Professor McKibbin’s dystopia

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Let’s recall Warwick McKibbin‘s vision for the Australian economy yesterday:

Obsessed by weak commodity prices and volatility in global financial markets to the point of not thinking about the future?

Don’t be, advises top economist and former Reserve Bank of Australia board member Warwick McKibbin.

Australia is better placed than most countries to benefit from long-term global trends – such as population ageing, fiscal adjustments and the shift in economic clout from Europe to Asia, Professor McKibbin says.

…”If you have got something like a fixed asset in a country and you are globalising the entire world then location becomes a valuable asset.”

“Real estate on Sydney harbour for example is also from a national point of view attractive. But for foreign investors it’s also very attractive because there’s billions of dollars of wealth being generated in China.

“The middle class is expanding, and they’re going to want to buy things, environmental goods – they’re going to want to buy stuff which we actually have in abundance. But much of it is fixed assets so you can’t change the supply of it, and so therefore it’s value is likely to go up a lot.”

But it will also drive up the real exchange rate, hurting the competitiveness of trade-exposed industries such as tourism – currently enjoying good growth with a lower Aussie dollar – and manufacturing. A stronger dollar means Australian goods and services are more expensive for foreigners while competing foreign goods and services are cheaper for Australians.

Now let’s go back a few years, from News:

Professor McKibbin told The Australian the bubble in global commodity prices and property markets in Asia threatened to dwarf the US housing market bubble that led to the GFC in 2008.

He warned that the inevitable bursting of the bubble would reverse the surge in Australia’s record high terms of trade, push down the dollar and leave the Reserve Bank struggling to fight off rising global inflation pressures.

“This is shaping to be much bigger than 2004 to 2007,” he said in comparing the new excess of global liquidity with the global financial bubble that led to the worst global financial crisis since the 1930s.

Professor McKibbin suggested the surge in global liquidity fuelled by US monetary expansion had echoes of the early 1970s surge in food, mining and energy prices that led to global “stagflation”, or the combination of high inflation and high unemployment.

The Reserve Bank meets tomorrow and is expected to keep official interest rates on hold following a week in which political instability in North Africa and the Middle East has pushed oil to more than $US100 ($98) a barrel.

…Professor McKibbin said the bursting of the new global bubble would severely test the Gillard government’s budget settings and its reregulation of the job market.

“We have not tested these changes that have come under the Rudd-Gillard era,” he said. “We are about to.”

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There was no stagflation but Professor McKibbin was 100% correct about the bubble. Over the same period, the RBA as well as successive governments preferred a vision of Australian exceptionalism and carefree Chinese reliance that proved to be 100% wrong.

We are now living through the consequences of that mistake as our standards of living fall and the very same fiscal test Professor McKibbin feared is dead ahead (only with four more years of accumulated debt) yet he is now espousing the very conventional wisdom of exceptionalism and carefree Chinese reliance that jeopardised the nation’s future in the first place.

It says something about the irresistibility of the accepted ideology driving insider’s policy. Despite being right most of the time for five years, MB is often criticised by insiders for being too negative. Yet in the life of this site, this is the most demoralising vision of Australia’s future seen. The McKibbin dystopia is nothing more than a repackaged form Dutch Disease that exports citizenship instead of dirt.

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Selling everything that isn’t tied down to the Chinese will marginalise generations from basic rights such as owning a roof over one’s head, it will gut the tax take as the best assets are profit-shifted to oblivion, it will dilute our natural endowments for the existing population and it will bog us further down in rent-seeking and falling productivity as governments fail to upgrade infrastructure to meet the new population. We don’t need to imagine anything to see that this is true, we can see it right now before our very eyes.

We can do, and are, so much better than this.

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.