Securities backed by credit cards, auto loans, and even what mortgage brokers thought were good credit risks in the housing market are all facing trouble ahead. De-leveraging-the selling of assets bought with credit-is taking place at the corporate and household level, even if it's not always willingly. Necessity is the mother of liquidation.
The New York Times reports that, "Bond investors first stopped buying private home mortgage deals, then shunned commercial mortgages. Now, they are becoming wary of credit card debts and auto loans. In the first half, private securitisations reached just $131 billion, down sharply from $1 trillion in the same period last year." Investment banks can't pawn off debt-backed assets as easily as they used to.
What does this tell us about the world we live in? People are cutting back on debt. And not just investors either. Inflation in food and energy has made it difficult at the margin for individuals to pay their debts on time. With income growth not matching rising prices, more people are falling behind on their bills and cutting back on their consumption.
If there's any good news in all of it, it's that there's probably a lot of fat to cut in the average household budget. There are many things that are nice to have, but not essential, like espresso machines and Blue Ray players and a Dyson vacuum.
The trouble is that one man's thrift is another man's profit. A less consumptive/consuming lifestyle for households will inevitably lead to lower jobs and wages for someone. Which industries stand to lose the most if consumption retreats at the margins?
Barrista at Starbucks' would be a good place to start. But if you work for a major car maker, investment banker, or luxury hand-bag maker, then you might want to dust off your CV and work on your interview skills. A lot of economic activity goes away when consumption is reduced, the more so when your economy is driven by spending.
By the way, though we don't have the exact numbers handy, we suspect that consumption contributes less to GDP in Australia than it does in America. In America, consumer spending accounts for 72% of GDP. There's a whole lotta spending going on in America.
In Australia, there's a whole lotta spending and debt as well (or dis-saving, as the economists call it). But there's also a whole lot of business investment and production. More on this tomorrow. For now, take a look at the two charts below from the ABS publication Australian System of National Accounts. We'll tell you what we think they mean tomorrow. But if you want to venture a guess today, ping us at dr@dailyreckoning.com.au
Dan Denning
The Daily Reckoning Australia
P.S. to get The Daily Reckoning direct to your inbox sign up to our free e-mail newsletter or if you prefer to use RSS, subscribe to the Daily Reckoning RSS feed.
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- Debt Ceiling Madness – Plus – The Great Correction…5 years On, Part III
About the Author
Dan Denning is the author of 2005's best-selling The Bull Hunter (John Wiley & Sons). He began his financial publishing career in 1997 and has covered financial markets form Baltimore, Paris, London and, beginning in 2005 Melbourne. He’s the editor of The Daily Reckoning Australia and the Publisher of Port Phillip Publishing.
Comment by Ross on 15 August 2008:
From 1969-82 the AU wages share went deep into paying off fixed rate mortgages set pre-inflation in a 3rd of the time. This grew the real estate bubble culture (get in deepest the banks ill let you early and wait for inflation) and taught the banks how "not to do it" Aussie style (hence not fixed but variable). With the US being mainly 30yr fixed and non recourse they didn't get the same greasy path but with crooked regulators and wall street blow-ins as treasury secretaries they didn't really need to as they could get plenty with Greenspan's puts running the cycle out.
Comment by Fast Ben on 17 August 2008:
The Reserve Bank keeps a close eye on their rigged CPI figures but has completely ignored Asset Inflation. Now at the first whiff of smoke they raise the white flag against the inflation fight. Higher interest rates are the only way to increase Australian’s savings and bring back housing affordability.
Comment by justin on 17 August 2008:
The Reserve Bankers are a bunch of idiots, beat only by the politicians. Not low, or high interest rates are needed, but stable interest rates and stable exchange rates. The Reserve Bank and its fiat money has achieved neither.
Comment by GaryB on 18 August 2008:
Exactly right Fast Ben, the RBA would be foolish to throw in the towel on the fight against roaring inflation. Aust needs more savers, not speculators profiteering from real estate and pushing up house prices for owner-occupiers. In the Sunday Mail yesterday Noel Whitaker was geeing up the real estate speculators and another story was salivating over the glories of negative gearing - stomach turning stuff for the young aspiring fist home owner-occupier. Anyway, the tax cuts from 1 July and oil prices easing from mid-July have probably delivered the equivalent of an 0.5% cut in rates for mortgage holders.
Comment by justin on 18 August 2008:
Watch the 90 day bank bill rate, that will tell you which way the RBA turns. Interestingly it has dropped significantly in the last week or two after being quite a bit higher for months and months.
Interestingly the AUD has also dropped significantly in the last week or two.
Comment by rahul on 18 August 2008:
Totally agree with Fast Ben. The RBA, like most other central banks, likes to believe it is the pickup in real demand (and not asset bubbles fuelled by easy credit) that causes inflation, and is now prepared to ease at the very hint of a slowdown in credit growth - which is believed to be "vital to economic growth"
Ulimately, it is the banks being rescued from their shrinking margins and falling volumes (brought about by bad business decisions in the first place)
Comment by Crisco on 19 August 2008:
Come on guys! It's not the Reserve Bank causing the problem. That's a Y generation cop out! Householders in Australia went for broke in the borrowing game to keep up with Mr & Mrs Jones in the housing and Blu-Ray/Plasma stakes.
It was overborrowing on the maximum sized house for their dollar, the car and the toys for the kiddies without recourse to risk in the credit market.
First law of business: Money costs money! Someone must pay! Interest rates had to rise because that's the nature of markets. It isn't any different to Fast Eddie of ABC learning who took margin loans on spec stocks. Big trouble for Eddy, big trouble for Australia if the RBA didn't turn off the caffeine drip.
The Y generation is lucky there are enough baby boomers still running the economy who still remember the hard times when money wasn't so plentiful. You should have listened to your parents.
Comment by kayle on 20 August 2008:
@crisco
Agree with 90% of your post, but calling BS on the wisdom (koff) of the Boomers. They're the problem, more like.
(Gen Y, in their 20s, are hardly the ones who drove up house prices and speculated wildly in the hope of making a retirement income...)
My in-laws have decided to sell their post-WWII teardown on an unremarkable lot for nearly half-a-million bux.
House is in terrible shape, 3 bed 1 bath, structurally unsound (some of the doors won't even close anymore from shifting), suspected asbestos in the basement.
Lot is 1/3 acre, in a boring suburb (Ermington), with no close access to transit (but a bus stop at a brisk walk from their place).
My MIL told me she'd had an offer of $400K but "wouldn't even consider it, of course". These wanna-be Trumps paid something like $30G back in the 70s for their house, and IF they can find a Greater Fool to overpay that much for their teardown, they still can't pocket the windfall because they've turned around and committed the same amount on some small villa in an equally boring, inaccessible suburb that's "great for retirees". (Hopefully ones who can drive a lot or don't need to go anywhere.)
You see the problem.
Stupidity comes in all generations, and because the Boomers were so big, consequently they have more stupids in theirs...who are out in force, hoping to get the X's and Y's to fund their retirements by taking over their POS boxes of air.
If we listened to the "wisdom" of my Boomer in-laws, we'd have a half-million-dollar debt around our necks right now and be praying to Sweet Jeebus that our kids were dumb enough to bail us out of it when they're old enough to work.
(And yes, they DID advise us to "buy a house" because then we'd be "putting our money into an asset". HA...I told them I'd rather put it in the bank than get fleeced by some bank trying to make their CEO bonus in fees and interest.)
Comment by kayle on 20 August 2008:
(edit...I mean, "into our bank account than get fleeced by some bankster trying to make their CEO bonus" &c.)
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