Sunday, 10. October 2010 22:39
Unfortunately, it appears my predictions were correct. Australia is now in the full swings of the ‘Dutch Disease’, as our economy approaches US Dollar parity, our exports are unable to compete with deliberately deflated countries such as India and China. Australia is at a terrible trade disadvantage, while drunk with high Dollar driven consumption. It beggars belief that only 6 months ago, when I originally wrote my articles questioning Australia’s ‘Economic Miracle’, I was heralded as ‘Doctor Doom’ in some circles. I counter that I was merely offering a seldom heard counter analysis drowned out by the never ending declarations of Australia’s economic victory over the Global Financial Crisis. I maintained, that the crisis was not averted, it was merely delayed. For how long, I will not pretend to hold insight, however that is inevitable, I am sure.
More background on my scepticism of the ‘Australian Miracle’ can be found here:
Australian Coal Exports Continue to Expand
House price growth to slow – or grow?
Business Investment Falls
Australia’s Export Composition
Government Spending Props Up Economy?
Two reports emerged this week, that I am aware of in my current superficial following of the mostly subjective media outlets:
ABC Australia’s 7:30 Report, Tuesday 05 October – will Australia’s resource boom hollow out Australia’s economy? This report should have been aired 10 years ago, not today. However, am relieved that at last the assertions of outcasts such as myself are being acknowledged.
Canberra Times, Thursday October 7 2010 “Overvalued housing market threatens to derail economy” (David McLennan). Surprise surprise. In the mad obsession to divert all available capital to the unproductive sector (residential housing), we have starved the productive sectors of capital, at a time when they need it most as the strengthening Australian Dollar squeezes Australia out of the global market. Not to mention various layers of market and labour distortion in to the mix that have not helped, but that touches on a contentious area I am not yet brave enough to venture in to. It is brave enough to question the dominant economic religion in Australia as it is.
In other news, the Reserve Bank of Australia (RBA) held interest rates last week. This suggests that the RBA does not seem to subscribe to the dominant religion either.
So Australia, drunk on consumption, is blinded to a few dangerous factors that threaten to de-rail our economy and bring back the dreaded 1980s “Banana Republic”. All of these factors together, can add up to a devastating fire storm. Anyone who has lived near an area afflicted by a bush fire storm knows how this works. Any factor in isolation is damaging. Together, they can add up to something spectacular indeed.
1) High currency, aka the “Dutch Disease” (more on this later) hollowing out Australia’s economy, leaving little left after the mining is gone.
2) Consumption driven economy, fuelled by the above
3) Diversion of capital to the unproductive residential housing sector. Not in terms of jobs as the dominant economic religion encourages us to believe, but in what this capital ultimately produces, which is nothing. Residential houses are a lifestyle choice and a psychological support, they are not productive in the sense that a factory or office building is. There is no net job creation like a factory will produce. The jobs only exist for the construction of the homes. It’s a zero sum game if anyone is looking for a ‘economic stimulus’ in residential housing. We would be better off building factories and critical infrastructure if we needed ‘stimulus’. And that of course also excludes ‘school halls’.
4) Sectors outside of of housing and mining continue to be starved of capital, when Australia should be making hay while the mining sun shines. Nothing lasts forever, and China is not exactly quiet in it’s ambitions to buy up resources in Africa and South America. Australia can only hold China to ransom for so long. And countries without democratic election cycles, for all their ills, can play the waiting game much better than any democratic country. China is not a country to under-estimate, and is a client relationship we depend extremely heavily on.
5) If the housing bubble bursts, the Emperor will suddenly have no clothes. Or as other commentators have suggested, when the tide rushes out, we will see who is standing naked. Unfortunately, this will mean that assets on balance sheets across the country will be written down, leading to catastrophic devaluations in stock markets and retirement funds. I do not believe the effects will be as bad as in the USA, however the effects will still be severe, when Australia is facing a demographic bulge that is famously under-funded for its retirement and as economic volatility will continue to threaten government revenue.
If Australia continues on its current course, we will indeed become a banana republic when the party’s over.
However, there are options, one of which is to conduct a thorough survey of the assets in the national economy. One of which is corruption and transparency. Australia has long since left the USA and most of Europe, including the UK, behind on this measure. That is a asset to be exploited in the financial markets. Managing overseas superannuation or pension funds for Islamic countries is a once in a generation opportunity we can not afford to miss. Within a generation, Australia could transform from hole in the ground to tower in the sky. And it would not be difficult, it just relies on some diversion of capital, the right legislative frameworks to be in place and some smart marketing by the government and by our financial institutions. Any financial product targeting overseas Islamic (or any overseas) pension fund management market should be tax exempt at the very least. Countries such as China and Korea do not hesitate to support their national economic strengths in much more overt ways. There is no reason why Australia should not do the same. This would benefit the global financial system, as well as our own well-being. Australia has a ready resource of highly educated Islamic students and citizens ready to go. We should encourage them to stay, not let them all go to Singapore where a government less encumbered by democratic voting cycles than our own, has seen this potential and is happily harvesting this resource with full page advertisements in every global magazine.
This is only one option, and there are many others. I will expand on these over the coming months, while I continue to challenge the dominant economic religion in Australia that threatens to de-rail our economy and send us all in to poverty unless we start investing heavily in our economic strengths, now.
