The debt is killing us

In his speech on Friday to the ACI2010 49th World Congress, Reserve Bank of Australia Governor, Glenn Stevens used the analogy that the global financial system had suffered a near death experience and is now beginning to recover gradually.

“The global financial system is gradually recovering its poise, after a near-death experience eighteen months ago. Perhaps like a patient that has suffered an acute cardiac event, there has been some lasting tissue damage, but quick intervention avoided something much worse. A period of emergency life-support has been, followed by a period of recuperation, with some ongoing medication, during which the patient has been able gradually to resume normal activities”

In the 1980’s Australian Households were fit and slim. For every $100 of household disposable income, Mr Household had $40 or 40kg of debt.

Over the years, Mr Household started consuming without trying to service the debt, in other words, Mr Household was eating junk food, packing on the pounds, watching “The block” and “Hot Property” from the couch and not trying to work it off in a timely fashion.

At the start of 2000, Mr Household had packed on 90kg of debt ($90 for every $100 earned). During the noughties, the pounds started to pack on even faster, thanks in part to the housing bubble.
24th September 2004 – Reserve Bank warns on debt levels

By 2008, Mr Household was carrying around almost 160kg of debt. He was severely obese. Mr Household also had a hypertension disorder, interest rates were starting to rise at rapid pace.

Then suddenly in early 2008, as Stevens described, Mr Household suffered from an acute cardiac event. In a bid to make the blood or credit flow more liquid, the RBA administered blood pressure medicine by reducing interest rates while the Government started to administer stimulus (CPR).

In the months after this sudden event, Mr Household was in shock. His natural instinct was reduce his weight (debt). He worked some of those kilos off, but quickly got depressed. He was also having withdrawal symptoms from his old ways.

In a bid to further stimulate the market, the Government decided to start feeding Mr Household potato chips again. This came as the form of the First Home Owners Boost, an incentive for First Home Owners to take on more debt. First Home Owners had low blood pressure (interest rates), so it was never a better time to enjoy large doses of chips.

However now stress levels are rising again and with it, higher blood pressure. Mr household has done little to work of the debt, in fact his stacking on the pounds again. The next cardiac event may be just around the corner, and this time may require a triple bypass.

The recovery from the triple bypass will be long and painful. Mr Stevens uses the word poise – “The global financial system is gradually recovering its poise”. The dictionary defines poise as a state of balance or equilibrium, as from equality or equal distribution of weight; equipoise. Globally, the financial system may be deleveraging, but with so much debt still in the system, it’s far from a state of balance. Australia believes it has escaped the brunt of the GFC, and hence has not begun to recover it’s poise.

Shedding the Kilos won’t happen over night. It will take years of exercise and long hours on the treadmill before we get back to a balanced, sustainable economy.

» Recent Financial Developments – Address to ACI2010 49th World Congress – 26 March 2010.

1 Comment

  1. I’ve often heard the term “Put Up or Shut Up” and I think this applies to RBA, all they ever seems to do is ramble on about how they will have to put interest rates up……. well do it and stop rambling on about it. Every week there is another article about this hollow threat…. perhaps the real-estate situtation would not be as bad as it is if some tough action had been taken much earlier.

    The longer they wait, the more bitter the pill.

    The elimination of negative gearing and the reintroduction of taxation for foreign investors will help bring about the important serious correction in housing that the country has needed for decades……

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