The Recession We Have To Have

As a child I always ate my vegetables first and saved the steak for last, bowled first and batted last in backyard cricket and ate all the tiny Easter eggs first. If there's medicine to be taken, I want it now.

Which is why I'm one of the few investors in Australia supporting the Reserve Bank's restrictive monetary policy and of the opinion that they should keep the cuts to a minimum. I'm fully aware high interest rates – relative to the past decade at least – are hurting the economy, hurting the stockmarket and hurting my business. But we don't have an option; it's either suffer some pain now and correct the imbalances in our economy, or deal with a much bigger problem a few years down the track.

For the past decade, the Australian consumer has been on a borrowing binge. The ratio of household debt to disposable income is now 1.6 times – more than double the level of just 10 years ago.

Free-flowing credit has enabled us to take tomorrow's consumption and have it today. In the quarter to June 2002, for the first time ever, we consumed more than we earned – the savings rate turned negative (in the 1970s it was in excess of 10%). Between then and March 2008, total consumption exceeded total disposable income by $284 billion.

As any Ponzi-scheme operator can tell you, the life cycle of funding a cashflow deficit with more and more debt is limited. Not surprisingly given Australia's burgeoning debt pile, the percentage of income required to service the interest payments has also blown out. In March 1994 it was 5.5%. In March 2008, 13.9% – the highest level on record.

We're a rich country and can afford to service some debt. But at some point we're going to have to live within our means. And we need to accept that getting from where we are today to a level of consumption that's sustainable will most likely cause a recession. A huge cut in rates might delay the pain, but it won't make it disappear – it's the recession we have to have.