Outside a clutch of small oil states, few countries beat Australia when it comes to complacency. A decade and a half of outperformance of most of the OECD members plus direct links into the China-India resource bonanza has convinced most of Australia that whatever the problems elsewhere in the world, the problems at home will be small by comparison.

Even a sharp fall in the Australian dollar of 15 percent from a multi-year high of US97¢ set just two months ago is seen as a temporary blip due to the retreat of commodity prices and expectation of lower interest rates.

Treasurer Wayne Swan, not a man for irrational exuberance, said this week that though growth had slowed (to just .3 percent in the last quarter), Australia’s gross domestic product numbers were solid and Australia was better placed than most countries to withstand the global financial fall-out. Even the astute columnist Alan Kohler writing in Business Spectator (an excellent on-line read) remarked that whatever the problems in the US “Australia’s export boom is based on something real and lasting” and there were no real problems in “Australia being the Saudi Arabia of iron ore and LNG”.

But as one who can remember just how rapidly Australia’s fortunes changed between late 1972 and early 1975, this correspondent is worried. Back then a resources boom created a huge current account surplus and led to revaluation of the currency – until things changed after the 1973/4 oil crisis and Australia’s Labor government, which had an inspired leader in Gough Whitlam but incompetent ministers, ended up indulging in bizarre ways to borrow money from unofficial Middle East sources.

This is not to suggest that Wayne Swan is going to repeat past idiocies, but there are other ways in which Australia is more vulnerable now than then. First, it begins what may be a prolonged global slowdown with a current account deficit – around 6 percent of GDP – worse even than those of the US and UK despite the commodities boom.

In the short run, that will probably improve as big iron ore and coal price hikes have yet to make their full impact on the trade balance, probably more than offsetting any declines in other mineral and farm products. Big external deficits were acceptable when Australia was a young country needing capital to develop it resources. But it is a mature economy which has over-invested in housing and allowed debt-driven consumption to grow inordinately.

Australia must very soon face a turnaround in the one little-noted statistic that has been so important to its prosperity since the mid-1990s: the terms of trade. These rose by an almost unprecedented 50 percent over the past decade, from a low in its terms of trade index in 1998 of 98 to the latest figure of 109. This run of good fortune enabled Australia to finance a consumer property boom and contributed to the steep rise in the Australian dollar from a low of US49¢ in 2002 to the recent peak.

The currency’s rise itself had a huge impact on domestic demand, making it both easy for banks to borrow Australian dollars offshore and keep prices of imported manufactures (mostly from east Asia) down.

But looking ahead, what do we see? Yes, export volumes of some minerals will increase as new mines are brought into production and new railway lines and port facilities enable Australia to take better advantage of demand from Asia. But do not imagine that those new coal and iron prices contracts are as good as gold. In times gone by similar deals were signed with Japanese buyers, but when world demand fell “renegotiation” became inevitable. Energy prices (for Australia that means coal, LNG and uranium) are notoriously volatile. As for iron ore there is so much of it in the world, including much of Western Australia, that availability of infrastructure is a far more important issue than either availability of ore or demand in China. Huge supply increases are now underway which at some point will overtake exuberance about China and India growth.

On the import side of the ledger things look certain to get worse sooner. Australia’s first terms-of-trade gain in recent times came not from commodities but from the Asian crisis, which led to currency collapses and the fall in prices of Asian imports. China’s remarkable rise as a low-cost manufacturer then added to benefit. But such things eventually come to an end as the US has already begun to discover and as Australia very soon will.

Until very recently the rise in the Australian dollar offset the appreciation of the yuan (and some other currencies) but the tide has turned and whatever the level of global inflation, Australia can now probably look forward to increasing prices for its (mostly Asian) manufactured imports. In other words, one part of the terms-of-trade gain is already beginning to reverse. Sooner or later it will be the turn of commodities – or at least some of them.

To see just how serious the consequences could be, one must then look not at the trade-based economy but at the domestic demand-driven one. For many months now there has been a disconnect between the buoyant commodity economy, being driven by massive new investment as well as high prices, and the urban centres which have been badly affected by high interest rates – and a strong Australian dollar. Australia may not have a sub-prime crisis and its Reserve Bank has been much more diligent than its US counterpart. Interest rates (now 7 percent) have kept ahead of inflation (4.5 percent). Nonetheless, overall levels of household debt are comparable to the US, reflecting both past consumer spending and mortgage lending. The residential property sector is vulnerable.

Nor will it be easy for the Reserve Bank to cut interest rates rapidly as the economy weakens. Australia still needs to borrow heavily, which means that its rates must attract foreign capital – or the Australia dollar will plunge further. Which is where the current account deficit is so important, particularly at a time of global uncertainties about financial health. While Australia’s institutions look in relatively good shape, there have been enough recent crises among some over-ambitious corporations – such as Babcock and Brown – to make foreign lenders pause a moment. Meanwhile the easy global monetary conditions which facilitated Australia’s debt binge are probably coming to an end.

Years of 4-6 percent current account deficit have left Australia with net foreign debt of A$616 billion and seen a rise in foreign ownership of equity assets – notably of mining companies and utilities sold off to by state governments to the likes of Singapore’s Temasek and the Hong Kong power companies. How much more of “the farm” can it sell? Or is it willing to sell? There are already signs of reluctance to sell too much to China so the nation may face a tough choice of cutting consumption in order to preserve national ownership.

Even if the trade deficit can be brought back into balance – a big if given the likely future trends in the terms of trade – there is a huge investment income deficit – about 4 percent of GDP – to be met. It has net foreign debt of A$616 billion and net foreign equity liabilities of A$113. Australia has the advantage that half the interest income and all the equity income due to foreigners is in Australian dollars so a fall in the currency could ultimately be a benefit.

But in the shorter run it could pose problem for a banks with large US dollar borrowings. And one way or another, the burden of past over-consumption during a period of almost unprecedented good fortune is about to catch up on the Lucky Country.