CANBERRA OBSERVED: News Weekly
Australia's debt party is well and truly over
, October 11, 2008
Sixteen years of uninterrupted economic growth have created an extraordinary false sense of security for Australians who have been living beyond their means, using overseas money.It was at the beginning of the Great Depression that President Herbert Hoover famously minted the words about the "fundamentals" of the US economy being "sound" as the alarms were blaring on Wall Street.
"The fundamental business of the economy, that is, production and distribution of commodities, is on a sound and prosperous basis," President Hoover proclaimed on October 24, 1929, in the wake of the stockmarket crash.
Without an ear for history President George W. Bush and even our own Prime Minister Kevin Rudd have been saying much the same in the wake of the current market chaos, which is on a global rather than national scale.
Mr Rudd and his Treasurer Wayne Swan have stuck close to a carefully written script which says that Australia's banking system is well-regulated, well-capitalised and without any of the toxic mortgage debt infecting the United States economy.Teetering
They have repeated the line throughout the current crisis, which has seen the US credit system teetering on the brink of total shutdown.
To be fair, what Mr Rudd and Mr Swan are saying is basically all they can say in the current situation of extraordinary uncertainty.
The use of temperate language and maintaining a calm demeanour are essential - particularly when nobody knows when the market turmoil will conclude.
Mr Swan, in particular, has no illusions about the potential for Australia to get caught in a global credit panic and has been making modest preparations for several months.
None can forestall a potential catastrophe - Australia as a debtor nation is simply too vulnerable.
For example, the Rudd Government moved some months ago that it would guarantee the first $20,000 of savers' deposits in the event of a bank collapse.
Some analysts predict a short, sharp shock and a mild recession for the United States, others predict the start of another Great Depression, while others say the coming of age of the Asian economies will provide a kind of immunity from serious economic sickness and the launching pad for a new era of prosperity.
But one thing is certain - the international economy is more interlinked than at any time in history, and the collapse of a merchant bank in New York has the potential to stop someone on the other side of the world getting a car loan, or even getting money out of an ATM.
Some statistics are worth noting.
Australia has $1 trillion worth of overseas debt, and a net debt of $600 billion - about two-thirds the size of the proposed Wall Street bailout.
Our foreign debt represents 57 per cent of our GDP.
Australia has the seventh busiest foreign exchange market in the world, despite having a much smaller economy.
"Australia's large foreign debt is a risk," CommSec economist Craig James told the Melbourne Age
newspaper just before the recent crisis.
"If there was a major global economic downturn, foreign investors would quickly take a negative view on highly indebted countries like Australia."
Mr James also warned that Australia's current account deficit had widened and was now running at around $19 billion a quarter - despite the extraordinary minerals boom.
"The simple fact is the extra income coming in the door from the commodity boom and rising exchange rate is going out the other door, spent on imported goods," Mr James said. (The Age
, June 4, 2008).
Australia's debt has been accumulated over several decades because successive governments (advised by its Treasury masters) have argued that a national savings strategy was never important.
It created a tax system which encouraged Australians to become the most deeply indebted householders in the world - using foreign capital when national savings were not enough.
Provided that people could meet the repayments, there should never be a problem.
The problem for Australia is that, should the commodity boom end, unemployment will rise sharply, many households will not be able to meet their repayments, and the banking system - which Mr Rudd and Mr Swan constantly boast about - will start to look a lot less healthy and well-capitalised.Expensive promises
The Rudd Government has made a series of expensive promises and is fortunate to have a strong budget balance going into any crisis.
But Mr Swan has already warned that the financial crisis is going to cut deeply into tax revenue.
He has not warned what will happen if unemployment jumps and welfare costs soar.
The Rudd Government is heading into uncharted waters.
Sixteen years of uninterrupted economic growth have created an extraordinary false sense of security for Australians who have been living beyond their means, using overseas money.
It won't be easy to be Prime Minister when he has to tell the nation the debt party is over.