Coronavirus will create zombie borrowers: still walking, but dead from debt

Coronavirus will create zombie borrowers: still walking, but dead from debt, by Bill O’Chee.

Between 2003-04 and 2015-16, mean household debt increased by 79 per cent, but mean asset value increased by 51 per cent and gross income by only 38 per cent.

Disturbingly, much of that increase in debt occurred after the Global Financial Crisis. Moreover, that increase in debt was driven by the Reserve Bank cutting interest rates to facilitate further borrowings.

Put simply, Australia’s response to the debt-driven GFC has been to grow more and more debt — at a rate that far outpaced the growth in income.

This was supposedly in pursuit of the RBA’s growth objective.

But, but, but … house prices?

If ten per cent of the workforce lose their jobs, then what will it do to home prices, and the facade of wealth that they represent?

The solution, I predict is that the banks will offer to capitalise people’s unpaid home loan interest on condition that the Government guarantees the liabilities. That will suit the banks perfectly –- capitalised interest and rescheduled loans mean people paying the banks more interest and for longer.

Government will agree to this because no government since 2008 has had the courage to call out Australia’s massive debt farce, for fear house prices will fall and the people will turf them out of office. The problem is that would give the banks risk-free loans with a residential mortgage spread. It’s nice money if you can get it.

The end result will be to burden some with crippling debt they will never repay. These are the zombie borrowers. They will still be walking, but economically dead with debt.

And lest we think stimulus packages will save the day, we should remember they too are built on debt. Net Commonwealth debt stood at $361 billion at the start of the pandemic, but $189 billion has already been added to that in the initial rounds of stimulus packages. That debt will have to be repaid, and that will come in the form of higher taxes.

Or government, moving on to the next addiction, will become enamored of printing. Once you move up to printing, everything else seems so lame. Inflation ahoy!