Something Feels Wrong

Something isn’t right economically in the world.  I won’t win a Nobel Prize for Economics for that assertion, but I just read things that are meant to be optimistic or upbeat and I find the dark cloud outside the silver lining.  A recent article in the Globe and Mail talks about how Canadians won’t suffer the same level of foreclosures as the US if the housing market cools because Canada’s banking system is less risky.  Also, Canadians carry less personal debt, although that seemed to be debatable.  This article was highlighting that the Canadian economy can withstand some downward housing pressure, but I took away from it the fact that even a slight housing slowdown could push people to the edge of losing their biggest asset.

I don’t live in Canada, so that doesn’t really bother me directly.  However, I do live in Australia where interest rates are going up, again!  Unlike Europe and the US where interest rates fell away to virtually nothing, here in Australia our current cash rate is 4.5% which is working out to a variable home loan rate of between 7% and 7.5% depending on your bank.  That’s a very wide spread and indicative of the lack of true competitiveness in the Australian banking sector.  

The other thing to note is, Australia didn’t have a recession and there is a debate about whether the country even had a single quarter of negative growth.  So if the world continues to rebound, we’re looking at a pretty odd situation here in Australia.  The Federal Government through away the massive surpluses to avoid a recession and have run up a debt.  Inflation is getting to the point where the Reserve Bank is worried about it and will have to continue to raise interest rates to keep it under control.  Rising interest rates will make the debt more expensive to service for the Federal Government.  The Federal Government is undertaking a popularist health care reform agenda and are already tabling some crazy tax grab ideas to pay for these things.  The only positive piece of news is that tax receipts for the Feds are up and that means more money in the coffers than budgeted, but its an election year so both parties will race to throw it away.

Then you look at other things like the price of Gold, the situation in Europe with debt, the falling Euro, the posturing of France and Germany and you start to wonder.  If I were China, I’d be very worried about my foreign currency holdings – Russia looks pretty smart for buying Canadian dollars.  The US economy looks like it could turn the country into a banana republic at any moment.

All up, I’ve decided to de-leverage.  When times are good, it isn’t necessarily a bad thing to carry some personal debt but with all of this uncertainty around, I’m thinking cash will soon be king.  So we’re going to start getting rid of anything that incurs an interest charge and move our money into things that yield some kind of return.  I’m also starting to think we’re going to see some opportunities and having cash always gives you the chance to take advantage of an opportunity.

Or maybe I’m just a skittish cynic.  At the very least I’ll be a cashed up, debt-free cynic.


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