Labor’s Debt Wreck
In recent weeks I have been commenting on the storm clouds gathering over the Australian economy and how our government has us poorly placed to deal with them.
The relative success of navigating the 2008 Global Financial Crisis (GFC) compared with other Western nations was due to several factors: no government debt, tens of billions in national savings and Chinese demand for Australian commodities.
Clearly these factors are no longer in play. Thanks to the Labor Government, we are now on the hook for around $250 billion in borrowings at a time when commodity prices and export volumes are slowing in parallel with the Chinese economy.
However, there are other observable warning signs that historically have proved to be prescient economic indicators. I don’t know if they are tracked by any economic forecasters and indeed, if they are, they may not withstand a rigorous analysis of their value.
The first of them is in the car marketing department.
This past week I have noticed promotions featuring ‘zero per cent finance’ from several manufacturers. Five years ago, these same offers were made by the big US motor vehicle manufacturers. It proved to be their last hoorah in tempting consumers into debt.
The result was to bring forward five years of auto sales, leaving lean years that resulted in massive job losses, government bailouts and parts of Detroit becoming a virtual wasteland.
The second warning that caught my eye was a newspaper report that stated Australia had the third most expensive currency in the world. It also ranked Australia as the most expensive of the 20 leading world economies in which to do business.
Based on research by the International Monetary Fund (IMF), the Australian dollar only ranks behind Norway and Switzerland in terms of purchasing power parity.
Norway has a massive sovereign wealth fund and royalty stream and Switzerland is seen as the historical safe haven in a very volatile Europe. This has seen massive currency inflows by European citizens seeking to protect their wealth from bank insolvency. The inflows were so large that the Swiss actually offered negative interest rates on their government bonds and still sold the lot to risk-averse investors.
In Australia’s case the rise in the dollar has principally been driven by our relatively high interest rates underpinned by the commodities boom. It has given many Australians a sense of wealth as imported goods cost less, overseas travel is more affordable and our domestic asset prices have held up. Once again, Australia could be considered the ‘lucky country’.
However, in the past two decades there have been several other economies which underwent a similar metamorphosis. Two that immediately spring to mind are the United States and the United Kingdom.
At subsequent times the citizens of these nations had massive purchasing power. Their currencies were dominant among the global trade. At one point it took two Aussie dollars to buy one US dollar and almost three Aussie dollars to pick up a Pound.
Asset prices in the respective economies rocketed ahead with a massive dislocation of investment fuelling bubbles in equities and real estate. Everyone was growing rich on a credit binge that lasted until the bubble burst.
Australia has had a slowdown of its own but the real effects of the GFC have been masked by the resource industry. This has given us the parlance of a ‘two speed economy’.
I suspect that mask is now coming off. As it does, it is reasonable to expect the Reserve Bank to further reduce interest rates (just like the UK and USA) and for the Australian dollar to drop in value.
As foreign investment seeks better yields the availability of domestic credit could significantly tighten, affecting business and consumer borrowers alike.
A slowdown in business means job losses, which brings the catch-22 of consumers being even more reluctant to spend.
The third indicator is that Australia is now considered a very expensive place in which to live and do business.
Our electricity prices are among the highest in the world, despite our abundance of cheap coal to generate power. The price of water, food, housing and transport are all constraining the family budget with little relief in sight.
The government is raising taxes, wasting money and sparing little thought for the long-term consequences of their actions.
We have seen all these things before – in other countries just before their economies fell into a giant hole.
We cannot say for sure that Australia will befall a similar fate; however, the warning signs are there. If the global economy suffers another ‘hiccup’ (as I expect it will in the next few months), we simply will not be able to withstand the impact like we did in 2008.
Ultimately, the mismanagement and waste of the past five years will be felt by every business and every family in the country.
As usual, Labor will expect someone else to pick up the pieces of their debt wreck.