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Why the Barefoot Investor thinks the Aussie economy is trash - much like Ireland in 2007

Anastasia Santoreneos
Couple managing debt. Source: Getty
Couple managing debt. Source: Getty

Scott Pape, better known as the Barefoot Investor, wasn’t happy about the latest RBA rate cut last week, and said anyone who was, shouldn't have been.

Writing in the Herald Sun earlier this week, Pape said record-low rate cuts are actually a sign that we’re in deep trouble and the Aussie economy was in a state of “monetary madness”.

Those thoughts were echoed by economist, Stephen Koukoulas, who said there was “clear economic pain” in Australia.

The Barefoot Investor said rate cuts were meant to act like cocaine, but after this many hits, their effectiveness was wearing off.

“Just like I can’t fathom my father paying 20 per cent interest on his home loan in the early ’90s, I’m sure my son will be baffled by our rock bottom rates today,” Pape said.

“Either way, this is a massive financial experiment that we’ve all signed up to…and the effect could be felt for generations.”

What’s so bad about the Aussie economy?

Earlier this year, Irish financial adviser, Eddie Hobbs, said he could see some early signs of an Aussie debt crisis.

Hobbs revealed 40 per cent of Australia’s big bank home loan book was out on interest only deals, which means Aussies are piling on the debt.

That, coupled with an inverted US yield curve (which generally signals a recession on the horizon), has a flow on effect to our economy.

The Aussie economy is also tied to China via demand for commodities like iron ore, and with Chinese household debt on the rise, this will most definitely affect Australia.

On top of that, just yesterday, Hobbs suggested the Aussie housing market was on the brink of collapsing, after finding that four out of every 10 mortgages were high-risk loans.

Hobbs said Aussie banks were over-exposed, and it was only a matter of time before a situation looked like the Irish crash in 2007.

In fact, on Hobbs’ analysis, things are actually worse in Australia relative to Ireland before the crash.

What happened in Ireland in 2007?

In 2007, a perfect storm in Ireland led to a disastrous economic crash - one that the country still feels the after effects of.

The Irish economy expanded rapidly between 1995 and 2007, primarily due to a low corporate tax rate and low European Central Bank interest rates.

In that time, there were also very loose monetary and lending policies in Ireland, which contributed to a property bubble that all but popped in 2007.

Many of the mortgages taken out by home-buyers with banks were “interest only”, which meant the banks were extremely overexposed to the property market, and home-owners were in a tonne of debt.

This came under severe pressure as the global financial crisis hit towards the end of 2007 and into 2008.

That meant the Irish banks were borrowing more from foreign banks, and most of that went to fund building projects.

But, there was an oversupply of those buildings, which meant they weren’t sold for many years, and caused the banks to lose money - an estimated $6.5 billion at the time, but eventually much more.

In summary: What are the parallels?

Already, it’s easy to see some similarities between Ireland’s crash and the current economic climate in Australia.

Our rates are at a record low, and the banking regulators have put forward loosened lending criteria.

The Coalition has dropped home loan deposits to 5 per cent, and Hobbs’ researched showed 40 per cent of mortgages are interest only.

The inverted US yield curve suggests we’re going to enter some hot recession waters too, so it’s looking like the perfect storm could hit Australia too.

Here’s a visual:

The parallels between the Aussie economy now and the Irish crash in 2007. Source: Yahoo Finance
The parallels between the Aussie economy now and the Irish crash in 2007. Source: Yahoo Finance

It’s not surprising then, that Pape is a little concerned about the shape of the Aussie economy.

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