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Michael J. Clark was born and raised in Sinclair, Wyoming. He is a poet, novelist, artist, historian, and market analyst. His fine arts portfolio can be found at the following address: http://www.hoalantrangallery.com/MJC2.htm His writing portfolio can be found at:... More
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  • DEBT AND DEPRESSIONS. AUSTRALIA HEADING INTO GREATER DEPRESSION AGAIN 20 comments
    Jul 27, 2012 2:59 PM

    One picture tells me Australia -- seemingly stable now -- is heading into another global depression -- and their third debt bubble since 1890 is the reason for this coming collapse.

    The chart below shows Australia's debt/GDP ratio. Australia's debt/GDP ratio was around 110% in 1890, around 75% in 1930, and is now around 160% of GDP.

    In 1890, Australia had the worst depression in the country's history.

    In 1930, Australia also suffered through depression with the rest of the world, although the 1890 depression was more severe and lasted longer -- the 1930 depression was exasperated by the social/political deconstruction brought on by World War II. We remember that Australia was nearly invaded by the Japanese.

    Debt causes depression. Can anyone look at this chart and not understand that our current global malaise is more than an economic downturn -- it is depression brought on by debt-congestion?

    Australian debt collapsed from 1890 to about 1920. Debt levels then grew for about ten years, before collapsing again until about 1950. The current debt/GDP in Australia is more than twice the debt level in 1930 and is nearly 50% larger than the debt bubble of 1890, which resulted in the worst economic depression and bank crisis in the history of Australia.

    There is no getting back to business-as-usual until all this debt is paid back, or destroyed through default and bankruptcy. This will take at least a generation to accomplish.

    (click to enlarge)

    "There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved."

    Ludwig Von Mies

    Michael J. Clark, Hanoi, Vietnam

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Comments (20)
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  • John Lounsbury
    , contributor
    Comments (3979) | Send Message
     
    Michael - - -

     

    Yes, to paraphrase Samuel Taylor Coleridge:

     

    Debt, debt everywhere,
    And never a drop to drink.
    27 Jul 2012, 05:17 PM Reply Like
  • Michael Clark
    , contributor
    Comments (8856) | Send Message
     
    Author’s reply » Yes, John. The best of times; and the worst of times...
    28 Jul 2012, 01:02 PM Reply Like
  • Freddy Hutter, TrendLines R...
    , contributor
    Comments (3738) | Send Message
     
    Much of Australia's debt is mortgage related. The Realty Bubble Monitor reveals the extent of the correction required. Homes were 77% overpriced in May: http://bit.ly/pWf306

     

    Similar ugly picture in Canada & UK.
    30 Jul 2012, 01:12 PM Reply Like
  • Michael Clark
    , contributor
    Comments (8856) | Send Message
     
    Author’s reply » Freddy:

     

    Private debt is MORE deadly than sovereign debt. Look at Spain: very good public debt picture when they went down; same with Ireland. Mortgage dead bubble is the most deadly of all.

     

    Painful depression coming to Australia, but also to UK and Canada.
    31 Jul 2012, 04:02 AM Reply Like
  • Freddy Hutter, TrendLines R...
    , contributor
    Comments (3738) | Send Message
     
    Michael, a Depression infers GDP will avg less than -4% for eight quarters. Sorry, but the TRENDLines Recession Indicator gauges none of the three jurisdictions are facing anything near that sort of prolonged, deep contraction.

     

    TRI charts: http://bit.ly/sTaQy3
    31 Jul 2012, 04:23 PM Reply Like
  • Michael Clark
    , contributor
    Comments (8856) | Send Message
     
    Author’s reply » Freddy: that's the commonly-accepted definition of a Depression. My definition of depression is a set of serial recessions alternating with weak attempts at growth lasting 18 years in duration.

     

    1929-1947
    1965-1983
    2001-2019

     

    We'll have more recessions. Deeprecessions is a kind of euphemism for Depression. Debt Depressions are different however; they get the core right out of a society. That's where we are headed. I hope we learn this time.
    31 Jul 2012, 10:27 PM Reply Like
  • Mercy Jimenez
    , contributor
    Comments (2140) | Send Message
     
    Michael,

     

    Appreciate your article. I do think, however, that several points need to be made to better understand the scope of AU debt and the big contrast with the US real estate debt/bubble.

     

    1) The debt to GDP ratio above is NOT the "government" debt to GDP ratio which is extremely low in Australia and demonstrates an extraordinary level of fiscal responsibility with planned budget surpluses. Australian government debt to GDP is only 22.9%: http://bit.ly/LhLNJJ

     

    In comparison US government debt to GDP has now reached 103%:
    http://bit.ly/NR2hHu And, that ratio only counts on balance sheet US liabilities with a deficit around $16T. It doesn't begin to account for the US off-balance sheet liabilities like GSE funding guarantees and unfunded entitlements which grows the deficit beyond an est. $80T. Australia does not play the smoke and mirrors game of mushrooming off-balance sheet liabilities.

     

    2) As Freddy mentioned above, a lot of the consumer debt is mortgage related, but exposure to high risk mortgages is small and concentrated by higher income households. While the real estate bubble in Australia may indeed deflate --it is unlikely to resemble anything like the US heyday of "come one come all" featuring NINJA loans and 125% LTV subprime ARM teasers.

     

    "Despite [Australian] banks’ high exposure to residential mortgages (56% of total loans at end-2010), exposure to high-risk mortgages is small, as less than 10 % of owner-occupiers had mortgages with loan-to-value ratios higher than 80% and debt service ratios greater than 30.6% Moreover, debt is mainly held by higher income households, with households in the top two income quintiles holding almost three quarters of household debt (Figure 5). The full recourse nature of mortgage lending also helps limit strategic loan defaults." Yes, unlike US banking protocol, Australian banks can and do come after your other assets if you default on your mortgage.

     

    http://bit.ly/PcrSw3

     

    3) And finally those AU banks that hold the mortgages -- implemented Basel II capital requirements in a far more conservative way than minimally required by Basel (e.g. doubled the minimum loss given default (LGD) floor adopted for residential mortgages -- see same document link above). So I do worry about the AU banks limited access to domestic capital funding sources -- but overall they have played the game much more conservatively than their US counterparts.

     

    The bottom line for me is that the debt levels need to be weighed differently for investors in consumer debt vs. government debt. And if one thinks Australia is headed into a depression with the strong fiscal underpinnings mentioned above -- I hate to think about where the US and other heavily indebted governments are headed.

     

    Just some additional thoughts to weigh into the equation. Thanks again,
    MJ
    30 Jul 2012, 02:23 PM Reply Like
  • Michael Clark
    , contributor
    Comments (8856) | Send Message
     
    Author’s reply » Mercy: Thanks for your response.

     

    Private debt is MORE deadly than sovereign debt. Look at Spain: very good public debt picture when they went down; same with Ireland.

     

    Private debt suffocates the economy. It's like a Thanksgiving feast. You eat so much, you can't eat for days. And then the Autumn gets cold. There's no more food in the ground, on the trees. And the winter is coming.

     

    Private debt watches consumers fill up to the brim, where they can't afford any more debt. That is the end of the bubble. Then the assets start to fall in value. Then, not only are the consumers full, but suddenly they are full of declining assets.

     

    Consumer debt is worse that public debt because public debt can be managed by printing more money. You and I can't print more money when we start to go under. We can only go under.

     

    If we choose to fight a debt bubble with inflation, it just means that we delay armageddon. And we destroy our currencies in the process.

     

    DEBT is the DEVIL. No way around it. One is not supposed to spend money he or she doesn't have. Spending other people's money leads to the debt house and to hell.
    31 Jul 2012, 04:07 AM Reply Like
  • Go Lakers
    , contributor
    Comments (1380) | Send Message
     
    You're wrong, Mercy is right. The Australian debt picture is very different to the US debt picture and it is comparing apples and oranges.

     

    For some reason I get a sense that people want Australia to fail, almost like they don't like that this little dinky country of just 22 million people might have just got it right. Bad news people - it did get it right and it has done for a long time. It's also been a long and deliberate time in the making. If you want more details, read a book by a guy called George Megalogenis:

     

    http://bit.ly/SR74Nk

     

    Australia is very well equipped to handle what is ahead because the place operates fundamentally differently from the US. Now a fair question would be, how does this Laker fan schmuck know all this?

     

    Because I am Australian and have lived in the US for 11 years and I spend about 3 months a year in Australia. That's how I know. I'm not guessing, I'm not doing research. I'm living it, I know.

     

    Don't use US assumptions to gauge Australian prospects - it is a factually incorrect thesis that will lead you to false conclusions, like Mr. Clark's conclusions. With all due respect Mr. Clark, charts and stats tell you only part of the picture and if I only knew what you knew, I'd probably come to the same conclusions.
    29 Aug 2012, 11:22 AM Reply Like
  • Michael Clark
    , contributor
    Comments (8856) | Send Message
     
    Author’s reply » I have nothing against Australia. In fact, I quite like Australia. But Australia's debt picture and America's debt picture are almost identical -- too much PRIVATE DEBT -- and an economy that is not growing, except through monetary tricks being performed by China.

     

    Tell me how Australia is different. I see this as a LAW no matter which nation is involved: DEBT SUFFOCATES GROWTH. How is that American, but not Austrlaian.
    30 Aug 2012, 09:34 AM Reply Like
  • Rokjok777
    , contributor
    Comments (602) | Send Message
     
    "Debt causes depressions"

     

    So Japan is in a depression? UK? US? Those are the three debt champions.
    31 Aug 2012, 03:10 AM Reply Like
  • Michael Clark
    , contributor
    Comments (8856) | Send Message
     
    Author’s reply » Look at a chart of total debt vs GDP. Yes, Japan has been in a depression since 1989, the UK is in a depression, and the US is in a depression. Any time goverment is forced to throw trillions into the black hole to try to prevent a depression IT IS A DEPRESSION.

     

    Will it get worse? Yes, for Japan, UK, US, and Australia.

     

    Japan's stocks are down 75% since the Housing Bubble top in 1989; Tokyo real estate prices are down 80% since the Housing Bubble top. If your claim is that Japan has not been in a depression then perhaps we need a new derinition for what a depression is.

     

    A Mountain of Debt that slows econo;mic expansion is ALWAYS the first stage of Depression. The last stage of a Depression is always no borrowers and almost no one interested in buying a house. The last stage of Depression is always the surrender of the entrepreneurs who have buying the dips all the way down. So, we still have a long way to go.
    31 Aug 2012, 07:04 AM Reply Like
  • Freddy Hutter, TrendLines R...
    , contributor
    Comments (3738) | Send Message
     
    Depression: < -4% GDP avg for at least 8 quarters
    31 Aug 2012, 11:32 AM Reply Like
  • Michael Clark
    , contributor
    Comments (8856) | Send Message
     
    Author’s reply » That's the conventional view. I would argue for a different set of cyclical terms -- and times -- in this 36-year cycle.

     

    1911-1920: reflation Winter
    1920-1929: inflation Spring
    1929-1938: disinflation Summer
    1938-1947: deflation Autumn

     

    1947-1956: reflation
    1956-1965: inflation
    1965-1974: disinflation
    1974-1983: deflation

     

    1983-1992: reflation
    1992-2001: inflation
    2001-2010: disinflation
    2010- 2910: deflation

     

    If GDP is less than -4% avg for 7 quarters not 8, then it's not a depression? It's a kind of squishy statistical definition, isn't it?

     

    Why do we accept this as our definition?
    31 Aug 2012, 12:19 PM Reply Like
  • Freddy Hutter, TrendLines R...
    , contributor
    Comments (3738) | Send Message
     
    Michael, you said above the USA is in Depression, yet its GDP has avg'd 2.1% over the last 8 quarters. Do you really want to quibble over the definition? Really?

     

    BTW, the Great Recession was -3.3% for six quarters, making it a Severe Recession by definition. By TRI measure, it was -4.8% for six quarters.

     

    TRI charts: http://bit.ly/pfbeJm
    31 Aug 2012, 12:38 PM Reply Like
  • Michael Clark
    , contributor
    Comments (8856) | Send Message
     
    Author’s reply » Freddy: Does it matter how much money governments are throwing at a 'recession' to keep it from becoming a depression? I think that needs to be figured in also. If any economy is shrinking despite trillions in 'stimulus' -- free tax money given away -- and that says quite a bit about the GDP rule and depression. Trillions in stimulus is kind of like moving the goalposts, isn't it?

     

    How would the American enconomy be doing with $0 in stimulus? I think that's a better guage.

     

    Whether we use the word depression or just deep-recession, we are deeply dependent upon government spending to keep GDP from sinking into the red. Politically, GDP becomes the target instead of the economy. How can money be used to manipulate the GDP reading? Isn't that what central banks have had as their target, GDP? Makeup for the pig.
    31 Aug 2012, 10:41 PM Reply Like
  • Freddy Hutter, TrendLines R...
    , contributor
    Comments (3738) | Send Message
     
    Fair point, Michael. But remember fiscal stimulus and deficits are fiscal policy (not monetary policy) and are the realm of Congress (not the central banks).
    31 Aug 2012, 11:21 PM Reply Like
  • John Lounsbury
    , contributor
    Comments (3979) | Send Message
     
    Freddy, Michael - - -

     

    Followed your discussion with interest.

     

    GDP is too narrow a measurement to use to define recession and depression. The NBER, the generally accepted official chronicler of recessions, does not use it as the only measure and has positive GDP quarters embedded in official recessions. Other factors that can enter determination of recession include employment, personal income, industrial production and other metrics that do not move in lock-step with GDP.

     

    I have posted a number of reviews about measurement of different aspects of the business cycle and have a lot more partially completed work to finish and get out for discussion.
    1 Sep 2012, 10:05 AM Reply Like
  • Michael Clark
    , contributor
    Comments (8856) | Send Message
     
    Author’s reply » Yes, Freddy. Stimulus is fiscal. But there has also been massive central bank involvement as well. Notice of Fed balance sheet and off-balance sheet...in the trillions.
    3 Sep 2012, 01:35 PM Reply Like
  • Michael Clark
    , contributor
    Comments (8856) | Send Message
     
    Author’s reply » I agree, John.

     

    Of course if we 'know' when deflations are scheduled to appear -- as per my 36-year cycle -- then defining depressions becomes less important than does planning for them and responding to them.

     

    I understand that economics as a discipline is not quite ready for that. They are much more comfortable looking back than looking forward.
    3 Sep 2012, 01:40 PM Reply Like
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