Will the next financial crisis be as bad as the last one?

Will the next financial crisis be as bad as the last one - Google Search

As such, it's significant that in the past decade, global household leverage has decreased: to 59 per cent in 2018, from 65 per cent in 2008. American household debt-to-GDP fell 20 percentage points to 77 per cent.

But a source of comfort for global financial stability does not extend to Australia. Here we have government debt-to-GDP at 40 per cent, easily the lowest among advanced economies. Leverage among non-financial companies, at 74 per cent, is about average of our sovereign peers.

Instead, we are a world-beater in possibly the worst kind of debt: household borrowing squats at 121 per cent of GDP as at June 2018, up from 109 per cent in 2008, the S&P numbers show. The closest comparison is Canada (100 per cent), Korea (96 per cent) and Britain (86 per cent).

We all know that our credit binge has fuelled massive house price inflation, which has only recently begun to roll over. How consumer spending and confidence will respond to what looks like the end of the property boom remains an open question, as is the potential effect on economic activity.

The next debt crisis may not be as bad as 2008 for the world, but it might be much worse here.

 

We sailed through the last one , thanks to China.
I dont think we will be so lucky with the next one.
Some countries got hit really hard after 2008 , One thing they had in common was overpriced real estate and slack lending practices.
The main driver was speculators that drove up the market , untill they all walked away and prices then started to come down.
In cases like Ireland the soft landing turned into a hard thud when world events took a turn for the worse

 

Side question - since offset accounts are somewhat unique to us. Are they factored in to household debt and if not would they impact the figures.

As a guy who at points has had 500k + debt and 500k offset.

Anyone know this?

 

The 500k debt is counted in household debt.

The 500k offset is counted in Net household debt.

 

I think it will be okay, we've learnt a lesson from the GFC end learnt to deploy unconventional tools to keep the money flowing and going round and round, thanks to that "QE" beauty.

GFC happened because we allowed the money to stop from moving around (hello Lehman).

 

Cool. Thanks.

Which numbers are being used above?

Or further - how big is our gap between gross and net debt?

Do offset accounts actually impact the number?

 

The article uses gross debt, which is misleading because it doesn't account for household savings.

"Instead, we are a world-beater in possibly the worst kind of debt: household borrowing squats at 121 per cent of GDP as at June 2018, up from 109 per cent in 2008, the S&P numbers show."

The problem is that net debt is also misleading because of how savings are distributed. There is a wide gap between gross household debt and net household debt


And actually, net household debt is slightly lower than around 10 years ago, while gross debt has continued to increase.

The problem is how household savings are distributed (unevenly). This article explains it better than I can.

Australia's record household debt is a ticking time bomb - MacroBusiness

 

A recession is an opportunity. It’s is an excellent way to grow wealth for those who were prepared. The problem? It is unlikely that anyone would know for certain when it happens.

 

One area that many learnt some harsh lessons after the GFC was not to borrow large amounts of money and invest it in the sharemarket.
Over time that will be forgotten as well.
A few other things have changed for the worse.
The government was rolling in billions of dollars of money from the mining boom, those days are long gone.
But most importantly it was the ability to drop interest rates very quickly, and by large amounts.
We have already had the big movements in interest rate movements, with very little left in the tank, and for very little success.
Unfortunately, due to very generous tax concessions the money was spent on loss making assets that rely on capital growth.

 

Hi Guys,

I basically agree with the sentiment above, but just a few things:

1) Any measure that talks about "household" wealth, or "household" debt is meaningless. Househouse sizes change over time: some households are one person, and other households are 8 people. Our households are shrinking, so all "per household" measures look inflated. The only measure that counts is "per capita".

2) Yes, it is similar to the GFC, where artificially low interest rates lead to excessive consumption of debt. The problem of excessive debt was solved with even lower interest rates and more debt. If you believe that central banks will solve the next problem in the same way that they did last time (massive re-liquification), then you want to rush towards the safety of physical assets, including real estate.

Cheers,
John

 

cash rate was above 7% back then, hard to see how they can solve the problem the same way when we are at 1.5%

 

Interesting point. They historically reduce rates by between 3%-5% when there is a recession. So it is hard to know where they go from here if things get bad. QE?

 

Maybe QE. Is it viable for an economy of our size? I have no idea.

Rates can go negative I suppose but that seems unlikely?

Stamp duty or other tax concessions perhaps?

If things get very bad, I imagine anything that can be done to loosen credit, will be done. That seems to be the cause. Though, it's sort of like drinking more to get rid of hangover at this point.

 

Quote..
The next debt crisis may not be as bad as 2008 for the world, but it might be much worse here.

Just look at it in very simple terms,and if you study the volume of posts by certain people within this site that don't invest in property they invest outside property ,and any investor knows full well like the weather the market cycle changes like the weather and it's foolish to believe that any market go up forever ..

From my experience market crashes and the lead up as we have seen within Australia ,add a change of investment rules and a new Government are followed by a market crash ,the exact date is any ones guess
as it will come back to one simple rule ,how you manage information and from who..

 

Gold and Silver m8...

 

IMO we have a lot of resources and resilience to a worldwide type financial crisis:

- our counterparty risk is a little lower given much of our financial system is concentrated in large banks that focus on resi mortgages. Ie it’s harder to have a worldwide debt crisis spread to Australia than in some other more connected financial centres given the type of exposure our institutions have.

- balance sheets of said institutions are unquestionably strong. Multiple FSAPs (IMF), APRA yearly stress testing indicates this. We’ve built larger capital buffers and improved liquidity measures over the past decade too.

- the fed government has a lot of stimulus power and typically shown a no nonsense ‘act quick’ approach to serious danger (multiple stimulus packages last time around very quickly). States are not dissimilar.

- monetary policy can be loosened much further if required. The stimulatory impact of rates being moved to 2.XX (what a stimulus would do) is huge. All rate sensitive sectors would pick up significantly and drive activity.

- can run the population tap faster too and tailor it too

I assume if there’s a massive China debt crisis though, we’re in trouble as we’re far more exposed to it than we probably fully understand. Household debt issues are probably likely to be triggered by local issues (we’re seeing downsides of this now and a greater sensitivity to value/wealth changes IMO) rather than worldwide and impact Aus more specifically than the rest of world.

 

This is why I think the next crisis will potentially be worse as there is less stimulus available.

I think the world recovered very quickly from the GFC. Look at the US as an example, the Dow Jones was at the pre-GFC peak 5 years after the fact and have well surpassed it now. Interestingly the ASX is back at the pre-peak level yet.

 

Was stimulus good for the Australian economy? Have a look at the performance of the Australian economy after our last recession. Have a look at the performance of the Australian economy after the GFC.

Besides a housing boom in Sydney and Melbourne, the Australian economy overall has been sluggish since the GFC. It's not performing well.

 

IMO Not a question of if but when its going to happen. Japan 2.0 coming soon if they dont sort out the trade war.

 

It's true. That is why they haven't been able to bring rates back up.

It was an extraordinary feat to somewhat dodge the brunt of the GFC. But in someways we have been on life support since. With China and the US both late cycle and duking it out and most of our powder spent, it seems like we are pretty exposed to an external shock this time around.

Who knows though, as @Redom stated, our gov has a history of swift action when **** hits the economic fan.