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Updated January 12, If you believe the hype, asset bubbles abound, global institutions are under attack, war on the Korean Peninsula is imminent, and the United States tax cuts might sink the Australian economy.
There is some truth to all of these concerns, but if you balance up all the risks, we should be alert but not alarmed. The two most notable potential bubbles are in Australian housing, and in cryptocurrencies like bitcoin. I have written a fair bit about risks in the Australian housing market of late. It's always hard to know whether high prices reflect a bubble, or just underlying factors like low interest rates and Australia being a great place to live.
On the other hand, there are disturbing signs that we have failed to heed the lesson of the US mortgage meltdown a decade ago. Australian lenders have lent vast sums relative to borrowers' incomes , often in interest-only loans, with around 55 per cent of loans intermediated by brokers.
Thanks to a recent move by Australian Prudential Regulation Authority capping interest-only loans at 30 per cent of new borrowing there has been some tightening of underwriting standards. But there are multiple, credible, worrying reports by UBS , and Tic: Toc Home Loans of so-called "liar loans".
Brokers have absolutely no skin in the game — they just get commissions based on the dollar value of loans originated. And the big banks, too, are playing with other people's money. The bitcoin bubble is a clearer case. It rose tenfold in , and a number of other cryptocurrencies did as well — some even more. The only way to justify these valuation on fundamental grounds is if they become a meaningful and widely used medium of exchange. Central bankers around the world have expressed deep scepticism about this, and with some reason.
And if bitcoin did start to rival the US dollar then authorities would have strong incentives to try and shut it down though this might take a lot of computing power as highlighted in this recent paper. The billionaire Winklevi and some other spivvy speculators lose a bunch of money.
A high probability bitcoin bust is much less worrying for the broader economy than a small ish probability housing meltdown in Australia. The most relevant part of that, for those noted as living in the United States, was the reduction of the corporate tax rate from 35 per cent to 21 per cent. This is good news for American business and bad news for the US budget deficit.
The scary story is that international capital is very mobile, and Australia's corporate tax rate is still essentially 30 per cent. Yes, there's a good plan by the Coalition Government to reduce it to 25 per cent. But that decade-long reduction happens at glacial pace, is not through the Senate, and may only result in reductions for small businesses.
But the concern is that the differences in tax rates between Australia and the US, and other countries like the UK and Singapore which also have sub 20 per cent rates , will lead to mass capital flight. I think this is a legitimate and important risk. Australia is a capital-thirsty country , with investors always looking for better returns. Yes, we have a lot going for us: But high corporate and personal income tax rates are a deterrent to both financial and human capital accumulated expertise coming to, or staying in, Australia.
As I pointed out in this report , we can't live off the "lifestyle dividend" forever. The most genuinely worrying thing that might happen in is armed conflict on the Korean Peninsula. Put this self-pronounced "stable genius" together with North Korean leader Kim Jong-un and there's plenty to worry about. The human toll of this kind of war would be catastrophic, with 20 million South Koreans in range of a massive array of conventional artillery.
It would also likely plunge the world into an economic panic that would reverberate far beyond the Korean Peninsula. The odds are that we get through without war, mass capital flight, or a housing crash. Maybe the price of bitcoin plummets. But all the risks are medium probability, and the consequences could be dire. The right way to think about it this — multiply the probability of these bad events occurring by the damage done if they do.
Originally published in The Conversation. First posted January 12, If you have inside knowledge of a topic in the news, contact the ABC. ABC teams share the story behind the story and insights into the making of digital, TV and radio content. Read about our editorial guiding principles and the enforceable standard our journalists follow.
This year's budget delivers the ammunition to fight an Opposition that until now has led the way on policy. But it also has a ticking time bomb buried just outside the four-year forward estimates. You know when your primary revenue target is illegal tobacco hawkers that this is going to be a pirate-fightin' affair.
Peter Costello's theory for economic battle came in three chapters — do the hard stuff in the first year, bed it down in the second and fight like buggery in the third, writes Andrew Probyn. You've probably heard her story, what happened in the laneway behind a Kings Cross nightclub. Now she's speaking publicly for the first time as a warning to others. Breaking news The Government plans to simplify personal income tax by abolishing the 37 per cent tax bracket in Breaking news The ATO will get powers to find lost superannuation and exit fees for switching funds will be banned.
Watch live Full coverage of the federal budget. The two most notable potential bubbles are in Australian housing and cryptocurrencies like bitcoin. What's the worst that would happen if the crypto 'bubble' bursts? Is the property boom over? With east coast property prices now stalling, or even heading backwards, the expert consensus is that Australia's real estate boom is over.
But what happens next? What bitcoin says about us Bitcoin is a formula almost guaranteed to end in tears, but still speculators pile in to the bubble, writes Ian Verrender. We asked if you believed the hype around economic doomsaying. Read the discussion in the comments below. Economic risks abound in Australia's leading economists are expecting to be a slightly better — but still underwhelming — year for the economy, with some big risks on the horizon.
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