On Thu, 9 Mar 2006 16:14:32 +1100, "Kwyjibo"
There's quite a few steps you missed, but cutting out the complex ones, what happens is that when a couple of hundred 'Person A's' take a loan, the financial insitution goes to foreign capital markets and borrows to fund their own domestic credit provision.
That's why about 80% of Australias foreign debt is held by banks, and most of that debt is the result of home loans.
Too simple.
Having fun while the credit lasts 1428Highly intelligent post. Money moved within a counrty (including social security payments) create a healthy cash flow, and everyone in business knows that cash flow...
You're getting things muddled, theres the Trade Deficit which is the difference between what we sell to the world and what we buy from them in goods and services, and there is our Net Income Deficit which is the dividend payments and net interest payments to foreigners.
Combined with Net Transfers (which is always relatively small), they make up the current account.
Current Account =the balance of goods and services+balance in interest payments and dividends + net transfers.
So home loans do increase foreign debt, because the banks that issue the loans borrow from foreign capital markets to cover them.
The wealth effect generated by the housing boom (a large part of which was financed with foreign debt via local banks) also increased the trade deficit because people used the flexibility in their mortgages to increase their consumption of imported goods.
So the housing boom and its mechanics hit the current account deficit in two ways - through the NID and through the trade deficit, although the former was by far a larger component than the latter.
