So when is Australian decline a problem, grey-beards?

The MYEFO remain center-stage today as we wend our way through Australia’s grey-beard commentary responses. The tone is, as usual, soothing. Alan Kohler is a picture of nonchalance:

Standard & Poor’s was looking to the MYEFO for a reason not to downgrade Australia; Moody’s and Fitch were looking for a reason to do it.

It seems none of them were given an excuse to pull the trigger. The most eagerly anticipated MYEFO for years turned out to be a non-event: move along, nothing to see here.

S&P remains the most likely to downgrade and Moody’s and Fitch less so, at least for a while. In 1986, Moody’s went first, in September, and S&P followed in December, but the statements from all of them immediately after the MYEFO release rule out any move for the time being, at least until the May budget.

Even if S&P does downgrade next year, it won’t be a big deal. It would be unlikely to add to the government’s borrowing cost at all, and would add no more than 15 basis points to interests cost on the banks’ foreign borrowings, which represent a third of their funding needs.

So the great downgrade hoo-ha of 2016 has turned out to be a non-event, although of course there continue to be efforts by the opposition to whip it up.

Also, Ross Gittins is positively smug:

To tell you the truth, I’m sorry it didn’t fall this week. That’s not because I bear the government any ill will, but because the sooner we’re downgraded, the sooner the public will realise there’s little to fear from a downgrade. The ratings agencies are toothless tigers.

In any case, there is no good reason any sovereign Australian government – federal or state – should allow a few American for-profit businesses to dictate how much it should or shouldn’t borrow (nor engage in hugely expensive ways of disguising the true extent of its liabilities).

The ratings agencies’ credibility has been destroyed by their part in the global financial crisis. Not only did these all-wise experts fail to see it coming, they contributed to the conflagration by awarding AAA ratings to the promoters of “collateralised debt obligations” – for the small fee – that soon turned into “toxic debt”.

So when is Australian deterioration a problem, grey beards? We’ve been chronicling this story for nearly decade now, warning repeatedly about the structure of the economy leading inexorably to the decline of Australian standards of living, an exemplar of which is the deteriorating national balance sheet. We’ve been right the entire time as Australian standards of living passes through a period with an end result worse than the US Great Depression yet here we are, plodding past milestone after milestone in a relentless national decline, with the same soporific drivel spouted from our ostensibly leading voices:


When does it become urgent, grey-beards? If it’s not the first downgrade, is it the second? Is it the third or fourth? Is it when we wake one morning and Alan Kohler declares from his prosperous tower with righteous indignation and goldish-like unmemory that Australia is the new Argentina?

The truth is, these commentators long ago abandoned any ethos that can ever tell you where we are at or going. Alan Kohler comes and goes between Baby Boomer servicing investment businesses that do not respond well to the truth of fading prospects. Ross Gittins is the titular head of Domainfax, the former liberal titan of Australian press turned bald-faced real estate spruiker. Like so many of their generation, both are so busy feathering their nests that the public good long since ceased to matter.

At least one old man today offers some urgency to address the great Australian fade out. Paul Kelly responds to recent MB prodding with a better effort:

This is not what real victory looks like. The mid-year economic and fiscal outlook is about survival but that does not constitute victory. The Turnbull government, courtesy of diligent housekeeping, now goes to Christmas having escaped the threatened AAA credit rating downgrade, earning a reprieve until the May budget.

The idea that Scott Morrison can perform another escape next May, with more of the same, is remote. The government faces the exhaustion of the incremental budget strategy it has pursued since the 2014 Abbott-Hockey budget. The comment from S&P Global Ratings rang the bell: “We remain pessimistic about the government’s ability to close existing budget deficits and return a balanced budget by the year ending June 30, 2021.”

…The government needs to move beyond responsible housekeeping and ongoing restraint. It needs to be ambitious and articulate the values that define the Turnbull government. That will be neither easy nor risk-free. But that’s the entire point. The strategy of mere survival or fiscal incrementalism has reached its limits. If this is all Turnbull and Morrison represent, they are likely to fade away this term in a long journey of credit downgrades, declining economic confidence and public disappointment.

UBS economist Scott Haslem says while the government has held “the status quo until the budget, there remains no room for slippage”. Industry Super Australia chief economist Stephen Anthony says: “This is kicking the can down the road for another six months. We have seen this before. It represents another lost opportunity. We are left with the impression of fiscal adjustment rather than fiscal reality. We are expected to achieve the surplus but with a weaker economy. We are not actually tackling the reform task. The question is why?

“Everybody senses the government should do more and the ratings agencies want us to tackle the task. The people are aware of the problem — they sense the structural foundations of the economy are tenuous. We have had an incomes slowdown and this is now the lived experience of people.”

The crisis in Australia’s political and governing system is set to deepen. Economic growth is at risk. The intractable nature of the budget problem remains. The AAA credit rating is in jeopardy.

Quite right.


      • The decline is only for those who don’t own property already…If you’re asset rich you’re a winner. If you’re a saver you’re a loser. Old beards are asset owners. Therefore winners. Young people just need to stop complaining and work harder.

      • H & H The ratings agencies are neo-classical mouthpieces (that means they are generally economically incompetent) who make politicized judgments closely related to their opportunity to profit as Ross Gittens implies.

        The world would be better off if no-one ever reported the ratings agencies carefully crafted press releases as those press releases are designed to present an incorrect neoclassical view within a framework that will keep revenue flowing to the ratings agencies.

    • Kohler and his mates have made heaps of money from their antics, was an early Crikey reader and watched the broker games the mining mates the housing advice.. huge money. Gittins did fine.

    • I’m surprised the good people at ABS haven’t “improved” GDP to include debt as a component of it, just like they “improved” CPI to exclude house prices in 1999.

      $6T… Well done bubble buyers with debt, the bubble would not exist without you.

  1. “We are not actually tackling the reform task. The question is why?”. The answer came from Bill Evans yesterday, “Of most concern here are the elevated levels of household debt.”
    Don’t poke it and it won’t bite you…….

  2. This whole perception thing really depends on who you are. I’ve experienced a bit of unemployment and actual pressure on the household income. It was bloody hard and I’ve come out of it like I’ve got a new set of eyes.

    Debt was bloody suffocating, but we managed to get through it. My focus now is total deleveraging. That means no mortgage, we sold the house, no credit cards, no personal loans.

    The big dream was an illusion. It felt good, but also felt wrong. If we do go through a recession, I don’t think everyone will be as lucky as I was in coming to a realisation that I was living in a house of cards. My sister, who is unemployed, is carrying $2m worth of housing debt she can only afford by refinancing her Sydney properties and using the new money to service the debt. It’s that a Ponzi scheme?

    Lucky. That’s it. I feel really lucky even though I’ve “lost it all” I can start to call a large portion of my income “disposable” again. Except I’m disposing of it in $USD, US industrials, gold and BTC. The relos think I’m cracked. Maybe I am, but I sure do sleep a lot better.

    I guess your perception of if things are bad or good depends on both your experience and what you are likely to experience. These grey beards had it easy, have got it easy, and will either have it easy or EASIER, hence nothing but unicorns crapping rainbows.

    • Mining BoganMEMBER

      “The big dream was an illusion.”

      Yep, well done. Welcome to the darkside. Bloody good feeling eh? I found it a long time ago and still find the lack of understanding of those around me annoying though. People trying to talk me out of a good and decent life because it doesn’t fit their mould. It’s worse than religion.

      You know, taking Jack the dog on his weight loss journey has delivered me much to feel superior to and look down upon. My latest obsession is flash cars in driveways. There’s a lot of new $50k+ cars, likely on the tick, sitting exposed to the elements because the garage is full of chinese buillt plastic crap that’s probably worth $500. Don’t understand it. Two reasons. Who needs a $50k car and who needs a garage full of crap?

      • No argument about the value of the plastic Garage junk BUT did your wife actually acquire all that crap for just $500? now that’s a question you never want to ask.
        Yesterday I was at a friends place and his 7 year old was writing down a shopping list while Mum searched the fridge/pantry and shouted out what was needed, predictably we had Eggs, Milk, Sugar but the next one on the list had me rolling on the floor laughing his daughter had written “wife whine”. I think that’s what you get if you suggest moving that $500 wort of plastic crap out of the garage.

      • Mining BoganMEMBER

        Oooohhhh T, that’s good.

        Even when reading that I was catagorising my ex-fellow bogans. Might have to go over it a few times.

      • Mining BoganMEMBER

        Yes CB, I have no doubt that they would have spent a great deal more to fill the garage, but I also have no doubt that it wouldn’t be worth much more than the $500.

      • Uranium GeoMEMBER

        Yes MB, I have noticed this with vehicles in and around Melbourne also. On Sunday I drove out to Ballarat and saw three brand new LandCruiser Saharas on the way out. I am also seeing a lot of new Prados not to mention the usual Euro status cars. All are brand new or near new condition. I get the impression a lot of these new toys are salary sacrificed all for the tax minimisation strategy.

      • Yeah – still plenty of expensive cars around Perth…blissfull consumerism. What downturn? Personally I haven’t bought a car in 11 years and I hope that the one I’ve got will last at least another 5.

      • MB,

        Try a change in diet for the dog. I switched mine from dry food to raw meat (some places around Perth sell it for $2/kilo) and veggies/fruit. She went from 36 to 28 kg in no time and just loves tucking into a chunk of meat on the bone.

    • Agreed.

      Although I would avoid BTC like the plague, not because of the concept (which is very clever) but because it is extremely volatile and overrun by low scale financial spivs and scammers (they have a wonderful future in the banking industry).

      • Yeah, I’ve only got a couple. I figured if they end up replacing all money, then they’re worth $50m each, or if they aren’t worth anything – well I can point to all the plastic crap I’ve bought the kids over the last decade and tell you how to waste money on buying crap.

    • Does your sister have longer term plans to address the debt? (e.g. sell an IP, decent job on the horizon?)

      • She’s addicted. Apparently $400K in capital gains is all the extra she needs to be secure. If she sold two IPs she’d carry no debt and own property in Balmain and The Rocks, live in style off the $2K per week rent she’d get from either. I tell her every week to sell, but it’s a Golden Goose laying Golden On Paper Eggs.

    • I think the effects of debt really arent looked at enough. The fear of ever missing a pay packet, the knowledge that becoming suddenly unemployed would cost you (eventually) your house, wife, pets etc. I’ve freed myself from debt and am slowly building a buffer against the bad times. Given Australia’s debt levels I’m sure there are a lot of people out there not only stressed to the back of their eyeballs, but who would welcome catastrophic events if those events merely promised to free them from their own mistakes. If I was sitting at the top and could still remember those feelings, I’d be very worried about a society full of people who are going to go from a feeling of smug richness to deep and inescapable poverty. We may even return to the days when people didn’t talk about how much they earn, and try not to stand out as ‘rich’.

      • I don’t miss the stress. I do miss the periodic moments of feeling unnecessarily good about myself. It was nice living a bubble for a while. They were good times, pure fantasy, but good times.

      • The not standing out as rich is already beginning to happen. There is a palpable sense of resentment if looking expensively well dressed-both l and my boys have noticed it.

    • Everyone keeps asking me when I’m going to buy a place in Perth, “you know, prices are down……..”, Response…”maybe so, but there’s a way to go yet…” They generally don’t like that!

      • I’ve been saying there’ll be a crash since the early 2000s. I wouldn’t bother now. I’d just point out fundamentals (prices are inflated because of the availability of debt and low interest rates) and suggest that it “could go either way, I just dont think I’d win that dice roll at this point”

      • I reckon when WA unemployment headline hits 8+ % we’ll really see the reversal gain some momentum here… I have lived in a cheap dog box on edge of the city for ten years now, but its now become a case of not wanting to catch a falling knife for me at the same time affording a house has become a reality…

        2017 – interest rates/borrowing costs upward pressure, at same time as higher unemployment…. the chooks are coming home to roost ?

  3. ErmingtonPlumbingMEMBER

    Some old Guys at the Bowlo yesterday afternoon, discussing the exchange rate due to one of them travelling OS soon, “assured me” the Australian dollar and her Economy was fine as long as the Liberal Party was in Charge. Economic calamity one went on, Only occurs during a Labor watch (sigh),….after Disconnecting and dropping a solar Hot water heater and panels from a 20-30 degree roof pitch, on a 30+ degree day,…I just couldn’t be [email protected], to start an argument/fight,…very unlike me,..I fear, I must be getting old.


    • the real question is why were you removing the panels from the roof ? aren’t we supposed to be adding extra renewable generation? (ie installing them)

      • ErmingtonPlumbingMEMBER

        The old solar heart HWH was an 1981 build! And a change over to Instantaneous gas HW saved the owner 2 grand.
        The tennant pays the Utilities.

  4. I wish I had an answer but I’ll be completely honest I don’t !
    I don’t know when our friendly carry-trade loan sharks will trip the trap, for them it’ll be purely a business decision there’ll no emotion, just a decision that their savings will generate greater returns elsewhere. When will that happen? who can possibly know?
    I don’t know when our friendly reserve currency(USD) will return to a normalized interest rate position. However I do know that the impact on Australia’s coat-tail ride along is none of their concern.
    I don’t know when our biggest customer (China) will suffer a financial/political/military meltdown but I do know that something is coming, something unexpected is always coming.
    Notice that neither MT nor the Federal budget nor the local service economy are even mentioned, not mentioned because they’re not important, in this sense commenting on the future prospects of Australia is a little like barracking for a Rugby team or screaming your number at a roulette wheel it might feel good at the time but it has zero real value, just like my comment and the comments of most Grey beards.

    • CB
      I don’t see why politicians have any motivation to co-operate. Let’s look at the electorate they represent:
      The Economy: When “do nothing” MT went for a double dissolution over industrial issues, the public increased their support for the union-owned party blocking any meaningful change. A fine example of cutting off your nose to spite your face. Of course, both sides of politics saw a personal profit in the 457 visa rort, so one mustn’t get partisan here.
      The environment: When I look around me in the street I see very few small cars. Indeed, the average vehicle dropping the kids (no one walks to school nowadays) off to school is an SUV, usually without a towing ball. That should tell you something about the average voter & the environment. The Green Left? Studies based in Melbourne & Sydney show that the loaded lattes send their children to private schools, avoiding schools where there is a high percentage of children from third world countries. One thing inviting them in, quite another having little Johnny sitting next to one of them.
      Housing & Negative gearing? This study: though admittedly 2 years old shows you why no one did anything. The current position? Easy enough to announce you will abolish it then do nothing once in power. Gillard showed you all how with the mining tax that was “never going to happen under my administration”. You really have to laugh.
      Education: Our poor (white) education standards reflect our general lack of discipline in the home. They contrast badly with, for example, Chinese children whose families have a strong work culture. Indeed, Asians who come from countries with no “social safety net” (a significant amount of which is of course spent on drugs) have a far better idea of Life’s reality: It’s competitive. Yes, those Zebras being eaten by the Lions were the stupid & the slow. No-one stopped the camera and went to rescue them.
      You see, politicians reflect their electorate – that’s why the place is [email protected]@@@d. We’re the profligate sons squandering the inheritance. It’s not that we have too many Asians, it’s that we don’t have enough of them….

      • Haha, very good. With regard to the no safety net society, I really feel that difference when I’m in the US, and I have to say I don’t like it, it makes me feel quite uncomfortable. Like every day my job is on the line and I have to prove my value or I’ll be cut faster than Donal Trump can say you’re fired!

        Germany has a lot of safety nets and is still prosperous, so I don’t think that is why Australian’s are so lazy, I think it’s because rent seeking has worked for so long, and you get generous tax discounts for it too, take that away and people would find other ways to “get ahead”. But instead buying more IP is the way to do it here.

  5. Gen Y Home Buyer

    I can’t remember where I read it, but I read a great phrase this week.

    Australia is like the communist countries in the 70s. All news is censored propaganda.

    • As someone who lived in one (though born in the 70s) I can attest that assessment is correct. Whilst I don’t remember the political context of anything earlier than the mid-80 (on grounds of being a child) my piecing of the history is that the 70s were still OK-ish. There was still a little bit of fat left, a little bit of wealth-effect going around so some people weren’t quite as bad.

      Troubles started later – but from the 70s – it still took 20 years for something to happen.

  6. Just a general political comment…is it my imagination or is the MSM(e.g. smh and afr) biased towards the Liberal party?

    • its a two party system, and the msm exists (as in, was created to) support the system. the rest is branding and jockying for status.

    • I wouldn’t say SMH is more biased to LNP than Labor. But MSM is unquestioning of whatever narrative is put out (especially if its to do with real estate price preservation). Governments used to have to internally spin the news and give that as a statement to the media. Now the media basically does it for them. If the government (of either colour) asserted that the AUD experienced a price drop due to changes in orange juice prices, you’d not have trouble finding articles that repeat that line without question. There would be counter opinions in the editorials, but right now whatever the gov says is taken as truth. You see this most clearly when they say someone or something is to blame for an event or issue. Like blaming higher house prices on lack of construction industry oversight. Or industry closure due to unions.

  7. Hill Billy 55MEMBER

    So until the SHTF we’re going to stay stum! How do they sit on their hands when saying this:-

    “We remain pessimistic about the government’s ability to close existing budget deficits and return a balanced budget by the year ending June 30, 2021.”

    Obviously nothing to see here. A crash is inevitable.

  8. There is urgency but everyone’s looking at the wrong metrics. Stop looking at the effect and concentrate on the cause.

    How about we start with productive capacity (labour) which is underutilised? Unemployment approaching 6% and underemployment approaching 20% and the biggest intergenerational theft of all – youth un-underemployment at 40%. How about we stop the employer groups hacking away at labour costs? Anyone lucky to have a job knows that their wages have flat lined over the last decade while costs have increased for utilities, health, education and all those things the Government is responsible for but has offloaded to the private sector.

    These two key demand drivers are sinking the economy while the Government squeezes fiscal policy and making the output gap wider. Private debt is completely maxed out so while expanding credit worked in the past, the RBA are now operating in a vacuum. Combined with the terms of trade, which is on shaky ground relying on dirt and apple prices, unless Government spending closes the output gap and as the TOT sinks, then living standards will sag into the toilet.

    All this drivel about the budget balance is an absolute distraction from the real economy. Gittins is right in that the ratings agencies are irrelevant. Unless this Government and the Opposition (forget the hapless Greens) begin to address the demand problems in the real economy and close the gap, a recession is a dead set certainty.

    • Well put. The denominator is the problem; that’s why all the financial ratios are getting worse.
      imo the RBA is largely responsible by refusing to cut interest rates more aggressively. In the last 2 years inflation has averaged 1.4% (they haven’t done there job). That’s deadly when private sector debt is as high as it is. I’m surprised we have managed to avoid recession so far.

  9. They are all suffering from a severe case of “Deficit Attention Disorder”.
    True, the ratings agencies are totally discredited. But, someone needs to deliver the message that too much debt is not good. My wife and I met with a mortgage broker recently. We were told that, just in the past few weeks, the banks have really tightened up on their lending standards. You have to prove to them that if interest rates rose to 7% and rental income dropped by 20%, you would still be able to service all your loans. Also, some people were borrowing from different banks and not disclosing all of their properties. They can’t get away with this any more because the banks are cross-checking with each other (or with the Land Titles Office?). Hopefully, this may bring some modicum of stability to the system.

    • That being the case, Steve Keen’s point about the velocity of debt (growth) being the critical element in sustaining a bubble is about to arrive at homes everywhere and start rattling a lot of cages

    • True to a point yogi man. I would distinguish between public and private debt, in that the latter is the real issue, the former more like the coal mine canary. Don’t rely on the banks to cross check anything, they are too hooked on propium to care less. You’ve just hit the APRA barrier, but that wilts in the afternoon sun, so keep trying.

  10. No one should listen to a word the ratings agencies say. The grey beards are right about that.

    The decline in national income is overstated as a problem. The terms of trade went up went up to their highest level in 150 years and not surprisingly they’ve come down. We can lament that we pissed the boom up against the wall buying flat screens from Harvey Norman and ever higher house prices but that’s history.

    There is one big economic problem and one big risk. The economic problem is piss-weak real economic growth. The risk is household debt.

    There are two big political problems. One is that the government has no idea what to do about the economic problem and the risk, and its responses probably worsen both. The second is that the punters are in an angry mood and are lashing out.

    Ugly, nasty events in the world don’t help. This really belongs in the Berlin thread, but I’ll put it here anyway. There are reports this morning that the European authorities have found out there’s a whole bunch of trucks travelling together, probably hijacked by terrorists, but nobody knows where or what the target is. The problem is that the terrorists are communicating in some kind of of code, “10-4 Rubber Ducky”.

    Too soon?

  11. The comments on a Gittins article never fail to be entertainment. He clearly has a little bunch of acolytes who know nothing, but praise everything he says as if it’s been delivered from the gods. One guy reckons Gittins and Kohler should be running the country.

  12. Hard to believe that just few short years ago

    Labor inherited a surplus of $20 billion, with no net debt and $45 billion in the bank.

    In five budgets between 2008-09 and 2012-13 Labor delivered $191 billion of budget deficits.

    As a result of their decisions, over the next four years (2013-14 to 2016-17) Labor has left an additional $123 billion in projected cumulative deficits.

    Under Labor then the Libs we’ve fanfared major spending programmes, NBN, Gonski, NDIS, CEFC, defence projcts etc. It is impossible to take an entitlement from an Aussie, too afraid to lose a vote or be labelled inequitable because God knows someone somewhere will shriek ‘unfair’.

    Kelly wants MT to be bold, cut the well-spun spin, articulate in PJK style terms the need for Budget reform, stare down the Left media, knock sense into the Senate and stop trying to be Everyman.

    It is time to call Labor to account, atone for its recent legacy and unite with the Government to set Australia back on track. Only problem is blokes like Swan and Chalmers are salivating for a ratings agency downgrade that can be used as a political tool – the national interest was never theirs – Prima facie.

    • Ahh it’s like taking a long awaited dump reading this stuff.
      Inherited a budget surplus ……. where? Which bank was that stashed in?
      Labour deliver budget deficits …….. hey man, I can go back fifty years and count on my hands the number of surpluses delivered over that time by both sides ……… and your point is ……….. ?
      Kelly wants MT to be bold? ………… genuine belly laugh right there!
      And to cap it of Labour atone for it’s legacy ………… jeez you don’t stop at all. Shall we look at the “legacy” of the Abbottista or is that a blind spot? And then we’ve got Bernadi and co is the wings … Hesus!

    • We are going to be downgraded because S&P says our external position is one of the worst they’ve rated.
      So let’s look at it:
      In 2007/08 net foreign debt as % of nominal GDP = 50.8%
      2012/13 = 52.3%
      @30Sep16 = 62%

      That is an unprecedented deterioration in foreign debt under Abbott and Turnbull.

    • Howard merely shifted the debt from public to private. Then goosed private debt even more.

      And if the banks go down, is the taxpayer on the hook for that private debt?

      One reason I gave up reading the Australian was their simplistic and ignorant view of economics. The Australian simply has no clue. I cannot read it and become more informed.

  13. The Austrtalian banks don’t have to borrow from foreigners. Switch your thinking! Foreigners with surplus AUD have to invest it somewhere which for most finds it way to Aussie banks (buying an asset just means the deposit is made by someone else).
    Australian banks can create money out of nothing by making a loan. They don’t have to “borrow” it from foreigners. The Bank of England has explained it quite clearly. (google bank of england money creation). Those who choose to hold AUD balances (as opposed to buying AUD denominated assets like government bonds) take the going rate of interest, the banks don’t have to bid up to get the foreign owners of AUD to put them in the bank. Whatever AUD is put into circulation remains in circulation until it is repaid to a bank which extinguishes a loan. But in our popponz economy with growth in population banks are almost always expanding the size of their loan portfolio in spite of the repayment of loans over time.

    • Australian banks do have to borrow from foreigners. They have to borrow the net income deficit on the current account. Meaning even if the trade balance was balanced and Aussie dollars were not leaking overseas, they would still be forced to borrow abroad to service the accumulated foreign debt.
      Also you are forgetting that the BoP is an equilibrium.
      Foreigners only end up with excess Aussie dollars to lend back, if they are happy to lend at an exchange rate which results in the excess Aussie dollars abroad.