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Economic 'Golden' Times: One year left?

Australia is a country which rewards the speculator over the worker and saver, evidenced by tax concessions for those who take out margin loans or who can gear property priced well above what sound "Return on Investment" calculations would value the house at. Favourable treatment to the speculator class creates a "sheltered workshop" investment environment, where the state protects so called 'mum and dad' investors from the consequences of poor decisions, shields them from risk and moulds outcomes so that investment according to the advice of spivs and political backers appears to pay off. At the moment, the share market rally after the August/September correction is offering the potential for some easy profits, which for the investor willing to take a little risk, can be increased significantly by borrowing money to increase holdings during this time.

Recently, the US Federal Reserve has stopped Quantitative Easing, which at least for now turns the tap off the easy credit keeping the markets afloat and asset prices high. The market reaction was rather optimistic, which many neoliberal economists pin to belief in an economic recovery. Others attribute this to over exuberance and over valuation, which is likely the more accurate assessment. There is no recovery and we are back to pre-GFC conditions, markets writing checks the economy can't cash. However, as long as one can see further than the rest of the market (which isn't all that far), then one can bail out before the big correction. A future GFC style crash (which will likely be given a novel name in an attempt to disassociate it from the issues which caused the last one) seems to be on the cards, but the critical question is 'when?'. Perhaps not for another year or two, or maybe three, but it is appearing likely we are past the halfway mark for this post GFC run. Australia won't escape this time.

The Signals

China: China is, at least from the Australian viewpoint, one of the biggest indicators that market sentiment in our country has a southwards swing ordained. We have hitched our wagon to China, based on the belief that China will lead the "Asian Century". The "Asian Century" was a misleading term, as at best it only included a handful of East Asian nations. The idea that China would be the future powerhouse of Australia isn't new. It is the 30 year old idea that Japan would be the new and upcoming powerhouse exhumed, reanimated and seen to by a mortuary cosmetologist. China is most likely to stall and stagnate as it approaches economic equivalence of the US, and there is evidence that China is already doing so. Coal and electricity consumption is dropping, growth is slowing and debt ratios are rising. China has long overbuilt but lacked a plan, at least one visible to the outside world. A quasi-communist, closed, centrally run economy cannot make capitalism work. The Chinese property market is in bubble territory and also in trouble as prices are falling, and some are predicting a crash. More likely, China will wind down and then face a prolonged period of stagnation which will lead to decay. As it does so, it will be in no position to keep Australia afloat with its diminishing demand for commodities, and greater control of money, often dirty and corrupt, flowing out of China into global property markets.

There is another reason to cast doubt on the idea that China will be the 21st century mover and shaker. It is because China is now outside of the historical context in which it has always sat. China has always fascinated the West by its scale, its size, and its potential for power, and at the same time, underwhelmed the West by its comparative lack of influence in shaping and developing the modern world. The 21st century will be no exception. Unfortunately, Australia has built its economy on ideology which isn't based on observation, but hope, and has overestimated, greatly, the ability and savvy of the Chinese. They are as dumb as we are.

This is likely to play out with international investors downgrading Australia's economic status well before Australians pick up on what is happening. Many Australians will simply repeat that we ARE different, and it is the rest of the world which is wrong, not us. The fact that Australia was lucky during the last GFC will be used More clued in Australians will therefore have to look abroad for an indication as to the health of our economy. It will provide a very noticeable early warning indicator of coming economic trouble here.

Tightening Credit:

The end of quantitative easing should see an eventual rise in the low emergency interest rates, but the US fed is keeping rates low for the timebeing. Quantitative Easing can keep interest rates low, which allows people to enter larger levels of debt. A mainstream economist may view this as a positive, but such economic positions are rarely put into context. We must ask, if people have access to low interest credit, what are they doing with it?

The answer, in the US as it is in Australia, isn't national infrastructure, a space program, nation building, revolutionary new industry or politics, or investment in ideas, but in bidding up assets. We have had 6 years of emergency low interest rates, punishing depositors and rewarding borrowers, but to what effect? What is to show for these few trillions of dollars the US Fed has pumped? What is to show for the billions borrowed in Australia? The answer is an economy barely better, if at all than that when we started. The ASX still hasn't reached its 2006 high. High unemployment, loss of manufacturing capability, unaffordable housing and a population still hamstrung by debt. The fundamental issues which caused the last GFC weren't addressed and still exist. Low interest rates have been squandered in the same manner that the mining boom was. Rather than used to de-leverage, reduce debt and allow the housing market to slowly deflate, further leveraging, speculation and borrowing took place instead. Interest rate rises may still be some months away, but they will be one of the catalysts sparking the next correction. For 6 years, low rates has meant 6 years of property purchases, some being 'interest only' loans, calculated at historically low rates. Interest rate rises will see many new entrants into the market underwater. The lower the interest rate, the worse the impact of a rate rise.

Consider one who borrows at 8% and their rate increased by 1% to 9%. This is a 12.5% increase in the interest bill, significant but potentially manageable. Now, consider someone who borrowed at 4% and has their rate increased by 1% to 5%. This is a 25% increase in the interest bill, somewhat more significant. The lower the rate, the greater the impact of each rise. The Reserve Bank of Australia HAD to keep rates low, as it has backed itself into a corner. The RBA must be pulling its hair out, being unable to raise the rate and risk economic trouble, but seeing the low interest rates used to fuel a bubble. Recently, even they have warned of a housing bubble, and if THEY are warning about it, we can surmise it means we may be closing in on the end.

A decrease, or tightening of the availability of credit should be seen as the economies death rattle. The appearance of a problem of credit availability, similar to the "Credit Crunch", but likely called something completely different, will indicate that time is short. Australia will however keep rates as low as it can, for as long as it can. A rate rise isn't imminent, but external pressures may force it up sometime next year. We can also expect to see a share market rally, although a weaker one compared to years prior, continue. Our economy is fuelled by credit, and contraction of the supply of credit will have a significant impact.

Political Stagnation:

Political ossification, the entrenchment of political duopolies is a somewhat overlooked, but external cause, of economic weakness. Since the 1980's, a neoliberal and demonstrably failed economic view has been shaping the West's, and by extension much of the worlds thoughts when it comes to economics. Since the 80's at least, there has been no social revolution, no change in the political class, and those in politics are converging in ideas rather than evolving. The US is now facing another Clinton, Hillary as a candidate, after two Bush's, an indicator that politics in the US is turning to a dynastic system rather than a meritocratic one.

The spectrum of worthy contrary opinions is being narrowed, and political opposition means more and more a droll contest for power, than contest of fundamental beliefs. Belief systems become most broken when unchallenged, and the lack of challenge means less awareness of mistakes, of error. The fall of civilisations is often accompanied by a minority ruling for the benefit of a minority, which doesn't adapt to change or necessity. Ask yourself, can our democratic system ever hope to push any true change, and a shift in world-view or reappraisal of the function of the economy or nation? If not, then a repeat of recent same mistakes is guaranteed.

This is made worse by the fact that we only believe in the spirit, if even that, not the capability of the very systems we promote and lionise. Democracy, equality, diversity and freedom are mere slogans, ideas we push on others, but we don't believe ourselves when put to the test. The fact that in times of crisis, we limit, rather than expand on these principles, belies the deep seated lack of faith we have in the ideals we punish others for being sceptical of. Is this a lack of faith in the ideas themselves, or lack of belief in our ability to make these ideas work? If we aren't willing to use the very tools and ideologies which we claim bring society out of darkness and prosperity, to give prosperity to ourselves, what do we use in place? The answer appears to be "nothing".

Parasite class over the producer class:

There have always been people who live off the backs of others, but one has to ask, is our economy geared towards them, or the producers? Economies run on the production of goods and services which are of value and of use to people. Without these, there is nothing at all to back the paper wealth of high land prices, high stock prices or the billions and trillions of dollars worth of funny money flowing through the economy. Wealth is realised upon its use to purchase, but what do we make that can be purchased? If our houses go up in price, what will be produced to purchase with that money?

The fact that our tax system favours speculators who use other peoples money to gamble on asset prices over workers and small business owners is a symptom of a problem, and that problem is a broken economic model. This model diverts wealth away from producing that we need and want, and towards unproductive economic activity based on quasi-religious economic and spiritual beliefs. Our current financial parasitic class have the cost, insight and usefulness of priestly classes in days gone by.

Complacency:

Perhaps the most appropriate term to describe the general attitude towards economic trouble in Australia is utter complacency, which should concern those wanting an economically prosperous future. A secure future never arrives carried by complacency and apathy.

  • High Immigration: This creates structural debt, as rapid population increase of working age adults requires rapid infrastructure spending. Yet the spending has not been there and infrastructure is falling behind to the point where Sydney and Melbourne may collapse under their own weight. The real issue is the lack of resolve in the political and media worlds to do ANYTHING about this. How can a society view the disenfranchisement, and dispossession of its future generations as "not a problem?". This is indicative of a social neurosis, a sickness.
  • Housing Bubble: Anywhere else in the world, this bubble would have corrected, but in this country which has an inexplicable and monomaniacal obsession with all things property, this bubble has been kept inflated at the expense of, pretty much everything else. This alone is an issue, but again, the lack of resolve to solve this issue, or address the shortcomings is concerning. Australia could very well face a severe "Brain Drain" as unemployment rises and educated, smart young people leave the country for affordable housing where job opportunities are similar or better. Ireland lost about 1/4 of its young people at the end of the housing boom. Australia may lose many professionals when our economy turns. The current belief is that young people are trapped and will have to 'lump it' when it comes to buying overpriced, tiny, shoddy units, but they stay solely because the grass is, for now, greener. Rising unemployment, exacerbated by high wages and lack of investment could trigger an exodus. These factors alone are issues, but they reveal a deeper problem, a lack of dynamism, national loyalty and collective will to live and thrive. A culture unconcerned about its own propagation and long term future. We hear time and time again in the media how yound people will just have to lump astronomical mortgages or rents. They DON'T. They can just pack up and leave, which is the last thing we want them to do.
  • Housing Market:

    Australian housing "market", if one could call it such, is without a doubt a bubble, and also very risky to those entering it.

    Australians believe that the price is based on fundamentals, but in reality it is based on a massive amount of interference, including

    • Tax concessions allowing investors to remain above water while overbidding for property.
    • First home buyers grant, and its subsequent extensions and expansions, which pushed up prices.
    • "Emergency" low interest rates, which have been in place for an extraordinary period of time (are we still in an emergency?) and will continue for the immediate future. This is obviously no longer about dealing with a crisis, but manipulating the economy by inflating the amount of money, to keep asset and stock prices high.
    • Relaxation of restrictions to foreign residents purchasing property.
    • Flouting of these restrictions, and state complicity in allowing these laws to be flouted. There is little doubt there is 'active ignorance' by relevant authorities, who feign ignorance and would rather remain unaware of what could be "hot", laundered money buying our homes.
    • 100% loans, interest only loans, borrowing against equity and other loose lending practices which are still occurring, even increasing.
    • Timed 'drip feed' land release and other artificial supply restrictions.
    • Massive immigration to ensure a rapidly increasing supply of tenants and competitors to Australians at auctions.
    • All these push up prices and all are the result of market intervention. Thousands of Australians are investing in asset prices which are only what they are due to active and continuing management. How long can the government afford to keep this up? How long can interest rates remain so low and immigration so high? The government has backed itself into a position where it has to do something, but can't because so many people have put money into this artificially supported market. Yet this is what Australians have banked on to fund their retirement. Those who supply money to our media, and financially support our sell out politicians need to be seen as espousing sound investment schemes and advice. The government and the media have a vested interest in making the fundamentally unsound investment principles of those who support them appear to work. Hence the requirement for manipulation.

      There are two ways this may play out. Firstly, the government will continue to intervene more and more to keep the market inflated, despite rising unemployment, poor balance of trade and increasing degradation of the international economy by liquidating the Australian way of life towards third world levels, to ensure the small minority of big player investors maintain their unrealistic and unwarranted returns. Or secondly, the Australian economy will enter a prolonged period of stagnation or a recession, most likely caused by external influences and the market will correct in the most uncomfortable manner. The warning that the housing boom has for us, is contained within the pundits overenthusiastic attitude, the neglect of other economic sectors, the disregard of the economic benefits that affordable and equitable housing bring (which outweigh those that asset price rises bring), the willingness to believe in shonky economics over sound nation management and the baffling willingness for Australians to sacrifice the future of future generations for equity today, a sign of decayed culture.

      It would seem that Australia may be exceptional, due to the narrow political world which exists, in that Australia will work against all forces calling for a resolution to the problem. Therefore, either Australia's property market will correct due to an external financial shock, or it won't correct, and standards of living will rapidly decline. Either way, future investment in this country is looking poor. Time will tell.