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House of Cards

A quite lengthy article published back in November last year by Matt Barrie and Craig Tindale on Medium.com entitled, “Australia’s economy is a House of Cards”, gives us a comprehensive view of where the Australian economy is at present.

What is revealed should shake Malcolm Turnbull and Scott Morrison out of their overly optimistic complacency, but as unlikely as that is, the report warns of what is to come. It is a long and highly detailed read, so for those who are time-poor, here is an overview…

Australia’s economy is a HOUSE OF CARDS … a précis

In a nutshell, our economy has recorded its 104th quarter of growth through sheer luck, that luck being a combination of rich natural resources and China. Our economy is more dependent on China than any other OECD country.

“As a whole, the Australian economy has grown through a property bubble, inflating on top of a mining bubble, built on top of a commodities bubble, driven by a China bubble.”

Looking down the barrel of some “staggering” losses by Chinese banks in what has been a “$34 trillion experiment” to create an economic miracle, the Chinese government is facing a meltdown likely to be far more catastrophic than the sub-prime meltdown in the US in 2008.

Such a meltdown will have horrific consequences for Australia. But that is looking at it from a purely selfish perspective. More broadly, the world could plunge into depression, with no further wriggle room for escape, given the present level of record low interest rates across the globe.

The US, Europe, the UK, Japan and China all fought the global financial crisis printing $19 trillion US, in exchange for various bonds and securities offered by commercial banks. It might have worked had that money found its way into the hands of those who would spend it buying goods and services.

But instead, that money was used by corporations in share buy-backs and property development (high-rise apartments) too expensive for the average consumer to afford. While brand new homes and apartment blocks with inflated values remained empty, they pushed up stock markets to new, unprecedented highs, despite no corresponding lift in company performance.

In the property bubble market, China was the main offender causing billions of dollars to flow out of the country by investors in search of more affordable opportunities that, in the process, set off a subsequent bubble wherever they went.

Back in Australia, we are the largest producer of iron ore (29%), in the world and 80% of that is sold to China. As we speak, a perfect storm is developing with other nations like Brazil ramping up their production and moving in on our market, at a time when China’s demand is in decline.

One doesn’t need to be an economist to see that the price of iron ore is set to take another savage dive. Coal is our next biggest export supplying 38% of world production. The long-term future for coal is not good. It’s use-by date is approaching.

Banks know this, but our government has its head in the sand. In the meantime, for miners in Australia, revenue is down and costs are up, meaning profits are dwindling.

In any event, Australia’s “economic miracle” does not come from mining or manufacturing. It comes from services. “With an economy that is 68% services, as John Hewson put it, the entire country is basically sitting around serving each other cups of coffee or, as the Chief Scientist of Australia would prefer, smashed Avocado.”

With an export market that delivers just 20% of our GDP and the value of goods and services produced barely above cost, little wonder we run both a trade and fiscal deficit.

When one applies the principle of the three sectoral balances to this equation, it means that the private sector is in surplus. A good thing, one might think, except that the private sector is not spending it.

Corporate investment has been dragging its feet waiting for the government to lead by example. Consumers are using their money to pay down debt rather than buy goods and services, or hanging on to it in anticipation of trouble ahead. Retail trade figures confirm this.

The only thing keeping Australia in growth mode now, is the property bubble. It’s a bubble that is helping to sink average working Australians further and further into debt.

Meanwhile, the only thing enabling them to meet their mortgage payments is the low interest rates they are paying. Fortunately for them, that will continue for some considerable time yet, because the RBA has precious little to offer the country in terms of monetary policy.

But when consumers start to lose their jobs, the spaghetti will hit the fan. 60% of Australian bank loans are mortgage loans. This is consumer debt, not productive debt. This is a disaster waiting to happen. And it’s not as if we never saw it coming.

Australians have the second worst household debt servicing ratio in the world, spending more of their income paying off interest that was, in 1989/90, double what it is now. We are about to experience an asset value collapse that could bring banks to the edge of insolvency.

There’s more bad news, particularly in the field of education, our third biggest export. Many have been warning about the oncoming tsunami, including Steve Keen, Bill Mitchell and others.

When it comes it will not be pretty. More importantly, it will set us back decades, all because we thought property portfolios sounded more glamorous than making cars.

Better we had made cars.


20 comments

  1. Terry2

    Thanks John,

    It has always struck me as quite bizarre that the present government castigated the car manufacturing industry as leaners and not worthy of subsidies and drove them offshore even though they employed thousands of people, engaged in the development of new technologies, trained apprentices in a variety of skills and exported cars to the world. Yet, these subsidies over 13 years from 2008 to 2020, were scheduled to be no more than about $415 million a year.

    Over the last 10 years or so, Holden has received $1.8 billion – $150 million each year – while Ford had obtained an estimated $A1.1 billion. Toyota received about $A1.2 billion in the last decade.

    But when it comes to a service industry that doesn’t actually produce anything or export anything or add to our national wealth we are happy to provide to private health insurance companies a massive subsidy which was forecast at $6.5 billion in the 2016 -2017 federal budget.

    So, you have the car industry receiving $415 million a year and being criticised to the point where they move offshore and private health insurance companies at $6.5 billion a year and being lauded by this government at the expense of our universal healthcare system [Medicare] being starved of funds.

  2. Florence nee Fedup

    This & the last government has failed on what many consider important. CEF, Medicare, Gonski, NBN, welfare, along with such industries as auto, which had high union involvement was deliberately destroyed. NDIS attacked not so openly.

    They would see their actions, achievements as a great success, that fit in with their neoliberal policy, which by the way isn’t economics.

    It would have to be the first government in our history that sets out to destroy, putting nothing else in place.

  3. Pilot

    Bloody LNP scumbags, the lot of them! They couldn’t care less about Australia or any average citizen. All they care about is their own bank balance and their mates’ bank balances. They are an utter disgrace!

  4. Freethinker

    We all know, well the majority of the readers in this site, that the present government is inept for some and that have different agenda for others (looking after their own interest instead of the good for the country) I am in that last group
    The question is, what are the alternatives?
    What will do an opposition that also has the ones in charge of macroeconomics?
    Do not forget that they are being educated and believe in neoliberalism which will be no much of a change.
    IMHO, if we like to see changes, instead of criticising the current mob we should demand policies of change by the those that can form the future government.
    The current government will not change the way that they are going because suit them (or the ones behind them that pull the strings)
    We do not want “mild changes” we need political courage, innovation, it is time of a change.

  5. Florence nee Fedup

    The industry was in trouble at the time through no fault of their own. In fact, their troubles could be laid at the feet of the mining boom & no no Abbott.

    The windfall profits generated by mining companies selling off the ore owned by the people at record prices. Profits they did nothing to earn.

    The windfall profits led to a high dollar, up to 110 cents over an extended period of time. Left especially manufacturing & tourist industry with reduced profits. Competition with cheap imports, dearer exports left them in dire straits.

    If Rudd, later Gillard faced with 20 million mining slush fund, Abbott’s no no & Murdoch’s media were unable to put in place an MRRT tax. This would have been used to alleviate, save in some cases our manufacturing industry,

    Sadly didn’t happen until too late. They even demolished the weal MRRT that Gillard managed to introduce.

    They only thing they have managed to build is Border Force, now Home Affairs, an expensive, costing billions to torture a few hundred refugees on Manus & Nauru indefinitely.

    All is done in secret. We have little idea what is going on on Christmas Island, with Dutton’s ability, bypassing the judicial system to deport whoever he likes.

    We now once again have high unemployment, personal debt, no wage growth. No security in employment.

    When will enough be enough with them?

    We are in the ninth day of this year. Every day we have seen those on benefits, unionist attacked.

    We still have the festering sore, PM left of S44. Something that should have been dealt with months ago.

    We have evidence that this government is willing to lie on every front, make claims that dealing with negative gearing would destroy the economy was a farcical lie.

  6. Florence nee Fedup

    It is not the time for a new innovative government to bring change. It is far past that time. Time to demand democracy that is of the people, for the people & of the people. Noticed, corporations don’t get a mention.

  7. Florence nee Fedup

    Look back through the history of politics in this country. It is Labor that builds, takes us through bad times. It is the Coalition that sets out to destroy all they achieve. Why is this so?

  8. Freethinker

    Florence nee Fedup, with my experience of 50 years in Australia “demanding” by the masses or future government demanding to punish the responsible for these social and economic catastrophic situation, it is an innovation by itself.
    In another note but that reflect way we are in this mess, I was furious yesterday when the mass media including The Guardian dedicated so much time to the craps of the Golden Globes and I can bet that many in electorate were even looking at the TV for more news about that.

  9. Kaye Lee

    The German government spends AUD$3.2 billion annually funding a network of research institutes to drive innovation, and their manufacturing sector contributes 22.6 per cent of GDP, underpinned by partnerships between researchers and industry.

  10. Florence nee Fedup

    Could we go back to the IR system we had before WorkChoices? Seem to recall it was a time when employers & workers worked together. We have never needed an Accord as much as we do now. With labour and capital pulling against each other, we will all go down the drain.

  11. Jack Russell

    It seems to me that it’s just one plan in play.

    A long term plan that’s been recently accelerated to the point where it’s noticeable out here in people-land now … to infiltrate governments and institutions of targeted countries and instigate all the mechanisms needed to pillage a country’s entire wealth and siphon it off into the control of private interests.

    All the rest is obfuscation, camouflage, and diversion while the players get the job done.

    How far off the mark am I?

  12. jamesss

    At this very moment the Senate estimates are reviewing an APRA submission to effectively give the banks the authority to steel from your bank accounts, The Financial Sector Legislation (Crisis Resolution Powers and Other Measures) Bill 2017 (If any bank gets into trouble) If one bank fails they all will as they all operate using the same principals.
    There are hundreds of submissions against the introduction of this Bill, and many for it! If you think you money is protected it isn’t, it takes an act of parliament to re-introduce such guarantees once the govt is notified CAN YOU SEE THAT HAPPENING?
    See the: CEC report 5th Jan. Utube. They have been warning people for Months.

    I have started to withdraw funds out of my accounts. More info is available in the December issue of CEC reports.

  13. Jase

    Where are you going to hold your money Jamesss? Serious question by the way.

  14. Jack Russell

    Jamesss, combine your comments with the current cashless society discussions … food for thought.

    However, if the CEC you mention is the same CEC I saw on SBS once ages ago … two guys with dire warnings? I think they believe in UFO’s too.

  15. Kronomex

    And from Friedeggburger we have this load of steaming dung –

    https://www.theguardian.com/environment/2018/jan/09/higher-electricity-bills-if-snowy-20-hydro-not-built-says-frydenberg

    “Australians would pay more for electricity and have more volatile supply if the Snowy 2.0 pumped hydropower project is not built, Josh Frydenberg has said.” Swap “would” for “will” because prices will continue to go up whether or not Turnbull’s Turkey is built. This is just more bullshit from a gubmint made up of ambulatory barely sentient faeces that oozes and spews crap.

  16. Möbius Ecko

    Corporate and conservative Australia would have you believe that negative to low productivity is the fault of labour and high labour costs. Nothing could be further from the truth. Our workers are among the most productive in the world and have been for a long time now, working many hours unpaid overtime and not taking entitled leave. Something Howard was going to take advantage of with Workchoices, and he used the furphy of low labour productivity to sell it.

    Low Australian productivity is directly attributed to business senior management and the constant stream of bad decisions they make, costing the economy billions each year. To further add to the drag on productivity, management punish labour with retrenchments and remuneration cuts for management stuff ups whilst they or the board give themselves massive pay rises.

  17. Jack Russell

    Despite any ultimate neoliberal fantasies of redesignating the working classes as beasts of burden managed by mass animal-husbandry methods, it isn’t going to fly. History says no.

  18. Robert

    Love or hate pollies, the Thai PM has found the perfect way to deal with the media:
    http://www.abc.net.au/news/2018-01-09/thai-leader-tells-reporters-to-quiz-cardboard-cut-out-of-him/9314172

    This morning there was a commercial TV promo for an upcoming piece on ‘road rage’ against a cyclist. The same footage was aired last night by the ABC. Apparently last night the police were saying that the crash happened because of the low angle of the sun blinding the car driver prior to his rear-ending the cyclist.
    This morning the incident was another example of ‘road rage’. Go figure.
    MSM – big on getting it wrong. More power to cardboard cut-outs I say.

  19. paul walter

    I was wondering how “they ” were going to do it.

    “Oh, Brave New World, with creatures such as these running it”

    The City of London and Wall St…their mandibles will be clicking and any nonsenses when it comes, so will the Tasers.

  20. Jamesss

    Jas …..at home for one, where ? depending on where you think it’s safe. Not in a bank! Do your own research. During the GFC there was a run on the banks. People took only small amounts out, around $5 billion imagine a significant run would probably force the doors shut. We are all responsibile for our own decisions. …I hope the submissions to the senate are successful and the Bill is rejected.

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