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| Household Debt |
Daily in the mainstream media we are told "Australia's debt is very low by international standards". In terms of government/sovereign debt, this is undoubtedly true and this is extremely important.
However, add in household debt and that of companies and financial institutions and a different picture emerges. The following chart, from macromonitors.com using 2011 data tells a very interesting tale:
Leaving aside the corporate debt position, you can clearly see Australia's household debt position relative to the ten largest mature economies of the world is significantly larger. Yes, our government debt levels are relatively low. But put the picture together and then Alan Kohler's excellent piece in yesterday's Business Spectator starts to make real sense.
Kohler writes:
The only thing that makes sense as a single cause of Australia’s misery is excessive debt.He makes the points:-
- Household debt has stayed at its historic highs of around 150% of disposable income for the past five years where other countries' households have deleveraged;
- Interest paid as a percentage of income has doubled in 20 years;
- the cost of land is among the highest in the world (in spite of Australia being so sparsely populated)
- restrictions on residential developments in cities combined with population growth have also contributed to extremely high prices for residential real estate
- reductions in mortgage rates don't counteract the psychological effect of the size of household debt.
Kohler again:
And now there is widespread terror that house prices will eventually collapse and leave millions with no equity, as happened in the United States. As a result the savings rate has skyrocketed and consumers are on strike, putting money aside for Armageddon.
Debt is making everyone grumpy and hypersensitive. When ANZ put up its mortgage rate by just 6 basis points last week – 0.06 per cent for heaven’s sake! – there was national outrage and attacks in parliament
Our daily diet of gloomy news from Europe and the United States in relation to debt is ringing the warning bells in Australians' minds. We know we are part of the global economy and there will be fallout for Australia from the current financial calamity unfolding in Greece and other nations of Europe such as Spain, Ireland, Italy and Portugal. We also see from afar the politicians' seeming inability to take bold political decisions and we watch distrustfully the involvement of the hedge funds and bondholders in the process of "voluntary haircuts".
So we need to listen when Kemal Dervis (former Turkish Economics Minister, Administrator of the UN Development Program and vice president of the World Bank, currently Vice President and Director of the Global Economy and Development Program at the Brookings Institution) writes on Project Syndicate:
Beyond the specific problems of the monetary union, there is also a global dimension to Europe’s challenges – the tension, emphasized by authors such as Dani Rodrik, and Jean Michel Severino and Olivier Ray, between national democratic politics and globalization. Trade, communication, and financial linkages have created a degree of interdependence among national economies, which, together with heightened vulnerability to financial-market swings, has restricted national policymakers’ freedom of action everywhere.
Perhaps the most dramatic sign of this tension came when Greece’s then-prime minister, George Papandreou, announced a referendum on the policy package proposed to allow Greece to stay in the eurozone. While one can debate the merits of referenda for decision-making, the heart of the problem was the very notion of holding a national debate for several weeks, given that markets move in hours or minutes. It took less than 24 hours for Papandreou’s proposal to collapse under the pressure of financial markets (and European leaders’ fear of them).
Around the world, the stock of financial assets has become so large, relative to national income flows, that financial-market movements can overwhelm most countries. Even the largest economies are vulnerable, particularly if they are highly dependent on debt finance. If, for some reason, financial markets and/or China’s central bank were suddenly to reject US Treasury bonds, interest rates would soar, sending the American economy into recession.
But being a creditor does not provide strong protection, either. If Americans’ appetite for Chinese exports suddenly collapsed because of a financial panic in the United States, China itself would find itself in serious economic trouble.
These interlinked threats are real, and they require much stronger global economic-policy cooperation. Citizens, however, want to understand what is going on, debate policies, and give their consent to the types of cooperation proposed. Thus, a more supra-national form of politics is needed to re-embed markets in democratic processes, as happened during the course of the twentieth century with national politics and national markets.
The scale of this challenge becomes apparent when one sees how difficult it is to coordinate economic policies even in the European Union, which has moved much further than any other group of countries in the direction of supra-national cooperation. Nonetheless, unless globalization can be slowed down or partly reversed, which is unlikely and undesirable in the long run, the kind of “politics beyond borders” for which Europe is groping will become a global necessity.
Indeed, the European crisis may be providing a mere foretaste of what will likely be the central political debate of the first half of the twenty-first century: how to resolve the tension between global markets and national politics.
