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The problems ahead

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Read this and find out...

These points were well expressed last week by the general manager of the Bank for International Settlements, Jaime Caruana, as he launched the institution's annual report.

"The path to a self-sustaining recovery is narrow and fraught with risks. This is true regardless of short-term prospects, even if we take the 'green shoots' of recovery at face value.

"We need to facilitate the necessary adjustments in the financial system and the real economy, while cushioning the impact of those adjustments on growth and employment.

"And we need to ensure that the short-run responses to the crisis do not mortgage the future, paying close attention to sustainability and exit strategies."

Most international commentary has focused on the need to fix the banks, but Caruana said the deep-seated distortions in the financial sector and those in the real economy were "two sides of the same coin".

The finance sector had to shrink, as it had grown too large and accumulated assets of dubious quality.

In many countries, debt and leverage in both the financial and the non-financial sectors had to decline while household savings had to rise, he said.

Industries that depended on exports for their growth and those that relied upon leverage both had to find new production models.

"Economic adjustment is a precondition for a self-sustaining recovery," he said.
If you can't see the big deal, here're some numbers...

...growth in credit to business has collapsed from $143 billion in the year to March 2008, to just $15bn over the past 12 months.

...since last November, the total debt outstanding to business has fallen by $20bn

...in the March quarter, the total business call on funds was a paltry $3.7bn...Less capital has to be set aside for home lending than for business lending, so the corporate sector is copping the brunt of the credit tightening...the commercial property sector...the next focus of financial instability

...Lending to households has roughly halved from a peak level of $116bn in the year to January 2008 to $58bn in the last 12 months.

...The level of household debt is now 55 per cent greater than the level of business debt.

Australian households have larger mortgage debts relative to household income -- a ratio of 136.5 per cent -- than any other advanced economy except Britain.
** assuming there's not much change coming our way, and assuming most of the traditional sources of capital are drying up (which they are)... ask who is going to provide finance or buy up all those distraught comm properties? Have a guess.

Assuming Australia doesn't like to deal with the SWF (which tend to pay a higher premium with an investment focus) and turn her back to them, ask again what will happen to these properties? Sold at a dirt cheap price to some hedge funds from the traditional allies? And further see their next move of job culling and dismemberment of these properties with no regard to impact to the local economies?

... just wait and see.

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  1. haunting's Avatar
    A follow up on the economic front...

    ** just think this way, 2008 probably is the peak year of the commodity super cycle, one can relate that to climbing a mountain - after reaching the summit, there's only one way to go - down. The question remains is how much "down". If China is still the saviour to this lucky country and if she could still live up to her name, let's hope the downward decent would stop at one third, or to half way, giving Australia economy a good chance to "outperform" the rest of the Anglo Saxon economies in the next 20, or even 50 years.
  2. haunting's Avatar
    Private sector investment set to fall, expert says

    Access Economics' latest investment monitor says the value of projects underway or in planning in the June quarter was more than $230 billion.

    That is a rise of $6.9 billion on the previous quarter but a reduction of $12.2 billion over the past year.
    ** from memory, Morgan Stanley is expecting a 12% fall in capex this year, not sure if they have revised their numbers. In any case, there's a solution and it lies in the Chinese Sovereign Wealth Funds (SWF), which are currently being instructed to "go out", invest and prosper. That's a global move by the Chinese govt to "hedge" their exposure to the US$ and it's real money, that is, if you don't mind to receive some "useless" US$ from them. By today's rate, it's worth about AUD1.215...

    So again, it boils down to this very unpleasant thought for Australia - money, jobs, prosperity and a good life vs principles, ideology, loyalty and eating less... at some point every Australian will have to decide on this, in the next two elections I reckon.
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