Thank you for a very comprehensive article.

Re; "....the extent to which our gross foreign liabilities are written in Australian dollars..."
Julia Gillard did recently state that the $A was now held in the reserves of 61 foreign governments so a substantial total of the foreign liabilities must be denominated in our currency.

The USA enjoys a very substantial advantage because its currency is the currency of most international trade and is the principal reserve currency. Because of those advantages the USA is able to be a major debtor and is even able to go futher into debt to buy overseas assets such as Graincorp.

The American market often plays the role of the consumer of last resort when countries are looking for opportunities to export their potential unemployment.

If the Euro area was not is such diabolical economic trouble then the Euro area, China and Russia combined could probably set out to negate some of that USA advantage.

Kellie, one of the myths of economics is that markets are rational.

The US Federal Reserve is injecting circa $1 trillion per year into their economy by printing money. If this liquidity is not injected, what will sustain the markets? If the markets crash and interest rates rise, how can the Fed expect recovery? Well in simple terms, it can’t!

There is no real basis for the high stock and bond prices. The prices are an artificial reality created by the printing press. Rational markets would take into account the printing press and would price stocks and bonds at a much lower level.

How can there be no risk in Treasury bonds when the debt is growing faster than the economy?

There is no recovery going on in the US, Europe and Australia is only now sliding down the wrong side of the economic curve, one our politicians and financial pundits have failed to see coming, or denied is facing us.

As 2013 progresses, a further downturn will continue. In the US, the Fed will have to get the printed money past the banks and into the economy. If this occurs, inflation will explode. The dollar will collapse, and import prices, as globalism has turned the US into an import dependent economy, will turn high inflation into hyperinflation.

Disruptions in food and energy deliveries will become widespread, and a depreciated currency will cease to be used as a means of exchange.
You can bet this is why the Australian Reserve Bank has set up its $380B Committed Liquidity Facility.

China is setting up international trade avenues that preclude the need to conduct trade in US dollars, you don't have to be a genius to work out why.

It’s going to get ugly, most Australian’s are oblivious to the real financial situation and governments and the banking sector are rightly to blame for this mess

Yes the mining boom shows very distinct signs of slowing, with the rest of the economy in a virtual recession.
So what are the choices?
Given every western style economy rest on just two economic pillars, energy and capital, we need as never before, to divorce ourselves from any dependency, on foreign oil.
Even if that means reversing recent decisions and opening up the reef to economic development, or exploitation of its possibly massive hydrocarbon reserves.
We need to import less and export more!
Our own tradition Australian sweet light crude leaves the ground as a virtually ready to use diesel; and produces four times less carbon pollution, than the current highly refined imports.
Copious NG can be used for all manner of energy and transport requirements, utilising ceramic fuel cells.
CNG powered ceramic fuel cells, produce mainly water vapour as the exhaust product.
We could build a carbon fibre electric car, {we lead the world in moulded carbon fibre technology.]
And replace the conventional engine and or the battery banks, with a significantly lighter CNG powered ceramic fuel cell!
A world leading world beating energy coefficient of 72%, would make this combination the cheapest to run or use. Economies of scale would make it the cheapest to produce.
Solid state technology, means no engine/gear box/transmission to wear out, with only electric motors turning! Which only need the very occassional replacement of bushes and brushes!
A safe 10,000 RPM, and the very high torque of electric motors, one for each wheel, would produce power to weight ratios, that not even the V12 could match?
And it's not just cars that could be powered by this combination, but trucks trams, tractors, roll on roll off ferries/rapid rail
Refuelling would only take minutes rather than overnight, with the half ton plus/plus battery pack!
We need a vastly reformed tax system, to make tax both unavoidable and the cheapest, with compliance costs eliminated. Lastly, very low cost publicly provided energy!
This combination would have the energy dependant high tech manufacturing industries queuing to relocate here, and guarantee our prosperous future.
Rhrosty.

This article is especially worrying given the newest tactic of the Banking Criminals. They have discussed the Bail-In method of covering their losses rather than asking for a Bail-Out by taxpayers.

In case you don't know what Bail-In means, it means the banks just take the savings of depositors and their term deposits to make up for any losses they incur because of bad loans and risky derivative purchases, etc.

Yeah, Folk, Ned Kelly is alive and well and seems to be the head of most banks.

It is for moments of illumination such as this, that we need a "lawyer and human rights activist" to explain complex financial issues to us poor deluded saps:

"Put simply, the surplus on the capital account is flogging off the sideboard to buy the fruit."

And calculating the dollar exposure on an interest rate swap is... what? Tapping the barometer glass? Reading your horoscope in Bella magazine?

The article is a true work of art in the manner in which it demonstrates such a perfect absence of understanding of its subject matter. Even that old chestnut...

"...we've learned that the National Australia Bank and Westpac borrowed money from the US Federal Reserve at the height of the financial crisis but we don't know if this has been paid back"

That's one of Arjay's favourites, Kellie. You could learn a lot from him when it comes to the perfidy of Banks. Of course, if you really want to know what went on, all you have to do is go to the source of your information - you know, the one that told you that our Banks borrowed money from the Fed - and ask them to tell you what was the term and the interest rate.

Personally, I would have been a bit disappointed with my Bank if it had not taken advantage of the Fed's offer, given the rock-bottom rates at which they they were priced.

It is extraordinary that an asset rich nation like Australia has a negative balance for gross foreign liabilities.

The last 7 years of a green led incompetent alp government has much to do with this. The author makes light of the $260 billion government debt and seeks to sheet home blame to the private debt, primarily that which is in the banking system.

International bank debt will always globally exceed deposited assets because banks aggregate debt by lending more than their deposited securities. However, they do not necessarily and by definition cannot exceed the worth of the assets which are used to secure the consequent loans. That is, unless they are forced by government edict to lend beyond the worth of those assets as happened with Fannie Mae and Freddie Mac due to the ideological imperatives of the Clinton government.

No doubt derivative debt is a problem as several Australian local governments found out when their loans were called in during the GFC. However bank debt against assets within Australia is not an issue with bad debts [essentially where the asset worth is less than the debt AND the debtor cannot fiance the primary debt] fluctuating but not exceeding long term trends.

The author's solution is:

"We need specialised manufactures and non-resources tradeable industries for export, a reduction in the real exchange rate and import replacement to lower our current account deficit. All this requires an extensive increase in funding for university research and development combined with "productivity raising reform".

This is nonsense. Universities have been the recipient of vast grants to research AGW for instance which is dead money. So to with the rest of this green government's policies which, unlike China's, have generated a huge debt with no asset to show for it.

It is that debt which is the issue not the private debt.