Australia facing debt-driven depression
Posted 1 hour 2 minutes ago
The world is facing a "full-blown depression" and Australia needs to drastically rethink its attitude to debt if it is to climb out of its current economic trap, says leading economist Steve Keen.
Dr Keen, an Associate Professor from the University of Western Sydney, says Australia is facing years of weak economic growth because of high debt levels.
"The scale of what we're in for is driven by the level of private debt that's been built up in a speculative bubble that in Australia has been going up for 45 years and in America for 65," he said.
"We've got to the stage where we literally have twice as much debt as we had prior to the Great Depression compared to incomes. That's what caused the Great Depression and that's what's going to cause this one."
Dr Keen predicts Australia will have double-digit unemployment figures by 2010,
"It's certainly approaching ... in terms of unemployment levels of 7, 8, 9 per cent. Certainly I think double-digit unemployment next year and getting worse and staying there for some substantial period," he said.
Dr Keen says Australia's economic outlook will not improve until the Government "shifts direction" and recognises the current financial crisis was caused by far too much money being loaned irresponsibly.
"The problem is you've got to cancel that debt either by abolishing it formally or by trying to refloat the economy and cause inflation and reduce the debt burden, but we're still at least a year or two away before that realisation will sink in," he said.
"Japan is still in a recession/depression 18 years after it fell in a similar trap to us, with far too much debt being used for speculative lending, particularly on real estate and shares in Tokyo.
"Until we realise the debt should never have been issued in the first place and then go about resetting, and frankly a biblical way, the old classical way of abolishing debt, we're going to be stuck in this trap.
"For Australia, even so, we've lost our manufacturing base, we've got to rebuild manufacturing to have the income that will generate sustainable demand in the future."
Rates
Dr Keen says today's expected 100 basis point cut in interest rates will go some way to reducing Australia's debt burden but nowhere near enough.
"It will certainly help a bit but, if you put it in perspective, each 1 per cent cut in rates reduces the interest payment burden on our economy by roughly $20 billion. That's because our debt level is currently about $2 trillion," he said.
"Now when people start to try and reduce their debt level, even if they try and knock it off by 5 per cent per annum that involves a $100 billion drop in their spending.
"Now the Government is talking nothing of that scale to try to counteract in the other direction, so inevitably this is going to push us down."
Dr Keen says he would not be surprised to see the Reserve Bank of Australia slash rates by 125 basis points.
"In terms of the rate cut, it's like guessing which cockroach is going to cross the line first in Changi, how the Reserve is going to react," he said.
"But my punt is that they're going to go for slightly more than 1 per cent and slightly less than the New Zealanders went for, so I'd say 1.25 is feasible."
Dr Keen says on a small minority will come out of the economic crisis better off.
"There aren't going to be too many winners out of it except those that are cashed-up - cashed up with a secure job," he said.
