Hockey holds fast to “sell ’em dirt”

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Earlier this week I wrote that the number one Australian economic blunder of recent times has been the failure to understand the real position of the economy post-GFC, largely by confusing structure and cycle.

The second coming of the mining boom from 2009 t0 2011 was interpreted by virtually all Australian authorities as a structural shift in the patterns of global demand. The rise of China made this partly true which is why Australia’s terms of trade will likely remain high relative to modern history.

But it was far less true than was assumed. The post-GFC China boom was in very large part just another business cycle, a boom and a bust. In retrospect the cycle will be seen as nothing more than a temporary uber-stimulus by China that actually marked the end not the beginning of its high-growth, high-commodity intensive period.

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This fateful misinterpretation led Australia’s elite to embrace a high currency as the principle mechanism for management of the excesses of the mining boom. The refrains “making room for mining” and “sell them dirt” we all remember so well only made sense if the boom was permanent, which it is manifestly proving not to be.

Sadly for the nation, the Abbott Government has still not figured it out. At the IMF, Joe Hockey says “sell ’em dirt” is alive and well, from The Australian

…“The bottom line is the world’s going to want commodities because of the emerging middle class, particularly in Asia but also in Africa and various other ­places,” Mr Hockey said during a panel discussion hosted by the International Monetary Fund.

“I don’t think there’s any commodities (downturn) — I think that’s market trash. I think we’ve got to deal with the reality of where the world’s going to be in the next 30 years. They’re going to want commodities.”

…Indonesian Finance Minister Muhamad Chatib Basri, an economist and former trade consultant, said…his country had to invest more in manufacturing rather than depend on resources for two-thirds of export revenue…“I do believe that the resource boom is over,”

South African Finance Minister Nhlanhla Nene backed the idea of preparing for change by shifting into processing rather than exporting raw materials.

…Nigerian Finance Minister Ngozi Okonjo-Iweala, an economist and a former World Bank managing director, concurred.

Mr Hockey said the dour forecasts did not take into account the long-term demand from the rise of a prosperous middle class in Asia. “I don’t buy this argument that the commodities boom is over…he wanted China to build more infrastructure and noted that Indian leader Narendra Modi wanted to raise $1.1 trillion for new infrastructure over the next four years.

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Is this 2005? China is moving away from infrastructure building because it is strangling its productive economy. Middle classes want services not bridges to nowhere. India is a preternatural mess and won’t rise like China.

The implications are that we can expect ridiculous revenue forecasts from the Treasury to continue. Not only that, no fiscal effort to bring down the currency and no coordinated effort to raise productivity or restore competitiveness. And certainly ongoing efforts to support house prices, given that’s all else there is.

It’s all the way with double Dutch disease and Australia’s lost decade stretches ever longer ahead..

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About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.