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"...public opinion deserves to be respected as well as despised" G.W.F. Hegel, 'Philosophy of Right'

the debt overhang « Previous | |Next »
October 22, 2008

Barry Hughes argues the following in the Sydney Morning Herald:

Rudd Government's $10.4 billion package is seriously incomplete. It is a one-off splurge designed to fill in near-term domestic growth potholes over roughly the next six months until global recovery comes. But what if the global rebound runs late? What does the Prime Minister do for an encore? Presumably the answer is another package. Australia is in the fortunate position of having more budget flexibility than most.

Speculation on assets is a potential path to individual riches. But why should households splurge when they are in debt due to big mortgages and maxing the credit cards from participating in irrational exuberance and may be faced with unemployment? Secondly, all the signs are that the global slowdown will last quite some time--we are talking in terms of years not months.

Ruddsuperman.jpg Moir

it is going to take sometime to reduce that debt. Apart from Steven Keen who is dismissed as an alarmist, few commentators in the media seem to be willing to talk about household debt---over-indebted households--at a time of rising unemployment.

We should talk about debt. Under flexible exchange rates the main tool for stabilising the economy is monetary policy not fiscal policy. As Hughes points out, though the monetary policy (fiddling with rates and the like) of the Reserve Bank will be in the form of rate cuts designed to induce more borrowing. However, people will be unwilling to borrow and go into debt.

As Keen says on his blog about the economic crisis in Australia:

the root cause of this crisis is excessive debt that drove house and share prices to unsustainable levels. Times appeared rosy as the house (and stockmarket) bubble continued, but this was only because borrowed money was adding to demand.No-one worried about this when it was easy to flog a house for a higher price. But unfortunately, this game had to come to an end, because debt servicing became prohibitive as house prices rapidly outstripped incomes. The bubble burst first in the USA, and the carnage it has wreaked there should warn us all that asset price bubbles are dangerous.

The newspaper headlines are going to be about repossessions of homes as people fall behind in their mortgages, not about buying new cars or plasma TVs.

| Posted by Gary Sauer-Thompson at 8:01 AM | | Comments (3)
Comments

Comments

if unemployment increases won't that impact heavily on older and younger workers.

Following on Nan's comment, much of the criticism of the package relates to NH buyers grant, to rekindle faltering activity in housing sector.
But, this seems at the cost of reinforcement of the old entitlement mentality; can't help with a readjustment of housing prices to more realistic levels, because of mortgage stress and loss of value of assets.
Rudd's government follows the "Howard Lite" approach of postponing the inevitable to fit the election cycle.
And never, ever, challenge the given paradigm.
.......................
On another issue, sad this deafening silence throughout media and blog universe in the wake of this week's "4 Corners" of the ongoing water pork-barrel debacle.

Nan,
Steven Keen is predicting that the fallout from the credit /asset bubble will be one in which Australian interest rates “will probably be zero by 2010”; that Australia is (not maybe) heading for a depression; the slump will last “for 10 years”; that house prices will fall 40%; and unemployment will rise to 10 or 15% and could go to 20%.

Brave man for sticking his neck out so far. His fellow economists are only too willing to chop it off quick smart. These predictions of a collapse in housing prices and rising etc unemployment was the basis of a Kerry O'Brien grilling of Kevin Rudd a fortnight ago. That indicated that O'Brien reckoned Keen had the basic picture right.