Exclusive : The Rudd government will tomorrow announce the spending of 200 million dollars over two years on the development a world first money tree. The grant will see the CSIRO expand its Clayton R&D labs in Victoria and the appointment of 100 new scientists.

In a leaked press release, Australia’s Chief Scientist, Professor Penny Exuberance said during the twentieth meeting of the Prime Minister’s Science, Engineering and Innovation Council (PMSEIC) held in June 2009, the chair, Prime Minister William Rudd expressed the extreme difficulties the Australian economy would face.

Rudd briefed the council that “Between 1996 and 2007, there was a 460 per cent increase in credit card debt, a 340 per cent increase in household debt, a 450 per cent increase in corporate debt and a 200 per cent increase in net foreign debt.”

“This crisis has shown we have reached the limits of a purely debt-fuelled global growth strategy. We must begin to plan for a properly globally co-ordinated withdrawal of the extraordinary interventions we implemented in the first phase of the crisis.”

“But it is a delicate balancing act. An early withdrawal of stimulus can endanger confidence and economic recovery.”

Professor Exuberance said “simply that Australian’s have been spending more than they earned since 2002. In late 2008 consumers started to run out of money or more precisely access to cheap credit and tightened their purse strings. This meant a double whammy. Not only are Australian’s faced with having to live within their means, they must also pay down the mountains of debt they owe. As they pay down this debt, it is additional money being stripped from the domestic economy which was otherwise underpinning domestic jobs. It’s a big problem.”

“The Rudd government took decisive action with an unprecedented fiscal stimulus designed to prop up spending, back to the unsustainable rates to literally buy time so a more coordinated solution could be sought. This has worked extremely well with most Australian’s thinking Australia will come out of the Global Financial Crisis almost unscathed. The housing market is booming. Confidence is up. Now the challenge is to develop the money tree before Australians once again start to run out of stimulus/credit and realise the steep drop between their current levels of spending, and a more sustainable level of spending minus the paying down of their excessive debts.”

We contacted the office of the Prime Minister today to ask if the project is considered risky and given the circumstances, if the money should be spent on infrastructure instead. In a written statement, Mr Rudd said “The project will be self funding. Once we have developed the first prototype, the CSIRO in partnership with the treasury plans to propagate the plant. An initial forecast is for one fully grown plant to grow ten $100 polymer notes per annum. If treasury plants two hundred thousand trees, the Commonwealth can achieve payback within one year”

With no comment from the Prime Minister on the likely success of the project, we sought advice from the Director of CSIRO’s Division of Molecular & Health Science, Dr Richard Newton. Dr Newton was overly confident telling us “The CSIRO Division of Chemicals and Polymers (now known as the Division of Molecular & Health Science) had an integral part to play with the release of Australia’s non-forgeable polymer money. The clear windows and optically variable device is made by a secret process invented by the CSIRO. We had the experience then to develop a ground breaking non-forgeable note then, we have the expertise to develop a money tree, now.”

Opposition Leader, Mike Turnbull was scathing of the radical idea. “What an utter waste of tax payer’s money. I doubt if they will be successful. Even if they are, it will wreck the finance system leading to massive hyperinflation.”

“Under section 19 of the Crimes (Currency) Act 1981, the act prohibits the designing, making, printing or distributing of representations of notes capable of misleading people to believe they are genuine notes, unless consent has been given by either the Reserve Bank or Treasury. The opposition will oppose any changes to the legislation making money trees legal”

We also contacted the Housing Minister for her comments. The Honorable Ms Tanya Property said “This is an excellent idea. Not only will it enable the government to extend the first home buyers grant, home owners will be able to grow their own money allowing them to upgrade to larger and larger dwellings. I was starting to get a bit worried as to what would happen as house prices unsustainably continued to outstrip median wages. I was worried having to go to Wayne Swan and ask to increase the FHOB beyond September to prevent the housing market collapsing”

“Since 2002 Australian’s thought money grew on trees. In two years time, it will become reality. I’m excited.”

Australia’s largest mortgage insurer, Genworth, says it will raise prices on Lenders Mortgage Insurance (LMI) by 20% this quarter on increased risk due to rising unemployment.

“There is economic uncertainty and unemployment is expected to rise and with that one expects to see some increases in people not being able to pay their mortgage – that’s the spectre on the horizon” said Genworth’s chief executive Martin Barter.

In July, Mr Baker reported due to lower interest rates, only 17% off borrowers struggled to meet their mortgage repayments in the last 12 month down from 23% recorded in the year prior. “But the real concern is unemployment,” “The trend shows that small increases in unemployment can quickly translate into repayment difficulties for home owners.” said Mr Baker.

All eyes will be on the ABS tomorrow when they release July 2009 Labour Force figures. Economists are expecting the unemployment rate to rise to 6%.

» Genworth hikes LMI prices by 20pc - Mortgage Business, Tuesday 4th August 2009

» Mortgage stress down, jobs stress up - news.com.au, July 22nd 2009.

On Sunday, Federal Treasurer Wayne Swan indicated the federal government had no intention of pulling the first home owners grant after suggestion it was fueling a new bubble. “To pull that stimulus out now would be to pull the rug from underneath recovery,” said Wayne Swan.

Today, the Reserve Bank of Australia voted to leave the official cash rate at a 49 year low of 3%. The RBA dropped rates dramatically from a peak of 7.25% on the 2nd of September ‘08 to a low of 3%, where they remain today.

It was cheap and easy credit which first fueled our debt laden love affair with housing, leaving the average household buckling under the mountain of $1.60 worth of debt for every dollar they earned.

So what happens when you have the official cash rate at a 49 year low, and the government pumps first home buyers with an increased BOOST? Your right, a super bubble.

The Australian Bureau of Statistics today released the June quarter update to the Australian House Price Index. It showed, Australian house prices rose 4.2 per cent in the last quarter and supports claims that the boost has caused yet another unsustainable bubble.

The Bank of England also aggressively cut it’s official bank rate from a high of 5.75% on the 4th July 2007 to its current rate of just 0.5%. This saw UK house prices spike 2.8% in the last quarter.

Unprecedented stimulus packages and historically low interest rates with consumers who have yet to learn any lesson from the credit crunch will be the next hurdle for the government. Last Friday, TD Securities-Melbourne Institute inflation gauge shot up at it’s fastest rate in seven years. With the next direction in interest rates likely to be up, it’s quite possible the Australian debt laden consumer will find out early next year what a true credit crunch is all about.

» House price jump stokes bubble fears - Business Day, 4th August 2009.

» First home owners scheme won’t end early - The Brisbane Times, 2nd August 2009.

The warning tone has been sounding since 2002. Beep-Beep-Beep-Beep.

In an interview titled “Mixed feeling on the real estate bubble” featured on Inside Business in October 2002, reporter Zoe Daniel said “Residential property, the most lucrative asset market in Australia worth a trillion dollars - and rising and ringing warning bells.” Zoe went on to interview other people in the story :

The then Reserve Bank Governor, Ian MacFarlane was quoted “This situation is one that we at the Reserve Bank are not entirely comfortable with.”

David Murray, the then CEO of the Commonwealth bank said “And the sooner that realism comes back into the market, the better off all of us will be.”

And Prime Minister John Howard indicated “I think it’s very strong. Some of the talk about a ‘doomsday scenario’ and the ‘bubble bursting’ has been exaggerated.”

www.nicholsoncartoons.com.au
2nd October 2002 - “Housing real estate building bubble, Costello Howard fly high”

Fast forward to the present and this week Australians were undoubtedly being prepped for the inevitable housing crash.

It kicked off on the weekend with the current Prime Minister Kevin Rudd and his essay published in the Sydney Morning Herald. When explaining the cause of the current Financial Crisis, Mr Rudd indicated one of the causes was “skyrocketing” housing prices “soar[ing] far above their true long-term worth, creating paper wealth that millions of households used as collateral for their growing debts.”

On Tuesday, current Reserve Bank Governor, Glen Stevens suggested affordable housing as one of the biggest challenges the whole nation faces right now.

Stevens warned of a major run-up in housing prices – or a property bubble – as low interest rates and cheap credit spur speculation in the market.

Buyers are set to squabble over the chronic undersupply of affordable housing in Australia, pushing up prices.

It’s a “quite disturbing” problem, Stevens said, which could leave Aussies over-leveraged and facing “asset price deflation down the track“

On Thursday, it was now Future Fund Chairman, David Murray’s turn to talk housing bubble. In an address to the American Chamber of Commerce luncheon, Mr Murray expressed his concern that Australia is a capital-poor country relying on overseas borrowings to keep the economy growing. “We asked them for the money to build larger houses, more square metres per house, year on year, and we ask for the money to put less and less people per house at the same time.”

He believes our obsession with housing could threaten supply of money into Australia, as lenders wonder if Australia will provide the best return on investment considering most other countries have experienced a correction in house asset prices.

I think our friends around the world who have a habit of saving money and helping us with it, are entitled to ask, “Is this the best return for my precious savings dollar?”

Also during the week at a symposium at Sydney University, Dr Fiona Allon said it should be remembered the US crisis came out of the housing market, and Australia should not think it is immune.

“Australia’s weakness actually was in its housing bubble, and I don’t think the dimensions of that have really played out fully,” she said.

“Levels of household debt in this country are generally equivalent to American levels of debt, and they’ve actually been even more than levels of household debt in the US.”

After seven years since the start of the housing bubble in Australia, the beep-beep-beep warning tone changed to woop-woop-woop this week. With banks starting to raise interest rates, and unemployment spiking, now could be a great time to evacuate the housing market. Are Australian’s are being prepped for the inevitable?

» Households front and centre of financial crisis - The ABC, 31th July 2009.

» Aust ‘must adopt new approach to housing’ - The ABC, 30th July 2009

» Mixed Feelings on real estate bubble. - Inside Business - 20th October 2002.