September 5, 2006


Debt-rich now doesn't have to mean trouble later: The baby boomers hit 60 this year but will the financial markets withstand the shock? (Alan Wood, September 06, 2006, The Australian)

[O]f late Australia's central bank and the federal Treasury have been looking at the combination of debt and wealth; that is, the overall financial position of households. Most recently it was the Reserve Bank of Australia's Ric Battellino, who runs its financial markets area.

He pointed out that in all but one of the past 10 years (2002) local households' financial assets had increased substantially more than their debt, noticeably improving their net financial position. And it is the boomers who hold the bulk of the assets.

Battellino went on to observe that the often-remarked fact that households had become net payers of interest was true only because they had shifted their financial assets from bank deposits, on which they earned interest, to equities and superannuation, where returns accrued largely in non-interest forms (capital gains and dividends).

Taking these non-interest gains into account changes the household savings picture dramatically. Instead of being negative, as the conventional measure suggests, savings are neither low nor falling.

So if we look at the ratio of household debt to wealth, after adjusting for implications of the shift in the holding of financial assets, it looks quite healthy.

Posted by Orrin Judd at September 5, 2006 9:48 PM
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