Debt crisis looms

Published in the Sunday Times, February 2007 by Dale Gillham

New RBA figures show that Australia is fast becoming a nation of debt. 

But is this a good thing?

If you are an investor, then creating positive debt is good because it has the potential to increase your asset base at a marginal cost - if your assets rise by more than the costs, you win.

Unfortunately, most Australians are creating what is known as negative debt, which means they are borrowing money to maintain their lifestyle rather than to increase their net wealth. 

The RBA figures show the ratio of debt to annual income is about 160 per cent, which reportedly is 50 per cent higher than five years ago.

What this indicates is that many Australians are beginning to experience a cash-flow squeeze where they do not have enough money to service their debts. 

The end result will be voluntary or forced liquidation of assets, which will see the property and share markets fall away.

How long before this happens is anyone's guess, but given that analysts are predicting the ratio of debt to income to increase, it may happen sooner rather than later.

To the market, as expected, shares rose strongly this week, making new all-time highs, with the market breaking 6000 points for the first time.

I have been expecting the market to find resistance around mid-February and to fall away. 

I still believe this will occur and given that today is February 18, it is highly likely that this will happen very soon, with the market likely to fall for one to two weeks into what I believe will be a minor correction in the present bull market.

Following this, I believe the market will return to being bullish and rise up making new all-time highs into April or May, which I suspect will be the yearly high for 2007.

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