Posted: December 24, 2004

Debt worsens

Recently released ABS Statistics show that household debt has hit a record $815 billion but the growth is slowing as the property slowdown deepens.

There is some evidence that households are attempting to reconstruct their precarious balance sheets by saving more. The slowdown in borrowing is a portent of a broader slowdown in aggregate spending and the fiscal drag coming from the flawed macroeconomic policy (running budget surpluses) will start to bite.

ABS says that by the end of September, outstanding household debt in Australia equals $814.8 billion with most credit demand coming via overseas borrowing. If we had the infamous "debt truck" now, it would be groaning under the load - foreign debt is now a record $406.2 billion compared to the $194 billion in March 1996. We should all recall the current PM hectoring us about our profligate ways. Total debt ($2069 billion) is around 250 percent of GDP.

While household debt growth has risen in proportion with wealth, the composition of wealth has shifted and with rising proportions accounted for by shares which in a meltdown become worthless.

It should be noted though that a current account deficit is not a bad thing despite the popular construction. Exports are after all a "cost" and imports a "benefit" If we can persuade the rest of the world to ship more real things to us than they want back from us and they are prepared to finance the imbalance by accumulating $AUD financial assets then that is a good thing. The real devil is the conduct of fiscal policy. By running surpluses, the goverment is forcing the private economy to go increasingly into debt and such a growth strategy is eventually doomed. The backlash is coming and it will be ugly.

Blog entry posted by bill