The next news of the week item is the on-going slow boil of the economic climate in Europe. We can’t do much about it except watch the frog boil. It is very difficult to predict exactly when it will blow.
How will it affect us here? Well I thought the best analysis was by Max Walsh in The Australian with his article “Debt to dominate debate for decade”.
For 3 decades we’ve heard economists posture about inflation and unemployment but debt was rarely mentioned. It has been the elephant in the room.
If you ever asked uncomfortable questions about the level of national debt they were brushed aside as irrelevant. Debt was even promoted as a good thing. Take on as much as you could! Well not any more. Now debt is seen for exactly what it is: an enormous liability.
Debt is set to dominate the debate for the decade to come.
Highly indebted countries such as the US Europe Japan and Britain are not in a good position.
There are 3 types of debt that we need to understand:
sovereign or public debt (we own it as government-owned debt) corporate debt and household debt. Together they add up to the total national debt.
We also need to remember the shocking lesson of the global financial crisis how readily the corporate debt was transferred to the public with bank bailouts and corporate bailouts too in some cases. In Australia in 2008 it meant the government underwriting our private banking system’s debt. If there had been a call on this guarantee Australia could have gone bankrupt. The whole capitalist system channels profits to the richest sectors but when huge losses are looking for a place to come home to they won’t accept them as part of the game.
Australia ranks well in public and corporate exposure to debt but we should be concerned about our household debt. Australia ranks third-highest in the ratio of household debt to GDP at 113%. This has been underwritten by government incentives in the tax system such as negative gearing and superannuation schemes and first homebuyer schemes that have made it easy for us all to buy into debt.
We should be concerned about our household debt exposure especially if it is above 85% when it becomes a drag on economic activity. Put simply we become wary of things like shopping and save instead.
I have a question here: What exactly does it mean to talk about a household debt exposure of 85%? What does that translate down to in terms of our own household? Wikipedia list Australia’s GPD [u]per capita[/u] US$39764. This translates into Australian dollars as A$39704 per capita.
85% of that is then $33748.
So [b]the question[/b] is: How many people in your household? Multiply that number by $39704. Then multiply the answer by 0.85. For example there are two people in our household so 2 x $39704 x 0.85 = $67497. The question is then is your household debt less than this? Remember it includes the mortgage car loans credit card debt money borrowed to buy shares bills any debt at all that your household is liable for. That figure again is $39704 multiplied by the number of people in your household multiplied again by 0.85.
If there is a serious softening in our economy (and the European sovereign debt crisis might well lead to this – the potential havoc is at least as big as the global financial crisis caused by the collapse of the US housing market – then our household debt will leave us very vulnerable and exposed.
Australia’s and Asia’s banks depend on wholesale funding and European banks are major players in this trade so we are vulnerable.
So the question I have for you is: What is your household exposure to debt? How vulnerable are you? How solvent are you?
It might well be a Chinese saying: The future belongs to the solvent.