Steve Keen is a well-known Australian-born, British-based economist that has been forecasting an Australian house price crash for at least the last 8 or 9 years. He famously lost a wager with Macquarie’s Rory Robertson and had to walk from Canberra to Mt Kosciuszko when house prices failed to fall 40% (in fact they have risen strongly). Nonetheless, Mr Keen has authored an article in Forbes magazine this week saying that Australia is the second most vulnerable country to a debt crisis in the next 3 years. His list of seven (in order) are: China, Australia, Sweden, Hong Kong, Korea Canada and Norway. In fact, he says in his debt blog, Australia will be in recession – probably by 2017.
Mr Keen’s Forbes article goes into good deal of detail using data from the Bank of International Settlements but in essence Mr Keen looks at the situation when the rate of private sector credit is large and growing quickly compared to GDP. Mr Keen says private sector credit growth feeds into aggregate demand and, when it falls, Australia will head into its first recession in more than 25 years.
“When the growth of credit falls – as it eventually must…growing debt servicing exhausts the funds available to finance it, new borrowers baulk at entry costs to house purchases, and numerous euphoric and Ponzi-based debt-financed schemes fail”. This causes a fall in credit “thus reducing demand rather than adding to it”. In his opinion, the fall in US credit growth was the cause of the GFC and a similar fall in Australian credit growth will be the trigger for an Australian recession by 2017.