NZ press: “too late” to prevent Australian “economic apocalypse”

From NZ Herald:

Australia has missed its chance to avoid a potential “economic apocalypse”, according to a former government guru who says that despite his warnings there are seven new signs we are too late to act.

The former economics and policy adviser has identified seven ominous indicators that a possible global crash is approaching – including a surge in crypto-currencies such as Bitcoin – and the window for government action is now closed.

John Adams, a former economics and policy adviser to Senator Arthur Sinodinos and management consultant to a big four accounting firm, told news.com.au in February he had identified seven signs of economic Armageddon.

He had then urged the Reserve Bank to take pre-emptive action by raising interest rates to prevent Australia’s expanding household debt bubble from exploding and called on the government to rein in welfare payments and tax breaks such as negative gearing.

Adams says he has for years been publicly and privately urging his erstwhile colleagues in the Coalition to take action but that since nothing has been done, the window has now closed and Australia is completely at the mercy of international forces.

“As early as 2012, I have been publicly and privately advocating that Australian policy makers take pre-emptive policy action to deal with the structural imbalances within the Australian economy, especially Australia’s household debt bubble which in proportional terms is larger than the household debt bubbles of the 1880s or 1920s, the periods which preceded the two depressions experienced in Australian history,” he told news.com.au this week.

“Unfortunately, the window for taking pre-emptive action with an orderly unwinding of structural macroeconomic imbalances has now closed.”

Adams has now turned on his former party and says both its most recent prime ministers have led Australia into a potential “economic apocalypse” and Treasurer Scott Morrison is wrong that we are heading for a “soft landing”.

“The policy approach by the Abbott and Turnbull Governments as well as the Reserve Bank of Australia and the Australian Prudential Regulation Authority, which has been to reduce systemic financial risk through new macro-prudential controls, has been wholly inadequate,” he says.

“I do not share the Federal Treasurer’s assessment that the economy and the housing market are headed for a soft landing. Data released by the RBA this week shows that the structural imbalances in the economy are actually becoming worse with household debt as a proportion of disposable income hitting a new record of 190.4 per cent.

“Because of the failure of Australia’s political elites and the policy establishment, the probability of a disorderly unwinding, particularly of Australia’s household and foreign debt bubbles, have dramatically increased over the past six months and will continue to increase as global economic and financial instability increases.

“Millions of ordinary, financially unprepared, Australians are now at the mercy of the international markets and foreign policy makers. Australian history contains several examples of where similar pre conditions have resulted in an economic apocalypse, resulting in a significant proportion of the Australian people being left economically destitute.”

Following his landmark seven signs of the economic apocalypse, which was read by a quarter of a million people, Adams has now identified seven signs that it is too late for Australia to take action. Here they are in his own words:

SIGN 1: TIGHTENING MONETARY POLICY

A cycle of global monetary tightening has begun. For example, the US Federal Reserve has raised short term interest rates in December 2016, March and June 2017 with more forecasted increases to come. The US Federal Reserve also announced a program, expected to commence within months, which would shrink its balance sheet (i.e. quantitative tightening) by selling its holdings of US$6 billion a month from Treasuries and $US4 billion a month from mortgage bonds, increasing each quarter until the Fed’s balance sheet is being reduced by a total of US$50b a month or US$600b per year.

Market expectations are now being set by officials at the Bank of Canada and the Bank of England for higher interest rates in both Canada and the UK in the near future.

Due to Australia’s record high foreign debt, increases in the international cost of credit are being passed onto Australian borrowers through the banking system, particularly on interest-only and investor loans.

SIGN 2: INVERTED AND FLATTENING YIELD CURVES

In May 2017, the Chinese Government bond market recorded its first ever inverted yield curve. Also, the US Government bond yield curve, over the past 6 months, has significantly flattened as some market analysts anticipate an inverted US yield curve in late 2017.

Inverted yield curves (or where long-term debt instruments have a lower yield than short-term debt instruments of the same credit quality) are known as a market predictor of a coming market crash or broader economic recession.

SIGN 3: SOVEREIGN AND CORPORATE DEFAULTS

Sovereign government and corporate defaults in both developed and developing economies are beginning to emerge. For example, China has registered in 2017 its highest level of corporate defaults in the first quarter of a calendar year on record.

Delinquencies and charge-offs in the United States soared to US$1.4b in the first quarter of 2017, the highest recorded level since the first quarter of 2011.

Also, in May 2017, creditors to the International Bank of Azerbaijan (Azerbaijan’s biggest bank) were forced to take a 20 per cent haircut (i.e. a partial default) which was upheld in June by a US Bankruptcy court in New York.

SIGN 4: FALLING CONFIDENCE AND CREDIT DOWNGRADES

In May 2017, six major Canadian banks were downgraded by Moody’s Investor Service (Moody’s) as concerns rise over soaring Canadian household debt and house prices leave lenders more vulnerable to losses. Moody’s also downgraded China’s sovereign debt in May 2017 for the first time since 1989 and has warned of further downgrades if further reforms are not enacted.

In May 2017, S&P has downgraded 23 small-to-medium Australian financial institutions as the risk of falling property prices increases and potential financial losses start to increase. In June 2017, Moody’s downgraded 12 Australian banks, including Australia’s four major banks.

Standard and Poor’s and Moody’s downgraded bonds for the US State of Illinois down to one notch above junk bond status as the state has over US$14.5b in unpaid bills. Despite a new budget deal passing the Illinois state legislature which raises more revenue through higher taxes, Moody’s this week has placed the state government’s bonds under review for possible downgrade.

SIGN 5: EMERGING CHINESE CREDIT CRISIS

Significant concerns among international observers are now being discussed publicly regarding the US$4 trillion Chinese Wealth Management Product (WMP) market as Chinese bank regulators are now taking significant interventionist steps to drain liquidity and reduce financial risk. As a result of recent interventionist steps, the one-year Shanghai Interbank Offered Rate hit a two year high at 4.30 per cent in May 2017.

The Chinese WMP market has, in the past few years, experienced significant growth involving long term asset acquisition funded through the use of short term liabilities.

Evidence is emerging that the long-term assets within WMPs are not performing consistent with expectations resulting in difficulties meeting short term debt obligations.

The WMP market represents approximately 10 per cent of the Chinese banking system whereas the 2006 07 subprime mortgage backed securities crisis only represented 2 per cent of the US banking system.

SIGN 6: SIGNIFICANT GROWTH IN VALUE OF CRYPTO CURRENCIES

In the past five months, the crypto currencies industry (especially the leading five internationally recognised cryptocurrencies) have experienced tremendous growth in market capitalisation indicating that investors are seeking to escape the formal banking and financial system as well as government mandated fiat currencies.

This is particularly acute in Japan where Japanese businesses and citizens have been pouring into Bitcoin given the Bank of Japan’s unconventional monetary policy measures, such as negative interest rates, as well as that Bitcoin has become legal tender in Japan in April 2017.

For example, Bitcoin has experienced growth in market capitalisation by approximately 170 per cent in the past 4 months, while Ethereum has grown by an approximate 2504 per cent, Ripple by an approximate 4025 per cent, NEM by an approximate 3194 per cent and Litecoin by 1236 per cent.

SIGN 7: DISCREDITED AUSTRALIAN FISCAL AND MONETARY POLICY

The 2017-18 Turnbull Government Budget, as well as recent decisions by the Reserve Bank of Australia (RBA) and the Australian Prudential Regulation Authority (APRA), have failed to address the structural imbalances and impediments plaguing the Australian economy.

For example, many of the assumptions underpinning the Turnbull Government’s 2017-18 Budget, including assumptions relating to growth in real Gross Domestic Product, non-mining investment, wages and household consumption, are highly questionable and almost certain not to eventuate, placing significant risk that the Federal Government will not deliver a budget surplus in FY2020-21 as currently projected.

Moreover, despite the introduction of new macro prudential rules by APRA, artificially low interest rates by RBA driven by a flawed monetary policy framework, has seen Australian household debt as a proportion of disposable income continue to climb to a new record high and now stands at 190.4 per cent.

Bwahhahhhaa!

Comments

  1. I read this the other day and wondered if it was actually supposed to be news. I guess it must be, to the masses.

    • As such it is a pretty good article though. Mind you frightening the horses is a very risky activity right now.

  2. yep too late

    should NOT have let interest rates be kept so low for the last few years…’emergency’ levels when we have 5% unemployment already massive household debt

    the question is, when will it go off??

    any takers??

      • Could it be that by 18 months the world will be absolutely aflood with newly printed money which, IF we are still a stable democracy in some way, will tend to flow here.

      • That is a possibility flawse. How many would have guessed that after the GFC we’d see the AUD move above parity with the USD and house prices balloon to dead bloated hippo in the sun status? Zero. Nobody.

        So there’s the problem, nobody expected that.

        This time, tho, markets do expect that, in the event of another collapse.

        So we could see something totally new happen.

        Expect the unexpected.

      • DominicMEMBER

        Correct Ortega. People have seen that money-printing has failed to ‘mend’ the global economy post-GFC so when the printing presses start up again it’s hard to believe we’ll see a repeat of what happened last time. In all likelihood, people will be fearful not bullish. What we’ll get is probably the inflation that so many feared the first time round.

    • There is no way unemployment is 5%. Australia is a mini version of the US with new jobs being part time, low paid and low skilled. We have lots of people that are under employed. Only our duplicitous clown politicians would push the 5% figure.

  3. Jake GittesMEMBER

    Told Murdoch media in Feb?! The NZ Herald sat on this since then, or perhaps could not afford the subscription until this month. Having sprayed everywhere and on everyone, Adams won’t be working in Australian policy arena again.

    • innocent bystanderMEMBER

      told anyone he could from 2012…

      As early as 2012, I have been publicly and privately advocating that Australian policy makers take pre-emptive policy action to deal with the structural imbalances within the Australian economy…

    • kiwikarynMEMBER

      It was always a news.com.au story – as per the attribution on the NZ Herald web site.

      • Ah yes. Curiously though, the NZ Herald article was published two hours before the news.com.au one.

      • kiwikarynMEMBER

        According to the time listed when I read it on news.com.au (and reposted it) the article was published at 9.47am while the NZ Herald article was published 11.45am (NZ time). But the news.com.au time appears to change each time its published to a different location on the web site – its currently saying it was published at 1.31pm.

  4. Inaccurate to say they failed to raise interest rates to prevent the debt bubble. They deliberately DROPPED rates to CREATE the debt bubble. I meant, to transition to a construction lead economy (for ordinary mum and dad tradies and property millionaires with taxable incomes of less than 80k trying to get ahead).

  5. SupernovaMEMBER

    SIGN 8: Out of control energy prices reducing our ability to trade out of this mess. Banana Republic here we come!

  6. SIGN 9 – out of control GAS prices that have a knock on cost effect to cement / bricks and finally housing construction costs………
    New dwelling construction down down……….

  7. Well at least someone is talking SOME sense.
    However….
    1.“As early as 2012, I have been publicly and privately advocating that Australian policy makers take pre-emptive policy action to deal with the structural imbalances within the Australian economy”
    2012?? These structural imbalances have been developing since the mid-1950’s. By 1983 the system, under the old rational rules, had become untenable. At that stage Keating, rather than reform the structural imbalances, enabled the debt explosion. The result, where we are now was predictable and indeed was predicted. So…..
    2. “the window has now closed and Australia is completely at the mercy of international forces.” The window closed long ago as per point 1. It probably closed in 1983 when the current debt blown insanity was unleashed. So…the window is not only closed it is jammed shut and the only way to fix it is to, pretty much, tear down the whole house and rebuild. Of course this is impossible to do voluntarily.
    3. Discredited fiscal and monetary policy. Now Adams just singles out Abbott and Turnbull Governments. This is pretty shallow. Gillard, Rudd and the idiot Ken Henry, Howard/Costello (who really gave the debt bubble its big boost) Keating, Hawke/Keating, Malcolm bloody Fraser, Whitlam (who was just an economic wrecking ball), Billy Snedden, Billy dillbrain McMahon…on and on and a couple I’ve missed.
    The point is the structural imbalances are much deeper than even someone like Adams realises.
    4. The RBA knowingly and wilfully set about the destruction of the productive economy. The housing bubble was their stated policy and they made no mistake. It is not possible for the RBA to even think about the real structural problems. It should be cleaned out top to bottom starting with the Board but not stopping there.
    6. We’ve now, as a result of a chronically and severely over-valued A$, dismantled productive industries. As pointed out by a variety of thoughtful commentators here this cannot be reversed. A factory doesn’t exist on its own – it is part of a network and that network is lost. Further our education system has been turned on its head to fit the FIRE economy PLUS a whole lot of other stuff that takes the place of learning. Again we are so far down this track that it is irreversible.
    7. Our universities have taught the tripe trying to justify this tripe for about 50 years that I’ve experienced. When it actually got a foothold i don’t know. They have now gone on to teaching scenarios and theories that are even more removed from reality i.e. stupid. 8.++++++++

    ANY attempt to correct the imbalances will be a disaster. You want to stop immigration then that will slam the building industry. Retail will follow. Unemployment goes through the roof. Real Estate collapses and probably banks go with it. Government receipts go to hell and gone etc in a giant wave of destruction that will not stop until it is finished.
    Again, fixing a distortion by imposing another distortion will just exacerbate all the problems in the long term. Negaive gearing reform…maybe. if you fix the real economic issues the negative gearing thing will look after itself. If you reform negative gearing so you don’t have to reform the whole economic model then you are just causing damage. Get rid of the Super distortions by all means but give people the incentive to save so that we do not go into more debt every day.
    In the old days one would recommend praying (which of course would materially change nothing) but not many of us do that anymore.

  8. I hope it all turns to shit while cocksuckers like Turdball and Moronson are still running the government …..

    • St JacquesMEMBER

      What! To an ex-Goldman Sacks lawyer??? Would be nice, but he’s not going to be in charge long enough to cop the full brunt of it..

  9. FeknameMEMBER

    Why am I only hearing about this now? Think that guy has a blog I can subscribe to?

    • He was a management consultant for one of the big 4. Why give it away for free when you’re able to charge several grand a day in consulting fees ?

  10. HadronCollision

    The salient part of this (emphasis mine).

    John Adams, a former economics and policy adviser to Senator Arthur Sinodinos and management consultant to a big four accounting firm.

  11. LOL
    There is quite literally a bottomless appetite among South American, Chinese, Asian, Indian students and professionals and hangers on to come to this country to study, work, emigrate or just flee their shithole native home. Enough anyway to keep the construction, education and retail sectors churning for another decade at least.

    No government, no matter how idiotic, is ever going to turn off that driver of this country’s GDP growth. And that driver has been enough to offset all of the above 7 factors for over a decade.

    No Apocalypse Now

    • Job prospects and cost of living can make people turn around quickly. Unless you come from a war-torn country or suffer some kind of persecution (i.e., you are a genuine refugee) then the bottom line speaks loudly. It happened in all the other countries and Australia is not some magical land of pixies where it won´t either.

    • Johannes Kepler

      There is quite literally a bottomless appetite among South American, Chinese, Asian, Indian students and professionals and hangers on to come to this country to work

      Until there is no work.

      This may come as a shock, but the entire building industry is built around borrowing money, which spend building houses, which employs people, which gives them money to buy the houses.

      If we ever get to the point where we have to pay that money back, or can no longer service the debt, or they will no longer keep lending us money – then we can no longer borrow money, can no longer build houses, can no longer employ people who can no longer pay for houses or buy them.

      And we are well and truly past all three lending criteria.

      No one – literally no one – will be coming here. Turning the driver off is not a government decision any more than Trump can turn off global warming just by denying it.

      End game.

      • This.

        Exact same situation happened in the US, Spain and Ireland. When the core engine of the economy is lending to build and buy houses, importing people to build and buy houses, and recycling that ‘wealth’ of rising house prices to drive your economy, when the limit is reached the drop is swift and sudden. Each of these have their own distinct characteristics as do the bubbles in Aus, Canada and NZ, but the point is – at some stage the new debt created and/or the supply of new debt slaves are insufficient to keep the thing moving forward.

        To be certain about this, just wind forward 10 years. Will houses in Syd/Melb be worth 4x what they are now (two doublings?) Of course not, no matter how many foreigners you import this can’t be sustained in a world of already stupid price rises and minimal wage growth. And once enough people see that, the game’s up. New starts will dry up, UE will rise and foreigners will stop coming.

    • Tamash1MEMBER

      Possibly. Ensuring a reduced standard over living and quality of life. Unless you like living and raising kids in something like London, LA, HongKong , Paris. Not bad for the top 2%. Pretty crap for the bottom 60

  12. PrinceOfPersia

    Interestingly “the Dill man” has not yet responded to this post! He probably does not have the capacity to understand its logic and subsequent assertion!!! Where are you loser?! LOL.

    • TailorTrashMEMBER

      If you mean who I think you do …then he is probably firmly engaged in relations ……after all the party is still in full swing ……..and swingers …swing …..

  13. Interestingly, I have noticed that there are a lot less of a certain category of 457 workers on the train down the north shore these days, even before the school holidays.

    Anyone else notice a change

    • Hunter80MEMBER

      They’ve worked out we are on to them and or we aren’t the shiny happy (and naive) peopled country they thought we were.

      Though there could be a lot of sick parents they have to go and visit (that, or a festival is on that they must be back for).

  14. [email protected]

    If you’re leveraged to the eyeballs while speculating on the direction os south-east coast real estate, stock up on brown colored underpants right now, as we speak;
    http://torontolife.com/city/charts-illustrate-not-time-panic-torontos-housing-market-yet/