We love debt, seriously

Check out the above chart via Zarathustra from BIS data. This a thirty year history of debt servicing ratios, that is the proportion of income spent on debt repayment, across the world. It’s gold for Australia. Gold, gold GOLD!

David Llewellyn-Smith
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Comments

  1. Do you guys really believe you are in a similar position to Ireland prior to the bubble pop on Celtic Tiger? I have been following the Aussie markets for about 6 months now and it seems as though it is due to pop every 5 mins. From up here in the Northern Hemisphere we would love to be in your situation, you have China committing to carry on buying Iron Ore, Further quarry expansions. It just seems as though you are untouchable. The only negative thing I can see on the horizon is that your Bond Yields are a little high. If you are due a crash that I read about how big would it be, would it eclipse the Irish collapse, would the Aussie be devalued 50%? I now there is no crystal ball but people have been talking about this crash for so long it just doesn’t seem to be happening. Maybe you are just the lucky country.

      • http://www.australiandebtclock.com.au/

        I am always slightly skeptical of these websites, I know you have a deficit (not sure what Gillard is smoking not to see it), but again you just seem like an incredible powerhouse to the world. Are you suggesting if it did topple it would be worse than the €uro crisis?

        • thomickersMEMBER

          Oh to clarify, I meant State Government debt (Victoria, NSW, QLD) and its annual budgeting.

          victoria for example has nurses and teachers striking over CPI salary increases. In reality they need a wage freeze (or a cut if there is less state tax receipts) if they wish to keep their jobs.

    • Troll alerts going off everywhere.

      Yes inigma, in over a millenia of burst bubbles, Australia is unique. We will be the only one ever where the skin of the bubble is 9 inches of titanium.

      In 100 years time they’ll be saying “look at Australia, the only bubble that didn’t burst, lucky we bought that Sydney bedsit for $2M in 2015, a bargain today at $100Billion”.

      Looxury.

      • I am not trolling I am just pointing out that whilst everywhere else is in austerity Australia appears to be doing fine, you guys haven’t had half the problems we have had in Europe or my native USA. I was just pointing out that compared to the rest of the world your economy seems a lot better than ours. From what I can see there are a lot of cracks. Ut it just seems to be holding together somehow, mining is still good, you have an abundance of resources. When exactly are you due this pop? You have missed out on it so far.

        • I would say we haved avoided your fate by luck, not design.

          I doubt I am alone in that view.

          What we’re trying to do is get recognition that even thgouh our past behaviour avoided the malign fate of our European and U.S bretheren, it is still behaviour that needs to alter, so we don’t end up as our European and U.S. bretheren.

    • The key that is holding up our high housing prices (or letting them slowly fall, actually) is our low unemployment rate.

      • Yeah, Japan’s property bubble is STILL deflating slowly after having been doing so for 25 years; perhaps this is what Aussie will do?

  2. The chart is just a reflection of interest rates, and confirmation of our ethics and capacity to service debt.

    A more informative chart would be debt per capita.

      • It’s not presented that way here. It infers that we have borrowed more than any other nation, which may be true, but only a debt per capita comparison will tell us that.
        Perhaps even more correctly we could incorporate household income in the calculation, but given the arguments over exactly what is household income, that would be problematic.

        • You think? Looks like a VERY straight forward presentation of one simple metric, which I interpreted, reasonably enough, and in accordance with your own assessment about ethics, that it shows we love debt. That’s all there is unless your defensive.

        • Isn’t the ratio on the chart exactly showing debt per capita (e.g. average) disposable income?

          • No it is NOT showing debt per capita. It is the cost of our borrowings, which takes into account our higher than avaerage interest rates over the period.

            You are right to be a little confused at first glance though, it’s a logical mistake unless you read the data.

            Sorry lori – I’m not having a shot at you.

          • The original article states the graph “..is the debt service to income ratios of the private sector in selected economy” How could it be other than on a per capita basis?

          • Pete, you are of course correct but the chart still spooks me in the sense that some of the countries there have had and do have much higher interest rates than ours yet still their debt service as a percentage of GDP or whatever variable you use is lower. It can’t be denied that Australia has abnormal levels of household debt compared to both the world at large and other OECD economies at a similar level of development. Sure, we’ve got the mining boom to blame for our nation’s superlative ability to service large amounts of debt (and I am one of those indebted patriots going for gold so no vested interest here), but that only underscores Dave’s original thesis that our potentially unsustainable overinvestment with houses comes thanks to the recycled proceeds of our potentially unsustainable overinvestment in holes.

          • Flashman – If we had similar borrowing rates to the USA we would be back amongst the pack – but I do concede that we are too high on this scale.

            If WA wasn’t going gangbusters, our rates would be lower – I guess we have to live with that imbalance.

    • +1. My initial thought was debt levels until i did a double-take on the graph and realised “interest rates” and “debt servicing” .

      The title is misleading.

        • Just saying that from the title my initial thought was the graph was related to debt levels rather than debt service ratios. I know it is spelt out in the chart, but those of us who troll through many financial articles before the markets open don’t have time to read all the fineprint.

    • This wiki definition might help:

      In economics and government finance, debt service ratio is the ratio of debt service payments (principal + interest) of a country to that country’s export earnings.[1] A country’s international finances are healthier when this ratio is low. The ratio is between 0 and 20% for most countries.

      So it does take account of Australia’s (export) earnings and its not purely a reflection of our higher interest rates.

      We do seem to be spending a lot more servicing debt relative to our export earnings than other nations.

        • Yeah, which makes sense, given that Australia is a net capital importer and most of that capital comes in the form of borrowings.

  3. So can we be absolutely so dead certain that further interest rate cuts of the order of 1% will not result in increased debt? Furhter, given the political, IR and WHS environment that that debt will be largely spent on consumption (including houses as consumption)

    • No flawse we can’t be, but debt isn’t the flavour of the month for households anymore, and that’s a good thing.
      Business needs to borrow, but most small business owners are hesitant because they are concerned about the future, and of course it’s very hard for business to borrow at the moment.
      You will remember 1991 – it’s like that again except there are no huge bank losses.

      • Businesses are under attack from you know who. Is it therefore any wonder they will shy away from stumping up more capital? Business is in the “risk off” mode right now and rightly so.

        Thanks for this article HnH. This combined with the McKibbon article clearly put in place the generational shift underway regarding our approach to debt.

    • Wait, what has IR and WHS got anything to do with debt?

      I think it’s best for everyone if you stick to what you know best – repetitive rants about CAD and “nothing can be done now, solutions back in time”. At least there is a tiny grain of sense in that.

      • Mav You’re just a moron spitting out stupid venomous ignorant rubbish! You make no thoughtful contribution of any kind.

        As Peter said why is this Mav poster allowed these personal attacks whereas anyone else is villified for even the slightest digression from the group think? Or is Mav not a real poster and just some alter-ego? I guess Mav is part of the required group think!

        Now,I have answered that question in some detail over and over again. However you are just so ignorant you don’t actually read. You sit in some privileged position where you don’t have to work or deal with the real worlkd. I’ll admit, in the interests of brevity, I did leave out the stupid policy of maintaining a high dollar by flogging our assets to foreigners resulting in a way over-valued A$. Again I have detailed the evidence of this over and over. Again that is part of the political process.

        So just to quickly answer the question given that you can’t add up 2+2

        In a different political, IR, and WHS environment, low interest rates might trigger some investment in productive processes. I continually look at manufacturing for my business given the direction I think the world will head. It’s something i would like to be involved in personally. However any assessment we make just runs into brick walls as far as risk goes on the IR and WHS front. The political front just means that extra costs of expanding and profligate government will simply continue to be passed on to business in the form of higher costs. In addition the political front means that the policy of selling off assets to run an over-valued dollar, in order to maintain consumption, will not change.

          • “Flawse, you are as abusive as anyone here.”

            So you’re made a categorical public statement here about my behaviour. Please publicly support and justify it.

            Put the Mav post back up so everyone knows what the hell is going on here.

            “Mav overdid that I think so have edited.” Overdid THAT? Overdid? What exactly do you8 mean by overdid? THAT? You mean just this once?

            I don’t abuse. I reply to Mav. Anyone else I think about what they say. Yes! I have a minority alternative viewpoint due to my education, age,and different life experience.
            It’s different to your bias so you find it difficult.
            I don’t think anyone else finds me abusive.
            Other than replying to Mav’s outright stupid attacks on me who else have I abused? Anyone who feels I’ve abused them please feel free to put their hand up and i’ll offer a sincere ‘mea culpa’
            I’ll admit replying a bit strongly to one or two posts that were unreasonable and a bit personal in their attack on me. That’s very different to this venomous stream that issues from Mav

            Yep Lorax and I did get into holts at one time mainly because, in my view, Lorax seemed to be attached at the hip to Mav. However I think Lorax and I have learned our viewpoints are not that far apart despite the apparent surface differences.

          • Example of a mighty serve to anyone who disagrees re the CAD?

            “Flawse, you are as abusive as anyone here.”
            Come on HnH. You made a big statement about me. Back it with people who feel abused.

            Mind you I will say that in response to your ‘as abusive as anyone here’ I don’t find anyone else here abusive except Mav. So maybe I AM as abusive as anyone else…except Mav!

          • No, Flawse. Since you are curious, I didn’t call you a moron or any other name in my original, un-moderated post.

        • Just have a little honesty and admit that you want our IR and WHS laws to be in line with China, so that we can run a 3rd world factory right here in our backyard.

          No need for elaborate theories on how household debt has risen because of our IR and WHS laws preventing the “job creators” from productively investing.

          • I want nothing of the kind. I employ people who work for me virtuaqlly forever and who are very happy working for me…Why would that be?
            Again you make a personal categorical attack without the slightest thought or knowledge. Typical!

          • If your theories aren’t just a fig leaf, then explain why debt increased under Howard’s work choices? What prevented the job creators from borrowing and investing productively?

          • Jumping jack flash

            And what is wrong with being globally competitive?

            Are we somehow above competitively priced manual labour, set by the globalised labour market, because of our superior intelligence and work ethic?

            Are we smarter than the workers in these 3rd world factories? Do we work harder?

            No. Those guys leave us for dead, and somehow we still demand our cushy conditions and high wages. Completely unsustainable.

      • At least you are sticking to what you know best Mav, personal attacks.

        If you dont understand how IR and WHS affects the application of additional debt within an economy i guess flawse’s posts would look like “repetitive rants”…

        I’d suggest instead you try and put the pieces of flawse’s posts together, as it will give you a far better understanding of why we (as in Australians) are in our current economic situation.

        • Oh please… I can read right through all the elaborate “economics theories” and the “productivity” window dressing that you use to justify suppression of labour even further.

          Is it a rant if I do away with the nicities and cut to the chase rather abruptly, for your liking? So be it.

          • Err.. Replace the word “rant” with “personal attack” in the post above. (another prayer for an edit button)

        • If you dont understand how IR and WHS affects the application of additional debt within an economy i guess flawse’s posts would look like “repetitive rants”

          Since you’re so clear on this issue poid, would you care to explain where flawse hasn’t?

    • The RBA figures are showing that since the Nov and Dec 2011 rate cuts, business borrowing has increased, but it hasn’t led to a bounce in housing credit (owner occupier or investor), and while it led to a bounce in non-housing personal debt, this ended in April when credit growth was negative again. Will be interesting to follow these figures on Friday when the May figures are released.

      • Jake
        I believe your time frames are too short. Unfortunately short time frames are how economic policy is set. Indeed economics in the western world only looks at short time frames.
        As such your take is correct for a personal short term decision making framework. In the long term lower interest rates result in more credit creation and debt.
        So it depends a bit on what we are talking about I guess.

        • Totally agree, I was clutching at straws to try and provide some sort of evidence, but yes its definitely too short a time frame. I’m aware that rate cuts take a while to trickle through, and there’s some noise in the data and other explanatory variables at play, too.
          Good pick up

          • Thanks Jake.. wasn’t a ‘pick-up’ really. As I said your point is a good one for short term financial decisions.
            I have an issue with what modern economics calls long term. I’m a bit too o0ld so long term to me means 2 or 3 decades! 🙂

  4. Gold Gold Gold….and yet the chorus calls for further rate cuts.

    Just because the world reckons we are a good risk and we are silly enough to pour the borrowings into casear stone kitchens, doesnt mean a debt bubble is a good thing.

    Hold the line RBA.

  5. Exports as a % of GDP are below 2000 leves, despite the boom. As Bob Gregory of ANU points out, this boom is unusual in that it is typified by rising terms of trade but not rising proportion of exports to GDP. Meanwhile, the gains in real income we have had from the higher dollar and rising terms of trade have allowed us to stay leveraged to the hilt. These two factors should go a fair way in explaining our high debt servicing ratio. Watch out as the currency and terms of trade falls.

    • Jake
      Look at the sale of assets. The whole damned prosperity thing depends on the continuous flogging of our national assets to any foreigner who will buy them.
      Your observations support my argument that mining, despite continual vilification in these pages, is NOT the problem. Flogging off our mines and resources to maintain consumption is the problem.

      • There’s probably some truth to that, I don’t doubt it. I do think however that mining is doing a few things. As Glenn Stevens and many others have pointed out, it has allowed us to slow our credit growth and increase our savings without consumption moving too far from recent averages. But its pretty much lead to a situation where non-commodity exports have been rendered less competitive, as have import-competing industries (imports have surged since about the early 2000s, while exports as a % of GDP are still below 2000 levels), and now our export income is very dependent on a few minerals, and the source of that demand is mainly China, which is showing serious signs of trouble. What happens to our debt servicing ability when China has a big hiccup? Mining has been good for households, has prevented the need to deleverage, and has hollowed out import-competing and non-commodity exports. So, pros and cons I guess. How sustainable it is I guess is a question of how sustainable China is and how soon India comes on in a big way. India’s chief economic advisor is predicting a big infrastucture boom over there in the next five years, but even that should be not a huge stimulus to our export demand.

        • All mostly true Jake and I agree Lord help us when this big ponzi ends. (My ponzi is not mining itself but the meta money flows that result from the currency value guarantees that are supported by mining resources)
          Again I look at Aus over a period of five decades or longer. Throughout that time we have continuously run a policy of an overvalued $A financed by overseas borrowings and sales of assets.

          So when the ‘boom’ ends we are not only going to be short the mining revenue. Suddenly the A$ will look terribly risky and this may involve large capital flight exacerbating the problem multi-fold.

          I guess i’m trying to say the problem is even worse than you think 🙂

          • Ok very interesting. But when you say “we have continuously run a policy of an overvalued A$ financed by overseas borrowings and sales of assets”, are you suggesting we regulate these things, ie run a policy to prevent the current policy you speak of?

            But yes I think capital flight could well occur if China has a hard landing, and its all going to be very painful.

            Maybe a more important question is how sustainable is the mining boom? Yes there will be short term problems of sizeable cost with a falling terms of trade and currency. But in terms of are we doing the right thing in putting our eggs in the mining basket, commodity prices are going to have to fall pretty far to endanger our mines, are they not? (Our cost curve, as far as I know, are pretty low, but someone feel free to correct me). Perhaps this is a long-term shift in our comparative advantage and the hollowing out that has occurred had to happen and has been done relatively quickly, and somewhat less painlessly, in the last few years due to the very high dollar. I guess the question comes down to long-term commodity prices. Historically, we’ve had falling real commodity prices, despite sporadic short term and rapid rises. So, is this boom the exception and our shift to mining is a good thing? Or will history repeat and commodity prices fall back to levels that will endanger a fair extent of our mining industry and ensure this whole exercise has very large costs?
            Not sure if this question is entirely related to your point, but interesting nonetheless.
            Hn’H, do you have an opinion on this?

      • flawse,

        If Australia’s capital markets are insufficient to raise capital locally for investment in our resources sector, should we slow down the pace of development to suit?

        Or, as we do now, should we bring in offshore investment?

        It seems to me that if you want an Aussie owned resource sector, the only entity big enough to cope is Govt. Are you advocating nationalisation of resources?

  6. Ouch, that’s crazy. Religious devotion to property as the greatest investment in the history of the world anyone?

    Just worked out that, now that I am moving in to a new place. My wife and I will be paying 30% of our income on rent+car. That’s assuming I continue to do as well as I am right now (who knows).

    Ouch…

    • You should be fine. I think over 30% and you are getting into mortgage stress territory. And this figure is conservative according to today’s levels of household debt. Banks would probably be happy to lend you more.

    • Papa told me when I was 20 and wanted to rent that I should plan on 33% rent, 33% living expenses and 33% savings into the bank for the future ! Aaah the good old days (1969 ish !!). So you’ve got some of that balance, good luck MattR.

  7. Our debt/GDP is still well below where the BIS say you get growth problems approx 85%, but according to the Wiki defn of debt service ratio “the ratio of debt service payments (principal + interest) of a country to that country’s export earnings” as per this post we’re leading the pack. All good while China wants our minerals, but after that … boom!

  8. My heart swells with pride at living in the most financialized country in the world.

    No wonder our banks are such happy oinkers. When they are slaughtered the marbling will be awesome.

    Citizens recently began paying down debt with determination. Meaningful principal reduction will take grumbling years. When mineral prices break below their new permanent plateau – an outcome the Chinese are determined to achieve – our narcissism will be exposed in the rear view mirror.

    Go you good thing!

    • +1, good post, except for

      “Citizens recently began paying down debt with determination”.

      Over 60% of our credit issued is for housing, and credit growth therein has been growing, and above inflation at that. Non-housing personal debt, and business debt, have had spurts of deleveraging. The net result is debt has still grown in the last few years.

      But I think you’re spot on. I wonder if our happy oinkers are getting worried?

      I think principal reduction will accelerate when commodity prices fall further. Consumption and house prices will bear the brunt

    • When mineral prices break below their new permanent plateau

      No! Ever increasing mineral prices are part of all government forecasts. Haven’t you seen those charts from Dr Gruen showing China has only just begun the industrialisation/urbanisation process, a process that will last at least another 30 years as we enter the golden age of the Asian Century?

      an outcome the Chinese are determined to achieve

      Really? I always assumed the Chinese liked paying obscenely high prices for our resources.

    • “No wonder our banks are such happy oinkers. When they are slaughtered the marbling will be awesome.”

      — awesome.

      I would agree that on the whole “citizens are paying down debt with determination” so far as their geared up to their eyeballs so of course they’re focused on paying down (or at least servicing their swollen debts). I don’t think that they are, however, approaching this with a focus on deleveraging….I know the raw number suggest there is some net debt reduction going on, but time will tell how determined the public actually is. The more recent drop in serviceability I would suggest is largely due to interest rate cuts.

    • Jumping jack flash

      I do believe that people are paying down debt with determination.

      I think many have woken up to the fact that you can’t spend the money you give to the banks each week, and equitymate is a con trick – a way to get people to take on more debt that will need to be serviced.

      Perhpas recent cost of living increases have been a catalyst to get people to actually look at their budgets too.

    • Well I for one reckon it’s a good little graph. It’s clearly not a reflection of per-capita debt (talking nominal terms), but it does show us….well as the table suggests, serviceability.

      From this we should be able to conclude that if X% are variable rates and a proportional interest rate change increases or decreases the serviceability cost by X%, then debt serviceability (or proportion of our hard earned going to service out debt) is going to increase or decrease by Y%.

      I’ve been ranting on for sometime about the correlation b/n interest rates & serviceability of debt (that everyone knows about) but is often excluded from measures of housing affordability…. For example if a property (say, 100% geared) costs you 5 x median income of $100k in Australia & the US, then both debts might be $500k but the $$$ required to service the debt with an interest rate of 4% vs 7.5% is a pretty significant difference.

  9. Looks like a lot of people working to service huge amounts of debt rather than live life. I question how sustainable this is not just economically but emotionally too. You would have to be a robot.

  10. anonysubscribe

    we have the worst debt ratio in the world. we are gluttons for punishment. the RBA, government and business conspire to brainwash us into being virtuous supporters of individual risk so that banks can continue their high risk games with our lives.

  11. anonysubscribe

    in this way I destroyed my quality of life paying for a house which never repaid the implicit expectations real people have of it being a store of value. brainwashing by real estate agents without truth from government is a poor sign of leadership and ethics in our society.