RBA's Guy Debelle sees parallels to 1960s debt-fuelled fiscal mistakes in US

The Reserve Bank of Australia has ramped up warnings that US President Donald Trump's debt-funded fiscal stimulus may have parallels to the late 1960s era that presaged nearly two decades of rampant inflation and skyrocketing interest rates.

Speaking as the three-month US Treasury yield surpassed the yield on the benchmark S&P 500 for the first time since the 2008 crisis, Reserve Bank deputy governor Guy Debelle said the US was deploying a large amount of debt-funded stimulus in an economy already close to full employment.

"It's not something you normally do at this stage of the cycle," he said. "It's been done in the past and hasn't often ended up all that well."

While again signalling that the Reserve Bank plans to keep Australian official interest rates steady in coming months, Dr Debelle addressed concerns that government debt levels are becoming unsustainable.

"One thing that is always interesting about debt levels is that they are always sustainable until they're not," Dr Debelle told a function in Sydney on Tuesday. "That is one of the aspects that we have the least amount of insight on in the economics profession."

"What level of debt is actually sustainable, particularly on the public debt side of things? We're a bit better on the business side of things or the household side of things but not on the public side of things."

Noting that while Australia's net debt is about 20 per cent of gross domestic product, he said the US government's borrowings are headed above 100 per cent by this time next year.

Fuelling the fire

The Trump administration's business and personal tax cuts are estimated at $US1.5 trillion over a decade, and have been likened by observers such as Goldman Sachs boss Lloyd Blankfein to throwing "lighter fluid on a fire that was already going."

"This is a similar situation to that in the late 1960s and could lead to more inflation in the US than currently anticipated," he told an audience in Sydney on Tuesday.

"In turn, that could lead to more tightening in monetary policy than currently expected."

Additional US Federal Reserve rate hikes, above those that already forecast by financial markets, could lead to further falls in the Australian dollar, he suggested, "given that the Australian economy appears currently to have more space capacity than some other advanced economies".

He made the remarks in a speech in which he added that any further tightening of lending standards would primarily hit the housing market even as he downplayed the dangers of the coming wave of resets to interest-only loans.

"These can see the required mortgage payments rise by nearly 30-40 per cent for some borrowers.There are a number of these loans whose interest-only periods expire this year. It is worth noting that there were about the same number of loans resetting last year too.

"Our assessment is that there are quite a few mitigants which will allow these borrowers to cope with this increase in required payments, including the prevalence of offset accounts and the ability to refinance to a principal and interest loan with a lower interest rate.

"While some borrowers will clearly struggle with this, our expectation is that most will be able to handle the adjustment so that the overall effect on the economy should be small."

Higher lending standards "may have its largest effect on the amount of funds an individual household can borrow, more than the effect on the number of households that are eligible for a loan.

"This, in turn, means that credit growth may be slower than otherwise for a time.

"To me, that has more of an implication for house prices, than it does for the outlook for consumption."

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