Let’s talk about debt. Not the sophistry of good debt and bad debt but the brutal reality of what debt actually does.
Debt doesn’t really matter… until suddenly it does. Then debt enslaves and erodes freedom. It cripples economies and enterprise. It destroys relationships and creates disharmony …and it’s coming our way!
The headline in The Australian newspaper today details an explosion of debt by the states which is expected to exceed $184 billion in the next five years. Commonwealth debts exceed $500 billion. Investment Bank Morgan Stanley estimates that household debt is 189 per cent of income – among the highest in the world.
Interest rates are at historic lows and yet over a million households are deemed to be in mortgage stress.
Debt is sowing the seeds for a very difficult period for the Australian economy. Little wonder the Reserve Bank has flagged more interest rate cuts in a bid to stimulate the economy.
The traditional theory behind this is if less money is spent on debt servicing, more will be spent and the economy will benefit from this extra cash flow. Low rates may also encourage greater borrowing for consumption and investment as capacity to repay is increased.
Both of these scenarios depend on consumer and business confidence to be effective and therein lies the problem.
Individuals will borrow to invest if they expect their investment returns to exceed the cost (and risk) of that investment. People will spend more as their debt servicing levels fall if they are confident that their personal financial situation is stable and improving.
In the absence of that confidence, lower rates do little to entice people to do anything except repay debt. This, of course, is a long-term virtue but does little to stimulate a flagging economy over the short-term.
And this is the scenario facing Australia today. The economy is slowing, confidence is down and there are few economic levers left for the managers to pull.
Our miraculous growth over recent decades has been a product of immigration, escalating house prices propping up spending and the resources boom. It has been aided by growing levels of government and consumer debt which have been used to avoid the day of reckoning.
Human nature lends itself to a cycle of economics. Confidence leads to over-exuberance and then a reality check which lends itself to a gloomy outlook. Over the decades, governments around the world have sought to avoid the cyclic nature of the economy through programs and stimulus that only paper over the cracks. In effect they defer the problem until it can’t be avoided any more.
The global financial crisis of 2008 was one such scenario which had a devastating impact on the global economy. A lot of the problems that caused that crisis (debt levels mostly) still exist today and some forecast another period of global instability lies ahead.
Australia seems to be at the tail end of the global cycle. Our recent economic growth has been a product of immigration rather than productivity. Individuals and businesses are being squeezed by fees, charges, cost of living and uncertainty about the future. A reduction in interest rates won’t help change that too much.
I don’t doubt that many measures that have been utilised overseas (like quantitative easing) may be suggested here but the consequences of such activity can make things worse.