Your point about the higher principle repayment being a drag with high debt / GDP levels is a fair one. That money does in effect "disappear", and the higher the over-all debt the more principle repayment in theory will be going on. I personally don't think we are past the tipping point yet with that though. I think that a large part of the high debt/GDP ratio is due to the widespread use of mortgage offset accounts, and LOC loans in the household sector. Ie, a fair proportion (I cannot find data to say how much so just postulating here), of that total debt is not actually debt that is being repaid, nor accruing interest, and therefore Australia's real debt/GDP position (household sector portion anyway) is actually lower than we think.
An example - I personally have nearly $400k sitting in a mortgage offset account, against a loan of the exact same amount, currently interest only. In the stats that's $400k loan asset and also a $400k deposit/liability sitting on the banks books. I also have another $250k of LOC accounts that I have had for ages, of which I have only deployed about half the available capital (for investment / business purposes). So there is $500k+ of debt in the stats that actually does not cost any interest nor is it generating any principle repayments. I am sure I am not alone in this sort of set-up!
The other side of this coin is that there is a lot of money sitting in these sorts of facilities that could quickly be deployed into the real economy if/when confidence were to increase, without causing an increase in current debt levels (the debt is already accounted for in the stats).
Anyway this is just a theory. I'd love to find the stats to look at this properly!
It's definitely a valid point that you raise and I too would be interested in knowing the number. Do you know what percentage of investors have interest only loans?
The simple fact is that debt is risk, because it makes a commitment to the future and the future is uncertain. Risk is necessary to create growth, but too much risk is dangerous. In some respects, markets can price and control this risk, but in some respects they cant.
Its unrealistic to expect individuals to collectively make good risk decisions because they have no way to have a realistic view of the future. This is why IMO there should be regulation around LVRs and income multiples, as well as on the lending side. Its fine for one individual to make their own bed and lie in it, but when millions do that its systemic risk, both on the upside and downside. At the very least there should be pricing, so higher LVR means higher price.
But in the ever-optimistic traditional economic model, this debt is no problem, its just waiting to be inflated away by growth in the economy and asset values i.e. by the creation of ever-more debt. The problem here is that when the debt engine stops, the parts of the economy that depend on it stop too, and they then slow the debt engine down more. Take a look at Private Equity, what fun those boys had for a few years, funding takeovers of massive firms through phenomenal leverage. When the risk was repriced, they basically disappeared (for now anyway).
Its strange that analysts can keep a careful eye on the Gearing Ratio of individual companies, but not on a national economy for example.
It's exactly right Davel. An economy that relies on ever expanding debt/gdp is not a sustainable one. During the expansion phase we see economic prosperity but once the deflation phase begins the economy hits the skids. The only solution that is now being put forward is by the MMT brigade who suggest that the shortfall in lending growth should be supported by expanding government debt but preferably debt that doesn't need to be repaid to anyone. It's a solution that acknowledges the existing arrangement is a bank run scam.
Unfortunately I think the money printers will eventually have their way because the alternative of austerity is unpalatable to both the politicians and the public. QE and its various incarnations will be heralded as saving the day before the consequences of that policy eventually bring down the whole house of cards.
Given the relative lack of effectiveness of QE in the US and UK, there'd have to be other tools in the locker woudlnt there? Cos QE alone aint gonna get it done...
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