The Australian Financial Review last month questioned how did we get so rich? With growing affluenza, Angus Grigg wrote that “almost unnoticed by much of the population, the country has become rich, very rich. Two decades of uninterrupted growth. Tax cuts and a booming China have delivered prosperity like never before”. In some ways, Grigg is correct — Australia’s per capita CDP has risen from $US21,770 in 2000 to $42,280 now, while the number of high net-worth individuals has leapt from 74,000 to 174.000.

But  it seems that numbers in this case do not tell the full story.

While Australians appear richer (the ABS puts the increase in per capital real GDP from $8800 to $15,170), like in the US and Ireland, that wealth has been created, literally from nothing. Well, not quite nothing — part of Australia’s wealth generation has been legitimate — largely selling commodities to China (more on that later).

The other part has come from Australia’s rapidly growing asset pile in the form of housing. This housing wealth has been created by banks, which have been willing to lend more money to borrowers. Part of this is due to the way fractional banking works — that is, a bank gets funding from depositors (and in recent year, overseas wholesale markets) and lends that money to borrowers. The thing is, banks lend upwards of 10 (or in recent times) 20 times the amount they have in capital or debt. This is highly inflationary, as it basically means that banks are creating money out of thin air.

As a result of this, everyone appears richer. Houses cost more, investors have lots more money to spend. Construction booms, workers have more money and therefore spend more, leading to more jobs in secondary sectors like retail.

The problem is — as much of Europe and the United States have found out — borrowed wealth is not real wealth. Real wealth generation comes from investing and innovating new ways to make or create things. Rather than becoming richer, having too much money tied up in a relatively unproductive asset (such as housing) leads to a reduction in the amount invested in genuinely worthwhile assets such as tractors or research labs.

Australia’s love of debt is so great, that even when debt increases, we celebrate our new-found austerity. Karen Maley in Business Spectator noted in December that “personal borrowings rose by a very sluggish 0.2% in October, and stands just 2.4% above the same period last year [and] even our traditional love affair with housing is cooling off. In recent months, borrowing for housing has been growing at a slower clip of 0.5% a month.” When so-called austerity still results in a 6% annual rise in borrowing (well above growth levels and inflation rates) this is a country that is simply addicted to debt.

With a mortgage debt to GDP level of about 90%, Australians remain significantly more indebted than Americans were just before their housing bubble popped. In fact, Australia’s relative mortgage debt is even higher than Spain, Ireland and Greece — those countries may be part of the PIIGS, but Australia’s home buyers certainly appear to be hogs.

But back to China. Aside from creating wealth out of thin air thanks to bank lending, Australia has also been highly adept at monetising its natural resources. The corporate tax paid by mining companies (profits are virtually irrelevant as the likes of BHP, Rio and Xstrata are largely foreign owned) allows money to be spread across the population through tax cuts and wonton fiscal spending programs designed primarily to ensure that whichever political party in government is re-elected.

And while China has allowed a steep rise in consolidated revenue, there are many who doubt the viability of the China growth story. Even China itself appears fearful that it has grown to far, too fast — on Christmas day the Chinese government raised interested rates for the second time in a month in a desperate bid to curb inflation (officially at 5.1% but probably far higher). Then there are the views of influential short-seller, Jim Chanos, who claimed that the Chinese economy is “on a treadmill to hell”.

Chanos notes that much of China’s recent growth has been spurred by fixed asset investment (which accounts for a remarkable 60% of GDP). And this isn’t the good kind of asset investment. About 14% of China’s GDP growth comes from new property sales, some of which continues to lay vacant. Chanos also observed that China’s property boom dwarfs that of the already collapsed Dubai. While Dubai had 240 square metres of property being developed for every $1 million in GDP, urban China has four times that amount. Even more worrying — in 2009 China was constructing 2.6 billion (yes billion) square metres of new office space. According to Chanos, “that amounts to about a five-by-five-foot cubicle for every man, woman, and child in the country”.

So Australia’s economic miracle and recent bout of affluenza is built on a house of sand. Local debt and what appears to be an unsustainable boom in its biggest customer. So while champagne consumption, which has increased from 1.4 million to 2.9 million bottles this decade, it seems like the time has come to put the cork in this spending party.