Debt, High Asset Prices Could Lead to Economic Bust in Australia

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The Fed cut rates yesterday. Or was it the day before?

Visitors to this sunburned country are often confused. At least, this visitor is.

‘What time is it?’ he wants to know. ‘What day is it? What day is it in the rest of the world?’

He has a hard time getting his bearings. He can’t sleep at night, and can’t stay awake during the day. He looks for the North and finds the sun shining in his face. The trees are peculiar looking things that seem to be shedding…the cars are on the wrong side of the road…and the taxi-drivers want him to sit in the front seat.

It is particularly confusing because, otherwise, it seems so familiar.

Yesterday, we drove out to the Yarra Valley. Melbourne is usually ranked as one of the most livable cities in the world. We can see why. The houses are cute…many with double-decker porches and wrought iron trim. The place is clean…safe…and easy to get around.

Down in St. Kilda, it seems like a beach resort, with crowds filling the bars and restaurants, and young people gaily and drunkenly cavorting in the streets. In fact, our only reproach is that the city is relentlessly casual, like Florida or California.

Out at the Tarrawarra winery, it looks more like the Shenandoah Valley. The country is beautiful, open…with horses and vineyards…and friendly people serving up so many wine samples we had to lie down.

“This place is not that different from the United States and Britain,” says our man on the scene, Dan Denning. “It’s really the same story. Lots of debt. High asset prices. People who’ve bought houses they really can’t afford, counting on price increases to save them. So far, they’ve done well…very well. Australia hasn’t had a recession in 16 years.

“All the Anglo-Saxon economies are similar – in that they all depend on consumer spending and have a lot of debt. But Australia – and Canada, too – have a great advantage. Especially Australia, because it’s so close to Asia. This is where the Chinese buy their raw materials. It’s a resource economy, not simply a consumer economy. Australians have gotten rich as prices of raw materials have gone up, especially out in Western Australia. And as long as the Chinese keep ordering resources, prices are probably going to keep going up…and the Australians are going to keep making money. But that’s the big question. If US consumers stop buying, the Chinese aren’t going to need so many raw materials.”

US consumers buy one-fifth of everything the whole world sells. And US consumers are feeling the effects of lower housing prices. As prices fall, the average person’s net worth goes down…and with it goes his desire to buy.

“But wait,” said a man at our get-together the other night. “There are about 3 billion people in Asia. And right now, the Chinese government is encouraging domestic demand. They have plenty of potential demand in Asia. They just have to tap into it. Even if the US stops buying, it shouldn’t hurt the Chinese economy for very long. They’ll still want houses and refrigerators…which means, they’re going to want to buy copper and iron ore from us here in Oz. I think we’ve got a long
boom still ahead of us here.”

Maybe so. But our guess is that the Australians may have a short bust in front of them too.

Bill Bonner
The Daily Reckoning Australia

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
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Comments

  1. If Americans account for 20% of global consumption and they reduce their spending by 20%, doesn’t that translate to a 4% reduction in global consumption. Is a 4% reduction in consumption enough for a bust?

    Reply
  2. Can’t disagree with what Bill is saying.

    The correlation between the Australian and US economic performance is high. In part this is due to the interconnectedness of capital markets and a shared penchant of both countries for debt. The link between US consumption and the price Chinese companies will pay for resources is simply the icing on the cake.

    Most of the exports from China, Japan and the rest of Asia to the US would fall under the category of discretionary.

    If the credit crisis were to discretionary consumption in the US by 20% for a number of years, Australia would certainly experience a major recession.

    Coffee Addict
    December 13, 2007
    Reply
  3. A continuing trade deficit suggests something other than an export boom and therefore any slowing in real demand will have a lesser effect than the change in sentiment. Commodity driven investment excess turning sour would result in a quite sharp correction with immediate consequences for the broader economy.

    Reply
  4. Have you ever heard that old saying “when America sneezes, the world catches a cold”

    Whatever happens in America, when they all go down, as if they are all gonna say in America “Oh well, goodbye world, you all go on without us, it’s been nice knowing ya, we’ll sink quietly into destruction peacefully, and you lot all go on with your happy new prospersous lives without us. Even though we’ve got the most power in the world, we’ll happily hand it all over to you lot now cause we stuffed up bigtime, there you go, now we’ll just go and lay down and die quietly. Good luck, bon voyage” Bullcrap! I reckon that if they go down theyll want to take the rest of te world down with them. As if they’ll let China and Australia and the rest of the world go on peacefully getting rich together while they stay patiently behind in the dust sinking into destruction. It’s like a bully at school suddenly having to be nice to all the nerds he picked on.

    And wouldn’t it be ironic if China suddenly found it’s own resources and didn’t need us any more. Now that surely would be a tragic and ironic twist to the story.

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  5. but poor americans can afford to buy 40% to 80% of what comes out of the far east……

    this is the most peculiar hyperinflationary depression that ever existed back to 4000 BC……

    although i must admit that it is an ad hock intellectual analysis…. since many centuries aren’t properly accounted for.

    light & luv

    Reply
  6. Christina go back to square one ! Your discursive tarradiddle has me wondering if my Phd at Griffith’s Uni was a soporific episode ?? I disagree with your preamble, analysis and hypothesis – thematically, your diatribe is not shared by most Oz economists, let alone the Reserve, Wayne Swan and that nemesis charlatan ex treasurer abbot/costello.

    Dalma Smithy
    December 21, 2007
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  7. Allan: Trade deficits by and large are not economically disasterous ! Australia buys imports ie machinery, auto’s, fuel,etc which it eventually uses to create exports and the Nation benefits. Trade is never stagnant, and just because Oz exhibits a paltry deficit – our economy remains robust. US, Germany, and a few G8 countries have massive deficits yet they too are benefiting long term. The old economic theory is not supportable nor sustainable in the 21st cantury ?

    Dalma Smithy
    December 21, 2007
    Reply

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