I asked Saul Eslake over at Troppo whether the high rates of monetary growth in the Australian economy in recent years were driving excessive borrowing and an eventual economic collapse with much higher interest rates. Saul, who is Chief Economist at the ANZ, is in a good position to have an informed view of this. He was fairly cautious in his remarks but sanguine – he thought a major household balance sheet correction was not imminent. He suggested this ANZ study of recent debt trends in Australia which I found to be a good read.
The argument is that the debt to GDP ratio has increased secularly in Australia since the 1960s – although growth has been particularly strong over the past decade and, indeed the debt to GDP ratio is now 4th highest in the OECD. This growth has been due in part to lower interest rates, low risks of job loss due to unemployment and to general expectations of improved economic stability which increase the willingness to take on debt. Evidence that debt levels are not excessive is taken to be the low level of loan delinquencies. There are also currently low levels of business debt.
Saul’s general views were backed up by Alan Wood a few days ago in The Australian. I think an earlier study by the AMP also has value.
I have previously posted on the revisionist interpretation of Australian savings rates that is supported by the Reserve Bank of Australia among others. According to this view, if account is taken of superannuation contributions and capital gains on the stock market, Australia’s savings rate at 24% is among the highest in the developed world. It troubles me though that debt obligations are fixed by a contract whereas stock market gains (which also largely underlie most superannuation savings) are not fixed. Could there be a global contraction that might substantially reverse these gains – Jeremy Siegel for example sees demographic trends as potentially driving a collapse when all us baby boomers retire together? I am also impressed by the thesis of Glenn Stevens that because debt levels will increase with an improved macronomic outlook that macroeconomic success can create the conditions for its own undoing.
I am interested in views in these various documents and the general issue of the case for a more active debt management policy for the Australian economy.
Sunday, September 10, 2006
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8 comments:
Yeah well the old familiar sneeze starting a lot of colds might be upon us
http://www.atimes.com/atimes/Global_Economy/HI09Dj01.html
I reckon Gerard Jackson's right. It's the money supply stoopids. All the same platitudinous rantings about how this bubble is different to the last are being trotted out by the usual suspects. True there is the demographic factor of the bubble which will be pricked even harder by a bulge of retirees cashing out their investments. Nevertheless, it will be hard to accept the level of often negatively geared indebtedness if the asset values drop substantially. Doubly so if unemployment hits hard in the downturn. Sell, sell, sell now!
Still banging the drum http://www.brookesnews.com/061109ausecon.html
Hi Harry.
I wonder what you have in mind in terems of managing Australia's debt. I am under the impression that most of Australia's debt is private sector debt. In the absence of market failures, there is no reason to believe that private individuals will not choose a debt level appropriate to their circumstances. Indeed, it is hard to believe that a central planner is likely to know an individual's preferences and endowments better thasn the individual. As such, any argument for intervention in private savings decisions must rest on the existence of a market failure. Before specifying a policy intervention to alter private savings decisions, the exact nature of any such market failure needs to be explored. This is essentially the Pitchford critique of concerns that were expressed about Australia's foreign debt in the past.
Regards,
Damien.
Damien, If you read what I wriote I haver not advocated a more interventionist policy but asked people to discuss it. As a former respectful student of J.D. Pitchford I have listened hard to his arguments.
The arguments I would be prepared to listen to would be various forms of credit rationing (based on adverse selection and or moral hazard), talking down or prohibiting risky lending practices, tax reform related to negative gearing etc.
But its a debate not a statement of policy intent. The liberalisation of financial markets has brought us great gains but I remain unsure that speculative, uninformed outcomes in credit markets operate to our national disadvantage.
It wasn't meant to be a critique of your position, Harry. It was more a general statement about issues that I think are relevant to any consideration of the optimality or otherwise of Australia's level of national savings. I tend to look at these questions through a micro lens rather than a macro one.
I'm not sure that credit rationing arguments would suggest we are currently borrowing too much. Don't they involve some people being denied loans when they are prepared to pay the prevailing rate of interest? But negative gearing probably biases investment towards property, thereby distorting the optimal allocation of investment funds.
Regards,
Damien.
first tell me your definition of money and then tell me how significant it is if the demand for money is unstable?
As Gerard Jackson predicted manufacturing is the first casualty of excessive money supply causing competing malinvestments elsewhere in the economy http://www.news.com.au/story/0,10117,20409884-1246,00.html?from=public_rss
Manufacturing is beginning to struggle
For the definition of money try here ep at lp http://www.brookesnews.com/060409useconomy.html
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