at Reality Check, as part of the ALP Fringe Conference program, which runs parallel to the national conference and provides NGOs and other groups with an interest in influencing ALP policy with a platform to host discussions and seminars.

I’m one of three speakers and we have only one hour, so it will be rushed: if you want to participate, don’t be late:

Date: Friday April 27th; Time: 1-2pm; Venue: UTS Haymarket Campus, Building C, level 1, Room 31. Just up Darling Drive from the Convention Centre/down from UTS Library (view map) Enter via Block D next to the ‘Art of food’ cafe.

Hell’s Belles

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This post has nothing–well, almost nothing–to do with debt. But this is a blog, right? So I can post whatever I want.

And what I want is for you to see a new play called Hell’s Belles–or at least spread the word about it.  It’s a comedy with the underlying theme of “Be careful what you wish for”: two divorcees fantasising about the ideal man accidentally conjure up a demon, who can only leave once he has someone’s signature on a contract that offers a wish in return for a soul.

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.

Dynamics of endogenous money

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Most conventional and unconventional commentators on money believe that money is destroyed when debt is repaid. I disagree–but explaining why takes some time. I received an email this morning from a Ecological Economics discussion list in the USA on this issue, and wrote the following explanation of my position. I thought that readers of this blog might find it instructive.


On the money issue, this is one where I beg to differ both with the response Josh put forward, and most of my fellow economists as well–non-orthodox and non-orthodox. I think it’s wrong to say that money is destroyed when debt is repaid–but to explain why, I need to both put forward a dynamic model, and find an appropriate analogy.

Household Debt: US vs Australia

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As part of the background to the LateLine interview yesterday, I graphed the US household debt to GDP ratio against the Australian. All the news recently has been about the sub-prime crisis in the States, of course: but guess where household debt has been growing fastest? That’s right, good old Australia has out-done itself once more. The accompanying graphic tells the story, which I’ll embellish in the next Debtwatch report in early April.

Household Debt to GDP, USA & Australia

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.