MW, as YM points out re the house analogy, Australia isn't pulling positive foreign cash flow from its foreign borrowings for a house.
Rather, we just keep borrowing more and sustain a -CF with foreign lenders, which obviously wouldn't be possible in a house paradigm, unless borrowers were gradually growing their chunk of equity in our house.
Foreign lenders aren't too concerned if we default in 2-3 years, because they don't carry risk that far out. Our Big 4 banks do because they borrow most offshore funds short term, and have to rely on regularly refinancing. It's your classic risk of borrow short term lend long term
The reason we are more exposed to external shock is that we are progressively more dependent on what global risk is rated at, rather than our economy.....and that has been reflected in the fixed rate rises that have hit us, a result of Aussie bond yields following US yields.
Re your points:
1.
Our capacity to service foreign debt is dependent on our trade balance not getting too much in the red.
That trade balance is very much dependent on Chinese economic activity. China's activity is very much to do with their trade balance and their economic stimulus.
China's trade balance is dependent on Europe and USA.
Ergo, our trade balance is dependent on Europe and USA imports, and Chinese economic stimulus.
Below is China's BoT.
Unemployment is still growing in Europe and the USA, and house prices still falling. It is unlikely US and Euro credit fueled consumption will reach early 2008 levels for years.
Therefore, that makes Australia's trade balance even more reliant on China's
artificial stimulus.
Australia wants to understand exactly what the Chinese stimulus entails and its risks. It is the most massive stimulus ever attempted anywhere in the world, and if it isn't spent on stuff that returns consistent cash flows, then it spells trouble ahead. Much of the stimulus was loans from Chinese banks to business. If those businesses to not generate enough cash flow from the loans, then Chinese banks will need bailing out by the govt. That very well could force China to start liquidating their 2T of US bonds, or blow out public debt just as Obama and Rudd have done. Either way, their economy has a genuine chance of slowing again.
From the
Royal Bank of Scotland re China's stimulus:
• While the pace of growth is accelerating, the quality is deteriorating. And while I have revised GDP growth upwards in line with the reported numbers, I believe that the economy will behave weaker than the reported numbers imply. My proxy estimates, based on the monthly data, show public investment and private residential investment as the main drivers of growth, private consumption as stable, and private business investment and net exports contracting sharply as a result of the collapse in global demand and rising manufacturing overcapacity. – Ben Simpfendorfer, Royal Bank of Scotland
RBS believe the stimulus is just inflating the Chinese property bubble again, with very little net productivity gains. If RBS is right, this is obviously unsustainable, and indeed a train wreck in slow motion.
Apart from that, the Chinese economy is around 1/10 the size of the USA and Europe combined. How likely is China's artificial attempts to stimulate domestic expenditure (a great part of which is investment in housing = bubble) likely to replace reduced exports to Europe and USA?
2.
House Undersupply
One could argue we have an undersupply of red feraris (or homes closer to work), because demand is high. However, everyone that demands a ferrari (or home closer to work) can't afford one. Supply matching demand is contingent on a significant price drop.
And do we really have an undersupply of housing?
The bottom chart below shows cumulative change in estimated resident population (the cumulative number of new residents) divided by the cumulative number of new dwellings. If Australia has a median household size of 2.6, and we have built enough homes for 1.65 people per dwelling, then have we built too many homes or too little?
3.
As I've said before, Australia's rates have been higher than the rest of the world's for years. To me, this just represents the premium the RBA thinks we had to pay to attract foreign capital to stop our banks from failing, and buy Rudd's bond issuance. The drop in rates we had didn't ramp consumption. People instead pulled their heads in and tried to pay down debt and reduce consumption, which is why Rudd stimulated.
Well we will enter the next credit tightening with historically high public debt.....it's a postive feedback loop from here, cos we will have to enter quatitative easing more deeply, just like the US.
4.
I'd love to sit down with an economics professor for a week and have so many things explained more deeply. Measuring our debt service capacity via GDP is wrong imho. As I said earlier, imputed rents make up 10% of GDP, which is money that doesn't exist. Health expenditure makes up another 10%, which doesn't contribute towards income like exports. 62% of gdp is services. And then there's our foreign interest bill, which I believe is about 4% of GDP. And gdp is ramped up via rising property prices and imputed rent, and the whole real estae industry.
If the population is increasing, then there will be an ever increasing demand on public services. Is tax income increasing in line with population growth, to maintain service level per capita and replace old infrastructure and build new? Without ever increasing housing prices, it appears not.
As I said above, some think ever greater foreign investment in Australia is a good thing, a sign of the strength and attractiveness of our economy to foreign capital. That's only one side of the argument. The other side is attraction of foreign capital is a sign we are prepared to pay a higher rate of return than anywhere else in the world, in preference to keeping those profits in the country to fund and own our future growth. Gee, we could even be using that capital to compete with China to secure ownership of mines in Africa.
The issue with this stuff is that we could be getting bled slowly as a nation, and not realize it.
Anyway, all interesting stuff, and healthy debate of it is all for the better.
we don't have enough of our own here? as we have a relatively small population and a relatively small economy? Surely though if we turn overseas funds into hard assets, which are paid off successfully over time, we provide a larger capital base to self-fund our own institutions lending? 
