So, the country has woken up. Mining booms do not last forever. It’s all so very predictable. Today is the terrible hand-wringing and shredding of the bodice. Tomorrow (or later today) the Pascometer will lead a chorus of supposedly contrarian thought telling us we’re a bunch of panzies and the boom will run forever on gas. It’s balderdash, the lot of it.
The truth is, as we’ve tried to illustrate at MB for two years, reality is not a binary. It’s not bears versus bulls. It’s not gloomsters versus optimists. You cannot extrapolate today’s conditions to eternity. Nor can you allow risks to paralyse your thinking. The middle road, that makes reasonable assumptions about future conditions based upon history, is the path of greatest prosperity. This is the philosophy we employ at Macro Investor. It’s foolish risking everything on being right when you can get rich being wrong too.
As a nation, it’s a lesson we seem unable to learn.
Take for example public policy of the past decade and a half. Regulators and legislators alike spent the post-millennium boom bowing before a theory of economic growth that was never designed in the way it was used. The Pitchford thesis was the idea that current account deficits didn’t matter so long as the borrowing involved was in the private sector and made by so-called “mature adults”. This idea resulted in today’s enormous debt hangover in households, the total debauch of our financial architecture, as well as the entrenching of our number one economic vulnerability. Yet the Pitchford thesis was never composed as such an idea. It was a specific response written in specific circumstances to wake a political class from a momentary obsession: Paul Keating’s Banana Republic hysteria. Yet somehow this small idea was transmogrified into an era-defining rubric that enabled the enormous waste of mining boom mark one and took us to the brink of collapse (and over it some ways).
Then this delusion passed. But it did so largely unnoticed and with almost no accountability because we were granted a reprieve. China rode to our rescue. The mining boom that had been squandered on debt and houses before the GFC redoubled in size. It did so on the back of a panic-driven local, Chinese and global stimulus effort. But rather than see this for what it was, an artificial recovery with a short half life, our authorities simply replaced one bullish delusion with another. China was now going to grow at 12% forever, driven by an infrastructure build out that ended at the edge of the galaxy. From there, India would take it on to the edge of the known universe. Our terms of trade were going to stay high forever and ease at a pace that ensured our riches.
Rather than incredibly fortunate, and bailed out, Canberra’s pokie capitalists made us the bullish exception to every rule. We didn’t need to save anything for a rainy day. We didn’t need to preserve any export sectors beyond commodities. We didn’t need to do anything. We were destined for greatness.
Today it’s all looking a bit shaky. Yet among the hand-wringing there is no recognition of the fundamental problem. There is still no accountability. The great delusion of our policy-makers is not being discussed. Nobody is discussing our future. And what comes next.
The fact is, this is only the beginning of the bust. It will be long and drawn out. I expect that within two years the entire minerals and bulk commodity complex to be down another 40%. Out terms of trade somewhat less so. It’ll still be at historically high levels. I buy the paradigm shift argument towards emerging market growth. But it won’t matter. External revenues will be too low for our cost structure. We’ll be saved from much pain by the gas boom, which will go on, but that won’t be enough either. Our standard of living are on a slow grind lower, which many know already.
I am a liberal thinker. I believe in markets. I believe in the free movement of private capital and labour. Judging by the recent responses to my writing on Abbott’s Great Gaff of China, much more so than our supposedly “liberal” Opposition and many MB readers.
But I also know that macro-economic settings determine how and what you own and your standards of living. It is not as simple as free-markets make you richer versus governments that make you poorer. For instance, there would be no housing bubble without negative gearing. It’s not some immutable free-market law. It’s a tax break that determines saving and investment flows.
And that’s the debate that we just won’t have. What are the macro settings that will increase national prosperity sustainably for our children? We rely instead on ahistoric platitudes and obsessions, punts, bets, booms and busts. Maybe it’s because of the gambling streak in our culture. Maybe it’s our broken politics. Maybe its the power of vested interests. I don’t know.
What we need is a leadership class that steps outside of this addiction to pokie capitalism. One that examines history and recognises our extraordinary endowments, as well as making reasonable assessments of the risks that are posed to them. We need a leadership class with the gumption to persuade people of their enlightened self-interest, one that balances risk and reward.
It is nowhere in sight.