Professor Keen believes that the Australian Reserve Bank (RBA) has “Unintentionally” lead the Australian economy towards a recession by facilitating and encouraging an unprecedented increase in household debt in the form of low interest property loans, which has led to asset bubbles. Professor Keen "We have borrowed ourselves so much to the hilt that we are now dependent on that continuing to rise over time (capital growth) and it simply won't," he told the ABC’s, The Business.
In February 2016, the Man behind the 'big Aussie short', Jonathan Tepper founder of research house Variant Perception, also declared in a controversial report that "Australia now has one of the biggest housing bubbles in history” that sparked a fierce debate about mortgage underwriting practices.
The professor famously lost a bet when he predicted a catastrophic crash in Australian house prices following the GFC and had to walk from Canberra to Mount Kosciusko as a result.
But he says, this time, he is right and does not have his hiking boots at the ready.
"We have borrowed ourselves so much to the hilt that we are now dependent on that continuing to rise over time and it simply won't," he told the ABC's The Business.
Many believe the Reserve Bank has been a steady guiding hand to the Australian economy in the years since the GFC, but Professor Keen believes it has guided the economy "straight toward the shoals" by encouraging households to borrow with low rates which has led to asset bubbles.
"They don't know what they're doing," he said. "Our debt level according to the Bank of International Settlements, private debt level, has gone from 150 per cent of GDP to 210 per cent of GDP.” He argued that means a large part of the growth that Australia has enjoyed since the GFC, while many other countries plunged into recession, has been fuelled by a 60 per cent rise in household debt.
Whichever party is in opposition at the time will blame the incumbent, but in reality this recession has been set up by the sidestep both parties have used to avoid downturns for the past quarter century: whenever a crisis has loomed, they’ve avoided recession by encouraging the private sector to borrow and spend.
The end product of that is starkly evident in a new database on private and government debt published by the Bank of International Settlements. Australia’s most famous recession sidestep was during the GFC, when it was one of only two countries in the OECD to avoid experiencing two consecutive quarters of negative GDP growth (the other country was South Korea). Since then, the private sectors of the advanced countries have collectively de-levered, reducing their debt levels from about 170 to 160 per cent of GDP. Australia, in stark contrast, has levered up. Our private debt to GDP ratio is now more than 20 per cent higher than when the GFC began, and more than 50 per cent higher than in the USA
BT Investment Management, whose 12.5 per cent return for its Fixed Interest fund was Australia's best in the past year, says there's a 50 per cent chance of recession in the next couple of years. The RBA will at least cut its target rate by 50 basis points to 1.75 per cent and could take more drastic steps, according to Vimal Gor, the fund manager's Sydney-based head of fixed income. The local dollar may drop below 60 US cents, he said.
Australia has been alone among major developed economies in avoiding recession for more than two decades, benefiting from a China-driven commodities boom. With resources investment dropping off and export prices plunging, the RBA is trying to revive business confidence , which has slumped to a 1 1/2-year low. It also wants to put a lid on an unemployment rate that reached the highest since 2003, without adding too much fuel to the nation's record housing boom.