Peak Australia

The nation’s pundits are not happy with the MYEFO. And who could blame them? Implausible assumptions, failed and ad hoc new taxes, and for what? A Budget surplus that is short term, a risk to growth and perpetuates a dying economic growth model.

First to put the boot in is Warwick McKbbin who uses the recent IMF confession that fiscal multipliers are not what we thought they were to suggest the Government is slowing the economy:

In the 1980s the fiscal multipliers from global economic models were estimated to be between 0.4 and 3.5. During the next three decades the fiscal multiplier has fallen to be between 0.2 and 1.5 depending on the model.

The reason for the wide range of estimates comes down to the assumptions about the way consumers, corporations and other government policies respond.

For example, it matters what is assumed about monetary policy when fiscal policy changes. We know from simple theoretical models that a fiscal contraction in an economy with open capital markets and a floating exchange rate will tend to put downward pressure on interest rates as the central bank responds to the output slowdown, leading to a capital outflow which depreciates the exchange rate.

Lower interest rates and a weaker currency will increase investment and increase net exports, which will reduce the GDP loss from lower government spending. Thus there will be some “crowding in” of private expenditure, which will tend to cause a lower fiscal multiplier.

Exactly right. But McKibbin goes on to make the same mistake that the IMF did. He then turns to the ‘confidence fairy’:

A key issue is the credibility of the fiscal cuts. The more credible the future debt reduction, the more confidence will be generated in the private sector. In forcing substantial budget cuts on countries with a fixed exchange rate, the economic costs are increased. This undermines the credibility of the future cuts, which further increases the economic costs of fiscal cuts. This is what the IMF has been finding.

This is another version of the old Ricardian equivalence theory which argues that individuals:

…internalize the government’s budget constraint: as a result, the timing of any tax change does not affect their level of spending. Consequently, Ricardian equivalence suggests that it does not matter whether a government finances its spending with debt or a tax increase, because the effect on the total level of demand in the economy is the same.

Perhaps there is something in the idea during “normal times”. But when you find yourself in a scenario of high private sector indebtedness, in households especially, then government fiscal constraint may be internalised in entirely the opposite direction as consumers also start saving. Lower interest rates only accelerate deleveraging and the only “crowding in” that happens is in the cash mattress. That is the primary lesson of peripheral Europe.

Next in the conga line of criticism is the failure of the MRRT. From The Australian:

WAYNE Swan’s $1.1 billion budget surplus projection has received an immediate body blow, with the government’s new mining tax raising zero revenue in its first three months.

The Mid-Year Economic and Fiscal Outlook, which did not include the mining tax result, warned “weak external conditions are expected to affect mainly company profits, largely in the resource sector, resulting in substantial downgrades to company tax receipts”.

…Mining industry sources are suggesting company tax from the resources sector will be cut by much more than the government’s estimated $2.3bn drop from the budget to the MYEFO report.

Originally the MRRT was designed to collect $10.6bn over four years from July 1 in an attempt to spread the benefits of the mining boom as well as to help cut the company tax rate, fund superannuation and provide infrastructure spending in the regions. It was also an integral part of the government’s plans to return the budget to surplus in 2012-13.

First question: Is the mining boom over? No, according to the government. Second question: If we’re still in a mining boom then why is its mining boom tax collecting no revenue? Answer: because it’s a failed tax, negotiated at the point of a gun and to regain power at any cost.

And of course, given the MRRT simply doesn’t work, neither do any of the benefits that were supposed to flow from it. Back to the AFR:

The Business Council of Australia has blamed ground rules set by Treasurer Wayne Swan for the failure of a business group set up to negotiate the government’s promised corporate tax cut.

The Business Tax Working Group said in a report last night it could not reach agreement on a way to cut the 30 per cent corporate rate.

…Even though they disagreed over the timing and some of the details, they agreed on the conclusion: a company tax cut was desirable but there was no consensus in the business community on how to pay for it.

I’d welcome a corporate tax cut. As the mining boom recedes, we’re going to need new investment to offset the decline in the mining capex growth model and the consumer borrow and spend growth model.

But the narrative in which it has to be delivered is not one of abundant wealth. Rather, it must be a context that acknowledges we aren’t different to everywhere else, just a little more lucky. We must:

  • confess that households need to deleverage and will require public deficits to hold up demand as they undertake the task;
  • install policies that remove the banks from public support so that we can run public deficits without risking credit downgrades to the entire financial system;
  • use macro-prudential policies to prevent interest rate cuts from stimulating established house prices and slash rates to bring down the dollar and accelerate deleveraging,
  • yoke wage gains directly to productivity growth.
Most importantly, of course, to achieve these aims we’re going to need strong and eloquent leadership that mobilises the body politic to the task of paying for past excesses through the simple and clear economic narrative of building a new economy aimed at export dominance.

The alternative is to rely on the fading “China put”. And whether by the sword of a current account crisis or the slow decay of time, we will watch our wealth decline.

Comments

  1. HnH, you inexplicably edited out the key 2nd paragraph from your quote of The Australian viz the MRRT farce –

    None of Australia’s biggest miners – BHP Billiton, Rio Tinto or Xstrata – has any liability under the minerals resource rent tax so far in 2012-13 and the government did not receive any revenue by Monday’s payment deadline.

    Apologies for continually returning to this key point. But it really urks me that so little focus is placed on the cosy relationship between the Big 3 multinationals and our local-miner-bashing government in relation to this issue. There is abundant hearsay and circumstantial evidence that these 3 multinationals actively conspired with Gillard to remove a popularly elected PM, for f***’s sake!! How is this NOT a proof that we are not living in a democracy but in a corporatocracy?! F*** the economics of it all … it’s the profoundly corrupt politics that should be the focus of attention.

    • Yep. I’m not sure the average punter can understand how hopelessly compromised nearly all our regulatory institutions have become under the growing cosy relationship between the corporate oligopolies and the Parties.

      Australia’s great economic thinkers and leaders seem unable to cope with this level of soft corruption – they are like a deer in the headlights. They are either happy to be paid off with nice soft corporate jobs (why fight the system) or just feel the task of addressing it is too vast.

      The whole resource rent tax story is an absurd tragedy.

    • Op8,

      Gillard, Swan and the Unions conspired to remove Rudd. The Big 3 would not have a chance in hell of removing a PM unless the traitors of Rudd were not actively seeking to remove him.

      Not giving the Big 3 a pass, but the deceitful Gillard needs to be held fully accountable in all this. And it stands out like the proverbial dogs testicles. Kloppers will not utter a word while in Australia about the Carbon Tax. That is the quid pro quo they all signed up to.

      This is the standard of our Govt.

      • Broadly that is correct. Corporations act predictably – they are greedy – that is their purpose.

        The political failure here was some of the worst i’ve seen in my short life – there was a massive betrayal of the ethic of the government responsibility to the nation. This was the outcome from the hollowing out of the party culture one associated solely with winning and keeping power.

        • +1 aj.

          Corporations are opportunistic. Which is why sensible regulations need to be in place to control their negative effects while ensuring there desire to invest and obtian reasonable profit from that is achieved and channeled towards re-investing. In so doing the growing prosperity is shared with the public in an enduring way.

          The situation we have now and more importantly looking forward is setting us up for an economic disaster. And that is not just Corporations. What SME would expand or even start in this taxing environment? Labor has a horde of highly paid taxpayer funded boffins in Canberra dedicated to dreaming up daily new ways to seperate businesses and wage/salary earners from their hard earned incomes. The parasites are taking over the host!

        • “…there was a massive betrayal of the ethic of the government responsibility to the nation…”

          Ongoing. Remember that at the next election.

          • The party duopoly are just two divisions of the one ‘Corporate Support Party’ as far as i’m concerned.

          • Do we really have to endure these paid political advertisements from 3d1k and GSM?

            While the deal done by Gillard and the Big 3 miners — to design a mining tax where no tax is actually paid — disgusts me as much as anyone, must we have all this talk about deceit, betrayal etc?

            Its bit much for a paid mining industry representative to come in here and call the deal a “massive betrayal” when the deal done was exactly what the miners wanted.

          • Lorax, you have been wrong on this topic since our discussions first began, gradually you have come to see the truth.

            Betrayal can also be considered in light of the knifing of Rudd, an elected PM, engineered by backroom AWU apparatchiks for personal power gain. Remove the blinkers.

          • I think it’s naive to believe that somehow the other half of the duopoly will be any different as far as a ‘lack of ethics’ is concerned. The two parties have been chasing each other down the rabit hole, with the media cheerleading them all the way.

          • Everyone should remember that 3d1k is paid to represent mining industry interests on this website.

            While I am the first to admit the AWU and other “faceless men” of the Labor Party orchestrated the removal of Rudd, it was aided and abetted by a merciless campaign against the RSPT from the mining industry. The “objective was achieved” when the Big Three miners negotiated a much more favourable mining tax deal with the Gillard government just prior to the 2010 election. So favourable in fact, it turns out they won’t pay any tax at all!

          • The original RSPT was a dog, poorly conceived, atrociously drafted, incompetently instigated.

            The opportunity to participate in comprehensive re-structure of the MRRT by some of the finest ‘minds in mines’ was an invitation only event.

            [Self edited final line – but the more astute will surmise]

          • You could spin for Australia 3d1k. Why waste your talents working for mining companies?

            Despite you heroic efforts, it is abundantly clear to everyone here that your main issue with the original RSPT was that it would have cost your employers an awful lot of money, and they were making staggering amounts of money at the time.

            The $22M spent by your employers in the six weeks prior to the end of the Rudd prime ministership, was one of the best investments in history.

          • dumb_non_economist

            That’s right 2d, the original tax was a dog from the mining industries eyes as it would have resulted in tax actually having to be paid.

            Forget all the crap about Rudd, he went because he was a micro managing control freak suffering from analysis paralysis. The further fall in the opinion polls due to the mining campaign was an opening they had to take to remove him or the next election would have seen a change in gov.

          • The original RSPT would have resulted in all mining investment leaving Australia at the fastest possible rate.
            Long term it would have earned stuff all in revenue because there would have been none to tax.

            The self-righteous sit here in judgement of everybody without having a clue what they are talking about. Mining isn’t some business where you go down the road…hire a ready-built shop, fill it with stock and bingo…two weeks you’re getting revenue.
            75% tax on earnings over about 6%…yeah that was always going to work on say a 15 year mine development.

          • The ‘Super Profits’ tax was (and the concept remains) a discriminatory tax directed at one sector only. blah blah BS spin blah blah

            Mod: this paid advertisement brought to you by the “insert big miner here” mostly owned by foreign investors…

          • The original RSPT would have resulted in all mining investment leaving Australia at the fastest possible rate.

            I don’t necessarily see that as a bad thing:

            1. It would have at least ensured that the resources remained in the ground for a little longer for future generations.

            2. And our over-leveraged, over-consuming populace would have had a reckoning with the issues due structural CAD a lot sooner.

            The mining investments and the resulting national income boost/ToT/high AUD merely kicked the can down the road and made the problem of over leverage/CAD/over-consumption much much worse.

          • The ‘Super Profits’ tax was (and the concept remains) a discriminatory tax directed at one sector only.

            That’s a staement, not an argument.

            There is also a ‘super’ element to the regime.

            When profits aren’t ‘super’, there is no extra tax.

            Do you see how that works?

          • Yes Mav That’s a hard one to argue against. However the result is a much lower living standard. The we have to ask for whom?

            I put it to you that the answer lies in my post which started near the top but has receded!

            “First how is this to be done? The powerful and the Public Service get fully compensated. It has been always thus. it’s the farmers and small business, the low paid,the savers, the pensioners, the disadvantaged who get it in the neck. These are all people without a voice so who cares! The cognisante will just gather around and tell each other how clever they are because their debts have been inflated away and they can afford a new BMW! (Forgive my bitterness but that is Australia right now and what is proposed will just make it more that way)”

            We need understand to make clear choices. At any time to try to live without mining, particularly foreign investment there-in, would have resulted in lower living standards. Had we always had a policy of living within our means we would now be much better off than we are.
            For 5 decades this society has always chosen over-consumption and less production. It will continue. If (WHEN?) ‘austerity’ is forced on us by events there is a whole group who will make sure it doesn’t effect them.
            Depressing eh!

          • “Do we really have to endure these paid political advertisements from 3d1k and GSM?”

            Lorax, I work in the private sector , pay taxes and nobody pays me to comment here. You inflict on us your constant barrage of Keft Wing extremist views so when you moderate some you may find others will follow.

            In the meantime stop the whining.

          • You inflict on us your constant barrage of Keft Wing extremist views so when you moderate some you may find others will follow.

            Please regale us of some of these “Left Wing extremist views” Mr Lorax has advocated.

    • “3 multinationals actively conspired with Gillard to remove a popularly elected PM”

      Rubbish. At the time a Labor ruse to deflect from the real conspirator(s). And the gullible party loyal bought it hook line and sinker. Come in spinner!

      • the gullible party loyal

        ROFL .. if that is a veiled reference to the OP (ie, me), you really are living in la la land.

        Perhaps you can explain exactly how & why the ALP would deliberately create a ruse that their (new) leader conspired with multinationals.

        I for one would be most interested to hear your attempt at explaining away:

        1. the hearsay evidence (via The Monthly) that BHP “gave the nod” to Gillard to topple Rudd;

        2. the fact that the anti-RSPT advertising campaign was “pulled” immediately on the knifing of Rudd / ascent of Gillard, and immediate renegotiations commenced exclusively with the Big 3.

        3. the fact that Swan/Treasury et al to this day have steadfastly refused to release any details of the core assumptions underpinning the design of the new MRRT 2.0 as negotiated exclusively with the Big 3, citing “commercial in confidence” as justification.

        • The not-so-veiled reference not directed at you…

          1. Hearsay
          2. Objective achieved
          3. Commercial in confidence

          • WTF?!!

            A new tax on minerals in the ground of a sovereign nation is designed behind closed doors in consultation with the Big 3 and only the Big 3 foreign corporations – their local competitor companies specifically excluded – and you think “commercial in confidence” is a sound justification for a TOTAL absence of transparency on the core assumptions underpinning the (new) design?!?!!!

            It’s f***ing treason. A blatant betrayal of the national interest, in favour of foreign corporations, at the expense of the citizenry and of the locally-owned mining sector.

            Ditto Lorax … you disgust me.

          • You should run for parliament, 3d1k. You ably demonstrate the necessary prerequisite – a wholly self-serving attitude. Summarily expressed both in word and action as “whatever it takes”.

            Given the rumours that you are financially remunerated for expressing this attitude on behalf of the mining sector, I for one would not merely delete your comments.

            I’d summon an investigation into having you charged with aiding and abetting the treason of Gillard and Swan.

          • 2. Objective achieved

            2. Unfounded allegation

            3d1k, you suffer from Romnesia..
            I know it is hard, but do try to remember that most people here don’t suffer from Romnesia.

          • Ouch…who wrote that second definition of Romnesia in that link?

            Gina Rinehart insists that if people want to be millionaires, they should spend more time working. She has Romnesia and failed to mention that she inherited an iron ore mine and a fortune from her father.

          • Given the rumours that you are financially remunerated for expressing this attitude on behalf of the mining sector

            Its not a rumour its fact, and you will note that he/she/it does not deny it.

          • Bloody hypocrisy in here is absolutely astounding.

            So everyone else in here pays themselves to sit here and comment????????
            In the process none of them continuously promote the status quo which favours their particular employment and lifestyle?

            This is just plain BS

          • Bloody hypocrisy … none of them continuously promote the status quo which favours their particular employment and lifestyle?

            Flawse, I happily take responsibility for starting this line of debate. So, on the presumption that I am included amongst those you are charging with “hypocrisy”, I would respectfully remind you of my history of annoying the [email protected] out of everyone on MB with my tireless advocacy for fundamental change to the status quo, espec. vis-a-vis usury and the monetary system 😉

          • Op8 That’s a discussion we must have one day 🙂
            Hypocrisy statement wasn’t directed at anyone particularly. Just a rant pointing out, again, that the venom directed at 3d1k is these pages is straight hypocrisy by many.
            What’s even worse it is generally grounded in false assumptions and assertions that have been pointed out time and time again.

    • The biggest failure is US – the electorate.

      We can be easily swayed by a mere $15 million in advertising propaganda spend.

      It just should how apathetic we are as a society and how short our attention span is.

      BTW, Adam Curtis has a great post on “Perception management” (SoN, a weekend post on this pl 🙂 )

      http://www.bbc.co.uk/blogs/adamcurtis/

  2. As you note HnH the IMF has had an ephiphany. The October WEO confesses that fiscal multipliers-IN TODAYS GLOBAL CLIMATE-are in the range .9 to 1.7-confirming Krugman’s assessment.Unless Australia is different(why?) fiscal consolidation costs more than it earns.I dont think the implications of the IMF work are yet fully appreciated.As you say, if the Gov. is in a panic,why be surprised if households increase savings.

    • Krugman is wrong. More to teh point he is myopic with an apparent attention span of zilch. Sure so-called austerity has negative effects on living standards….duh!!!!
      The problems are structural and long term. We have been living on credit and not production. We have over-consumed. We have been doing it for between three and five decades depending on the country. But noooooooo that’s not the problem. The problem is ‘austerity’
      What is ‘austerity’? It is basically that we have run out of credit! We are going to have to reduce demand and actually go back to work. That will take some time to sort itself out.
      There is no magic wand!

      • The paradox of course is that chronic and overwhelming social unhappiness has come from the over-consumption.

        ‘Austerity’ – the word itself is designed to imply that lack of consumption creates ‘unhappiness’ – the exact opposite of actually what occurs in people that re-prioritise their lives away from consumption.

        • Welcome to the brave new world of “money can’t buy happiness”. Was that an age old adage? Well I never.

          But we can be too hard on over-consumption. It has meant that the GFC bears so very little resemblance to the Great Depression.

          The protesting Greeks are not happy, granted, but they’re also quite chubby (by historial standards).

          • 😉 droll. Most of the developed world could of course live of their excess fat for quite a considerable time.

            (you don’t work in advertising/marketing do you – that’s where the consumption is good guys all hang out)

          • If I remember correctly, Professor Afferbeck Lauder, in his classic Let Stalk Strine, noted that the Greek version of “love is a many splendoured thing” was “love is money splattered thick.”

    • Fiscal multipliers would only be at the top end of that range in a country which can’t loosen monetary policy. Either because rates are at zero (the US) or because they share a common currency (Spain, Italy etc.).

      The multiplier in Australia right now would be very low.

  3. Let’s have a look at the ‘solutions’ here shall we

    “We Must”
    “confess that households need to deleverage and will require public deficits to hold up demand as they undertake the task;”
    The problem the economy has is too much demand and not enough real production. Yet you big aim is to ‘maintain demand’
    So we’re running a CAD and incurring increasing debt or asset sales every day…your solution is we must hold up demand in order to maintain the rate at which the debt is growing?

    “install policies that remove the banks from public support so that we can run public deficits without risking credit downgrades to the entire financial system;”
    Maybe you can explain how this is to be done without increasing savings or decreasing credit hence knocking around your demand. This requires increased interest rates. As you said three days ago ‘where are the funds going to come from?’ You propose to increase our rate of asset sales to foreigners?

    “use macro-prudential policies to prevent interest rate cuts from stimulating established house prices and slash rates to bring down the dollar and accelerate deleveraging,”

    How will slashing interest rates accelerate deleveraging?
    Let’s look at this for exactly what it is. You want to print money and give it to people who have borrowed too much so they can have more money to eventually spend. At the same time you destroy the lives of those who have been prudent and further destroy any future incentive to save in any way. Again how are you going to fund anything in the future…you have to borrow more…duh! As Barry’s brother Bob would say…Brilliant!

    In the end you are just starting another round of increased spending that creates more real debt that can’t just be printed away. This is exactly what we’ve been doing for decades!!!! We’ve been running negative RAT rates, continuously, for decades It’s exactly how we got here. What do you think you are proposing that is new? Why will doing the same thing now, on an increased magnitude, suddenly result in a different outcome?

    “yoke wage gains directly to productivity growth”
    First how is this to be done? The powerful and the Public Service get fully compensated. It has been always thus. it’s the farmers and small business, the low paid,the savers, the pensioners, the disadvantaged who get it in the neck. These are all people without a voice so who cares! The cognisante will just gather around and tell each other how clever they are because their debts have been inflated away and they can afford a new BMW! (Forgive my bitterness but that is Australia right now and what is proposed will just make it more that way)

    Secondly you have no measure for real productivity. Hire a lawyer and create laws that impinge on the ability of a business to function…what have you just done? Have you increased productivity because the lawyer is doing new work that wasn’t done before? Have you decreased productivity because factory output declines?
    We know the real answer but your current measures of productivity would probably show an increase in productivity!

    “leadership that mobilises the body politic to the task of paying for past excesses through the simple and clear economic narrative of building a new economy aimed at export dominance.”
    Yeah it’s the politicians! It’s all their fault!

    Every proposal you have made works in exactly the opposite direction to your stated goal. You just want easy answers…you just want it all magically to go away…there is to be no decrease in demand (living standard)How are you any different to Swan Hockey et al?

    • The big issue I have with ‘public deficits to hold up demand’ is that it is based on an idea of countercyclicality. That is, public spending is done in the bad times, and then recouped in the good times. But we can all see the problem with this! And it is why we are all in this financial mess. The cut backs in the good times, never happen. And they won’t, this time either, if that is what is applied as a solution. The only option that will work in the longer term is, cut backs in the bad times. It’s rationally expected by ‘us’, and easier to implement. Tough, but understandable.

      • But,but,but..what about growth Janet? we must have growth.. and,and,and..deflation? that could kill us all.

        • Precisely. I’m sick of this myth of “death through austerity” propagated by people whose best evidence is the rioting of well-fed, adequately-clothed Europeans.
          Yes, high youth unemployment is misery. But in this unprecedented era of human affluence it is FAR from lethal.

        • Patrician, are you sure we need this growth?
          The gov could not sustain it even during the mining boom. It failed to allocate it to high tech and education and/or distribute the wealth equally. Now we have neither infrastructure no favourable demographics to support growth. We’ll be lucky if the economy contracts less than 1% per year….

          • T, I’m sure some powerful interests WANT endless growth..but

            What we NEED is growth in our productive capacity.

            What we DON’T NEED is sustained emergency level interest rates driving asset price inflation and debt-fuelled consumption.

            What we DON’T NEED is some of the worlds most overpriced land sucking the productive life out of our economy

      • reus…I’m a he! Some might claim a bit much of a ‘bloke’ If you have a good sense of the ridiculous and want a good laugh the character is from the book ‘The Throwback’ by Tom Sharpe…

          • 🙂 Yep it’s almost 4 decades since I read it !!!! Then again I read it every few years just to get some ‘balance’ back!!!!

      • Flawse comments are pretty good I dont always agree 100% but as 3D1k says he is formidable.

        i reckon Macrobusiness should have a competition in categories for regulars posters.

        • Flawse is getting up there for “rant of the week/day/hour” ….very passionate today/this week/month aren’t you Bill!

          3d1k would win the “Spin! Spin! Spin!” award.

          I’ll put the competition idea up at the next editorial meeting…I like it.

          • Prince
            My consciousness of our decline is now 50 years old…so it’s fair to say that when I look at what the non-solutions proposed it’s frustrating.

            Further the problem really is that we have discussions then it is as if some ‘re-set the stupid’ button is pressed and all retreat to the same stance they always had.
            Rumples is probably the great exception.

            Of late I’ve been looking to get banned for being so contrary so I can give up and just go ride the bikes or swim!!

      • Diogenes the CynicMEMBER

        What’s not to like he talks sense!

        Deficit spending is just running up the credit card to keep the groceries in the fridge. After you have sold off your jet bike, car, furniture you have still have to pay the piper.

    • +1

      Thank you Flawse.

      I am overly concerned on the faith we have that transfering debt from private to public simply makes everything right. It doesn’t. It kicks the can down the road. Maybe we can do it for decades, but not indefinitely.

    • Usually you are quite the contrarian Flawse, but as time goes by I find myself agreeing with you more and more. We cant dodge the over-consumption bullet it will catch up with us sooner or later, some call it the GFC bullet but that doesn’t change what it really is.

      When you consume tomorrows production for today’s consumption for literally years to come its going to get ugly eventually. Even if the average Aussie put every cent of their disposable income towards complete deleveraging it would still take years to get back to square one.

      Also if the government guarantees on the bank deposits are removed they can say goodbye to my deposits and I can imagine a great many other peoples. I would rather stuff my money in a mattress or a safe than have the housing bubble destroy the banks and my deposits along with them. At least this way we don’t loose our money.

      From a non personal perspective the ratings agencies have said that the implicit government guarantee’s give the banks at least 2 additional notches on their credit ratings. Remove those guarantee’s and watch the credit ratings tumble and the banks cost of borrowing would soar. Really what you end up with is a hammer and an anvil situation with the Australian public in the middle. You have the hammer which is the ratings agencies downgrading the debt which drives the cost of borrowing higher and then yo have the anvil which is Australians pulling out their money in a bank run because it is no longer safe. Both of these contribute to higher interest rates and makes the idea of anything resembling ZIRP impossible. Instead of making mortgage repayments more affordable instead you make them more expensive and destabilize the entire economy.

      Unless the slow melt in housing prices continues for at least another 5 years and the banks stop giving out dodgy no-doc and low-doc loans, its a matter of when the banks will have to be nationalized rather than if.

  4. See MYEFO – the economy is already burdened with a circa $13 billion per annum Interest-on-Debt bill.

    There is no need to run a (increasing) public deficit, thus burdening the economy with ever more principal + usury to pay, when historically it has oft been demonstrated that the government can simply “print” and spend directly in the economy, creating its own “demand” – public works, etc.

    • HI OP8Red off topic but relates to a previous post of yours – your favourite topic. A couple of questions

      1) if banks don’t need deposits to lend then why do they chase them
      2) Why can’t a little bank like BOQ compete with the majors for sound credit opportunities (they are too expensive) if banks don’t need deposits to lend

      The two questions are probably related.

      • Re 1) use of the term “need” conflates two distinct issues – the fact that, in practice, loans create deposits and not vice-versa, is I think a separate issue to whether or not banks need deposits to on-lend. In any event, in context of the AU banking system, the best answer I can offer to your question is that a) I don’t know, and b) general commentary appears to be that a drive by AU banks to attract deposits is to ween themselves off wholesale funding. I would venture to guess that a drive to attract local deposits can coexist with attempts to reduce reliance on offshore borrowings due to the relative time lags between alternate flows of funding. I imagine someone like Deep T can better answer your question.

        Re 2) again, I can only guess that the answer lies in relative time lags on the various source funding flows. For example, monies “deposited” (not borrowed) at BOQ by a (espec. new) customer of BOQ may well derive in whole or in part from borrowings (ie loan = new deposit) at one of the majors. Again, one such as Deep T probably better equipped to answer.

      • Regarding 1) I thought that banks needed some deposits in order to satisfy reserve requirements stipulated by APRA?

        • There’s a time lag that the banks try to take advantage of. They lend the money and then find the deposit before the reporting time.

          • littleguy…there is a wee gap, like minimum 32%, marginally possible 60% (I don’t know), in the middle they have to find from somewhere else.

          • Sorry, shot my opinion off too quick! Not sure of the gap. Someone else might be able to figure it better than me. Banks lend. A fair proportion of it heads overseas in imports. They COULD lend for exports or manufacturing which would eliminate the problem.
            Who is investing in those things right now?

            Anyway sorry!

      • After some research – I believe all reserves are borrowed and it is rare that reserves are lent directly by the central bank.

        Source of funds for reserves:

        1) Deposits
        2) Short term and long term securities
        3) Central bank – sale of balance sheet assets to reserve bank in exchange for reserves known also known as open market operations
        4) Interbank lending markets – They borrow from each other. 2008/2009 was a breakdown in the interbank lending market which is why the Federal Reserve conducted open market lending operations so banks could sell their assets (eg loans) to the central bank to meet their reserve requirements

        I may be wrong about some of the above

        • According to the following 2007 Federal Reserve research paper, the Oz banking system is one of 6 OECD countries that operates with zero monetary (NB: not capital) reserve requirements –

          Reserve requirements are the minimum percentages or amounts of liabilities that depository institutions are required to keep on hand in cash (vault cash) or as deposits with their central banks (required reserve balances).

          Twenty-four of the thirty countries that belong to the Organization for Economic Co- operation and Development (OECD) employ reserve requirement systems…

          The remaining six OECD countries implement monetary policy without reserve requirements.4

          Footnote 4 goes on to explain who those six countries are …

          4 The six countries consist of Australia, Canada, Denmark, New Zealand, Norway, and Sweden.

          … and then explains how our banking system operates, vis-a-vis the absence of any monetary reserves:

          The central banks of these six countries make interbank payment settlement accounts available to depository institutions subject to certain rules. They provide standing facilities with interest charges and the lending interest rate sets an upper bound on the market interest rate. These central banks also pay interest on end-of-day account surpluses, and that interest rate forms a lower bound on the market rate Thus, lending and deposit rates form a corridor for the target overnight interest rate.

          In addition to imposing rules for settlement accounts and providing standing facilities, most of these central banks influence the aggregated settlement balances in the banking systems mainly through open market operations.

          http://www.federalreserve.gov/pubs/feds/2007/200754/200754abs.html

          • Interesting.

            We need to understand what the reserve bank charges them on borrowed funds and understand how much of the funding comes from the reserve bank to understand why they would even bother paying interest on deposits.

            There must be a mechanism (rules above) that discourages them from borrowing from the reserve bank. There also must be some self imposed reserve requirement which is not mandatory.

          • Check this link. Reserve bank is lender of last resort only when banks can’t borrow self calculated reserve requirements. Banks are discouraged from borrowing from reserve bank due to penalties imposed.

            http://www.rba.gov.au/speeches/2008/sp-gov-150408.html

            This explains why banks chase deposits. Thy essentially operate in a free market until their existence is threatened via bank run or running out of deposits. At that point, they become state sponsored entities being able to raise funds from the central bank. Heads you lose tails I win.

            This also means big banks which have a perceived lower risk profile than smaller banks have a funding advantage when operating in the free market setting. It also matters when those banks go to the reserve bank for emergency reserves as the reserve bank assesses loans on the same basis as a commercial bank and would penalize a smaller bank to a larger degree than a larger bank. So there is a rigged game inside a rigged game as the larger banks keep their smaller rivals at bay during times of crisis.

  5. What is McKibbin talking about?
    Is he saying you should prolong and ride out an economic downturn with fiscal contraction because at some point exports will save you?

    His take on the IMF figures on the fiscal multiplier also contradict some recent work by Eichengreen and O’Rourke (who I’m inclined to trust more). They also estimate the multiplier to be at 1.6.

    http://www.voxeu.org/article/gauging-multiplier-lessons-history

    ‘The Fund’s new estimates, which range from 0.9 to 1.7, suggest that Europe’s policies of austerity are in fact directly responsible for the fact that the continent’s recessions have been even deeper than initially forecast.’

  6. Let’s have Austerity. Let’s have Govt spending under strict control at much reduced levels. Let’s have a flexible productive labour force , encouraging and rewarding the private sector to innovate and adapt rather than being too reliant on Govt spending for it’s incomes.

    Let’s have targetted tax cuts and incentives, to allow consumers more disposable income, to allow businesses to invest and innovate more cheaply, to hire at a lower cost, to foster more R&D and medical research. Slash the regulatory burden on SME’s with special focus on the labor, tax compliance and green tape regulations.

    Let’s have a real Surplus for gods sake and pay off this Debt, providing Billions of savings in interest annually to invest in education , health and R&D.

    We have regulatory, labor and tax GRIDLOCK in the economy. Capital is reluctant to invest for fear of being eaten alive by this voracious Govt bent on taxing any kind of propserity into oblivion.

    We are heading ENTIRELY in the wrong direction.

    • “…Capital is reluctant to invest for fear of being eaten alive by this voracious Govt…”

      I suspect McKibbin agrees:

      ‘Add to this the bias towards using corporations to fund spending promises, with surprise tax changes, which further undermines confidence and investment in the economy’

      • Explorer,
        Feel free to critique where you want or where you disagree. I don’t see anything in your “data” that goes to my points , whereas McKibbin seems to share a similar outlook.

  7. First to put the boot in is Warwick ‘McKbbin who uses the recent IMF confession that fiscal multipliers are not what we thought they were to suggest the Government is slowing the economy:

    In the 1980s the fiscal multipliers from global economic models were estimated to be between 0.4 and 3.5. During the next three decades the fiscal multiplier has fallen to be between 0.2 and 1.5 depending on the model.’

    From the horse’s mouth:

    “IMF staff reports, suggest that fiscal multipliers used in the forecasting process are about 0.5. our results indicate that multipliers have actually been in the 0.9 to 1.7 range since the Great Recession. This finding is consistent with research suggesting that in today’s environment of substantial economic slack, monetary policy constrained by the zero lower bound, and synchronized fiscal adjustment across numerous economies, multipliers may be well above 1.”

    http://www.imf.org/external/pubs/ft/weo/2012/02/pdf/c1.pdf

    McKibbin is 180 degrees wrong, and your piece needs an edit HnH.

  8. “We have regulatory, labor and tax GRIDLOCK in the economy.”

    Exactly. That’s why for the RBA the ONLY thing they can do is re-inflate the housing market. They are left with no choice.

    The main problems aren’t even about debt in the end. They are about the basic structure of our economy, our society, and ourselves.

  9. McKibbin makes a lot of good points in his article.

    The real threat to the economy, is the governments anti-business and opportunistic medium term fiscal strategy.

    Threatening tax increases on business may make sense at the peak of a mining boom when planned investment is historically strong (although cutting spending would make a lot more sense). It doesn’t make sense when planned investment appear to be weakening. So why is the government threatening business with tax increases (eg. Parkinson’s payroll tax hike)?

    His point about Swan’s plan to bring forward tax collections is dead right as well. It won’t have any affect on the fiscal position – it’s just a con trick to win votes, at the expense of businesses cash flow.

    • So why is the government threatening business with tax increases?

      There are two potential sources of revenue, when you boil it all down: people and businesses. Businesses don’t vote.

      • There are two potential sources of revenue, when you boil it all down: people and businesses. Businesses don’t vote.
        No, they carry much more power than mere votes: they lobby and they advertise.

        • Not SME’s which is where most of the employment is…we can’t afford to either advertise or lobby…that’s why we are screwed!

        • they carry much more power than mere votes: they lobby and they advertise.

          So tell me, why have individual tax rates been reduced much more than company rates over the last 50 years?

          Surely the power to vote a government out is far more influential than the power to lobby and advertise. This is not the US, where any politician entering office owes more favours than they can pay back in a lifetime.

          • So tell me, why have individual tax rates been reduced much more than company rates over the last 50 years?

            Because wage share has dminished for mouch of that time when cuts were being delivered.

            If wages are shrinking as a proportion of the pie, then discretionary spending (i.e. after-tax income) can not shrink at the same rate.

            In other words, they are getting tax relief because they are gettings less return from their productive output.

          • Wage share hasn’t been falling for 50 years. It only started falling in the 80’s, was flat in the 90’s and then fell again in 00’s (mainly due to China).

            The increase in profit share doesn’t mean business is making a killing. As profit share has increased (globally) investment demand has actually declined. So something else is happening.

          • I didn’t say it has been falling for 50 years, however it peaked in approximately 1974.

            http://www.abs.gov.au/AUSSTATS/[email protected]/Latestproducts/5204.0Main%20Features22010-11?opendocument&tabname=Summary&prodno=5204.0&issue=2010-11&num=&view=

            Roughly the end of the Heynesian era, and has trended down ever since.

            Yes something else has happened, a blowout in executive wages and other perquisites (corporate boxes at sporting events, $40,000/sqm office towers with harbour views, flying business class on junkets galore, and the rent seeker getting a massive extra clip.

            The point I am trying to infer is that the person who exerts themselves, who sells their labour, is tapped. They’ve had to supplement their spending levels for 20 years to maintain spending, and thus jobs.

            Business has enevr said “NO” to the likes of Frank Lowy pushing up rent, they find it easier to bully low skilled workers into smaller wage (share) and passing on the costs to consumers.

            They have completely abrogated their responsiblity to be a vigilant component of the invisible hand.

            No they want guv’mint to intervene by punishing the prudent.. surprise, surprise.

    • So why is the government threatening business with tax increases

      Well seeing as wage share has shrunk to post WWII lows, and profit share is at all tiem highs, thus taking a greater proportion of the pie than ever before, perhaps it is prudent to claim they do not pay enough tax.

  10. “we’re going to need strong and eloquent leadership”

    Lol. I have a squadron of Berkshire Whites fully fuelled and ready for take off at any moment.

  11. Third time lucky? The IMF’s estimates for the fiscal multiplier have been revised UPWARDS to 0.9-1.6 not DOWNWARDS. These estimations make it a lot harder to justify contraction/austerity.

    See my and Terry McFadgen’s previous comments. I’ll do this all day if I have to….

  12. Alex…so the solution is no reform, keep everyone employed where they are, continue to over-consume, ask more and more of our world every day, and the Chinese are to remain the suppliers of goods for nothing forever?

    • Leave aside whether you hate/love Twiggy Forrest, the Chinese, Gillard, JM Keynes, or Hayek for one second. Even if this love/hatred forms a core part of your identiy. Please, just try it!

      OK, we there?

      Good. I am simply pointing out for the fourth time now that the IMF has revised estimations for the money multiplier upwards. HnH and McKibbin both seem to get the direction wrong in this article, suggesting that ‘to suggest the Government is slowing the economy’.

      McKibbin says the range is now 0.2-1.5 but the recent IMF estimation which HnH states that McKibbin is referring to is in fact 0.9-1.6.
      Anything greater than 1 means the expenditure is having its desired effect.

      That is all.

      • Alex sorry I probably missed your main point. Bad human characteristics involved there I’m afraid and I do appreciate being pulled up on that one!

        Personally i find that debate pointless as the IMF et al are all assuming unlimited free funds available from the external account. There is no limit imposed by the external account. My early and long ago years of modeling certainly involved trying to put some numbers on such things.
        Thus for “Anything greater than 1 means the expenditure is having its desired effect.” it may increase GDP but it MAY still be by increasing debt depending on, both, the structure of the economy and the direction of the spending

        Unfortunately today most economic thinking seems to emanate from the US where they have been able to issue USD and Treasuries at will.
        While the collapse of the USD does not look imminent Herb Stein will be proven correct in the end.
        Further in all these things Nassim Taleb’s writings and the sand pile experiments should be kept in mind.
        Cheers

        P.S. More than happy to have your thoughts in response!

        • Cheers, Flawse. I have no ideological or economic problem with Gov Debt/GDP increasing because I think it will be manageable. Other non-euro countries have increased their ratio while their rates have remained low:

          http://twitpic.com/9wv4ep

          To all those cheering on a bond crash, let’s not forget the famous trade which isn’t mentioned nearly enough: shorting Japanese bonds aka. the ‘widow-maker’. Folks have been pulling that one for 15 years apparently.

          Government bonds will be ugly dogs of an investment sure, but in competition of ugly dogs they’ll be the least ugly. We’re entering a world where chasing capital returns of any kind will be the domain of a few highly skilled traders.
          Also, I think (tentatively) that MMT crowd might be on to something with the ability of reserves banks to fund that growing debt by simply expanding their balance sheet. Although we’re probably a long way from that and it would be a radical move. Maybe debt-cancellation would be more likely?

          And wouldn’t you agree, regardless of policy prescriptions, that HnH and McKibbin have got something very wrong in their interpretations of the IMF multiplier estimates?

          • Alex If I’ve missed your whole thrust just ignore me.

            Re bonds you might find support in this bloke I know. I did post this somewhere yesterday (another human trait I can’t help in this case)

            http://video.cnbc.com/gallery/?video=3000123359&play=1

            So Bonds remain about current levels. At Zero interest rate Fiscal policy has to start bearing the brunt.
            Note he got them to include a Q on inflation so he could qualify the remarks. Inflation up, interest rates up and Bonds get killed. Not sure where he might have got the idea inflation could be a threat from!

            On this multiplier issue John Mauldin’s article this week is pretty good
            http://www.JohnMauldin.com.
            or
            http://www.marketoracle.co.uk/Article37168.html

            He gives a couple of quotes of others
            Gavin Davies of FT
            “The opposite is also true. Now that interest rates are stuck at the zero lower bound, central banks cannot reduce policy rates when fiscal policy is tightened, and the multiplier is correspondingly increased.”

            “In another article, Professor Carlos Vegh of the University of Maryland said lots of evidence suggested that multipliers would differ greatly from country to country; and “the whole exercise of trying to forecast growth for many different countries using essentially a single multiplier, whatever the value may be, is, in and of itself, an exercise in futility”. (FT)”

            HnH writes “A Budget surplus that is short term, a risk to growth and perpetuates a dying economic growth model.”

            If the multiplier is, in fact, greater than 1 then Govt contraction of 1% GDP results in a greater than 1% contraction of GDP. The corollary being if Govt increases fiscal stimulus greater than 1% it increases GDP by greater than 1%. Aren’t you both saying the same thing just from flip sides of the coin…or have I completely missed the point again?

            I need to repeat my opinion that any such considerations, that don’t take into account external debt and the limits thereto, is pretty irrelevant.

            Just ref your statement on MMT (Modern Monetary Tripe 🙂 )
            “lso, I think (tentatively) that MMT crowd might be on to something with the ability of reserves banks to fund that growing debt by simply expanding their balance sheet. ”

            Again it is only true as long as you ignore the external account. Ignoring external debt is not reality. Bill Barnacle stated that Foreign Debt doesn’t matter because it never has to be repaid, indeed, never has been repaid. This is all demonstrably false particularly in Aus case. You print money you end up with debt in the external account that necessitates the continuous sell-off of assets.

            Debt cancellation is little different. It doesn’t matter whether you lower interest rates/print money, cancel debt, run fiscal deficits, whatever, in our economy you will end up with more debt in the external account. You don’t ever get anything for free. To get stuff you have to produce stuff.

            On the subject of cancellation and the external account Chinese savers will have little inclination to forgive us our debt so we can go on indulging ourselves at their expense.

  13. Agreed, getting one multiplier over a range of countries is futile as they all have different circumstances. But it is interesting that the particular monetary circumstances we have might modify the multiplier(s) and that this is being acknowledged formally, when intuitively it makes a lot of sense.

    I still don’t understand your link between treasury spending and external debt if that debt were to be funded by domestic lenders or the reserve.

    Also, can you get me a job with that guy (Daniel McCormack) at Macquarie?:)

    • “lso, can you get me a job with that guy”

      I can gt you a beer with him at Christmas 🙂

      “I still don’t understand your link between treasury spending and external debt”

      Keeping it simple for a moment and presume no savings by the private sector (domestic or business) Also just for the moment assume a fixed supply of domestically produced goods. Now you start running a deficit (therefore we assume on an injection none is absorbed by tax)from the Public sector and money gets injected into the private sector follow the flow.

      This can result in only two things…
      1. more money chasing fixed goods resulting in inflation or
      2. Money is spent on imported goods
      (Note there is an increased volume of money effect but it is of minor importance and ends up as either 1.or2.

      (Note as an aside if the imported goods are cheap enough printing more money can actually result in DECREASED measured inflation. This is what has been happening.)

      Now in reality we have a whole lot of possibilities. Govt runs a deficit the money will result in any one or all of the following
      1. If interest rates are positive RAT at least part of it will end up in private savings
      2. Business also saves
      3. If the structural settings are good for investment the proceeds of 1.&2. end up back in the economy promoting growth and maybe even exports
      3. Result in inflation of non-tradable goods in the economy
      4. Result in more imported goods

      Now which of these things is dominant depends on the structural and investment environment.

      In our economy we are running a chronic CAD that has gone on for 54 years bar one. Our propensity to import is very high. Currently we spend something like 32% of GDP on imports. Note this includes food and non-tradables etc. It is likely that an INCREASE in money supply, either through public or private creation of credit, will result in a marginal increase in imports of much higher than the 32%. I’ve been asking if there is anyone around RBA or treasury who has some idea of what this marginal number number might be. Just surmising in my own head I’d say it is over 50%.
      So any increase in credit or money whatever you want to term it results in more imports a higher CAD and necessitates greater sales of assets to foreigners.

      Again it doesn’t matter whether it is Public or Private debt creation.

      In our case this has been going on a long time. The result is that our service sector is some 80% roughly of the economy. There-in lies an essential problem.
      Most of any injection goes into this service sector one form and another. More money more imports but no extra production of goods for exports…result higher CAD.

      Now even suppose the Govt builds infrastructure but it is in the form of a city bridge designed to get commuters to work. Fundamentally the bridge is not going to produce anything.
      So, much of the steel may be imported; imagine a Tradie rolls up to work on it…he needs a new ute…imported; he needs new tools…imported; the contractors need new computers and software…imported; the tradie takes his family to a restaurant, money flows to employees thereof…need a new TV…imported etc etc etc So all we manage to do is to add to import everywhere the money flows.
      Pretty much no addition to exports (or import replacement).

      So your whole economic framework is important. Your IR, your WHS needs be sensible, your tax structure needs to make sense, your exchange rate has to make sense (note how the exchange rate is set at the moment is insanity)
      If you had a good investment environment you could run a Govt deficit directed at productive infrastructure with much less effect on the Current Account. That is NOT the environment we have.
      Notionally, with a good investment environment directed towards production, the Govt could run a deficit, soak up a bit with higher interest rates to induce savings, and might get away with no increase in the CAD.
      Note ‘Housing’ is probably one of the worst ways to spend a Govt deficit…produces nothing and results in a pile of imports.

      In summary a Govt deficit need not end up in the external account but in the case of western economies that are all running CAD’s, have poor economic and social structure, and negative RAT interest rates, that’s where it TENDS to end up.

      I hope I’ve shown the effect a little. It’s difficult in that in economics everything works in dynamic loops. In trying to explain in words one has to stop the thing in time a bit and try to advance it frame by frame so to speak.

      Sorry if I’m teaching my grandmother to suck eggs but you did ask!! 🙂

      • Flawse, have you considered these examples of government (note: not a central bank) creating currency (ie, not bonds = debt-at-usury) and spending it into the economy specifically on public works?

        http://www.webofdebt.com/articles/infrastructure-crisis.php

        http://www.webofdebt.com/articles/bankrupt-germany.php

        It seems to me there is evidence to suggest that such a process of currency creation and injection, properly targeted, would negate the concerns you’ve cited (my bold added) –

        presume no savings by the private sector .. Also .. assume a fixed supply of domestically produced goods. Now you start running a deficit (therefore we assume on an injection none is absorbed by tax)from the Public sector and money gets injected into the private sector…

        This can result in only two things…
        1. more money chasing fixed goods resulting in inflation or
        2. Money is spent on imported goods

        • (There is not enough info on the island economy to comment and I don’t have the time to follow it through at the moment) On island economies we have our own resident expert Leigh Harkness on Buoyant Economies.
          http://www.buoyanteconomies.com/default.html

          Note also in my thinking, for the sake of simplicity 🙂 I just treat the CB and the Govt as one. I can’t see any great flaw in this from a macro viewpoint.

          Op8 refer to my sentence or two on Public works. Sure you can target public works, for example, you might build a bridge over the Ward River, and Coopers Creek so you can get cattle to market; you might build a new port so you can get coal exported; you might train people in practical skills that up grade your capacity to produce; there are lots of options. However two things
          1. In the building bridges or ports example…you need machinery cranes bulldozers trucks…all imported. Tradies need utes…imported..new tools…imported. So if you are running a CAD these expenditures, even though well directed and intentioned, make your CAD worse. So you have to either /both borrow and sell assets to finance it.
          2. The second point is you can only control the expenditure on the first line. After that the water (money) flows according to the lie of the land. If you’re economy is badly consumption oriented most of the second layer of spending goes into increased consumption most of which is imports.
          (Note, as I’ve said in a better structured economy, you would get increased production etc However that would by its nature be one that is not running a chronic CAD in the first place.)

          Even considering all this, this is not how most of our Govt deficits are created. They’re created by Govts buying votes. So much of it is social spending. Even when we build bridges and rail lines they are in urban areas and thus facilitate more non-productive activity. As far as facilitating productive activity, well, we have to get Govts, Unions, the education system, personal work ethics, Banks, CB, Treasury etc etc etc all thinking differently to the way they now do……fat chance!

          Re inflation the simple fact is that we DO have inflation. It is just currently being offset by cheaper imported goods. We’re basing all our economic planning and all our bets that this will continue ad infinitum. As others here say…what could possibly go wrong?

      • OK, I got most of that and I see your point.

        Is the amount of money in circulation (M3) the linchpin and long-run determinant of the CAD though? As far as I understand we’re all running long term CADs because the global work force doubled, the ‘global wage’ plummeted, and it was inevitable. We’re an extension of the RMB/USD export/deficit funding nexus.

        What if we run the same deficit program with AUD at 70c, and when the CAD is smaller? When iron ore is $45 and China is in it’s third year of sub 5% growth?

        nb. I’m Econodel on Twitter.

        • Alex I’m a backward old b…..d I don’t do twitter!
          Note important! Unlike Barnacle Bill and others i don’t pretend I’ve got the answers. In fact my normal “The answers lie back in time” statement is where I sit.

          I don’t think M3 is the long-run determinant of the CAD.It’s the short term determinant perhaps. The long term determinant results from long term policy settings

          “As far as I understand we’re all running long term CADs because the global work force doubled, the ‘global wage’ plummeted, and it was inevitable. We’re an extension of the RMB/USD export/deficit funding nexus.”

          (Not having a shot) That sort of statement is just trite rubbish spun out by wrong thinking economists and Govt to justify the mess we are in. Again I don’t have all the answers and all I want to do here is to deal with the policies and problems of our own country (unless we presume we don’t have any, in which case, this (MB)is all a waste of time.

          Re the 70c etc question. You’ve posed a good question and its the sort of question everyone ought be asking of our current economic model.
          My opinion is this (just quickly thinking)
          Despite China growing at 5% or less wages are not going down. They will continue to rise and probably quite rapidly. There are 3 reasons. 1. It’s Govt policy 2.Their long-term demographics ensure that current labour shortages will continue 3. Prosperity means that the newer generations are not prepared to work the jobs the older generations did and secondly when they do work they do not work with the same application.
          Therefore in RMB terms the price of stuff we import is likely to continue to rise.
          Given that, with the dollar at USD 70c (or the equivalent in RMB) Aus will have chronic inflation…like 20% or some such. What will interest rates be? Will we raise interest rates and therefore the dollar to head off inflation?
          Even at 70c we’d still be running a CAD as per your $45 iron ore price. (Note there would not be many iron ore mines still producing) The only way to stop the CAD would be to stop the speculative currency flows and a fair bit of the foreign investment flows. I’m not too sure where the dollar would end up in that case 40c? 30c? Imagine the inflation and dislocation!
          Frankly it seems to me the choices available to us now are all poor!!!

      • Flawse
        Consumption IS the driver of the economy. We have no choice but to consume. That aside – services are actually closer to 70%, which is hardly disgraceful given how the structure of the global economy has been transformed over the past 30 years. Don’t higher commodity prices effectively set the ‘investment environment’ in the sense that high profits in our resource sector encourages greater foreign investment ? Which increases the CAD ? From that point of view, isn’t a tax that makes investment in resources slightly less profitable – when coupled with other settings that encourage investment in other industrial production – not of itself a bad thing ? I’m not sure how investment settings during the Coalition’s last period of government worked to reduce the CAD or diversify the economy away from services. And our savings rates has actually been increasing of late while the CAD as share of GDP has been declining. If I had to pick a political party more likely to increase taxes on capital gains – a measure that would surely encourage more actual saving instead of encouraging people to rely on ever increasing asset prices – it would be Labor. If you’re all for a lower CAD, you should get behind them!

        • spleen….I’m aware consumption IS the economy. it doesn’t have to be! It’s the very point on which we are so basically fundamentally wrong in our economic settings. It has meant that we have pursued consumption as our sole goal. We haven’t bothered about debt until it is too late. Now we want to keep on ignoring it…we can’t.

          Re 70% it doesn’t matter much. The fact is the CAD is telling us that it is too high. We are over-consuming and under-producing.

          Re the investment environment…I’m repeatedly on record as believing that this Free and Floating exchange rate thing is insanity! However from where we are now if we cut capital flows in then we have a sinking dollar and severe inflation and dislocation on our hands.

          Re invesmtment in industrial production…yes..as per my post…however as far as anyone ACTUALLY investing at the moment it isn’t going to happen. The whole environment is so anti-business we cannot establish such businesses.

          (Sorry a container has just pulled up and I have to go empty it!!!! Look forward to getting back later!)

      • The best & simplest explanation of the structural imbalances that I have read for a long, long time.

        Which means you are automatically disqualified from a Treasury / RBA / bank economist post.

        • “The best & simplest explanation of the structural imbalances that I have read for a long, long time.”

          I second that. Time to take a leaf out of Germany’s playbook. We HAVE to boost production.

          • I agree – let’s boost production. Preferably of stuff Germans don’t already make, or that the Koreans aren’t trying to knock off even cheaper. Hmmm, … what can we boost production of ?

          • In the short term, probably stuff that comes out of holes. Uranium, for example. I was pleased that Gillard pursued opening up uranium sales to India on her recent visit there. And that Newman rescinded the ban on uranium mining in Queensland. I am extremely disappointed that the SA and Federal governments did not do more to encourage BHP to continue investing in Olympic Dam.

            In the longer term, we should be leveraging our cheap energy to do further processing of the stuff we dig up, instead of exporting all the cheap energy. And we should be investing more, not less, in R&D.

          • PS, we had a pretty promising car export industry going until we let the exchange rate knock that on the head.

          • Yes, the answer is Uranium ! Well done, Mr Heyworth – pour yourself another single malt. The problem is – way back when our currency was languishing around 0.50 USD, we were still busily speculating on non-productive investment. Mining companies morphing into dot coms. Poof ! All gone ! What we really needed back then was visionary leadership in government. The Coalition failed then, they are going to fail again. Labor’s not perfect. Far from it. But they have better form at visionary reform.

      • Hey flawse,with you in mind,at a noted pace
        1.Can-maybe you can find one Today..
        2.Leakage
        Note-the change in aggregate demand
        Note-this is what has been happening…Today it’s # 1

        1.No,if they create jobs,people can save and purchase your products,while the imported parts you use,will be counted as a leakage by you,like an imported SUV,3d will make up the difference for now.
        2.Your business can invest to cut out all the shipping/double-handle need,and employ more skills/jobs
        3.A new round of induced expenditure..-leakages n tax
        3.You’re mates are going to see this..Drinks on flawes,Alex..he’s saved his Tax refund from not long back …don’t forget health services
        4.Halved,back to two..n
        Not more!..between you and 3d..I wonder who’s more dominant to depend on the structural and investment environment by MB, to more storage cap’s..

        Chronic Dad..55 next,n another for the bar..correct
        Like a bath full of holes..
        Note- non etc..but if I’m to start making space-ships..you reckon you’d fly round the wrong crowd..n we’re on a different wave length,what are you like at algebra …so jobs,n what happens if it floods this summer and the next,the new owners might take a bath.

        Again,I thought we we’re paying this off..
        You’re right on that one…ah 80% you’re getting close..,on digging holes…should we head-it at currency,or just swap them..as explained higher,call another doctor

        You can always make your own,like flow..moving on replacement..So sustain insanity,then good ,I’d say Magic..granted..soak to sit..I’m sure you’ll let us know…Summary,Forget it you’ve pushed me too far,Hope you follow,n..don’t worry it’s Free
        Cheers JR

  14. Spleen…I don’t think we have to proscribe what production will be boosted.
    Now I don’t know how to fix all the problems. I’ll leave that to you young blokes. However given where we are the first thing is to figure out how to get this damned dollar down. The so-called free and floating exchange rate has to go and we need some control on the speculative flows in particular.
    Further it is essential that we be able to encourage savings through some means other than financial repression. So again we need to partially unhook the exchange rate from interest rates.

    Once the dollar is down and somehow you managed to create some sort of pro-productive environment I reckon there might still be enough Aus people with nouse to figure out what to make or create.

    As an example of possibilities I have a little knowledge of a proposed iron ore project. It has the potential to be a great project bring employment to an area that needs it. Originally it was proposed to process the ore to some extent. However this processing has a heavy power input. The Carbon Tax slammed the nails in the coffin of the idea. Now it will be raw dirt straight on to ships. The processing will be done in China. Let’s not start any arguments about climate change and Carbon Taxes. It has to be accepted that it does have an effect and this is one. If we think that’s OK well that’s the way it is. However dollar down, sensible policies, who knows what might be possible?
    But obviously some downstream processing of what we dig up might be a good place to start.
    Anyway i’ll leave that to brighter minds than mine.

    I do want to make one other point about the structure of economies that concentrate more on production than consumption. Rumples at one stage posted on urban planning and how it was good planning to have the shops in the centre. Thus a consumption based economy TENDS to produce very concentrated urban environments.
    A production economy, on the other hand, requires more land and ease of transport so your factories etc tend to get positioned around the edges. Now this is just theoretical but we can extend the concept. The bigger and more concentrated the urban environment the more complex and expensive the infrastructure becomes in order to keep the concentrated environment going.
    A production based environment is more decentralised and requires less complex infrastructure.
    The whole concentration on consumption just generates more and more problems.

  15. Just for the record
    1. To design a fix for our problems we have to start from where we are at. As much as we’d like to start from somewhere else it isn’t possible. Over to you guys!

    2. Herb Stein, Chairman of the Committee of Economic Advisers in the Nixon cabinet
    ‘If something can’t go on forever, it will stop!”

    • In reply to your reply above:

      1. The global workforce has at least doubled in the last three decades and wages have fallen. Wage growth in China hasn’t actually kept apace with productivity growth. A large TV or computer is at most half the price it was in ’95 ($2000 for a 486-pc or 68cm TV). Why are two manual labor uni jobs I had in the early noughties no longer in Australia? Textile dying (i’m not kidding) and assembing home theatre projector mounts? I’m sorry- trying to imagine an Australia where those things are still done here is impossible for me.

      2. It seems in talking about the CAD we all start at different places. Inflation looms large in your mind, where as I start with the dollar. I also can’t comprehend inflation (aside from commodity market financialisation as we’ve seen) in a world where fundamental Supply>Demand in both developed and developing countries. I believe we’ve had an epic era of debt accumulation in breadth and depth, and that as deleveraging grinds away it’s no coincidence we see US Banks, Euro Deficits countries and a Chinese growth model all become shaky WITHIN FIVE YEARS of each other.

      3.Just having a peak at Australia’s CAD here:
      http://www.tradingeconomics.com/australia/current-account

      It rockets all over the place. Yes, there was a trend down to 2007 but it now seems to be shrinking. Surely we need to put that chart up every time we talk about the CAD? And overlay it with the AUD, iron ore and coal prices?

      4. I’m job hunting and you’ll have to excuse my shameless attempts at networking. Trying to think of a way to get in contact while remaining incognito here.

  16. Thanks Alex

    As I’ve said before if in economics you are thinking in straight lines you have it wrong. It’s all dynamic loops.

    Re China…I’ve been going there now for nearly 30 years so I’ve been privileged to be witness to the great marvel economic happening of the modern world. In total I’ve spent over 2.5 years of my life there! Too much Moutai!!! Might explain why HnH thinks i’m mad!

    I am in factories there all the time and I have two employees there. Wages in most of the factories we use have been rising at between 23 and 27% per year over the last three to four years. It’s slowed a bit currently. However it is Govt policy to increase wages one form and another. A big part of the increase has been for social security….super and medical.
    I also talk to managers about the worker supply and changes in attitudes etc. It can be most entertaining. Suffice to say the effects of the terrible demographics and increasing prosperity are causing problems.

    Re the CAD at a time of peak ToT you’d reckon we ought run a surplus. So as ToT decline and we get more competition from Africa, in the face of deeply negative RAT rates what will it start to look like? Further in the last few years we’ve had massive borrowings and asset sales so repatriation of interest and dividends is likely to become a more serious problem Remember the CAD does not include earnings by foreign companies that are re-invested in Australia. I have no numbers but I’ll wager over 50 years this amounts to one heck of a lot of money.

    Re at 70c inflation vs the CAD I don’t think we can look at either in isolation as the reality will be that we will have inflation. My FOB cost of goods has been rising on average about 8 to 9% per year. This has been offset by the higher dollar value. As the dollar falls the RMB FOB cost of goods will continue to rise albeit at a slower pace. Inflation looks baked in.

    “I’m sorry- trying to imagine an Australia where those things are still done here is impossible for me.”

    Unfortunately from time to time I interview people for storemen jobs here at my warehouse. It’s a distressing experience. We don’t have jobs anymore for many of these guys. I’m depressed for weeks afterwards…it might be my current problem 🙂
    We have to get the dollar to 70c or 40c. My thinking from back in time a little was that the equilibrium price for the A$ was about 40cents. If commodities continue to decline that might be the number I get in my head again. ATM I’m like you I’m thinking 70c and see where we are then.

    Can’t help with the job. I’m just an SME with an emphasis on the S. However [email protected] is my contact.