Debt Image

Total Credit in the Australian economy increased from $36 Billion in September 1976 to $2,926 Billion in February 2019 (source RBA d02hist). Now that may seem like an astronomical rise (11% compound annual growth for over 42 years) but, if you benchmark the debt against the RBA cash rate to get a proxy debt cost, the debt even looks manageable.

With almost $3 Trillion in outstanding credit, if the RBA cash rate is reduced to 1%, then the proxy benchmark cost reduces to $30 billion per annum, or the same levels as 1987.

Every economic problem was met with a drop in interest rates: the 1982 recession/property correction, the 1987 share market crash, the 1989-92 Paul Keating recession we had to have, the 1997 Asian Financial crisis, the 2001 Dot com bubble, the GFC, and Quantitative Easing 2 since 2011.

The US had been trying to normalise (lift) interest rates for a while, but the weight of debt has the Federal Reserve and the Australian RBA capitulate to the obvious fact that a lift in interest rates will cause an economic Armageddon.

The last recession Australia had was in 1992, and we have had continuous economic growth ever since. If you were 21 years old in 1992, you may have a recollection of that last downturn. That 21-year-old is now 48 years old. So, it is probably fair to say that that most working age people do not know what an economic recession looks like. They are the cohort who will tell you that property prices will double every 10 years – guaranteed.

Maybe the best example of economic stagnation is Japan. In 1991, the Nikkei Index was 24,069. On Friday 5th April 2019 (28 years later), the Index closed at 21,807, a fall of 10%.

It wouldn’t be wise to bet on continually rising asset prices – you probably need to plan on the basis that they don’t.