Some, perhaps many, Australians accept the Federal Government's claim that we're living in an age of great economic prosperity. They believe they've never had it so good. It they want a new car or a house, they can have it. It's as easy as that.
The reality is that they've never had such unfettered access to borrowed money.
When we borrow something, it's easy to delude ourselves into thinking that it's ours. In our minds, the material wealth of the owner transfers to us. But it's our debt — and not our wealth — that has actually increased. Managed debt creates economic security and wealth. But debt out of control destroys our quality of life. It can lead to chronic depression and material poverty for ourselves and our families.
University of Western Sydney associate economics professor Steve Keen says the very least that we have to do is to stop borrowing faster than our income is growing.
'This isn't quite "hitting the brakes", but trying to ensure that the rear wheels of the Australian economy aren’t forever spinning faster than the front ones.'
Keane spells out the dynamic of debt accumulation in a paper published this week by the Centre for Policy Development, which is an offshoot of New Matilda magazine. The paper, which is titled Deeper in Debt: Australia's Addiction to Borrowed Money, details the likely economic consequences of the debt binge.
He says Australia's level of irresponsible lending isn't as high as that which brought on the US subprime crisis. However because our rate of increase in debt is so much higher, the impact of any slowdown will be more severe here — and the pain will be much more widely spread.
Vulnerable people are being exploited on many different levels. Higher-risk households have needed to rely upon non-traditional mortgage lenders. Such lenders have funded loans on the now unstable global capital markets.
Keane says the extent of household debt needs to be brought to light through a full public inquiry. He argues that lenders should be compelled to calculate loans based upon people's capacity to repay, not asset-price speculation. He points out that that house prices in Japan fell on average five per cent per annum for over a decade after its 'Bubble Economy' collapsed.
The lack of public housing and the shortage of rental accommodation are also factors encouraging people to take on loans they can't afford.
Despite the booms and busts in the business and the housing market, since 1964 the ratio of Australia's private debt to GDP has grown by 4.2 per cent every year, and is currently 156 per cent of GDP. Increased private debt is much more likely to diminsh rather than enhance our quality of life. During the coming election campaign, it's worth keeping an eye open for economic policies likely to put a brake on this unsustainable exponential growth in borrowings.