Why the US is to Blame

Here is the statistic that tells it all. Over the weekend Bloomberg reported that the US's debt of $13 trillion will shortly overtake its annual GDP.

Any country with a debt to GDP ratio of 40, let alone 50 or 60 is generally considered a third world basket-case. The US is bad, and the Europeans even worse. Of course both have had to bail out their banks so when market conditions are right, and when that will be is most uncertain, they can sell the banks back onto the market and collect some of the money back.
In Australia many of us have justifiably become concerned with the spending of the Government, although its Budget forecast this year suggests sovereign debt will peak at $93 billion in the coming two years before disappearing altogether around 2017.
When compared with an annual economy of $1.3 trillion, our debt looks miniscule, manageable and wholly more desirable than most other parts of the world. But the global debt will, and is already causing us challenges.
Even now it is obvious that banks' cost of funding is rising quickly and it puts more pressure on them to raise interest rates for mortgages and business loans. But when it comes to mortgages they are kind of stuck.
Though Kevin Rudd's approval ratings have plummeted in recent weeks, it would be a brave banker to raise mortgage rates outside of a Reserve Bank increase this side of the election.
To do so would not only incur the wrath of the Government now, but after the election the whole industry might expect some punitive action given the benefits the Government bestowed on the industry during the global financial crisis. Yet, privately, the banks' senior executives know that the pressures are building, and something must give.
However the Reserve Bank might not provide the pressure point shortly. Though we know Glenn Stephens and the Reserve Bank board are not shy of raising interest rates during an election campaign (they did it to John Howard in the last election) it is obvious that the preferred position is to stop and watch the economy for the coming months, rather than continuing to raise rates.
So the pressures are building - you can tell from the quite astonishing deals on offer with Term Deposits right now. Some banks are offering higher interest on deposits than they are collecting on home loans. It is most unusual, but shows the desperation of some to avoid funding massive tranches of debt in the offshore markets.
The point for Australia as a whole is that the advantageous debt position should be placed into context. While the Federal Government has a relatively small amount of debt (and one it should actively seek to control) many households have significant debts (many times their personal GDP) which makes them (and therefore the economy) highly susceptible to rate movements.
And you can see it. Retail sales have been stagnant - with only the offer of bargains enticing the credit cards out of peoples' wallets, credit card use is down and debit card use is going through to roof (you don't have to be a pointy-headed economist to work that one out). In other words people already know the dangers of higher rates, no matter what the Reserve Bank says it might or will do.
After all Glenn Stephens is the Governor who said that rates would rise gradually - and then slammed them up six times in eight months.

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