The economic climate just changed for Australia. By Robert Guy in The Australian.

Australia spent the cheap-money era convincing itself that expensive houses, bloated government, lousy productivity and asset prices amounted to an economic model.

Global bond markets are calling time on the fantasy.

Money has a price again. Australia’s 10-year bond yield is at levels last seen in 2011, well above 5 per cent. It does not set mortgage rates — the RBA cash rate does — but resets the cost of capital beneath government borrowing, corporate debt, infrastructure and equities.

With gross debt above $1 trillion, refinancing turns yesterday’s choices into tomorrow’s interest bill.

The uglier discovery is how little growth Australia can now generate without above-target inflation. … Australia can barely grow above 2 per cent without above-target inflation. …

Australians are carrying more public debt, paying more for capital, housing, energy and services, and getting little in return from productivity or per-capita growth. The economy still functions, but increasingly on worse terms. … This is enshitification at a sovereign scale: the platform still works, but the user pays more for less. …

Australia’s place in the world economy:

The AI economy continues to outpace Canberra’s thinking. … Australia is down the bottom pouring the concrete. …

Australia risks mistaking AI infrastructure for AI power.

We know this model: dig it up, ship it out, let someone else add the value, then buy it back at a premium. AI could be the same old bargain in digital form. We supply the land, power and concrete. Silicon Valley owns the margin.

Forty years of decreasing interest rates ended in 2022, globally. It’s not widely appreciated yet, but history suggests we have now entered the back leg of the cycle, with several decades of upward-trending interest rates ahead. Rolling over loans will get more expensive, so capital will have to be repaid.

Many western borrowers, and governments in particular, will simply not be able to afford to keep paying interest on their debts. Japan will spend all its tax income on servicing its current debt when interest rates average 7%, the US 14%, and Australia 21%. In the 1970s, to stop inflation, interest rates had to rise to 20%.

So, governments will be forced to use their only escape hatch — devalue their paper currencies, i.e. allow a controlled inflation to run to whittle away the real value of debts, a policy called financial repression. (Is it just a coincidence that everything in finance has an obscure or misleading name?) Borrowers love it, lenders lose. This policy was last run in the 1970s. (Btw, got gold? The gold price went from 35 USD to well over 400 USD per ounce in the 1970s.)

The Albanese Government, like the Whitlam Government in the early 1970s, just “happens” to be in power when global stagflation hit. A high-welfare, big-spending government that was elected at the end of the easy times, just as the festival of cheap credit was drawing to a close. Bad timing, yes — policies appropriate for the time they were elected quickly became very inappropriate as time changed. But unlucky again, not really — elected governments always get pretty free-spending towards to the end of easy times.

And like the Whitlam Government in 1975, the current government is quickly going to become very unpopular.