Debtwatch April 2007: Who’s having a housing crisis then?

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Who’s having a housing crisis then?

Glob­al eco­nom­ic atten­tion has been focused on the sub-prime lend­ing cri­sis in the Unit­ed States recent­ly, and many local ana­lysts have made sooth­ing nois­es to reas­sure Aus­tralians that “it could­n’t hap­pen here”.

The USA’s sub-prime mar­ket is indeed a pecu­liar­ly Amer­i­can phe­nom­e­non; but the lev­el of Aus­tralian house­hold debt (the sum of mort­gage debt and per­son­al debt) is every bit as extreme as the USA’s. And con­trary to pop­u­lar opin­ion, our debt binge dwarfs Amer­i­ca’s. As the chart below shows, Aus­trali­a’s house­hold debt to GDP ratio has been grow­ing more than three times as rapid­ly as the USA’s since 1990. The ratio has grown at an aver­age of just over 2% per annum in the USA; it has grown at over 6.8% per annum here.


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Dynamics of endogenous money

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Most con­ven­tion­al and uncon­ven­tion­al com­men­ta­tors on mon­ey believe that mon­ey is destroyed when debt is repaid. I disagree–but explain­ing why takes some time. I received an email this morn­ing from a Eco­log­i­cal Eco­nom­ics dis­cus­sion list in the USA on this issue, and wrote the fol­low­ing expla­na­tion of my posi­tion. I thought that read­ers of this blog might find it instruc­tive.

On the mon­ey issue, this is one where I beg to dif­fer both with the response Josh put for­ward, and most of my fel­low econ­o­mists as well–non-orthodox and non-ortho­dox. I think it’s wrong to say that mon­ey is destroyed when debt is repaid–but to explain why, I need to both put for­ward a dynam­ic mod­el, and find an appro­pri­ate anal­o­gy.


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Household Debt: US vs Australia

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As part of the back­ground to the Late­Line inter­view yes­ter­day, I graphed the US house­hold debt to GDP ratio against the Aus­tralian. All the news recent­ly has been about the sub-prime cri­sis in the States, of course: but guess where house­hold debt has been grow­ing fastest? That’s right, good old Aus­tralia has out-done itself once more. The accom­pa­ny­ing graph­ic tells the sto­ry, which I’ll embell­ish in the next Debt­watch report in ear­ly April.

House­hold Debt to GDP, USA & Aus­tralia

Per­ma­nent link to this post (82 words, esti­mat­ed 20 secs read­ing time)

Debtwatch goes blog

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A sub­scriber to my Debt­watch newslet­ter sug­gest­ed that I estab­lish a blog. I plan to pub­lish my month­ly Debt­watch report here, as well as send­ing it out to sub­scribers.

Next month I will also start a USA ver­sion of Debt­watch. The recent pan­ic on Wall Street can be seen as yet anoth­er “cor­rec­tion”, but it might also be the begin­ning of the unwind­ing of Amer­i­ca’s long-run­ning hous­ing bub­ble, which has dri­ven pri­vate debt lev­els there to over 160 per cent of GDP–higher even than Aus­trali­a’s. While we def­i­nite­ly have enough debt “home brew” of our own to trig­ger a cri­sis, we are as always just min­nows next to the USA; the old say­ing that “if the USA sneezes, Aus­tralia catch­es a cold” may come home very pow­er­ful­ly soon if the world’s largest econ­o­my actu­al­ly comes down with the pneu­mo­nia of a debt defla­tion.


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