news.com.au 28 Feb 2017
AUSTRALIA is headed for an “economic Armageddon”, with record household debt, record foreign debt and a massive housing bubble creating a perfect storm that could “wipe out” millions of families if there is a global shock.
That is the apocalyptic warning of a former government economic advisor, who says the government needs to cut tax incentives such as negative gearing and welfare handouts and the RBA needs to increase interest rates in order to avoid a “devastating depression”.
Corporate governance specialist John Adams, who was an economics and policy advisor to Senator Arthur Sinodinos and management consultant to a big four accounting firm, believes he has found seven disturbing signs that the global economy is primed for a major fall.
Worse still, Australia is particularly vulnerable because of significant structural imbalances, including record levels of household debt not seen since the lead up to the last great depression in the 1920s.
“Australians should be concerned over the state of both the Australian and global economy,” Mr Adams told news.com.au.
“The data clearly demonstrates that there are significant structural economic imbalances in the Australian economy. Significant expansion of the broad money supply and record low interest rates by the Reserve Bank of Australia as well as generous tax incentives and welfare provisions by the Federal Government have led Australians to amass record levels of personal debt which have fuelled the creation of asset bubbles, particularly in housing.
“Millions of Australians are not only doing it tough through significant cost of living and debt serving pressures, but are at significant risk of being financially wiped out if an unanticipated adverse international economic shock were to hit Australia such as a new global financial crisis.”
Mr Adams called on the RBA to take pre-emptive action by raising interest rates and said the government needed to rein in tax breaks like negative gearing as well as welfare payments.
This, he admitted, would result in “a mild controlled economic recession” but would stave off “uncontrolled devastating depression”.
But hey, it’s the apocalypse we’re talking about, so don’t take my word for it. Here is John Adams’ full analysis in words and pictures, which he calls….
Seven Signs Australians Are Facing Economic Armageddon
Sign 1: Record Australian Household Debt
According to the Reserve Bank of Australia, Australia’s household debt as a proportion of disposable income now stands at a record high of 187%.
The two closest episodes were the 1880s and the 1920s, which both preceded the only two economic depressions ever experienced in Australian history in 1890 and 1929.
Sign 2: Record Australian Net Foreign Debt
Australia’s net foreign debt now stands at more than $1 trillion and as a proportion of Gross Domestic Product was at a record high of 63.3% in June 2016.
This makes Australians much more vulnerable to international economic developments such as higher global interest rates, international financial crises or major government or corporate bankruptcies.
Sign 3: Record Low Interest rates
Australia has its lowest official interest rates on record with the Reserve Bank of Australia’s cash rate sitting at 1.5%. The current low rate of interest is not sustainable over the medium term and will inevitably rise.
Australians, particularly in Sydney and Melbourne, who have borrowed record amounts of money are very susceptible to higher interest rates.
Sign 4: Australian Housing Bubble
The expansion of credit by the Reserve Bank of Australia has been pumped into the Australian housing market over the past 25 years. Credit, which has been directed to Housing as a proportion of Australia’s GDP, has exploded from 21.07% in June 1991 to 95.06% in June 2016.
Over the same period, credit which has been directed at the business sector or to other personal expenses has remained relatively steady as a proportion of GDP.
Sign 5: Significant Increases in Global Debt
The General Manager of the Bank for International Settlements stated on 6 February 2017:
“Total debt in the global economy, including public debt, has increased significantly since the end of 2007 … Over the past 16 years, debt of governments, households and non-financial firms has risen by 63% in the United States, the euro area, Japan, the United Kingdom, Canada and Australia, 52% in the G20 and 85% in emerging economies. Heavy debt can only leave less room for manoeuvre in responding to future challenges.”
Sign 6: Major International Asset Bubbles
There are significant asset bubbles in bonds, stocks and real estate in major economies such as the United States and China, which has been fuelled by the significant increases in global debt.
For example, the Shiller PE Index in the United States which measures the price of a company’s stock relative to average earnings over the past 10 years is now at 28.85. This is the third highest recorded behind the Tech Bubble in 1999 and “Black Tuesday” in 1929.
Sign 7: Global Derivatives Bubble
According to the Bank for International Settlements, the value of the over the counter derivatives market (notional amounts outstanding) stood at US$544 trillion.
Much of these derivatives contracts are concentrated on the balance sheets of leading global financial and banking institutions such as Deutsche Bank. The concentration of complex derivative contracts on bank balance sheets poses significant risks to both individual institutions and the global financial system.
Veteran Investor Warren Buffet has repeatedly warned that derivatives are “financial weapons of mass destruction” and could pose as a “potential time bomb”.
And to top it all off, Mr Adams believes the current policies being pursued by Treasurer Scott Morrison are “negligent in addressing the big economic elephants in the room”.
So there you have it. Pay off your mortgages, stock up on canned goods, and don’t say you weren’t warned.