The special sauce of the Oz economy: “Household Debt” breaks through to the mainstream.

To read the original version of this comment in the original context at Business Spectator click this link. (link may be locked – but there is a free trial available)

First it was Mr Gittin’s noting hints from the RBA that monetary policy may be out of gas, now Mr Kohler, star of Business Spectator and the ABC is giving some attention to the issue of Australia’s amazing mountain of household debt.

While it is great that FINALLY the issue of the explosion in Australian household debt over the last 17 years is getting some coverage by the elder generation, it is not exactly new news.

The Australian economic model since the late 1990s has had two components.

1.    A mining boom of historic dimensions.

2.    A similarly unrepeatable boom in Household Debt .

RBA ‘bait rates’ induced a decade long program of household debt expansion. Much of which (35-40%) was borrowed off shore and the majority of which was ‘invested’ in bidding up the price of the existing housing stock.

Politicians on both sides, but especially Mr Howard, applauded the malinvestment in residential house prices because the expansion of household debt meant that economic activity could be supported without public debt.

Expanding Household Debt has been the secret “MSG” ingredient that has added so much tangy flavour to the Ozzie economic recipe for almost a generation.  BBQ’s across the nation marveled at the rich smoky flavour that household debt added to every occasion – boat purchases, holiday houses acquisitions, holidays overseas, retirement planning. YUMBO.

Mr Howard’s so called fiscal conservatism was essentially managing the economic heat being generated by the debt boom and, for his successors, the household debt and mining booms.  Hosing down a household debt bubble (by running public surpluses) that he encouraged with capital gains concessions and making politics out of “…interest rates will always be lower…”  was Mr Howard’s main claim to fame.

The ALP were not much better as they seemed completely incapable of communicating to the Australian public the risks of substituting household debt (goosed with RBA ‘bait rates’) for public debt as the “engine” of the economy when resources like labour are not fully utilised.  Most likely it was because the right wing of the ALP was at university at the same time as Mr Howard’s economic advisers and their text books said the same thing – Private Debt does not matter.  Unfortunately of course, as we are finding out, it matters a lot and more so when it is owed off-shore – at least the Japanese were not that stupid.

No surprise that as the mining boom stalls and the household debt boom has reached its peak that the government finds itself trying to keep the economy alive with large and growing fiscal deficits while bemoaning the fact and trying to maintain the claim they are anti-deficit.

Unfortunately, Mr Hockey does not seem to understand any of the above (apart from the bemoaning) and he still seems to think there is room to support economic activity with even more debt loaded onto individuals and households.  Listen to the government and almost all of their policies involve some new and novel way of loading up the households of Australia with even more debt (lower rates, cracking open super for home buying, student loans).

Is the solution public debt – which is not the same thing as a fiscal deficit?

Nope but that is a subject for another day.

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