November 19, 2012
I am sitting in a small cafe watching an ancient, wizened former AnzacÂ soldier placing a flower in remembrance of his fallen comrades at theÂ cenotaph in Martin Place in central Sydney. The man must be 90 atÂ least, but he is standing erect, two bright medals on his chest. WhoÂ is he remembering, or what horrors is he hiding?
The monument full of poppies marks the thousands of Anzac soldiers whoÂ died in the two world wars. The Australian casualties in the FirstÂ World War are truly shocking. Some 38 per cent of all men between theÂ ages of 18 and 44 enlisted. More than 400,000 left for war and 58,000Â died. In a dreadful twist of fate, accounts from Turkish snipers inÂ Gallipoli attest to the fact that the Anzacs made easier targets thanÂ the average British and Irish soldiers because the milk-fed, ruralÂ Anzac soldiers were physically much bigger than the much smaller, lessÂ well nourished British soldiers. Twenty-five years later, 39,000Â Aussie soldiers died in the Second World War. This man was one of theÂ survivors.
As he stands alone, hundreds of Sydney commuters rush by, consumed byÂ their own cares, as he is by his. The ancient veteran then leansÂ against the monument, lost in his own thoughts. The Australia heÂ fought for was a very different country from today’s Australia. BackÂ then, it was a largely British – and Irish – country. Today, Sydney isÂ a city which hosts – according to its lord mayor, with whom I shared aÂ panel last Tuesday – people who speak 200 different languages. It isÂ clearly an immigrant melting pot, and the initial Italian, Croatian,Â Serbian and Greek immigrants of the 1950s have been superseded by hugeÂ Asian migration in the past 20 years, underscoring yet again thatÂ Australia is part of the Asian world now. Over the years, the IrishÂ have kept coming too. Some years, it has been only a trickle, andÂ other years, like now, it is a deluge.
This multicultural Australia is again home to thousands of young IrishÂ people and, last Monday night at a packed convention centre, I spokeÂ to 400 of them. The event was organised by an Irish business network -Â the Lansdowne Club – which has seen its membership swell in the pastÂ three or four years.
One of the most telling parts of the discussion was when the moderatorÂ asked how many in the room were paying off mortgages in Ireland. MoreÂ than 100 hands went up. This is an extraordinary state of affairs.Â Here we have people who have travelled to the other end of the worldÂ to find work and are still lumbered with ridiculous mortgages thatÂ they are still servicing. It attests to the fact that the moral hazardÂ argument regarding debt deals is pathetically weak, as this showsÂ people who have already left the country and are still maintainingÂ their payments. Some went so far as to say that they were in AustraliaÂ in order to be able to meet their payments at home. If anythingÂ reveals the craziness of punishing people for making the mistake ofÂ succumbing to the incessant financial propaganda spewed out by the
banks from 2000 on, surely it is this.
The conversation moved on to the issue of Australian property. TheÂ Aussie property market has been defying gravity for years now. InÂ fact, you could have come to Australia at any stage over the past fiveÂ years and be reasonably confident that the market was madlyÂ overheated, set for a collapse – and yet it hasn’t done so. But everyÂ person I spoke to, particularly the Irish ones, seemed to think aÂ monumental crash is only months away.
We know that a property boom is never caused by supply and demand.Â Property booms and property bubbles are always and everywhere causedÂ by too much credit, and we all know that the ugly handmaiden of creditÂ in good times is called debt in bad times. Credit sounds good, debtÂ doesn’t – but they are one and the same thing and, when a marketÂ reverses, credit morphs into debt instantaneously.
So why has Australia avoided a bust so far, particularly when theÂ Aussie banks are so exposed? If you doubt this, consider this fact: atÂ today’s share prices, the Australian banking system is valued at moreÂ than the entire banking system of the eurozone. Australia has aÂ population of 22 million, compared to the eurozone’s population of 317Â million. You might say ‘go figure’, but the crash hasn’t happened.Â Why?
Maybe one of the reasons is that the Aussies have that rare luxury ofÂ being one of that relatively small number of benighted countries – weÂ also could have been one – to which the financial markets are preparedÂ to lend in its own currency, which is floating. This means that, ifÂ the country has a wobble, the exchange rate falls dramatically, whichÂ cushions the blow and allows the country to recover without anÂ over-dramatic collapse in local asset prices.
But the mechanism whereby a country with its own exchange rateÂ overheats is not too different from one which does not have its ownÂ exchange rate, like Ireland. In Australia, the boom causes the currentÂ account to plunge into deficit, because Australian banks are borrowingÂ abroad to lend into the overheating local markets. The locals wantÂ Aussie dollars so that the banks have to convert their borrowed USÂ dollars into Aussie dollars, because you can only buy Aussie propertyÂ with Aussie dollars. This causes the Aussie dollar to riseÂ dramatically against the US dollar – as has been the case in the pastÂ few years.
In order to cool down the economy, the central bank raises interestÂ rates, but this just attracts more money in, as the spread betweenÂ Australian interest rates and US rates widens and the currencyÂ appreciates more. Gradually as this goes on, exports become moreÂ difficult and imports become cheaper, driving the trade deficitÂ upwards. Also, as happened in Ireland, all this effervescence in theÂ local economy makes investing in the local economy much moreÂ attractive than the hassle of competing on the international market.Â As for productivity, it begins to fall, as more and more cash andÂ immigrants are sucked into the country to be deployed in the boomingÂ local economy.
As prices go ever higher, certain investors begin to take profits -Â and then prices fall. Then leveraged investors, who got into the boomÂ late, panic and try to sell, leading to a flood of properties. This inÂ Australia will be coincident with the currency falling. The fall inÂ the currency will offset some of the falls in property, but not all.Â This is what is on the cards for Australia. As to when exactly, it’sÂ impossible to tell, but it will happen – for sure mate.
The old Anzac shuffled off after a while, locked into his own world. IÂ turned to last Wednesday’s Sydney Morning Herald. The main paper wasÂ 20 pages long. The business and sport supplement was another 20 pagesÂ but – wait for it – the property supplement last Wednesday was aÂ whopping 136 pages of wall-to-wall, unashamed, top-shelf, property
porn.Â Now where have we all seen that before, and what did it signal?
David McWilliams new book, The Good Room, is out now