“Mad” Adam versus Ross Garnaut

Advertisement

mismatch

“Mad” Adam Carr today launches a broadside at Professor Ross Garnaut:

Australia does not have a debt problem. Professor Ross Garnaut should stop saying that we do.

…Professor Garnaut’s Melbourne Economic Forum appears to have adopted an unnecessarily alarmist position on Australia, our prospects and our prosperity. Debt is only one aspect of their alarmism, but it’s an important one as we come into what may be a rising interest rate environment. Professor Garnaut’s view, for instance, is that the country is ‘unusually vulnerable to international interest rates rising above their historic lows’. This vulnerability apparently stems from having a private sector that has one of the largest obligations to foreign lenders in the world. Now this is true. Our net foreign debt position, including the public sector, is about 53 per cent of GDP, which is comparable to many European nations who are net external lenders.

It is not true to say, however, that this represents some vulnerability that should be of concern to citizens. Nor is it something policymakers should try and address at this stage of our development, other than to perhaps redirect some of that spending to more productive ends, such as infrastructure…Australians are building national wealth, not only by borrowing to fund our growth and investment, but also by lifting our holdings of foreign assets (direct investment, equity, debt).

Adam Carr is applying the old Pitchford thesis logic here. Two points:

  • if our private sector debt is so productive, why does the public sector balance sheet implicitly guarantee the private? It may be that in total the debt is manageable but the composition matters a lot and the guarantee points to a clear vulnerability;
  • when is the right time to start worrying about it? Should we wait until we’ve borrowed our fill and global markets turn around and say “no more”, then watch the nation sink?
Advertisement

Clearly, the answer is that we have already leveraged households far enough (even the RBA admits as much) and the nation should very much be engaged in policy-making that restructures the economy towards more sustainable, productive and meritocratic outcomes for its capital stock. That way we can support and even improve our living standards, as opposed to partying like its 1999 before crashing into a heap.

Enough said!

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.