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.