Debt, debt, debt, debt, debt! Everywhere you go, it’s waiting for you.
From government, to private lives, it has become the number one facilitator of any given action. For proof, we suggest you resist the urge to channel surf during commercials. Instead, why not endure the financing options that will be spruiked at you by hyperactive dancing sales people. Or, for a less painful option, consider the effect an interest rate rise has on the disposable income of new home
Money may make the world go around, but it’s debt that dominates the world of money.
Like a giant spinning top, the global economy has relied on the increased economic flow and circulation that debt provides. Eventually it will stop spinning and fall over on its side.
You see, it works like this: Central banks are like the tip of the spinning top – the point upon which our debt based economic system expands from and pivots off. It’s a very narrow tip.
The Financial Crisis is an indicator that the world economy has become extremely top heavy with debt and is dangerously wobbling around like a slowing spinning top.
Governments and central banks have managed to engineer some more spin, but only at the expense of piling more debt on top of the already wobbling structure. This only increases the stakes of keeping it spinning.
But have we discovered the point where more debt will not provide more growth – only more instability? Who knows? (Other than these two academics, who reckon they’ve figured it out.)
The key point is that a roaring economy might be great, as the boom period showed us. But if this boom is at the expense of stability, and only artificial spin is keeping it going, then we are going to pay for it eventually.
”Prepare for a very difficult economic time, which you will not be able to escape,” said the chairman of the Netherlands Authority for Financial Markets at the ASIC summer school.
The Sydney Morning Herald (SMH) explains why Hans Hoogervorst is so ‘optimistic’:
“Australia is unlikely to avoid an imminent economic downturn caused by excessive government debt”.
Hans’ timing is excellent. But why stick to government debt?
Dan Denning reports that “…in another ABS release we learn that the country’s net debt figure has reached a new all time high, both in nominal terms and as a percentage of GDP. The net debt (public, private, household) is $647 billion. It was up $14.2 billion in the December quarter and is over 60% of GDP.”
International debt flows are particularly big on the economic agenda for Australia. Michael Stutchbury, in Tuesday’s Australian Newspaper, explains that the traditional measure of trade flows serves another purpose for Australia:
“Today’s economic orthodoxy suggests current account deficit simply measures the extent to which domestic savings are not big enough to finance the mining investment boom.”
Going back to Dan’s commentary:
“The net foreign debt and current account deficit are a reminder that much of Australia’s current prosperity – from house prices to mining profits – comes via borrowed money. Of the $647 billion in net foreign debt, $426 billion – or 65% – is owed by Australia’s financial corporations.”
With debt running so deeply in the veins of the Australian economy, would it even be possible to have a healthy type of growth emerge? Or would a pickup in economic activity simply be another re-leveraging, doomed to topple the economy at some point in the future?
Austrian economic theory, to which the Markets and Money subscribes, would suggest that a period of “creative destruction” must clear out all the malinvestment and excessive leverage before healthy growth can resume. Some of this has occurred, but nowhere near enough, especially in Australia.
Tim Colebatch at the SMH reports that Australia’s mortgage debt has “soared” to more than $1 trillion. That’s 15 times what it was 20 years ago. The breakdown of the figures since 1990 is fascinating. A 12 fold increase in mortgage debt for people’s own homes, as well as a 30 fold increase in mortgage debt for rental investors, while disposable income merely trebled.
“In January 1990, home mortgages ate up just 28 percent of our disposable income. By January 2000, that had ballooned to 66 per cent, and by January this year, it doubled again to 134 per cent.
“Households’ willingness to take on greater debt powered much of Australia’s economic growth from 1990-2010, but with our households now as indebted as any in the Western world, economists say that will not be repeated.”
All this not only inhibits growth, but exacerbates just how sensitive the Australian economy is to interest rates.
Apparently, a quarter of Sydney homeowners have already experienced the other side to Australia’s housing boom. Nick Gardner at The Daily Telegraph writes:
“Despite a broadly rising market, property analyst Residex has revealed 24 per cent of properties bought and sold between January 2005 and January 2010 fetched less than the vendors had paid.
“The average shortfall was more than $54,000 but varied between suburbs.
“The biggest losses were in the affluent Neutral Bay/Spit area, where typical shortfalls topped $275,000.
“But even in Campbelltown, where the median house price is a modest $346,500, 36 per cent of properties sold for less than was paid, with an average shortfall of $31,000.”
No matter how wealthy your suburb, you aren’t safe from Mr Market.
The real problem faced by people who have lost value in their homes is that the price of the home they are moving to is likely to have risen. Their loss has two sides to it; the nominal loss on their house and the increased price of the new house.
Assuming this is true, it would point out something which has confounded any neutral observer to property markets since the Stone Age. If house prices across the board rise by say 50%, this would be heralded as a success in the property industry. If you realise this gain by selling and moving out, you still have to live somewhere. Your new place would also have increased in price, forcing you to pay more. So, in terms of standards of living, you have got absolutely nowhere.
Any gain is offset by an increase in the price of the house you move to.
Obviously, house prices don’t move identically across the board. This means there are opportunities to gain. But spruiking an increase in a nationwide price index doesn’t equate to Aussies being better off. It equates to those Aussies who didn’t own a home, but want to buy one, being worse off. That means it’s even worse than a zero sum game.
So, the property spruikers will claim that it’s all about picking the right locations. Well, if house prices in Melbourne rise by 50%, while house prices in the rest of Australia stay the same, would Melbournites be better off?
No, unless they wanted to move away from Melbourne…
The ‘Ouzo crisis’ has entered a critical phase. The Greek people are having to make crippling blows to their public and personal budgets. Worst of all, Elly Koufakis, who “…used to buy special SpongeBob SquarePants toilet paper for her children, [says] she doesn’t anymore.”
Other devastating accounts include that of Haris Georgatou: “After years of spending $15 a day on coffee, he now makes his own at work.”
My own countrymen, ze Germans, have heard their Chancellor rule out a Greek bailout. She stated it in very Deutsche terms:
“There is absolutely no question of it. We have a (European) treaty under which there is no possibility of paying to bail out states in difficulty. Right now we can help Greece by stating clearly that it has to fulfil its duties.”
Germany’s history isn’t great when it comes to treaties.
It would seem that the statements are just a game of terminology anyway. A German bank (rumours are amassing around KfW Bankengruppe) may be backed by the German government in a Greek bailout.
Die Welt put it unambiguously:
“The pressure is growing — the chancellor knows that. She is still waiting for the right time to justify the billions (in aid) for Greece… But by then the situation in the financial markets could have spun out of control… The billion euro question is now therefore ‘when will Merkel move?'”
Apparently investment banking giant JP Morgan considers California (the Vino crisis?) to be a bigger worry than Greece.
Dan Weil explains this is because of the possibility of contagion. Also, JP Morgan hedges its European exposure, so others bear the risk. Those two points appear largely contradictory, but oh well.
Economic Outlook – Look Out
Some nice examples of how government intervention works come from Sean Hyman at Moneynews, with his article titled “Don’t Believe What You Hear: It’s Not Getting Better”.
“Now Fannie Mae says … that it needs another $15 billion, bringing its total to more than $75 billion. This company is such “crap” that it’s had 10 consecutive quarterly losses. Its latest quarterly loss was $16.3 billion.
“AIG lost $8.87 billion in the fourth quarter.
“The FDIC has shut down more banks in Nevada and Washington. That makes 22 bank failures this year (and 140 banks last year and 25 the previous year).”
Then Reuters chimes in with this:
“Some 400,000 jobless Americans could exhaust their unemployment benefits over the next two weeks, the Labor Department said. By the end of March, 500,000 workers could lose the COBRA subsidies that help them pay for health insurance.”
And the Washington Times reports the statistic that sums it all up:
“Moreover, for the first time since the Great Depression, Americans took more aid from the government than they paid in taxes.”
That is worth reading twice.
If you are wondering what the Reserve Bank of Australia (RBA) is thinking as it continues its rate rises, check out their October 2009 minutes. It seems the RBA is reading up on Austrian economic theory. The ABC even considered it worth quoting this part of the minutes directly:
“Very expansionary policy could result in the build-up of other imbalances in the economy, which would ultimately be detrimental to economic growth.”
This revelation should make RAB governor Glenn Stevens very nervous when he looks to his comrades’ rates overseas. The nearest rate of a developed nation is 0.5%. That’s 1/8th Australia’s and “very expansionary”.
Retirement advice for Terrorists
The London based Daily Mail reports that the cancer stricken Lockerbie bomber is alive and well, having so far lived twice as long as predicted when he was released from a Scottish prison on compassionate grounds.
Yes, terrorist and compassionate grounds.
Anyway, upon hearing of the luxury and heroic status being enjoyed by the bomber, American blood began to boil. James Taranto of the Wall Street Journal spun the whole thing like a magician to apply to the socialised healthcare debate, which seems to be reaching our own shores:
Great Moments in Socialised Medicine
“In Britain, the government itself runs the hospitals and employs the doctors,” claims former Enron adviser Paul Krugman. “We’ve all heard scare stories about how that works in practice; these stories are false.”
“This defence becomes harder to believe when a cancer patient can get better care by going to Libya.”
To be fair, James Taranto’s comments on a daily compilation of amusing articles are not entirely serious.
Global Warming Casualties
There have been further casualties on the global warming front, with a baby girl surviving a gunshot wound in her family’s suicide. The wounded survivor lay among her dead family members for three days. Why did they have to die? The suicide note explained it was their fear of global warming.
Dr Mark Perry of the University of Michigan posted the following on his blog:
“From Al Gore’s article We Can’t Wish Away Climate Change in today’s NY Times:
“It would be an enormous relief if the recent attacks on the science of global warming actually indicated that we do not face an unimaginable calamity.”
Dr Perry has degrees from George Mason University, the only university in the world which offers a specialisation in Austrian economics (as far as I know).
Lastly, my apologies for providing a reference to an outdated article on Eastern Europe and thanks to the readers who pointed this out. I was intending to feature Eastern Europe in its own section and did not revise the content that I decided to keep. Considering Eastern Europe still exists, it seems the article’s forecast did not eventuate – yet.
Have a great weekend.
Markets and Money Week in Review