Predicting the future is tricky business, whether you have a crystal ball in front of you or a spreadsheet filled with numbers. But the way the Australian economy is speeding up has many of us worried, and we cast a wary eye to the future, to see if we can spot where and how the next financial crisis will hit us.
We live in a banker-controlled global economy. Just about every major country in the world has a Reserve Bank sitting at the top, regulating interest rates for borrowing and lending, and by extension wielding an iron fist over the value of money and assets. Australia is no different; with an overheating housing market and ever reducing rates of interest, Australian banks are teetering ever so slowly toward the precipice of recession, maybe even depression.
Fitch ratings director Andrea Jaehne confirmed this recently when asked – somewhat presumptuously – why the Australian banking system was so ‘safe and solid’. She responded without the normal esoteric bank-speak, and simply said, ‘I wouldn’t call it safe and solid.’
She went on to explain that it is the lack of competition between the four big banks in Australia that may allow them to mitigate their rising risks and maintain their AA- credit rating without going under. 79% of residential assets are held between the four banks, which is a significant market share no matter how you slice the pie.
In plain layman terms, what this means is that if the Australian banking system gets into some financial trouble, they can simple raise lending rates or slash deposit rates (or do both at the same time) to get a higher margin on their business. This will have obvious repercussions on the housing market, and plunge the overall economy into a depression.
When asked where the most risk lays, Jaehne said, quite rightly, that it is impossible to spot the snowflake that causes the avalanche. It is more important, rather, to acknowledge the fact that an avalanche is coming, sooner or later. However, she did say that the trigger may come from unemployment hitting an inflection point and causing undue stress to the economy.
The other big factor is policy itself, both monetary and political. The Reserve Bank may be forced to raise rates before they’re comfortable, and that may send a jolt of inflation into the economy when no one’s looking.
But the message is clear: while we can spend all the time in the world trying to guess at which precise factor will cause the next financial crisis, the most important thing to note is that it will probably be a black swan, which by its very nature is unpredictable. All we can do, therefore, is to manage our existing risk the best way we can.