From Houses & Holes
at 9:01am on December 10, 2013:
While the nation continues to debate whether we should let this business go or bail out that business, the real issue continues to be ignored. Indeed it is so far off the radar that cheap shot commentators like Michael Pascoe can make wise cracks about it while the economy burns.
But it’s not funny. It’s not even a little bit amusing. Australians are being slaughtered by emerging markets; gutted by the Japanese; truncated by the Americans and butchered by the Europeans.
I am talking about the global currency war that we are comprehensively losing while having our backs turned.
Qantas, Graincorp, Holden, Electrolux. These are all iconic Australian businesses that have absolutely no reason to fail. Two are virtual monopolies that should be making money on a conveyor belt. The third and fourth are high tech industries that should be tailor made for a smart, developed economy.
But instead all four are failing because they can’t compete with leaner and meaner foreign operations.
Qantas can’t get cheap enough finance and has no access to cheap fuel the way Middle Eastern airlines do. Graincorp is saddled with out-dated infrastructure and can’t seem to raise the capital to renovate itself despite a supposed “dining boom”. Detroit has confessed that Holden is being pulled out owing to a structurally higher dollar and labour costs. Electrolux is the same.
Metals refining, surely an area in which we should have a distinct advantage, is also failing, with last week’s Gove refinery the latest casualty. Processed food exports haven’t grown since 2005 while raw agricultural foodstuffs have jumped. We’ve already lost half of our petrol refining capacity. The Productivity Commission nails all three for dragging down productivity growth owing to high wages, low investment and idle capacity (read the dollar):
As these various businesses pack up their kits, our manufacturing sector is headed for an unbelievable 5% of GDP, by far the lowest in the OECD (making Luxembourg look like an industrial powerhouse) and approaching or past a point at which the inability to produce material for ourselves is also a strategic risk.
Most disconcerting of all is that this is transpiring as we head into a great reckoning in the wider economy. The mining boom is ending, its fabulous capital wave is subsiding, its huge ramp up in employment is ebbing, and over the next three years it will recede as fast as any business investment correction in the last one hundred years. We’ve plenty more gas but are too expensive to extract it. Perth’s Magnolia LNG is headed to Louisiana to produce gas there instead.
The plan to build more unproductive houses to fill the void is a classic kick of the can, adding to capex briefly but adding nothing to productive capacity. In the mean time it keeps our wages and interest rate structure temporarily high and makes the underlying problem worse.
The prospects for productive Australian industry are waning daily. Yet the dollar is still sitting at 90 cents, boosted by the same countries’ central banks that are feasting on our production, and pouring Dutch disease into our ears while we sit back and debate which business is worth saving.
The issue is not who do we bail out. It is how do we reverse the trend of uncompetitiveness that is sweeping everything offshore that is not buried in, or cemented into, the ground. The currency must be actively lowered or it will only drop when the economy does, leaving us bereft of a rebound.
Australian disease is entering its terminal phase, and boy, is it going to be one for the text books.
Reproduced with permission from Macrobusiness.com.au
Colin, you forgot to mention a number of other issues. Australia has among the greatest concentration of control over numerous sectors of our economy, which works counter to the fact that innovation and dynamism come from diversity and tolerance of different ideas.
The media is an obvious example. Debate on real issues that require detailed study of complex matters gets swamped by catchy, empty statements of opinions guided by political or economic benefit. The most important factor in the future of any economy is how the next generation is educated. The education debate in Australia is overshadowed on one hand by self interested unions determined to preserve the status quo and on the other by laissez faire idealogues who champion “choice” as the path to innovation, when few parents and even fewer children have a choice. How many media outlets proclaim that a central obligation of any society (and economy) is to ensure that the next generation should be educated to have the confidence to trust their own thinking, regardless of their social background? Having bums as parents should not disqualify children from realising their intellectual potential. The success of an economy in the C21st will be based on the diversity that comes from individuals achieving their potentials. The community has a responsibility (and economic incentive) to ensure that a quality education is available to every child.
More significant is a banking industry that limits financial options for small to medium businesses and ensures that finance is high cost and inflexible, fully drawn advances, no offset accounts. Flexible come-and-go finance such as overdafts come at high interest rates. And no guarantee of continuity of finance – when there is an economic crunch, banks routinely call in small business loans, causing the loss of many business, not because they were unprofitable, but because they lacked the cash to repay the loans they borrowed to provide the cash their businesses lacked. It is not just Bangladesh that needs an alternate source of business finance that provides support for individual initiative.
Even more significant is the concentrated control of access to the market. The major retailers have carved up industry after industry, based on using dominant control to screw producers while paying employees among the lowest incomes in the economy. Everyone gets screwed except for the organisation that controls access to the market. The dairy industry may have needed rationalisation, but how did we get to the position where efficient dairy farmers are working their rings out to make ends meet, while the only people making money out of milk are retailers who decided that it would be sold at $1 per litre? Ditto bread, where the major bread producer went from rooster to feather duster because retailers decided that bread needed to be sold at $1 a loaf.
And why have retailers bought out wine auction houses and online wine retailers? If they control access by wine and other liquor producers to the retail market they have that market captive and can screw those producers. It is simple. Concentrate control of access to the market and you control the industry. Understand that and you understand why major grocery chains have extended their reach into liquor, petrol, stationery and hardware. They have no special expertise to contribute to those industries, but they understand that if they can dominate control of the market they can control the industry.
Farmers complain that cattle auctions are no longer an open market. The two major buyers who have dominant control of meat sales do not bid against each other. Any lot will have only one bid from the majors. The major retailers who stridently advocate the operation of the market to make industries more efficient sytematically act to prevent operation of the the market. Their only interest in a market is how they can control it so they can screw advantage from it, from their suppliers and their employees.
If one of these retailers sees a health food product achieving good volume, they find someone to package that product with a house label and the original producer gets delisted – the retailer can take over a successful small producer’s business with no compensation.
Do not waste time puzzling why Australia has been unable to generate an active food production industry. It is not because we cannot produce quality food efficiently, it is because we do not have a genuine retail market as an essential support for a domestic food industry. The only organisations able to stand up to the major retailers are even larger international “food” producers who have no loyalty to local produce and are able to source the cheapest products globally, with quality a secondary consideration.
Like our concentrated banking industry, our concentrated retailers do not see their function as providing an essential economic service to the Australian economy, they see their function as using their dominant position to screw from the economy a share that is disproportionate to their contribution.
We do not need present day Australia as a case study. The Japanese economy grew dynamically during the 1970s. Its stubborn refusal to extricate itself from the economic malaise that has gripped it for decades since has defied conventional economic logic. The Japanese Reseve Bank may have defined the critical factor in its attempts to find which arrows need to be fired to make its radical stimulation campaign work. It has recognised what Adam Smith in 1798 described as a self evident maxim, that attention is too often directed to producers as the drivers of economies, when the real driver of economic activity is consumption.
Nothing motivates a producer more than demand. The solution of the Japanese Reserve Bank is that workers need to earn more so they have more to spend. This flies in the face of the Productivity Commission case that high wages are a cause of lower productivity. Pay millions of workers enough that they create demand and the economy becomes dynamic. Reduce income share to workers too much and demand drops and the economy stagnates.
History is littered with unrecognised case studies. People still debate the cause of the collapse of the Roman Empire (and every other collapse before and since). The strength of the early Roman Empire was the large number of small holders throughout large areas of Italy who prospered from supplying the demands of a growing Rome and coincidentally provided the centurions for the Roman legions that made Rome strong. As wealth and control became more concentrated in fewer families, more provisions came from large plantations that used slaves, often in foreign countries, undercutting the very strength that had established Roman dominance.
Western economies are similarly hollowing out their economies, with extreme dumbelling of income, a growing percentage of income going to the top 10% of income earners and a growing % of income earners gravitating to lower income levels, heading in the same direction that kept Japan in economic stagnation for decades, with cashed up corporations unwilling to invest because of lack of demand from a population forced to live parsimoniously.
The US has been down that path twice in the past century, without recognising the dysfunction in its economy. In 1928 the top 1% of income earners received a peak of 21.8% of total income. Most economies came out of the Great Depression within a few years. The US remained stubbornly in Depression. When war broke out in 1939 the shortage of labour lifted wages, income share of the top 1% dropped over the next few decades to between 10-15% and the US economy regained its dynamism. From 1980 that income share increased back to 21.8% in 2008, just before the next biggest economic collapse since the Great Depression.
I am not sure what all this says about economies, but I am sure that economists are not asking the right questions. Perhaps they should ask why the most successful economies in the world also have the highest levels of trust (measured by World Value Surveys) and the least successful have the lowest levels of trust. A major factors supporting a high level of trust is a low level of income inequality. Economists look for quantitative explanations for economic activity when the real world points to qualitative explanations, the quality of social interactions and of education, particularly in primary levels that implant in young children the habit and desire to actively learn that carries them through their school years.
Increased competition would certainly lift performance, but I don’t agree with raising wages to boost consumption. Herbert Hoover was big on that in the early 1930s. Instead of boosting consumption he got higher unemployment. Even if he had managed to avoid the job losses, higher wages would lead to higher prices, and inflation, rather than an increase in real consumption.
Excuse the simplicity but: if the US dollar rises the Aussie falls…making us more competitive across the whole economy. Great.
If the US dollar falls commodities prices rise…..making us more income because commodities are our biggest income. Great.
Whatever the outcome Australia is uniquely positioned, economically and geographically. I dont see too many problems…except ones self created, lets get on with it.
Peter Castle
If the US Dollar falls, the Aussie Dollar rises — leaving Australia no better off from the rise in USD commodity prices.
2009-2011 was the opportunity to have the recession Australia needed to have, while resources projects would’ve continued pumping capital in. Instead politics dictated terms. Now we need major tax reforms and a bureaucratic overhaul, and a recession when the rest of the world is coming out of one.
Mark Faber said it earlier n the piece. Wages did not keep up with productivity so people could not buy what they produced. Then they borrowed to consume until that source ran out. Now the banks have driven house prices so high that they have consumed all the wealth so where do we go from here. High wages are needed to pay rent or the mortgage. It is time to think outside the square.
I think he has it farce about ace, if you’ll excuse the pun. US consumers borrowed against their housing (home-equity loans) and other assets in order to consume more than their income (what they produced).
Also, banks did not drive up house prices. Consumers did. But the banks helped by lending them cheap money.
High wages expose local industry to international competition and inevitably lead to job losses (hence Australian disease). There only three ways I can see to avoid this: (1) a lower exchange rate; (2) lower wages; and (3) import tariffs. The latter is the most artificial and therefore the least appealing.
Aloha! Just a simple comment here. Given that the Euro is some 30% higher than a USD then why is it Germany has such a strong export market? Australia is sitting on a huge basic material resource, Germany isn’t. Whats wrong?
The “true cure” is this …
“This statement means that the Commonwealth Bank can make money available to Governments or to others on such terms as it chooses – even by way of a loan without interest, or even without requiring either interest or repayment of the principal.”
You Aussies need to follow the advice of Australian economist Mark Mansfield as it is not the first time that Australia faced this same disease. Read his paper entitled “Manufacturing Money”.
LINK: http://www.sosnews.org/library/banks/making.htm
Germany largely exports technology. It does not ship Volkswagens to the US, it ships the technology and builds the cars in Tennessee and Pennsylvania.
Manufacturing money has been tried before but almost inevitably leads to Weimar-type hyper-inflation. What could be done is for the central bank to print AUD to buy foreign assets, ideally housed in a sovereign wealth fund. That way the inflationary impact is limited to the effect of higher AUD prices for imported goods, as the Aussie dollar falls, giving local manufacturers a much-needed boost.
Aloha! Mahalo for your discourse. You leave out the “mittlestand” of the equation and in the instance of German car plants in the USA they assemble, but the main components like the motors for BMW are manufactured in Munich. Germans don’t give away the farm! Also Germany imports raw materials for inputs, which with a strong currency becomes cheaper imports that lower overhead of German based factories and makes their exports a bit more competitive not less. Can’t Australia build its own Holden?
Okay, I am not sure of the AUD Weimar effect. I don’t recall Australia going Weimar. Germany suffered hyperinflation due to political based decisions from their inability to make good on war reparations. The allies came in and took German resources from the Ruhr and left German workers on strike and good shortages followed, which the German government printed up money to pay workers and buy food. In essence the Weimar printed up money to stay in power, not uncommon to modern global government (aka:credit money)now.
Central banks are the problem. Why do we need a “money middleman” skimming profits between the government and its citizens? Its a deal that makes the Mafia envious! Not sure how you got from “Manufacturing Money”(the article) to Weimar? Why not have a government owned commercial bank pay for its own infrastructure without debt and interest? Whoever owns your debt(creditors) and collects the service of that debt(interest)owns your assets. Why allow such inherent instability? Its like Planned Chaos!
As an example the US Treasury added nearly $500BIL in net debt in less than two months time as of Dec 11th(FY2014). It took Exxon 70 years to get a market cap of $411BIL. At the same time the US Fed(US central bank) is adding trillions to its balance sheet in a couple years time. How does that produce a kilo of butter or build the next Exxon? This is why markets are disconnected and why we as global citizens are feeling more and more alienated monetarily speaking. We have been alienated from reality by highly corrupt money and politics.
You make your profits from your market trades, you’re taxed on those profits and then you try to maximize your net profits purchasing power and plan thirty years in the future for retirement based on constantly shifting “free floating” monetary sands built on fluctuating unending government and central bank rules and regulations and rates(The New Three Rs). Under those critical circumstances there is no such thing as the 1% and the 99% … we are all the 100%! Something the 1% will understand and act on too late of course. Mahalo –
The link between Manufacturing Money and Weimar is inflation. Government printing money to pay for goods and services will result in more money competing for available goods and services. The result is inflation.
Raising wages or not, the main issue is with trust. When we grew up we learned from what we saw… if you fall, you learn to pick yourself up and that is an unavoidable experience, our parents didn’t allow me to stay down and cry, I saw their confidence and learned that falling over and failing at something is a wonderful incentive to grow up and excel. The recent Australian governments have demonstrated no leadership and poor decision-making abilities. They are scared to fall down because they don’t have the confidence to pick themselves up.. that fear and ill-making decisions is transmitted to all of us.
What you are referring to is trust in the capitalist system of creative destruction. Central bank and fiscal attempts to avoid the pain of contractions allowed the build-up of imbalances which threaten systemic failure. Attempts by export-driven economies to suppress exchange rate appreciation further magnified these imbalances, resulting in a perfect storm.
While we need to have trust in the market mechanism, to achieve balance, we also need to recognize when the market mechanism is being distorted or manipulated by central bank actions and is not performing its much-needed function.
Exchange rates are being distorted by central bank intervention in a number of economies and we cannot afford to stand by and allow the annihilation of Australian manufacturing.