Why Australia’s lost decade is worse than Japan, US

An AFR quote from PIMCO today is interesting:

PIMCO’s Australian head Rob Mead says indebted Australian households have caught the Reserve Bank in a trap.

While the US Federal Reserve may have put its foot firmly on the brake if it needs to slow its economy a slight tap by the RBA may prove too jarring.

The reason the central bank is trapped, he says, is because Australians have taken on more debt at low interest rates, making households “highly sensitive to even small upward changes in the cash rate.”

“We used to be appreciative of the fact that our central bank had such a direct transmission mechanism to the cost of borrowing,” Mead says. “As you lowered rates the benefit to the borrower was immediate.”

That’s because Australia has a floating rate mortgage market that can fluctuate in response to changes in the cash rate.

“Arguably what we have now is a central bank that is somewhat trapped in the sense that while we have had a big build up in household leverage, it’s been taking place at lower and lower rates.”

It’s far worse than this. The debt bubble is clearly going to pop some time. And when it does we’ll have no rate reductions to aid deleveraging. Indeed, we may well have rate hikes as markets reprice our risk.

This compares horribly with other large debt bubble bursts and lost decades such as those that transpired in Japan and the US. These, at least, used crashed interest rates to deleverage their households sectors. We’ve done the opposite:


It is true that Japan grew public debt grew through its low interest rate period but so is Australia. Also, the US has seen corporate and public debt rise during its low interest rate period whereas Australia has not done so very much.

Nonetheless, when the great deleveraging comes to Australia, it will be that much harder to adjust through a lost decade because the debt cannot be offset by lower rates and, given we’re a small and open economy with enormous external debt not a self-funding reserve currency titan, public sector borrowing will be constrained as well.

Then again, Australia is different.

Houses and Holes
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  1. Was listening to the Senate broadcast last night on ABC radio,, whilst stuck for an hour in bumper to bumper traffic at 7pm on camden valley way (sydneys latest growth hotspot already buckling from lack of infrastructure-i digress), and the topic of discussion was housing affordability. Even LVO and macro business was quoted throughout.

    Long story short is the pollies know it’s all fuked. They know what’s wrong and what needs to be done to fix it… But they won’t because it’s TBTF or they don’t want to loose their seat..
    Self interest is a mutha f#(ker…. 18c that!!!

  2. “This compares horribly with other large debt bubble bursts and lost decades such as those that transpired in Japan and the US.”

    You aint seen nuttin yet.

    So many households have bought mediocre property assets with debt they have no prospect of repaying except through a level of sacrifice they would find… unpleasant.

  3. To say Australia can’t address its ill performing economic units because they are too ill is plainly gibberish. Perhaps the article could be edited to suit its audience rather than a one sided plea from bond holders that suffer pain if rates rise. We need a short sharp rate rise to bring some reality back into the deep ‘blue sky’ mindset of Australian economic units. That’s it and please stop confusing such a plain issue.

      • So do it while Brent oil is falling and there will only be a muted AUD effect. AUD’s going to be taken lower eventually when bank NPAs begin to accelerate so a bit of an uptick in AUD now gives us room to address that NPA situation when it comes. No more time on this sorry.

      • There will come a time when several rate rises will do absolutely nothing to stem the fall of the AUD.

    • Ronin8317MEMBER

      A interest rate rise coupled with capital control on inflow can work, but the political willingness to impose capital control is zero. Have you notice that the banks are now acting independently of the RBA lately? That’s because they source their funds from overseas, and a rising AUD from higher interest rate actually makes it cheaper to borrow.

      When even a non-democratic country like China cannot impose capital control, what chance has Australia?

      • The banks like us to believe that overseas funding costs are the main issue for them, but when they get 60% of their funding from local deposits I’m not buying what they’re selling.

      • Even StevenMEMBER

        A higher AUD doesn’t make it cheaper for Aussie banks to borrow. An expectation of a higher AUD in future, might.

        The main driver is, and will always be, perceived risk of lending to the Aussie banks.

    • TailorTrashMEMBER

      That’s a scarey number if you had all your super in bank stocks …….is there a source for that ?

    • Even StevenMEMBER

      A debt holder is the individual (or corporation) that holds (owns) someone else’s debt.

      A debt holder does not repay debt. The debtor (borrower) repays debt.

      Also, that 90% sounds like it was pulled from your ass (no offence).

  4. Interesting. However, assume we absorb another 11,000 Chinese millionaires. Interest rates got to .5% p.a.. A huge govt stimulus package is released, this can go on and on and on…. ….No pop in sight.

  5. the Household debt to GDP graph is interesting, note that from 1978 to say 2000, the household debt is low compared to US and Japan, that was the period that AUS was prosperous in real sense.

  6. Indeed, we may well have rate hikes as markets reprice our risk
    Then the AUD will absorb all the damage and get crushed.

  7. Perhaps a silly question but would anyone know the impact to Tokyo/ New York when the US/ Jap housing crashed ?

    If Aus did have a housing crash I imagine Sydney would be our equivalent city.

    • Japanese real estate crashed 60% on average … but some of the ‘bling’ parts of Tokyo suffered much bigger falls:

      “… in 1989 property in Tokyo’s Ginza district sold for $20,000 per square foot. By 2004 prices had fallen over 90 percent …”

  8. The baby in the pic looks suitably fearful – or breaking wind – as his IP portfolio vaporises.