Australian disease enters terminal phase

ScreenHunter_1161 Feb. 10 17.22

It’s official, Australia’s car assembly industry is dead, with Toyota last night announcing that it will cease local operations in 2017, citing high costs, the elevated Australian dollar, and increasing competition from free trade agreements.

With the announced closure there will be 2,500 job losses from Toyota’s assembly plant, which comes alongside the 1,200 job losses at Ford and 2,900 job losses at Holden by 2017. Total job losses across the economy will be much greater, however, with tens-of-thousands of job losses likely across component makers, let alone those indirectly reliant on the industry. Some estimate as many as 200,000 jobs are now in jeopardy.

There are three questions to answer today. Why has this happened? Does it matter? What does it mean for the future?

On the first,  there is no need to look beyond the obvious of what all three manufacturers have told us: they can’t compete from Australia. Business is about efficiency and it’s cheaper and more profitable to make cars elsewhere and ship them to Australia. It’s wages. It’s the currency. It’s many other input costs including, I’m sure, land costs.

Why is it so expensive to manufacture here? It’s not because of some natural order of things. Nor is it because of the rise of cheaper emerging markets. It’s a choice we’ve made for a dozen years and more to prioritise certain forms of growth. Across the millennium we chose to invest heavily in houses and consumption, we chose a tax regime that supported it and established a higher inflation target band for the Reserve Bank than other countries. The result was predictable in a debt borrowing surge, consumption led growth via wealth effects and high wages growth in non-tradable sectors.

For a while we were protected by a low currency as the world fixated on other things. But when luck turned our way, and the commodities boom arrived as our consumption boom departed in 2003, the inflationist path we had chosen began to bite with a higher currency. Our real effective exchange rate (REER), that which summarises all of a country’s costs versus others, began to climb:

frbrbw

Competitiveness in all tradable goods sectors began to feel the pinch. But until 2008, our existing settings of inflating asset prices and consumption were boosted by our next choice, which was to recycle the benefit of the commodities boom into the local economy for immediate gratification. Rather than correct, we boomed!

Then came the global financial crisis, which pulled down all other Western economies with similar business models to our own, as the debt which underpinned growth became too expensive to service. Our luck held, however, and the commodities boom returned in an even bigger form, driven by emerging countries like China which stimulated building in their own desperate attempt to ward off the GFC.

All but one Australian institution chose again to devour the raw proceeds of the boom. Any attempt to save some of the commodity revenues for the future or to slow it down were smashed by a self-satisfied political economy. The one exception was the Reserve Bank which chose to inflate our already high interest rate structure and currency to prevent inflation getting completely out of hand.

The result was a second leg up in the REER. And now any tradable business not bolted down by extreme competitive advantage was swept offshore, including today car manufacturing, as well as an increasing number of other famous Australian manufacturing brands. So much for where we came from. Does it matter?

There are prior examples of similar episodes in other countries. The most infamous being The Netherlands and what is described as “Dutch Disease”.

In the 1970s, The Netherlands enjoyed a North Sea gas boom. But the resulting macroeconomic impact of a rising real exchange rate meant that it also suffered a material decline in manufacturing output. At the time, The Economist magazine described this phenomenon as Dutch disease. It has since been described in various forms as the “resource curse” or in Australia as the “Gregory effect” after economist Bob Gregory.

What I call Australian disease has two key differences to the Dutch experience. The first is that even during its episode of tradable pressures, Dutch manufacturing never fell below 20% of GDP in output terms and when the boom ended manufacturing output rose to new highs:

lkjb;b

In Australia’s case, manufacturing output is already down to 7% of GDP, the lowest in the OECD and equal with Luxembourg. With cars gone that will shrink towards 5% very quickly. So when one asks if it matters that we won’t be making cars any longer, it’s not an easy question to answer because no developed economy has ever tried to thrive without an industrial base. In relative terms, that’s where we’re headed. The falls in the total number of people employed in manufacturing and the sector’s employment share are going to accelerate.

ScreenHunter_1162 Feb. 10 17.51

And manufacturing capital expenditures (capex) will go the same way:

ScreenHunter_1163 Feb. 10 17.53

That brings us to the future and the second difference to the Dutch experience. Our commodities boom is thought to be more permanent. The gas, coal and iron ore deposits that underpin it have longer duration reserves and it is likely that global population pressures will keep commodity prices higher than before the rise of China. This is the deliberate gamble taken by Australian authorities in their management of this process. They reckon we’ll be all right on the mining truck’s back.

They may be right long term but not the in the short and medium term. One immediate impact of the closure of car manufacturing is that it is colliding with the end of the commodities boom. Australian business investment is headed off an historic cliff for the next three years as the boom winds down. The labour market will be under pressure for much of that period despite the steady rise in exports as projects move from construction to production because they need MANY fewer people to operate the plants than it took to build them.

Another hit to business investment and the labour market is the last thing the economy needs in the next three years and Ford has already said if sales don’t improve it will be leaving earlier than planned, meaning all three may follow in the heat of the worst of the mining capex cliff. That is an unhappy prospect.

Longer term, Australian authorities may be right but it’s a punt without historic precedent and comes with a number of risks:

  • the huge supply response in commodities that Australia is a part of may be more effective than we bargain for. In the history of capitalism it usually has been. Alternatively, demand for our commodities may be lower than we bargain on. China is already slowing more than Australian authorities reckoned and there are very strong arguments that it will have to slow much further and become far less resource intensive to become sustainable. If either of these are true then that will mean commodity prices fall much further than we hope, exposing our lack of alternatives for export growth;
  • second, manufacturing is the key sector that generates productivity gains in an economy. Without it, an economy may face peak productivity and that means decline;
  • third, a total reliance upon commodity exports, especially those that come from a very limited number of multi-national firms, risks unbalancing the political economy of the nation in favour of those firms. That is, it can undermine democracy and the economy as rent-seeking supersedes the commons. It also means you are implicitly eating you nation’s future for those come after;
  • fourth, and more speculatively, if the world turns nasty, as it does occasionally, you are left without the people or intellectual property to defend yourself militarily.  

These four are the symptoms of Australian disease. An economy struggling to grow at potential and unable to increase its efficiency. A political economy where miners rule the roost at the expense of everyone else and future generations are ignored. An overly dependent ally that can’t carry its own weight strategically.

Can anyone really say with a straight face that they see none of these symptoms in Australia’s shaken frame?

89 Responses to “ “Australian disease enters terminal phase”

  1. Lef-tee says:

    “So when one asks if it matters that we won’t be making cars any longer, it’s not an easy question to answer because no developed economy has ever tried to thrive without an industrial base.”

    Oh goody, we’re engaging in a grand socio-economic experiment – toss our country in at the deep and see if we can manage to swim to save ourselves. If we can, fantastic! If we can’t….erm, what’s plan B?

      • Lef-tee says:

        Too late.

      • migtronix says:

        Genius! Of course the unions will robots by then :)

      • casewithscience says:

        Sorry HnH, I think you vastly underestimate our intellectual capital. We just need some transfer of actual capital from making holes to fueling new industries.

      • flyingfox says:

        @casewithscience

        Unfortunately the vast amount of intellectual captial (and I do agree on this point) are drowned by the even vaster amounts of sheer stupidity.

      • JohnsonM says:

        @ casewithscience,

        I know we like to say that, but I’m not sure what statistics support that view. We export less professional services than the average country as well (i.e. we have a revealed comparative disadvantage in most ‘white collar’ high intellectual capital / high value add services).

        Travel is doing well though, and that includes education. Is that the intellectual capital you meant?

    • tonydd says:

      It is my fear that Tony Abbott has a kind of Pol Pot approach to IR in this country.

      He can’t ‘fix’ the problems so he will oversee the complete destruction of unionized industries and begin again from year Zero on the AB (Anthony Abbott) calendar.

      However the intelligence of this ideology is questionable when recent governments of all persuasions have cranked up the single greatest input cost of labor for current and future industry, that of course is shelter.

      While V. I. Lenin is not on the PM’s reading list he would do well to note one of VIL famous and simple truism,

      ‘everything is connected to everything else’.

      • speculator says:

        if anything, he reads Greenspan

      • Mining Bogan says:

        It’s interesting how it’s all turning out. Big business ran the wages up in a failed attempt to break union influence. Kinda blew up in their faces. Now it seems the only way is to scrap any business that has an organised workforce.

        A real foot-self-shooting thing going on in Oz.

    • DMc says:

      Plan B is agriculture and tourism. The FTAs we’re signing up to post-haste will allow us to export food to countries like Korea, don’t you know.

      Oh what’s that? Agriculture is only about 3% of GDP, tourism even less, and those FTAs are helping to kill local manufacturing? Faarrkkkk….

  2. Pfh007 says:

    “Longer term, Australian authorities may be right but it’s a punt …..”

    They have no idea what they are doing – both the LNP and the ALP.

    They have been relying on the set and forget ideological promises of neo-classical/mutant keynesian theory.

    * No need to manage growth in private debt

    * No need to manage the growth in mining volumes

    * Monetary policy is the solution for all occasions.

    * Foreign ownership of local capital and assets like land doesn’t matter.

    * Current account doesnt matter because if foreigners will lend we must take.

    As those promises have been shown to be hollow they have simply no idea what to do next except to run around and point the finger and blame irrelevancies.

    Until they understand the mindset that produced this outcome there is no real hope of lasting solutions.

    They could do a lot worse than be forced to engage with the debates that have been raging on MB over the last few years.

      • Pfh007 says:

        Absolutely.

        As Elvis might sing.

        “They are always on my mind “. :)

        The RBA charter must be changed and clauses (b) and (c) removed to make it clear that the RBA is only responsible for controlling inflation.

      • Andy! says:

        +1
        And none of that “look through” BS and no more ignoring or explicitly targeting exponential house price inflation.

      • glissom says:

        “The RBA charter must be changed and clauses (b) and (c) removed to make it clear that the RBA is only responsible for controlling inflation.”

        The idea of an independent reserve bank controlling inflation lies on the same neoclassical assumptions as the other mistakes we’ve been making since the 80′s.
        It also relies heavily on NAIRU, it’s a tool that uses unemployment to combat inflation. Madness.
        We need different economics and different policy and the RBA is very much part of the problem.
        Basically agree with all your other points above.

    • aj. says:

      Well put Pfh – the political classes really do appear to have no idea what they are doing.

      • Opinion8red says:

        You don’t need to know what you are doing, when you only do what you are told to do by others.

        This leaves only the very minor dilemma of coming up with media sound bites and press releases that project a more or less credible perception that you do know what you are doing.

      • Vitalstatistix says:

        RBA should be abolished, otherwise similiar outcomes to that in the US may happen here.

    • Mik says:

      From out of the ashed could possible come a phoenix, making Aussie made cars that one day may compete against the likes of Merc, Porche, BMW and Jaguar. I have already heard that a group are looking at buying Holden out and have offered 750m for the business.

  3. tonydd says:

    It is my fear that Tony Abbott has a kind of Pol Pot approach to IR in this country.

    He can’t ‘fix’ the problems so he will oversee the complete destruction of unionized industries and begin again from year Zero on the AB (Anthony Abbott) calendar.

    However the intelligence of this ideology is questionable when recent governments of all persuasions have cranked up the single greatest input cost of labor for current and future industry, that of course is shelter.

    While V. I. Lenin is not on the PM’s reading list he would do well to note one of VIL famous and simple truism,

    ‘everything is connected to everything else’.

  4. aj. says:

    Thanks Boomer politicians and business leaders you have a done a, err… really terrific job and well we’ve all really just loved having you about, but, umm we might just take it from here.

    Thanks X/Y

    Hey that’s a really nice black Audi – you should enjoy that in retirement.

    • migtronix says:

      And what does one hear re: investing in hi-tek manufacturing , bio-med, software, robotics, etc aj? Churp chirp Churp. Crickets. Cicadas. Other winged beatles…

    • emess says:

      Gen X has been voting for the past ten to thirty years. The first of them will be fifty Years of age this year.
      Pre-boomers have been voting forever.

      Maybe Gen Y has a genuine grievance, but the rest of us are up to our necks in then responsibility for where we are now.

      • migtronix says:

        If voting changed anything they’d make it illegal. And yes that goes the boomers too.

      • emess says:

        Question.

        At the Federal election last year, how many gen x voters even raised housing (for example) as an issue.

        I mean if gen x had raised these issues at a political level, and boomers or pre-boomers had thwarted or dismissed their concerns, then gen x and y resentment would be understandable. However, of all the election issues that could have come up, how many of those dear to the hearts of gen x were even proposed, let alone fought for?

      • Escobar says:

        I’m an X

        I’m not complaining – I’ve had great jobs throughout my career and have been able to move in an out of jobs easily.

        I don’t know any boomers or X’s that are complaining. My circle isn’t that large. A limited perspective.

        A 5% unemployment figure covers all sins.

        Point is – would we have been happier with a consistently large unemployment figure while encouraging a welfare state a la southern Europe.

        Or are we better off encouraging business and productivity reform which we have done in the past.

        I would expect the Y’s to complain, but here at work they tell me they’re saving for a house – still somehow optimistic… even after I explain what I’ve read on MB.

        2 cents

      • aj. says:

        I reckon the boomer pollies and bankers have been a little skinny with the truth while gen X has been flat out chasing the carrot.

        Work in finance Escobar? Those X’ers who have been in finance have had a good run.

        Boomers vote as a block, so they have been running the show, both on planning and speculation, the X’s and Y’s (now many loaded to the gills with debt) are just waking up to the long con.

        I don’t see this a boomer fault, rather the clever work of the boomer generation of usurers and rent seekers.

      • Escobar says:

        aj,

        Yes – finance.

        All of my “X” friends including finance and non-finance – optometrists, scientists, government directors, tradies and business people seem to have done quite well (aged between 35 and 50 years (i’m low 40′s)). Yes technically the 50yr olds are Boomers.

        Obviously that wont continue but they’re well placed to handle a shock. Admittedly it’s not a good cross section of people to base any judgement, but we have gained incredibly from the last 20-30 years.

        Just don’t understand why we haven’t heard much from gen “Y”.

      • aj. says:

        The bigger issue Escobar is the sellout of the country’s manufacturing base and productivity for housing wealth, and X’ers should be getting concerned about this as their kids hit school/uni, and perhaps even for their own jobs.

        It’s pretty obvious now that to counter this our politicians have been running a surepticious massive unfettered growth population model and kept the private debt levels at nosebleed levels, and the more we do this the more we degrade our lifestyle and environment on the hope it can be sustained.

        My view is that people don’t start getting wealthy until they own their home outright and can then start saving, but many X’ers will not be in this place until very late in their lives and even then it will need some serious inflation.

      • Escobar says:

        aj

        For what it’s worth, I (and people I hang with) should pay more tax because we have gained, especially through property.

        Happy to pay what’s fair.

        SLIGHTLY more Land tax, Capital Gains Tax… even Income Tax but that affects everyone (too blunt).

        I realise I’m off topic, but so long as higher taxes aren’t deflationary or hinder investment or activity. We live in the best country in the world – we should pay for that privilege.

        I’m in finance and lean towards capitalism & entrepreneurship – but not this rigged system we have evolved.

        If I felt I wasn’t doing to well (especially when in my 30′s) I would have left for greener pastures.

        Gen “Y” would have to be thinking this given the cost of housing and graduate opportunities.

      • drsmithy says:

        Just don’t understand why we haven’t heard much from gen “Y”.

        They’re voting with their feet and emigrating.

  5. 8mill says:

    I loved the way Malcolm T on q&a last night said why not let spec go, as it would be great if another business came in and said, we’ll take all these workers etc and build a thriving business?

    What planet would that be on malcom.

    • moderate mouse says:

      What else would you expect from Q&A? Verbal cockfighting dressed up as intelligent discussion.

      On topic – the Great Reckoning approaches. 5% manufacturing is just jawdropping. What exactly does this country produce now? Some rocks to build China’s empty apartments. Some coal so China can smelt the rocks. Some gas that Japan wants at half the price (and we’ll destroy our farmland to get it to them, thank you very much), and not much else.

  6. Andy! says:

    Not my first choice, but under the circumstances this is absolutely wonderful news because housing prices will be decimated to where they should be for a sustainable future.

    • Wing Nut says:

      Nah, just open up the immigration flood gates with all those cashed up buyers. Give it a couple of years til they realise they’ve been sold a dud, pull their cash and skidaddle. THEN watch house prices.

      • churlish says:

        The fact that buyers and real estate pundits remain cock-a-hoop when firstly the RBA has crushed interest rates because of the expected slowdown, and second, that there is now a regular feed of bad employment news is astonishing to me, but what one would expect in a bubble where euphoria reigns.

    • casewithscience says:

      The house market is separate to the rest of industrial production. IE, if people don’t get a good price, or at least close to their original purchase, then they just don’t sell. This limits supply, which has an obvious effect on the house price for new consumers……

      The only way to push people out of their homes is through increasing repayments (ie an interest rate hike). But enough people are locking in now that the effect will not be strong, at least for until the next correction phase in 5 years time.

      • Explorer says:

        It will be unemployment that pushes people out of their homes, be they owned, mortgaged or rented. The renters and mortgaged with no buffer go first, then the buffers run out and more go, and then even those with full ownership but with long term unemplyment can be forced to cash out and rent to survive.

      • AB says:

        The house market is separate to the rest of industrial production.

        Of course it is. Those who lose their jobs can just pay their mortgage out of their dole payments.

  7. migtronix says:

    So who’s putting in bids for the very last car to roll off an Australian assembly line? I reckon the last run will sell like hot cakes

    • Mining Bogan says:

      Ha! My fellow bogans are lining up as we speak to grab the last HSV or FPV and put it up on blocks. Reckon they’re gonna be rich. They even think the ones they already own are going to be worth a motza.

      It’s hard trying to explain what a classic car is to them.

    • StatSailor says:

      Like the rush to buy the last Australian Ford that caused the surge in Ford’s sales that lead to, oh, an acceleration of their plan to leave?

      Crickets, cicadas…

  8. myne says:

    I blame Howard. It takes a while for an economy to turn.

    * Failure to use Keynesian saving during the boom by dropping effective taxes.

    * Changing mortgage interest to rents in the CPI

    Those two policies allowed and forced wages up by massive and hidden inflation locked away in asset prices.

  9. Snail Cafe says:

    Great article HnH, I cannot remember a time in my lifetime a scenario like this where we are living in such a confused daze of high property costs and a tumbling manufacturing employment sector. The already empty factories here in the blue collar suburbs of Sydney that I see today, not one of them has been reinvented into another new manufacturing identity. They are either sitting empty or being used as a storage facility and some have been redevoled into new smaller commercial units selling anything from pet products to keep fit classes.
    BTW Harry Dent is coming to Sydney this weekend I think….he is quite a big name and gets a lot of airtime, I was thinking would it be worthwhile for HnH and Gunna to get an interview with him on the Australian Disease.

    • moderate mouse says:

      Dent was interviewed on Channel 7 news over the weekend (hey I was channel surfing…). They actually did a good job of it. Dent called a 30-50% drop in house prices over the next few years. Some sprukebot from Residex was on there putting the counterpoint, and Dent brushed him off by saying you simply can’t listen to those who are part of the ponzi. The piece ended with the following: “So the message to first home buyers is simple – wait. The message to investors is – get out now.”

      Agree – would be good to see an MB interview while he is in the country.

  10. RobW says:

    We don’t need to continue to produce things, add value to our exports, or worry about unsustainable levels of personal debt or rising unemployment. A new government, cheap credit, and rising house prices and the wealth effect will save us!

    Housing, Housing, Housing!

    can I hear an Oi, Oi, Oi?! Probably not from you un-Australian housing bears on Macrobusiness..

    • flawse says:

      RobW

      No!!!! BOOM! I’ve just bought! Lord knows how this is going to end up but one way or the other the result is going to be very very extreme.
      All my nightmares of 50 years are coming to pass.

      • migtronix says:

        Do you see now how it doesn’t pay to be awake flawse! If you’d been sleeping peacefully like everyone else last 50 years your dreams would be unicorns and fairy-floss too :)

      • flawse says:

        Yeah mig My (ex) wife always said to me ‘Why do you worry so much? You know too much! Everyone else is just buying houses, getting rich in them, and having a good time! How right she was!”

      • migtronix says:

        Ha ha yes that’s a common refrain with me also flawse I get frequent from (ex) girlfriends. In truth though I have a stash of Au/Ag no one but my dad knows about, a slew of paper assets and some curious inventions that, in totum, would well exceed most people property portfolio – and in diversification beats it hands down! But thats for me know and no woman to ever find out about ;)

      • flyingfox says:

        @flawse Ignorance is bliss. Just follow the masses …

  11. evilsync says:

    “She’ll be right mate!”

    -evil “I lol’ed” sync
    11/02/2014

  12. meco says:

    Perhaps it’s time to encourage one of our small-scale niche market auto-manufacturers to go larger scale and soak up some of the skills that will be lost once the OS-owned car manufacturers leave. If the federal and state governments were willing to hand over hundreds of millions of dollars to foreign-owned companies, why not invest in an Australian company which is willing to design new cars and expand?

  13. rob barratt says:

    It will take a generation to change the mindset of Australian workers (excepting our farmers).
    Firstly, they’ll need to realise that the quality of their media is such that many of them have never got to read about the damage caused by mal-investment. The same goes for the Big Australia Ponzi. The way we are going, immigrants are just heading to join the Centerlink queues.
    Secondly, the age of entitlement has led to there being:
    1) Three forces working in the economy: The big business vested interests, the workers and the unions. None work together, the unions in particular have metamorphosed into something resembling independent corporations, many of which are subjected to no form of audit. Recent events at Toyota have amply demonstrated that the unions will sacrifice the workers for their own ends. Bizarre. I and many others on this BB have worked in Germany & Holland. You just have to work there to see the difference, everyone pulls together in the enterprise.
    2) Poor educational policy. Everyone gets a pat on the back. I took part in a telephone interview a while back for a ‘graduate’ we needed in IT. I was flabbergasted by how little that person had been taught. General levels of literacy and especially maths here are a real challenge to any hope of a new high tech age. You may not like the extreme competition for higher education in places like Singapore, but once you realise that life is/must be competitive, you have no choice but to accept that what you are seeing is essentially evolution. I admit that this and globalisation does not portend well for many of us. The Luddite movement of the early 19th century may yet happen again.
    3) A lack of political leadership, a political independence from both unions and business rent seekers. Having said that, the level of debate, the complete polarisation between “Left” and “Right” here is hugely damaging, making leadership that much harder. Everyone walks away from the IR dilemma. Again, a comparison with the successful EU countries makes all this obvious.
    It will take a generation, a generation who are all too likely to witness huge falls in their standard of living.

    • flawse says:

      Sensational post!
      I disagree re a generation. I’m thinking more like two or three generations! We’ve got to train some teachers to train some other teachers to train a sufficient numebr of teachers to teach generally. Then we’ll be turning out Grads for whom there is no industry…so then we have to build the industries etc etc

    • gooseberry says:

      RE: Lack of political leadership.

      I believe it is an outcome of two things
      - our relatively short federal terms (3 years)
      - how shall I put it, a lack of “sophistication” in the general population’s understanding of the reality of things born about from an inadequate education on topics like economics, science, technology, logic and morality (I mention morality from the perspective not of religion, but of self-interest vs benefit of society/nation)

      Both those things combine to bring into the political landscape people who are not willing to make hard decisions that benefit society and the nation in the long term, but short term decisions influenced by groups acting out of self-interest – just to get elected or kept in their seat at the next election.

      • flawse says:

        Thanks gooseberry
        Add in an idiotic MSM and hours of brainwashing ‘It’s all about me’ advertising every night!

        I heard a good comment a day or two ago on the ABC (of all places :) ) Whoever it was said (more or less) ‘ We have become the consumers of government. We vote for who will give ME the most’

  14. 3d1k says:

    ‘A political economy where miners rule the roost at the expense of everyone else and future generations are ignored.’

    C’mon mate, you know this is a nonsense statement. Provocative entertaining hyperbole, but nonetheless vacuous.

    The resource investment boom carried the nation and is the only reason we did not succumb to the economic malaise that afflicted so many post GFC. It has delivered years of globally enviable economic conditions.

    The Dutch survived so-called Dutch disease however it is important to recall that manufacturing in the seventies was not subject the the competitive pressures presented by globalisation experienced by all over last couple of decades. Globalisation and technology combined have transformed the manufacturing and trading landscape.

    Blaming the resource sector is misplaced and does not address the very real challenges ahead. The resource sector has delivered many good years. Policy makers well may not.

    • General Disarray says:

      ‘A political economy where miners rule the roost at the expense of everyone else and future generations are ignored.’

      C’mon mate, you know this is a nonsense statement. Provocative entertaining hyperbole, but nonetheless vacuous.

      I dunno. We’ve got one of them running a political party and another that transports politicians around on her private plane and has them interfering in her personal legal matters.

      Nonsense, vacuous? mmm

    • Pfh007 says:

      C’mon mate you know that you are gilding the lily.

      I love big holes as much as the next bloke but the issue is the rate at which mining was allowed to expand.

      The rate of expansion was too great with the result that both the export of dirt and the investment boom lit a rocket under the exchange rate – with a public and private credit boom driven by overseas borrowing doing the rest.

      Certainly the Fed tax grab was a mistake – the states royalties were quite capable of extracting the super profits.

      All that was required was a slower rate of growth and a system of export volume licences issued (by auction) by the Fed govt would have achieved that.

      The mining industry is a golden asset but it requires a bit of management so it doesn’t wreck the joint.

      • Escobar says:

        Pfh

        Instead of slower growth, we should have “rat holed” the proceeds for future generations.

        Otherwise you’re saying instead of going for broke to win a grand final, we’d rather save ourselves for the long-haul only to become minor premiers at best (still good, but not great).

      • flawse says:

        Actually it wasn’t the resources boom as such that is the problem. As pfh opines it was our management of it and our willingness to sell off our natural resource assets to fund current consumption that is the problem. We should have had some capital controls which would have automatically slowed the process down. In addition we should have had some degree of Aus ownership but we can’t do that without saving which means higher interest rates which, in the current environment, means a higher exchange rate!
        Get rid of the FF&FFFER! Let’s get some damned sense into what we are doing.

    • migtronix says:

      Agreed 3d1k the resources gift ought not be looked in the mouth.

      HOWEVER export duties should be doubled! And all those BS tax-breaks for working above a certain latitude should also be scrapped — hell they pay more than offsets it.

      And residents of Peppermint Grove should be the first to capitulate to a land tax!!!

      • flawse says:

        Mig
        I’m invested in an iron ore mine which may or may not get going after about 15 years of investing with no return and no guarantee of ever gettting anything back. Why, after looking to the future and inversting in something that would be in the long term intersts of the nation should i pay an inordinate amount of tax relative to somebody who invested in taxpayer subsidised bank shares? I don’t understand.

      • migtronix says:

        @flawse: Dude you either give a free reign to plunder resources or you don’t!

        I agree re investing but the payoff should be collapse in the financial bubble not more cheaply extracting resources.

        EDIT: Yes of course I meant for project going forward naturally

      • flawse says:

        The bubble in resources is caused by unfetterd capital flows and the FF&FFFER. We spend the sale of the in-ground resources on consumption. By all means set a royalty scheme in place that can be seen upfront. Then we invest with knowledge of that scheme.
        We cannot just go and hit industries with punitive taxes just because one day we decide we don’t like them.

    • RobW says:

      “The resource investment boom carried the nation and is the only reason we did not succumb to the economic malaise that afflicted so many post GFC.”

      Ridding on China’s back may have deferred the day of reckoning, but it doesn’t mean it’s not coming. If the property and share markets do implode what will we have to show for the resource investment boom? Free market ideology suggests the proceeds will have been wisely invested, I’m not so convinced.

    • Powermonger says:

      Agree.

      I think the biggest problem, and a problem just not isolated to Australia, is that we basically abandoned our manufacturing skills and processes in pursuit of easier profits and gifted this to China. We thought we were smart but instead of helping ourselves, we passed on all our ingenuity, manufacturing standards, patents and processes and taught Chinese manufacturers how to do it instead, there by empowering China further and crippling ourselves.

      Now companies and countries have to dance to China’s tune, we no longer can march to our own beat. Instead of learning from this mistake we now impovrish ourselves further by selling our homes and farmland to China and other foreign entities.

      • Snail Cafe says:

        Agree with you 100% PowerM. I saw it with my own eyes from 2005 on and I thought how bloody stupid and short sighted the West is ….as the Chinese smirked to themselves and must have been thinking, “C’mon suckers big note yourselves as much as you like and we’ll play the Face game which you don’t understand”. As I’ve said many a time tongue in cheek…the Western businessmen sold out many a time in China after being supplied a good looking Chinese girl for the night and the western prick thought he was doing the screwing…..No No it’s too late now for us in the west,we have been totally f—ed by a much smarter,cunning and dare I say cruel culture that plays the long game.

  15. 3d1k says:

    My reply on this thread have disappeared!

  16. 3d1k says:

    My reply on this thread has disappeared!

  17. DarkMatter says:

    One aspect of the Australian Disease that is seldom mentioned is the fact that Australia has no tradition of technological innovation or manufacture. When we make or invent things it is usually seen as an oddity or a bit of comedy.

    Other countries (US for example) have innovation enshrined in their history and culture. Engineering folk heroes – Bell, Ford, Edison, Steve Jobs, Bill Gates, Elon Musk. In fact the list would run to hundreds. Some of those people actually came to the US for opportunity and to be valued. Then, there are the achievements – Apollo, Mars, Atomic energy, computing.

    Australia has mostly been governed by lawyers, bankers and primary resource men. Technologists (for want of a better word) have always been seen in Australia as lower class impractical tinkerers. Our inventions are often cast as a bit of larrikanism – the Hills Hoist (an aluminium tree the missus can hang the washing on). The Victa Mower (saves valuable drinking time). I suppose it is a form of cultural cringe.

    Anyway, given the prevailing attitudes, it was probably inevitable that we would eventually end up where we are – with no manufacturing capacity. As a nation, we actually don’t want to get our hands dirty with silly little widgets. That’s what Asians are for (as well as buying our stuff).

    I am afraid that this is the only plausible explanation, because in reality Australia is up its eyeballs in opportunities.

    o Solar energy technology
    o Ship building
    o Electric vehicle (4WD)
    o Batteries
    o Silicon wafers

    There are dozens of hi-tech low-labour things we could do. We have all the resources in our own backyard, we just don’t have the vision and optimism to do these things. And, sadly we won’t. Australia’s future now belongs to Asia. We are like a badly run business that is waiting for new owners with energy and vision to come in and make a go of it.

    • McPaddy says:

      Sadly, I think you’re spot on there, DM. Hard to see how this can end well.

      When it comes down to it, despite the propaganda, we’re really a nation of value takers, not value creators.

      First we took the land. For the last 150 years we’ve been pretty systematically extracting all the value from the land that we can. Fundamentally all we’ve ever been able to sell externally in decent quantities is things that we haven’t created.

      The really sad part is that there’s so little awareness of this in the public at large. We’re too busy patting ourselves on the back.

      While the party continues – good times!

      We’re like a trust fund baby on a national scale.

      • myne says:

        Trust fund baby boomer.

        One word adds a whole new level, doesn’t it?

      • Snail Cafe says:

        Hi McPaddy and DM very well said.
        I was watching MKR on Sunday night (not my choice btw) but I couldn’t help thinking that the peanut referred to as the captain who was cooking with his missus and was quaffing wine as he swanned around full of bullshit as he stuffed up everything but took it for granted that they were going to get a high score is the sort of character that is now up there in a good job in Australian society…yeah the peanut works in a bank btw.

      • flawse says:

        We’re too busy patting ourselves on the back.

        God yes!!!!!!!!

    • rob barratt says:

      DM
      If you wanted to start up a high technology enterprise wouldn’t you need to look for three things:

      1) A legislative & IR climate that did not prevent you from operating your business efficiently;
      2) Political stability; and
      3) A highly educated pool of prospective employees.

      Australia has 2 & a fair number of 3, the problem is, too many would-be entrepreneurs fall at the first and look elsewhere.

      • DarkMatter says:

        That is quite a rational way to look at it. check 1 check 2 check 3.

        Part of the problem is that it has become an ingrained reflex to see things as the Fire Sector does. You put all the rules and incentives in place and TahDah up sprouts the nice little earner like magic. Ross Gittens is a great proponent of LegoBlock economics – those displaced manufacturing workers will recreate themselves as service sector workers because they are just numbers.

        A flaw in that idea is that if the politicians have the power to fiddle the legislative & IR climate to make high tech viable, they also have the power to fiddle legislative & IR levers to make, say, banking and Real Estate into a golden goose. The attraction there is that they feel comfortable with banking and RE, whereas engineers and hi-tech stink.

        Innovation has other aspects as well. From a purely rational viewpoint you would never invest in new ideas – because they mostly seem hairbrained to a sensible person.

        For example – at 17 Bill Gates was a skinny nerd poking around in computer clubs with unwashed hippy-like students and assorted misfits. He had a little BASIC program that ran very slowly. We all saw he was destined to become one of the richest and most powerful men on the planet – yes? Same deal with Steve Jobs and Woz. A little home built computer board – they showed it to HP and got shown the door. HP can now barely build a pale imitation of the Apple iPad. HP obviously knew where the big money was going to be – second rate printers and office equipment.

        Innovation has a bit of alchemy to it. Silicon Valley was a hot bed of ideas and startups. Innovation feeds on ideas and you need a culture to nurture that. In Australia we have the opposite. People are mesmerized by The Block and Real Estate and easy money crowds out our dream space. Property is the sure thing – let some other mug make the toys for you to buy.

      • Lighter Fluid says:

        You would also need a willing Capital base, and as DM has so eloquently explained, there just isn’t the interest here.

        Venture capital in Australia has dried up significantly since 07, and the market for listed companies in those sectors is small (thanks to drowning out of all speculative-type stocks by explorers). VCs look for an exit, and as it is, there just isn’t the capital or appetite for high tech, high risk, discovery-phase companies in this country.

  18. China-Bob says:

    I’d expect manufacturing to fall well below 5% when all the Auto makers close, the problem is that manufactures both create and belong to extended value chains. Even when moderate contraction occurs you quickly find that critical elements of the value chain are no longer viable and suddenly close, this causes the problem to spread its the law of unintended consequences and its real.

    This sort of wholesale destruction of a complete industry is without precedence, it will have unexpected follow on consequences, this could be good (as in every cloud has a silver lining) but generally speaking that’s just wishful thinking, when an industry is in a state of collapse the insiders are those most effected so they’re likely to be the least optimistic and the least capable of recreating their own future.

    One of the unintended consequences might be a huge Aussie brain drain. A kinda universal @#$%-it moment, I’m out of here, whats the point of staying?
    I know that many local Aussie engineers and scientists that feel this way. There are a lot of CSIRO guys that could easily double their pay by just moving anywhere, they liked the job so they stayed, They’ve now they discovered that the country really could give an RA about them, so maybe its time. There is no way to willfully destroy an entire industry (like automotive) without other industries asking who’s next? with talented individuals asking themselves, should I get ahead of this?

    The big problem is that none of these individual decisions really effects macroeconomic parameters like GDP, at least not over the short term. The longer term damage is also invisible because we have no way to measure opportunity costs, what-could-have-been is the causality and its effects are truly immeasurable.

    • RDO says:

      …the problem is that manufactures both create and belong to extended value chains. Even when moderate contraction occurs you quickly find that critical elements of the value chain are no longer viable and suddenly close, this causes the problem to spread its the law of unintended consequences and its real.

      Absolutely CB. It will also be horrendously difficult to kick start the chain again once it is gone. Any future entrepreneur looking to start a new venture here will quickly realise that the required support base in non existent.
      It’s hard to believe that we are watching first hand the destruction of our industrial base.

    • flyingfox says:

      @ CB Once again, very well put.

      There are a lot of CSIRO guys that could easily double their pay by just moving anywhere, they liked the job so they stayed,

      Actually scientist (and engineers ?) get relatively well paid in Oz compared to overseas. But that comes with having to live in Melb and Syd I guess.

      But yeah I get your point.

  19. Willy2 says:

    Don’t forget the impact of Australian Baby Boomers retiring. Also NOT a good development.

  20. MYBIT says:

    When are people in this country going to get their heads out of the sand and realise that, on average, our labour costs are killing it. Yep, I’ll say it, on average people are getting paid too much, penalty rates are killing us and companies can not operate here being hamstrung with labour inflexibility.