Will the next recession in Australia be bigger than the Great Depression?

Discussion in 'Property Market Economics' started by Perthguy, 14th Nov, 2017.

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  1. Guest

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    The Australian (and global) economy and housing market have been built on a paradigm of increasing debt to GDP. We have been living on cloud nine for 60 years. What happens when the music stops?

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    As was mentioned earlier in the thread, the Australian economy (well, the headline growth rate) has been cushioned by the highest immigration levels in the developed world and supported by trading partners like China who've been blowing up their debt levels to those comparable in the west.

    What happens when this trend of increasing debt to GDP reverses?

    Could the above chart show a longer term 'cycle' that has been running longer than you have been alive (or investing) and hence not adequately prepared for (due to recency bias)?

    Do you believe we are literally in a new paradigm where high levels of debt can be maintained and will just eventually plateau? Even if that is the case, what will a plateau in the growth of debt to GDP mean for our economy given that it has been increasing for the past 60 years?

    What happens when Australians start getting sick of cramming hundreds of thousands more people into the country every year (arguably already happening, see rise of One Nation)?

    How well is our economy prepared to handle an external shock if China's economy goes through a bust?

    I've given up trying to time the events of the next major downturn (those who recall me as hobo-jo on Somersoft may remember I was 'resident bear' around 2010-2012 :p), but I still see Australia's economy (and households) as being vulnerable to a massive downturn. Bigger than the 1930s? Could easily be the case.
     
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  2. willair

    willair Well-Known Member Premium Member

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    You would have to have read what David Murray talks about-after all he was the C E O for CBA from early 1990 till around 2005 , with a "CG" of over 23% compounding year in year out if you reinvested all the div,s
    and I watched this Man speak..

    As far as the next great depression in Australia,the next big wave will be all the baby boomers as they shed all their consumerist tendencies and sell off their investment and travel..

    https://www.rba.gov.au/publications/rdp/1999/pdf/rdp1999-06.pdf
     
    Last edited: 15th Nov, 2017
  3. MTR

    MTR Well-Known Member

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    Here we go again, 10 reasons why Economists always get it WRONG
    Dan Erwin


    "Ten Reasons Why Economists Always Get It Wrong."

    extract

    Forecasting doesn't work and never did. Like weather forecasts, which are based on physical parameters (not pschological--like economics), it's always a hit or miss affair.

    You can't predict a turning point. It's the old issue of will this turn into a horrible recession, or merely a blip on the radar for the next 15 months?

    Economic models assume that economies are stable. Data, such as bond ratings and debt structures, are never stable.

    Economists tend to focus on specific, accepted parameters and ratios. As a result they fail to see warning signs unless they hit them over the head.

    Economists are afraid to break rank with the consensus. If they're wrong, it's career suicide. Since no one dares to say otherwise, the consensus grows stronger and becomes even harder to buck. In other words, economists are human, and they err.

    Forecasts, of themselves, affect the economy. The forecast becomes part of the "given," and influences human behavior--for good or ill.

    Forecasts influence politicians. A politican approaching an election will treat a forecast differently than after he/she's elected.

    People look for shortcuts, but there aren't any. Robert Shiller said the market failures of the recession were foretold in the economic literature, but nobody looked at the data. Just the bottom line. The devil is in the details but if you don't read the details, you'll get caught up.

    Economists believe their own stories. "This time it's different, or our case is different." It never is. They thought, for example, that securitizing debt would change the world and that economics would start acting differently. But it didn't, and the world exploded.

    When the economy is roaring and soaring, control mechanisms collapse. We make our biggest mistakes when the future looks very, very sunny.
     
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  4. Guest

    Guest Guest

    There are always some economists who are bearish, always some who are bullish, how do we know which group will be wrong? :p

    Good points. The world will 'explode' again. How ready is our economy to handle these events given we are already at record low rates?
     
  5. wilbell5

    wilbell5 New Member

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    Our next recession will be tiny, right now the share market on the improve but there is no income growth. I'm assuming business are holding their cash right now and still are not confident enough to further invest or pay their debts down faster. I think it will be a small recession because all of this planned infrastructure spending will flow into the economy and actually increase wages. Increased wages means people reduce their debt and can then spend more and can actually afford more debt and the cycle continues.

    My best guess is that the powers that be will step in too early into the recession and open the flood gates to the banks to lend more money to stimulate the economy. I actually think we will have another massive boom once our little recession hits. Just my opinion.
     
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  6. Perthguy

    Perthguy Well-Known Member

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    I did read what he said. "a crisis on the scale of the 1890s great property collapse could not be ruled out". I agree. It can't be ruled out. That Australia will not experience a recession cannot be ruled out. That Australia will experience a recession but not a depression cannot be ruled out.
     
  7. Big Will

    Big Will Well-Known Member

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    80% of ecomists say there is no recision in the next 2 years or four out of five.

    Different way of looking at things.

    Will it happen who knows I am more scared of the USA and their debt levels being nearly 21 trillion which is only affordable due to low interest rates if rates rise how will they go?

    Their gross debt to gdp is over 105%

    U.S. National Debt Clock : Real Time
     
  8. Scott No Mates

    Scott No Mates Well-Known Member

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    The presentation from @Gockie's Chief economist John Peters didn't signal any risk of a depression, recession, sunburn or gravel rash.

    Yes we are intimately linked to the Chinese economy but it's still growing at around 6% pa, both Indonesia & India are becoming more important for our export markets.
     
  9. Perthguy

    Perthguy Well-Known Member

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    This business that Australia is facing a depression more severe than the Great Depression is based on superficial analysis.

    "Private Debt to GDP in 1930's was 45%

    Its now 125%"

    Yeah, good, but that doesn't mean we are headed for depression.

    I am not doing a full analysis because it is a waste of time but the short version is this: the great depression was preceded by a period of ridiculous economic growth.

    "For many countries (though with some notable exceptions like the UK and Germany), the 1920s was a decade of rapid growth and rising prosperity. Asset markets had been booming fuelled by easy credit. US stock prices more than tripled in the five years leading up to October 1929. There had been rapid financial innovation and increased leverage by both financial institutions and households. They were not called the roaring twenties for nothing. The similarities with the lead–up to the current global recession are clear enough."
    https://static.treasury.gov.au/uploads/sites/1/2017/06/03_Colin_Clark_speech.pdf

    Or pretty much this:

    "Both crashes were preceded by periods of strong growth in stock prices."

    Australia has not seen strong growth in stock prices for a long time. There was some strong growth up to 2008 but that was 9 years ago.

    So, the superficial analysis picks one factor and predicts the outcome based on that. We haven't had strong growth in stock prices therefore we won't have a depression. Stupid, but it makes as much sense as the OPs suggestion that we will have a greater depression because Private Debt to GDP is 125%.

    If anyone could be bothered doing an actual analysis, the economic factors to consider are:

    terms of trade

    exchange rate

    balance of payments

    Monetary and fiscal policy

    private debt to gdp

    private savings to gdp

    growth of house prices Australia wide

    growth of share prices Australia wide

    But even then, someone looking for a depression will not find what they are looking for.

    "At the time of the Great Depression, Australia’s macroeconomic policy frameworks were tragically ill equipped to cope with anything other than small, inconsequential macroeconomic or financial market shocks. Faced with a shock the size of the Great Depression, they were simply overwhelmed.

    The lessons learnt from that disastrous experience have informed the macroeconomic policy frameworks of today."

    https://static.treasury.gov.au/uploads/sites/1/2017/06/03_Colin_Clark_speech.pdf
     
  10. mcarthur

    mcarthur Well-Known Member

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    I don't understand the article really, at least from the stature of Murray. There's lots of "here's why the indicators don't look good", but I'm missing the "what should we do" take home, except for the "implement the FSI’s recommendation to ban superannuation funds from borrowing". Is the risk from SMSF's borrowing really at a level to make the difference between 1890's and everything-will-be-ok? :confused: Or is it that Murray doesn't have any answer (given the guv has already implemented the rest of his recommendations)?
     
  11. PandS

    PandS Well-Known Member

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    having too much debt always lead to some sort of pain down the road, personal, corporate or government, when will that pain arrive no one knows.

    rather than predicting and waiting for boom and bust you better off being conservative and carry on and make sure if you are unemployed for a year or two you can meet all your obligation
    you have enough cash reserve to meet all your outgoing in downturn etc....
     
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  12. Trainee

    Trainee Well-Known Member

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    Great for established investors. Think like that for a newbie and youd never start.
     
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  13. Perthguy

    Perthguy Well-Known Member

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    Sensible advice.

    Yes/no. For people starting out it's more about risk assessment and timing the risks. For example, someone starting out now, with no buffer, probably would not want to go "all in" on Sydney at this point in the cycle. Different story if they are looking at Perth, for example.
     
  14. trendsta

    trendsta Well-Known Member

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    For all the bears, with their PHDs in bear-o-nomics, and certainty of the next depression..

    Rather than just talking about it , why aren't you guys taking the opportunity to make millions from it, be financially free and happy.... If you are saying the downturn will be severe and long, why wait for the rise many many years away... make money from the fall....

    Forget about property: take all your assets, use the proceeds to short the markets, buy put options / CFDs, gold, bitcoins whatever you see value.. Please let us know what you decide to invest in so we can track it for you...

    Personally if I had such conviction and surety, that's what I would be doing.. I wouldn't be wasting my time on a property forum ... I would be on trading forums learning best strategies to take advantage of the falls...
     
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  15. ollidrac nosaj

    ollidrac nosaj Well-Known Member

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    I have made this point many times, and it has been countered by many who believe the 1.5 ocr still has capacity to serve as a buffer!:rolleyes:

    This was the original catalyst for the GFC. To increase lending within weak economic fundamentals, might create another boom. But with the capicity for an even bigger bust.
     
    Last edited by a moderator: 10th Oct, 2021
  16. ollidrac nosaj

    ollidrac nosaj Well-Known Member

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    Sure, while i am not taking short positions, i am underweight domestic to international in my current equity portfolio.

    30% QOZ
    30% HEUR
    30% ETHI
    10% PMGOLD
     
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  17. trendsta

    trendsta Well-Known Member

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    Good on you mate. We may not share views, which is fine, but you are backing your research and convictions with action and having a go at it... All the best !


     
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  18. ollidrac nosaj

    ollidrac nosaj Well-Known Member

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  19. Silverson

    Silverson Well-Known Member

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    A nation of asset rich cash poor people.... Time for the old growth vs cashflow debate again haha!
     
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