Debt Drugged

Debt, debt, debt, debt, debt! Everywhere you go, it's waiting for you.

From government, to target="_blank">effect an interest rate rise has on the disposable income of new home owners victims.

Money may make the world go around, but it's debt that dominates the world of money.

Like a giant spinning top, the global economy has relied on the increased economic flow and circulation that debt provides. Eventually it will stop spinning and fall over on its side.

You see, it works like this: Central banks are like the tip of the spinning top - the point upon which our debt based economic system expands from and pivots off. It's a very narrow tip.

The Financial Crisis is an indicator that the world economy has become extremely top heavy with debt and is dangerously wobbling around like a slowing spinning top.

Governments and central banks have managed to engineer some more spin, but only at the expense of piling more debt on top of the already wobbling structure. This only increases the stakes of keeping it spinning.

But have we discovered the point where more debt will not provide more growth - only more instability? Who knows? (Other than

The key point is that a roaring economy might be great, as the boom period showed us. But if this boom is at the expense of stability, and only artificial spin is keeping it going, then we are going to pay for it eventually.

National Debt

''Prepare for a very difficult economic time, which you will not be able to escape,'' said the chairman of the Netherlands Authority for Financial Markets at the ASIC summer school.

The

http://clicks.portphillippublishing.net//t/AQ/AAEhaQ/AAEnkQ/AAFlIQ/AQ/AgMlFg/Vc5w" target="_blank">in Tuesday's Australian

Newspaper, explains that the traditional measure of trade flows serves another purpose for Australia:

"Today's economic orthodoxy suggests current account deficit simply measures the extent to which domestic savings are not big enough to finance the mining investment boom."

Going back to Dan's commentary:

"The net foreign debt and current account deficit are a reminder that much of Australia's current prosperity - from house prices to mining profits - comes via borrowed money. Of the $647 billion in net foreign debt, $426 billion - or 65% - is owed by Australia's financial corporations."

With debt running so deeply in the veins of the Australian economy, would it even be possible to have a healthy type of growth emerge? Or would a pickup in economic activity simply be another re-leveraging, doomed to topple the economy at some point in the future?

target="_blank">creative destruction" must clear out all the malinvestment and excessive leverage before healthy growth can resume. Some of this has occurred, but nowhere near enough, especially in Australia.

Mortgage Debt

Tim Colebatch at the

"In January 1990, home mortgages ate up just 28 percent of our disposable income. By January 2000, that had ballooned to 66 per cent, and by January this year, it doubled again to 134 per cent.

"Households' willingness to take on greater debt powered much of Australia's economic growth from 1990-2010, but with our households now as indebted as any in the Western world, economists say that will not be repeated."

All this not only inhibits growth, but exacerbates just how sensitive the Australian economy is to interest rates.

Housing

Apparently, a quarter of Sydney homeowners have already experienced the other side to Australia's housing boom. Nick Gardner at

The real problem faced by people who have lost value in their homes is that the price of the home they are moving to is likely to have risen. Their loss has two sides to it; the nominal loss on their house and the increased price of the new house.

Assuming this is true, it would point out something which has confounded any neutral observer to property markets since the Stone Age. If house prices across the board rise by say 50%, this would be heralded as a success in the property industry. If you realise this gain by selling and moving out, you still have to live somewhere. Your new place would also have increased in price, forcing you to pay more. So, in terms of standards of living, you have got absolutely nowhere.

Any gain is offset by an increase in the price of the house you move to.

Obviously, house prices don't move identically across the board. This means there are opportunities to gain. But spruiking an increase in a nationwide price index doesn't equate to Aussies being better off. It equates to those Aussies who didn't own a home, but want to buy one, being worse off. That means it's even worse than a zero sum game.

So, the property spruikers will claim that it's all about picking the right locations. Well, if house prices in Melbourne rise by 50%, while house prices in the rest of Australia stay the same, would Melbournites be better off?

No, unless they wanted to move away from Melbourne...

Sovereign Debt

The 'Ouzo crisis' has entered a critical phase. The Greek people are having to make http://clicks.portphillippublishing.net//t/AQ/AAEhaQ/AAEnkQ/AAFqgQ/AQ/AgMlFg/1ru2" target="_blank">rule out a Greek bailout. She stated it in very Deutsche terms:

"There is absolutely no question of it. We have a (European) treaty under which there is no possibility of paying to bail out states in difficulty. Right now we can help Greece by stating clearly that it has to fulfil its duties."

Germany's history isn't great when it comes to treaties.

It would seem that the statements are just a game of terminology anyway. A German bank ( target="_blank">Die Welt put it unambiguously:

"The pressure is growing -- the chancellor knows that. She is still waiting for the right time to justify the billions (in aid) for Greece... But by then the situation in the financial markets could have spun out of control... The billion euro question is now therefore 'when will Merkel move?'"

Apparently investment banking giant JP Morgan considers California (the Vino crisis?) to be a bigger worry than Greece.

target="_blank">Sean Hyman at Moneynews, with his article titled "Don't Believe What You Hear: It's Not Getting Better".

"Now Fannie Mae says ... that it needs another $15 billion, bringing its total to more than $75 billion. This company is such "crap" that it's had 10 consecutive quarterly losses. Its latest quarterly loss was $16.3 billion. "AIG lost $8.87 billion in the fourth quarter.

"The FDIC has shut down more banks in Nevada and Washington. That makes 22 bank failures this year (and 140 banks last year and 25 the previous year)."

Then target="_blank">Washington Times reports the statistic that sums it all up:

"Moreover, for the first time since the Great Depression, Americans took more aid from the government than they paid in taxes."

That is worth reading twice.

If you are wondering what the Reserve Bank of Australia (RBA) is thinking as it continues its rate rises, check out their October 2009 minutes. It seems the RBA is reading up on Austrian economic theory. The target="_blank">comrades' rates overseas. The target="_blank">Daily Mail reports that the cancer stricken Lockerbie bomber is alive and well, having so far lived twice as long as predicted when he was released from a Scottish prison on compassionate grounds.

Yes, terrorist and compassionate grounds.

Anyway, upon hearing of the luxury and heroic status being enjoyed by the bomber, American blood began to boil. James Taranto of the http://clicks.portphillippublishing.net//t/AQ/AAEhaQ/AAEnkQ/AAFqjQ/AQ/AgMlFg/1YkB" target="_blank">further casualties on the global warming front, with a baby girl surviving a gunshot wound in her family's suicide. The wounded survivor lay among her dead family members for three days. Why did they have to die? The suicide note explained it was their fear of global warming.

Dr Mark Perry of the University of Michigan posted the following on in today's NY Times:

"It would be an enormous relief if the recent attacks on the science of global warming actually indicated that we do not face an unimaginable calamity."

Dr Perry has degrees from George Mason University, the only university in the world which offers a specialisation in Austrian economics (as far as I know).

Lastly, my apologies for providing a reference to an outdated

Have a great weekend.

Nickolai Hubble.
The Daily Reckoning Week in Review