A prominent economic forecaster based in Melbourne makes his livelihood predicting the next major economic crisis. He has been doing it for 20 years so eventually he will get one right and be able to say ‘I told you so’. The fact is that capitalism for all its faults is a resilient sort of economic system. Energy crises, global warming for example can be good business.
A couple of features of the current international debt situation however do concern me:
1. Credit card debt. Fortune points out this week that US consumers have a massive $915 billion in credit card debt and this debt is starting to come under strain. Banks last quarter announced their worst results since 2001 with credit card delinquencies impacting on earnings. Citigroup announced a 57% decline in earnings citing higher credit card costs. It has set aside $US2.2 billion to cover defaults.
For the first time cardholders were increasing their balances outstanding and taking cash advances on these cards. American Express is also seeing signs of distress. Credit card debt is a real problem since it is unsecured. Difficulties arise when customers start using credit cards to repay home mortgage debt. In the UK, which is further ahead of the US in a phase of declining house prices, has 6% of its homeowners using credit cards to repay their mortgages – since 2005 delinquencies have risen 50%.
Australia has not yet entered a phase of major decline in house prices – in Melbourne they are rocketing ahead to rival Sydney prices – but when the crunch comes the same difficulties will develop here.
2. The sub-prime mortgage crisis last summer involving about $US 900 billion was not just a flash in the pan. The massive extent of the underlying problems is just starting to unfold. Citigroup has sacked its CEO and announced up to $US11 billion in write-offs to reflect the declining value of its sub-prime mortgage related securities. Merrill Lynch ousted its CEO a few days ago amid huge announced losses on sub-prime securities of $US 7.9 billion amid claims from Deutsche Bank that it might need to write-off another $US 11 billion.
I worry that Australia might be hit hardest precisely because the real estate market - outside of Sydney - has been slow to adjust downward – if you believe the OECD we have the most overvalued real estate on the planet. 1.7 million people in Australia are currently living under housing stress paying more than 30% of their income for housing and the bet is interest rates will rise again today.
Despite the attempts of my macroeconomic colleagues to convince me all is fine I still find it hard to understand how Australians can be in a sound credit position when 16 years into an economic expansion our credit aggregates are growing at 15.9% annually and our money stocks are growing at 15.4%. This is during a phase where inflation looks like peaking at around 3%.
It worries me with an inexperienced Labor Government looking as if it will take the helm.