Strong Australian Economy… What a Load of Blarney

The big news this week has been the unexpected strong showing of the Australian economy.

According to the Bureau of (tortured) Statistics, economic growth rose 3% over the past 12 months.

Officially, Australia’s economic output reached $1.6 trillion.

The headlines said it all:

  • Australia’s economy is stronger than anyone thought’ — Business Insider, 2 March 2016
  • GDP: Economic growth beats forecasts’ — ABC Online, 2 March 2016

For a public that is time poor, and has shortened attention spans, this news grab would have been very comforting.

Unfortunately, it’s given our society a false sense of security.

A strong economy sends a subliminal message that we (the collective) can ask for more.

Why not introduce more welfare benefits? Why is there a need for a Medicare co-payment? Why can’t unions demand higher wages? And why not buy that third home on 100% finance?

From where I sit, we don’t have a healthy economy — it has a terminal illness.

We have a debt addiction that’s masking a deep malaise in our economy. The RBA is doing all it can to keep the drug in the system. This is a statement from RBA chief Glenn Stevens (1 March 2016):

…it is appropriate for monetary policy to be accommodative. Low interest rates are supporting demand, while supervisory measures are working to emphasise prudent lending standards and so to contain risks in the housing market. Credit growth to households continues at a moderate pace…

Monetary policy is accommodative. Low interest rates are supporting demand. This is just central banker code for saying we’ll continue making cheap money available so ‘credit growth to households continues at a moderate pace’.

Without that moderately paced household credit growth oiling the economic machine, the whole thing comes to a grinding halt.

And where did this so-called strong growth come from, anyway?

We know our Federal government borrowed $40 billion to fill its budget black hole. That’s 2.5% of GDP.

The Australian household sector’s love affair with debt continues to reach for new highs. Over the past 12 months, household debt-to-GDP has risen from 97% to 102%…so there’s another 5%. You can see this in the chart below.

Australian economy household debt to GDP

Source: Federal Reserve Economic Data

Throw in another 5% for corporate, state and local government borrowings and we have a country going 13% deeper into debt to produce a measly 3% growth in economic activity.

We should be ashamed of ourselves.

We are addicted to living beyond our means.

And our policy makers — RBA and governments at all three levels — have no intention of showing any leadership or discipline.

Here’s a chart of a country that tried this same flawed model of economic growth:

Ireland Economy GDP

Source: Trading Economics

Ireland was the economic miracle of the late 1990s and 2000s. From 2000 to 2007, Ireland’s GDP rose from US$100 billion to US$270 billion. There would have been plenty of headlines about a ‘strong economy’ back then. In fact, with each passing year of increased indebtedness the Irish economy became weaker and more vulnerable.

As we know, the economic miracle was all good old Irish blarney. The Irish got drunk on property related debt. What followed was the mother of all hangovers.

Without its stimulatory drug, the Irish economy suffered painful withdrawal symptoms.

Australia’s collective debt (public, private and corporate) is around $5.6 trillion. Our economy is $1.6 trillion. We have debt to GDP of 350%…if it goes much higher we’re going to need oxygen masks.

Yet that is precisely what the RBA is encouraging with its ‘accommodative monetary policy.

Not everyone is singing from Glenn Stevens hymn sheet, however.

At the recent G20 Finance Ministers meeting, Germany’s Finance Minister Wolfgang Schäuble made this statement in relation to the debt-financed global growth model:

It is even causing new problems, raising debt, causing bubbles and excessive risk taking, zombifying the economy.

In other words, ‘things are turning ugly; stop this experiment before it turns into a monster’.

Too late Wolfgang.

The time to heed that warning was in 2008–09. Since then, the world has pumped its veins with another US$60 trillion of this toxic stuff.

We cannot function without it…otherwise we risk having to deal with reality. God forbid we have to suffer the fate of living within our means.

The debt epidemic is a global problem.

In the Financial Times, George Magnus wrote an article titled: ‘China’s credit binge is the real concern’ (11 January 2016).

This is an extract from the article (emphasis mine):

Important economic reforms to the real economy and state monopolies have stalled, or succumbed to inertia and pushback. Policies designed to develop new sectors have not been matched by those needed to tackle problems in larger ones, such as poor productivity, chronic overcapacity and now a fourth consecutive year of producer price deflation. Tellingly, China’s most serious problem — the relentless accumulation of debt — received passive attention at most.

Sound familiar?

Real economic reforms in Australia have also stalled, and succumbed to inertia and pushback.

The desire to retain power is far greater than making the tough decisions.

Implementing spending cuts (welfare, public sector jobs, and healthcare) and making some of the 3.6 million non-tax-paying households contribute to the system is just too hard.

Rather, we continue on in this dumbed-down state believing our economy is getting stronger, when in fact we’re sowing the seeds of our demise.

In his 25 January 2016 blog, Michael Pettis, professor of finance at Guanghua School of Management at Peking University in Beijing, wrote:

In fact it doesn’t really matter if China is able to report growth rates for another year or two of 7%, or 6%, or even 8%. If the only way it can do so is by allowing debt to grow two or three times as fast, there will have been no improvement at all, the economy will not have adjusted, and China’s longer-term outlook will be worse than ever.

The same holds true for Australia.

Growing debt at 13% to produce 3% GDP growth rates makes no sense at all…unless of course you are a headline grabbing politician or central banker trying to justify your existence.

What do we have to show for all this debt — a mining bust (that is far worse than it should be, because the resource companies were geared up on the China growth story), a housing bubble (although no property expert would agree with this), government debt (at all levels) that continues to increase by more than $1 billion each and every week.

Just when I thought things couldn’t get any worse, I read that Glenn Stevens’ (who retires in September) likely successor will be his current deputy, Phillip Lowe.

According to The Australian:‘Dr Lowe studied for his PhD under economist Paul Krugman at Massachusetts Institute of Technology and is known for his fierce intellect…

For those not aware of Paul Krugman, he is the US Fed’s chief banner waver.

Whenever the Fed wants some credibility for its hare brained stimulus plans, they wheel out Krugman to sprout his academic BS in the New York Times.

In Krugman’s world you cannot have too much money printing. Stimulus needs more stimulus. Rates can always go that extra bit more into the negative.

All I can say is, ‘God help us if one of his protégés is taking charge of the RBA’.

I hope and pray that with his fierce intellect, Dr Lowe has worked out that Krugman is the economic equivalent of Dr Frankenstein.

If not, then remember you read this future headline right here: ‘RBA implements QE’.


Vern Gowdie

Editor, Markets and Money

Vern Gowdie has been involved in financial planning since 1986. In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners. His previous firm, Gowdie Financial Planning was recognized in 2004, 2005, 2006 & 2007, by Independent Financial Adviser (IFA) magazine as one of the top five financial planning firms in Australia. He has been writing his 'Big Picture' column for regional newspapers since 2005 and has been a commentator on financial matters for Prime Radio talkback. His contrarian views often place him at odds with the financial planning profession. Vern is is Founder and Chairman of the Gowdie Family Wealth advisory service, a monthly newsletter with a clear aim: to help you build and protect wealth for future generations of your family. He is also editor of The Gowdie Letter, which aims to help you protect and grow your wealth during the great credit contraction. To have Vern’s enlightening market critique and commentary delivered straight to your inbox, take out a free subscription to Markets and Money here. Official websites and financial eletters Vern writes for:

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