Debt Ceiling Gets Disappeared

Australia’s debt ceiling ‘disappeared’ yesterday. The Liberals and their new found friends the Greens abolished the limit just days before Australia was due to breach the $300 billion mark. It must be great to be a politician. You just slice through any laws and limits with the stroke of a pen.

Who knows what the point of a movable debt ceiling was in the first place. Perhaps to apply political pressure on big spending governments like our current one. But the media didn’t even get much of a run out of the story. Especially compared to the same set of events in the US, which got global coverage for weeks.

Despite Labor’s attempts, Treasurer Joe Hockey barely made it onto the news and raising the ceiling didn’t seem to embarrass him one bit. ‘You do not play Russian Roulette with a loaded gun when it comes to debt‘ he told ‘those opposite’ on TV last night, from memory.

We thought a loaded gun was the whole point of Russian Roulette. Now that would be a good way to enforce the debt ceiling! Each time the Treasurer wants to raise it, get out the Colt and have a whirl. If he comes out unscathed, that’s another $100 billion authorised.

Of course, Australia’s real debt limit is still very much in place. Not that the media is aware. The Sydney Morning Herald came up with this clanger: The federal government will be able to borrow as much money as it wants.‘ Err, no it can’t. Nobody knows at what point people will stop lending our government money. But there is such a point, as Greece learned the hard way. If that does happen, our treasurer will blame greedy capitalists for refusing to play Russian Roulette on the debt with him.

Although, because Australia can issue its own currency, unlike Greece for now, perhaps the government really can borrow as much as it likes. It just has to ask Glenn Stevens at the Reserve bank to create dollars and buy government bonds. But that would be illegal under the laws governing the Reserve Bank of Australia! Well borrowing the 301st billionth dollar was illegal too, until yesterday. So who knows what a Treasurer could persuade the RBA to do. That $8.8 billion given to the RBA looks like a bribe now, doesn’t it?

Of course, Australia is miles away from any problems related to excessive sovereign debt. But that’s exactly the mentality which gets you into too much debt in the first place. We’re speaking from a position of authority on this. It’s been suspiciously easy to spend money on our new credit card.

Anyway, it seems we have overcome the risks of a debt ceiling thanks to the wisdom of our politicians, especially the wisdom of Greens leader Christine Milne. Phew. Balanced budgets are very dangerous, after all. Working families should kneel before parliament and hug trees in thanks.

Actually, those working families have other problems to deal with, says Robert Gottliebsen at Business Spectator. Five ‘waves’ of problems in fact. And all of them are going to turn working families into…well non-working families.

The first wave is the end of the mining boom. At least the investment stage part of it. Gottliebsen reckons contractors could lose 70% of their business by the 2016 election.

Of course, the projects constructed will go on producing and exporting. Hopefully Australian households will be able to compete with foreigners at international prices to buy their own country’s gas. Which is the second wave of trouble. Gas prices could double in some areas as export terminals come online. And power prices are already set to surge too.

The third wave is an interesting one. Apparently the Rudd-Gillard government turned Australia’s wage awards system into a nationally based one, instead of the old state based system. Of course, it adopted the highest state’s minimum wages and penalty rates. These are being phased in slowly in states that had lower rates. But the shock is still bearing down on shoppers and the marginally employed. As any economist will tell you, raising the minimum wage doesn’t simply increase people’s pay, it raises the price of unskilled labour, which cuts people out of a job.

Which brings us to the fourth wave of unemployment – public sector employment cuts. For some reason, the people living off your taxes won’t be able to find anyone to voluntarily pay them money instead. And so they will join the ranks of the unemployed too, where they will continue to be paid by your taxes. Ironic, isn’t it?

The fifth wave of unemployment is kind of part of the fourth. It’s the car industry, which looks set to be subject to the public sector worker cuts as well. Gottliebsen reckons shutting down the car industry will cost the government a billion dollars to pay for ‘retrenchment’. Yikes. If only we’d known that when we first started subsidising them.

Qantas remains in the news too. It’s officially just like Holden – seeking a government bailout or anti-competitive protection – admitted CEO Alan Joyce. Of course, he actually said the exact opposite in an article in The Australian. But that’s as good an admission as you’ll ever get.

So what does Hockey do? Allow mining, Qantas, Holden, the public sector, and industries relying on a low minimum wage to all to get into trouble at once? It’s a tough pickle. But a lot less tough without a debt ceiling.

Perhaps all this gloom will finally pop the property market bubble. Morgan Stanley Australia chief Steve Harker has a completely bizarre yes/no answer to that notion.

He reckons severe ‘losses…won’t be triggered by a collapse in the property prices, but by the proliferation of unviable property schemes that are now being peddled’ to Self Managed Super Funds. The Australian Financial Review quotes his explanation:

At present, people can take what amounts to a triple bet on property. They own their own home, which is capital gains tax free. They can also negatively gear investment properties to the point where it eliminates all income from other sources and now people can gear their self-managed super funds into property.

It’s the third aspect of the triple bet that concerns me. I think the single biggest economic wreck – and one that will occur in this country in the next five to 10 years – will be in the SMSF space.

The SMSF space is ripe for property spruikers and promoters, high-yield schemes and fraud. We’re talking about potentially $200 billion in superannuation savings being completely blown up. It will make Storm and Pyramid look like insignificant blips.

Hmm, $200 billion in property investments blowing up without house prices taking a big hit? Sounds unlikely.

One of the interesting things to emerge out of the sub-prime story in the US was the importance of rising house prices. If house prices go up, lending money to people who can’t afford it is a good idea for everyone concerned. Anyone who gets into trouble can simply sell out and make a whopping amount of money in capital gains without ever defaulting on their loan. And banks always get their principle back because the collateral, the house, went up in value.

As soon as house prices stop going up, getting a mortgage you can’t afford becomes dangerous. You don’t make money out of the deal. And the bank is worried about its loan. That’s when lending freezes and so prices start to tumble.

So if Harker is right about problems in the SMSF property world, our bet is it will go contagious into the rest of the property market and the economy real fast. Apparently housing bubbles can trigger the biggest recession since the Great Depression, after all.

Anyway, you can add the SMSF property boom to the list of ways the Aussie property bubble could pop.


Nick Hubble+
for The Markets and Money Australia

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Having gained degrees in Finance, Economics and Law from the prestigious Bond University, Nick completed an internship at probably the most famous investment bank in the world, where he discovered what the financial world was really like.

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