How bad is it really?
It is hard to believe the Government will warrant bank deposits for the first time ever in our history. Yes, Kevin Rudd had dinky option but to play the game. But what is the average Australian to think?
First, it is prominent to understand why the global economy is faltering and it is highly volatile. We are in the midst of a "liquidity crisis" - but what does that mean [exactly]? In straightforward terms it means that money circulation has dried up. Here in Australia, we are yet to feel the full force of this but in the Usa, it is full on: It is approximately impossible to get a loan to buy a vehicle and home buyers without a 50% deposit are simply out of luck. In the Usa right now, it is approximately impossible for a small/medium size enterprise to fetch credit to operate their enterprise - i.e. To form or import goods to sell.
Or is this emergency best described as a "solvency crisis" - just ask any enterprise owner on the road (and any mortgagee) starved of credit and facing the very real possibility of liquidation and closure.
Right now, our banks are tight with lending money ... Instead encouraging habitancy (with engaging interest rates and government guarantees) to deposit money to ensure there is adequate capital available! This is an acute situation. Banks have to lend money to keep the economy going. For example, on average billion a month is required to fund the asset market. Right now, we are nowhere near that figure. This will inevitably lead to a fall in asset prices (possibly 25-30%) and quickly unless money flows again into the hands of lenders and reliance is restored.
The irony of this situation is that banks have to make a decision at some point to start lending - otherwise they risk not putting a floor under the prices of assets, prominent to more foreclosures and losses in asset (and business).
Now... Back to "how" [exactly] we got into this mess in the first place.
In straightforward terms, there comes a point when the whole of debt carried (consumers this time, in 1990 it was precipitated by enterprise debt) is too great to service/manage. Yes, there is a limit! As this limit is approached, the banks begin to quiz, the capability of their debt (and the assets behind them as collateral). And this scrutiny leads to tightening of available money (or credit).
So how much debt is being carried by consumers? The short riposte is - report amounts. You might well ask, how could this happen? Well, history shows us that aggressive "fiscal" and "monetary" course post the 9/11 disaster set this up - a hazardous combination of historically low interest rates set by the preserve Bank (monetary policy) plus tax relief and other incentives from the Government (fiscal policy). Put the two together and some stimulus from aggressive lenders, and you get a resultant spending frenzy. Of course certain consumer sentiment helped as well ... And "keeping up with the Jones's".
Massive increases in "disposable income" creates quiz, for "stuff" - upgrading the house, inexpressive education, the Suv, entertainment, holidays and other "discretionary" items - creating an inflationary environment. In a nutshell, heaps of money spent on non-essential goods and services.
So report levels... Compared to what?
Well, comparing today to the Great Depression puts this into perspective. Back then, inexpressive debt was 64% of the nation's yield (Gdp - Gross Domestic stock - or what we spend). Today that frame is 165%. simply put, today we are spending far more than we earn. By comparison, in the Usa the figures were 150% and 290%.
Now you might be thinking Australians have less debt to manage? Think again. The Australian asset store is the most greatest in the world today and by a vital margin - the figures are nothing short of frightening! As values fall (and they will, of course most other "stuff" mentioned above will have even less value) these ratios will explode. Debt will quickly increase as a % of Gdp as Gdp reduces.
What's the message here? reduce your debt ... Fast. If you also have a business, find new ways to increase your cashflow immediately.
Stay tuned, next week we will be discussing the Australian asset store - these facts and figures are greatest and nothing short of frightening! If you own a asset or even if you are just thinking about acquiring one... You cannot afford to miss our next newsletter.
What every person Ought to Know About the Economic emergency