For seven years now we at MB have darkly observed that the Australian economy is caught in a growth straight jacket. It is as obvious to us as it is hidden from everyone else. The constraint is very straight forward:
- Australia earns income by selling dirt to the world;
- it makes itself rich by leveraging that income in global markets, via major bank borrowings, and tipping that debt into a housing bubble that supports consumption;
- when any kind of turmoil threatens what is a gigantic national act of maturity transformation (borrowing short and lending long) the Federal government steps in with guarantees to prevent external interest rates from bankrupting the banks.
The system has worked marvelously for nearly twenty years but it has two fatal flaws:
- first, if the dirt income dries up then the leveraging process gets more and more stretched such as household debt today;
- second, it only works so long as the public guarantees are worth something and that means public surpluses come Hell or high water.
As dirt income diminishes, at a certain point it becomes a growth zero sum game to keep the system running because the efforts needed to keep the public guarantees in place undermine the very private economy that they underwrite. For just how long do you think that the government can plunder households with higher taxes to guarantee their huge leverage?
At some point household cash flow is so stretched that balance sheets must contract.
We have watched as this system has convulsed through the business cycle, forever lying to everyone within it to keep the confidence together that it still works. It has refused to bring banks to heel. It has accumulated debt both public and private to keep running. It has tortured successive treasurers who couldn’t understand why the drive for surplus was not rewarded with a new flourishing of private borrowing that could deliver their growth forecasts. It has already seen bank downgrades and sovereign downgrades are coming. It has gone a long way towards destroying any recognisably functional political economy as public and private merge into a singular perma-crisis aimed squarely at keeping the bubble inflated.
We call it the politico-housing complex and that cracking sound that you can hear is it breaking:
- the dirt income needed to keep the system from tipping into over-leverage is drying up. As iron ore and coking coal hit new lows through H2 this year it’ll get worse and worse;
- nine consecutive Budgets have lied about the path to surplus to sustain the guarantees. This Budget is so desperate, it has tried to hoodwink with “good debt” and was forced to raid the banking honeypot, triggering a war between politico-housing complex co-conspirators, the banks and government. The Budget is such a gigantic fiction that the forthcoming revenue misses will be big enough to strip the sovereign rating;
- in turn, that will raise funding costs for the banks and the broader private leveraging. These costs are already rising internally as the powers that be try to cover their butts as the credit bubble becomes obvious to all.
It will still probably take a global shock to strip away the lies that are gluing the creaking edifice together but that’s coming before long. When it does we’re going to find that:
- fiscal policy is spent;
- monetary policy is spent;
- immigration policy is spent.
And house prices will be falling with nobody and nothing to stop it.
The time to act is now. Get your money out of Australia. We can help you do that with the launch of the MB Fund next month (with 70% international stocks).
Register your interest today (if you have not already):
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.
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