Australia’s growth straight jacket

Whilst my colleague Michael Feller was yesterday concerned with our cosmic wellbeing in a philosophical treatise on the usefulness of GDP as a measure of economic health, I am focussed on a problem much closer to home.

Whether we’d like to live in a Panglossian country of verdant forests dotted with proud antelope grazing rich soils shared with our own fecund production, fine cuisine, wine, and conversation that we harvest wrapped in togas and self-satisfaction is beside the point. We just can’t now or in any reasonable assessment of the future because we’ve already stuffed ourselves so full of debt that we need to work it off.

And I’m wondering how the bloody hell we’re going to do it.

The buzz from our economic elite – the RBA, Treasury and their media mouthpieces – is that now, as the peak in the mining boom passes, we’re going to go easily and swiftly back to the future of debt-fueled, housing-led growth. The RBA’s Deputy Cap’t, Phil Lowe, made this crystal clear in a speech yesterday:

This weakness in the construction sector, particularly of new homes, has been one of the bigger surprises in the economic outcomes over recent times. Looking forward, a pick-up in construction activity is one of the factors that could provide an offset to the eventual moderation in the current very high level of investment in the resources sector.

This is a sorely contestable point which, as usual, is simply being accepted as a fait accompli by our economic elites. Quite aside from the question of whether or not this is a wise course for the economy, there is a question of whether this back to the future approach to economic growth is possible. In order to grow, housing markets need credit growth and there are big unanswered questions about how much of that Australian banks can actually deliver.

Consider. NAB’s finance director Mark Joiner recently declared that we are at “peak debt” in terms of our offshore borrowings:

“I regard us as at a peak in wholesale borrowing, not even in percentage terms but in dollar terms. Australian banks will only be able to grow in line with what they are able to bring in on the customer side (with deposits). So they will not be able to go with an upswing in credit. In my view, the Australian banks, for a long time, will only be able to buy the asset side of their balance sheet dollar for dollar with what they bring in on the customer side”.

In short, the banks will only be able to lend one dollar for every dollar of local deposit growth. Now, in terms of financial stability, that may sound quite sensible, and indeed it is. But in terms of the plan to stimulate growth in housing credit, it’s a different story.

According to APRA, Australian deposit-taking institutions have $1.54 trillion in deposits covering assets of 2.71 trillion. Deposits are growing at 12% per annum so that’s a total of available credit growth right now of $185 billion or 6.8% per annum. Given aggregate credit growth is currently running at 4.1%, that’s some surplus credit capacity. As such, the banks have been able to match credit growth with deposits since the GFC:

However, that is not the end of the story. Deposit growth is itself a function of many different things: attitudes in the community and business, the amount of lending already underway (which creates deposits), the balance of growth forces at work across the private, public and external sectors, the level of the currency as well as interest rates and, crucially, the degree of income growth in the economy.

For instance, between 1997 and 2007, a combination of raging credit growth and a terms of trade boom helped deposits grow at an average of 10.2% per annum:

And as you can see, since the GFC it has been even better. Since 2008, the factors that determine deposit growth have been in perfect alignment: conservative spending and high interest rates have accumulated savings, credit growth has declined but remained positive, governments have borrowed offshore and spent the money at home, the rising currency has attracted a potent carry trade of international deposits to local banks and the terms of trade boom has delivered very high income growth. Thus it is no surprise to find that from early 2008 up until today average annual deposit growth accelerated to 13.2%.

But now, as we aim to boost housing construction, all of these tail-winds for deposits are quickly reversing. Interest rates are falling, the dollar is falling, the terms of trade are falling, income growth is falling, government spending is falling and credit growth remains subdued.

So, let’s assume (not unreasonably) that deposit growth will also diminish, to around 8% per annum in the next year. In that event, total credit growth capacity would drop to 4.55%. That does not leave much room to expand above the current rate of growth. Bugger all in fact.

So, what is to be done?

Well, if the RBA succeeds in its declared intention to accelerate credit growth for more house building there are five options. The first is that banks begin to grow their offshore borrowings again. However, both ratings agencies and regulators (including the RBA) have warned that to do so will risk bank stability and credit ratings.

The second option is that the banks lend less to business and more for mortgages. But that is probably not possible either given that any boost in household credit growth will  almost certainly also boost the demand for credit in associated industries. The beauty of the mining boom was that the banks didn’t lend to miners, leaving credit capacity free for the rest of us.

The third option is that some other way is found to boost income growth. To achieve this, either the government must resume borrowing in international markets and spend like a drunken sailor at home, which is politically unlikely but, more to the point, because the government already implicitly guarantees the bank’s offshore borrowing, would also result in credit downgrades for the government (and banks). Or, productivity must rocket and make us much more competitive attracting new equity investment from offshore. Or, another export boom must fall into our laps. We can’t, surely, be that lucky.

The fourth option for boosting lending is to boost deposits directly. This could be done by redirecting some of Australia’s large store of superannuation into the banks. It’s possible but is not happening now. It might also be done by running very high immigration levels, which is happening but obviously also has political limits.

In short, the RBA’s plan for greater credit and housing construction growth sets its dual mandates of economic growth and financial stability on a collision course, as well as aiming it for a head on with the government in terms of macro-economic management. Both are the result of the failure of our economic elites to address the fact that Australia’s pre-mining boom economic model ended in the GFC, and now that the mining boom is also ending, we risk donning a growth straight jacket.

David Llewellyn-Smith
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Comments

  1. The sad reality is that it doesn’t matter what happens to the economy or society in the longer run, as long as nothing nasty happens whilst the current incumbents are in place. Witness David’ Born Again’ Murray, who having overseen a massive expansion of the CBA balance sheet during his time at the helm, is now warning about that very same expansion. What the credit agencies say, or threaten, doesn’t matter; what domestic debt is reignited, doesn’t matter; what financial stress is placed upon individuals and households, doesn’t matter. As long as it all hold together until the next crew takes over.

    • David Murray’s big talk about the level of public debt is just hand waving to distract attention away from the level of private debt he helped create.

    • But Janet, what you’ve just described is an infinity cycle (a true paradox!) where they kick the can down the road and the next lot kick the can down the road ad infinitum.

      My question is simple. How long before we break a leg and fall over from all the can kicking?

  2. At the moment in Canberra it seems our economic future couldn’t be further from their minds. It’s chaos that these people get paid for as we spiral into a possible abyss. As for David Murray Janet if he’s fess up I’d have more respect for him, but on balance he’s making a lot more sense of late, but that’s no get out of jail card.

    • I love the smell of WB Yeats in the morning:

      TURNING and turning in the widening gyre
      The falcon cannot hear the falconer;
      Things fall apart; the centre cannot hold;
      Mere anarchy is loosed upon the world,
      The blood-dimmed tide is loosed, and everywhere
      The ceremony of innocence is drowned;
      The best lack all conviction, while the worst
      Are full of passionate intensity.

      • Yep when you’re feeling in a ‘dark place’ nothing like a bit of old William Butler to really round it off 🙂

        You do have to wonder what the hell comes next for this world and I suspect the last two lines may be more relevant in these circumstances than might seem at first glance.

        And what rough beast, its hour come round at last,
        Slouches towards Bethlehem to be born?

        I’ve felt for a long time that we are headed into a time of ‘great weeping and gnashing of teeth’

          • ..the first dream in pink is when red looks like black so you bet on 0,n,while the second turns a rainbow gift baby cabbage yellow..The rest is surely not that lucky…negative,n,4 how do banks find the [email protected],all with it’s market makers,red teethed and jacketed straight..Thanks H&H

          • I think you’ve tabled the limit there flawse..let me spin a head tail in for good measure..Grab a pile of matches 500#/house..pay yourself 100#,grab a coin,ready to flip,you now run a controlled betting system,,so you write on a piece of paper 1,2,3,4,5 so ,you’re first bet will be the outsides addition,1+5 matches on heads,flip ,you win 6# form house,now cross off 1 and 5,you’re next bet will be 2+4 on heads ,you win ,collect 6#,cross off 2,4,you’re next bet will be 3 on heads,but this time you lose 3#,it’s tails,now you add the number 3 beside the last 3,where you’re next bet will be 3+3 on heads and if you win ,the game is complete..0 adds and table limits stops game ..on runs,but opposites in can win,in short..average Cheers JR

      • rob barrattMEMBER

        The bankers took that “tide in the affairs of men, that, taken at the flood, leads on to fortune”. As for the rest of us, it’s now time for “omitted, and all the voyage of their lives is bound in shallows and misery”. The personal debt levels here being the mud at the bottom of the harbour.

      • I prefer Blake:

        A dove-house fill’d with doves and pigeons
        Shudders hell thro’ all its regions.
        A dog starv’d at his master’s gate
        Predicts the ruin of the state.

        The prince’s robes and beggar’s rags
        Are toadstools on the miser’s bags.
        A truth that’s told with bad intent
        Beats all the lies you can invent.

      • GunnamattaMEMBER

        What about some AE Houseman

        A lot of senior corporate types, banking officials, public servants politicians and journalists would have the idea down pat….

        Epitaph on an Army of Mercenaries

        These in the hour that heaven was falling
        The moment that Earth’s foundations fled
        Followed their mercenary calling
        And took their wages and are dead

        Their shoulders held the sky suspended
        They stood and Earth’s foundations stayed
        What god abandoned these defended
        And took the sum of things for pay

        • They’re all good! Thanks!
          Just the same…reading them one after the other is a suicide inducing act.

          • Here’s one to cheer you up flawse. The interpretation into English from the Middle French of the original poem is a bit awkward at times, but it still has the potency of the original’s message of hope.

            The globe is sadly groaning with debt, poverty and strife

            And billions now are pleading to enjoy a better life

            Their hope lies with resources buried deep within the earth

            And the enterprise and capital
            which give each project worth

            Is our future threatened with massive debts run up by political hacks

            Who dig themselves out by unleashing rampant tax

            The end result is sending Australian investment, growth and jobs offshore

            This type of direction is
            harmful to our core

            Some envious unthinking people have been conned

            To think prosperity is created by waving a magic wand

            Through such unfortunate ignorance, too much abuse is hurled

            Against miners, workers and related industries who strive to build the world

            Develop North Australia, embrace multiculturalism and welcome short term foreign workers to our shores

            To benefit from the export of our minerals and ores

            The world’s poor need our resources: do not leave them to their fate

            Our nation needs special economic zones and wiser government, before it is too late.

          • Not at all flawse. I find it encouraging. A reminder that those who have gone before us, have seen it all before. And more besides. And yet, we are still here. Facing similar dilemmas. Gives me hope that maybe, just maybe, humanity might get it right some day.

            Thanks to all the poetic contributors. Simply superb.

      • rob barrattMEMBER

        Well, while we’re in the mood:

        I looked above and chanced to see
        a palace of fine porphyry.
        High on a crag of iron ore
        it proudly reigned o’er all before.
        But as I watched, I felt a breeze
        and then a tremor of unease.
        It seemed to me a crack appeared
        below those walls where people cheered.
        That crag immense appeared to shake
        to shift and shrink and deeply quake,
        to disappear before my sight,
        the source of all, the proud and might.
        I saw it then, the folly of men
        No wisdom there, no wit or flare
        dependent all on sterile fare.
        And man in future will deplore
        That kingdom based on iron ore.

          • The poetic finesse admirable, the sentiment flawed!

            We are a resource rich country and that is a good thing. Bagging it is futile.

          • HnH, was that comment necessary ?

            My sense of humour in far better shape than many of the dourists lurking, thank you very much.

          • Yes, it was necessary. There is clear effort in that poem and preaching to the guy instead of engaging his point of view was unworthy. A rare moment of poor astroturfing etiquette on your part.

          • Bull. I complimented RobBs poetic skills, disagreed with his sentiment. My response not to Rob, to Bear Feller – assuming he agreed with the sentiment expressed. No drama, no rudeness…

          • rob barrattMEMBER

            Don’t panic lads. I’m not as gloomy as the poem about our future or as anti-mining. It’s just that MB ran to a few minutes of poetic license. Anyway, writing of the porphyry palace was an oblique tilt at the real estate business as well, just to make sure I made as many enemies as possible…..

          • Now sleeps the crimson petal, now the white;
            Nor waves the cypress in the palace walk;
            Nor winks the gold fin in the porphyry font:
            The firefly wakens: waken thou with me.

            – Tennyson

          • Terrific Rob and thanks to one and all!
            Somehow poetry transforms the spirit in a way prose can’t. I guess it’s allowed a bit more freedom with the imagery…if you are good enough to write it!

  3. GunnamattaMEMBER

    On this

    ‘The RBA’s Deputy Cap’t, Phil Lowe, made this crystal clear in a speech yesterday:

    This weakness in the construction sector, particularly of new homes, has been one of the bigger surprises in the economic outcomes over recent times. Looking forward, a pick-up in construction activity is one of the factors that could provide an offset to the eventual moderation in the current very high level of investment in the resources sector.’

    I was told (from within the RBA last night) that that speech was actually a clear statement for government – a poke in the ribs to get them to do something about LVR (or land) as the RBA (or some in it) are actually of the view that a housing boom would be disastrous for Australia (for reasons outlined on that thread yesterday) but that housing related employment is actually the most likely to firm up employment (against a backdrop of employment softening, but not crashing I was told – apparently the RBA [and Finance] are of the view that the baby boomers will walk out of the workplace in sufficient numbers to prevent an employment meltdown)

    • Plausible. Indeed likely in the case of Phil Lowe, given his history. But he’s also signaling the market here, pretty literally…The question is, who are you Gunnamatta?

    • Some good news there Gunnamatta; thanks for sharing it.

      But will the politicians get the message and act on it? It would amaze me if we see a good outcome, but I remain optimistic.

      I’d be amazed if all those baby boomers all quit; can they afford to?

    • Hubris.

      There isn’t a lot the Feds can do about land. And I don’t see how older people leaving the workforce would solve the employment situation in the short term. It is a longer term process. Besides older people are postponing their retirement because they don’t have enough Super. Did the RBA sleep during the GFC and not notice this?

      My main question remains – how is the RBA going to force our banksters to lend to property developers? High Rise Harry must be waiting for that answer.

        • Deep-T can correct me if I am wrong – I think lending to property developers is LESS profitable, requires higher due diligence (This is important at a time when banks are cutting costs/workforce) than lending to mega mortgage mugs..

          And there isn’t a shortage of retail borrowers here who are willing to jump through a lot of hoops (or mortgage brokers) to get that loan.

          • Lending to property developers requires about 6 times the capital allocation without being able to charge 6 times the margin. So lending to mega mortgage mugs is currently more profitable. This will not last

          • Thanks for the info, Deep T.

            This will not last

            Not a problem for most bankers who operate on the principle of IBG YBG – Sir Ralph, Murray, David Liddy et al will testify to that.

            Speaking of David Liddy, what impeccable timing! BOQ posts first bank loss in 20 years and this guy must be sipping wine on a beach somewhere in SEQ.

          • GunnamattaMEMBER

            ‘Speaking of David Liddy, what impeccable timing! BOQ posts first bank loss in 20 years and this guy must be sipping wine on a beach somewhere in SEQ.’

            Presumably from the balcony on an absolute bargain picked up from an overleveraged boomer offloading at a mortgagee auction

          • Deep T – can you elaborate on your comment about development vs mortgage lending?

            I’d like to understand the dynamics and quantums better.

    • So, you say that less people will be willing to work, because more will retire and that is why there won’t be an employment meltdown. But doesn’t that mean that the economy will be actually producing less income with more people consuming? Then how can the bank credit grow for new home construction when the income producing people will relatively shrink? Would those people be able to take more debt than previous generations, which are in a retiring mode and selling houses for funding their consumption?

      The disproportion in the economy are enormous and the balance requires very brave politicians or great leaders, not only here in Australia, but everywhere where the globalization ideology has driven the local jobs away in China and deprived the national economy from skill development continuity in many industries. One can harvest only what one has sown.

  4. Thanks HnH I hope this gets read widely…send it to every damned stupid Member of Parliaments at all levels.

    Fifth option
    Keep flogging our assets to foreigners at an increasing rate. This is our time honoured way of financing ourselves. Hardly a day goes by at the moment without the announcement of another Billion dollar takeover by foreign intersts one form and another.
    Our policy of, now (waaay tooo late), trying to devalue will accelerate the process as our assets become substantially cheaper for those in the world with a long term view.
    Anyway I believe we will continue to try to delay the inevitable with this option. After all the community has been opiated and are totally unaware. Not just average Australians, but also the elite, believes that foreign savers send money here because the like us. It’s a card that will remain a trump for a while yet…public opinion, and universities, carefully managed.

    What we are finally coming up against here is the limits of the external account. I know the term is largely unknown to modern economists but it does exist and it does limit what can be done.
    Unfortunately it has been ignored for 50 years. Now it is all too late

    The answers lie back in time.

  5. Thought provoking HnHs

    Credit growth just cannot happen in any meaningful way which eventually leads to deleveraging from unsustainable private and public debt levels.

    Our real problem is that most of the credit growth in the last 10 years has been for unproductive purposes.

    The RBA may think that employment levels will be maintained as boomers retire but that’s just a number. What is really happening is that the percentage of people in employment in productive is decreasing. These are the people that need to support existing debt without any growth

    Perhaps the RBA should be pursuing policies which actually encourage the depositors to invest their money in productive pursuits and not just in residential mortgages through bank deposits. Or are they? To ZIRP and beyond

    • On your last sentence Deep T, tis why we need a mature, liquid and innovative bond market – not just government bonds, but corporates and special (i.e like Research Bonds) structures that encourage private and public enterprise to use very idle bank deposits (and superannuation cash) to invest in projects for the future.

      Unfortunately, we seem to have trained the populous that all debt is bad – ie look at the furore over the federal gov’t debt or the states debt levels. This hyperbole, coupled with the correct concern over unproductive private debt has shifted/entrenched the notion that ALL DEBT IS BAD. This is nonsensical – you need debt to fund entrepeneurs, large scale private and public projects alike, with long timeframes or unknown payoff scenarios.

      Unfortunately, we take the easy way out and just borrow to buy (mostly existing) houses off each other. Easy peasy.

      • Just a qualification Prince…we need to really ‘save’ to create the debt. By this I mean not the pseudo saving that we are now engaged in. The outrageously negative RAT interest rate route is headed in exactly the wrong direction.

        To try to briefly clarify. Given that we have a developing massive problem with our external funding if we just ‘create’ the debt for investment than as soon as we go to buy a piece of machinery, technology, or a tractor from offshore we run into a funding problem. So we end up selling assets to foreigners to fund our proposed industrial expansion. There is no sense to that.
        We have to really save so that we consume less and have funds that we can access to buy the machines.

        • I agree with the Prince, we do need to fund our own banks borrowings through the bond market. Why send interest payments to overseas investors, so savings through bonds is a worthwhile objective.

          • I agree as well, but I think the real problem is public’s lack of knowledge about the bond market. Australians know all about equities and property, but the bond market is a mystery to us.

            Another problems is the very small weighting given to bonds in a typical “balanced” super fund or managed fund. I think its usually about 10%, perhaps more for a conservative fund.

          • Hands up all those – especially those 20 or more years from retirement – who honestly trust the banks to wisely “invest” your super, and not merely use it to create more asset bubbles with the national balance sheet as backstop for when it goes pear-shaped.

            TP, I agree that your proposal makes perfect sense in principle … provided you ignore that fact that it is in the banks’ best “interest” (there’s that word again) to blow bubbles.

            Kiss your super goodbye.

  6. Exactly Deep T. Now I believe my opinions are far from mainstream but as of late there are whisperings about the problem. e.g. David Murray.

    If, as per HnH’s post here, the external account is now a problem in the financing then, even if boomers retiring solves the ’employment’ problem, we are still left with your problem of investment in ‘unproductive purposes’ We’ll only have made the problem of unproductive non-competitive activity worse and made the funding problems in the external account worse.

    Maybe that’s still the real problem with Phil Lowe’s speech….he didn’t even mention the external account which would mean the RBA is still living in some sort of modern economic fantasy land.

    • Apart from health and education (rising 4-6% p.a exponentially for the last 10 years…) we dont have an inflation problem.

      Oh, and housing/rental costs. Just minor things, no necessities. Nothing to worry about if fuel prices go to $2 a liter. Gloomer.

      • I hope you’re right, but the fuel has a direct real cost of living impact. Also in the background the cost of grains globally is being driven up by drought and financialisation of them. Furthermore, how about energy costs other than petrol rising.

        I hope I’m wrong Prince.

      • Sorry, just to be clear I had my sarcasm font on there…

        I share Terry and Flawse and other’s concerns about imported inflation on a lower dollar.

        Maybe because I remember the last major ruction of the dollar, as I was running a courier business and fuel prices almost doubled. Margins evaporated.

        Think of the worst possible time to have a bout of sustained inflation (real, not CPI hedonic adjusted to the wazoo)…

        When your biggest population cohort begins to retire perhaps? And the following (actually slightly larger) has a mountain of debt to repay?

      • You must be a relative of my dog! He always reckons the next thing that is going to happen in his life will be good!! 🙂

        You’re looking backwards! 🙂

        P.S. I don’t want to divert the thread but Health and education are part of the story. It’s your non-tradable sector. Something else that is important, given the discussion yesterday, is how State Govts will fund themselves. Utility charges have been a significant player and will likely continue to be so.

  7. A small step (for us!) in the right direction re productive use of savings, and an alternative to whatever else there is to invest in.
    “The (Auckland) council plans to sell $125 million in six-year bonds, and will accept up to $50 million in oversubscriptions. The funds will be used to pay for the council’s infrastructure projects, and will carry credit ratings of AA”
    Pays higher than Zip(1.08% over 6 years swap rate); get’s a good credit rating; is guaranteed income; ensured repayment by ratepayer via future rates, and gets something developed in the community. My only nagging concern is that it’s giving more of ‘our’ money to ‘them’ to apply!

    • Janet…just re infrastructure projects.
      Now there was a note here yesterday about Greiner et al in NSW recommending infra-strucure spending on roads to get more people into the city.
      Now this is spending on infra-structure that is actually negative to productivity. We are using infra-structure to re-inforce the non-productive, consumption sectors of the economy.
      That’s not the sort of infra-structure we need.

      • Australia’s ranking on infrastructure comes in about 40th. Improved infrastructure is one of the pressing requirements to improve efficiency and quality of life. Ask anyone who uses platform 2 at Town Hall in Sydney!

        • Explorer,,,but the point is we need less ‘business’ in the middle of the cities and more production which means more diverse population centres.

  8. “we seem to have trained the populous that all debt is bad” – no, not all debt, just government debt. Private debt for private consumption is just fine, the more the better.

    Lowe’s prescription drives me crazy. How the heck can citizens (collectively) increase their debt load even more? Do any of these policy-makers consider the practical implications of their top-down modelling prescriptions to actually work?

    • Debt is fine. Usury is the problem.

      “Compound interest” … ffs.

      The monetary system itself is a Ponzi scheme, and, respectfully, everyone discussing “solutions” to impending economic “growth” problems arising from unsustainable private (or public) debt servicing” burdens, without comprehending that the usury-based “money” system itself renders your solutions impossible, is just pissing into the wind.

      Great article HnH. Love the second paragraph. And loudly applaud the recent focus on “growth”.

      Nevertheless, I respectfully submit that your analysis is fundamentally flawed, by omission of the key causal component in the problem under discussion.

  9. I am feeling like the bloke in the picture this morning.

    Wife tell me that they have to lay off 5 people today from the womens refuge that she is a board member of. Withdrawal of grants from both State and Feds.

    Big Australia i believe is the next step , so that they can get GDP growth out of nothing.

  10. Australia has painted itself into a very small corner thanks to high debt and low productivity growth.It needs a much lower AUD but cant afford it because of the inflation impulse.So the RBA is stuck and trying to pump housing is a strategy of pure desparation.Digging out of this hole is a 5-10 year exercise with a massive turnaround in public attitudes to productivity being the first challenge.But you dont get elected telling people its a 10 year journey of pain do you?

    • GunnamattaMEMBER

      Thats about the sum of it. That also leaves the RBA in a situation not unlike most of the rest of the worlds central banks, just playing for time until there is some fiscal side cavalry (write your own ticket currently).

      But as I dare say the mining bot crowd will be the first to let us know (given that they are still sleeping in Perth) the alternative is a crash of sorts, and that will be painful too.

    • Well put.

      It’s perhaps a little sad watching the way the government and the institutions are prepared to engage in such brutal dishonesty with a new generation of debt serfs just to feed their own greed.

      The parliament is beholden to the parties that are beholden to the corporates that are beholden to the god of endless growth. Expect major pumping and plan accordingly.

  11. Jumping jack flash

    “We just can’t now or in any reasonable assessment of the future because we’ve already stuffed ourselves so full of debt that we need to work it off.

    And I’m wondering how the bloody hell we’re going to do it.”

    +100

    This is indeed the question. It is no secret that the mining boom boosted wages from all the overseas money flowing into the country.

    It is also no secret that turning on the debt taps boosted demand and jobs, from all the overseas debt flowing into the country.

    It has all but stopped on both fronts. This is a severe mess we have – an enormous debt pile that can’t be serviced. But in my opinion there is only one solution:

    The “economic miracle” of transferring public debt to private debt has run its course. Now the pendulum must swing the other way because our privates can’t cope with the burden any more. In short, the government must take on debt.

    They have a choice: choose either to invest in production, cut red tape, kick some lobbyists’ heads, and kick the population in the arse and get them working competitively.

    Or they can bail everyone out and then default.

    • Jumping Jack…you’re ignoring the external account. How can the Govt take on more debt? It still has to be funded. As long as, as a whole nation, we are not saving then we have a funding problem.

      The problem is far worse than you think!! :)…I do mean that seriously.

    • Yet in the face of this the RBA/politicians see pumping the housing bubble as the main game.

      I can tell you from the business I work in we had a flood of foreign investors in all sort of enterprises, but in the last two months that has fallen off the cliff. There are good profitable business for sale or JV’s that just don’t get funding. This might be a cycle given other capital requirements elsewhere, and I hope it is, but the longer it goes on I’m not sure were we’ll be.

        • I’m in FS Capital raising, but the company does a lot more. The sectors have been agriculture machinery parts, agriculture, electronics, solar, steel fabrication products, some small mining, and a few others. I don’t have a full list and these are the ones I’ve been working on. You can see a reason for some of these. I see investors pulling back. Other companies like the one I work for tell me similar stories. I want to see the ABS stats of the FS sector in two quarters as I think will show some of what I’m seeing.

      • “Well Homer, I guess you’re the winner by default.”

        Homer: “Default? Woo hoo! Default: the two sweetest words in the English language… de fault, de fault, de fault”

  12. The fourth option for boosting lending is to boost deposits directly.

    If they want to boost deposit growth, how about a 50% tax break on savings? Why should savers pay the full marginal rate on interest earnings, while investors get a 50% discount for capital gains?

    • I disagree though I am a saver.. Quite happy with the government guarantee of my savings.. What more can a saver ask for? Think of the 50% tax as insurance premium.

      • That’s one hell of a premium, and I don’t have a lot of faith in the government guarantee.

        With interest rates coming down, savers are going to be forced to take more risk and look for a better return. This inevitably means deposit growth will fall sharply.

        • I am not an Insurance actuary.. hopefully there is one among the commentators who can tell if the premium is over priced.

      • All the government guarantee means is that if your bank goes down they will increase your tax to pay you back your lost savings. You still lose your money.

          • Yep. In spite of what some people think there isn’t actually that much difference between the public and private sectors. They are both swilling the same money around.

  13. Thanks H&H. A great article.

    In relation to your suggested option 4 to boost deposits I am a bit confused as to how redirecting superannuation would create more deposits (on an aggregate basis).

    I am not sure if my logic is correct but if we direct savings away from equities how can this create more aggregate deposits? I assume this would only be possible if we redirected away from international equities as a domestic equity transaction that is on-spent domestically should keep the money in Australia.

    Interested in your thoughts?

    Burgot

  14. “It might also be done by running very high immigration levels, which is happening but obviously also has political limits.”

    Methinks our masters are creating the only situation wherein The Boganity would accept new, expanded limits. Who is going to fill all the apartment towers springing up in the Melbourne CBD?