Chris Joye (AFR) on the budget deficit:
There are two critical differences in 2015 that make Australia’s current debt burden [42.2% of GDP] much more troubling than that serviced by previous generations. Back in the 1977 and 1983 recessions, the household debt-to-income ratio was only 34 per cent and 37 per cent, respectively. Even in the 1991 recession, it was just 48 per cent, which is one reason why home loan arrears were so benign. Yet by 2015, the household debt-to-income ratio had jumped 3.2 times to an incredible 154 per cent, which is above its pre-GFC climax because families haven’t deleveraged….
Public and private debt levels are important to our economic health, but where the money is borrowed domestically it is far less serious than when it is borrowed offshore. In the former case, net debt in the economy is effectively zero — one sector runs a surplus while the other runs a deficit — but where money is borrowed offshore, the nation as a whole becomes a net debtor. Which is why short-term borrowing in international markets by Australian banks — used to fund the housing bubble in the run up to the GFC — was so dangerous.
From Greg McKenna (House & Holes) at Macrobusiness:
“….The funding gap is estimated to be $600 billion. In a speech on Friday, Westpac deputy chief executive Phil Coffey cited research from PwC which estimated the gap could grow to $1.325 trillion if there was a pick-up in credit growth.”
Here is the latest chart from the RBA showing the rising borrowing, it’s quarterly and likely lagging:
Notice how the article is focused entirely upon the “funding gap” as a tactical challenge in which the banks are innocent players. In reality there is no “funding gap”. Rather, our financial system is addicted to unproductive mortgage-lending and that crowds out the kind of business lending that would generate income growth and local savings. The “funding gap” is created by the banks not serviced by them.
International borrowing to fund a domestic property bubble is double trouble.