The five stages of economic grief

So, we go on holiday expecting the worst and when we return it’s all good! Europe is fixed (at least it was before S&P interfered), the US is powering, property and equity markets are set to boom. Holidays are wonderful things. There is no substitute for the calm that comes with relaxation and the perspective that that brings.

I remember when I was doing The Distillery at Business Spectator in 09/10, before his holidays Alan Kohler was beating a relentlessly bearish drum. But on vacation he had revelation. He returned refreshed and declared, to his embarrassment, that he’d been overly bearish, that he’d been been wrong to suspect the durability of the global recovery and, by extension, the equity rally underway at the time.

A similar revelation has overtaken me during the holidays. With a perspective cleared of the day-to-day cut and thrust of global markets, it was much easier to find clarity in long term strategic thinking. And, like my peers in global markets, I have refreshed my outlook.

The direction for the world economy I described last year, with its ceaseless crises and troubled growth, is no longer so salient to from my revitalised perspective. These crises are merely symptoms of a greater underlying shift. And that shift takes me not further from my thoughts of last year but more deeply into them.

The paradigm shift of which I speak is not some new crisis in Europe. Nor is it the US’ emergence from an older crisis. Neither is Australia facing some temporary shift away from its debt-driven growth of yesteryear. It’s not even China and its massive investment model that has driven the mining boom. The shift is that yesterday’s demand driven economy, that relied upon debt to inflate assets and drive private balance sheet growth as well as consumption, has ended. It is finished permanently (or for so long that it might as well be permanent). The global growth of the future will be driven by the forces of investment, production and intensified competition for limited demand.

This is nothing new of course. In 2009, PIMCO described it in an investment sense as the “new normal”. But the big leap one must make – of imagination and logic – is to conclude that this is a permanent change, not a passing crisis. It is easy to lose sight of this when engaged with the hysteria of daily market moves.

If you accept, as I do, that this paradigm shift has taken place, then the European “crisis” is nothing more than the latest expression of the underlying reality that countries will now need to compete successfully to grow. It reframes as visionary Germany’s recalcitrant insistence that its southern peers reform their economies in return for fiscal support (even if its various tactics for achieving this end are self-defeating). It repositions the period of relatively stable economic growth currently enjoyed in the US as little more than an oasis of demand-driven calm before the real work begins of addressing its growing fiscal burden and ongoing credit excess. It renders China, with its leadership in savings, industrial capacity and exports, the unquestionable front-runner in ideological and political economics for the future. It is the interplay of these Great Power strategies with the extant force of increasingly conservative capital market structures that forms the foundations of the great shift. All will feel it in their currencies, in their markets and in their understanding of economics itself.

For Australia it presents both opportunity and threat. On the one hand, as usual, our extraordinary endowment of cheaply produced industrial commodities and energies positions us as a natural beneficiary of the new era. On the other hand, the downsides of that very endowment – a high currency, capital shortage for non-mining sectors and the natural laziness of the lucky – leaves us languishing everywhere beyond that good fortune. The year 2011 was marked by a broad denial in policy and business circles that this was the case. Everything from employment strategies to monetary policy was geared, for much of the year, towards an impending boom that proved a mirage. And largely for reasons of mismanaged political economy, policy-makers were (and remain) unwilling to act to bring relief to this circumstance, preferring the utterly self-defeating macroeconomic approach of killing existing export sectors in manufacturing, education and tourism to make room for commodity exports.

One of the surprises I expect in 2012 is upside for these downtrodden sectors as the global business cycle limps along. The global growth drivers will be the same as last year only weaker. The current US mini-cycle will provide broken momentum but will be prevented from accelerating by its internal contradictions. Perpetual recession in Europe will weigh upon every economy. China will grow at 7%, hobbled by stimulus that must work around stalled and falling housing markets. The risks for all are to the downside. I expect the Australian dollar and commodities to also fall steadily as the US dollar rises through the year. Just as importantly, however, is that Australia’s downtrodden sectors are now cheap. Cheap as chips. They have been under the cosh since 2007 and although investment in the manufacturing sector has not grown much it hasn’t collapsed either. The sector is lean and getting leaner, productivity will be up, with relief from the dollar, profitability will jump. There should also be, surely, renewed predation to bring new life to management strategies.

But that is the good news. The bad news is that the old part of our economy, the vast majority of it, remains leveraged to leverage – asset values and consumption have only begun their long march to sustainable levels of services spending. Household debt levels are still very elevated. Oddly enough, while the denial of 2011 determined many of the major decisions of the captains of industry and policy, regular households were miles ahead. Sensing the passing of the thirty year era of frivolous borrow and spend, regular Australians responded magnificently with a drive to save their hard earned capital. Through this singular act of prudence (no, not fear, as the spruikers of the old order will call it), they succeeded in helping rebuild our broken banks. Expect that, too, to continue, even in the face of greater interest rate cuts than many are expecting.

For the services economy, the shock and denial of 2011 will slowly give way this year to creative destruction. The bloated incomes of debt-addled consumers of the 1990’s, which gave way to terms of trade spoiled consumers of the the 2000’s, will not be spent. And income growth rates will begin a long decline. Businesses will find margin in cost cuts and efficiencies. Change agents will be in demand. IT and business process services will boom. Jobs will go. Productivity will raise its head from the canvass. Inflation will be contained but housing assets will still melt. Equity markets will rally and fall, range bound. Economic growth will be lacklustre, propelled by the external sector and held back by services languor.

None of this will pass without a fight. The interests of the politico-housing complex will writh and whine, as we’ve seen already this year with the usual suspects on the hustings cheerleading a return to yesterday’s growth paradigm. There are still many investors as well who reckon the greater fool model has life. The tax laws still support it.

However, the complex is hamstrung. The ratings agencies – those freshly intolerant police of imbalances – declared in the last quarter of 2011 that the ratings of the Australia’s big four banks are reliant upon an implicit government guarantee and, in turn, that the rating of the Federal Budget depends upon a credible path to surplus. Irrespective of growth outcomes, expect more fiscal tightening in 2012. Monetary policy will also be inhibited. The RBA’s mining boom rhetoric underpinned much of the broad denial of 2011. Some, no doubt, was jawboning. But in using the Phillips Curve to guide its thoughts on growth, capacity constraints and inflation – without fully considering the effects of disleveraging – the RBA appeared dangerously close to a major policy blunder in over tightening. Thankfully, they did not move as many economists demanded; going with the data ahead of their own modeling. An even greater challenge lies ahead in 2012. The easing cycle we have embarked upon is overshadowed by the same questions that have dogged other Western central banks in recent years. Even if the falling dollar is to be welcomed, is it in the national interest to seek any acceleration in credit growth in the global context that I’ve described? If increased consumption, not borrowing, is the goal then will and should indebted households respond? Is it even possible with bank funding costs reaching unthinkable levels in the past month? Is the blunt tool of interest rates now itself obsolete on all counts?

If 2011 was the year of denial then 2012 will introduce the next phases of grief at the passing of an economic order. There will be anger, bargaining and depression as the interests of the old order seek to duck the nation’s fate. But there will also be the beginnings of acceptance amongst businesses far and wide and, with that, renewal.

David Llewellyn-Smith
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  1. Welcome back, David. And what a magnificent piece of writing and thought to start the new year off with. Perhaps the proof of the pudding will be in Ms. Merkel’s capacity to hold firm to her policy of ‘no print’. I believe she will; but the holidays have also given me pause to think, as they did for you.And I am no longer as sure as I was!

      • I sure need them to print! My bets are that they will and as you say macros ‘their actions speak differently.’

    • Print ‘Off’ Print ‘On’ and now I am Print ‘Off’ again:

      I believe that with the latest downgrades in Europe combined with the hedge funds holding out on a Greek haircut, and their (hedge funds) brinkmanship with their finger on the trigger of Greek default.

      This shows that if you have money in the PIIGS its gone and that throwing god money after bad will not be politicaly possible.

      • tony…I sort of agree but who is going to pull the depression lever?
        Wish I knew the answers to all my own damned questions!

  2. +1 The big issue of 2012 will be the shortfall in Aggregate Demand as citizens aggressively dislever.

    Howls of dismay as individuals discover very heavy debts are difficult to shift, no matter how hard they save (buy peanut butter futures).

    Negative demand for credit will pinch bank income just as they need to make solid bad debt provisions, and their balance sheets will shrink.

    Sackings in construction, retail, hospitality and finance will boost unemployment.

    Land prices will begin the necessary and massive repricing with big falls and more to come.

    Our struggle has nothing to do with Euro crises, China commodities or the US middle class. It is entirely home-grown and our lust for risk thru debt has earned us every painful lash.

    What matters is the reaction of the federal government’s economic apparatus. Wayne Swan appears to have read his Minsky. I hope he has plenty shovel ready projects to approve. High speed rail anyone?

    • “Our struggle has nothing to do with Euro crises, China commodities or the US middle class. It is entirely home-grown and our lust for risk thru debt has earned us every painful lash.

      Thankyou for saying this – it is, largely, true.

      And we would do well to recognise and appreciate this, and it’s many implications – especially as “the old order”, as HnH described it, tries to get as all to leverage up again, as though that were a “sign of returning vitality to the economy”, as I’ve already read some saying (!!).

      Yes, the old order has gone – the sooner we Aussies realise that, and actually BE the “clever country” we think we are (rather than the short-sighted, asset-price dependent and “lucky” country we actually are…?), the better we will be, at least in theory…

      My 2c

      • Burb

        I just wanted to note your post about forced choices a few days ago. I didn’t comment and unfortunately it passed without other comment.
        My deepest fear in regard to all this is that in the long run people will elect a dictator; someone who promises them reform and sunshine.
        We know how much sunshine comes with dictators. War is the other great risk if we try to correct all these errors at some future time through coercion.

        Unfortunately in regard to H&H’s deep holiday thinking I believe our REAL problems lie even deeper. 50 years of profligacy and amorality have caused deep cultural ills in our societies that cannot be corrected. (except by a dictator) These ills are now two generations old (including my 60’s generation).

        The answer lies back in time.

        • 50 years of profligacy and amorality have caused deep cultural ills in our societies that cannot be corrected.

          Can you expand on this a bit ?

          The answer lies back in time.

          No it doesn’t, because we don’t have a time machine. The *causes* might lie in the past, but the answer has to be in the future.

          • Smithy…I should say ‘The easy answers lie back in time’
            Searching for the answers is why I keep blundering about in places like MB

            As to the first part…I need a book. When I start to think about it my mind turns to mash.

            I look at every level of society.
            Government – politicians We go from election to election with a whole heap of new promises about how the next lot are going to make it better. I’ve watched politics for over 50 and economics for almost 50 years. We now vote on the basis of ‘What’s in it for me’ as Socrates predicted over 2500 years ago.
            The level of ignorance and cynical exploitation of this trend by our elected leaders dominates our political landscape.
            Further there is no lie, no deceit, no exaggeration that is too much to either retain or gain power. We’re in trouble.

            Government bureaucracy It expands itself because that is the only thing it knows. It organises for itself a privileged place of high pay and security no matter what the cost is to the ordinary people. It is an unthinking monster only interested in feeding for its own growth.
            The ordinary family worker can see the stupidity of the sort of things that are now given priority by bureaucracy but are now powerless to stop it. When I question people in teh bureaucracy about some of their activities, the response is ‘I agree! But it’s not up to me. It’s the policy of the Department’ Frankly that is not a satisfactory answer.

            People We’ve voted out anyone who proposes in any way that we should limit our profligacy. Our society is sick and we are unwilling to act. Drugs kill our children and corrupt our whole society. Yet we are unwilling to do anything about it. We should be willing to do whatever it takes as we cannot continue down our path.
            Television deadens our minds to reality and reduces our empathy.
            People search for some sort of individual self-validation opting for a tattoo rather than searching for their soul.(Note I don’t mean a Christian soul as per my own upbringing)

            Our education system is seriously defective yet we are unwilling to confront the issues.
            We are unwilling to confront greed at any level. Our response to amoral greed that is evident is to try to get ourselves on the same gravy train. The multiples of executive pay vs the average worker are so way out of kilter. There seems to be nothing we can do and one can only conclude again that those leading our corporations are an amoral lot. The same applies to the various professions especially the law which has certainly ascribed to itself an undeserved reward for the mess that it is making of our community laws and values.
            Individual responsibility is actively discouraged and we all blame someone else or the government or the neighbour’s dog! Anyone but ourselves!

            As I said Smithy my brain turns to mush!!!
            In conclusion, as per Alexander Dumas
            ‘All generalisations are dangerous; even this one’

          • I would argue that for an ANSWER to lie back in time implies that it is “too late”, such that the status quo cannot be saved (not here to questioning whether it even should be saved…).

            This, thus, implies that subsequent actions to now “save” the status quo are futile, and efforts should, therefore, be aimed at moving away from the status quo, and forging a new paradigm.

            However, this is unlikely to be a very popular notion for two reasons primarily, IMHO:

            1) People don’t like to be told that they can’t do things – especially that what they want to “work” can’t work, and actions of stubbrn and optimistic denial ensure; which lead to the next point…

            2) There is simply far too much vested interest, in all parts of society/economy – from the worker, through to the wealthy merchant and politican; from “I don’t want to lose/change my job”, to “I don’t want my business to fail” to “I believe in and have worked too hard for this system to fail”.

            However, all notions do not consider whether the status quo can even be “saved”, let alone whether is should given systemic injustices, tendancies and imbalances that few deny.

            But we will “try” nonetheless, and likely experience (and direct) exponential systemic entropy into those areas of society and the economy that the collective decide that they do not value as much as they did, given that, now, certain personal and collective interests are now under threat. That is, the rubber has hit the road, and now the true colours start to show.

            It is why, IMO, when those “expendables” (for a time) such as the poor and powerless suffer more and more for our “saving the system…for their good” – such as QE, printing, etc, which results in wealth and power transfer – that I believe we will eventually move down the power-centralisation, “strong leadership with sunshine” route discussed above.

            For, as the efforts keep failingm adn the socio-economic problems get worse, there would be recognition that a paradigm shift is necessary; and if the freedom/market “solutions don’t work” (large debt restructure/default is not an option, remember?), then the new paradigm of further centralisation and “making it happen” will be the only other general paradigm to move to.

            “Why isn’t the government doing something about …. ?!?!” they/we will say.

            “The answer is ….. policy” ,etc ,etc.

            The attitudes are alraedy in place.

            In a broad (and admittedly simplified) sense, isn’t it just a matter of deduction, if one can accept a few broad axioms?

            /end ramble


        • “2. Greed, laziness, and dishonesty have
          roots in our fallen condition which are
          far deeper than is any economic system
          or situation. Businesses and society
          should be structured to restrain our
          vices, use these vices for the common
          good, or reduce the destructive power
          of these vices.”
          From a bit of recent reading. My main thought was “Yeah but how?”….Non-benevolent Dictator?

          • Sounds rather biblical to me.

            Most people are not greedy, lazy or dishonest. The problem seems to be that the relative handful of people who are, tend to rise into positions of power and wealth.

          • Via reading of the US ‘Daily Reckoning’, that would read as the inherent flaw in democracy.

            You can give but you can never take away.

            But a dictator, oh they will take and give you a jolly good lashing to boot.

          • I think the nature of the Arab spring, #occupy and even the tea party suggest that centralisation is not the way it will go. The internet (distributed communciations) and small scale renewable energy (distributed energy) provide the basis on which a new paradigm can be decentralised and positive.

            Which is not to say that there won’t be a lot of pain on the way there, particularly as the vested interests and rent seekers use all their considerable power to hold back the wave of change.

          • pabster,

            I think your point is relevant, and I don’t disagree…for a while.

            The reason for this is for the tendancy for people in general to centralise things, particularly, power, waelth and influence, even ideas – and even, sometimes, for what appear to be “good and sensible” reasons, such as in the case of ideas, where an institute or similar “pops up” to clarify, represent and promote the idea.

            Hence, I think the notion of decentralisation will be true FOR A WHILE, but then find itself centralising into the hands of fewer and fewer people.

            In a sense, fallen human nature seems to make centralisation somewhat inevitable, it seems…

            My 2c

        • Flawse,

          I think the following is what I said, in the context of money printing being suggested as a “solution” (though, in their defence, I’m fairly sure the proponent was also in two minds about its real effectiveness):

          “…though printing will, under current structures, result in wealth transfer from the systemically under-privileged to the systemically-privileged…
          The only way to NOT have such a transfer occur in the midst of such “solution printing” is for the system to take much, much more control, and force certain things to occur and not occur…not a world I want to live in…
          IF…if we do not want to wreck the car, salvage parts and build a new one, then, IMHO, we choose between one of the two scenarios.
          My opinion is:
          1) that the car is not saveable; and,
          2) that the control option will be pursued “out of necessity”, as vested interests will not allow the system to “collapse” – they will “save it, and us all” instead
          3) their will still be a good deal of wealth and power transfer as a result of the printing – part of what will prompt the control strategy (eg. “capitalism doesn’t work”
          …all because we won’t accept that the car can’t be saved…
          My 3453453 cents”

          A dictator? IMHO, I would suggest not in the “classic” way, though I do actually agree in principle.

          I would suggest more of a conglomerate of similarly aligned groups and institutions, with an “elite” headship, which has the same effective function as a “dictatorship”, but the appearance and bells and whistles of a Social Democracy; a great Humanist venture, and quite possible a movement that has quite a global base – it would be “all for the good of the people”, you see 😉

          Such that the deep cultural ills brought about by significant collective amorality will not be fixed, only “fixed” by such a “dictatorship” – or, as it would most likely be called “strong and decisive leadership” (!)….as if true morality could truly be imposed!

          Agreed that War is not unlikely – but I would, again, envisage them as “wars of necessity, for the greater good”; even wars of pseudo-morality, “Humanistic Crusades”, if you will.

          And, sunshine? Well, isn’t that just a matter of perspective? I mean, at least for a little while…until reality does, as you imply, hit home. Wasn’t even Hitler a ray of sunshine to the German people, post WW1, post-Weimar? He even brought them a quasi-moral satisfaction for a time, as WW2 began and progressed quite well fror them for a time…

          Anyhow, you have brought some thoughts of mine out of the woodwork! Sorry!

          Admittedly, my thoughts are predicated on notions of not being able to “save” the status quo, anyway one tries – either deep recession and structural change results, or wealth transfer results from political ranglings; and a deep understanding of human nature that drives me to believe the latter is far and away most likely.


    • David, every word is right on the button. Too mnay people being paid ludicrous salaries and too many people hopelessly drowning in debt.

  3. Phil the engineer

    It will all be fine.. Craig James said on Sunrise this morning that interest rates are at a historic high (when you start your time series at 1997). The reserve bank will cut rates, the big 4 will pass it on and away we go!

  4. “Sensing the passing of the thirty year era of frivolous borrow and spend, regular Australians responded magnificently with a drive to save their hard earned capital.”

    It’s nice to see this out there at last – those that resisted the ‘leverage into assets’ sales pitch that saw the great loss of middle-class wealth in the US and Europe (and may yet occur in Aus) have been essentially resisting the sell-side implication of ‘a lack of bottle’ for some time.

    To move even further into the structural theme, a new generation is gaining more presence. Generation X is more cynical, less consumption focused and far less enamoured with the status quo.

    Everything always always moves in cycles, but some cycles are longer than others.

    • Generation X is ….less consumption focused
      Sure doesn’t apply to most that I’ve seen! Soft unproductive jobs, new house, new SUV, best clothes, expensive drinks…

      • Well… that’s a separate debate (and i’m yet to see a generation that doesn’t think the next one is lazier). What you describe is much more early Y’s and Z’s to me – those that came out of school/uni as the economy was rolling. But glib points aside, there will be plenty of each generation that were sucked in by the easy credit years.

        But the point i’m interested in kicking around is that the X-gen (those that came out of uni/school in the last deepish recession) have been relatively cynical, conservative and somewhat frugal and anti-leverage in nature. This is the generation that is taking over from the boomer and at their core they don’t share the optimism of the boomer generation.

        And if there is anything that the credit based asset growth industry needs it’s optimism.

        • Ah aj I think you are operating from a biased sample of people you personally know!!!
          I wouldn’t make generalisations based on that!!!!! Not half! 🙂

          • As opposed to the sample you’re working on f. 😉

            The fact is gen-X has a different character than the boomers. The boomers hold a big big chunk of the debt and they’re counting on rolling that over to gen-x (and gen-y etc)…

            lets see how that plays out.

      • As a Y-er, I think there’s a rising sense that our promised future has been squandered away. Yes, we did leave school in the boom years, but we finished uni in the aftermath of the GFC. The hopes and aspirations our parents inspired (or indoctrinated) in us were lies, and our generation will be saddled with the consequences.

        This is certainly apparent from the perspective of climate/environmental issues, but is also emerging with the increasing recognition of the Occupy movement last year too.

        At least that’s the impression from my biased sample population 😉

  5. It takes an even bigger leap of imagination and logic to reconcile the notions that a) China represents the benchmark for ideological and political economy and b) countries now need to compete successfully to grow.

  6. H&H

    Nice one!
    “It reframes as visionary Germany’s recalcitrant insistence that its southern peers reform their economies”
    You sound like you’ve turned DEEPLY conservative backing the German model!!!

    You are still at war with yourself
    “The RBA appeared dangerously close to a major policy blunder in over tightening. Thankfully, they did not move as many economists demanded;”

    As soon as events move in a way that might correct some of the imbalances, like an over-bloated service sector, everyone calls for the lowering of interest rates to restore the imbalances to the previous status quo.To stop debt growth in this country we need sufficiently positive RAT rates to encourage people to save. Otherwise we are continuously operating on increased debt.

    I don’t know how many times we must go over this
    “preferring the utterly self-defeating macroeconomic approach of killing existing export sectors in manufacturing, education and tourism to make room for commodity exports.”

    It’s NOT the commodity exports that drive the dollar. It’s the fact that we are willing to sell off the whole commodity industry, and any decent industry in any other sector, to foreign buyers to fund our profligate consumption. This drives the dollar and results in the speculative one way bet that then attracts a mountain of speculative money…all of which we welcome because it allows us to consume more.

    Other than that welcome to the ‘common sense’ economics fold!!!! 🙂 although I doubt you’d see jelmech’s idea of placing yourself alongside my thinking as elevated status 🙂

    • Wouldn’t say at war with myself, but as both a market observor and longer term strategist I have a foot in two camps. My two positions come together in the last paragraph about monetary policy, suggesting simple interest rates are a dated mechamism…

      • Yes I noted that H&H. Also agree with your question? or conclusion?
        “Is the blunt tool of interest rates now itself obsolete on all counts?”

        As a blunt and only tool it was ALWAYS obsolete. Economics has been headed down the wrong fork in the road for a very long time.

        • Perhaps not … if an appropriate amount was paid for savings (capital) and thus the appropriate was paid by the borower (risk being paid by the borrower as a + %) then I think it is the appropriate use of this tool.

          Its just not the right tool for the job that needed doing.

          • tony that was the easy solution that was available in the past.

            Now it would bring on a disaster. I think we agree that not to do that will bring on an even bigger future disaster!

  7. Did anyone notice the news that Immigration is to be increased to 185,000 to alleviate skill shortages.

  8. “Inflation will be contained”
    MAYBE for the next 12 months H&H. There is a tsunami wave of inflation out there on teh horizon. I don’t know how fast it is traveling but it sure as heck headed our way.
    From an economic and investment viewpoint we should be preparing for it in an attempt to minimise what will be considerable damage. It is too late to start building a sea buffer after the wave hits. By then it cannot be stopped.
    H&H I believe DFM’s post and the comments thereto here is worth a read

    Note his assessment of a likely RMB/AUD of 3.6. Add this to consistent legislated 20 odd % annual wage rises in China although these may slow a little if they allow the Yuan to rise.
    The add this imported inflation to our current domestic inflation of 5 to 6%.

    It’s a serious matter that should be addressed instead of the usual ‘Oh inflation, she’ll be right mate!’

    • Flawse, over the holiday period I read an interesting piece at Deflationite (I think). Author was making the connection between long periods of deflation eventually feeding into a hyperinflationary cycle. May be along the lines of your concerns.

      • JMO I rate hyperinfaltion as an outside chance – about 10% but I might be an optimist in that regard. Nevertheless unless the inflation genie is addressed I think we will see 20 to 30% inflation rates. We will certainly see 10% if DFM is anywhere near correct.
        Our FOB price rises out of China have slowed recently however I note new legislation for 20 odd % price rises in various provinces.

        Unfortunatley I’m of a mind that it is all baked in the cake. Mainly we are talking how we will spread the hurt.
        The answer lies back in time.

        BTW 3d1k thank you for the link on ‘How the west was lost’ Good one. Damage is underestimated because they don’t see an external account but overall it is something everyone should watch. Over the break there was also an examination of the role of Religion and the Protestant work ethic in our prosperity. Unfortunately I can’t find a link yet as i don’t know the name of the doco.
        In searching though I did read this

        His 20 points for reformation are pretty good! Again how would you get from here to there?

        • Flawse, the true assessment of the very real impact of the Protestant Work Ethic on our economic prosperity and current/future direction has not ever happened, nor is it likely to any time soon.

          I remember reading Weber on this subject during my MBA and it struck me back then that whilst there were some positive elements to it, there were equally as many negatives. It seemed to me that so defined are we by what we do for a living, that it is unlikely that we can ever extract our thinking from the growth merry-go-round, and the subsequent over-consumption meme that supports it – all in the name of fulfilling some latent desire to succeed.

          Combine this with a century of the blight that is psychologically based marketing and I can see why you say that the answer lies back in time – unless 90%+ of the world’s population is abducted by aliens and reprogrammed, we’re not likely to see the type of paradigm shift required without a diabolical amount of pain for a huge number of people.

          As for the 20 points, the alien abduction thing is about the only way we’ll ever get there, save for continued civil unrest as wealth distribution becomes more noticeable and entirely unpalatable, resulting in eventual regime change. Long before this happens though governments are likely to pursue war in order to prop the system up again – oh that’s right, the US have already tried that tact.

          • Thanks for your post Aaron. I agree pretty close. One problem we do have is that some, such as the Chinese, will/must continue with growth. It will be very competitive for resources, and necessarily power, at some stage in the future.
            I won’t go further or I’ll start to go round in circles again!

      • IMHO, it’s about faith; hyperinflation (HI) cannot occur without a loss-of-faith in the subject currency, which is usually fiat.

        The powers that be wish to retain control, and the status quo, and currency destruction via HI is a loss-of-faith in govt event…not acceptable to them.

        Hence, if things start to look that way, I would not expect HI – hints of it via high-inflation (the beginnings of loss-of-faith), possibly, but not outright HI.

        I would expect large ramping up in interest rates (IRs) as this started to “look worrying” – and, yes even in the context of a large and crippling debt overhang, which should, in theory at least, crush debt holders – vested interests – including govts.

        However, the govts are left between a rock and a hard place, are they not?

        Lose control via HI; or increase IRs and crush debt holders (and the economy, via large-scale debt deflation).

        ..this is one of the main reasons I argue that the status quo cannot be saved; for things must run their course, and these are, IMHO, the two broad courses of action.

        So, IR increases are likely, even in the context of debt overhang; but to handle the debt overhang and possible associated consequences, increasing the power and authority of govts to “manage” the mechanisms and fallouts would be a “sensible” course of action – ie. further centralisation, for the sake of “blocking” the normals avenues of expression of market-baed economic problems, such as inflation and deflation in certain sectors of the economy/society.

        Again, this is another reason why I argue that significantly increased power centralisation is the most likely course of action (again, because the myriad of vested interests in the status quo, from the worker to the politician, will not accept the “creative destruction” of debt-deflation).

        FYI: for anyone that is interested, I touch on some of these HI in the context of debt-deflation type thoughts in a “hack” article I wrote back in July 2010, here, where I, somewhat simply, argue that debt-deflation, and associated vested-interest reaction to it, will actually exaccerbate inflation pressures; which, if faith is lost, could lead to HI:

        /the rambler strikes again!

          • “so-where-will-interest-rates-go-now/”
            Pretty good summary there Burb thanks. I keep trying to reason it through myself as to what will happen in the face of rising inflation. I just end up with a mess in my head. Maybe that is the true answer…it’s just a mess.

            Inflation will get out of control. Like you I doubt hyperinflation but one can go wrong by underestimating the stupidity of CG’s and others who rule us such as Treasury. If they were not demonstrably stupid we would not be where we are!

            Note angels says the CB’s will be slow to act on inflation. Note the groundwork being laid at the moment by some academic economists and others suggssting the inflation target should be set much higher at anywhere between 4 and 6%. We can expect this sort of rhetoric to increase as the pressures mount. We can also expect the suggested appropriate targets to rise. We haven’t taken the hard medicine in the past why expect us to willingly take the even more bitter and longer lasting medicine in the future?
            So CB’s will be too late in both recognising inflation and then responding to it

            In any case I doubt the first part of the coming inflation can be stopped much by rising interest rates anyway. It’s sort of built in. By the same processes we have been able to have low inflation, despite extremely low interest rates, the reverse or mirror image will now apply.
            We will get inflation because of what is already in motion and interest rates will have limited effect except to possibly prevent hyper-inflation. However if they don’t whack it with high interest rates hyperinflation will follow.
            Note re inflation we are talking about inflation of everything you need and (relative)deflation in everything you own. As we have discussed above God help us after that!

          • Good thoughts, flawse.

            Yes, i’ll admit I have only thought a little about the powers that be raising the “acceptable” inflation target…

            …but always found myself dismissing it as “too stupid” to seriously consider, even for the arrogant.

            For, once one gets the ball rolling down the inflation hill, it might just keep going if people chase it and push it faster, so to speak.

            Inflation and deflation really are different beasts, aren’t they – and I prefer the deflation route myself, for a number of various reasons – economic, moral, etc.

            …but as you say about stupidity…poorly placed faith can do a great deal of damage!

            And I also agree with the bi-flation notion you promote, and HnH has also spoken of: “inflation in what you need; deflation in what you own”.

            …all in the midst of govts desperately trying to keep that quasi-relevant number we call the CPI above zero, and doing just about anything to do so!


  9. Refreshed and reinvigorated! Welcome back.

    An interesting opening salvo – agree with several of your points. Do find it a bit of a struggle to see how the ‘downtrodden’ sectors of manufacturing, education and tourism are cheap as chips and likely to experience any upside in 2012 given the ‘global business cycle limps along’ with depressed demand.

    Yep, the interest rate tool, the only one in the RBA’s toolkit is looking obsolete. In 2012 more attention may be paid to ANZ (+ Comm, Westpac, Nat) rates meetings than those of Mr Stevens.

    • “the interest rate tool, the only one in the RBA’s toolkit is looking obsolete”

      Disagree that it is the only tool – it is just that it is the only tool that has been used.

      They can conduct:
      – Jaw-boning
      – LSAP including quantitative easing
      – Liquidity provisions
      – Currency swaps
      and so on

      Finding that higher AUD is unpopular and given the status of a currency haven, they could go the route of the Swiss.

      In a world of competitive currency devaluation, there are many options still available to them.

  10. 2012 is shaping up to be an interesting year.

    I agree with your comment about monetary policy. I’m hoping that this year people actually start discussing Australia’s macro setup. Inflation targeting by CB (as the sole macro tool) has been succesful at managing demand over short term, but in the process has compounded and contributed to underlying structural weaknesses.

    When the ToT have strengthened, RBA tightening has worked by hurting the non-mining economy (effectively releasing inflation pressures through the CAD). When the ToT were expected to weaken (as in the GFC), RBA easing has worked by encouraging households to take on more debt.

    If policy is going to be a reaction to changes in the ToT, we need a much more active fiscal policy. If the ToT are expected to remain high, we need larger surpluses and more micro-economic reform (in order to increase potential GDP). If the ToT are expected to weaken, we also need surpluses now and micro-economic reform now (to encourage a strong non-mining traded goods sector). Monetary policy should be on auto-pilot.

  11. Its refreshing to know that someone in the world of finance’s opinions are not set in stone and can change depending on both changing developments and personal realisations.

    So Kudos to you HnH.

    As for the body of the article, I mostly agree it is indeed a time of both psychological and economic change away from the debt fuelled economies of yesteryear. However I am not confident in China’s ability to continue to grow so strongly in the face of reduced Western demand and revitalised Western manufacturing (especially the United States).
    China’s day of reckoning will come just like the American’s, European’s and eventually for us Australians. They have a property bubble just like the American’s and us, there’s will eventually burst too only it’s going to hurt them even more than it hurt the Americans. Also considering both my own personal research and articles sent to me by others I am not convinced that China’s level of debt is anywhere near what they say it is, all it takes is for their property bubble to pop to reveal that they have been swimming naked for a long time. This is the country that doesn’t even tell the truth about its own defence budget even though no other nations would act differently even if they told the truth, because everyone knows they are lying anyway.

  12. Very insightful article for the start of the New Year.
    The worst news seems to be we have to compete with China, which I think is not so much of a big challenge. We have to lower the wages and the quality of every product we manufacture and we can be done nicely with the productivity problem. Did anyone notice how the quality of everything was going down during the last decade due to global competition? Just because we have i-pod, i-pads and i-phones doesn’t mean we have higher living standard. Obviously today much more than any other time in history, the living standard is measured with the entertaining gadgets, not with more productive tools and knowledge. Any idiot can become a celebrity and write a book for his “great life achievement” of how to grab the attention and the dollars of the drunk-like masses.
    Yes, you are right HnH, “there will be anger, bargaining and depression as the interests of the old order seek to duck the nation’s fate.” The article sounds very much Marxist alike, but that is because you are touching the very nerve of our time and your approach is very much dialectical. Keep digging, people deserve the truth, not opium.

  13. yes a stimulating , old testament welcome to 2012 ..thanks HnH.
    the take-away for me were these observations:

    the forces of investment, production and intensified competition

    renewed predation to bring new life to management strategies

    IT and business process services will boom

    with respect to the last 2 observations two stocks that come to my mind are:
    Hastie and BSA Group.
    best of luck in 2012 HnH and do please keep up the good, biblical work.

  14. Great post H&H.
    IMO this is key “The shift is that yesterday’s demand driven economy, that relied upon debt to inflate assets and drive private balance sheet growth as well as consumption, has ended.”
    I believe it will take quite a while before this sinks in.
    During the holidays I was thinking about how most people are not interested in finance, economics or politics, and the limited interest they have revolves around domestic news. They will probably find it astonishing that money in the form of cheap, easy credit may not fall from the sky anymore.