Seven Signs Australians Are Facing Economic Armageddon

Economics advisor John Adams warns that Australia faces “economic Armageddon” because of “significant structural imbalances” not seen since the lead up to the Great Depression in the 1920s.

Here are his seven signs:

Seven Signs Australians Are Facing Economic Armageddon

Sign 1: Record Australian Household Debt

According to the Reserve Bank of Australia, Australia’s household debt as a proportion of disposable income now stands at a record high of 187%.

The two closest episodes were the 1880s and the 1920s, which both preceded the only two economic depressions ever experienced in Australian history in 1890 and 1929.

Sign 2: Record Australian Net Foreign Debt

Australia’s net foreign debt now stands at more than $1 trillion and as a proportion of Gross Domestic Product was at a record high of 63.3% in June 2016.

This makes Australians much more vulnerable to international economic developments such as higher global interest rates, international financial crises or major government or corporate bankruptcies.

Sign 3: Record Low Interest rates

Australia has its lowest official interest rates on record with the Reserve Bank of Australia’s cash rate sitting at 1.5%. The current low rate of interest is not sustainable over the medium term and will inevitably rise.

Australians, particularly in Sydney and Melbourne, who have borrowed record amounts of money are very susceptible to higher interest rates.

4: Australian Housing Bubble

The expansion of credit by the Reserve Bank of Australia has been pumped into the Australian housing market over the past 25 years. Credit, which has been directed to Housing as a proportion of Australia’s GDP, has exploded from 21.07% in June 1991 to 95.06% in June 2016.

Over the same period, credit which has been directed at the business sector or to other personal expenses has remained relatively steady as a proportion of GDP.

5: Significant Increases in Global Debt

The General Manager of the Bank for International Settlements stated on 6 February 2017:

“Total debt in the global economy, including public debt, has increased significantly since the end of 2007 … Over the past 16 years, debt of governments, households and non-financial firms has risen by 63% in the United States, the euro area, Japan, the United Kingdom, Canada and Australia, 52% in the G20 and 85% in emerging economies. Heavy debt can only leave less room for manoeuvre in responding to future challenges.”

Sign 6: Major International Asset Bubbles

There are significant asset bubbles in bonds, stocks and real estate in major economies such as the United States and China, which has been fueled by the significant increases in global debt.For example, the Shiller PE Index in the United States which measures the price of a company’s stock relative to average earnings over the past 10 years is now at 28.85. This is the third highest recorded behind the Tech Bubble in 1999 and “Black Tuesday” in 1929.

Sign 7: Global Derivatives Bubble

According to the Bank for International Settlements, the value of the over the counter derivatives market (notional amounts outstanding) stood at US$544 trillion.

Much of these derivatives contracts are concentrated on the balance sheets of leading global financial and banking institutions such as Deutsche Bank. The concentration of complex derivative contracts on bank balance sheets poses significant risks to both individual institutions and the global financial system.

Veteran Investor Warren Buffet has repeatedly warned that derivatives are “financial weapons of mass destruction” and could pose as a “potential time bomb”.

Household debt is too high. Rising foreign debt and record low interest rates are fueling a housing bubble. Global debt is too high and rising, while stocks are over-priced. Throw in the global derivatives “bubble” with some truly terrifying numbers just to scare the punters out of their wits.

Nothing new here. Nothing to see. Move along now. The global economy is in good hands…..

Or is it? Aren’t these the same hands that created the current mess we are in?

John Adams is right to warn of the dangers which could have a truly apocalyptic effect, that makes the global financial crisis seem like a mild tremor in comparison.

Some of the risks may be overstated:

The derivatives “bubble” is probably the least of our worries as most of these positions offset each other, giving a net position a lot closer to zero.

Defensive stocks like Consumer Staples and Utilities are over-priced but there still appears to be value in growth stocks. And earnings are growing. So the stock “bubble” is not too alarming.

Global debt is too high but poses no immediate threat except to countries with USD-denominated debt — or Euro-denominated debt in the case of Greece, Italy, etc. — that cannot issue new currency to repay public debt (and inflate their way out of the problem).

But that still leaves four major risks that need to be addressed: Household debt, $1 Trillion foreign debt, record low interest rates and a housing bubble.

From Joe Hildebrand at News.com.au:

Mr Adams called on the RBA to take pre-emptive action by raising interest rates and said the government needed to rein in tax breaks like negative gearing as well as welfare payments.

This, he admitted, would result in “a mild controlled economic recession” but would stave off “uncontrolled devastating depression”.

The problem is that the Australian government appears to be dithering, with one eye on the next election. These are not issues you can “muddle through”.

If not addressed they could turn into the four horsemen of the apocalypse.

Source: Apocalyptic warning for Australian families

12 thoughts on “Seven Signs Australians Are Facing Economic Armageddon

  1. evansdavid says:

    Perhaps a disconnect in the comments. US readers are entitled to call a long term SPX bull (for the time being). The Australian market has gone up 18% in 7 years.

  2. pussboy says:

    I think its going to get nasty. SDR’s are coming. Time to own gold and silver.

  3. John Murray says:

    Statistically we have a recession every 4.5 years or thereabouts and if we miss that, we tend to get one after 9 years.Our time is up. Yes, and every now and then we have a major war because the new young turks have not experienced the horrors and think it is a jolly good idea.Same with the economy Trump is again deregulating the banks and banks here are lending recklessly. I had a helluva time getting a loan in 1992 but today the banks would throw the money at me.

  4. evansdavid says:

    SIGNS 1 AND 4 are testaments to the enduring and paralysing lobbying powers of the real estate industries in this country – real estate agents, property developers, banks, and all the rest of the rent seekers, including the politicians (Member for Bennelong) excluded in the current “do nothing malcolm” crew.

  5. frankaquin0 says:

    Dang! He writes a good horror story.
    Our helplessness will be good practice for the 2029 reminder that we aren’t in charge of anything.
    See: https://science.nasa.gov/science-news/science-at-nasa/2005/13may_2004mn4

    • ColinTwiggs says:

      Instead, what we’re going to have is an eye-popping close encounter:

      On April 13, 2029, asteroid 2004 MN4 will fly past Earth only 18,600 miles (30,000 km) above the ground. For comparison, geosynchronous satellites orbit at 22,300 miles (36,000 km). “At closest approach, the asteroid will shine like a 3rd magnitude star, visible to the unaided eye from Africa, Europe and Asia–even through city lights,” says Jon Giorgini of JPL. This is rare. “Close approaches by objects as large as 2004 MN4 are currently thought to occur at 1000-year intervals, on average.”

      Thanks Frank, And here I thought collision of our Milky Way galaxy with the neighboring Andromeda galaxy was all I had to worry about. Luckily that is only predicted to take place in 4 billion years.

  6. Graham says:

    Armageddon ……………… really, come-on you just can’t be serious.

    Doomsday prepping / the- sky’s-going-to-fall-in / there’s no tomorrow / an impending apocalypse is upon us / and-the-like negative and/or depressive claims amounts to empty sensationalism most times … this article – and your decision to highlight it now – is regarded, by me, as a prime example of one of those times.

    Significantly detracts from a supposed value-adding service….. I really hope that confirmation-bias in an attempt to garner alleged support for a predisposition to a particular market view / position is not a cause.

    Objectivity is the key … the industrial-oriented markets are cheap on a relative price-earnings basis, looking forward …. that’s it ( = the markets have correctly priced in associated risks )

    • ColinTwiggs says:

      I have 4 words for you (actually 9): Household Debt, International Debt, Low Interest Rates, and Housing Bubble. Which of those can the RBA/Australian government safely ignore?

      • Graham says:

        ???? … and there are so many more, and over-riding, findamental positives to focus on . Its’ a bull market – globally – as the positives dictate – and your later graphs reveal that. That’s my point .. in more than ‘4 words’ … bad taste, mate

      • ColinTwiggs says:

        And in a bull market we should all wear blinkers?
        You seem to have missed that the article was published in The Australian last week and I was commenting on the strength of the claims.

    • frankaquin0 says:

      The all-knowing market may indeed be self correcting – omnipotent some might say – but it’s hard to admire the cleansing properties of a bushfire when the authorities say it’s heading up your driveway.

      Anyway, Armageddon ain’t so bad. I seem to recall the chosen ones survive. That would be the money lenders in this case, since we already know the big ones can never fail.

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