# What is Australia's total DEBT?



## MR. (17 October 2009)

Has anyone calculated the sum of Australia's Private and Public debts?

Private is 156% of GDP
http://cpd.org.au/mediarelease/australias-own-subprime-crisis
Public is 17.5% of GDP
http://buttonwood.economist.com/content/gdc

Will check above figures. Has anyone an article on the totals? Or has anyone totalled these before?


----------



## Amor_Fati (17 October 2009)

Try the RBA statistics http://www.rba.gov.au/Statistics/AlphaListing/alpha_listing_d.html, they will definitely have what you need.


----------



## Smurf1976 (17 October 2009)

MR. said:


> Has anyone calculated the sum of Australia's Private and Public debts?
> 
> Private is 156% of GDP
> http://cpd.org.au/mediarelease/australias-own-subprime-crisis
> ...



So we've got debt at 173.5% of GDP. That leads to the question as to what happens next? I'm expecting we'll try inflation, whether it gets going sufficiently is another matter but I think we (the Western world in general) will certainly try. How else would we possibly repay all that debt?


----------



## MR. (17 October 2009)

Amor_Fati said:


> Try the RBA statistics http://www.rba.gov.au/Statistics/AlphaListing/alpha_listing_d.html, they will definitely have what you need.




With thanks. Forgot about that site



Smurf1976 said:


> So we've got debt at 173.5% of GDP.




If these figures are used. But are they right?



MR. said:


> Private is 156% of GDP
> http://cpd.org.au/mediarelease/australias-own-subprime-crisis
> Public is 17.5% of GDP
> http://buttonwood.economist.com/content/gdc



That 156% of GDP happens to be the same figure as "Debt to disposable income" from the RBA.  I have put it in a chart below. 

View attachment Chart 1.doc


What about the 17.5%. If we made the date on that buttonwood calculator 2007 or 2008 the data claims we have 143 and 120 billion in public debt. We had no government debt then. The GDP data seems close at approx 980 billion AUD and is similar to this site:
http://www.dfat.gov.au/geo/fs/aust.pdf

The RBA data however for GDP is approx 275 billion. 
http://www.rba.gov.au/Statistics/AlphaListing/alpha_listing_g.html

Hmmm


----------



## MR. (17 October 2009)

The figures below were from the ABC News (I think in December 2005). In USD's
......................................................................
Who's in hock to whom (Global balance sheet)
US $2542 Billion
Australia $388 Billion
Europe $896 Billion
UK $338 Billion
Japan $1536 Billion
......................................................................

I assumed the above figures were debt owed to others. When divided by population of those countries we have:

US $8596 per person
Australia $19400 
Europe $3446
UK $5586
Japan $12056

Is $19400 correct? 
That is what I'm trying to check. Certainly is higher than the others!


----------



## Knobby22 (17 October 2009)

I reckon mostly in housing loans.

If there ever was a psychological change in investors thinking then watch out!
Australians love of property would take a lot to change though.


----------



## Smurf1976 (17 October 2009)

Knobby22 said:


> I reckon mostly in housing loans.



Not really helping Australia as a whole though. We borrow money from foreigners, on which we pay interest, in order to bid up the price of exactly the same houses we already had. All we've gained, as a country, is the debt - there's absolutely nothing to show for it.


----------



## joeyr46 (18 October 2009)

Smurf1976 said:


> Not really helping Australia as a whole though. We borrow money from foreigners, on which we pay interest, in order to bid up the price of exactly the same houses we already had. All we've gained, as a country, is the debt - there's absolutely nothing to show for it.




Krudds good for it he's guaranteed the bank deposits so we won't have to worry
and the guarantee is worth the paper it's written on (Was it written)
anyway if I had a printin press I could make the same assurances its just a question of what the bit of paper I give you is really worth and when you get it and the fees to give the governement the paperwork to prove it really is your money


----------



## Knobby22 (18 October 2009)

Smurf1976 said:


> Not really helping Australia as a whole though. We borrow money from foreigners, on which we pay interest, in order to bid up the price of exactly the same houses we already had. All we've gained, as a country, is the debt - there's absolutely nothing to show for it.




Well put! Australians have not seen bad times for 20 years. One day there will be a major wake up call.


----------



## MR. (19 October 2009)

Have it finally...

Total private debt = $1,913,544 million which is 160% of GDP

From chart one: (1/2 way down)
http://www.debtdeflation.com/blogs/...lies-damned-lies-and-housing-statistics/?cp=2

Reconfirmed as $1.9 billion in this following article. 
Also states : “more than one and a half times Australia's annual economic output.”

http://www.abc.net.au/news/stories/2009/09/17/2688894.htm
Hope one isn’t acquiring their information from the other!

Public debt is about 1.5% now of GDP. Will re-find that info’. 

Smurf will add from the above link:


> While some of that debt would have been used to build new dwellings, or renovate existing ones, which creates jobs and places for people to live, the majority of that debt would have gone to bidding up the price of land on which existing properties stand.
> 
> That creates no jobs (except a handful for real estate agents, brokers and financiers) and simply represents the nation taking out debt to join a national Ponzi scheme, where the later comers pay a premium to those who have been in the housing game longer.


----------



## Beej (19 October 2009)

Smurf1976 said:


> Not really helping Australia as a whole though. We borrow money from foreigners, on which we pay interest, in order to bid up the price of exactly the same houses we already had. All we've gained, as a country, is the debt - there's absolutely nothing to show for it.




That's not entirely correct. We have gained the debt, AND the money. While it may not be the most efficient way to pump capital into the economy, even when used to "bid up house prices" that money still moves on through the Australian economic system and could end up being invested in the stock market, into new businesses, into the construction of new buildings etc (which is very productive) and so on. Unless the money instead flows directly back off-shore (because say foreigners owned the property purchased), or all the proceeds were used to buy imported goods, then some/most will flow back to the government in the form of stamp duties and capital gains tax dues etc.

Bottom line is the money just doesn't "disappear" just because it was originally borrowed for the purpose of a real estate purchase. The credit is the mechanism for putting new money into the whole system, where it goes *first* simply determines the efficiency with which that capital might be put to "productive" use. Land/houses will always cost something and will always required borrowed money for the majority of purchasers, so a large proportion of "new money" always has and always will find it's way into our economy via borrowing for property as an asset class. 

Cheers,

Beej


----------



## Beej (19 October 2009)

Beej said:


> That's not entirely correct. We have gained the debt, AND the money. While it may not be the most efficient way to pump capital into the economy, even when used to "bid up house prices" that money still moves on through the Australian economic system and could end up being invested in the stock market, into new businesses, into the construction of new buildings etc (which is very productive) and so on. Unless the money instead flows directly back off-shore (because say foreigners owned the property purchased), or all the proceeds were used to buy imported goods, then some/most will flow back *into the economy in general and some also* to the government in the form of stamp duties and capital gains tax dues etc.
> 
> Bottom line is the money just doesn't "disappear" just because it was originally borrowed for the purpose of a real estate purchase. The credit is the mechanism for putting new money into the whole system, where it goes *first* simply determines the efficiency with which that capital might be put to "productive" use. Land/houses will always cost something and will always required borrowed money for the majority of purchasers, so a large proportion of "new money" always has and always will find it's way into our economy via borrowing for property as an asset class.




I just wanted to make a correction in post above (in bold).


----------



## MR. (19 October 2009)

MR. said:


> Reconfirmed as $1.9 billion in this following article.




Should read 1.9 *trillion *as per the article not billion.



Beej said:


> We have gained the debt, AND the money.




Yes we have.......
Wonder how much of that has now ended up (lost) to overseas? 

We know where the debt is but not the money!


----------



## MR. (20 October 2009)

MR. said:


> Public debt is about 1.5% now of GDP. Will re-find that info’.




http://www.news.com.au/business/story/0,27753,26140464-462,00.html


*Public debt = $27,100,000,000 * (27.1 Billion)
Approx 1.3% of GDP at 30th June 2009 

*Private debt = $1,913,544,000,000 * (1913.5 Billion)
Approx 160% of GDP at April 2009  

Total debt of approx $88,200 per person in Australia.​


.


----------



## algis (20 October 2009)

Beej said:


> We have gained the debt, AND the money.




True, the PRINCIPAL borrowed gets circulated about the country for more productive things, but what about the INTEREST?


----------



## Uncle Festivus (20 October 2009)

Debt itself is immaterial - it's only a problem if you can't pay it back, even then it's all about degrees of debt .....

If the bank lends you $300k and you can't pay it back - it's _your_ problem; if they lend you $10B and you can't pay it back then it's _their_ problem! 

If the government has guarenteed the banks deposits, it's then _our_ problem!

So _your_ problem then becomes _my_ problem......

Here's a new concept - living within ones means!


----------



## White_Knight (20 October 2009)

Oh my god, we're all doomed!!!!!



What a spastic thread

Those figures arent even bad, particularly when compared to countries like US, Japan, Euroland.

Let's think about it:


USA:

Public Debt to GDP ratio - 80%
Private Debt to GDP ratio - 350%

Japan:

Public Debt to GDP ratio - 160%
Dont know the other one

You guys had better think of your debt compared to your incomes. If you have a mortgage worth 450K and an income of 60K, your personal "debt to GDP" ratio is 650%. Better go kill yourselves. 160% doesnt sound bad now, does it?

Fact: Australia's debt burden is sustainable. Inflation will come about because of wage pressures from a socialised labour system on top of an overheated economy. It wont be because the government printing money.


----------



## satanoperca (20 October 2009)

White_knight were did you get those figures from.

They don't look right.

Cheers


----------



## MR. (20 October 2009)

> Those figures arent even bad, particularly when compared to countries like US, Japan, Euroland.
> 
> Let's think about it:
> 
> ...




Dear White_Knight

Thanks for answering the simple question earlier then. Since you have all the data.

I would like to know (apart from a link or two for your last post) exactly how much Japan "has" in Private savings. 

MR.


----------



## Beej (20 October 2009)

algis said:


> True, the PRINCIPAL borrowed gets circulated about the country for more productive things, but what about the INTEREST?




Well that's right but if the productive use of the money earns more than the interest bill (or generates more increase in VALUE than the interest costs to us), then we are ahead, and that's the end game.



White_Knight said:


> You guys had better think of your debt compared to your incomes. If you have a mortgage worth 450K and an income of 60K, your personal "debt to GDP" ratio is 650%. Better go kill yourselves. 160% doesnt sound bad now, does it?
> 
> Fact: Australia's debt burden is sustainable. Inflation will come about because of wage pressures from a socialised labour system on top of an overheated economy. It wont be because the government printing money.




I actually agree pretty much with this. There is nothing to panic about with Australia's current private debt, and certainly not our current net public debt.



MR. said:


> I would like to know (apart from a link or two for your last post) exactly how much Japan "has" in Private savings.
> 
> MR.




MR not sure about Japan but I am sure it is a lot! Even in little old Australia, as of Aug 2009 private households had $433B (~40% of GDP) in cash savings/deposits in banks, and something around $1 Trillion (~90% of GDP) in superannuation funds. There's a stack more "savings" sitting in RBMS funds as well. So even just counting the cash and super, that pretty much adds up to the private debt total leaving a net debt of only about 30% of GDP.

On top of that there's another $325B (30% of GDP) or so in bank deposits from private corporations. 

I guess these figures raise an important point - why just look at gross debt? You also need to look at the rest of balance sheet, ie total assets as well as liabilities! In Australia, the private debt could be paid off in total with household + corporate cash savings + household superannuation funds alone. We haven't even considered the $3.8T worth of residential real estate, or the I don't know how much commercial real estate, farm land, mineral deposits etc etc? In reality, on a per capita basis, our net position is several $100k per person "in the black". The per capita gross debt figure is therefore backed by our personal net asset position, and funded comfortably and sustainably by our gross national income (ie GDP). Ie (for Uncle Festivus!) we do live within our (national) means! 

PS: All bank figures from APRA (http://www.apra.gov.au/Statistics/Monthly-Banking-Statistics.cfm)

Cheers,

Beej


----------



## Soft Dough (20 October 2009)

Beej said:


> Well that's right but if the productive use of the money earns more than the interest bill (or generates more increase in VALUE than the interest costs to us), then we are ahead, and that's the end game.




100% agree,

hence we should invest in infrastructure, ports, rail, schools, training facilities, businesses.

but I think you are confusing where money goes when comparing

personal debt ( primarily consumption - ie overseas to china for stoves, cars, playstations )

Some business ( productivity - ie exports, protection from overseas interests )

Government ( facilities to aid business and health and education ) <- well that is where is used to be spent anyway.



Housing does not generate income for the country, it is a surefire way of using the money from mining to build houses which generate no income for the country, at the expense of businesses which employ people and government revenue which faciltates business action.


----------



## Beej (20 October 2009)

Soft Dough said:


> 100% agree,
> 
> hence we should invest in infrastructure, ports, rail, schools, training facilities, businesses.
> 
> but I think you are confusing where money goes when comparing personal debt ( primarily consumption - ie overseas to china for stoves, cars, playstations )




No I don't think I am. Money doesn't just get spent once, and when we talk private debt to GDP ration's (ie the $1.9T of private debt) the largest chunk of that comes from total mortgages used to buy houses, not imported goods etc. So *that* money (the money used to buy property) has not disappeared at all and in fact a large amount of it may well have ended up flowing into the very "productive" area's you list.

You have never had and will never have a situation where all credit created within an economy is created directly for the express purpose of building a port or buying plant for an exporting factory/mine etc. You will also never have the situation (not in a globalised world anyway) where a portion of our money is not spent on imported goods.



> Some business ( productivity - ie exports, protection from overseas interests )
> 
> Government ( facilities to aid business and health and education ) <- well that is where is used to be spent anyway.
> 
> Housing does not generate income for the country, it is a surefire way of using the money from mining to build houses which generate no income for the country, at the expense of businesses which employ people and government revenue which faciltates business action.




Well notice I used the word "value". Export income is not the only way to increase the "wealth" (or standard of living) of a country you know. It's a good way, and needed if you also import, but not the only way. Every bit of productive work done can and often does create lasting value whether we export the result of that work for hard cash and or use it to make something we need or want. Eg if credit is used to build new houses or improve existing ones, (or even if the income from export mining is used for this purpose), then that provides both direct value and improves standard of living. An economy, and our standard of living, does not derive from export income alone, and there's no rule that says when you do earn export income that all of that must be spent on improving your ability to generate more export income! You have to spend some of the dividend on standard of living related items as well.

Cheers,

Beej


----------



## Macquack (20 October 2009)

White_Knight said:


> Fact: Australia's debt burden is sustainable. *Inflation* will come about because of wage pressures from a socialised labour system on top of an overheated economy. *It wont be because the government printing money.*




Ask any Zimbabwean if they agree with you.


----------



## trainspotter (20 October 2009)

Not suggesting for one moment it will get this bad BUT ......... 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 borrowings of nearly $110,500 dollars. Hope this clears this matter up. Oh yeah .. this was before Kevin Rudds stimulus packages kicked in !. Thankfully the Aussie peso has climbed dramtically assisting the repayment capacity of the Guvmnt.


----------



## Soft Dough (20 October 2009)

Beej said:


> No I don't think I am. Money doesn't just get spent once, and when we talk private debt to GDP ration's (ie the $1.9T of private debt) the largest chunk of that comes from total mortgages used to buy houses, not imported goods etc. So *that* money (the money used to buy property) has not disappeared at all and in fact a large amount of it may well have ended up flowing into the very "productive" area's you list.




We still have money which housing costs going overseas purchasing depreciating assets.

If I have 2000 homes worth $1 billion in housing sitting there, what cash does that bring into the country and what employment does it create

vs

2000 homes ( the exact same homes ) worth $500 million and $500 million upgrade to ports and rail


----------



## Beej (20 October 2009)

Soft Dough said:


> We still have money which housing costs going overseas purchasing depreciating assets.
> 
> If I have 2000 homes worth $1 billion in housing sitting there, what cash does that bring into the country and what employment does it create
> 
> ...




Sure your point is a valid one. Likewise what if the 2000 homes were only worth $100M and $900M got invested in other things? Even better right? What if we built the homes and gave them away for nothing and put the full $1B into ports etc?

The problem is, neither you, or I, or any other individual, get to decide as a whole how much money gets borrowed for what and spent where - they tried that sort of thing once in the communist soviet block - it's called a "controlled economy" and it was a dismal failure on every front. So instead we live in a country where we each as individuals decide if/how much money we save/borrow, where/what we spend it on and so forth. The aggregate result of all those millions of individual decisions result in the macro statistics around net/gross debt vs GDP, the allocation of capital across the economy etc etc being discussed here. The government and central bank can attempt to influence these things by pulling levers that might sway us as individuals one way or the other, but at the end of the day it still all boils down to millions of individuals making their own decisions for their own best interest - that's the system in which we live.

Cheers,

Beej


----------



## Soft Dough (20 October 2009)

Beej said:


> Sure your point is a valid one. Likewise what if the 2000 homes were only worth $100M and $900M got invested in other things? Even better right? What if we built the homes and gave them away for nothing and put the full $1B into ports etc?
> 
> The problem is, neither you, or I, or any other individual, get to decide as a whole how much money gets borrowed for what and spent where - they tried that sort of thing once in the communist soviet block - it's called a "controlled economy" and it was a dismal failure on every front. So instead we live in a country where we each as individuals decide if/how much money we save/borrow, where/what we spend it on and so forth. The aggregate result of all those millions of individual decisions result in the macro statistics around net/gross debt vs GDP, the allocation of capital across the economy etc etc being discussed here. The government and central bank can attempt to influence these things by pulling levers that might sway us as individuals one way or the other, but at the end of the day it still all boils down to millions of individuals making their own decisions for their own best interest - that's the system in which we live.
> 
> ...




I know it is weird, when I was young and poor I was a capitalist, and the older and richer I get, the more of a socialist I become ( because I feel that in a fair and reasonable society as Australia is some socialist attitudes could benefit all at the expense of very very few ) ( and I by no means want to increase social security, I would prefer policies empowering people to look after themselves )

I think it all went to crap when John Howard et al. decided to cut taxes instead of investing money to make money, compounded by Krudd and propping up the market.

So as I would have never said when I was younger: 

We need higher taxes and government investment in strategic enterprise. ( which I believe would provide australia with greater wealth )

Because as it has been shown with the housing boom, you cannot trust the general public to make wise choices with the proceeds ( both direct and indirect income ) of the business investment and government interventions that they scorn and ridicule.


----------



## wayneL (20 October 2009)

Soft Dough said:


> I would prefer policies empowering people to look after themselves



I wouldn't call that socialism FWIW


----------



## Fleeta (20 October 2009)

Beej said:


> The problem is, neither you, or I, or any other individual, get to decide as a whole how much money gets borrowed for what and spent where - they tried that sort of thing once in the communist soviet block - it's called a "controlled economy" and it was a dismal failure on every front. So instead we live in a country where we each as individuals decide if/how much money we save/borrow, where/what we spend it on and so forth.




Isn't the problem that the vast majority of us lack 'financial eduction'. What would household debt look like if school kids for the past 30 years had been educated about credit and investment decisions in high school?


----------



## MR. (21 October 2009)

I hate long posts....



Fleeta said:


> Isn't the problem that the vast majority of us lack 'financial eduction'. What would household debt look like if school kids for the past 30 years had been educated about credit and investment decisions in high school?



Lack the financial education, jeez, I feel that way after reading some of the above posts. Wonder if some have had too much financial education which would somewhat explain as well why private debt reached as high as it has.

Hear hear, either they start teaching it in schools or the government or RBA better start taking more responsibility. 


White_Knight said:


> If you have a mortgage worth 450K and an income of 60K, your personal "debt to GDP" ratio is 650%. Better go kill yourselves.



I understand how you must feel it’s ludicrous! 

As I pointed out here: https://www.aussiestockforums.com/forums/showthread.php?t=9911&page=344
Ofcoarse you'd have to deduct wages, overheads, depreciation. But it’s better than buying some of those other items. 



White_Knight said:


> USA:
> Public Debt to GDP ratio - 80%
> Private Debt to GDP ratio - 350%



Does it make it alright because the US has more debt than us? 


trainspotter said:


> Each and every Australian then, including babies, accounts for borrowings of nearly $110,500 dollars. Hope this clears this matter up.



Ha and it get’s larger!


Beej said:


> Well that's right but if the productive use of the money earns more than the interest bill (or generates more increase in VALUE than the interest costs to us), then we are ahead, and that's the end game.



This must be another one of those “over financially educated” moments again.  
Ya gota be joking!



Beej said:


> I guess these figures raise an important point - why just look at gross debt? You also need to look at the rest of balance sheet, ie total assets as well as liabilities! In Australia, the private debt could be paid off in total with household + corporate cash savings + household superannuation funds alone. We haven't even considered the $3.8T worth of residential real estate, or the I don't know how much commercial real estate, farm land, mineral deposits etc etc? In reality, on a per capita basis, our net position is several $100k per person "in the black". The per capita gross debt figure is therefore backed by our personal net asset position, and funded comfortably and sustainably by our gross national income (ie GDP). Ie (for Uncle Festivus!) we do live within our (national) means!
> PS: All bank figures from APRA (http://www.apra.gov.au/Statistics/Monthly-Banking-Statistics.cfm)



Thanks Beej for the link and bank deposit figures. 
I actually wasn’t intending to balance the books. I was interested in what Austraila’s total debt actually was/is.



> why just look at gross debt?



A debt to GDP%  figure could mean the change in debt relative to the change in GDP over a period of time. I hadn’t investigated the actual sums before now, I’d taken them on face value as presented. 

Also one day that gross debt should be repaid but ofcoarse it never will be in full. Asset prices rise and fall and so will our GDP but the debt figure doesn’t change with asset prices or GDP fluctuations.  A debt is a debt no matter how productive it’s thought to be.  

As UF claimed:


> Debt itself is immaterial - it's only a problem if you can't pay it back, even then it's all about degrees of debt .....
> 
> If the bank lends you $300k and you can't pay it back - it's your problem; if they lend you $10B and you can't pay it back then it's their problem!
> 
> ...




I don’t comprehend why “as a nation” we let the private sector expand it’s debt as much as it has. It was unnecessary and wasteful.  Why the RBA didn’t raise interest rates years ago to slow the property growth and debt, I will never know.  

So it continues...... Punish savers and reward the risk takers.


----------



## aleckara (21 October 2009)

It does not make sense to compare asset levels with debt and try to 'balance the books' anyway. On a micro individual scale sure, but on a macro scale you can't. The problem on a macro scale is that asset values are primarly determined by the amount of debt in the economy particularly if there is a shortage of them and people are forced to pay for it to survive (aka housing).

Your asset can go up in two ways. Either generate more income, or via capital gain. To generate more gain someone has to borrow more than you to buy it (on average). The problem is that this debt mostly is to buy established properties which does nothing for our quality of life but raises our debt level. It generates an initial benefit but the credit ends up being inflationary in the end anyway. Like a junkie we keep needing more and more.

You can't separate asset values for the bedrock of the economy with the nations debt levels especially if most debt is related to housing. They are a function of each other - i.e as debt in the economy falls so does housing and are not independent. If housing debt ever falls in Australia I'm sure housing will follow faster. But of course I'm starting to be in the housing bull camp atm as i see people finding ever more ways to borrow more for a house.


----------



## Wysiwyg (21 October 2009)

aleckara said:


> The problem on a macro scale is that asset values are primarly determined by the amount of debt in the economy particularly if there is a shortage of them and people are forced to pay for it to survive (aka housing).




Mate, where does it say there is a shortage of housing in Australia and more particularly, what part? 
I don`t see a shortage of housing, just a shortage of people who can afford the things when their prices multiply at the rate they do.


----------



## White_Knight (21 October 2009)

Macquack said:


> Ask any Zimbabwean if they agree with you.




What i meant is that the RBA ISNT printing money.

People need to stop reading news articles from the US and applying them to Australia.

Just like KRudd's speech on greedy bankers taking excessive risks and damaging the whole financial system...when Australia's banks have been pretty much been unscathed by the crisis.


----------



## MR. (21 October 2009)

aleckara said:


> It does not make sense to compare asset levels with debt and try to 'balance the books' anyway.
> 
> You can't separate asset values for the bedrock of the economy with the nations debt levels especially if most debt is related to housing. They are a function of each other




It's not real clear what you have written. I take it your opinion is that one can't look at housing debt without housing assets. ? 

Like comments from others, one should not be looked at without the other then? But property prices have increased because of cheap credit and promotion. Not from rental yields. There values are questionable and are not sustainable from their rental returns. Therefore real estate and their debt should not be looked at together.


----------



## Beej (21 October 2009)

aleckara said:


> It does not make sense to compare asset levels with debt and try to 'balance the books' anyway. On a micro individual scale sure, but on a macro scale you can't. The problem on a macro scale is that asset values are primarly determined by the amount of debt in the economy particularly if there is a shortage of them and people are forced to pay for it to survive (aka housing).




This is true to a point, however perhaps the way to look at it is to think about what is our national "LVR" if you like. As long as the LVR is low/conservative, then asset price movements are not a problem - same way you might assess the risk of a margin loan for shares right? In Australia's case, it looks to me from the figures I posted earlier that our national LVR would be in the order of 25-35%, which is low risk. So as long as serviceability is OK (which can be measured by looking at debt/GDP ratio), then really there is no great problem. I would suggest that only if debt/GDP rations went past say 300% would start to be looking at general serviceability problems.



> Your asset can go up in two ways. Either generate more income, or via capital gain. To generate more gain someone has to borrow more than you to buy it (on average). The problem is that this debt mostly is to buy established properties which does nothing for our quality of life but raises our debt level. It generates an initial benefit but the credit ends up being inflationary in the end anyway. Like a junkie we keep needing more and more.
> 
> You can't separate asset values for the bedrock of the economy with the nations debt levels especially if most debt is related to housing. They are a function of each other - i.e as debt in the economy falls so does housing and are not independent. If housing debt ever falls in Australia I'm sure housing will follow faster. But of course I'm starting to be in the housing bull camp atm as i see people finding ever more ways to borrow more for a house.




That is true, but again no one holds a gun to anyone's head and forces them to borrow money to buy a house (they can rent, move to a cheaper location etc), or invest in the stock market via margin loan, or take out a car loan to buy a new car (instead of saving for a second hand one) etc etc etc. Therefore the growth in credit is primarily a reflection of the demand from private individuals, + of course the fact that a low inflation/low interest rate environment globally has made the money/credit easier to come by for more people perhaps than in past times. This could be seen a sign of increased prosperity, household income and job security etc, which are all positive things.

In terms of the credit growth driving ASSET price inflation, I think that is also true, however the difference between this and general CPI type inflation is that people can choose whether to buy land/property etc as an asset, but they don't have to as they can rent, but CPI forces cost of living increases on all through non discretionary items - you can't opt out of a CPI increase.

 I would also use Sydney during the 98-03 property boom as an example (when prices rocketed but rents were static) that shows that even when monetary inflation might be driving a rise in asset prices, the utility aspect (ie rent and therefore CPI) does not get pushed up to the same extent. Rents did subsequently rise, but that had more to do with increased disposable income + high demand/low supply for rentals in that market through that period as opposed to pure monetary inflation effects IMO.

Cheers,

Beej


----------



## Temjin (21 October 2009)

Beej said:


> *Therefore the growth in credit is primarily a reflection of the demand from private individuals,* + of course the fact that a low inflation/low interest rate environment globally has made the money/credit easier to come by for more people perhaps than in past times.* This could be seen a sign of increased prosperity, household income and job security etc, which are all positive things.*






> Australia’s credit growth is still falling
> September 29th, 2009
> 
> 
> ...




http://cij.inspiriting.com/?p=813

Do we see a sign of increased prosperity here?

I haven't find a similar chart for public debt yet, but you can be sure there has been a massive growth mainly due to the stimulus packages. Replacing private debt with public debt is what Keynesian inspired economists tend to do. 

The question remain is, HOW DO YOU force the private sector to borrow again? Do you point a gun at their head and say, BORROW FROM THE BANK NOW OR ELSE GO TO JAIL? Give them incentives like lowering interest rates? Give them tax credits? But what if the private sector is still reluctant to borrow? 

Looking at the chart above may seem bad, but in reality, it's ALOT WORSE in the US right now. As defaults are rising, banks are afraid to borrow and hoard reserves, while the consumers who have lost a large chunk of their assets become savers all of a sudden and reduce spending/borrowing. In turn, private businesses does the same in response to this.


----------



## Beej (21 October 2009)

Temjin, is that graph for total private sector credit growth including corporate, or household alone? Most of my comments pertain to household credit growth in general, and I was referring specifically to the period from mid/late 90s through to 07-ish as well. I do still agree with your point in general.

Re the US - yes, they are certainly in big trouble right now.



			
				Temjin said:
			
		

> The question remain is, HOW DO YOU force the private sector to borrow again? Do you point a gun at their head and say, BORROW FROM THE BANK NOW OR ELSE GO TO JAIL? Give them incentives like lowering interest rates? Give them tax credits? But what if the private sector is still reluctant to borrow?




That is the big question! Low interest rates, tax rebates, investment allowances and so are the regular tools used. Like I said earlier, you cannot force them, government/central banks can only pull levers that attempt to influence the behaviour of individuals and businesses. That's why no outcome is certain! If you can't get things going again then yes, recessions etc will follow as obviously aggregate demand is going to contract.

Cheers,

Beej


----------



## satanoperca (21 October 2009)

Temjin,

I think you will find that businesses do want to borrow but the banks are unwilling to do so, credit rationing. 

Talking to a good friend who headed up the risk management department with one of the big four leads me to believe this along with friends and clients opinions. He has now setup his own company specializing in finding credit for mature and good cash flow businesses. He said it is very tight and difficult at the moment with sound business unable to secure money for further expansion or just day to day activities.

It is this anecdotal evidence that leads me to believe that all is not well in the corporate and business world.

It is business that are the power generators of the economy not the RE market. No business growth, no growth in employment, no money to pay of massive RE debt.

Again only time will tell.


----------



## MR. (21 October 2009)

Beej said:


> That is the big question! Low interest rates, tax rebates, investment allowances and so are the regular tools used. Like I said earlier, you cannot force them, government/central banks can only pull levers that attempt to influence the behaviour of individuals and businesses.
> Beej




Beej, is it your opinion in Australia that things were travelling well as they were before the US stuffed things up?


----------



## MR. (21 October 2009)

satanoperca said:


> Temjin,
> 
> I think you will find that businesses do want to borrow but the banks are unwilling to do so, credit rationing.




Why continue rationing credit? Lack of it? The banks must still feel that the businesses in question are still at risk!


----------



## Temjin (21 October 2009)

Beej said:


> Temjin, is that graph for total private sector credit growth including corporate, or household alone? Most of my comments pertain to household credit growth in general, and I was referring specifically to the period from mid/late 90s through to 07-ish as well. I do still agree with your point in general.
> 
> Re the US - yes, they are certainly in big trouble right now.




Yes, I believe it is for total private sector including all businesses, personal and household. Obviously, household credit would exhibit a less decline, or perhaps an increase if you break the chart down. Will need to check ABS on this. 



			
				Beej said:
			
		

> That is the big question! Low interest rates, tax rebates, investment allowances and so are the regular tools used. Like I said earlier, you cannot force them, government/central banks can only pull levers that attempt to influence the behaviour of individuals and businesses. That's why no outcome is certain! If you can't get things going again then yes, recessions etc will follow as obviously aggregate demand is going to contract.
> 
> Cheers,
> 
> Beej




Yes, the question now is, would those "regular" tools work? Since none of us here are purely academic economists (at least between you and me), can we know for certain that their "economic theories" (mainstream Keynesian), who DID NOT predict this crisis, will be able to lead us out with those tools? 

Can we confidently assume their economic theories, which actually have never been an exact science over the last few hundred years as there were a lot of debates/controversies, actually accurately reflects the "real" world?  

I believe "pulling those levels" would only distort the market in its attempt to move back to equilibrium. The process is very painful to certain people/interest groups, but unfortunately, our politicians see thing a lot differently and prefer short term solutions at the expense of the future. 



			
				satanoperca said:
			
		

> Temjin,
> 
> I think you will find that businesses do want to borrow but the banks are unwilling to do so, credit rationing.
> 
> ...




You are certainly right on that the credit rationing has been applied indiscriminately for ALL businesses, both good and bad. I certainly hope the banks / lenders have in place the necessary procedures to root out the real good ones from the bad ones. 

However, they are in a conservative mode and it's nature for them to shut off credit in order to preserve their capital reserve and prevent more potential losses.  

Yep, I agree that businesses are the generators of the economy and NOT the RE market. The latter is non-productive as available credit are consumed to speculate on prices that does not generate any economic benefit as a whole. Whereas, businesses do create REAL WEALTH by providing valuable services and/or goods from basic resources. 

It's unfortunate that the government has decided to save the RE market than the business sector by providing far more tax credits to them than the latter. (evidence from the FHBGs and the credit growth rate differences between RE and the private business sector) 

I guess this is because the Big 4s have more than 50% of their "assets" are in residential mortgages. It would be a complete disaster to their portfolio if prices drop significantly and default rates increase. This is the last thing the government wants. (and the banks obviously)


----------



## MR. (21 October 2009)

Temjin, 
You have brought up some valuable opinions.  Yes,  everything will/should  be done that is possible to keep real estate from deflating.  If real estate had been left to inflate over the years it should not be a surprise that now at these levels  “everything” will be done to keep the asset price healthy. Hopefully in the endeavours to restart the economy the speculative real estate bubble doesn’t increase further. 

Hopefully the outcome of the US rate drop in 2000 isn’t an example. 
But I'm not so sure.....


----------



## Temjin (21 October 2009)

MR. said:


> Temjin,
> You have brought up some valuable opinions.  Yes,  everything will/should  be done that is possible to keep real estate from deflating.  If real estate had been left to inflate over the years it should not be a surprise that now at these levels  “everything” will be done to keep the asset price healthy. Hopefully in the endeavours to restart the economy the speculative real estate bubble doesn’t increase further.
> 
> Hopefully the outcome of the US rate drop in 2000 isn’t an example.
> But I'm not so sure.....




Thanks MR.

The remaining question is again, go back to whether those "tools" will be enough to prevent those assets from deflating and cause a local banking crisis, but at the same time, enough to prevent those assets from inflating too much to cause a bigger bubble. 

They may want to do "everything" to keep them healthy, but whether they will be successful or not is another matter. Again, I have little confidence that they will succeed in their endeavors. Why? Because history say so. 

The Australian economy is doing so well right now, relative to other developed countries anyway, is largely because of Chinese's massive stimulus package. They still have a huge over-capacity and imbalance problem. With their export collapsed as a result of reduced demand from the US and the rest of the world, what is the reason behind their "record" import data? Research had indicate that the state sponsored companies are stockpiling the resources to take advantage of the low price, and in addition, private speculators were actually buying them to...well.. "speculate" without the intention of using them. (i.e. not consuming) 

It's not sustainable in my opinion, so as soon as the stimulus effect from China has waded off, their demand for our resources will drop.

This then in turn, cause higher unemployment rate, blah blah blah. You know the rest. 

I think I went outside the topic of debt. hahah but that's ok.


----------



## MR. (21 October 2009)

Temjin said:


> go back to whether those "tools" will be enough to prevent those assets from deflating and cause a local banking crisis, but at the same time, enough to prevent those assets from inflating too much to cause a bigger bubble.




The more I think about it the more I'm concluding that we have the tools with enough interest rate movement in Australia to prevent those assets from deflating. (for now) Many debtors hadn't had it so good with these low interest rates, doubt they'd default, if they were still employed and/or had tenants. 

1) Latest interest rate rise was to cool real estate. Could still continue on it's path with increasing rate rises for now. But dampening the economy. Until?

2) If realestate is under control and inflation breaks 3% again, will the RBA raise rates knowing how deep the debt is in real estate?


----------



## Macquack (21 October 2009)

MR. said:


> 2) If realestate is under control and inflation breaks 3% again, will the RBA raise rates knowing how deep the debt is in real estate?




Are you suggesting that the Reserve Bank would penalise people with no debt so as to cower to the debt laden masses, I think you may be right.


----------



## Soft Dough (21 October 2009)

Macquack said:


> Are you suggesting that the Reserve Bank would penalise people with no debt so as to cower to the debt laden masses, I think you may be right.




Depends how influenced the reserved bank is when they receive their PM from our PM.

It also depends on when the next election is.


----------



## joeyr46 (21 October 2009)

Soft Dough said:


> Depends how influenced the reserved bank is when they receive their PM from our PM.
> 
> It also depends on when the next election is.




Since when did the RBA decide were interest rates will go supply demand decides. RBA has no power at all and just follows along behind what the market does and then make silly statements like "Rates are at emergency levels" Might have been lowest levels since 1960 (And interestingly house prices did not scream up until the seventies at 13% interest rates )Current level of interest rates is  IMHO a measure of the fact that we have so much debt there is no one left who either wants to borrow or qualifies to borrow, we're finally running out of greater fools (maybe)


----------



## MR. (21 October 2009)

MR. said:


> 1) Latest interest rate rise was to cool real estate. Could still continue on it's path with increasing rate rises for now. But dampening the economy. Until?




Until,  the economy can take no more pain from higher rates. Interest rates are kept on hold for the economy and the RBA turns a blind eye to real estate. The government steps in and changes a few real estate rules perhaps so she aint flyin too far. 



MR. said:


> 2) If realestate is under control and inflation breaks 3% again, will the RBA raise rates knowing how deep the debts are in real estate?




They’d be treading carefully not to upset the real estate market. I’d think the RBA might let inflation  run a little to the peril of savers. 



Macquack said:


> Are you suggesting that the Reserve Bank would penalise people with no debt so as to cower to the debt laden masses



Appears that way to me. 
What else could the RBA do?


----------



## MR. (21 October 2009)

joeyr46 said:


> Since when did the RBA decide were interest rates will go supply demand decides. RBA has no power at all and just follows along behind what the market does and then make silly statements like "Rates are at emergency levels" Might have been lowest levels since 1960 (And interestingly house prices did not scream up until the seventies at 13% interest rates )Current level of interest rates is  IMHO a measure of the fact that we have so much debt there is no one left who either wants to borrow or qualifies to borrow, we're finally running out of greater fools (maybe)




Joey the following is to the best of my knowledge. 



joeyr46 said:


> Since when did the RBA decide were (where) interest rates will go(?) (The RBA dictates cash interest rates and margins are added by banks to borrowers) supply demand decides. (maybe but mostly not)
> 
> RBA has no power at all (The RBA has the power to change interest rates whenever they like up or down)
> 
> ...


----------



## Chronos-Plutus (21 September 2020)




----------

