It’s Wednesday and I spent some time this morning reading the latest IMF – Global Financial Stability Report – The IMF pretends to know what is going on in the world economy based on a series of faulty assumptions about how the economy works. But the data it provides is interesting in its own right. Interestingly, Australian households currently have the highest debt service ratios in the world due to record debt levels and rapidly rising interest rates. What is generally overlooked in these discussions, however, is the initial large increase in debt. In this article, I explain, among other things, how the obsession with fiscal surpluses in the 1980s and beyond combined with labor market (good for employers) and financial market deregulation (good for bankers) created the conditions Households can actually only sustain growth in consumer spending by sharply increasing their debt and driving their savings rate into negative territory. The legacy of the misguided shift to fiscal austerity remains. Later in the article I make a brief comment about the Middle East and then we listen to some music.
Australia’s financial instability
The first chart shows the ratio of Australian household debt to disposable income since the third quarter of 1990 (as a percentage).
The rapid rise from the 1990s to the global financial crisis was the product of two trends.
First, the federal government deregulated financial markets, exposing households to excessive financial engineering imposed by bankers.
Financial markets have no limits as they can push debt onto households obsessed with mass consumption.
Secondly, between 1996 and 2007, the federal government ran fiscal surpluses in 10 of 11 years, which increasingly squeezed the liquidity of the non-government sector.
The only reason the surplus persisted for so long was that, in the face of a liquidity crunch, the household sector maintained consumer spending growth (and thus strong tax growth) by driving the savings rate into negative territory for the first time in history and took on large amounts of additional debt. .
Repairing the balance sheet is a long process, so the current instability is exacerbated by the RBA raising interest rates since May 2022.
The above-mentioned IMF report states:
Mortgage rates are rising globally, affecting loan originations, borrowers’ ability to repay and house prices. However, the impact varies across economies.Countries with most variable-rate mortgages and house prices still above pre-pandemic averages, such as Australia, Canada and New Zealand, have seen double-digit falls in house prices since their peak… Countries with these characteristics are likely to experience further interest rate declines The increase has the greatest impact on household debt ratios
The chart below shows the growth in housing interest payments in millions of dollars (left) and as a percentage of total income (right).
Since the Reserve Bank of Australia began raising interest rates, interest payments have increased sharply, reaching A$11.57 billion, an increase of 99% since the rate increase.
Where did that thing go?
To bank executives and shareholders.
While low-income households have less debt than higher-income households, we know that mortgage stress as a share of income is higher for low-income households.
The RBA’s move to shift income from low-income households to high-income households by raising interest rates is quite astonishing from a historical perspective.
The International Monetary Fund report shows that Australian households have the highest debt service ratio among developed economies in a comparative sense.
The chart below covers data up to the December 2022 quarter and shows debt service ratios (in percentage terms) for a range of countries in the December 2022 quarter and the change in reference mortgage rates in 2022 (in percentage terms).
I ranked the data by DSR from highest to lowest.
Since then, the RBA has raised interest rates four more times (by 1 percentage point).
So the DSR will become higher again.
On average, Australian households spend 16.3% of their income on housing repayments, which will now rise to around 20.6% after the additional increase.
IMF modeling shows that if mortgage rates rose 500 basis points relative to December 2022 quarter levels, Australia’s DSR would rise from 16.3% to 18.5%.
Based on this extrapolation, the current DSR will exceed 20%.
The Guardian reported (July 3, 2023) that some models from the Australian National University show that “the squeeze on household budgets may be most severe for low-income earners such as recent homebuyers and single-parent families” (source).
Modeling by the Australian National University shows that if the Reserve Bank of Australia raised interest rates by a further 50 basis points, the share of income from housing would be:
1. Bottom quintile of households – 56.7% (up from 36.4% in 2021).
2. Second quintile households – 33.8% (up from 22.4% in 2021).
3. Third fifth of households – 28.4% (up from 17.9% in 2021).
4. Fourth quintile households – 28.2% (up from 18.0% in 2021).
5. Top quintile households – 20.3% (up from 13.3% in 2021).
Households in the top income quintile are almost certainly also those pocketing the additional interest mentioned above, which shields them from the DSR rise mentioned above.
Amid all the debate about instability, what is most easily forgotten is that much of the damage was done in years when the federal government recorded fiscal surpluses.
This was at a time when “national savings” were rising and the government was getting rid of its debt burden.
But the reality is that at that time there was a huge shift in the non-government sector, especially the household sector, towards debt to meet necessities – especially as wage growth also flattened due to labor market deregulation.
As interest rates rise, this legacy continues and leaves society increasingly vulnerable to financial instability.
It also makes it easier to redistribute income and wealth from poor to rich, and is one of the reasons Australia’s inequality index has risen over the past three decades.
Current conflicts in the Middle East
First of all, I hate conflict and murder.
Second, I hate terrorism.
But the Australian government’s response to the latest conflict, and the mainstream media’s frenzied reaction, has been shocking.
No party commits violence against the other party who is the victim.
The Australian government has long been silent on the abuses of Palestinians by right-wing Israeli settlers backed by the Israel Defense Forces.
Mainstream media rarely mention the long history of abuses, including border checks, summary violence, building walls across communities, house looting, rape of women, murder and more.
Human Rights Watch analysis (April 27, 2021) — Crossing the Threshold: Israeli Authorities and the Crimes of Apartheid and Persecution – provides some insight into Palestinian life in the illegally occupied territories and their homeland.
The current Prime Minister (Netanyahu) has further worsened the situation by pandering to the fanatical far-right and given settlers more license to destroy legitimate Palestinian homes and communities.
Instead of publicly condemning these human rights violations by Israelis, our government immediately came out and denounced Hamas as a terrorist organization that violates human rights.
That’s all I want to write about this situation.
My views have nothing to do with anti-Semitic views.
I also hate anti-Semitism.
Music – Tony Joe White
Five years ago this month, one of my favorite artists— Tony Joe White – Died (October 24, 2018) at the age of 75.
Shortly after (October 28, 2018), the Guardian published an article— Tony Joe White’s obituary.
The last time I saw him play was in 2017 at Newcastle. I had watched him play many times before this.
He used an old Fender stratocaster and a Bassman 4 x 10 40-watt amplifier (the 1959 version, although he was using the reissue version the last time I saw him). But the perfect combination.
He usually just sits and plays by himself, with a drummer in the background.
Then would play crazy distortion, wah-wah, and stuff on the guitar. It’s a very special sound.
This is a beautiful song by TJW – rainy night in georgia – From a BBC program screened on 27 September 2013.
He wrote the song in 1967 and it first appeared on the 1969 album – continue – This is his second studio album. In 1970 I purchased a copy from the Bourke Street Import Shop in Melbourne.
It was widely reported (originally by Brooke Benton).
Regarding the origin of this song, he told reporter Ray Shasho—— interview – January 17, 2014:
When I graduated from high school, I went to Marietta, Georgia, where I had a sister. I went there to get a job and also played guitar at home and stuff like that. I drive a dump truck for the highway department so I don’t have to go to work when it rains. You can stay at home and play guitar and hang out all night. So when I moved to Texas about three months later, these thoughts came back to me.
That’s enough for today!
(c) Copyright 2023 William Mitchell. all rights reserved.