The question is not if, but when, this country’s own credit crisis is going to catch up with us. If you missed tonight’s ‘Debtland’ episode of Four Corners, you can watch it here. Be warned, it’s disturbing (if a little sensationalist).
It is a fact that we’re in the midst of a debt binge of unprecedented proportions. The ratio of credit to disposable income in Australia is north of 180% – one of the highest of any country in the OECD (in the US, that ratio was 140% before the crunch).
The most common argument you’ll hear professing we don’t have a problem is that debt is high, yes, but so are household assets. If there are so many assets, where’s the income those assets are producing? Houses yielding 3% net rental returns on their supposed value don’t help service debt costing 10%, or 20% in the case of personal credit cards.
So how can this go on so long? I thought the most insightful comment from the program was this from JP Morgan banking analyst Brian Johnson (no relation):
Banks can do dumb lending year after year after year. But that isn’t what creates the problem. It’s when banks stop doing dumb lending.
I’d argue that it is the dumb lending that creates the problem, but you get the point. As long as the banks keep feeding their customers’ addiction to debt, they don’t have to worry about defaults. It’s a Ponzi scheme of sorts – and one that might soon come tumbling down.
The global credit crisis is making it difficult and expensive for the banks to access funds. And that means they’ve got less funds to lend and will need to tighten their lending criteria. Is this the trigger that finally brings the party to an end?
Maybe, maybe not. But one day we will have to deal with the hangover this binge leaves us with. The banks will be at the forefront but the implications for the wider economy are worth some serious thought.
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Forager Funds is a boutique fund manager specialising in a value investing approach. We offer an ASX listed Australian Shares Fund as well as an International Shares Fund both aimed at delivering returns for long term investors.