Sunday, February 14, 2010 12:03 PM
Dear Barnaby. You are correct about DEBT.
The half-wits in the media have deliberately confused PUBLIC DEBT, with NET FOREIGN DEBT. The latter is what matters (since this results in a transfer of wealth offshore) - and while we have little public debt, Australias NET FOREIGN DEBT (NTF) is amongst the WORST in the industrialised world.
Australia's dreadful current account deficit's WILL have deleterious implications for this country's exchange rate and economy. This implication comes from no lesser authority than Paul Volcker, Former Chairman of the US Federal Reserve, April 10, 2005. Australia's net foreign liability position per capita is much worse than the US, and our rate of debt accumulation is higher. Most importantly, we are NOT a reserve currency like the USD. This is what Volker said.
"Under the placid surface [of the economy], there are disturbing trends: huge imbalances, disequilibria, risks… call them what you will. Altogether the circumstances seem to me as dangerous and intractable as any I can remember, and I can remember quite a lot…The difficulty is that this seemingly comfortable pattern can't go on indefinitely. I don't know of any country that has managed to consume and invest 6 percent more than it produces for so long. The United States is absorbing about 80 percent of the net flow of international capital. And at some point, both central banks and private institutions will have their fill of dollars...I don't know whether change will come with a bang or a whimper, whether sooner or later. But as things stand, it is more likely than not that it will be financial crises rather than policy foresight that will force the change." - Paul Volcker, Former Chairman of the US Federal Reserve, April 10, 2005.
Given a decade of economic debt-consumption-agraryan led structural regression (ie real estate agents earning more that scientists and engineers; no 21st century industry development in Australia like other small countries, eg, Samsung, Acer or Nokia here, ‘we’ll just dig up our FX out of the ground until it runs out and speculate the proceeds on quasi consumption items like housing…’ mentality…etc). And Australia is neither a military nor political superpower. Importantly, it is not a reserve currency. Just in case you don’t believe the Former Chairman, witness what Former US Treasury Secretary, Robert Rubin said (with 2 others) in a paper presented to the American Economic Association, January 2004.
"The traditional immunity of advanced countries like America to Third-World-style financial crises is not a birthright. Financial markets give us the benefit of the doubt only because they believe in our political maturity…in the willingness of our leaders to do what is necessary to rein in deficits, paying a political cost if necessary. And in the past that has been justified. Even Ronald Reagan raised taxes when the budget deficit soared. If this kind of fecklessness goes on, investors will eventually conclude that America has turned into a third world country, and start to treat it like one. And the results for the U.S. economy won't be pretty." - Robert Rubin, Former US Treasury Secretary, in a paper written with 2 other authors presented to the American Economic Association, January 2004.
How direct and honest. I wonder if our policy amateurs pulling the levers would ever be as candid.
I am constantly bemused at references to the Pitchford Thesis (Consulting Adults, etc). This simply thesis that is based merely on a National Accounts accounting identity is often used as a crutch for ‘non-policy’. The implication from the thesis is that neither size nor direction of a current account imbalance are of significance inso far as it reflects savings and investment distortions. I do not think anybody would argue against this position. What is salient here are those ‘distortions’ that compromise economic performance. In the real world, distortions matter. A significant distortion (call it institutional/ market failure, or whatever you like) is that I (and most people) can borrow a multiple of their income (ie 400% to 800%) to speculate on the housing bubble. Yet these same people cannot borrow even 50% of their income from a bank to put into productive shares, unless they already have equity (ie housing equity, there’s that self-reinforcing bubble again). This is one factor at the heart of deficit/ exchange rate depeciating Anglo countries. Clearly borrowing (predominantly) money from the technology dynamo countries (with comparative advantage in both exports AND capital) for a residential yield of 1.5% or less (implied P/E ratio greater than 67:1 !) is sub-optimal for an economy (even given beta risk adjustments aka CAPM).
Still not convinced? Take a lead from the most successful investor in the world Warren Buffet, where he shifted billions out of the US because of the impending adjustment of the US to the CAD disequilibria that Volcker referred.
[PS I tend to believe 'insiders' like Volker, Rubin and Buffett, who have held positions of unprecendented power within the financial markets, who understand the disruption of market priciples by fiat biased central banks (eg witness the creation of Greenspans Plunge Protection Team after the failure of LTCM. Why do taxpayers have suffer the added taxation of hedonic manipualations and 'core' inflation. Why is the US Fed monetarizing massive debt through the repo desk, injecting unprecedented liquidity, to sustain the paper wealth illusion of overvalued stock/ asset markets. Why do free markets need such manipulations?
Answer, just read what the maestro George Soros has to say about the unsustainability of financial markets. Since he made over a billion pounds in just one day arbitraging against the Bank of England, I think he knows a thing or two.]
Craig Stevens ACT 0428 351 308
When Lee Kwan Yu went to the ANU in 1980, he declared that Singapore’s per capita output would surpass that of Australia in 20 years. A bold claim for an island without vast natural resources to convert to FX to buy productive capital (like Australia). Yu was duly laughed at by (most) of the flat-earth economists in attendance. He was rudely mocked. Yet, IT TOOK SINGAPORE JUST 15 YEARS TO SURPASS AUSTRALIA.
How did they do it? I won’t be giving a lecture here, yet one can discern similarities with the Celtic Tiger (Ireland) and countries such as Taiwan and South Korea. New Growth Theory plays an important role.
CAD’s that are used for building productive assets that integrate an economy with global technology and industrial supply chains are fine.
CAD’s built on massive foreign intermediation (witness the 70% rise in loans by banks in the RBA Bulletin) used to underpin drastic house price inflation and home renovations, are somewhat different. {See what Adam Smith actually says here, regarding housing expenditure and (FX) producing capital}.
To the flat-earther’s that don’t believe in a housing bubble/ misallocation, just witness what the Citibank housing evaluation method says (simply measuring rental yield against interest-only debt servicing costs) {These guys only manage billions on a daily basis}. It implies an ALL TIME bubble. Witness what the OECD says about Australia’s housing prices/ misallocation.
When Asia is finished bank-rolling the speculative, debt-binging Ango-Saxon economies, to buy Asian capital intensive products, we will see which economies are the most productive.
Will we ever see a Nokia, Acer, Samsung, LG, Ericssen in Australia? Somehow I doubt it. Even after the RBA has failed in its Charter of ‘Stability of Currency’ (as the TWI collapsed from 100 in 1970 to 61 today), our economy is still reliant on increasing (net) debt and equity liabilities. We’re still not even productive enough to have a merchansise surplus sufficient to finance our foreign interest and dividend obligations. This is despite massive reserves of ‘god given’ FX just lying in the ground (with a terms-of-trade boom). What a joke.
Maybe Lee Kwan Yu was right. Maybe we will be the “...poor white trash of SE Asia”.
Economists used to be sophisticated enough to distinguish between structural and cyclical economic growth. These days it all seems too hard for them. “Just let the currency slide” is the maxim.
Structural economic development is difficult. It requires the appropriation of science and technology, and its application to world competitive industry. ITS DIFFICULT. It requires expert policy on infrastructure/ labour relations/ private capital markets/ education/ enabling technologies (IT/ ICT/ Telco), etc.
Cyclical growth is different. Just loosen capital adequacy banking requirements, and allow the punters to blow wads of foreign capital on housing speculation and home renovations. Services ‘industries’ such as banking replace production. Of course, when the punters reach debt saturation, or foreign creditors become nervous - the state of the real structural economy is revealed. The other draw-back is that this can only be done once, after which every other generation thereafter labour under the consumer debt/ equity interest/ dividend outflows.
A bias away from structural policy toward cyclical policy requires policy makers to ignore sound public finance principles, such as when the social benefits of capital exceed the private benefits.
It is said that ‘policy errors’ accumulate as a structural depreciation in the host currency. I note that the USD has depreciated 40% against the Euro since 2001. Currently the US rates 7th on PPP per capita, behind countries such as Switzerland, Ireland and Denmark. And it’s falling fast. http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nominal)_per_capita
Once the USD fully depreciates to its long-term equilibrium rate (at least 40% below where it is now, and continuing to fall), and as global (ie Japanese, Chinese, Tiger-Economy and German) exchange & interest rates rise - the US will continue to fall in PPP per capita ranking (Australia will follow). We should see Japan rank above the US in the next decade or so. At that point, the Chicago School will be shown for what it is. A failure that ignored the inter-generational dynamics of financial intermediation on the real economy.
With monetarisation of massive US deficits though the repo-desk, expect commodity/ gold inflation to continue. Also, expect the current account surplus/ technology focused countries to prosper. Cyclical (foreign debt-consumption driven) service economies will coninue to see widening current account deficits/ and continued depreciation of the currencies. {Even Keynes was worried about central banks debauching their host currencies. After all, its much easier to ‘manufacture’ GDP figures this way than actually become more productive against global competition. These days most economists seem unconcerned (witness the rise of an ounze of gold from $35 USD to $556 !! from 1970’s to 2006.} Maybe I’ll be able to retire 20 years early !?
Make no mistake. It will be an Asian century. Real (marketable) tech-intensive production will eventually trump foreign debt/ equity liability funded consumption/ housing speculation. renovations.
Craig Stevens ACT
Unlike most mainstream economists, I do have a track record in forecasting. I was one of the only economists that predicted the current financial melt-down of industrially hollowed-out, debt saturated, Anglo-liberal economies, some years earlier. I even advised the former shadow minsters’ via a letter in June 2007. The economic ‘experts’ of the time of course scoffed at the idea. They knew better.
Economists fail to acknowledge that Australia has had its GDP boosted by an extraordinary level of international borrowing over the last twenty five years. This borrowing is unsustainable. Net foreign debt has increased from $25 billion (1983) to $674 billion (2008). We are now the third highest per capita debtors in the world and have an economy dangerously dependent in digging (non-renewable) stuff out if the ground to pay for it.
Unfortunately, most of this national debt has been spent on consumption, rather than wisely invested. This is why we continue to post Current Account Deficits, rather than Surpluses after many decades. Unlike Australia, Japan is a lender not a borrower. Japan has seen its net foreign assets more than double in the last seven years to $1,800 billion. Moreover Japan (and Germany) are world-leaders in industrial production, technology and export competitiveness. Both nations were ‘administratively guided’ by the ‘flawed’ economics decried by Kirchner.
Selling non-renewable resource assets (like Rio Tinto) will exacerbate the massive intergenerational burden for the future by ‘flogging the silverware’ to pay for current consumption. National wealth is equal to income producing assets, something which Australia has very little of except for saleable stuff in the ground. Kirchner should be seeking to maximise net national wealth as opposed to temporarily propping up GDP with foreign borrowing and (non-renewable) asset sales. Only the accumulation of income producing assets wealth can prevent a collapse in our standard of living when our international creditors withdraw.
Treasury Secretary Ken Henry has endorsed the $42 billion stimulus package. Henry has previously championed consumption expenditure through his ‘Go Hard, Go Early, Go Households’ aphorism, to boost Aggregate Demand. Is Demand excessively weak? It depends how you measure it. Growth in Demand will likely fall, in line with a recession. The problem is that all Demand must be paid for, eventually.
Australians have been spending more than they have been producing (with Demand exceeding Production) for over 50 years, with a rapidly deteriorating Current Account Deficit the last 6 years. Households have been ‘Going Hard’ resulting in a mountain of debt (third highest per capita in the world) resulting in an interest expense of $51 billion per year, and an economy dangerously dependant in digging (non-renewable) stuff out if the ground to pay for it.
In the 1950’s mainstream IMF economists predicted South Korea would be amongst the four poorest nations in the world, advocating development of labour intensive industry. Luckily South Korea rejected the advice, focusing on capital intensive industry, high technology agglomeration and industrial science. They are the only country to quadruple real income every decade for 4 decades, and are an high-tech export powerhouse. Instead of cash give-aways to Households, government allocated money to companies to research, value-add and export – benchmarking performance.
Austrian economist, Ludwig von Mises said in 1912 that all monetary excess leads to complete financial collapse if followed by further ‘stimulatory’ borrowing by central banks. Only income from production rather than further borrowing can prevent economic catastrophe. Anglo-liberal economies have spent trillions bailing out failed banks. Can they afford 10% of that to rebuild their hollowed-out industrial bases to pay for the Aggregate Demand? Maybe its time that Henry looked to Australian companies to stimulate Demand via investment rather than encouraging more Household debt-consumption.