Don’t mention the debt: It is Australia’s Ponzi scheme

There’s been a lot of debate about the economy and the differing views of both political parties.  But what we need are real facts and figures to play with and I’m confident we now have something real to go off.

I’ve got to say that I’ve come to respect the analysis and opinions of business and finance writer Michael West, from the SMH.  He’s a straight shooter and rarely pulls his punches.  And this article is no exception.

Don’t mention the debt

Michael West

Our overseas borrowing is the great unspoken. It is the one subject assiduously avoided in public by Kevin Rudd, Malcolm Turnbull, Ken Henry, APRA, the Reserve Bank and the big banks. They probably even gloss over the matter when chatting privately among themselves.

It is Australia’s Ponzi scheme. Bernie Madoff goes to Bondi. We keep getting those foreign dollars in while sending plenty out, but never quite as much, hoping no one will blow the whistle lest the whole game end.

Same deal in the US, though far more menacing.

Our economy, like the US, UK and many in the developed world, is a chronic current account deficit nation, splashing year-in year-out on the national credit card and hoping the global bank keeps increasing the limit.

What is the limit? We don’t know that, yet. Yet surely it must be tested one day.

And in light of the recent developments in the US and particularly in Austria and Eastern Europe, that day may arrive sooner rather than later. It is as close as a foreign lender or two saying, no thanks, we’ve got enough of that, can’t take any more.

Batt man

Let’s put the Federal Government’s stimulus package in perspective.  Kevin Rudd reckons $42 billion will stimulate the economy through the hard months ahead, which it will to a point.

Crying Whitlam and Khemlani, Malcolm Turnbull reckons the package is simply more dollars borrowed from tomorrow to fund us today, which it is. It could be better spent.

Some will dissipate in dingy pokie parlours and in a frenzy of pink batts which, once domestic capacity is reached and the foreign pink batt players have sorted every house in the country, will leave a couple of barren pink batt factories.

To get to the point, fiscal stimulus is better than nothing. It will have some effect. Still, as a vision for the economic future it is akin to staring wistfully at the kitten in the room while ignoring the rogue elephant glowering behind it.

Looking at the numbers, according to the Australian Bureau of Statistics we have about 21,374,000 or so people living in this country. Our combined national debt (taking all government, personal, private and business debt into account) is $2.32 trillion ($3.4 trillion including equity) as of September last year – and growing. A falling Aussie dollar makes it more expensive to repay, or roll over.

Each and every Australian then, including babies, accounts for foreign borrowings of nearly $110,500 dollars. If we use the same method to calculate what the cost of Prime Minster Rudd’s “stimulus package” is to the nation, we end up with a cost of nearly $2,000 per head.

Inching to the edge

To put it another way, says macroeconomic consultant Mark Beavan, Kevin’s rescue package is increasing the nation’s net debt by little more than 1%.

”Malcolm might happily forget that while his former government colleagues were steering the good ship Australia, the nation’s total debt soared from a mere $700 billion in 1997 up to $3.2 trillion by the close of their term. An increase of 387%”.

Deregulation brought growth alright. But there is a yin for every yang. The Opposition may well brag that it left office with zero debt – zero government debt that is – as the upshot of policy was to lump it onto the consumer.

That is something the nation has to live with for a long time. In the meantime, it will do the sovereign credit rating no favours.

”In the fluid deregulated markets, the government (past and present) didn’t think for a second about regulating the extent and rate at which the nation got itself into debt,” says Beavan.

”It is too hooked on the drug of national economic growth for economic growth’s own sake and refuses to allow the dream of many Australians (who still believe that housing prices can only go up) to be punctured along with our economy”.

Inflating house prices

Beavan believes that if all that debt were stripped away, irrespective of land shortages, property prices would be half to two-thirds of what they are today. ”If homebuyers don’t have money on loan from the banks, then they could not afford to pay the higher housing price – so the price would have to fall or the market would stagnate”.

”Why did we not index the rate of debt growth (15% per annum compounding for the last 12 years straight) to that of the country’s economic growth (less than 3% when the debt is stripped out)? Surely a lending system predicated on genuine national economic growth would be a far more practical solution?”

If governments had constrained debt growth, bank profits could not have kept growing at 15% a year. Or executive salaries at 30% for that matter. (Not to mention state stamp duty revenues.)

Bank binge

It is no coincidence that the banks’ profit numbers match the growth in national debt.

As the banks have racked up their record profits they have come at a price, but that price is yet to be crystalised. Anecdotal evidence suggests loan-to-valuation ratios of 90% are still on offer so the banks are keen to keep the residential mortgage-growth dream alive.

Against the backdrop of consumer debt at 174% of GDP (down slightly from its record high of 176.9% last May) is the spectre of banks not being about to roll their wholesale funding offshore.

On the ABS numbers for September (the December lot will be interesting), there is $654 billion of net debt owed to overseas parties – banks and others who have problems of their own.

The December quarter numbers will show a sharp increase over September. In little over two months the Aussie banks have run wild with the government guarantee on wholesale funding, raising some $50 billion – or half of their estimated $120 billion in wholesale funding needs for the year.

The average size of borrowings is up threefold and the rush is widely put down to the view that there is a fair risk of global credit markets icing over once more. Better soon than never is the gameplan.

The pricing of the issues has improved since the guarantee was brought in and overall the demand for Australian bank paper is a vote of confidence in the banks and the system. Indeed, racked up against the sorry state of most western banks, our banks are killing it.

Wipe-out

A report from Boston Consulting group released last night estimated the global financial crisis has wiped some $US5.5 trillion from the market value of the world’s banks, equivalent to 10% of global GDP.

The banking industry’s market value fell $US4 trillion by the end of 2008, and shed a further $700 billion in the first three weeks of this year.

While US banks drop like flies and UK banks lapse into the hands of government, they are still producing loan growth before bad loan write-downs, and profits of $4 billion-plus per year.

Look no further than Westpac’s $1.2 billion in cash earnings for the December quarter delivered yesterday. Revenue growth remained strong. Westpac, along with the rest of the Big Four are still pumping out the loans. Chief Gail Kelly conceded consumer delinquencies were on the rise, but the quantum is yet immaterial.

Thanks to the other government guarantee, the deposit guarantee, the banks have prevailed at the expense of non-bank institutions following a flight to safety last year. Bulking up their deposit-bases has also protected them, delivering far greater domestic funding.

Another ‘D’ word

Still, the worst is to come. The level of unemployment will largely determine the degree of mortgage defaults. Meanwhile, the great unspoken, the national debt, will continue to remain unspoken.

The monthly RBA bulletin was released today. A couple of countervailing trends: outstanding balances on credit cards were up from $44.7 billion to $45.2 billion, while growth in personal loans is down.

According to Professor Steve Keen, who keeps a close watch on Australia’s debt situation (and is particularly bearish on the economy) these figures are evidence of people being cautious on taking on new debt but sufficiently hard-up they are not paying down their credit cards.

When it comes to indebtedness, on Keen’s numbers Australia ranks third behind the UK (with household debt to GDP at an astounding 240%) and the US (180%). Australia’s ratio has come back to 174.2% now. It is still way too high.

And it should be borne in mind asset values have been declining, so debt to equity ratios are going through the roof.

All this makes for a monumental challenge for the Government and the big banks.

Both have managed the crisis reasonably well until now but the cycle is likely to deteriorate from here and the big unknown is the potential for a foreign debt crunch.

 

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35 Responses

  1. Disparaging remarks about the pink batts led economic recovery! Who’d have thunk it?

  2. Just call it by its real name JMc

    PYRAMID SELLING!

    Bloody bunch of Ponzi’s alright!

    Government borrows to pay The Robber Barons who lend the government the money in the first place and I end up paying when I haven’t borrowed a cent from anyone since 1986. DUH!

    Should I start working the system and getting a bit back I wonder! That’s just playing their bloody game – like everyone else!

    Ever descending spiral into NOTHING!

    What a bleedin’ joke!

    …and Tom, what’s wrong with pink bats?

  3. We’re about to undertake a voyage up the well known creek that, not 3 – 4 months ago we were told we wouldn’t need to take because we were well placed to weather the storm. I think masturbation is back in fashion in Canberra.

  4. John, I agree that West has a valid point of view and argues it well. I read him in The Age rather than the SMH but because they are in the Fairfax stable it matters not to the point I want to make.

    Simply, I have difficulties with this post, because you ‘lift’ his article in its entirety. While you acknowledge the source and provide a link, there is no need or indeed any incentive for the reader to go to that source and presumably view the advertisements that keep West on the payroll.

    While it’s certainly not illegal, I think there’s a moral or ethical aspect that is being ignored. While I can’t put my finger on it exactly, it seems to me to be somewhat parasitic.

    I think ‘links’ with your commentary are a better way to proceed than a complete lift. Just sayin …

  5. Well, regardless of the source I do find the notion that my family will be $40k in debt quite disturbing (once the govt spends the entire $200bn).

    With this level of debt asset sales by future governments will be inevitable, but what will be left to sell?

    I’d say the banks, they’ll have to be nationalised at some stage, and they’ll then be sold again to raise the money to pay for the bail out.

  6. Nature5

    I was willing to take your comments on the chin until you used the word ‘parasite’ if you have a personal problem with me please say so without inferring I’m simply a ‘parasite’ that you don’t really like.

    Lets be truthful and honest..

  7. Tom of Melbourne

    ” I do find the notion that my family will be $40k in debt quite disturbing (once the govt spends the entire $200bn). ”

    Tom I’m not sure you read West’s piece. He says:

    “Each and every Australian then, including babies, accounts for foreign borrowings of nearly $110,500 dollars.

    If we use the same method to calculate what the cost of Prime Minster Rudd’s “stimulus package” is to the nation, we end up with a cost of nearly $2,000 per head.”

    What Rudd is on about is but a ‘drop in the ocean’. Lol.

    As for:

    “I’d say the banks, they’ll have to be nationalised at some stage,”

    Even in the US, that is becoming the ‘common sense’ even among the neo-cons. Try rhis link:

    http://finance.yahoo.com/tech-ticker/article/181000/Analyst%3A-%22Nationalization%22-of-Citi-and-BofA-Inevitable-in-09

  8. He wouldn’t acknowledge economic reality when he was leader nor is he willing to acknowledge it now.

    Kevin Rudd’s $42bn stimulus package a knee-jerk reaction, says John Howard
    http://www.theaustralian.news.com.au/story/0,25197,25079667-12377,00.html
    THE federal economic stimulus package is a knee-jerk reaction to the world economic crisis that will plunge Australia into debt for decades, former prime minister John Howard says.

    Speaking to Liberal Party members at the party’s Melbourne headquarters tonight, Mr Howard said the federal government risked repeating economic mistakes of the 1970s with its $42 billion spending package.

    “Our circumstances here in Australia do not warrant a knee-jerk return to the policies which delivered stagflation in the 1970s and early ’80s,” he told about 300 of the party faithful.

    “We should not be panicked into financial profligacy and the burdening of future generations of Australians with huge amounts of debt.”

    Mr Howard said it took 10 years for Australia to repay $96 billion in federal debt left when his
    government came to office. “

  9. Just for the record Nature5…so impressed by West’s analysis and opinion, I felt that posting the entire article was appropriate given that so much of our recent debates were covered. I don’t make a habit of posting this way.

    Usually you’ll post snippets and people will end up debating endlessly about the facts covered without looking at or comprehending his entire argument. This is a waste of a good debate, in my opinion.

    Neil for example will refer to Howard’s record for reducing government debt without considering the rapid growth in national debt under his watch.

  10. John McPhilbin,

    “without inferring I’m simply a ‘parasite’”

    Inferences are in the mind of the beholder surely. Never at any stage did I accuse you of being a ‘parasite’. Any evidence of same?

    I think not. Never said it! And never ‘inferred’ it. What I did say was that your action on this occasion seems somewhat ‘parasitic’ in the sense that your contribution to the post was somewhat minimal – certainly when compared to West’s efforts and also his employer’s contribution which in my opinion ought to be acknowledged.

    As for:

    “if you have a personal problem with me”

    John, I have no ‘personal problem’ with you or any other contributor. I am only interested in ‘ideas’ or points of view.

    “Lets be truthful and honest.”

    I agree!

    John, I come from a background where every idea was sliced and diced to the Nth degree. No free rides!

  11. “Our circumstances here in Australia do not warrant a knee-jerk return to the policies which delivered stagflation in the 1970s and early ’80s,” he told about 300 of the party faithful.

    But …that was when Dr John was treasurer, surely he’s not admitting to being a prime contributor to stagflation in the Australian economy 😉

  12. ‘No free rides’, ‘parasitic’ interesting use of language especially given the point you wanted to make.

  13. I’d be open to you posting and thread or two just to see how you fare. I have no problem with fair criticisms, however, I’ll challenge any criticism that is couched in language aimed to offend. And yes, that’s the perception I get.

  14. Nature5

    I’m willing to bet that Michael West and SMH would appreciate people like me making reference to their news organisation as being I such high quality that it may just encourage more people to read their online and paper edition when looking for reliable news and opinions.

    Just a thought. Full credit was given to Michael and his gift for making complex issues easy to understand.

    In fact, I emailed him the blog and offered him praise as I have done on previous occasions. And from what I can gather he appreciate the acknowledgment and feedback.

    No harm no foul, perhaps?

  15. somewhat parasitic, is not parasitic, but close enough to call you it. WTF. (moves on from the puzzle)

    I dont attack the character just the comment.
    (i can whistles Dixie while eating underwater)

    Theres room for all peoples comments and leave the character assassinations to me. Please dont just lash at Tom again like last time leave him out of it. He really is a good bloke.

  16. Aqua

    I get a little sick and tired of what I consider ‘passive -aggressive’ comments aimed at the person and not the issue.
    It’s otherwise known as ‘sniping’ how many people have you met that use this as their favoured technique for attempts at character assassinations? I’ve met plenty and I’m willing to bet you have to.

    Think of a military sniper and you’ll get my meaning. Waiting in the shadows just waiting for the opportunity to get a shot off.

  17. also with the general knowledge you have about things Nature its a shame when things like this happen. I do think you contrubute many good ideas and comments, even if sometimes we dont see eye to eye.
    ——————–
    John, with how much effort you put in keeping some off us up to date and debates with others its a sad time to see a good blogger get hurt for no reason.

  18. N5 @ 10.54 – I did read the article, and I have a basic understanding of the difference between public and private debt.

    I prefer the no debt life; it’s easier on stress levels and state of mind.

    When a government holds debt, they hold it on my behalf.

    The public may be a casualty of private debt and profligacy, but those of us that are prudent can (to a certain extent) insulate ourselves from the economic outcomes of this. This isn’t the case with public debt.

    I understand the need to maintain economic activity, but I’d be concerned if we rush into too many more poorly targeted $42bn packages.

  19. Tom

    I find your comments a little baffling. Consumerism keeps our economy turning. A debt-laden society unable to save and spend and sensible rates because of their debt obligations is a recipe for a ‘depression’. When we started on the credit binge we were essentially bringing much of our future spending into the present whilst forgetting that some day the well would run dry, and unfortunately for us it has.

    Export revenues are cream on top for the government. Now we have to start producing more than we consume and the adjustment is going to be very painful indeed.

  20. John McPhilbin, on February 20th, 2009 at 9:36 am

    Who are we selling to, and what are we selling, in that equation, ignoring the debt levels for a moment? Wasn’t the Current Account Deficit always the canary in the mine for how far Australia had strayed from prudence even in the middle of the boom, which still didn’t see incomings exceed outgoings? Who thinks they can run a home budget, let alone a ‘national’ budget, like that for long?

  21. John, I am suggesting that private individuals can take steps to insulate themselves against the worst consequences of a private debt binge.

    Prudent individuals cannot insulate themselves as easily against public debt, carried by the government.

    That’s why I don’t like the expectation that my family will be saddled with repaying our share of the anticipated $200bn government debt.

    There needs to be a very careful balance in the stimulus vs debt equation. I’m not impressed that the government is getting best value for our share of the $42bn they’ve so far committed.

    The idea that they will spend another $160bn just as recklessly is deeply concerning.

  22. That’s all very well but where’s my nine hundred bucks?

  23. reb, on February 20th, 2009 at 10:36 am

    Yep, and that’s the crux of the politics. ‘Show me the money’, closely followed by ‘show me what public thing is being bought with public money’.

  24. John, on the subject of banks: http://www.news.com.au/business/story/0,27753,25081465-462,00.html WESTPAC is the world’s most profitable bank and Australia the most lucrative banking market, according to a new survey by Boston Consulting Group.

  25. Min

    Watch for the time lag Min. Provisions for bad debts are starting to increase at a rapid rate and they’ve have lowered themselves to increasing ATM charges significantly.

    Our banks have been relatively fortunate however they’re all aware that the market in which they’ve all made healthy profits is shrinking.

  26. It seems that many people know where their priorities really lay. Let’s hope the next round of handouts are used similarly by those who have overextended themselves.

    Rudd Government handouts used to pay off credit cards
    http://www.news.com.au/dailytelegraph/money/story/0,26860,25078471-5015795,00.html
    AUSTRALIANS chose to use a large slice of their $8.7 billion pre-Christmas government handouts to paydown their credit cards bills, new central bank figures show.

    The value of credit card repayments rose by $3.9 billion in December – the biggest monthly increase by value since Reserve Bank of Australia (RBA) records began in 1994.

    Australians spent $21.464 billion on credit card repayments in December, which was more than the $21.043 billion spent on credit card transactions, the RBA data released yesterday found.

    CommSec economist Savanth Sebastian said most of the federal government’s December fiscal stimulus handout was not spent, which meant a fair amount went towards credit card repayments.

  27. John McPhilbin, on February 20th, 2009 at 3:21 pm

    IF you’re an average Australian you’re worth just over $250,000 have a house valued at $458,488, a mortgage of $341,000 , credit card debt of $3085 and earn $1124.50 a week.

    Only a couple more handouts to go???

  28. Legion

    “Only a couple more handouts to go???”

    It hardly makes a dent does it??? It shows just how deep in debt we are. I’m betting $42 billion is just the beginning. We’ve a long, long way to go before we can consider ourselves over this crisis.

    We’re in for a very bumpy ride over the next couple of years.

  29. Min

    Imagine that, banks are increasing their ATM fees to how much? Around the $2-3 mark and electronic processing should cost no more that $0.10 according to Stevens. There’s no doubt in my mind that banks have become very desperate and will try to milk everyone by any means necessary.

    Stevens slams banks over ATM fees
    http://business.smh.com.au/business/stevens-slams-banks-over-atm-fees-20090219-8cbz.html
    Reserve Bank Governor Glenn Stevens has said there is no strong case for banks to impose fees on people who use Automatic Teller Machines of a bank other than their own.

    Historically, banks have charged people a ‘foreign’ fee for customers using an out-of-network ATM. Starting on March 3, the RBA will ban ‘interchange’ fees paid between banks when customers from one network use another bank’s fees, forcing the ATM-owner to charge the customer directly.

    The reform is aimed at eliminating the ‘foreign’ fees banks add to cover the cost of electronic processing, which RBA governor Glenn Stevens said today in parliamentary testimony should cost ”no more than 10 cents.”

  30. Min

    Unbelievable, what did I just say? I’m amazed they’ve been so quick to disclose their concerns.

    Bad debts to spread, ANZ’s Smith says
    http://business.smh.com.au/business/bad-debts-to-spread-anzs-smith-says-20090220-8del.html
    Bad debts in Australia will spread from ”high-risk” businesses and customers to ”mainstream” clients, as the economy worsens, ANZ Bank’s Chief Executive Officer Michael Smith said.

    While Australia has been insulated from the ”bloodbath” of 2008, it hasn’t been immune from ”the most difficult set of economic conditions the world has faced since the Great Depression of the 1930s,” Smith said in a speech to the American Chamber of Commerce in Sydney today.

    Australian banks’ credit ratings will be reviewed by Moody’s Investors Service as the nation’s economy deteriorates, the New York-based ratings company said this week. Westpac Banking Corp., Australia’s biggest bank by market value, said on Feb. 18 first-quarter profit stalled as rising bad debts erased gains in fee income from the takeover of St. George Bank.

    ”While Australia is better positioned and has been remarkably resilient so far, it has not given us immunity, nor will it this year,” he said. ”Although Australia might, just, escape having consecutive quarters of negative GDP growth, given the emphasis which the government has placed on avoiding this, it seems certain that Australia will experience a significant economic slowdown during 2009.”

  31. “Still, the worst is to come. The level of unemployment will largely determine the degree of mortgage defaults. ”

    As will INFLATION.

    Ironically, thank gawd for the contraction of the economy & car purchasing in this respect…:)

    And the possible end to Bush’s “Pre-emptive strike for oil” policy.

    The price of oil was a killer. As was food. Exactly why we can’t be too picky about our purchases for now…climate fck ups and all.

    Tho unemployment is the problematic by-product…but then, how many families were smart enuff to think about the future?…the possibility that we could go into recession, have huge trade & industry shifts due to the archaic nature of some…& climate change focus?..prepare for the sudden illness or death of a partner?

    How many pumped out babies like there was prosperity forever? Alot of naivety…& conformity demonstrated. And myopic thinking by a government that provided incentives for the poor to reproduce at unsustainable levels.

    Tho it’s possible they were creating little tax-payers, consumers & soldiers for the future…Peter Costello and his mates will be about 60 odd in 2020…

    I doubt Labor will be in power then. Imagine what Costello & his minions can do w/ all those propagandised kids?…all coming to military age…

    Seems to me that many of the heavily debt-burdened were thinking too short-term. And listened to the advice of media pundits, real estate gurus & financial advisors who prioritised their own interests over others.
    N’

  32. N’

    “Seems to me that many of the heavily debt-burdened were thinking too short-term. And listened to the advice of media pundits, real estate gurus & financial advisors who prioritised their own interests over others.”

    Don’t forget our super-hero JWH – “We’ve never had it better, interest rates are low which means people can borrow more”

  33. “Don’t forget our super-hero JWH”

    How could we John?…Good old Super Rodent…he keeps popping up like the gopher in Caddyshack.

    “We’ve never had it better, interest rates are low which means people can borrow more”

    Get yer shiny new plastic & manitou home loan now…approved by me, John Winston Howard, King of the Spruikers.

    good point John. Useful quote.

    N’

  34. N

    Love it, the gopher. Illustrates the point beautifully.

    This clip always reminds me of JWH

    Crazy Frog – We are the champions (ding a dang dong)

  35. Hey,

    I’m enjoying the site.

    Keep up the Good work.

    Love Heaps

    Sky

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