Online Opinion

Dunno about you, but  I’m already tired of hearing about how the economy has recovered. Apparently we live in a world where speculation and media hype are enough to drive the global economy. But I still have a couple of questions…

If the economy has recovered, then why is it too soon to remove the stimulus? And what happens when the stimulus is removed? What, the private sector is just going to pick up the spending where the government left off? Cool. Sounds nice.

But what about the massive Australian debt bubble at about 160% of GDP, up from 80% only 15 years ago? It’s not like we can just leverage ourselves out now that everyone has already got more debt than they can handle. So when the stimulus is removed… And it has to be at some point… What’s to stop a second plunge into recession? I guess the private sector will just magically resume their consumption of debt to keep things moving. Ha!

Let’s not forget that the Australian real estate bubble is even bigger than that of the USA. And according to RP data, we’re still in the same place we were at the peak in February 2008. And the average house now costs 7x average annual earnings. Aggregate inflation over the last 10 years was about 36%, but property values went up 300%.  Does that sound sustainable? Surely a correction is needed.  And if this doesn’t happen abruptly, are we meant to believe that values will just stay steady until real (not speculative) demand returns? I doubt it.

First I’ll enjoy watching as the low end of the market fail with the removal of the first home buyers grant. Next, I’ll giggle as those leveraged further up the chain run into trouble, because that house they paid too much for, means they can’t afford the repayments on the bigger house they moved too, that’s also not worth as much. All of this made more difficult as unemployment continues to grow. Because, whilst the government has pumped more than $200M into the market, it has been leveraged to falsely inflate prices by around $3B, all of which is about to disappear into the thin air from whence it came.

My guess is we’re just looking at a house of cards for 2010. As the FHBG is removed, and the government comes under pressure to stop public debt, and businesses trade below book values and are forced to write off inflated assets,  deleveraging will ramp up and values will be forced to correct.

I love living in a utopia created & maintained by speculation.

Eichengreen  &  O’Rourke have done an interesting comparison between the Great Depression of the 30′s and what’s going on now. The big difference between the two eras is obviously the injection of stimulus. How much further can we debase world currencies and spend from the future?

And people wonder why no-one wants to breed at the moment?

For another interesting perspective on the similarities between then and now, the News From 1930 blog is also worth a read.