How long can this go on ?

Another huge current account deficit, coming in at around 7.2 per cent of GDP. And that’s with high commodity prices and low world interest rates, thanks to the ‘global savings glut’. Put commodity prices back to normal, and interest rates up by a couple of percentage points, and we could easily be running a deficit in excess of 10 per cent of GDP. At that rate, net overseas obligations would be in excess of 100 per cent of GDP within five years.

Australia has been called a miracle economy on the strength of an impressively long, but by no means unique, economic expansion. But if we manage sustain this kind of imbalance for another five years it really will be a miracle. As far as I know, no economy has ever managed anything like it.

25 thoughts on “How long can this go on ?

  1. the last time we had commodity prices at these levels we had a current account surplus.

    At least we have better economic management these days.

    What happens when the bond markets start waking up to reality. The income deficit will become much higher.

    This means the only way to reduce the deficit is to crunch imports and hope like Treasury Exports will eventually rise to respectable proportions.

    I feel we may heve a few years of ‘sub-optimal’ growth ahead of us

  2. Does this mean that we are heading for recession, depression? It sounds bad but what will the likely effect be?

  3. Past experience would suggest either a recession or a sustained period of low growth, particularly in consumption. But we’re in uncharted territory here, and the optimists say global financial markets will look after us.

  4. And why do you think that financial markets (or markets in
    general) won’t look after us?

    I really don’t see a problem, much less a ‘recession or a
    sustained period of low growth’. Apart from the obvious currency
    depreciation argument, there’s no reason to think that the ‘global
    savings glut’ — if that’s what it is — will persist. The money
    has to find a home eventually and it’s not like it’s a bottomless

    There’s always an argument to say that everything is going
    downhill, especially in economics. And there’s always an economist
    who will make it. That’s not to say that everything isn’t going
    downhill — perhaps it is. But I suspect ulterior motives behind
    these just-so stories, particularly when they are trotted out with
    such obvious pleasure and pride by the economic pessimists.

  5. “Australia has been called a miracle economy on the strength of an impressively long, but by no means unique, economic expansion. But if we manage sustain this kind of imbalance for another five years it really will be a miracle. As far as I know, no economy has ever managed anything like it.”

    With all this private profligacy going on John, what’s your position on the Labor States beginning to loosen their budgetary pursestrings with borrowings at the end of such a long boom?

  6. This is the problem as I see it.
    There is no such thing as a saving’s glut or a savings shortage. There are only central banks who create monetary expansions and by extension credit expansions. Because money supply – the-“Ms”- are so corrupted these days, we can only go on bank deposits to see what is going on in the monetary soup. The Reserve bank has conducted what I would call a criminal exercise over the last 10 years. Deposits… errr money supply… has virtually exploded. We have seen evidence of this inflation in the real estate market. In the 70’s inflation was felt in the CPI but because the RBA is so CPI centric it overlooked the mess it was creating in real estate until it was too late.
    The problem the RBA has created for us – inflated real estate- was made worse by these nutcakes in NSW imposing a sellers tax just when the market here was turning south as they wanted to get a piece of the action and help fund the continued hiring of their constituency. I regard the Sydney real estate market as ground zero for a real fall. The problem for the RBA and us all, for that matter, is when the economy slows down rates will have to remain higher or stay higher than they normally would because of the C/A deficit, which is, as John points out, 7.2% of the GDP.

    We aren’t the only ones in this boat. It’s going top be ugly folks. the one thing I disagree with John is that he thought we may just be able to work out of this horrific mess. I can’t see it. There is just too much debt in the system- far more than when we went into recession in the early 90’s.

    This time it is the middle classes holding all the debt. When you here the anecdotal evidence it scares me to hell. People who I consider at the front line of layoffs during recessions are carrying some of the biggest debt. Advertising guys earning 350K a year and wives working in marketing jobs earning 100k. Some of these people are running mortgages of $1,500,000 and have kids at private schools. These are the first jobs, which go during a recession and there are plenty of these people around in Sydney and to a lessor extent in Melbourne. These places are full of high paying jobs that would get the axe in a recession.

    The joke is that the RBA doesn’t even know what it has created. It is like a specialist listening to all the patients’ symptoms and looking at an x-ray rather than an MRI. It can hear all the problems but can’t see what’s causing it. MacFarlane ought to be fired for what he has done and about to cause.

    This goes to the heart of the problem in the Western world since we broke away from the gold standard. At least with gold, currencies had an anchor. These days, currencies are simply floating (not exchange rates) without any anchor. Central banks don’t know what to target and these goal posts keep moving all the time. It is just criminal that central banks are no longer targeting money supply.

    When we really think about the current system guiding short-term interest rates is a just silly and dangerous too. Why? Because how can the central bank know or be expected to know just what quantity of money is demanded at a certain interest rate level. It simply cannot. Remember, the short- term interest rate is targeted, not the quantity of money. That can only be guessed. Hence the problems we are now in.

    Watch out below.

  7. The Adelaide RE market has recently tanked judging by the pge9 report in The Advertiser today re Glenelg luxury apartments.

    “Brock Harcourts Glenelg agent Annie Need said a number of newer development buildings were suffering from large numbers of investors wanting to ‘get out or cash in’.”
    “‘There are too many people wanting to get out of some of these new buildings’ she said. ‘The area is going through a bit of a hiccup. Some people don’t realise that it takes time, like any good investment’.”

    “Holdfast Bay mayor Ken Rollond said he had been approached by a number of ‘desperate’ residents trying to make a case against Glenelg developers. ‘I have had some phone calls from owners who are desperate. They feel, I think, that they were were wrongly advised,’ he said. ‘I don’t think they really understood what they were getting into’. ‘Many people now just want to get rid of them’.”

    “President of the Real Estate Institute of SA Robin Turner said Glenelg’s market was in a ‘stop start syndrome’. ‘There appears to be an oversupply at present and this has had a negative effect on capital values and rental values.’ he said.”

    Help us mayor!!!! Bloody pathetic really isn’t it? I think I’ll avoid walking on the footpaths around these monuments to greed for quite a while.

  8. observa Says:
    “I think I’ll avoid walking on the footpaths around these monuments to greed for quite a while”.
    These are decent hard working Aussies, Observa. It’s normal human nature to try and improve one’s lot in life. They are simply panicking that they made the wrong decision with their money. Of course they should not get any government help to slide out of a contract. But isn’t the sneering the wrong emotion?

    They are the sort of people who were led by a central bank to borrow money at cheap rates and will then be screwed to the wall. It’s McFarlane who ought to be sneered at, out a job.

  9. “These are decent hard working Aussies”

    They might be decent. They might be hardworking. They might even be Aussies.

    They are also real estate speculators who rolled the dice and lost. McFarlane didn’t put a gun to their heads and make them buy these investment properties. In fact, he’s been warning people against getting into the property market.

    These people have got a problem because they didn’t listen to him. Well, it’s caveat emptor and tough titties for them.

  10. To expand on David’s commets, I’ll start worrying about protecting speculators from their errors when they start sharing part of their winning bets with the rest of us willingly – and no taxation doesn’t count.

  11. I’m the fat lady and I’m calling it now!

  12. David Ricardo:
    Seriously David, most everything you write has a nasty, disdainful, sneering disposition about it. It reminds me of the type who would hide behind the curtains of his windows, giggling while his neighbour’s car is dispossessed.
    Fellow Aussie’s have been goaded by cheap interest rates to go speculating. Here it was in real estate, in the US it was tech stocks. We already saw the tech crash in the US cause misery to lots of people who didn’t deserve to have their savings crushed because a central bank that allows money supply to go parabolic. I will say it again these people are decent hard hardworking folk who are trying to improve their lot in life. It’s a normal human act.
    But I guess you are different.
    What McFarlane has done, are goad-unknowing people into speculating by manipulating the money supply. You may think that is fine. I don’t, as it is not nice to see fellow Australians getting hurt

  13. I suppose, S, the difference between you and me is that I believe that adults – even decent hardworking folk – should take responsibility for their actions.

    You say they are trying to improve their lot in life. One way to do this is to work harder and smarter. Another way is to punt on the property market. Let me say it again. Macfarlane (I looked up the spelling – if you’re going to slag people off you could at least spell their name right) warned people not to do it, because property prices can do down as well as up. They chose to ignore him. That was their call, but they get to wear the consequences. It comes with being a grown up.

    And, really, what is this manipulating the money supply crap? Macfarlane’s job is to keep inflation down and keep the economy moving, which he’s done. If you’re going to start blaming people for the property price bubble, try Peter Costello for cutting capital gains tax.

  14. Actually I’d blame the systemic, inherited problem of progressive income taxation per se. It’s the difficulty of temporal measurement of that income and its taxing which begets capital gains and negative gearing dilemmas for all administrators. Interest rates are a minor side issue alongside this major driver of human behaviour.

  15. Hello Joseph Clark… you back from Germany? About time you got a job eh? 🙂

    I agree with Ricardo — Marcfarlane has done his job of looking after inflation. It’s not his job to baby-sit “hard-working Australians”… or even us lazy ones.

    Before we allocate blame for the property price bubble we should be sure that there is a bubble and that it is a bad thing. Both are open questions at this point.

    As for our current account deficit — I think it is easily explained by the positive state of the Aust economy vis-a-vis other economies. No problem. I would be shocked (and worried) if we didn’t have a significant CAD at the moment.

  16. David:
    Reallly? There you go again? Thanks for alerting me to the correct spelling of McFarlane (sorry). I am sure you did this to help me rather than showing the nasty, sneering or disdainful side of your prose.

    Inflation has not been kept down at all. Inflation, this time reared its ugly head as asset inflation, not consumer prices (CPI). The RBA belted up the money supply and let it rip. How do we see it? Well in lots of ways. This time we saw in Real Estate.
    Unlike you, David, I have an unsneeering attitude towards the people of the country. If you had bothered to read what I said earlier, you would have noticed that I did mention nothing should be done about the coming liquidation of inflated assets.
    One last thing, tax cuts like Cap. gains tax cuts have nothing to do with asset price inflation. The tax system will merely direct loose money towards the most tax effective returns.
    The hard, decent workers of the country don’t understand the consequences of loose money and its effects on asset prieces. In ordinary circumstances they shouldn’t because they hire people like McFlarane who are supposed to know better.

  17. I am with dave on this.

    sorry john but if people buy an apartment off the plan in the expectation of selling when it is avaliable to live in to make ‘easy money’ then it smells like a bubble to me.

    There a plenty of people out there still paying off interest only loans on apartments that are well under water. They are merely rolling over their loans in the hope that prices will rise and they can pay off the principal with their capital gain.

    I doubt that will happen. if interest rates rise again then those hardworking speculators will be between a rock and a hard place!


    Australia’s current account deficit fell to around $1.3 billion in April. That’s around half the record $2.6 billion recorded in March.

    Part of the fall is attribnutable to a 14% surge in non-rural exports as previously reported increases in coal and iron ore prices started to kick in.

    We may just avoid the painful consequences of an excessively high current account which Doctor Q alluded to above. But personally I think the massive tax cuts and spending increases in the past two Federal budgets were unwise.

    The gains in real incomes arising from the budget measures are likely to be offset in large part by the fall in the Australian dollar and rising inflation.

  19. Ian that was the monthly TRADE results.
    The Current account is only done on a quarterly basis

  20. Damn, that’s about the most elementary error one can make in macro-economics.

  21. Homer and David:

    The average person doesn’t know much about economics. And David you don’t seem to get it either (and I am not sneering at you) and wouldn’t expect you.
    Money is a store of value, or at least it is supposed to be until central banks thought it would be better play around with the money supply. An extreme example of what RBA has done is to look at at it like this. South American governments used to inflate at such horrendous rates that people were somtimes paid hourly and they then went out and purchased goods. Interest rates were set at a monthly rate rather than annual. Prices of course would just adjust almost everyday.

    The RBA has been printing money for the last 10 years at an enormous rate: nothing like what the South Americans used to do of course, but the idea of money being a store of value has gone out the window.

    Implicit in running the central bank is that it should not damage the economy by running policy which seems out of control. I can very well imagine that the RBA doesn’t understand the consequences of its own actions any longer. It thinks that keeping target to the CPI is all it needs to do. It isn’t because inflationary policy doesn’t have to translate itself into the price of goods and services as it can attach itself to asset prices.
    Of course we are are responsible for our own actions, but why bring out the punch bowl out in the first place.

    It’s like saying the RBA policies cannot cause damage and if even if it does we should just ignore it. We can’t allow that because money is not something that ought to be manipulated.

  22. A long time ago I actually looked at the demad for money equation.

    I found it was incredibly unstable. ( I didn’t those who had wrote on the subject did).

    If your demand for money function is unstable then money supply doesn’t matter until it becomes stable.
    The montearists assume a stable demand for money function.

  23. Isn’t it about time we stopped treating residential property like other assets? Why is it such a good thing when house prices go up? so that those who already own property feel better off and can borrow even more money against the value of their home. Isn’t consumer debt already high enough?

    In my view the main reason for rising property prices (actually a misnomer as it is actually the land going up in value not the buildings on it) is a lopsided tax system which encourages people to own multiple properties. It is investor demand, driven by tax relief on interest payments, negative gearing and the reduced trate of capital gains tax which is pushing up prices. When we have a sensible tax system we might get back to a situation when the only reason to buy a house might actually be to live in it!!! Then those on low income might get a fair go in life and be able to afford a home of their own instead of paying rent and transfering mnoey to those who are already rich enough.

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