Related Story: Bitcoin: What’s the worst that would happen if the crypto ‘bubble’ bursts? If 2018 pans out like some of the early bitcoin price plummets suggests, we’re in for a rough year. 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.
I have written a fair bit about risks in the Australian housing market of late. On the other hand, there are disturbing signs that we have failed to heed the lesson of the US mortgage meltdown a decade ago. With east coast property prices now stalling, or even heading backwards, the expert consensus is that Australia’s real estate boom is over. 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. I’m not saying there will be a property crash, but there are plenty of markers of bad behaviour.
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 2017, and a number of other cryptocurrencies did as well — some even more. Bitcoin is a formula almost guaranteed to end in tears, but still speculators pile in to the bubble, writes Ian Verrender. 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.
The billionaire Winklevi and some other spivvy speculators lose a bunch of money. We asked if you believed the hype around economic doomsaying. Read the discussion in the comments below. 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. But what kind of news is it for Australia?
The scary story is that international capital is very mobile, and Australia’s corporate tax rate is still essentially 30 per cent. Australia’s leading economists are expecting 2018 to be a slightly better — but still underwhelming — year for the economy, with some big risks on the horizon. 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. 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: stable democracy and the rule of law, a good education system, reasonable infrastructure, and great weather. As I pointed out in this report, we can’t live off the “lifestyle dividend” forever. US President Donald Trump threatened to “totally destroy” North Korea in a speech to the United Nations General Assembly, and recently tweeted about how big his nuclear button was. Put this self-pronounced “stable genius” together with North Korean leader Kim Jong-un and there’s plenty to worry about. Actually, throughout my life, my two greatest assets have been mental stability and being, like, really smart. Crooked Hillary Clinton also played these cards very hard and, as everyone knows, went down in flames.
I went from VERY successful businessman, to top T. I think that would qualify as not smart, but genius. 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 2018 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.