Slain PMs pile up at the feet of RBA and Treasury

The Liberal Party crisis rolls on today with every man and his dog proffering an opinion. It is nearly all besides the point.

The Coalition crisis is not the result of itself. We have not churned through six prime ministers in ten years because of this latest ideological clash.

The rolling political crisis that has engulfed both parties is the symptom of an economic malaise that nobody in power understands nor has addressed. Australians everywhere are confused and angry because their standards of living are falling in front of their eyes as nobody gets a pay rise, house prices stretch away from their children and infrastructure as well as government service provision deteriorates.

Nobody has explained to Australians why any of this has transpired. On the contrary, they are constantly fed a diet of discombobulating propaganda that things have never been better and are only going to improve.

Well, they’re not. Things are going to get worse. A lot worse.

After the millennium, the economy went through the greatest mining boom in a century. That was great so far as it went. But there was a cost. A decade of growth inflated wages and input costs and the currency so much that we priced ourselves completely out of the things that we can sell overseas and compete against others selling to us (tradables)

Once past the mining boom peak in 2011 we faced a choice. It was as obvious then as it remains today that the great commodity price boom was going revert to mean. It is only halfway there today but will complete its return journey over the next five years as China goes ex-growth.

What that amounts to is an huge and ongoing pay cut for the country. We do the same amount of work to ship the same amount of dirt but we get paid half what we used to. Yet because we hollowed out the non-mining tradable sectors there is nothing to pick up that growth and income growth baton.

The appropriate policy solution to this challenge is to engineer a real exchange rate adjustment. That is to deflate your input costs and currency to the point where your tradable sectors can compete again. Investment grows, creates jobs and, over time, your improving productivity releases wage and income growth.

Instead we did the complete opposite. Panicked authorities who had predicted that the mining boom would last another thirty years stoked a house price boom. That delayed the falls in our currency and re-inflated input costs. It was complimented with a wild mass immigration program that has exacerbated the reflation of input costs but prevented any wage growth.

In short, the powers that be – Treasury and the RBA – elected to push all of the post-mining boom adjustment onto anyone that did not own land and had a salary. They chose class war over shared real exchange rate adjustment.

The result has been ceaseless political chaos. Against a backdrop of unexplained – indeed deliberately obfuscated – falling living standards, the polity has descended into permanent anger. Every election comes with a brief flush of hope that the worst is past and the new PM can fix things. A few months of improved consumption then slumps as it becomes apparent that the new is no better than the old. House prices keep stretching away from the young, wages keep falling, and services keep declining. Polls decline quickly.

Australia’s bastardised political environment can’t cope. There is no leadership of sufficient calibre to describe it and the interests that benefit from the RBA/Treasury growth model – including the media – inhabit both parties. Political parties are corrupted by a complete misread of what underpinned thirty years of growth and, encouraged by the lost RBA and Treasury, keep going back to old answers that no longer work, making themselves unelectable in spectacularly short periods.

Then the ruthless factionalsim of both parties takes over and they eat themselves alive as PM after PM is gutted and falls.

It is not going to stop until the model itself is broken. Either the next PM sacks the boffins at the RBA and Treasury, as well as trashes the interests driving the growth model, and explains to Australians the mutual sacrifice needed to repair our course, or the model itself will run out of puff as monetary, fiscal and immigration policy are exhausted.

The next PM is already dead man walking unless he tackles this head on.

Comments

  1. St JacquesMEMBER

    What the politicians think and do matters little and the political system has exposed itself as empty and illegitimate; it does not serve the people and only did when there was a credible threat in the form of the USSR.. The banks and big end of town and the big miners – mostly foreign owned – control the show, see Rudd v Miners over the windfall tax. They don’t give a rat’s arse, and it’s way too late to turn around our hollowed out debt and population driven Ponzi economy. The best thing would be a sharp crash, the annihilation of the Ponzi economy and its fake inflated asset wealth, and the painful rebuilding of a real economy. Not going to happen. Anyone who pulls up the drawbridge on mass immigration and foreign investment in our property and assets will soon be out on his or her ear, as everyone with a mortgage screams blue murder. Thus Australia is going to become a steadily nastier, ever more bitter, ever more divided country, with a sliding credit rating and increasingly volatile politics.. And poorer, a lot poorer. like Argentina.

    • Houses were fairly priced in 1996. Even in 2000 Aussies could have been told “no more house price rises for you”. Perhaps even in 2008.

      But the ALP went all in.

      • @Jacob Did you not read the article? This is not restricted to a single party. What shits me most about living in this country is that when a decent article calls the system out for what is is, instantly the comments start and it becomes labor vs liberal or ford vs holden or AFL vs NFL etc etc. Aussies need to stop this parochial shit and start taking notice of what is happening around them!

      • fitzroyMEMBER

        The 5 big policy failures were Rudds Foreign investment rules and the failure to enforce them, the capital gains discount, the trashing of manufacturing, no tax reform, with taxes on income too high and wealth too low and mass immigration.

      • Jacob
        In 1984 a house in many parts of Brisbane had the same value as a fair sized mixed farming property on the Western Downs/Maranoa, with an equivalent house.
        This BS started a long time ago and they are all guilty. Now we have a parliament full of career politicians on both sides who are not interested in anything but playing the political game to win – for their own ego and entitlement.

    • What the politicians think and do matters little and the political system has exposed itself as empty and illegitimate; it does not serve the people and only did when there was a credible threat in the form of the USSR..

      Yup. I’ve never seen it mentioned anywhere in mainstream media that the social welfare programs brought in during the 50s/60s/70s were directly a result of the competition against Communism. In order to keep the proles from going full Commie in non-Commie countries, these programs were put into place to keep the unwashed masses happy.

      When the USSR fell and Communism as a serious competitor to the Western socio-economic-political structure was eliminated, the neoliberals started going to work to eliminate all these welfare programs and return us to a feudal oligarchic state where the owners make the rules and the unwashed are kept in check by economic necessity.

      • Hell, the social welfare state was born from Otto Von Bismarck’s desire to maintain the political and economic status quo

      • Unless I’ve missed something, the welfare system has actually become more generous over the past 20 years, not less.

        Between middle class welfare and the various do-gooding programs that governments take it upon themselves to run it’s no wonder we’re broke. Saw a press release from the Queensland Government the other day about a new program that involves them spending a lazy few million running classes that teach young girls how to do basic repairs to a bicycle…

        The true decline in living standards is probably even worse than it looks when you consider huge sections of the population have their lifestyles propped up by middle class welfare payments that have no genuine reason to exist beyond fooling the punters into thinking they’re better off than they actually are.

      • drsmithyMEMBER

        Unless I’ve missed something, the welfare system has actually become more generous over the past 20 years, not less.

        It has become more generous to people who don’t need it, and less generous to people who do.

        Or as a Liberals voter might describe it, people who deservecontribute more get more and people who deservecontribute less get less.

      • Ronin8317MEMBER

        re : Martin. The few million dollar doesn’t benefit the girls learning how to repair the bicycle : they benefit the people offering the course for a few million dollars!! You are mistaking ‘welfare’ for blatant corruption. I’m sure the course is run by some ‘mates’ of the government.

  2. Jake GittesMEMBER

    Yes: that period post 2011 looked as if adjustment might be rational, not so. Pure banana republic polices to safeguard a select group. The awareness does seem to be seeping though but the media has been slow and ignorant and plain stupid in its role.

  3. Know IdeaMEMBER

    It is difficult to know how to address your comment. There is so much material to work with. My preliminary observation would be that you certainly engage in a social life far distant from which I am familiar. Maybe it is an age thing.

  4. proofreadersMEMBER

    “… because their standards of living are falling in front of their eyes as nobody gets a pay rise …”

    Correction: “… nobody gets a pay rise other than politicians, senior bureaucrats and C suite members …”???

  5. proofreadersMEMBER

    “… The next PM is already dead man walking unless he tackles this head on.”

    To be PC: “The next PM is already a dead person walking unless he/she tackles this head on.”?? In deference to J Bishop, who could be the next seat warmer??

  6. Ronin8317MEMBER

    RBA and Treasury belong to the ‘GDP Worship’ cult, which are no different than the cargo cults of the South Pacific . As the art of economics switched to empirical measures after WW2, the correlation between rising living standard and GDP growth has been mistaken for causality. Currently, economic policies have become a tool to increase GDP at any cost, without regard to the physical reality of the population.

    As to the AUD exchange rate : every other major and minor nation engage in blatant foreign exchange manipulation, so “leaving it to the market” actually means allowing foreign government to control our currency. Government intervention is bad, but foreign government intervention is good? What kind of stupid logic is this >_<.

  7. ricsvtrMEMBER

    From Chris Joye this morning –

    “Needless to say, the RBA is doing its best to once again irresponsibly inflate the hazards to which prudent investors are subject. It is quite staggering that with a 5.5 per cent jobless rate, which is a sliver above full-employment, and headline inflation within the RBA’s target band, that the central bank nonetheless deems it appropriate to impose a negative real cash rate on savers. Punish the prudent while bailing out borrowers, eh?

    Other more sensible central banks around the world understand that if you keep rates too-low-for-too-long, you inevitably blow asset price bubbles, an observation that has been completely lost on a myopic and immensely arrogant Martin Place, which is preternaturally incapable of admitting it is wrong.
    Road to normality

    Oh no, the rate cuts in 2016 had nothing to do with the “surprising” and striking re-acceleration in national house price growth back to double-digit rates in the months that followed. No, that was all about housing supply. Seriously Phil, bite the bullet brother.

    You and I both know that we need to start on the road back to normality, and that one “financial stability” hike this year is not going to change the price of eggs in China. Since I have said that, though, I have almost certainly reduced the probability of it happening. ”

    http://www.afr.com/business/banking-and-finance/once-safe-australian-fixedrate-bonds-suffer-losses-20170706-gx6aqn

  8. “Australians … are constantly fed a diet of discombobulating propaganda”
    And this will continue. Australian journalism is dying or owned by those with real-estate agendas. Politicians are desperate for donations for publicity and will literally sell out Chinese lobbyists for a few thousand dollars.

    People are easily distracted – instead of focusing on 300,000 per year mass immigration, cynical politicians can distract us the few thousand “boat people”.

    Propaganda works, that is a reason the mess will get worse.

  9. “”In short, the powers that be – Treasury and the RBA – elected to push all of the post-mining boom adjustment onto anyone that did not own land and had a salary. They chose class war over shared real exchange rate adjustment.””
    Now I’m at least a big a critic of the RBA as anyone and the stupidity has been monumental but…..

    Maybe the above! However I doubt that is how the RBA thought about it in anything like those terms. They set out to juice the property market to create economic ‘growth’ as the mining boom settled down. That was their stated policy and their reason for lowering interst rates. They have been eminently successful and their goals have been achieved.
    The fault seems to lie at the very core of modern economics. The combined worship of GDP plus the absolute total disregard of external accounts and associated debt.
    I don’t have the RBA’s charter in front of me but it sure as hell doesn’t mention anything about CAD’s and Foreign debt. The big focus is on inflation and employment. IF that is their charter can we doubt they have acted correctly. To allow the currency to fall, rationally, by restricting both speculative borrowing and ”investment” capital flows would have, without doubt resulted in inflation and ALSO increased unemployment as the economy was forced into the correction of distortions that started 60 years ago and been reinforced ever since.
    To get understanding here I think we have to stop pointing the accusing finger at various institutions (although it is good sport and a lot of fun that I indulge myself in a lot) and really have a look at our understanding of economics. Clean out Treasury and RBA by all means. Those there all seem to worship at the same false idol. However there is no point in appointing a new lot,educated at the same universities, with same charter.
    In summary modern economics is just BS unless you believe in a one world open borders no cultural, social or philosophic identity type world.

    • Paul Kelly blamed the general lack of faith among the local populace for the decline of Australia the other day, which is totally idiotic. You don’t have to be a rocket scientist to tell that the consistent CAD has been the source of national decline.

      Consistent CAD leads to a consistently falling currency. Conversely, consistent CAS leads to a consistently rising currency. Just contrast the charts of AUD/USD and USD/JPY over the last 40 years.

      As they say, a rising tide lifts all boats (as in Japan). The opposite is also true: a falling tide sinks all boats, which incidentally has been the case here…..

      • “”Consistent CAD leads to a consistently falling currency””
        It should and the system SHOULD be self-correcting. Unfortunately as we’ve noted before we pay for our CAD largely by selling assets. This also allows us to borrow excessively. So our economy has never been allowed to correct towards production and the distortions get worse and worse.
        Nuts!

        P.S. Note I’m not taking away from dumplings comparison of the value of the two currencies. It would look worse without all the asset sales!

      • Ronin8317MEMBER

        The model on CAD leading to fall in currency is wrong. With our banks borrow from overseas, it result in both an increasing CAD and also an increasing currency. 0% interest rate is the ‘singularity’ of modern economic, and since GFC, all the major economies are running at 0% (and sometime negative), so any country that didn’t engage in the farce gets swarmed by the flow of free money.

      • @Ronin
        Yup!!! Agree (just for clarity) That is what is wrong! We have handed our sovereignty to the FED. Nuts!

      • In a short term, yes. But in a longer term, the borrowing has to be repaid with (positive) interests, in one way (regularly scheduled) or another (irregular capital flight). Over a sufficiently long term like 40 years, the facts are undeniable.

        More or less the same goes to direct investments. Initially, money flows in when a foreign firm builds factories or some other productive assets here. But then, the profits keep flowing out from then on.

        After all, a foreign firm (or bank) is trying to make money, not lose, by investing (or lending) here.

      • “”After all, a foreign firm (or bank) is trying to make money, not lose, by investing (or lending) here.””
        🙂 Not according to the RBA who reckon that despite 60 years of CAD’s our equity investment overseas is higher than foreign investment here!!!! By definition the foreign firm here pretty much has to have been losing money and we are pure geniuses at foreign investment.
        It’s good to be Aussie and so smart. No wonder the world loves us!!!

      • Ronin8317MEMBER

        re : dumpling.In the long term, to repay the debt, foreigners ends up owning everything in Australia, which is the process we’re under going now.

        Furthermore, the money borrowed is not invested into anything useful : it is used to inflate the housing bubble. Some of it is used to build those giant LPG plants which makes Australia the laughing stock of the world as we pay more for gas locally than what is delivered in Japan, and takes $0 in tax because it’s losing money.

  10. The trouble with being this accurate and concise is that there is no need to write it again*…well done, H&H.

    *I’m convinced this is why the established columnists contradict themselves every other week.

  11. I guess the mutual sacrifice bit will be the tricky part because all our politics now is satisfying never ending demands from never ending groups that pop up all over the place and cry poor or unfair and now just about every voter gets quite a lot from the government and I bet won’t be too happy to sacrifice any of it and same goes for half the politicians who are complete mongs at the top of the self interest tree and go around promising money we don’t have to everyone so Im pretty sure mutual sacrifice will be the hard one?

    I think once there were politicians who could sell this mutual sacrifice and who really wanted Australia and its people to do well but now I think a lot of politicians only want the job and have sold us down the gurgler especially the ones in that waste of space the Senate except for Christian Porter and Mathias Corman. I’m pretty sure the idea of sacrifice has almost gone in this instant world where it’s all about me and now if you get my drift.

    • Ronin8317MEMBER

      Mutual sacrifice? Like calling for cuts to Newstart while giving the rich foreign companies a tax cut? (championed by Mathias Corman no less). ‘Mutual sacrifice’ does not means ‘someone else should get less while I get more’, which is why the LNP can’t sell the blatantly unfair budget.

      • . Mutual Sacrifice. Yeah, I can see it now:

        Our polies coming forward to vote down their entitlements…
        Bankers queuing to pay a surcharge. ..
        Vaucluse residents sell mansions for charity..
        Family trusts (compulsory for the wealthy) move to pay more tax…
        Middle class votes for a 10% “Save Australia” levy (not payable by family trusts or politicians)
        Australia adopts the single car driving license (like any normal country with a remotely similar population) to lower the number of civil servants required to maintain the current ridiculous system & save money

        Yes, it’s all going to change.. Hugo Chavez would be proud of us

    • Heh, heh…. Stalin was an expert in requesting his people to sacrifice. The good part is that all those people who would sacrifice a lot applauded in standing ovation while he made the very speech that called for the great sacrifice……

  12. SoMPLSBoyMEMBER

    Glad to hear that Malcolm identified himself to Queen Elizabeth II as an ‘Elizabethan’ and a liberal.
    Many wonder why capitalism is so in love with fossil fuel? Apart from the massive margins extracted via rentier policies, fossil fuels have no equal when it comes to keeping the ‘workers’ toeing the line.

    More about the ‘Elizabethan Leap’ here:
    https://www.jacobinmag.com/2016/10/climate-crisis-fossil-fuel-renewables-marx-malm/

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