How to solve a debt crisis
By Justin Pyvis – Delivered on 13 Oct 2021

Good morning! The ACT lockdown will end from this Thursday at 11:59pm as the territory approaches a 99% vaccination rate (a whopping 96.8% of those aged over 12 are already vaccinated with at least one dose).

Unlike in NSW, the ACT will ease restrictions slowly over the next weeks and months as the fully vaccinated rate approaches 100%. It will also start paying less attention to case numbers, because:

"These daily numbers are becoming less important with our higher vaccination rates and more movement in the community. We are moving towards a COVID Normal, where we will expect to see a level of ongoing community transmission of cases."

That sounds like a reasonable approach – there's a very good chance that case numbers start to spike as regions reopen, given vaccines are only partially effective at stopping Delta variant transmission (but remain excellent at preventing severe disease). People will inevitably freak out when that happens, so it'll take some cool heads to keep their fingers off the panic 'reimpose restrictions' button at the first sign of trouble.

Fully vaccinated population (aged over 12)


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Note: Brent oil, gold bullion and iron ore prices are the second futures contract. Bond yields are 10-year Treasuries.

The US S&P500 fell for the second straight day, losing 0.24% following an inflation warning from the IMF (see below) and the latest New York Fed consumer inflation expectations showing "short- and medium-term inflation expectations rising to their highest levels since the inception of the survey in 2013".

Locally, the ASX200 dipped 0.26% as the energy and materials sectors took a breather (-1.1% and -0.1%, respectively) and higher bond yields saw tech (-1.5%) sold off, following similar declines in the US the night before.


Freedom bound: According to the latest NAB Business Survey, Australian businesses are feeling good – confidence "rebounded strongly in September to be well above its long-run average". The rise in confidence was due to "the announcement of reopening roadmaps in these states [NSW and VIC] as well as rising vaccination rates across the country".

No relief: The Energy Minister of Qatar, the world's largest exporter of LNG, said "We are maxed out, as far as we have given all our customers their due quantities". The comment came after steelmakers in Britain said they may have to cut production, following Spanish producers who have already suspended production.

"Teetering on the edge": 80% of India's 135 coal-powered plants have less than 8 days of supplies left, with half of those having enough for 2 or fewer days. In 'normal' times Indian power plants usually hold enough for around 18 days. Coal accounts for approximately 70% of India's electricity generation.

Everyone loves houses: New home sales grew 2.3% in September from the prior month, according to the Housing Industry Association (HIA)'s latest report. Over the past six months sales are up 9.3% when compared to 2019 (i.e. pre-pandemic).

"Be vigilant": Following the scandal that saw her accused of pressuring staff to favour China while at the World Bank, IMF Managing Director Kristalina Georgieva survived with the 24-member board's "full confidence". The statement came prior to the Fund's latest World Economic Outlook, which cut global growth expectations to 5.9% in 2021 while warning that central banks "should absolutely be vigilant about what's happening [in terms of inflation]".

How to solve a debt crisis

Debt levels in Australia, at all levels of government, soared following the outbreak of the COVID-19 pandemic. Right now interest payments on that debt remain low but the situation will turn on a dime if inflation proves to be less "transitory" and more persistent than central bankers expect.

Breaking it down: All Australian states increased their debts during the 2019-20 financial year with the exception of WA, where debt declined by $A1.3 billion thanks to Chinese stimulus propping up iron ore prices.

While the grandest absolute increases were in Victoria and NSW (the two largest states), as a share of Gross State Product net debt was highest in VIC (9%), SA (8%), WA (7%), QLD (4%) and then NSW (2%). The situation has no doubt worsened significantly in NSW and VIC due to the recent lockdowns.

However, the states are put to shame by the Commonwealth government, where net debt is expected to hit 50% of Gross Domestic Product by 2025.

Why this matters: More public debt means higher interest payments and fewer resources available each year for the things governments spend money on, such as public servants, social welfare and infrastructure. If revenue doesn't increase in-line with interest payments, tough decisions will have to be made to keep debt levels from spiralling further out of control.

The grand plan: According to leaked advice provided to NSW Premier Dom Perrottet by the Department of Premier and Cabinet, the government needs to push a "national dialogue on an aggressive resumption of immigration levels as a key means of economic recovery and post-pandemic growth... similar to Australia's post-World War II approach".

The plan reportedly called for a "doubling" of pre-COVID immigration levels for the next five years, with a focus on "the skilled migration we need to develop key industry sectors".

Looking forward: It's highly likely that this is the approach eventually taken by the federal government. Australia is a desirable place to live – nice weather, stable institutions, a relatively laid back lifestyle – so there shouldn't be a shortage of people willing to move there.

It would also solve the debt crisis without requiring politicians to make hard decisions on spending cuts or productivity-boosting reforms – more people earning more dollars will increase public revenue even at current tax rates. A higher immigration rate would also support demand for Australia's favourite asset class, houses and apartments.

The Wrap Up
    🏖️Thailand plans to fully re-open to vaccinated tourists from countries deemed low risk from 1 November.
    🏭Queensland's government joined NSW in committing the state to net zero emissions by 2050.
    🏝️Tasmania's government will release its border reopening plan next week, which is expected to require travellers to be fully vaccinated and a display negative test 72 hours before arriving.
    🎅South Australia's Premier Steven Marshall said it's going to be "a very normal Christmas and people who are double vaccinated will be able to come in", with the exception of "situations where people may have been to an exposure site or a dangerous setting or cluster interstate".
    🤠The Governor of Texas issued an executive order banning any entity, including private business, from enforcing COVID-19 vaccine mandates on workers.
    🍟Sony and Taiwan's TSMC – the world's largest chipmaker – "are considering joint construction of a [$US7 billion] semiconductor factory in western Japan", with half to be paid by the Japanese government.
    🔨China's President Xi Jinping "is launching a sweeping round of inspections of financial institutions", in an attempt to find "answers to how certain deals or decisions related to private firms were made".
    💸Yeah, it's not paying it back: China Evergrande Group missed a third $US148 million payment on an offshore bond yesterday.
    💉According to the September quarterly ­employee sentiment index survey conducted by workplace software company Elmo, "70% of Aussies want to see their employers making the COVID-19 vaccine mandatory in the workplace, up from 62% in June".
    🥝New Zealand is using "Mr Whippy vans" and "Shot Bro" buses to get its vaccination rate up quickly, and is now close to surpassing Australia despite having previously trailed significantly.
    ✈️Australia will get a new independent budget airline in 2022 called Bonza, which will be all "about the leisure traveller".
    The Socceroos' 11-match winning streak was ended by Japan 2-1 yesterday, their first opponent ranked inside the world's top 70 since losing to South Korea in 2019.
    🙃In the US, a record 4.3 million people quit their jobs in August – around 2.9% of the workforce – as people "vote with their feet" in a tight labour market.
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