By Houses and Holes on September 20, 2012
The grey-beards of Australian economics today unite to deliver one enormous wake-up call to the nation, its government, its interests, its media and its people.
Don’t get me wrong, the bucket of cold water is not deserved in equal measures. For mine, the Australian people have been awake to the dangers facing the country since the GFC, hence the community embrace of saving. But the nation’s media and government have existed in a bubble of hubris, forging ahead with yesterday’s policies and arguments as if Australia is immune to global and historic forces.
I am talking about the end of the mining boom, which is nothing more than the march of the GFC to those that have escaped until now, and the persistence of policy settings that assume that the private sector is immune to deleveraging, as well as the failure to plan beyond the next hole in the ground.
Ross Garnaut and Bob Gregory deliver the bad news today via a string of speeches and articles in the [Australian Financial Review]. For those that don’t know, Garnaut is the architect of the open economy policy settings that have delivered 30 years of prosperity and Gregory is the local pioneer of arguments about the effects of Dutch disease. Both are eminent economists.
So what do they have to say? Nothing good.
Garnaut warns of falling living standards:
“I think we’re going to have a very difficult time adapting to the decline in living standards that’s going to be a necessary part of the adjustment to the end of phase one and two of the boom,” he told a conference on the rise of Asia. Professor Garnaut’s warning that the looming economic adjustment would be more painful because governments had not saved enough of the resources boom in budget surpluses came as international ratings agency Standard & Poor’s reaffirmed Australia’s AAA sovereign rating assuming budget cuts continue.
…Professor Garnaut said Australians would not be so anxious about potential risks if governments had saved more of the resources boom since 2003.
…“The time for careful management of a difficult adjustment is the time that lies ahead,” he said.
Meanwhile, Bob Gregory with Peter Sheehan write an opinion piece that endorses the Garnaut position but goes further with proposed solutions:
As the resources boom unwinds over the next few years, Australia will experience a large deflationary impact, primarily driven by the fall in the terms of trade and in resource investment. The production and export of resource commodities will rise as projects are completed, but this will generate few jobs and limited domestic income to offset the terms of trade decline and the falls in mining investment.
Many have argued productivity growth or labour market reform are central issues to be addressed as the resources boom passes. Productivity growth in the long run is particularly important but the key challenge over the next few years lies in addressing the change in the impact of the resources boom from expansionary to deflationary.
Until recently, theory and practice around the world has given primacy to monetary policy in responding to macroeconomic shocks. But, with many economies in the zero interest rate trap, the limits of monetary policy are being realised. Monetary policy cannot be expected to play the central role in addressing the long-term demand shocks Australia faces. The current de facto policy settings – that monetary policy will support the economy in the short-run while fiscal policy is restrictive – contain risks for the longer term.
They go on to argue that the Federal government will need to spend big on infrastructure to support growth and propose a new fund to finance the spending, in part through guaranteeing state debt.
I agree with every word. But there is little hope that those in power do. Treasury Secretary Martin Parkinson responded:
“Because boom implies there’s a bust,” he said. “Where we will end up at the end of this is with mining being a much larger share of a reshaped economy.”
Ironically, this is the very thinking that all but guarantees a bust.
Reproduced with thanks to Houses and Holes at Macrobusiness.com.au
Colin,
I never object to the payments going to you for the charts and your comments.
At last there is a smart person making these long overdue assessments.
Thank you Brian, I rely enjoy some of the analysis from Houses and Holes at Macrobusiness.com.au
I think many in the west australian investment community have for some time compared us to the coyote who has run off the cliff while chasing the road runner, it is only now that we have looked down. A tradesmen with a stop / go sign earning $100k was never going to be sustainable.
What no one seems to talk about he ever increasing efficiency in the worlds economy. The economy simple does not need the labor that exists today let alone those coming of the university convaer belt. We have demand , supply and money by the bucket load in all economies , What is missing is money in the hands of those with the demand. The problem here is a minority who have forgotten money has to circulate not gravitate to be effective.
We still need consumption. Replacing workers with robots lowers wages and may reduce consumption if prices fall through improved technology. What is the answer? Lower the birth rate or increase welfare dependency?
Sorry Colin I am not sure I follow your point. Are you saying that the whole point of life is consumption? Surly if the economies efficiency , can now provide for our needs and wants ,with fewer workers , why not reduce the work week to 30 hours.. This would reduce many of life’s negatives such overwork traffic jams and lack of family time , to name a few. ,
As I said before the problem is there is to much money chasing returns as opposed to creating employment.
Adam Smith believed that the sole purpose of all economic activity is consumption. As the level of technology rises, the skills base broadens. If you reduce the work week to 30 hours, Blogs & Co. shut up their factory and move the jobs to China, India, Vietnam or the Philippines — whoever is prepared to work a 40 hour week. The result is we all have plenty of leisure time but no money.
The objective of investment is to maximize returns while minimizing risk — not create jobs.
Thank you Colin for stating the main problem with the economy at this point in history. There are many who feel that the whole point of economic activity is to maximize accommodation of wealth. If it creates a few jobs in the processes then all well and good . However as the worlds economy becomes ever more efficient at creating more things that are needs and not wants the more divided we become. Remember that all the money we have is someone else s debt.. If the people cant earn money to pay for their needs then they will take it from those that do. Is that what you want?
I suspect that income inequality increases with advances in technology. This presents a problem as labor demand shrinks while supply is constant, leading — over time — to lower wages. The only way I can see to correct this over time is lower birth rates, reducing long-term labor supply. Legislating shorter working hours has been tried elsewhere (France) but without success.
Population control is used by the Chine’s government to reduce population growth. Some of the problems are that many female fetuses are being aborted so that the family has a boy. Also a population imbalance between carrier’s and the elderly in years to come This leads to a serious population in balance , causing unnecessary stress. If we as a species of animal is ever to get beyond the neanderthal approach to community structure, then we have to learn to share as oppose to compete. For the record I live in a 3rd world country in the bottom 20 in the world ,as calculated by GDP.
Declining birth rates are synonymous with most advanced economies, without any form of population control.
“we have to learn to share as oppose to compete”
Self-interest is a far more durable human emotion — and the foundation stone of the capitalist system.
“By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was not part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it.” ~ Adam Smith, The Wealth of Nations (1776)
Colin
Adam Smith made sense in 1776. However that was over 200 years ago and the world is a very different place. America was awash with untapped resources to exploit and a population with many oppotunatise. Today the western world’s 18-25 year old’s have up to 50% unemployment.and buckets of student debt to deal with.Some will succeed, but those that dont ,will take what they cant earn.
My point is the capitalist system that gave every one who was prepared to make the effort a chance at the middle class life is no more. I accept that as a human animal self interest will always be what motivates, however it is team work that will achieve the maximum result , not the selfish loner.
The system is flawed and that flaw is now becoming visible in many parts of the world. There is an imbalance which if not fixed will cause all our standards of living to fall. Simply increasing the amount of money in circulation is like giving an alcoholic a bottle of whiskey.
Adam Smith still makes sense. The flaw is not the capitalist system but interference with the functioning of the capitalist system: fractional reserve banks and central bank manipulation of interest rates and exchange rates.
You say they then go on to argue that the Federal government will need to spend big on infrastructure to support growth. This is something I never believed in: You never get growth from government spending and if they are saying the boom is over what would be the point of improved infrastructure.
Infrastructure spending should not be undertaken to support growth, but to fix the hole in aggregate demand when the private sector starts deleveraging after a banking/bubble crisis, threatening a deflationary spiral.
Sadly politicians have no clue of effective economic strategy. They seem take advice form economists who share their party dogma rather than constructive apolitical advice. Tell Parkinson to call up Gordon Brown -He knows how to end boom and bust!
The ASX 200 is in an uptrend of two months duration on a daily chart. After 5 years of GFC doom and gloom I expect improving economic conditions not more of the same. Prophets of doom are always right sooner or later but the immediate outlook to me is for improving trading conditions.
What I see ahead are rising stocks and commodities caused by competing currency devaluations (QE) — not because of improving economic conditions. The symptoms are the same but the outcome is different.
yep thats the plan boom bust and with each one force becomes more consolidated.
Government thinks it has power but they have only force there is a difference/
People have power ,government bleed off that power and what they cant bleed they take by force.
Central Banks control everything. They have made every boom and bust in the past. In the U.S our Federal government’s power is gone it has been replaced by a private Central Bank calling it’s self “The Federal Reserve” but it is no more Federal that Federal Express yet it controls all of our banks. It controls the amount we pay on loans for our house, car food and petrol. It is all part of the goal of a one world government. America’s sun is setting too.
“it is no more Federal that Federal Express”
This is a common mis-perception. The Federal Reserve is merely the “back-door” of the Treasury department. Look at who appoints the board of governors (effective control) and who receives the Fed’s profits (Congressional budget).
Collin: It is you that suffers from a misconception. Your belief is exactly what the FED intended people to believe.
In 1921 William Harding then Governor of the FED said ” From a legal standpoint these banks are private corporations, organized under the 1913 act but they are not in the strict sence of the word Government banks.”
This special act of 1913 by Congress was in direct violation of the 16th Corpus Juris Secundum, Section 141 which states that Congress cannot delegate or sign over its authority to any, corporation or foreign nation but with a wink and nod they did exactly that.
President James Garfield said ” Who ever controls the volume of money in any country is master of all its legislation and commerce.”
The FED controls everything it is the real power. All Central Banks are private credit monopolies that print money out of thin air and force the people to pay tax on worthless paper backed by nothing.
That is why the the stock market will drop like a rock. There is no economic recover there is only QE3 a false sence of recovery.
SELL SHORT!
The Fed was set up with private shareholders in order to bypass restrictions in the Constitution on government issuing paper money. The shareholders are private banks, but the government appoints the majority of the board of governors and profits of the Fed are not distributed to shareholders but to the Congressional budget.
If we take International Accounting Standards definition of control (IAS 27), the Fed would be classed as a subsidiary:
Doug
Thank you for your clear statement regarding the Federal reserve. If it is as Colin say’s , and it is a government agency owned by ” We the people” then the 5 trillion in US government bonds that thc Federal Reserve has on its books , could simply be written off .
Yes the FED is a Government Granted Private Monopoly. By law the seven members of the FED board are appointed by the president for a term of 14 years. This is to create the illusion that “We The People” acting through their elected leaders, have some voice in the nation’s monetary policies. In practice however, every president since 1913 has appointed those men who were congenial to the financial interest of the International Banking System. I am almost 80 years old and I worked for the Treasury Department for 30 years before I retired. I know firsthand how the game is played.
If you look at the origin of U.S. paper money you will see it is mathematically impossible to pay off the National debt “William H. Ferkler, Manager of public affairs Department of the Treasury, Bureau of Engraving and Printing said “We are advised the FED pays the Bureau approximately $23. for each 1000 notes printed. This does not include the cost of printing, paper, ink, labor etc. Therefore 10,000 notes of any denomination including the $100. note would cost the FED $230. In addition the FED must secure a pledge of collateral equal to the face value of the notes. Therefore this private banking cartel called the FED receives $1,000,000. for a cost of only $ 230.
Since the notes are no longer secured by the gold standard “We The People are forced to pledge our land, labor and assets. What a racket!
The FED creates this paper money as DEBT out of thin air. This DEBT money is the money supply we are forced to use and obligated to repay PLUS interest. However, the money to repay the interest is never created within the system.
Loan repayments to banks reduce the money supply, because the money is removed from circulation when the debt is repaid. To keep the money supply from shrinking, MORE borrowing is necessary. It is mathematically impossible to pay off the aggregate debt principle plus interest.
It is a Piozzi scheme. It must have more borrowers in order to keep going. This need for more money led to the Housing loans to unqualified persons in a futile attempt to avoid the day of reckoning, borrowers are forced to take on increasing debt to pay not only principal on the debt but Interest too. Debt escalates at an exponential rate until borrowers are forced into bankruptcy.
The FED will never allow “We the People to simply write off the debt it’s a GOLD MINE! Who really makes up the power behind the FED.? Here is a partial list the private group of Bankers that make up the “stock holders” Colin mentioned.
Rothschild’s of London and Berlin, Lazard Bros. of Paris, Israel Mossesschieff of Italy, Kuhn and Loeb of Germany, Warburg of Hamburg, Leaman Bros. of New York, Goldman Sach of New York and Rockefellers of New York. Whose debt is it anyway? Is this what we have worked our fingers to the bone for to pay interest to a group of private investors many of whom hate the U.S. these people collect the usury and control our economy life.
Whoever controls the volume of money in any country is MASTER of all its legislation and commerce! They can make a BOOM or BUST with the stroke of a pen.
The ultimate consequences are: Involuntary unemployment, inflation, burdensome interest rates, and the loss of our inherited rights and freedom. The FED is all an Illusion to keep the masses under control but we are nearing the end of the 100 year cycle it to will pass away..
George W. Malone, U.S. Senor from Nevada put it this way when speaking before Congress in 1957. He alluded to the families that secretly own the FED and control the U.S. finances: “I believe that if the people of this nation fully understood what Congress had done to them, they would move on Washington; they would not wait for an election.”
Chris/Doug,
The scam is right there in front of you and you are missing it because it is so simple: Fed purchases of government bonds are simply the government lending to itself. Why would it do that? The answer is that the government (Fed) pays for those bonds with Fed credits (freshly printed dollars) with nothing to back them.
That is how the government circumvents the provisions of the Constitution that restrict legal tender to gold and silver and forbid the issue of “bills of credit” — what we now refer to as paper money.
Thank You Collin for pointing that out and calling it what is a SCAM!
The time is rapidly approaching when every tax dollar will go just to pay the interest on the national debt. The only reason this Ponzzi scheme had not already collapsed is because the people still have confidence in the system. When the debt swells to $20 trillion the interest alone will be over $1.7 trillion or about 200% of all personal income taxes projected.
The FED violates your 13th Amendment Consitutional rights by placing the people into involuntary servitude. By forcing the people to use an illegal medium of worthless paper money, indebted with interest that can never be paid back, we are placed into involuntary servitude to these private individuals who operate the FED.
If the FED were really part of the Federal Government they would be listed in the telephone books under United States Government. They are NOT listed as such. However they are listed in the white pages next to Federal Express.
For four years, the puppeteers have dressed the bust up like a boom-boom.
As long as the collective “state” strategy is to inflate via currency dilution, the makets will seem to boom and we are fools not to partake.
If we don’t partake, our cash will be worth less than 50% two years from now.
Advantage goes to those that have already.