What is it about English-speaking countries that they
make a virtue of going into debt? Recent statistics from the United
States, Britain, Australia and New Zealand show alarming rises in
borrowing from foreigners to finance consumption. How much longer
will it be before some financial grim reaper comes to reminds them
of Benjamin Franklin's advice: "Rather go to bed supperless than
rise in debt".
The current U.S.
deficit, $800 billion or 6.5 percent of gross domestic product,
attracts some attention if only to enable Pollyanna economists to
emphasize its irrelevance and look forward to another year of fast
(debt-driven) GDP growth. Britain's external deficit has also
ballooned and could well hit 4 percent of GDP, or $85 billion, this
year. Most Britons have yet to wake up to the fact that they are now
energy importers; meanwhile they are doing almost nothing about
nuclear or renewable alternatives.
But perhaps the most
remarkable examples of Anglo-Saxon profligacy are to be found south
of the Equator. New Zealand's current account deficit is now running
at 8 percent of GDP. A small country's problems are unlikely to
shake financial markets, whatever the debt may do for future
generations. But Australia, which has net foreign obligations of
$400 billion, is another matter. It just reported another ballooning
trade deficit that shocked even normally complacent local
commentators. Its current deficit for 2005 will likely come in only
a fraction under 6 percent of GDP. That is an astonishing figure for
a year that has seen huge rises in the prices of most of its major
mineral exports - coal, iron ore, natural gas, copper and gold.
Australia has been
receiving huge amounts of foreign money on the back of its mineral
and land resources and the assumptions about Chinese demand. It is
has relatively attractive interest rates - yields of 1 percent or so
above U.S. rates. But where is all this leading the Lucky Country?
Australia boasts of
having almost the highest growth rate among developed countries.
Some of that has been thanks to a more competitive business
environment. But the most important ingredient has seldom been
noticed. Over the past 12 years, Australia's terms of trade (the
difference between import and export prices) has improved by an
extraordinary 38 percent. Some of that was the impact of lower
import prices in the wake of the 1997-98 Asian currency devaluations
and the rise of low-cost Chinese production. For the past two years
however, when the index has gained 23 percent, the cause has been
the boom in mineral prices.
The terms-of-trade boost
has coincided with very low global interest rates. The result has
been that domestic demand in Australia, backed by high real estate
prices that peaked two years ago but then hit a plateau rather than
a bust, has been growing steadily. Import demand has grown even
faster, helped by an Australian dollar that is now 50 percent higher
against the U.S. dollar compared with its 2002 nadir because of its
perception as a "commodity currency."
Australia's ability to
continue on this path depends on two factors: stabilization of the
terms of trade at this exalted level, and continuation of high
international liquidity and low real interest rates. Commodity
exports look well enough underpinned for now by the supply/demand
equation after years of low investment. But the import side of the
terms of trade could be in for some rude shocks if the Asian
countries that supply most of Australia's manufactured imports allow
the major revaluations that the United States is urging on China and
others. A 20 percent gain by yen, won and yuan would hurt Australia.
Although most of
Australia's net foreign debt is denominated in or hedged into its
own currency, it is still vulnerable to rises in international rates
that would further increase its current account deficit. Rises in
local interest rates to choke off imported inflation or support
flows into the currency could easily push the real estate market
into the dive needed to bring house prices - especially in Sydney -
back to their long-term trend line. The alternative? A collapse of
the currency, at least against Asian ones.
This may seem an
altogether too gloomy picture for an economy that has better
demographics than most of the OECD countries, plus investment and
environmental attractions for cash-rich Asian neighbors. Nor does
Australia have an American- or British-style fiscal deficit to worry
about. Nonetheless, Australia seems to have as severe a case as any
of the Anglo-Saxon debt disease - and, given its terms-of-trade
gains, even less excuse.