20 October 2003

It's the economy that dispatches governments

The obvious candidate here - the only obvious candidate - is the extraordinarily long boom in house prices and the related rapid growth in household debt. Surely the housing bubble will bust eventually and when it does, the fallout will transform all the presently self-satisfied two-bob capitalists into angry voters looking for a pollie to punish.

Well, you'd imagine so - but the more you think about it, the harder it is to see. It's not hard to see a lot of negatively geared investors in rental apartments getting their fingers burnt, but they'd constitute just a few per cent of households.

When you think about the group that matters from a macro-economic perspective - the owner-occupiers - it's hard to see many of them in serious difficulties without a big rise in interest rates and a jump in unemployment.

And why would the Reserve Bank want to raise rates to recession-precipitating levels without it first having a mighty inflationary breakout it was struggling to control? Do you see that looming on the horizon? I don't. Inflation's set to fall.

All I know is, all good things come to an end. All economic expansions end in recession and all governments eventually get swept away - usually by the first recession that occurs on their watch.

Salon carried an interesting piece on the housing bubble in the US:

Today's families are in financial trouble, because they're spending so much more on big fixed expenses -- mortgage, health insurance, car, preschool, after-school care and college.

What's happened is that the cost of being middle-class has shot out of the reach of ordinary families over the past generation.

It would be good to know if Australian families are suffering from inflated housing prices in the same way. It might be bad news for the government.

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