20 April 2011

We are nearing an endgame

I consider comments like these below from a high profile business executive (as reported by The Australian) as significant. You can be sure the smart money is now positioning itself.

THE world economy is on "life support", living beyond its means, with the threat of a cataclysmic shock within the next eight years, ABC chairman Maurice Newman warned yesterday. The former chairman of the Australian Securities Exchange, who is also a director of the Queensland Investment Corporation, said the Australian economy was better placed than many others to withstand the potential major shock to the world trade and financial system. But he warned that Australia had only a few years to get its economic house in order ...

"We are nearing an endgame, which I put at no more than eight years away, possibly less," he said. He warned that policy failures of governments, rising social costs and financial market volatility would "create a crisis" that would trigger "widespread trade and capital market dislocation". ...

But investors needed to prepare for the crisis by de-risking their portfolios and cleaning up their balance sheets. Australians needed to press their political leaders to make the economy more competitive.

Mr Newman predicted that the coming financial crisis could trigger an end to the role of the US dollar as the reserve currency of the world. He said it could be replaced by a system of International Monetary Fund drawing rights, which could be made up of a basket of currencies including the Chinese renminbi and gold.

7 comments:

Justin said...

Hey Bron

I find it somewhat comical that these so called 'high profile' executives keep saying Australia is 'better positioned'.

I say garbage. We are currently doing ok due to the relative strength of the AUD against the USD but noting the level of outstanding government debt and given the fact that it is no more likely to be repaid than in 1997, I say we are living in a precarious credit bubble. A bubble that is no less likely to burst than during the Asian Financial Crisis.

Bron said...

Agreed, but this is the first one I've seen saying de-risk yourself and talking about gold as part of a new currency.

Forge said...

Relatively speaking, the government is not in that bad a position balance wise. Cashflow is a different thing, especially in the face of tightness privately.

No, our real risk has been and remains the massive private exposure we have to property values.

Justin said...

No Forge, the real risk is that our creditors will, probably suddenly, realise that government bonds will not 'pay'. The government debt market is out of control, $4.6 billion already in April & that's not a big month.

Property values are secondary to the government bond market.

Forge said...

Careful there. You are confusing rate of change with position. In regards to rate of change you are right - public debt in increasing quickly, while private debt is now flat or starting to edge downward.

However in terms of overall position, private debt is clear of 160% of GDP, mortgage debt on it's own is clear of 90% GDP , while the government has yet to reach 20%. Even allowing the 3:1 ratio between public and private, mortgage debt is a greater current risk to our economy than the government.

Still, the way things are headed, you be correct in a year or two.

Justin said...

No, I'm not confusing anything with anything else. Those percentages mean nothing.

That GDP is all fluff anyhow.

Forge said...

Ok. If you are just making a statement with no basis, you could have just said so to start with.

The numbers, far from meaning nothing are an indication of leverage. GDP, regardless of it's accuracy, is a single number that the above are scaled against, leading to a comprehensible, comparable set of numbers.

Are there other factors? Yes. Are these a good first order indicator of risk? Yes.