Ross Gittins ducks the blame

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Ross Gittins is a survivor. Today from the venerable grey beard:

Now we’re emerging from the decade-long resources boom it’s easier to view the process with greater insight and make a more sober assessment of its costs and benefits.

What happened was a huge jump in the world prices of coal and iron ore as China’s period of rapid economic development of heavy industry and infrastructure caused global demand to outstrip global supply.

The surge in China’s demand caught the world’s mining industry unprepared. Like miners in other countries, our largely foreign-owned miners lapped up the huge increase in prices and profits.

…What then kicked off was a multi-billion dollar race – between rival firms in a country, but also with the many firms in other countries, all expanding their capacity as fast as they could.

It takes a long time to build new mines and bring them into production. So the chances of your mine being completed in time to enjoy the super-high prices aren’t great – the more so because it’s essentially a self-defeating process: the more firms join the race and the harder they try to be among the first to complete, the sooner supply catches up with demand and prices start falling.

…But while the miners are busy gearing up, their foreign customers are just as likely to be coming towards the end of their own boom in investment and construction. The inevitable result is that the global mining industry moves from a starting point of under-capacity to an end point of over-capacity.

This is the eternal story of mining. Only in passing is it ever in equilibrium; it’s almost always in either under- or oversupply – probably spending a lot more time over than under, the less profitable of the two conditions.

Ah, it’s the eternal story today perhaps but it wasn’t so in 2011:

Why is it not a two-speed economy? Because about three-quarters of us work in industries that are neither great direct beneficiaries of the resources boom, nor great victims of the high exchange rate it has brought about.

And also because we live in one national economy, not eight isolated economies. There is a high degree of trade between the states and territories. They are subject to the same exchange rate, interest rate and federal budgetary policy.

A fair bit of the cream from the resources boom goes to thefederal government. And all the mining royalties gained by the WA and Queensland governments are shared with the other state and territory governments via the formula by which the proceeds from the goods and services tax are divided between them.

The rise in the dollar is actually one mechanism by which part of the earnings of the miners is redistributed to all other industries and all consumers, in the form of cheaper imports.

If you think you’ve got nothing to show for the resources boom, all you’re showing is your economic ignorance.

And here is what he said as late as this time last year:

Kevin Rudd keeps saying the China resources boom has ended, but Reserve Bank governor Glenn Stevens said recently the boom was merely ”changing gear” and going through a ”phase shift”. So who should we believe?

The econocrat, of course. The politician is exaggerating. It’s true, however, that we have reached a highly significant point in the boom: though it’s far from ending, we’ve reached the point where it’s gone from making a positive contribution to economic growth (real gross domestic product) to making a net negative contribution.

Gittins was the great apologist for the mining boom, the hollowing out that it caused and the good it was doing the overall economy. Yet he concludes today:

In the aftermath of such booms we realise we should have refused to be rushed. Why does no economist ever warn us to be less short-sighted? Their faulty model.

No Ross, it isn’t in the aftermath. MB warned you over and again. History warned you as well. Yet you bought and amplified the economist’s bullshit models exponentially.

Hang your head thrice over for being wrong, for making many others wrong too and then taking no responsibility for any of it.

David Llewellyn-Smith
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Comments

  1. I must confess I spotted Gitto’s piece this morning and wondered if it wasnt the official ‘I’m off the bandwagon’ piece…

      • Well done – he has been obviously wrong on many fronts for a long, long time, making excuses for out of control Government spending – I suspect for political reasons. To the point I find it almost impossible to read any of his comments now.

        In regards to this up and coming commodity bust – you haven’t seen anything yet…

      • reusachtigeMEMBER

        In all seriousness, awesome job calling this guy out H&H! There’s nothing I hate more than those who basically say “no one saw it coming”.

    • Well I for one would be thinking that if I was trying to tout ‘confidence’ in the economy and wanted the team walking the walk, I would be wanting Gitto talking the talk too.

  2. sydboy007MEMBER

    Possibly male blindness. You know, when you’re in the garage looking for some tool and can’t find it, only to come back half an hour later to see it in plain view.

    I like some of what Ross writes, but he does seem to be more and more off his game as the years go by.

  3. Yes, I recall Gittins! jubilantly declaring back in 2011 that the mining boom would run for DECADES!! Now he writes this piece saying people need to be less short-sighted and irrationally optimistic. Indeed.

  4. Looking back, his most important work has been teaching young people the subject of Economics.

    Unfortunately it was Keynesian economics which Japan has tried and failed with for the last 25 years.

  5. Gittins has a lot of hide.

    No acknowledgment that he was dancing along the sidelines of the Resources Big Match, all twirling pom poms and high kicks.

    No reference to his endless columns rabbiting on about the magic of the endlessly adjustable purity of neo-classical ideology and how everyone must just suck up the lemons it produces.

    Having been smugness personified for the last few years it is clear he won’t be giving that up anytime soon.

    Researchtime has it right – Ross thinks he is a political player.

    Anyone serious about moderating the boom and the rate of growth of the mining sector was talking about auctioning transferrable export volume permits and higher royalties fixed by reference to market prices.

    These would have managed the rate of growth of the sector in the nations interests but allowed the market to determine who could best use them and ensured that any abnormal gold rush returns were shared.

    No complex new taxes required.

    • ‘Gittins has a lot of hide.’

      Note to self….it is exactly this type of ‘hide’ – known as confidence in the HnH piece today – that Australia’s economic elites are bemoaning the rest of us lack.

      As Pfh rightly notes (in fine style, the very idea of Gitto high kicking and with pom poms has made me spill coffee over the weekly report) Gitto has been in full confidence mode for a number of years.

      That he would seemingly be getting off the confidence express right as the intercom announces all aboard for the punterariat suggests to me that the train may not run precisely as scheduled .

  6. I used to think that business cycles were best managed through countercyclical expansion policies, however these days I must admit I’m a procyclical fanboi. The problem with the countercyclical approach isn’t the logic of the approach its overcoming human nature which is precisely why procyclical wins out every time. BTW just for clarity I’m not only talking about the business financial management case that’s almost always best done countercyclically the real difference is in the ease with which an idea can transition from powerpoints to production. These days once in production you have a custom made facility that has no other know use, so it simply does not matter how much it cost to create because you’ll continue to operate it until opex costs exceed revenue.

    The real trick to procyclical business is managing the finances so that you maintain equity control while the bond holders take one for the team.

    Edit: amplifying the procyclical attitudes (during the downturn) is also what enables management (equity) to survive the downturn because bond holders see the situation as being even more desperate then it really is, so they’re not tempted to mount a takeover or force liquidation.

    • Too tie my comment back to the Ross Gittins, these days I see it as the job of the media to support procyclicality.

      Think of it this way, Would Andrew Forrest have EVER been able to raise the money for FMG without a compliant or indeed spruiking Aussie financial media? Without this positive feedback the project would never have gone ahead, with it we enabled something huge to get started, something that could truly transform the IO mining oligopoly and thereby brought real free market competition to this old-boys-club.

      Sure there’ll be a period of dislocation and some debts to work through along with some hefty write-downs (mostly foreign) BUT on the production side we’ve developed a viable third force in Aussie IO and maybe indirectly created the environment for a fourth big IO miner (Roy Hill). When weighing the costs I ask myself the following, Without the mining boom (and all the pro cyclical commentary) what alternative Aussie businesses would have been developed. Personally I’d like to believe that all manner of smart-Australia (clever country) companies might have developed but in reality their funding was never impacted by the boom and perversely if anything the post mining boom period has created an excess pool of highly skilled (and cashed-up) Aussie based engineers…this is exactly the environment that’s required for startups to develop and succeed..

      • Hmmm,

        Not sure about that CB.

        Always good to have more competitors in a market but when that market is the sale of non-renewable national resources, is it really in the national interest to encourage unviable investment knowing that it will result in a glut of excess capacity and the sale of those non-renewable resources at give away prices?

        Setting a maximum rate of growth for the industry via export volume licensing and then allow the industry to trade those licenses would permit plenty of competition but less boom and bust whiplash.

      • Pfh,

        What would have said to restricted expansion to maintain prices with a mrrt to capture some of that gain?

      • I think there are a couple of issues unaddressed.
        1. It has not been income entering and staying in Aus that has caused the rise in the A$. It has been the capital account. We have not run a CAS through all this so-called boom.

        2. If you run a ZIRP Ot RAT negative IR policy you value all your resources at zero – FeO2 , O2 or Carbon pollution for those ardent followers. Zero or Negative RAT IR says that there is no PRESENT or FUTURE cost to the project. If you value your resources at zero you will always, always, always and forever get over-use. The lag effects are a minor issue by comparison and would be much less under realisitic costing.

        So I don’t think we have to, nor shouild we, pick industries so much as price everything correctly. Pricing everything correctly does no mean arbitrary discriminatory taxes imposed on particular industries not favoured by whatever government happens to be in power.

        Edit: I am talking about a principle here. You DO have a practical problem where existing miners have established under the negative RAT policy and then you want to establish realisitic costing on new industries. Maybe others with a better brain than mine can figure that out. All in all….again…
        The answers lie back in time.

        The problem we fac e with economiusts who are changing their tune on policy and outlook about as often as they change their underpants is that they have no fundamental core grasp of REAL economics. It’s easy to change the fairies at the bottom of the garden!

      • @Pff,
        I also wish that it were otherwise but its not, so we have to choose the least evil path forward. One involves selling some of our natural resources AND a big slice of the dream to foreign entities and seeing what we get in return (expanded Ports, railways, productive mines, skills …as well as TV’s, cars, holidays…..)

        What’s changing my mind (wrt modern day Australia) is the simple fact that I’m now working on some projects with some ex-mining engineers, they’re skilled (well sort of) definitely cashed up and wanting to create an enduring high tech business all bootstrapped with the proceeds of their mining adventures.

      • @flawse – the best answers may lie back in time, however, we are in the here and now. The journey of solving this mess starts with correctly pricing debt (+300bp) and removing the obscene tax distortions around property. The culture of every spare fking cent the general population has going to real estate along with their nightly masturbation ritual over the Block has to stop.

      • Andy

        Thanks! Couldn’t agree more.
        However I am concerned by those who just think we correct the housing bubble and we all go on to lead lives of joy and prosperity. If we are going to attack the problem and see it through we ned have a very clear notion of what is going to happen. Otherwise we are going to get 6 or 12 monts in and everyone will be screaming for all the same oold fixes…you know…cheap IR’s, tax breaks etc etc

        This is going to take decades. It will invoilve hardship. it will involve a revamp of everything that is in existence now. It will require a clear hard look at ourselves – individually and as a society.

      • @flawse sounds good, personally I’m more than ready for this place to change for the better. And yes you’re probably right about what will happen though *sigh*

  7. reusachtigeMEMBER

    What’s wrong with Gitto? Where’s his “confidence”? He is clearly letting down “Team Australia”.

  8. One of the most dangerous representatives of the entitled “me” generation that infests the MSM commenterati. He has a good brain and I also think his heart is in the right place, but his vision is fogged by his own privilege. The fact that he’s not a wingnut makes him all the more potent a force for evil.

  9. I was holding off on renewing a subscription because I wasn’t sure if i’d use the Macro stuff.

    But seriously, how good is this, how can you not pay for it? Where would my understanding of the economy have been if i’d just relied on Gitto, Pasco and the boomer crew and the marketing from the Lords of Usury?

    I think Theodon of Rohan probably has the appropriate quote:

    “Your leechcraft would have had me crawling on all fours like a beast!”

    • As Daffy Duck would say, “yeah yeah yeah, as long as I’m rich” – the people in charge just feather their own nests. It amazes me that the most prolific crime of all (denying Australian’s an affordably priced home) breaks no laws.

    • But we know without good journalism politicians run unchecked. These guys held out to us that they were manning the gates, that they were holding the bankers and the politicians accountable.

      Why should they not shoulder some of the blame.

      I used to like Gitto, but i’m getting more and more pissed off as i understand the sheer magnitude of the lies and ignorance.

  10. We’re probably the only nation on the planet complaining about having missed the GFC fallout, seen exports boom and retained an enviable standard of living. Poor us.

    • Don’t be too hasty in concluding that Australia “missed the GFC fallout”.

      The Rudd stimulus and the China Boom may have simply delayed it.

      • That’s always been my opinion – hence the mining boom was a gift (of which much was squandered by successive governments). With other nations struggling to emerge from post GFC morass we can only be grateful for our reprieve, even if proven temporary.

      • @3d

        We are not moaning about the miss, it was just delayed, most sensible people saw that. We are moaning about the fact that much more could have been done to reduce the impact of what is to come… the mining boom was a boon, that was squandered..

      • ff

        Who would have voted for any government that wanted to placer some REAL policies in place? For one thing we’d have had capital controls and higher interest rates as well as a lower dollar. Name a singler journalist or Banker who would have said ‘We must face our reality’ One sure way of getting yourself unelected is to promise the Aus people higher interest rates and more expensive ‘toys’

      • Stephen

        I suspect the application of realism would have som,ewhat less of a dislocation in the Swiss economy than ours. Perhaps also they have been less self-indulged than we have been over the decades as a result of our over-abundant natural resource wealth that we have sold and wasted.
        Pewrhaps I’m older and therefore more disillusioned and I have done some hard yards in my life while looking at five to six decades of this schmozzle. Would that you were correct!

      • Fl. when I was working in Switzerland the Swiss FC proudly told me how they voted down funding a bridge upgrade that no one wanted because it wasn’t a good use of money.

        Direct democracy works there.

      • aj…it’s not going to be that simple here. We are going to have to vote ourselves a real substantial decline in living standards! it ain’t gunna happen!

      • “aj…it’s not going to be that simple here. “

        I agree with flawse, albeit for a different reason.

        Switzerland is the oldest continuing democracy on this planet. It took several centuries for the Swiss to polish their system and reach where they are.

        Copying a successful system and transplanting elsewhere rarely works. That’s why I doubt that the “true” democracy would work here as designed.

        It is not only the matter of the nuts and bolts of transplanting a system either, which is already difficult enough by the way (as to who should be given the superpower to carry out the transplanting operation, how to decommission the superpower entity once the job is done, etc.). A system only works properly when all the necessary fields of expertise are deployed in place. It will take a few generations to develop all the required expertise.

        Having said that, I am optimistic that we will eventually get there……. perhaps in 200 years?

      • When all else fails semi-Panglossianism can be used to beat off any threats.

        The term Panglossian, after the character is Voltaire’s Candide, is usually taken to mean incurable optimism: for all its faults, the world we live in is “the best of all possible worlds”. Panglossian conservatism draws the inference that, if we already live in the best of all possible world, then any attempt at improvement is futile. Indeed it may even border on offensive to waste people’s time by raising the topic of improvement.

        Semi-Panglossianism is the view that change is impossible – and that it is offensive even to raise the topic – except for a list of improvements the semi-Panglossians themselves would like to see. Those changes – but only those changes – may be discussed.

        Ultimately, however, there is only one change that can make a lasting improvement. That is to empower The People through Democracy.

        It is, after all, their country!! It is their choice to make.

    • Seriously, 3d who missed the GFC fallout? Oh that’s right the boomers, and the property speculators, and spin doctors like you that work for the mining industry.

      No one else did. The GFC was our chance to reset the system, but we bailed out the banks and the boomers.

      You can spin for your mining lords till your tongue turns blue – it won’t change the facts.

      • well said @aj

        the GFC was a natural part of the cycle – fair, just and welcome… and completely wasted

      • What a load of total reconstructed rubbish 3d.

        The choice was there to bail out the economy properly, to bail out debt mired households, but our boomer politicians bailed out their property portfolios by bailing out the banks and the property asset holders.

        This was played out across the west.

        Howard and Costello lead us to private debt hell, and Rudd and Gillard closed the gate and threw away the key.

        Your role as a spin master for the mining industry is centrally focussed on making sure that the profits of the mining industry flowed mainly to our 80% foreign owned mining industry and not the Australian people. And our greedy idiotic politicians were happy to oblige.

      • Aj the world was awash with easy money – many developed economies went on a consumption binge – everything – houses consumables you name it. We were no exception.

        Easy to say what ‘should’ve been done’ when (a) it wasn’t and (b) there is no way of proving the effect of your newfound wisdom had your suggestions been adopted.

        It is what it is. The boom was wonderful. Now for the after party.

      • “The choice was there to bail out the economy properly, to bail out debt mired households” Bail out? What with?
        The idea that we can painlessly reconstruct this economy is just nonsense.

      • Total crap 3d – there were plenty, including the cynical Howard and Costello that knew they were juicing private debt for short term political gain.

      • aj…sorry yes…you gave me the correct answer! We borrowed foreign money and sold off Aus owned assets to fund the Banker ‘bail-out!’

        I can’t see that’s a ‘bail out’ More like a bail-in – more debt for all of us!

  11. Gittins wasn’t the only one.

    The Economist no less (in the special feature of May 2011 – “The next Golden State” – written by John Grimond) was also spruiking the eternal boom.

    But it goes back even further. The picture accompanying The Economist article bore an uncanny resemblance to an even older story.

    In 1980 Time magazine ran a cover story on Australia – illustrated with a front cover showing a map of Australia in a gold panning dish – just months before the collapse of the “resources boom” and the start of the 20 year recession in commodity prices!

    These reporters never learn.

    • “Gittins wasn’t the only one.”

      Indeed.

      I’m not sure if this obsession with Gittins really accomplishes much. Granted I have been disappointed with his comments at times but, he is probably one of the few economists with a regular column in the main stream capable (and willing) of taking a socially/environmentally progressive stance on issues.

  12. Tom ConleyMEMBER

    Gittins is a contrarian to contrarians. He likes to debunk and therefore ends up making silly statements like he did in 2011. At least he’s changed his mind I suppose.

    Still it’d be tough work coming up with interesting economics columns for as many years as Ross has …

  13. I’m pretty sure someone said that this mining boom will run for 100 years.

    Not to mention that Gina wanted special treatment because she was carrying the Australian economy.. pfft hallowing it out more like it.