HAVEN’T the yanks got themselves in a pickle?
The most succinct summary I’ve heard of their debt crisis is from US financial guru and talkback radio host Dave Ramsey, who used comparative numbers to parody what it would be like if Barack Obama rang his show looking for some financial advice:
Ramsey: “You’re broke.”
Obama: “Uh-huh. Look there’s been a fair bit of fighting around the White House on this issue but we are making progress. We’re thinking about making some ‘big cuts’ to bring our annual spend down to $72,000.”
Ramsey: “But you earn $58,000, stupid.”
While all the talk this week has centered on raising the debt ceiling, the real issue is the debt, and in particular the out-of-control spending that has caused it.
Both sides of politics in the US have consistently spent more than they earned, although lately they’ve been giving it an extra nudge: there’s the cost of running the empire, about a trillion dollars spent fighting a couple of expensive wars, and another trillion or so bailing out the bankers on Wall Street – not to mention the cash spent reinflating the sagging economy.
But, as anyone who’s been caught playing credit card roulette will attest, the real killer is the interest costs you’re slugged; if you don’t have the dough, they just keep compounding till they cripple you.
So that’s the situation America is in right now: broke, old (as a population – they’re getting older, retiring in droves, and likely to be even more of a drain on social security healthcare services they can’t afford now), and looking to borrow its way out of trouble.
Obama wants slight spending cuts and higher taxes. His opponents want radical spending cuts and no tax hikes. Neither will fix the problem – and if the Government cuts too hard, the American economy will fall back into a deep recession.
We've got the fastest growing wealth letter in the country (find out why, here)
So what does it mean for you?
Well, it means lower growth from your investments while the US and Europe try to dig themselves out of debt. And, just like our own attempt at escaping the cult of credit, it’ll likely take many years.
Here’s you: “China.”
Here’s me: “I hear you. But China has its own problems at the moment (a rampant property boom, food inflation), and they’re still being affected by the decline in orders from their major trading partners.
In contrast to the US and Europe, our public finances are in good shape (as they should be from the benefits of a once-in-a-lifetime boom). It’s the households who are in hock in our economy – and thankfully, unlike the US government, we’re reducing our spending and sorting our situation.
Don’t worry, be happy
Our biggest and most influential banker, RBA Chairman Glenn Stevens, reckons that our sudden bout of financial frugality will pass and that we’ll soon be back to spending like it’s 2003.
While I’d never write off our love of shopping, my direct experience in the trenches tells me there are three factors that are missing from Glenn Stevens’ analysis:
1) We’re becoming bill busters
When it comes to reading the mood of the masses, the nightly current affairs shows have it sorted. And I’ve done more money makeovers on telly in the last six months than I have in the last six years.
This week a Nielsen worldwide consumer confidence poll found that almost one in five Aussies has no spare money after paying for essentials. And for the first time since 2009, the survey found we’re focused on reducing every aspect of household spending – electricity, gas, phone, entertainment, alcohol, new clothes. Hell, we’re even switching to home-brand groceries.
There’s a reason for this. As the inflation figures showed this week, the costs of everyday items like food and fuel are rising, while the one thing that made us feel and act rich – the family home – has now fallen in value for the past six months.
2) We’re shopping online
I’m one of those dudes you see out the front of a shop holding the bags, waiting for my girlfriend to finish ‘browsing’. Yet even I’ve been lured into shopping online – but only from overseas websites that offer huge discounts to what’s on offer in the shops (and I say that as a proud shopkeeper’s son).
This week a report from PricewaterhouseCoopers found that half our purchases online this year – some $6 billion – have been with overseas retailers, and it’s growing, spurred on by the Aussie dollar at $US1.09 and heading higher.
There are 1.2 million people employed in the retail sector, and the ripple effect of the retail downturn means millions more are being affected by the migration from bricks to clicks, and that’s denting our confidence. Not everyone watches the news, but everyone talks to their mates.
3) We’re getting nervous
A few weeks ago three older ladies, presumably in their 60s, bailed me up after a speech I’d given. All were still working. None had a choice – they didn’t have enough in superannuation.
My explanation of the miracle of compound interest didn’t wash with these ladies. They were at the end of their working lives and were scared about losing their money again. The Global Financial Crisis was seared into their memory, because they’d seen their life savings cut in half.
Their belief in the system has been shattered. They have little faith that our politicians have a handle on the situation, and it’s little wonder: the party leaders are too busy scoring cheap political points and favouring spin over substance.
“I now listen to that Barnaby Joyce”, said one of the ladies. “He said the US was going broke, and everybody said he was an idiot. But he was right.”
She had a point. Then again, it struck me that we really are in uncharted territory when Barnaby Joyce starts to make sense.
Tread Your Own Path!