Australia’s economic Hari-Kari

ScreenHunter_01 Sep. 06 07.42

Cross-posted from Paul Wallbank.

The Golden Era of Credit is Now Over” writes Maximillian Walsh in the Australian Financial Review today.

Max’s story relies mainly on the April edition of Bill Goss’ monthly newsletter where the founder of investment firm PIMCO writes about the talents of today’s market wizards;

All of us, even the old guys like Buffett, Soros, Fuss, yeah – me too, have cut our teeth during perhaps a most advantageous period of time, the most attractive epoch, that an investor could experience.

The credit boom of the last fifty years created many winners – investment bankers, property owners and those who sell things funded by easy finance.

One of the best examples of a fortune made through easy credit is Australia’s Gerry Harvey. Here’s one of Gerry’s ads from 1979.

Hurry into Norman Ross. You can use Bankcard or our easy credit system. You can even use cash!

Three years later Gerry was sacked from the business he founded and he set up Harvey Norman, promising John Walton and Alan Bond “I’m going to beat you.” By the end of the 1980s he had.

Gerry’s success is built on easy credit and the rise of the consumerist economy. From the hire purchase plans of the 1960s, the introduction of credit cards in the 1970s and the banking deregulations of the 1980s, Gerry was able to sell goods to eager consumers who could worry about paying later.

In the 1990s and 2000s a happy coincidence of easy credit and cheap Asian manufacturing – note the prices of electrical goods in that 1979 commercial – saw businesses like Harvey Norman grow exponentially.

Mao promised the Chinese a chicken in every pot, Gerry delivered a plasma TV in every Australian bedroom.

Today, as Bill Goss says, the credit party is over. Last drinks were called with the failure of Lehman Brothers on September 16th, 2008.

However this hasn’t stopped the Aussie economy, as the Sydney Morning Herald reports today Sales growth cheers Gerry Harvey.

In the same edition the SMH reports the government science organisation, the CSIRO, is cutting hundreds of staff. Notable in that article is a comment from the organisation’s CEO;

Dr Clark said more than 2000 companies collaborated with CSIRO but that industries were reducing the amount spent on research.

So at a time when the Australian economy is struggling with the effects of a high currency and exhibiting all the symptoms of the Dutch Disease, consumers are spending more on TVs and sofas while business cuts investment in research and development.

Karl Marx famously predicted that the last capitalist will be hanged with the rope they sold, Australians have a bunch of Harvey Norman branded credit cards for their financial seppuku.

 

Comments

  1. “Karl Marx famously predicted that the last capitalist will be hanged with the rope they sold”

    round and round we go chasing our tail, postponing the inevitable that Marx described nearly 2 centuries ago: Workers ARE the market and they need to have enough cash to buy the stuff they produce. If they don’t, the system fails. You can postpone the inevitable by placing workers in one continent and customers in another, by giving them credit, by feeding them asset bubbles, but all you’re doing is postponing, it will eventually come back and bite you.

    Problem is, humanity hates Marx’s solution on how to fix the problem.

    • Marx wasn’t really about a “solution” – lets be honest – he was more interested in a dialectical materialist depiction of capitalism, which to date remains unrivalled.

      • You mean, “a dialectical materialist depiction” of EVERYTHING…… including the “solution”.

      • The “solution” adopted by Marx’s followers who have attained power, has always been worse than the problem it was designed to solve. But I will say more below about where another solution came from, that no-one understands.

      • Very few of Marx’s followers were enough intelligent to understand his works, but his name was easily abuse by communist parties around the world and their low educated leaders, who have never got the patience and the will to read his economic manuscripts and The Capital.

      • +100. “he was more interested in a dialectical materialist depiction of capitalism, which to date remains unrivaled”

        This is the essence of his work, but we needed more than a century and a half and the great GFC to understand that he didn’t give a solution, but the deepest and the most honest analysis of capitalism and its prospects. Everything in our life is subdue by dialectical materialism, from the most complex issue to the simple tomatoes we grow in our gardens.

      • Schumpeter, in “Capitalism, Socialism and Democracy”, as much built on Marx’s work and agreed with many of his conclusions as he disagreed with and debunked others.

    • And of course, you can keep it all going if you continue to pile immigrants into a country which already has a very precarious water supply & city transport infrastructure. Roll on “big” Australia (and buy a helicopter to get to work if you’re one of the poor sods who live in the city).

    • “Problem is, humanity hates Marx’s solution on how to fix the problem”

      Indeed. Like most so called “solutions” they look great on paper until you hit that thing called reality.

      Humans always have and always will predominantly operate from the point of self interest. That is why the Socialist/ Communist and all shades in between “solutions” have failed. Human nature rules. People are aspirational. The self interest test needs to be accomodated in all areas of social organisation and policy for them to be succesful or viable.

      • A thesis that very conveniently suits the ideology being defended. Despite being complete baloney.

      • disco stuMEMBER

        “That is why the Socialist/ Communist and all shades in between “solutions” have failed. ”

        Yes, those Swedes and Scandanavian countries are such a bunch of dirt poor turnip eating socialists, heaven knows why they haven’t ditched their cradle to the grave model years ago.

      • Actually disco
        I think you will find that a great many Scandinavians now regret socialist leaning policies, especially with regard to immmigration. As recent events have shown, there are now considerable fractures just beneath the surface of the socialist utopia most people seem to believe they have.

      • Sweden does have a few things about it that need to be taken into account.

        Firstly, until it adopted mass-immigration policies in recent decades, its population was made up almost entirely of Swedes. The culture was strong on the work and responsibility ethic. Socialism was really adopted as a genuinely Christian safety net for the needy, who generally did not abuse it. (NZ’s rate of uptake of the solo mothers benefit when it was introduced, for example, was something like 10 times Sweden’s).

        Secondly, Swedes have been leaders in technology and industrialisation. Their economy is based heavily on high value activities. Nuclear is a major source of energy.

        Thirdly, Sweden’s arms exports as a proportion of the total, is the highest of any country in the world. Furthermore, they sold arms to both sides in WW2 without incurring any cost of fighting.

        Fourthly, Swedes are curiously patriotic and few emigrate in reaction to being overtaxed or over-regulated. There is not much of a Swedish diaspora. But it is worth noting that Swedes outside Sweden are more successful on average than Swedes inside it, and identifiable immigrant groups in Sweden have been shown to be less successful than members of the same immigrant group who went to the USA.

        I always find it ironic when people who are anti-industry, anti-ethics of responsibility, anti-nuclear, and anti-arms industry; LOVE Sweden’s lavish welfare State. It is also ironic that the same people who like Sweden, dislike what they perceive as entrenched wealth at the top in “capitalist” countries, when the rate of “churn” in the top 1% is among the lowest in the world in Sweden and highest in the USA. Sweden’s “capitalists” who backed the transition to socialism some decades ago were merely acting rationally to protect themselves from competition.

        Ironically, this is precisely what crony capitalists in the USA would LIKE to do, and this is the direction in which the entire West is heading. It is just a pity that some nations heading in this direction are not starting from the same “high base” of social capital, a near-monoculture, industry, science, high-value, armaments exports, and nuclear energy.

      • disco stuMEMBER

        Irrespective of the lack of churn amongst the top 1%, I bet there are still fewer Swedes eating turnips* per head of population than in America.

        (But yes there are characteristics specific to Sweden, such as its ethnic homogeneity, that have contributed to the success of it’s social welfare model)

        *Turnips, Soup kitchens, food rations, whatever.

      • yep
        You have a mono culture just before someone forgets the benefits and you move to a ghetto culture. Of course, I’m talking about the kind of immigrants who don’t subscribe to the democratic view. When this happens, it’s only a question of time and numbers before that “alternative” view starts to be stridently expressed.

      • Interesting analysis. You omit mentioning the positive role of a strong trade union movement which was able to enforce policies of “wages solidarity” (keeping differences in relative pay rates small). This, I would assert, has had a net positive effect on the high productivity achievements of Sweden (as you say, they are “leaders in technology and industrialisation”).

        As evidence for this assertion, see this interesting paper (a bit old now) which gives historical context & analyses the empirical impact on Swedish productivity of these wage fixing policies:

        http://www.nopecjournal.org/NOPEC_1995_a07.pdf

        Whilst its a complex and nuanced picture, the paper’s normative takeaway (at least for Sweden) is that central wage fixing across industries, whilst allowing a degree of skill based wage differences, enhances overall national productivity. The idea is that high wages overall will force labour and capital to flow to the most efficient and profitable industries, and to not allow low wages to prop up profitability for failing industries.

        As such its almost the opposite of Aussie and “enterprise bargaining” that replaced our former “comparative wage justice” system of wage fixing. These days its only CEO’s who can use CWJ arguments to justify their own lavish packages!

        Sweden is indeed an interesting case and you are quite right to point to the ironies of the old entrenched “1%” wealthy elites over there who really run the show. Nevertheless I am constantly amazed at how little serious attention the northern European/Scandanavian experience receives from thinking people and in public discourse here.

      • The Trade unionism is in the same boat as the welfare State, it works in Sweden but it definitely won’t lift Bangladesh into the 1st world.

        I would suggest that Sweden had a strong and rapid trajectory of “development” due to underlying cultural factors, and this trajectory could be sustained and indeed even helped with positive feedbacks as you describe from trade unionism, and from the “safety net” welfare system, and from universal free education.

        But if you don’t have the trajectory in the first place, you can’t “be Sweden”.

      • It has succeeded to far greater heights in the meantime. The problems with it relate to increased rent-seeking and cronyism. The solution is not more socialism (we already have plenty of it, there is no “capitalism” country in reality), it is disempowering of the cronies and rent-seekers.

      • hear hear Phil. Would be nice to return to real capitalism sometime soon. I keep thinking the only field where it exists is private trading…but I’m biased and the night is dark and full of terror…etc. etc..etc

      • Increased rent-seeking and cronyism (among other things) are seminal aspects of the primary tenets of Capitalism. After all, “nobody ever saw a dog make a fair and deliberate exchange of one bone for another with another dog”. Right?

        Get what Smith is saying? 😉

        Are we dogs?

        I don’t think we are.

        Rise above it.

      • Yeah, “capitalists” are actually seldom supporters of capitalism/free enterprise. But few people understand this nuance.

        Yes, we do need to use a term other than “capitalism” to describe a system that LIMITS the power of “capitalists”.

      • You want to make a profound statement, then immediately get the definitions wrong.

        Socialism isn’t communism.

        Socialism is access to product regardless of the fiscal means to acquire them. Schooling is one such product. All schools can be private ventures, and governments do nothing more than provide vouchers to students.

        Communism is the denial (at least partially) of property rights, and all property is centrally owned, with the distribution of wealth along the along of all products being socialised.

        As far as ‘socialism’ not working… the most successful venture in the history of humanity is universal secondary education… socialism.

        You failing to understand that may perhaps point to it (socialism) not working on you. You post history indicates someone deficit in education. Just because it didn’t work with you, doesn’t mean it doesn’t work, you shouldn’t be so solipsistic.

      • Hmmm, I am not so sure about the ongoing success of universal free schooling, there are things to worry about. The monolithic nature of the system lends itself to “capture” and inertia and entrenched inefficiencies.

        As P J O’Rourke points out, there is something odd about the apologists for the system claiming firstly that they provide the best possible education for society’s children, and then reacting strongly to any suggestion of parents having a CHOICE, or of any competition being introduced.

        There is an old rule about what happens to anything that is “free”. That is, the cost eventually becomes unsustainable. Many people are shocked to learn that the cost to the taxpayer of educating each child in the “public” system, in spite of the economies of scale, is HIGHER than the fees of most private schools, and everyone knows which get the best outcomes – even when low socio-economic groups children are “vouchered” in.

      • Hmmm, I am not so sure about the ongoing success of universal free schooling, there are things to worry about. The monolithic nature of the system lends itself to “capture” and inertia and entrenched inefficiencies.

        Well I would state the worst outcome is it being captured by ideologues. The anti-boy fem-centric views in public schooling today demonstrates that in much of the anglosphere.

        That said, whilst the model is far from perfect, it has been the most beneficial outcome for humanity.

        Remeber, prior to Gutenberg, a book cost 3 years wages and literacy was scarce. Care to fathom the cost of business when such rudimentary skills are so expensive.

        Perhaps a broader, privately delivered scholing regime would produce better outcomes, but the model we do have had to date has advanced humankind more than anything else.

        As P J O’Rourke points out, there is something odd about the apologists for the system claiming firstly that they provide the best possible education for society’s children, and then reacting strongly to any suggestion of parents having a CHOICE, or of any competition being introduced.

        Ideologues always crave power. Schooling offers a place for such people to propel their ‘insight’, it’s ripe for capture.

        Part of regulation, in my mind, is about preventing capture.

        There is an old rule about what happens to anything that is “free”. That is, the cost eventually becomes unsustainable.

        That ‘rule’ is dumb.

        It’s based on Ricardian interpreation of supply and demand. So if education is free, people seek unlimited consumption of the product?

        That can’t happen unless other, non-education policies, supplement it, such as income support.

        Many people are shocked to learn that the cost to the taxpayer of educating each child in the “public” system, in spite of the economies of scale, is HIGHER than the fees of most private schools, and everyone knows which get the best outcomes – even when low socio-economic groups children are “vouchered” in.

        I’ve never been satisfied with any analyis I’ve seen that supports an argument along those lines to be honest. The waters are always muddied.

      • Rusty, “free” water and “free” roads lead to excessive consumption. “Free” education won’t lead to cost overruns by way of the “demand” mechanism, so much as the inertia and capture by teachers and bureaucrats who lack the accountability inherent in a model where the customer is paying.

        I think we agree on this. You sum it up nicely, “….Part of regulation, in my mind, is about preventing capture…..”, but who regulates the regulators, and so on ad infinitum? Can you point me to any bureaucracy in the world that has not been captured by bureaucratic self-interest and ideology – apart from in Singapore where that genius Lee Kuan Yew established the “3 year tenure” for civil servants.

      • How can intelligent people believe that a solution for our so complex capitalist society can be written only on a couple of pages (a booklet, which is actually the communist manifesto) when the problems themselves required thousands of pages of analytical work? It is amazing how naive are most of the people or maybe how brainwashed are they.

  2. Just for nit-picking – it is actually spelled “Hara-kiri” or “Harakiri”. It is also known as “Seppuku”.

    Obligatory Wikipedia Entry: http://en.wikipedia.org/wiki/Seppuku

    To be honest though – there’s nothing honourable in what the australian economy is doing to itself. In this regard, I very much more subscribe to Jon Stewart’s analogy of auto-erotic asphyxiation.

    http://www.thewrap.com/tv/column-post/jon-stewart-likens-sequester-auto-erotic-asphyxiation-video-80111

    Yes, I know – it’s an analogy to an analogy.

  3. I think, UE, that your comment “Last drinks were called with the failure of Lehman Brothers on September 16th, 2008” hits the nail on the head. Looking back at the ramp-up to the credit fuelled mania, I would pin-point the ‘penny dropped’ moment to an event that accelerated the schizophrenic geo-political as well as economic malaise: Sep 11. 2001

    Bush, wars, gold ^ etc.

    • I have a lot of time for the Leigh Harkness solution, the only issue is if everyone is doing it, you still have the same problem, countries cant all be running CAS’s all the time as you get imbalances, and human beings are greedy primates.
      So a credit fueled binge is a way for populistic leaders to get into power and unfortunatly most political leaders are sociopathic, greedy primates.

      • countries cant all be running CAS’s all the time as you get imbalances, and human beings are greedy primates.

        You didn’t even need to put a qualifier.

        it is literally impossible for all countries to run CAS’ atthe same time.

        CA-Deficits and CA-Surpluses have to be a zero sum.

    • Jack, I think maybe you misunderstand the Harkness idea. He suggests that bank lending growth be linked to the extent of foreign reserves the banks hold.

      However, as he points out in section 2.4 of the linked paper, this does not preclude current account deficits. What it does is prevent a current account deficit having deleterious effects via boosting the exchange rate.

  4. Ronin8317MEMBER

    It’s better to think of Harvey Norman is as a finance company rather than a seller of overpriced household goods.

    The world has more production capacity than people who can pay for them. As long as this continues to be true, easy credit will continue.

    • “The world has more production capacity than people who can pay for them. As long as this continues to be true, easy credit will continue.”
      Ronin Look at Chinese demographics, prosperity and social trends as a response to the ‘one child policy. It isn’t going to be true for too much longer

  5. Even consumerist-driven businesses like Harvey Norman will have short-term bounce backs in the structural adjustment. As technology continues to rapidly advance and the AUD keeps prices low, even “prudent” consumers will be tempted into buying that new laptop/tv/fridge eventually.

  6. What caught my attention (after watching the eye opening “I’m going to beat you” Gerry Harvey link, was the following AustrIreland piece..and the catalyst that would herald the end of the Aussie housing market – employment and rent falls. And didn’t we have a something on MB today about downward rent pressure in Canberra today? Maybe, just maybe…..

  7. It was a common insight back in the classical-economist era, that rising incomes drive land rents up, leaving the renter class little or no better off. But this assumes that the rentier-land-owner class maintains an oligopoly grip on ‘land supply”. This was easy for them under conditions of urban growth dictated by the distances people could walk (few owned horses) or catch public transport (streetcars or trains). The process of urban development was usually “anti competitive”.

    Marx wanted land nationalised. Henry George wanted it taxed instead of incomes. But Alfred Marshall and numerous economists, social reformers, and politicians after him, saw the solution as increased mobility and increased “supply” of urban land. The writings of Ebenezer Howard, the so-called “father of urban planning”, was full of this stuff.

    It is ironic in the extreme that urban planners today are unanimously working towards the very opposite of what Howard was for his entire life. Howard wanted rural land to be converted to urban with nil capital gain (or “planning gain”) in the process. This is actually a reality in dozens of cities in the USA even today, where median multiples are consistent and stable at around 3. It is impossible to have median multiples consistent and stable at around 3 without this proviso.

    I argue that “automobility” (from Henry Ford onwards) enabled a genuinely competitive process of urban development for the first time ever. Bill Leavitt was a kind of Henry Ford of suburban development.

    There is always a substantial supply of very low cost (relative to urban land rents) land beyond urban fringes. If uplift in the “economic rent” of this land is kept to a minimum during the process of development, due to genuine competition in the market between developers, then there is an effective “vent” to speculative pressures on the prices of ALL property within the urban area. “Location” premiums for urban land are additions to the price of the lowest cost (and less efficiently located) land in the urban area. Genuinely competitive fringe land development processes always result in fringe lot prices that relate not to urban incomes or demand pressures, but to the lowest possible uplift over and above RURAL land prices that a developer can bring the lots to market for.

    There is simply so much rural land adjacent to the (very long) fringe of a city, that it is impossible, or not worthwhile, for even an oligopoly to “corner” the “total supply”. The total amount of the land between the fringe and an imaginary new diameter only a few miles further out (and easily accessible by automobile) is a land quantity sufficient for literally decades or centuries worth of urban growth.

    However, a certain kind of government imposed urban planning and regulatory instruments, restore the oligopoly power of fringe land owners and land bankers. I argue that there was a period of low, stable urban land prices instituted through automobility and competitive fringe land development, which does not end unless government imposed urban planning provides conditions for the extraction of what I like to call “oligopoly rent”. (Alan W. Evans calls it “quasi monopoly rent”). This is the reason that the USA’s urban land price bubbles have in fact been restricted to a few States and cities where there has been a combination of high demand and the capture of “planning gain” by the owners of raw land or land bankers.

    There are many non-supply-side factors blamed for these urban land price bubbles; however, if international evidence is considered, the relationships are much weaker than assumed. Britain literally never had the period of low, stable urban land prices enjoyed by the USA and many other countries after 1945, precisely because Britain in 1947 enacted the “Town and Country Planning Act”. The UK has had cyclical volatility in its property markets for decades. In fact cyclical volatility is the norm everywhere that genuinely competitive “automobile dependent development” does not render “supply” sufficiently elastic to deliver price stability. The fact that the UK is a significant outlier in volatility data, is proof of this; while most other first world countries were enjoying decades of economic stability like never before, the UK, which was the only country that strictly rationed its urban development permissions during this era, was the only nation that missed out on the cyclical stability in urban land and indeed in its broader economy.

    Even in France, there is a term, “Le Trentes Gloireuses”, to describe the unprecendented economic stability of 1950-1990. I argue that the minimisation of economic land rent and the cyclical stability of urban land markets were a major factor in the stable, strong economic growth of the decades following WW2, and the end of this era correlates closely to the adoption of constraints on automobile based development and subsequent increases in economic land rents and cyclical volatility.

    I also argue that the Great Depression of the 1930’s was really the last great bubble and bust in urban land prices, of a repeated cycle of many such bubbles and busts. Fred Foldvary’s papers on urban property cycles convincingly demonstrate this, but Foldvary himself is at a loss to explain the lapse in the volatility of these cycles for several decades, after which it has returned.

    Foldvary, a combined “Austrian” economist and “Georgist”, believes that land taxes and a gold standard would solve these cyclical problems. He shares with most economists, a blindness to the role of the elasticity of the supply of housing and other property in moderating the “price” response to demand shocks.

  8. So no changes were made to GST on imports valued at less than $1,000 and Gerry Harvey now says he’s doing ok?

    So what WAS all the winging about??

      • Still it is all unsustainable. I don’t like Gerry Harvey but….Imagine your society, and your purchasing, without shops displaying the product. I’m open to persuasion but I doubt it is all going to make a better place to live.

  9. Bows to Phil’s wide sources of knowledge.

    I’m still convinced that part of the problem is the economic structure. If we made more stuff instead of creating more centric government and service industries there would be more people living in what are now called ‘fringes’ spending a whole lot less time (and money)getting to work at factories located in their ‘fringes’

    I put the notion forward (again) with just the notion that the idea might get considered!

    • It is a question which is the chicken and which is the egg. Growth containment planning and zoning actually prevents factories from being built at the urban fringes, to a great extent. But you are probably correct in that policy makers at all levels are not worried at all by this, as they do indeed see the centric bureaucracy and service economy as the viable future – quite wrongly, of course.

      Planners could really help the economy even if they maintained the racket with housing, if they at least allowed rural land anywhere to be freely converted to commercial and industrial use (even if they won’t allow housing). That would help a lot of it to “happen”, and people could at least live at the fringe and drive 5 minutes out into the country to work.

      I would still maintain, from academic evidence mind you, that just allowing splatter development of all kinds is ultimately the best of all. If you want to reduce resource use, tax resource use. Urban form is nothing to do with it. Someone responding to high energy costs with a sustainable home in the woods and telecommuting is probably going to beat the guy who lives in an apartment and catches heavily subsidised trains.

      • It is a question which is the chicken and which is the eggYes Phil thanks…good point.

        Like everything else in economics, and possibly life, it’s a feed-back loop that’s for sure. It’s something that most seem to miss preferring to conveniently think in straight lines.

      • Yep, and a lot of the feedback loop effect is self-fulfilling prophecy. Like, the manufacturing sector and the tradables sector are dying off because of perverse consequences of regulations, and the economy is moving to a debt-based consumption and services “model”; and analyses are published saying, in effect, “look, services are now much more important to our economy than manufacturing, what can we do to ride this wave of the future….”

        D’OH!