An article in this weekend's edition of the Sydney Morning Herald has revealed that by the end of the 2007 financial year (on June 30, 2007), Australian household debt will have hit the $A 1 TRILLION mark. Please note that this is TOTAL (including mortgage) household debt. In March, household and business debt combined rose by 1.4 percent, the fastest pace in four years. Business debt grew by 2.0 percent in March, the highest pace since 1988.
Australia's population is just under 20.8 million. With household debt on the edge of the $A 1 TRILLION level, that's a per capita debt of a whisker under $A 50,000. "Per capita", of course, means every living person in Australia, including babes in arms, senior citizens, and people (there are actually quite a few) who don't carry any debt at all. It is a gargantuan number to contemplate.
This galloping debt explosion is giving the local central bank, the Reserve Bank of Australia (RBA), sleepless nights. On the one hand, they are feeling great pressure to try to dampen down the borrowing orgy with a rate rise. On the other hand, the Australian Dollar recently breached the $US 0.81 level to the great dismay of Aussie exporters. And on another hand entirely, there is going to be a Federal Election in Australia sometime this year and the RBA doesn't want to be seen as "political".
If the RBA does raise rates next week (the decision is due out on April 4), they will almost certainly do so by the 0.25% increment so favoured by the Fed. That would lift official Aussie rates to 6.50 percent, their highest levels in more than a decade.
Aussie analysts are divided 50/50 over whether the RBA will raise rates next week. They are unanimous, however, that if the RBA doesn't raise in April, it will raise at its next meeting in May.
Now, let's compare these debt levels with those in the US. And please take note that at 300 million, the population of the US is about 14.5 times bigger than the population of Australia.
The big difference is that unlike the US federal government, the Aussie federal government hasn't run a budget deficit in the past decade. That means that Australia's outstanding federal government indebtedness has been substantially reduced over the period while federal government funded debt in the US is up nearly 70 percent.
But when it comes to household (and business) debt, the situation is pretty similar. Australians are even more house mad than are Americans. Of the $A 977 Billion of household debt they presently carry, $A 840 Billion or 86 percent is mortgage debt. The rest, $A 137 Billion, is personal debt which includes credit card debt, personal loans etc.
We do not have a total for US household or mortgage debt, but we do know that between the third quarter of 2000 and the third quarter of 2006, US mortgage debt grew by $US 14.7 TRILLION. We also know that as of March 2007, US consumer debt totalled just over $US 2.4 TRILLION. On these numbers, US per capita household indebtedness is running considerably ahead of the equivalent figure in Australia. To cite one example, between 2002 and 2006, Australian mortgage debt expanded by just over $A 400 Billion.
Even so, the debt increase in both nations, and over most of the rest of the world, has accelerated faster over the past six or so years than it ever has before. That is why the rest of the world is still raising rates nine months after the Fed stopped raising in June 2006. Europe raised this month. India raised again this week. Australia is going to raise either next week or next month.
All over the world, analysts and the man on the street alike take a look at the debt levels and resign themselves to the prospect of higher interest rates to come. In the US, the attitude up until VERY recently has been the reverse. The higher the debt level went, the greater the clamour for the Fed to start LOWERING rates. The difference is that in the US, the level of interest rates is not seen as a determinant in the exchange rate of the currency while in the rest of the world - IT IS. When Wall Street clamours for lower rates, it never gives a second's thought (at least not in print) to the question of what that might portend for the US Dollar. The rest of the world knows all too well the devastation that artificially manipulated domestic interest rates can and HAS had on the domestic currency.
The US Dollar is regarded by Americans as being immune to any type or degree of political interference with the markets or the economy. This is so for the very simple reason that, as sole global reserve currency for most of the past 60 plus years, it HAS been immune. The only time that the US Dollar has come under REAL pressure during that period was in late 1979 when Fed Chairman Volcker was informed by his foreign counterparts at a meeting in Belgrade that either he let US rates free to reflect the risk of holding US Dollar or they would DUMP the US Dollars they held. That led directly to the US recession of 1980-82 and to US rates which peaked above the 20 percent level.
The US Dollar has had periods of weakeness since, but they were always headed off. In the 1980s and 1990s, it was done through what was called "concerted Central Bank intervention". In this decade, it has been done through the seemingly insatiable appetite - especially by Asians - for US Dollar denominated debt of all varieties.
That is why US debt levels have managed to reach the heights they have, on every level, government, business, and consumer. That is why the Fed was able to lower interest rates from 6.50 percent to 1.00 percent in 2001-03 with minimal repercussions to their currency.
But those days are now rapidly drawing to a close. The US is terminally overextended, both by keeping its global empire afloat and by its continual stimulation of the consumer spending which makes up 70-80 percent of what is referred to as (domestic) US economic "growth".
Australia has very high levels of consumer debt, comparably low levels of government debt, and runs big trade deficits. The US has gartantuan levels of both consumer and government debt and runs gigantic trade deficits. Australia exports raw materials (REAL economic goods) of all descriptions. The US exports little except armaments and US Dollars. Both nations face an economic "correction crisis" of crippling proportions. The difference here is twofold. First, the US faces a even worse situation than does Australia. Second, the US, to a greater extent than Australia or any other nation, truly believes that - "IT CAN'T HAPPEN HERE". Americans have good reason to believer this - it hasn't happened - yet.
Gold comes into this at the same point as it has in every brewing currency crisis in history. It stands OUTSIDE the system, unencumbered with obligations, funded or unfunded. It is solely an asset, not a liability. It provided the foundation on which US Dollar global credibility once stood and it will emerge unscathed, indeed greatly enhanced, from the loss of US Dollar global credibility which is inevitably coming. It is, just as it has been throughout monetary history, the ultimate form of financial insurance.
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