The truth about our debt

Wed, 11 Oct 2017  |  

This article first appeared on the Yahoo7 Finance website at this link: https://au.finance.yahoo.com/news/1870680-024951753.html 

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The truth about our debt

Much is being made of the record level of household debt in Australia. The media is full of stories screaming about the risks of debt for the economy.

Household debt has risen from levels equivalent to around 75 per cent of annual household disposable income in the mid 1990s to close to 200 per cent today and it is an issue that sparks fears of a crash, the next recession or something equally frightening. Debt is high, for sure, but for anyone who undertakes sober and factual analysis of the household debt issue and judges the overall financial position of the household sector and not just debt, there is little to be worried about.

It is vitally important to realise that households do not take on that debt and throw the cash away. On the contrary.

Debt is used to buy assets which includes things like housing, commercial property and shares. For the bulk of the population with little or no debt, they are coincidently squirrelling away their savings and are accumulating wealth.

According to the latest data complied by the RBA, household assets are growing very strongly, aided by a building up in savings, unrelenting growth in superannuation holdings, growth in bank deposits and of course, from rising house prices. While household debt is indeed just under 200 per cent of disposable income, household holdings of financial assets, which includes superannuation, direct share holdings and deposits, is now over 400 per cent of income. This is up from around 200 per cent of income in the mid 1990s.

While it can and never will happen, this fact indicates that householders could ‘cash out’ their financial assets, pay off all their debt and still be left with a couple of trillion dollars or around 225 per cent of household disposable income in left over cash. That is a sound start to analysing the household sector’s balance sheet and puts the kybosh on the ‘debt disaster’ we hear so much about.

Now let’s look at another part of the household sector’s balance sheet, assets in housing. The total value of housing in Australia is hovering around $7 trillion – yes trillion – which is over 500 per cent of disposable income. In the mid 1990s, this ratio was under 300 per cent. This wealth accumulation in housing has been phenomenal.

It means, quite simply, that while the household debt to income ratio has risen by around 125 percentage points over 25 years, assets in housing alone have risen around 225 per cent of household income. When all household assets are tallied, they total just under 1,000 per cent of annual income, which looked at another way, is a multiple of 10.

This means that the net level of household wealth (total assets minus total liabilities) is currently just under 800 per cent of income. It has never been higher. Net assets have risen from around 450 per cent of income in the mid 1990s. Or another way, for every $1 of debt that the house sectors has, they have $5 of assets, which is a loan to value ratio of 20 per cent.

It is also important to note that the level of financial stress is low. Indeed, it has rarely been lower in the last 25 years than it is today. Bad debts are a trivial proportion of bank liabilities, borrowers are comfortably meeting repayments and a huge proportion of mortgage holders are well ahead in their repayment schedule.

Suffice to say, the focus on household debt captures only part of the story of the risks to the economy. Substantial interest rates rises would hurt the economy, to be sure, but this is the very reason why such a policy outlook is not going to happen.

But while the asset side of the household balance sheet remains healthy, the debt side will remain a non-problem.

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This article first appeared on the Yahoo 7 Finance website at this link: https://au.finance.yahoo.com/news/trump-boosts-us-stocks-borrowed-government-money-011637215.html 

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Trump boosts US stocks with BORROWED government money

US stock prices continue to trade at near record highs and a lot of the recent rise has a lot to do with the policies of President Donald Trump.

The surge in the Dow Jones Industrial Average has been phenomenal. Since the November 2016 Presidential election, the Dow Jones is up around 50 per cent despite a few hiccups at the start of 2018 as the US Federal Reserve hiked interest rates and the threats of a US trade war turned into a reality.

The rise in US stocks, whilst impressive, is built on all the wrong things. ‘Wrong’, that is, in terms of sustainability.

As President, Donald Trump has delivered a range of tax cuts that have a total cost to the budget of around US$1.5 trillion. This one-off, impossible to replicate policy like any other policy that dumps cash into the economy has underpinned stronger economic growth and a temporary lift company profits. The tax changes has seen US companies engage in a record level of stock buy-backs which by design, has been a powerful driver behind rising share prices.

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Everyone stopped talking about government debt, but here's why it still matters

Wed, 19 Sep 2018

This article first appeared on the Business Insider website at this link: https://www.businessinsider.com.au/government-debt-stephen-koukoulas-2018-9 

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Everyone stopped talking about government debt, but here's why it still matters

Having been a headline issue for many years, government debt no longer gets the media or political focus that is used to.

At one level, this is odd, because the level of gross and net government debt have continued to rise unrelentingly in recent years, with gross debt at a record high and net debt touching a peace-time high.

The lack of focus on government debt probably reflects the fall from grace of the chief debt fear-mongers Tony Abbott, Joe Hockey and Barnaby Joyce who were vocal advocates of the “debt and deficit disaster” that Australia was allegedly confronting five years ago. 

The fact that the Coalition government has demonstrably failed in its policy approach to the issue is also likely to be a factor why it has dropped off the list of popular political topics. It could also reflect the fact the belated realisation that Australia level of debt and deficit are, and always have been, low and manageable.

So low is Australia’s government debt, even today, that the three major sovereign credit ratings agencies have assigned a triple-A rating even though the path to a balanced budget and debt stabilisation has been slow and unconvincing.
This is not to say that the level of government debt is not an issue. It still is.

And just because it is not a constraint on the economy or a meaningful concern to markets, it doesn’t mean policy makers should take their eye off managing government debt, especially at the moment when the economy is growing and the global economy is giving Australia a helping hand.

Sensible and pragmatic economists are usually pragmatic about debt and deficit. Pragmatic in a sense that a move to debt and deficit are good policy when the economy is weak and debt reduction and surplus are good policy when the economy is growing strongly. Suffice to say it will be important to ensure that the path to small, but growing, budget surpluses over the next few years is kept, but only if the economy continues to grow at a reasonable pace.