This comment was made at Macrobusiness  (link may be locked – but there is a free trial available)

Good to see that deposit growth is holding up despite the RBA very working hard to convince the average Australian that they should be off chasing their fortunes in the stock market or borrowing cheap money from the banks to keep houses prices stable.

The banks may be able to fund some credit growth using domestic savings but all of it?

What about the 30-40% of old credit growth that was funded off shore and needs to be rolled over?

Seems that relying on the savings habits of foreigners will remain the policy of choice. Nothing wrong with the savings habits of foreigners – in moderation.

It seems clear that generating sufficient capital internally (without the compulsion of the super system) to fund our investment/speculation choices is still in the too hard basket.

… and this

“…At these levels I think it’s viable. But any movement to higher credit growth on recovery and it’s straight back offshore for more money as deposits flow out to stocks, property etc. We’ll have more tomorrow on this very topic…..”

Excellent – look forward to it.

That is one of the key issues – how much are we willing to pay for independence from foreign savings and debt markets.

Or to put it another way how much ‘independence’ can our asset prices tolerate.

The problem with a slow melt is that people tend to panic at the first sign of perspiration and the necessary adjustment takes decades instead of years/months.

… and this

• flawse

  The Govt is funding its deficit offshore…as a nation we’re actually at the same point we started. We’re just putting it on a different credit card.
• Pfh007

  Yep – those cheap savings of foreigners are very appealing to a govt flogging NBN securities.

  Requiring a government to limit the sale of securities to willing locals would be a good move.

  While a few have said we should take the foreigners cheap money and use it to build infrastructure, there is no such thing as a free meal, and we will find that a pound of flesh will be paid in the end (by the public).

  The greatest myth is that Australia is incapable of generating the capital required to develop its resources.

  Lack of will is all we lack.

• Pfh007

  By first sign of perspiration I mean any sign of stagnant or declining asset prices.

  Too often there is rush to take measures (cutting interest rates) to ‘stop’ any adjustment.

  Certainly a collapse in asset prices is undesirable but I think people panic too much at the prospect of any asset price adjustment.

  People like and need housing especially all those new migrants.

  There will still be demand as prices decline and most likely increasing demand as price gradually approach/revert to mean.

  In addition economic activity that is stimulated by unsustainable interest rates is unsustainable.

  A faster rate of asset price adjustment is not only possible but in our interests as distorted prices will continue to distort our economy.

  The government is quite capable of taking action to protect/assist those who cannot cope with a steady adjustment in asset prices.

  Of course taking action on speculative capital flows is a necessary part of the mix but the Asian crisis was an excellent demonstration why capital flows must be subject to controls.

  Of course there is always the option of inflation as a debt reduction strategy and that will tempt the political class but surely we can do better than that.

• The Patrician

  Spot on as always Pfh, I just wish Glenn and his mates were listening.