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The pitfalls in talking up the economy

By Arthur Thomas - posted Friday, 12 December 2008


Lessons learned

The crisis has taught the financial sectors a very painful and belated lesson in reckless lending practices and poor credit assessment.

And housing? What impact will lower interest have when it is the cost of housing and capital repayments that are beyond reach?

For this to change, house prices will need to reflect a realistic relationship between earnings, affordability and a deposit that go hand in hand with affordable interest and repayments. Credit providers will be demanding adequate equity in case the payments stop should the homeowner suffer financial difficulties.

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The big infrastructure spend

This has been touted as crucial to Australia's future and a major employment creator.

But when looking closer, one may ask just how many from the unemployed finance, retail, hospitality, entertainment and car industries will find jobs here? Even if these projects are as big as proposed, will there be enough skilled and unskilled workers laid off from the mining sector downturn to fill the jobs. Will Australia once again look overseas for labour on 457 visas?

Just how big is the consumer spending base?

While the task of spending Australia out of recession lies squarely on the shoulders of Australia's 20.8 million total population Rudd appears to see the white knights as Australia's pensioners, carers and families splurging their $10.4 billion windfall.

The days of unlimited and easy credit and zero equity are gone and we now face the consequences. These years of "splurging" have produced increasing numbers of Australians being added to the credit risk lists resulting from defaults on credit card debt and purchase agreements for appliances, furniture, gadgetry, cars and personal possessions. With their creditworthiness destroyed, it is unlikely that these Australians will be joining the pensioners, carers and families in Rudd's Christmas splurge.

Home buyers, caught out first by rocketing mortgage interest payments and then plummeting house values, find their equity below asset value and face mounting debt. Similarly those who borrowed against the family home on rocketing valuations to invest in real estate, home improvements, family leisure items and the stock market, face the same harsh reality.

It is unlikely that a sizeable percentage of these two groups will readily participate in the Rudd urge to splurge.

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For them it is a Catch 22. Continue paying for a falling market asset in times of uncertainty and the prospect of looming unemployment, or surrender to repossession and become another credit risk list name.

The overall result appears to be a substantial decline in the consumers that Rudd has relied on to join in his "spending splurge".

There are clear signs of rising unemployment for the post Christmas retail trade as well as those already being laid off in the resource related industries. Rudd's spending pep talk is an insult to these Australians at a time when they have to unload and reduce debt in a market short on buyers and credit.

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About the Author

Arthur Thomas is retired. He has extensive experience in the old Soviet, the new Russia, China, Central Asia and South East Asia.

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All articles by Arthur Thomas

Creative Commons LicenseThis work is licensed under a Creative Commons License.

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