Gotti is out defending Highrise Harry’s interests yet again today:
BT’s Vimal Gor says that during the commodity boom times the Australian banks borrowed massive amounts of money, mostly in the form of long-term bank bonds, from foreign markets. This grew the banking system to today’s massive size. Gor says we effectively borrowed against the windfall of rising commodity prices, acting as if they would last forever.
This money went straight into housing credit which grew by up to 20 per cent every year. Unfortunately, as a result, much of our mining rewards found their way in to funding house prices in Australia.
BT emphasises that the income windfall from rising commodity prices was spent as quickly as it was earned. The balance sheets of CBA, Westpac and NAB more than doubled from 2003 to 2008, and “foreigners were more than happy to oblige by funding the bank loans”.
…BT says the borrowing we undertook in the early 2000s was OK given how fast our income was growing at the time. Unfortunately, the commodity prices that supported this income growth didn’t last forever.
So, as these prices have fallen, our ability to support a current account deficit that is just as big as it was pre-crisis has diminished so we are now borrowing more than we are earning. This is a highly worrying trend.
BT believes that over four years this debt and our inability to tackle it will force the Australian dollar down to 40 US cents. This would be a huge shock to the economy.
…If China transitions away from its massive commodity-driven export industries — as the IMF believes it should — then, of course, that will compound our problems. We will have to do the same thing and we will need migration along with prosperity in tourism, international education and perhaps export health services.
Good grief, Gotti, this is like saying that the best treatment for a sexually transmitted disease is to have more unprotected sex. If you agree with BT then you cannot defend the interests of Highrise Harry. The high population growth-housing inflation-consumption model is the very thing that BT is saying is unsustainable.
What Australia needs to mitigate the BT outcome is a massive competitiveness, innovation, market structure and productivity push that powers all tradables. Pretty much the opposite of everything Gotti stands for.
