Australia’s Two-Decade Debt Binge Set to Get Bigger

Australia’s Two-Decade Debt Binge Set to Get Bigger

This year has been the year of debt.

Accumulating ever greater amounts…and acknowledging the importance of it.

Here’s a staggering thought for you.

In 2018, US$8 trillion of debt was created to produce only US$1.3 trillion of global ‘growth’.

In other words, the growth for last year was one-sixth of the total debt created.

But hey, it’s paying back the debt that’s the issue, isn’t it?

Modern banking only cares if you meet those interest repayments…

Back when we repaired it instead of replacing it

My parents bought a house on one income. And that house was only four-times my old man’s salary as a copper.

Like most people their age in the very early 80s, the entire house was filled with other people’s stuff. Furniture they could get for free or on the cheap.

I still remember this clunky old washing machine they owned. It must’ve been fixed maybe a dozen times by the end of the 80s. It walked across the laundry on the spin cycle.

To this day, I still remember mum running out the back with a hose connected to the washer for the ‘drain’ cycle.

Brand-new, shiny whitegoods were a luxury a few decades back.

Things had to be repaired rather than replaced. The only other option was loading up on credit. And no one really wanted that.

Of course, things have changed since then.

The cost of whitegoods and electronics has fallen significantly in the past three decades.

That’s globalisation working right there. Most goods are made on the back of cheap Asian labour, drastically slashing costs.

In addition, other companies can ‘borrow’ the intellectual property designs and create their own, cheaper, non-household-name versions of the same product.

The end result? Today, a kid moving out of home could walk into an electronic shop and buy a dirt-cheap washing machine for half a week’s pay.

Would it last a whole decade? Probably not. That’s a minor detail though.

Even better (said firmly tongue in cheek) is the availability of in-store credit.

Why spend your salary now on the washer…when you can pay it off over 50 months interest free!

Perhaps that’s the biggest difference between ‘then’ and ‘now’.

Prices have fallen so much, relatively speaking, that buying new feels like the more sensible decision to make.

What is different, however, is the ability to use in-store credit or just whack it on the credit card.

Tomorrow’s payment is tomorrow’s problem.


Too much debt makes Australia unstable

And this brings me back to our year of debt.

The ability to use debt is terrifying.

The US$8 trillion debt bill, with marginal growth rates, is near impossible to pay back.

Global economic prosperity is reliant on easily accessible credit.

This isn’t just an international problem.

This is a very real problem for Aussies. We are currently at our most indebted ever.

Last year, our own central bank noted that Australians incredibly high debt levels were an issue for economic stability.

The following statement is from the Reserve Bank of Australia’s September 2018 meeting minutes:

This high level of household debt relative to income raises two potential vulnerabilities. First, because mortgage lending is such an important part of bank balance sheets in Australia, any difficulties in the residential mortgage market could translate to credit quality issues for banks.  

‘…The Australian banking system is potentially very exposed to a decline in credit quality of outstanding mortgages.

But the second potential vulnerability — from high household indebtedness — is that if there were an adverse shock to the economy, households could find themselves struggling to meet the repayments on these high levels of debt.

If they have little savings, they might need to reduce consumption in order to meet loan repayments or, more extreme, sell their houses or default on their loans.

‘This could have adverse effects on the real economy — for example, in the form of lower economic growth, higher unemployment and falling house prices — which could, in turn, amplify the negative shock.

Suddenly, Australia’s two-decade credit binge was a bad thing.

RBA does a U-turn

But the shame in having a debt problem didn’t last long.

Barely four months later from that statement, and the RBA has done a sharp U-turn.

The RBA is concerned that our banks are ‘seizing up’ and reducing the amount of credit in the system.

The RBA’s Deputy Governor, Guy Debelle, said the following in a speech to economists in December last year:

The lesson is that countries that did that [lend] fared better than countries that didn’t. That lesson is relevant to the situation today in Australia, where there is a risk that a reduced appetite to lend will overly curtail borrowing with consequent effects for the Australian economy.

This was the writing on the wall at the end of last year.

The beginning of our central bank realising that they would have to cut rates, even when they said they wouldn’t.

The Aussie economy is reliant on debt.

Debt for housing, for consumption and possibly even debt just to pay the bills each week.

Yet all this debt was seen as a good thing when it was ‘creating’ economic growth a few years ago.

The very people who thought they could engineer our economy — our own central bank — are beginning to realise that nearly two decades of lending has crippled the economy.

Yet, if they don’t keep lending, the Aussie economy will seize up anyway.

There is no easy way out of this.

We are possibly looking at a very slow ‘unwind’ of Aussie economic growth, which, I have no doubt, our central bankers will try to prop up along the way with more and more credit.

We’re three rate cuts deep for 2019.

At this stage it’s unlikely the RBA will cut rates tomorrow.

None the less, rates are going to get even lower in 2020.

Until next time,

Shae Russell Signature

Shae Russell,
Editor, The Daily Reckoning Australia