The End of Australia a lengthy video presentation about a book of the same name which concerns the possibility of a global contraction of debt levels – and its economic effects.

The book was written by Vern Gowdie who has long advocated a conservative investment strategy. It has been inspired also by Bill Bonner (a significant US financial analyst) who has long been issuing warnings about the impact of high debt levels.

A outline of, and comments on, the online video presentation is given below.

Related arguments about the risks associated with huge accumulated debts have long been developed for many years by an Australian academic (Steven Keen) whose web-site is here. He has been wrong for a VERY long time, but is now getting accolades. His analysis seems to the present writer to be based on a narrower (ie purely economic) viewpoint.

Major Themes of the Online Presentation about The End of Australia

• Australia’s financial system nearly experienced a crisis at the time of the GFC – because of a run on banks. This was blocked by government guarantees of bank deposits.

Comment: There was an obvious risk at that time (see Defending Australia from the Economic Crisis, 2008). It paralleled events in the 1890s when an international financial crisis disrupted the large external capital inflows that Australia’s economy has always needed to cover the difference between domestic spending and income. Without capital inflow Australia’s banks could no longer finance property investment, property values collapsed, banks became insolvent and a depression ensued. In 2008 government net debt was very low so its guarantee of banks carried a lot of weight. Government’s debt position is not now as good but still much better than most – so government guarantees would be worth something. But current structural budget deficits (which would escalate in the event of an economic crisis) would devalue those guarantees. However authorities have already required banks to increase their capital reserves – as they clearly anticipate another possible financial crisis. Banks have also tightened up on lending for property investment (eg in terms of higher interest rates and lower maximum-loan / income ratios).

•  Easy money policies by US Federal Reserve have created a global expansion of credit which boosted demand from low-cost producers such as China on whose demand for commodities Australia has become dependent. This process is now winding down – but Australia has not adapted and is living beyond its means. This will probably result in a ‘long bust’ (which will be far worse than a mere recession);

Comments: This is an over-simplification of what is probably a real risk. Global debt levels relative to global GDP are roughly double what is likely to be sustainable – so a huge write-off is unavoidable. This will probably be triggered by US Federal Reserve fairly soon as interest rates start rising – and economies with weak financial systems will be in trouble. The escalation of global debts associated with easy money policies has been under-way for decades and arguably primarily reflects a ‘clash of civilizations’ between profoundly-incompatible Western and East Asian systems of socio-political-economy (see A Generally Unrecognised 'Financial War'?, 2001+; Structural Incompatibility Puts Global Growth at Risk, 2003; and 'Currency War': A Counter-move by the Federal Reserve?). The escalation of irresponsible credit was: (a) started by Japan as part of the methods used to achieve post-WWII economic ‘miracles’; (b) used by US Federal Reserve to prevent a stock market crash in 1987 from affecting real economy; (c) escalated by Japan in the 1990s to cope with its 1990 financial crisis (and increasingly used by China also) which, through carry trades, had the effect of exporting financial bubbles to the rest of the world – one of which burst giving rise to the subprime-crisis in US and the GFC; and (d) escalated again by the US Federal Reserve through its quantitative easing which, through carry trades, had the effect of exporting financial bubbles to the rest of the word – while at the same time China maintained its growth by a massive domestic credit expansion;

•  It is clear that a recession is coming to Australia.

Comment: Australia has been highly dependent on now-collapsing demand for commodity exports – and particularly on China. China is likely to be headed for a financial crisis (see Heading for a Crash or a Meltdown?) and also (perhaps) for a political crisis (see Context to China's Sharemarket Boom and Bust and China Won't Get Far Along Its New Silk Road If It Suffers a Political 'Flat Tire'). Australia’s economy is too poorly developed to be able to generate new opportunities to compensate (see How Durable is Australia's Luck?) . This is the basis of both: (a) ‘panic stations’ warnings and new policy proposals from recent National Reform Summit (which said to the government 'do something' did could not suggest what); and (b) The End of Australia warning probably from US sources.

• The coming recession will have extremely serious consequences (eg bank closures, credit cards not working, collapsing share values and superannuation funds, panic property selling, no available credit, evaporating jobs, emergency taxes, evaporating entitlements, civil unrest). Australia faced (but avoided) those risks in 2008 – because of mining boom that China stimulated. Australia has been living beyond its means in many ways. Debts have risen – savings dwindled.
•  Australia has had an unprecedented long boom from 1991 – and people expect this to continue. But there is a global debt super-cycle. The wider world depends on a mountain of credit. This started to crack up in 2008 and is now likely to do so entirely.
•  Global credit boom is ending. Total outstanding global debt is $200tr – and counting unfunded social security obligations etc the total could be $500tr. Debt / GDP ratios are now so high that perpetual increases are impossible. Yet growth has depended on rapid increases in debt for decades. Great Credit Contraction started in 2008. Many efforts have been made to stop its deflationary impact – by creating more debt. Australia’s banking sector (which is heavily exposed to property) could be one of the first to buckle. The consequences of credit contraction will be the reverse of what people are used to (eg in terms of rising property prices / wages / share markets / superannuation balances / entitlements to government support).

Comment: There are a lot of constructive economic activities / changes under way. However it is very difficult to see how these can be sufficient to overcome the global growth constraint associated with high debt levels (see Credit Bust First: 'Sixth Revolution' Later).

•  Australia has done relatively well by international standards since 1990. But private debt levels have risen quickly (to now160% of GDP). Australia has also done well because of China’s growth – and this encouraged Australians to take on more debt. And this in turn increased government revenues / spending obligations. Australia now has federal budget in deficit – with one of world’s most indebted private sectors. This makes Australia vulnerable to global deflationary slowdown.
•  Sharemarkets may not continue rising in future. From 1968 to 1983 Australian sharemarket went nowhere – before than rising rapidly for 32 years. US markets now seem likely to fall 50-80%. Conditions now are worse than before 1929 share market crash – after which market fell 89% and did not recover for 25 years. Other market crashes have exceeded 50%. The common cause has been high debt – and a refusal to believe that good times could end.
•  Steps that could be taken to guard against the effects are:
  • Build a ‘Storm Shelter’ (ie a way to keep away from likely disaster areas) – and remember that busts create opportunities.
  • Avoid false ‘Storm Shelters’. For example, gold will be caught in panic selling when cash is king. Also some shares are particularly dangerous

Comment: ‘Games’ seem to be being played in relation to gold – though what is being achieved by doing so is not clear (see Interpreting the Canary in the Gold Mine)

• Cash will be king – but only the right kind of cash. There is a need to be alert to: potential deposit traps; and smaller banks. Self-managed super reduces risks. There are source to find safest term deposit / savings vehicles. Holding a lot of cash is appropriate. Don’t take advice from financial planners.
• Be careful with superannuation – as balanced will fall and government may seek to nationalise superannuation assets and / or cut tax concessions. There are ways to reduce superannuation risks.
• Buy when the crash turns into opportunity. Suggestions are available about how to recognise this
•  There are already signs of the Long Bust (eg wobbly stock markets, historical market highs, 10 year government bond yields under 1% and market manipulation by policy-makers. When system cracks: (a) bond investors will flee to share / property markets; super funds could fall 30-50%; share / property markets will fall due to restricted credit and cash; China won’t rescue anyone.

Comment: When interest rates start rising, bond markets can be expect to be first to be affected –and perhaps collapse quickly (see Will the Normalization of Interest Rates be Slow?).