As you have heard in the news by now, Australia’s Prime Minister Kevin Rudd announced a AU$10 billion stimulus plan. This is partially reminiscent to the US stimulus plan sometime at the beginning of this year, when the US government sent free money to American taxpayers and called them tax rebates. Rudd’s plan includes money for families, retirees, homebuyers and jobs training and infrastructure projects.
Will all these work?
Before we answer this question, let us consider the relative scale of the problem. According to Professor Steve Keen, Australians’ increased debt last year added $250 billion in spending into the economy. Currently, Australia’s credit growth is decelerating very rapidly. Should credit growth stagnate (or worse still, contract), this $250 billion (or more) in spending will go up in smoke. Therefore, a $10 billion stimulus is actually very minuscule compared to the potential loss in spending by Australian consumers when they are stretched to their limit in taking in more debt. Since most of the Australian economy is made up of consumer spending, such a severe contraction will have a very acute repercussion for the Australian economy. Recent data suggests that Australia’s total private data to GDP ratio is standing still at 165%.
There is no way the government can take up the slack left by the Australian consumer without turning the budget surplus into a deficit that is ten times its size (i.e. turn $22 billion surplus into a $250 billion deficit). But to keep Australians spending as before, they will have to accrue even more debt. There’s no way this increase in debt relative to income can go on forever without turning the entire nation’s economy into a massive sub-prime economy. When that happens, the inevitable blow up in debt bubble will be far greater.
By now, you should appreciate the magnitude of what the government and RBA are fighting against when you consider the scale of the coming deflationary force.
Tags: credit growth, debt, economic stimulus, Kevin Rudd, RBA, Steve Keen
