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Howard has encouraged the building of Australia's foreign debt but he likes to give it a different name -- he calls it "offshore investment". The tricky thing is carefully avoiding the fact that the money flowing in from overseas is NOT INCOME it is a LOAN. We are still faced with paying that money back WITH INTEREST.
Think of a small business owner who learns how to talk the talk and dress the part but deep down can't really walk the walk. She heads over to the bank and gives a good spiel and gets a business loan. Now she's sitting pretty; buys a nice car, rents an office with a view and a big boardroom table, tells her firends she is doing damn well, gives herself a pay rise. Any idiot can see a day of reckoning coming but hey, the business is expanding contracts are getting signed, advertising is saturated, the imbalance between income and expenses will be sorted out later, right?
Sometimes it works, sometimes a business drops right into that perfect niche, grows rapidly and then consolidates nicely. It's a dream, like winning the lottery, it does happen BUT don't plan your future on the presumption that it will happen for you. Most of the time it fails.
So what happens when it does fail?
In the case of the small business, the owner might end up personally liable and be forced into bankruptcy or might find a good lawyer who explains how the business was managed perfectly but just came unstuck due to completely unexpected circumstances and the CEO walks away without a scratch and is eagerly approached by someone else wanting to start the same scam. At the end of the day, the money never gets repaid to the bank and somehow the difference has to come out of all the other bank customers.
For a country, the implications are a bit different -- who is the bank here? Well we already know that this is not government debt so in theory it isn't guaranteed by the government either. On the other hand, if there was no guarantee whatsoever, then no one would be investing... Let's look at foreign investment on the ASX (i.e. foreign ownership of Australian publicly listed companies). In principle, if an Australian company goes into receivership, the shareholders get what is left AFTER all other debts are cleared. In practice, share prices usually start to drop as soon as the company starts to hit trouble. The falling share price of any big company tends to drag the rest of the market down as investors get nervous and positive feedback ensures that all prices drop more than they really should.
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