confirmation of what we thought, page-8

This from the comments from gunnamatta wipes the floor with which ever point the author of the article is trying to make.

Australia has a great economic past. Yep 21 years without a recession. Well done. It has done this on the back of the largest private debt growth in Australian history and a mining boom.

Lets look at debt first. The debt growth means that private debt to disposable income in Australia is currently at 150%. That debt hangs over Australia’s future. If you think to yourself that 175basis points of interest rate cuts over the last 18 months have made little impression on consumer sentiment and spending and wonder why, your answer is probably about here. Your average Australian is strapped out. That is private debt. Ignore any (generally conservative/Liberal) claims about government debt – at about 17% of GDP in Australia it is better than anywhere else in the OECD and better than most comparable economies in the world, but there’s a sting in that tale too.

Then with that debt, have a think about where the average Australian is employed. That is about 2-3% in mining - the rest elsewhere. Then look at unemployment - sure the ABS stats have been pointing to 5.4% unemployment (if you worked an hour last week you won’t be in them) but you could have a look at the Roy Morgan data (currently running over 10% unemployment).

Now those that aren’t in mining are presumably working in either a globally exposed sector of the Australian economy, in retail, local services, manufacturing or the government sector. How healthy are these? Those globally exposed are seeing their competitive basis hammered by the strong AUD spruiked in the article – the last year has seen everything from car parts makers closing down to banks, services and mobile operators offshoring their service staff, to tourism and education figures taking a battering, as the AUD sparks a response known to your economics set as ‘Dutch disease’. In addition to Australia not actually making anything significant, you could look through ebay on any particular item and ask yourself are Australians better off walking down to their shops to buy major items locally or buying them from the US to be home delivered – would you like to work in retail against an opposition creaming your margins with lower overheads in another country? That’s on top of consumer figures and consumer sentiment data of the last 18 months showing Australians aren’t really spending – figures have grown largely with inflation and sentiment has been uniformly soft.

Government spending has also been trimmed or hammered depending on whether you are looking at a Federal government trying until recently to bring in a budget surplus or a State sector which has seen large scale cullings of public servants in QLD, NSW, WA and VIC. Then there is the prospect of more at a federal level if the Abbott led Liberals assume power in September as every man jack of the country assumes.

Where to be employed and how sure to be of employment - Enough to take on some additional debt?

Then have a look at that mining boom. It has been great, it has for sure shielded Australia from the worst effects of the GFC until now. It is for sure going to mean that mining plays a larger than historical role in the Australian economy for some time to come. But the data of the last couple of months suggest that from some point right about now it begins to recede as it morphs from an investment boom into large projects, to a volumes ramp up against a backdrop of easing prices. Putting aside on of the criticisms of the current government that it utterly has failed to extract any of that for Australian society apart from those directly benefitting, there is the issue that in the December quarter of 2012 Australia’s 4 largest export earners were Iron ore, coal, gas, and gold – don’t ever tell yourself our great nation is much more than a quarry. Now have a look at those. Do you wonder about what smog alerts in Beijing and a focus on global warming globally might do for coal prices? Do you wonder what a Chinese clampdown on real estate construction (the largest consumer of Australian Iron ore) might have on iron ore prices? (notwithstanding the global increase in projects to bring more iron ore to market) Do you wonder what the impact of the US now exporting gas into Asia (setting aside the increased scope to replace coal with gas) and much of the world taking up gas fracking may do for gas prices? What is happening with prices for those right now, and what is the outlook? Even with gold there is a viable argument that it is an investment in a financial meltdown.

TBC

So what has Australia done with its mining boom and credit expansion? Spread the risk and diversified into new productive capacity? New industries? New infrastructure and kit for old industries? Well the answer is that at a national level we have become a nation of property speculators. Australia has about the most expensive housing in the world (setting aside city states - in a nation with amongst the lowest population densities in the world) has a taxation system cultivated to real estate speculation through negative gearing, and has a banking system which directs 2/3 of all lending to mortgages. And that banking system borrows about 25% of what it lends from overseas using the over-valued mortgages of Australian property as collateral. That low government debt figure also plugs back in about here because the government implicitly backs the banks and if ever anyone asks about the mortgages used as collateral for the banks borrowings – basically the first thing which would happen if the property Ponzi were to slow or stop – then the government is presumably on the hook, and government credit ratings and debt levels could be expected to climb as a result (look at Ireland before they stood behind the Irish banks).

Beyond real estate speculation Australia’s credit binge has been spent on stuff from elsewhere which generally comes under the subheadings ‘merchandise’ in the national accounts – code for general crap.

So the offer for many Australians, particularly the young and new migrants (or at least those who haven’t been in a position to extract wealth from another nation to bring with them) is that they can go massively into debt, to buy ludicrously expensive housing (often a long way from where they are likely to get jobs) backed by jobs in industries which are under major stress.

This is the equation that leads back to the politics so glibly questioned in this piece.

Australians aren’t looking at 21 years without a recession, they are looking maybe a year, maybe five, into the future and wondering about what they see, if not disliking it outright. Neither the ALP or the Liberals seem to have a narrative of the type stood and delivered on by Hawke and Keating a generation ago to the effect that ‘this is what the future generations will do, and this is how they will get there, and this is how it will benefit them’. Instead they have a political narrative (widely despised on both sides) which revolves around ‘this is what we will do for you now’ in the context of the doing now seems to be focussed largely on supporting those with assets and debt, at the expense of those without assets and looking to save – except where these latter are prepared to put themselves massively into debt. It’s actually the sort of question quite a few English (not to mention Irish, New Zealand or American – with Canada having broadly the same experience as Australia) think could have been asked elsewhere before the global financial crisis hit.

That’s why Australians aren’t particularly enthused. If the author of this piece had got out of ‘enough press conferences in Europe’ or had chatted with economists and market analysts rather than ‘bean counters’ then there may have been a more interesting piece about the interplay between Australia’s economy and its quite surreal politics. The other thing to note is that other resource rich nations – from Norway to Chile and Brazil could also learn a great deal about what not to do from Australia. For it is a nation with a great many economic and social questions ahead of it and a political process which isn’t providing answers or even a clear understanding that such issues exist – and the gap between the narrative and most peoples understanding is generating disenchantment