Seeking a Liberal International Order (2010+)

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Seeking a Liberal International Order

CPDS Notes

Addenda - Global > >>

Addenda - Australia >>

 

 

Seeking a Liberal International Order (Draft March 2010)

Introduction  

In early 2010 the World Economic Forum (WEF) conference at Davos involved the theme of 'Rethink, Redesign and Rebuild", because of concerns about the financial crisis of 2007 and its adverse effect on the real economy in 2009. 

A European central banker privately stated that financial system is too important to be left to the free market - and this reflected a prevailing spirit of 'post-capitalism' amongst those gathered there. It is taken as given that the free market failed in 2008 and a new regulated / interventionist / prudential system is needed. WEF had been leading advocate of freewheeling approach to 'globalization' (with reduced tariffs, deregulated markets, and borderless capital; / labour flows). This vision failed with  2008 financial crisis that impacted the real economy in 2009 - leading WEF to a focus on renewal in 2010. French President argued that the problem was assuming that the market was always right, and was widely applauded. Others expressed similar views. US needs to understand that GFC proved Europe and Asia right - ie that economic 'liberalism' as in UK / US involved a dangerous over-reliance on the market. However, while more regulation is inevitable, it is not possible to have much faith in regulators (Ignatious D., Prevailing wind blows into Davos, 2/2/10)

One observer, Anatole Kaletsky, noted that the Forum raised, but did not really discuss, questions about the future character of the global economy. In particular, he suggested that there was a need to reinvent Western models of capitalism, because their 'market-fundamentalist' foundations had been destroyed by the global financial crisis (GFC), or else China's authoritarian state-led variety of capitalism would dominate in future.

Outline: There was uncertainty at recent WEF meeting at Davos about , and an unwillingness to discuss, whether the new economic model that will dominate will be a radically reformed version of Western democratic capitalism - or some variant of the authoritarian state-led capitalism favoured by China, Russia and some other emerging economies. Developing countries have lost interest in the Washington consensus since crisis - and everyone talks about new Beijing consensus. The West needs to reinvent its systems or lose. It is not adequate to claim that Western and Chinese models of capitalism are not radically different. Also they can't peacefully co-exist. China's determination to run huge export surpluses through undervalued currency gives West cheap products, job losses and higher debts. Also China is growing more confident in its rejection of democracy. Minor banking reforms will not restore the Western system - as GFC reflected failure of the whole market-fundamentalist model of capitalism of Thatcher / Reagan period. The challenge for West is to again create a new version of capitalism - eg with reserve banks and governments taking more responsibility for managing economic growth. Western political systems may also need reform to make them faster in consensual decision making. Perhaps governments need a heavy involvement in finance, energy, environmental and strategic infrastructure - but less involvement in health, education, pensions? (Kaletsky A., New capitalist model needed: World Economic Forum, The Australian, 5/2/10)

This document, which deals with both democracies worldwide and Australia in particular will consider:

  • the nature of China's political and economic system - which hypothetically might be the centre of a new international economic order, that would translate into political and cultural dominance;
  • the inadequacy to date of Western-led efforts to deal with recent global security and crises because of a complete failure to consider the practical consequences of differences in cultures / worldviews;
  • weaknesses in the 'Beijing Consensus' that emerging economies are increasingly admiring;
  • options for remaking democratic capitalism.
China's Political and Economic System

There is no doubt, as Kaletsky's article suggested, that China's political and economic system is radically different to those that Western societies have assumed to be the global norm (see China as the Future of the World, 2003), Those differences:

  • appear to have their origin in ancient Chinese cultural traditions, and can be understood by recognising that an approach to the way information is used (which differs from the rational thought that Western societies inherited from classical Greece philosophers) results in differences in the nature of power, governance, strategy and economic goals (see East Asia in Competing Civilizations, 2001);
  • were first exploited by Japan to accelerate economic learning as the basis for its post-WWII pre-1990 economic miracles (op cit), before being spread throughout East Asia. China's leaders were finally convinced in about 1979, though China did not bother with the democratic super-structure that Japan had erected as a 'face' for its authoritarian, state-led 'capitalism' to gain acceptance from Western observers;
  • involve economic models that can not truly be described as 'capitalist' - noting that:
    • Japan has been described by an influential official as a 'non-capitalist market economy';
    • 'capitalism' traditionally involves profit focussed enterprises. However coordination of economic activities by a decentralised search for favourable financial outcomes by capitalistic enterprises is not the way major East Asian economies are coordinated noting that, for example: (a) profitability was not a significant goal of Japan's enterprises, rather market share was emphasised (ie cash flow not value added); and (b) there is no Chinese word for 'unprofitable';
    • providing a very strong cash flow can be maintained, and much of this is saved, concerns about balance sheet difficulties can't be raised by external lenders;
  • are intentionally  kept 'opaque' to outside observers - noting that not allowing others to understand one's shape and deception are features of the traditional Art of War;
Those differences played a major role in the emergence of the GFC (see Structural Incompatibility Puts Global Growth at Risk , 2003; Financial Imbalances in Financial Market Instability: A Many Sided Story, 2007; and Impacting the Global Economy, 2009).

Thus the GFC was not simply a reflection of the failure of 'market fundamentalism' (whatever that is) but also of the failure of Western analysts and authorities to understand that they have been dealing for decades with with fundamentally different systems of socio-political-economy. An attempt to interpret some unrecognised aspects of recent history is in An Unrecognised Clash of Financial Systems?;

Inadequate Responses to Islamist Extremism and the GFC

Western-led efforts to cope with recent international crises have been inadequate and counter-productive to the interests of Western societies because of the failure of students of the humanities and social scientists to seriously consider the practical consequences of differences in cultural assumptions (see also Cultural Ignorance as a Source of Conflict).

The implications of differences in cultural assumptions under Islam and in East Asia are given particular consideration in Competing Civilizations (2001+), while threats since 2000 to the international order that has been established on the basis of Western-style democratic capitalism are outlined in The Second Failure of Globalizations  - which refers in particular to:

Western-led international efforts to date to promote recovery from the GFC are also fundamentally futile because they attempt to recreate conditions like those prior to the GFC (eg see G20: Announcing 'Peace in our Time'?). Such efforts (ie rescuing financial institutions, stimulatory spending and tighter global regulation of financial institutions) ignore:

  • the financial imbalances that have emerged as a consequence of the need that Japan, China and many emerging economies have for export-based economies in order to protect against domestic financial crises;
  • the inability of major Western economies (such as the US) to indefinitely provide the demand-in-excess-of-income that has, so far, prevented the structural demand deficits in many export-based economies from crippling global growth, and their consequent probable need to take action to reduce those imbalances by means such as those suggested below;
  • the do-it-without-talking-about-it changes that may actively be being put in place in an attempt to create an new world-within-the-world based on neo-Confucian social relationships (see Creating a New 'Confucian Economic World?) hopefully as a means to survive without strong external demand;
  • the impossibility of developing new global financial regulations in an environment in which there are fundamental differences about the role of financial systems within any system of political economy (see Obstacle to Effective Global Regulation);
Where Will the Beijing Consensus Lead?

While 'everyone' may now be interested in the new 'Beijing consensus', it is likely to lead to failure.

China as well as: (a) other economies in East Asia that, like China, have applied variations on the economic model that was the foundation of Japan's pre-1990 economic miracles; and (b) emerging economies that have adopted export-led growth strategies in order to reduce their risk of financial crises, are all likely to be headed for crises in the medium term.

Why: Economic Growth Can't be Led Indefinitely by Emerging Economies

There is a real risk the strong growth led by China which is increasingly important to global economic prospects will not prove durable in an environment in which major economies (especially the US) are also forced to look to export-led growth to overcome the effect of the financial crisis on their economies.

While some suspect that Western-style democratic capitalist models might increasingly be replaced by Chinese style autocratic development models (eg Ignatius D., 'Prevailing wind blows into Davos', Australian, 2/2/10) it is likely that the latter face serious obstacles (see Are East Asian Economic Models Sustainable?, 2009), because

  • those economies have been critically dependent on export led development - as current account surpluses are vital to protect financial institutions where the latter are not committed to using their people's savings profitably;
  • such economies are thus macroeconomically unbalanced and unsustainable in isolation (ie domestic demand is always less than supply);
  • everyone else in the world (especially the US) has used up their ability to provide the excess demand needed to sustain export-led strategies like those of Japan, China and Germany - and so, given huge public debts and a likely ongoing de-leveraging by the non-government sector, previously-deficit countries like the US also must now pursue export-led growth, and clearly not everyone can do this simultaneously;
  • none-the-less the need for the US (and other formerly-deficit countries) to now try to shift to export-led growth will block continued current-account surpluses, and thus lead to financial crises, in East Asia and in other emerging economies that have tried to follow the 'Beijing consensus'; and
  • where there is no serious capitalistic search for profit by enterprises, it is probably impossible to balance supply and demand.

Similar constraints seem likely to apply to emerging economies outside East Asia that have also followed the fashionable trend to export-led growth to avoid risks of financial crises (see A New World Order: Leadership by Emerging Economies?).

Remaking Democratic Capitalism [Preliminary Notes only]

There is nothing unusual about creating new models of capitalism. This has happened repeatedly in history, as the rules governing the operations of profit-seeking enterprises have been changed (often as a result of crises).

Currently re-creating democratic capitalism perhaps requires:

  • appropriate leadership. Western political systems are a means for community learning which is inevitably 10-15 years out of date relative to leading edge knowledge - and are a means for promoting social stability (and need to be protected as such) but can't take leadership role in setting economic directions without: (a) surrendering control to elites and thus providing the unscrupulous with an opportunity to profit at community expense; (b) being directed by interest groups generally; (c) failing to get it right because of problems of complexity and timing (ie being out of date). Politically-driven attempts to stimulate economic change are thus usually economically counterproductive. There is however scope to create apolitical institutions which operating under democratic mandates whose role is to stimulate market-responsive economic change at the level of industry clusters as a whole that would have similar productivity and competitiveness benefits to innovation at the level of individual enterprises; 
  • significantly enhancing the supply side and flexibility of the economy should be achievable in a democratic political context by methods speculated in Lifting Productivity: Considering the Bigger Picture; and also in relation to the development of stronger innovation systems in Australia in A Case for Innovative Economic Leadership);
  • re-inventing economics to recognise that methods such as those suggested above would have the effect of changing causal relationships in economic systems. This implies that there are limits to traditional economics in so far as economists strive to 'understand' causal relationships as a basis for economic modeling in the hope of identifying what inputs should maximize outputs if the economic system remains unchanged, Greater economic benefits should come from studying how economic systems might best be constructively changed. Economics also needs to recognise that traditional methods of counter-cyclical methods (ie based on fiscal and monetary policies) are not the only tools available to stimulate economic recovery - especially where national debt levels constrain stimulatory spending and monetary policies have passed their use-by date (see Alternatives to Monetary Policy);
  • reducing global financial imbalances (and thus the need for artificial 'profitable' uses for large quantities of capital inflow in the US and elsewhere) perhaps by:
    • constraining the availability of credit for consumption in countries with persistent current account deficits, and boosting the supply side of their economies (as above); 
    • inhibiting exports from economies that run persistent net current account surpluses - particularly in order to apply pressure for the adoption of profit-seeking financial models;
    • reducing huge public spending by NATO governments in relation to conflicts with Islamist extremists, by serious efforts to discredit the ideology of the spiritual leaders (see Discouraging Pointless Extremism , 2002), rather than by continuing to try to defeat ignorance on the battlefield;
  • developing new techniques for macroeconomic management because of the the feedback between the creation of credit and the escalation in asset values which meant that easy credit created by the US Federal reserve in order to sustain US / global growth in the face of large demand deficits in East Asia and elsewhere, led to (and in fact depended on) the asset bubbles whose bursting resulting in the GFC (see Booms and Busts: Unsatisfactory Tools for Macroeconomic Management). The solution can not be to rely on governments to manage the business cycle - because their inability to do so (due to delays in getting relevant information and implementing responses, which often turned counter-cyclical initiatives into pro-cyclical outcomes) was demonstrated in the 1970s. Rather what may be required is an extension of the sort of automatic stabilizers implicit in payments to the unemployed, to a series of  leading economic indicators do so.. Automatic stabilizers would be needed that respond to early indicators of growth and seek to keep it within a safe range;
  • constrain the development of complex financial systems - because they can make it impossible to market participants to make rational investment decisions (see Restricting the Role of Financial Services?);
  • dealing with 'modern' weaknesses that have emerged in democratic governance systems, as illustrated in Australia's Governance Crisis and the Need for Nation Building.

The above are further developed in addenda related to democracy globally and Australia in particular.

Towards a New Economic Understanding 

Towards a New Economic Understanding

There have been increasing attempts by professional economists to revise their understanding of economics as a result of:

  • the global financial crisis (GFC) that erupted in 2008; 
  • subsequent difficulties in achieving sustainable recovery; and
  • the adverse consequences that have emerged - such as rising public debts, growing inequality and potential economic stagnation / crises in various parts of the world. 

There have also been allegations by aggrieved groups that what has happened must be the results of plots by someone to benefit at their expense - a view that seems overly-simplistic (see below).

These present comments are only a brief and partial view of the issue that focuses on (without being limited to) the need to fully understand the effect of the 'bureaucratic non-capitalist' methods of social, economic and political organization in East Asia that are quite different to their democratic-capitalist Western equivalents and thus make efforts to understand what is going on purely in terms of conventional political and economic concepts inadequate.  

The opportunity that the present writer had in the 1980s to 'reverse engineer' the intellectual basis of East Asian economic 'miracles' as part of a multi-year study of economic strategy issues, which is the basis of these comments, is described here.

Outline

In brief attention is drawn below to:

  • recent economic events in an historical context;
  • fundamental differences in ways of thinking in societies with an ancient Chinese cultural heritage, and the 'bureaucratic non-capitalist' systems of socio-political-economy that these allowed (initially in Japan) as the basis of 'catch-up' economic miracles;
  • the macroeconomic obstacle to global growth that these 'bureaucratic non-capitalist' systems have required (ie demand deficits / savings gluts);
  • the need for easy money policies to counteract the adverse macro-economic impacts of the 'bureaucratic non-capitalist' systems and of the poorly-developed financial systems in emerging economies elsewhere, and the role easy money had in the GFC, and in generating other problems;
  • the ongoing risk of major financial / economic disruption;
  • the relationship between economic and national security issues;
  • suggested responses to this situation including an apparent need for a paradigm shift in economics.

Historical Context

A highly simplified context to the need for a review of conventional economic understanding is presented below. This suggested that:

  • Democratic capitalism was the foundation of Western societies' economic and geo-political success from the late 18th century. This involved a complementarity between capitalism (ie independent hopefully-morally-responsible profit-focused investment to raise productivity in a competitive environment and increase overall wealth) and democracy (to reflect the overall ‘public’ interest through: a system of law as a framework for the community's social and economic transactions;  and capturing a share of national income through taxation to provide 'public' goods and services and ensure against gross imbalances in wealth);
  • Manufacturing (which emphasized mechanization initially, and mass production from the early 20th century) had been a key high productivity function in developed economies from the time of the industrial revolution – and was the basis of fairly broadly based high-wage job opportunities;
  • From the 1950s, low wage economies in East Asia (initially Japan) were unexpectedly and increasingly successful in mass production manufacturing using 'bureaucratic non-capitalistic' methods (see below);
  • From the 1960s 'de-industrialization' then eliminated many the of high wage manufacturing job opportunities in 'developed' economies;
  • In the face of effective low-wage competition, maintaining traditionally higher income levels in developed economies required continuously creating market-focused competitive advantages;
  • Market liberalization was used with some success in more developed economies from the 1980s to facilitate diversification into higher productivity functions - by reducing democratic (ie public interest and redistributive) influences that can slow / impede market-responsive economic adjustment. It also reduced democracy's vital traditional role in counterbalancing profit-focused capitalism;
  • The spread of market economies after the failure of Communism in the late 1980s permitted rapid economic growth in many emerging economies outside East Asia - often with: (a) a significant role being played by multinational corporations; and (b) considerable difficulties in creating a viable institutional framework for domestically-based economic-initiative (eg sound financial systems);
  • From the late 1980s easy money policies: (a) became vital to maintaining global economic growth in the face of the structural demand deficits that were needed to avoid financial crises in economies with non-capitalistic or poorly-developed financial systems; and (b) replaced counter-cyclical spending as the most credible tool for macroeconomic management. While this allowed two decades of global growth, it was also associated with financial instabilities, resource misallocation, rising inequality and rapidly increasing government / household debt levels;
  • In many developed economies, high community expectations (ie about public services and income transfers) and limitations on tax revenues in a competitive environment (where many other societies had lower expectations) combined with other factors to create structural deficits and rising public debts over several decades that were eventually recognized to be becoming unsustainable.

About the Global Financial Crisis

The factors involved in the global financial crisis (GFC) that that was triggered by sub-prime defaults in the US in 2007-08 are complex (see GFC Causes).

While the GFC seemed to arise unexpectedly, it can only be properly understood by considering the effect of profound and hard-to-understand cultural differences between major civilizations - differences that are usually put in the 'too hard' basket. However, if they are not understood and seriously addressed soon, they raise the risk of another breakdown of the global economic and political order like that which preceded and arguably caused WWI. 

An outline of those cultural complexities and what might be required to resolve the risks that they pose was attempted in Competing Civilizations (2001+).

The latter suggested that reducing those risks required reforms to the international system focused on: more effective democracy; ethical renewal; enhancing cross-cultural communication; reform of the global order; more effective economic development practices; and reviewing the role of money. A method whereby such reforms might have been explored globally (while allowing for cultural differences) was speculated in A New 'Manhattan' Project for Global Peace, Prosperity and Security (2001).

From that perspective The Second Failure of Globalization? (2003+) addressed both:

One critical factor in the GFC has arguably been the post-WWII impact of what can simplistically be described as 'bureaucratic non-capitalistic' methods of socio-political-economy in East Asia. The latter have their origins in ancient Chinese traditions that are: (a) quite different intellectually from Western ways of thinking (eg see East Asia: The Realm of the Autocratic, Hierarchical and Intuitive Ethnic Group?, 2001+ and Competing Thought Cultures, 2012): and thus (b) very hard to understand in terms of Western concepts (eg see Babes in the Asian Woods, 2009 and Why Understanding is Difficult, 2011).

Liberal Western democratic-capitalist systems of political economy rely on the efforts of independent rational individuals in distinct social, economic and political contexts. However major East Asian economies involve authoritarian hierarchical bureaucratically-coordinated ethnic networks that have social, political, economic, military and criminal functions simultaneously. And, rather than 'capitalism' (ie independent profit-oriented investment), major investments:

  • tend to be based more on elite consensus (drawing on hierarchical social networks) about what is likely to benefit the ethnic nation as a whole;
  • draw on the savings of the ethnic nation with an emphasis on market power and limited regard to return on capital (see Evidence); and thus
  • depend (amongst other things) on the willingness of common folk to work hard for limited reward out of a sense of ethnic nationalism - which is unfortunately a formula for conflicts.

As a result a large component of the world’s market economy now no longer works in ways that can be understood in terms of conventional economics (eg see Understanding East Asia's Neo-Confucian Systems of Socio-political-economy, 2009; China can't be properly understood in terms of Western economics, 2009 and; Australia and the Asian Century: The Challenge Can't Be Understood in Terms of Economics, 2011).

The unconventional way such market economies operate (eg involving mercantilist / power-seeking rather than capitalist / profit-seeking goals) has had adverse implications for the global economy as a whole by giving rise to:

  • the 'savings gluts' / demand-deficits in the major 'bureaucratic non-capitalist' economies that were essential to prevent state-linked banks with suspect balance sheets from having to borrow in international financial markets where their balance sheets would have been subject to scrutiny. The 'savings gluts' / demand deficits would have caused global growth to stagnate unless trading partners maintained excess demand. This led to large international financial imbalances and required trading partners) to be willing and able to accept perpetual current account deficits and ever increasing debts (see Structural Incompatibility Puts Global Growth at Risk, 2003+). This severely affected the US as it taken a Cold War role as the world's 'consumer of last resort' to encourage the adoption of liberal systems of political economy globally as an alternative to Communism;
  • the loose pre-GFC monetary policies in the US that facilitated high levels of demand (by boosting asset values and thus lifting high household demand via a wealth effect amongst those with significant existing assets and by encouraging higher-than-normally-safe levels of public debts). Those loose monetary policies (combined with poor lending practices) eventually gave rise to the global financial crisis (see Impacting the Global Economy, 2009);
  • counter-measures after the GFC started - presumably to encourage reform of financial systems in countries that had had to rely on current account surpluses (and thus add to international financial imbalances) to protect poorly developed financial systems from crises (see 'Currency War': A Counter-move by the Federal Reserve?);
  • ongoing risks of slow-motion failure of international financial / economic systems (see An Approaching Crisis?). Large scale creation of cheap credit had been significant in driving economic activity for at least a decade – and had created serious potential problems (eg distortion of financial markets; potential asset bubbles; rising inequality as wealth creation came to be associated mainly with rising asset values and to benefit those with existing assets; and levels of household and government debts that would be unsustainable when interest rates normalized ie when investment came again to depend again on domestic savings rather than on expanding reserve banks' balance sheets or 'savings gluts' in countries with underdeveloped financial systems);
  • a need to view economic issues in the context of broad national security considerations (see Comments on Australia's Strategic Edge in 2030, 2011; Creating a New International 'Confucian' Financial and Political Order, 2009+; Seeking a Liberal International Order, 2010+; and The Resurgence of Ancient Authoritarianism in China, 2014).

Market Liberalization had Advantages and Disadvantages

The de-industrialization in Europe and North America that started in the 1960s, largely had its origin in the success of the 'bureaucratic non-capitalistic' methods in facilitating catch-up economic 'miracles' in East Asia. The productivity of mass production manufacturing (which had previously been a source of broadly-based high-wage employment opportunities) declined.

More developed economies thus needed to develop new higher-productivity economic functions if they were to sustain relatively high community incomes.

From the 1980s economic reform in more developed economies started to involve market liberalization to accelerate economic adjustment by curbing political constraints on economic changes that would increase productivity but disadvantage established interests. Such reforms arguably: resulted from OECD observations of the way government attempts to speed adjustment had backfired in Europe in the 1970s; provided some benefits; generated unintended consequences; and were ultimately insufficient in boosting competitiveness and productivity.

In Australia's case, for example, a so-called 'microeconomic reform' agenda arguably:

Counter-cyclical Measures were Inadequate: Structural Reforms are Vital and Long Overdue

It was becoming obvious by late 2014 that the world faced severe constraints in sustaining economic growth and preventing geopolitical tensions spiraling out of control (see An Approaching Crisis?).

Overcoming accumulated financial / economic problems required structural changes, as it was futile to continue presuming (as had been done since the start of the GFC) that the problem was cyclical. Counter-cyclical measures (such as the stimulatory government spending and easy money policies) could never make global growth sustainable. They did not deal with the structural causes (ie the demand deficits in economies with non-capitalistic or poorly-developed financial systems) that led to large international financial imbalances and thus required artificially cheap credit to stimulate asset values and make high debt levels seem viable (see Structural Incompatibility Puts Global Growth at Risk, 2003).

 'Financial', 'economic' and 'other' structural changes seemed to be needed. Unfortunately such changes had been neglected for so long that it seemed highly unlikely that adjustment could be achieved smoothly. Keeping the wheels turning through the crisis that seemed to be emerging (rather than allowing a breakdown of basic social, economic and governance functions) was likely to be all that was achievable.

Changing Financial Systems

Systemic 'financial' changes that were needed seemed to include:

  • eliminating the international financial imbalances that have been a bye-product of the 'bureaucratic non-capitalistic' methods that were the basis of East Asian economic 'miracles' and had made easy money policies necessary to sustain global growth (see Making the G20 Useful at Last, 2013).

While monetary easing had been able to prevent financial crises from affecting the real economy from 1987 until 2007 (and moderated the impact subsequently), this merely created ongoing dependence on such policies and numerous adverse side effects (ie distorted investment, rising inequalities and high / unsustainable government and household debts). It did not provide a basis for sustainable global economic growth.

Global financial imbalances (and thus the need for artificial 'profitable' uses for large quantities of capital inflow in the US and elsewhere) might be constrained by:

  • limiting the availability of credit for consumption in countries with persistent current account deficits, and boosting the supply side of their economies (eg as suggested below);
  • inhibiting exports from economies that run persistent net current account surpluses - particularly in order to apply pressure for the adoption of profit-seeking financial systems;
  • reducing the cost of conflicts with Islamist extremists, by serious efforts to discredit the ideology of their spiritual leaders (see Discouraging Pointless Extremism , 2002+), rather continuing to try to defeat ignorance on the battlefield;
  • recognizing the constraints that international competition places on the ability of governments in developed economies to meet the services and wealth transfer expectations of their communities, and seeking alternative methods of meeting those needs (eg as suggested in The Probable Need for a Community-based Solution.
  • providing support to emerging economies in the development of reliable financial systems;
  • developing new techniques for macroeconomic management because of the the feedback between the creation of credit and the escalation in asset values which meant that easy credit created by the US Federal reserve in order to sustain US / global growth in the face of large demand deficits in East Asia and elsewhere, led to (and in fact depended on) the asset bubbles whose bursting resulted in the GFC (see Booms and Busts: Unsatisfactory Tools for Macroeconomic Management).

The solution can not be to rely on governments to manage the business cycle - because their inability to do so (due to delays in getting relevant information and implementing responses, which often turned counter-cyclical initiatives into pro-cyclical outcomes) was demonstrated in the 1970s. Rather what may be required is an extension to a series of leading economic indicators of the sort of automatic stabilizers implicit in payments to the unemployed. Automatic stabilizers would be needed that respond to early indications of changes in economic activity and seek to keep it within a safe range.

  • determining how to share the financial losses that are likely eventually to accompany the winding down of QE (eg how much reliance should be placed on 'bail-ins' of those with deposits / investments in financial institutions). A large 'bail-out' of investors / depositors by governments restricts their ability to spend in other ways - while 'bail-ins' are likely to increase the risk of 'runs' on financial institutions with suspected balance sheet problems and thus (perhaps) lead to otherwise-avoidable financial crises. It can be noted that in October 2014 China announced what seems to involve a 100% 'bail-in' for investors (ie households and private companies) of the bad debts that have been incurred by China's local governments and shadow banks. The latter had been likely to impose a massive debt burden on Beijing, but are now likely to have quite different but probably no less serious adverse economic effects [1]
  • reforming international financial systems perhaps by:
    • reducing their complexity to make market instabilities less likely and make finance an adjunct to the real economy rather than the primary field for profit making (eg Restricting the Role of Financial Services?). Such changes would in effect reduce the problems that have been seen to be associated with mass speculation [1] and the poor perception of 'capitalism' that has emerged (according the The Economist) because it has been 'financialised' by bankers. Up to a point purely financial profit-seeking can aid in forcing constructive changes in the real economy, but that point seems to have been passed;
    • addressing the market-fixing risks that seem to have existed [eg consider The Fix is In, 13/11/14];

Changing Economic Systems

The supply side, flexibility and productivity of economies might be increased by democratically empowering apolitical leadership in accelerating the market-oriented development of economic systems and industrial clusters as a whole as speculated in Lifting Productivity: Considering the Bigger Picture (and also in relation to the development of stronger innovation systems in Australia in A Case for Innovative Economic Leadership). This would arguably require elected governments to recognize the limits on the productivity of politically-endorsed initiatives as well as a new paradigm in economic theory focused on how to constructively change, rather than simply understand, economic systems (see below). Side-impacts of such changes should include:

  • improving the tax base that governments require to carry out their 'public' functions;
  • creating improved opportunities for those on the margins of society - and thus reducing inequality;
  • development of complementary processes to stimulate real-world community-based solutions to emerging social and environmental challanges.

Attention also needs to be paid to the 'so-called' resource curse - whereby regions with rich natural resources tend to have economic development difficulties because local political and business elites can gain benefits from facilitating resource investment and thus provide poor-quality economic leadership to their communities.

Other Structural Changes

Financial and economic changes can not be sufficient on their own. Structural changes are arguably needed also within the community and in major non economic institutions (such as governments).

The need to strengthen democratic governments is argued using Australia as an example in Australia's Governance Crisis and the Need for Nation Building (2003+). This referred, amongst many other things, to the increasing complexity of issues governments confront (eg because issues interact or because non-Western cultural traditions need to be taken into account) and to the consequent need to:

  • improve the availability to the community and elected governments of relevant information about those complexities; and
  • reduce the expectations on what contributions democracies can make (ie by creating methods for dealing with emerging issues, rather than trying to guess the answers and control all outcomes).

For example, community-based efforts to provide support for the relatively disadvantaged are likely to become increasingly important in developed economies because of the constraints on governments' tax revenues that are imposed by effective competition from emerging economies with lower wage, public service and income transfer expectations (see The Challenge and Potential Cost of Inequality and Insufficient Income).

And as noted above, complementary 'non-economic' changes that seemed necessary in the international arena were suggested in Defusing a Clash (2001+). The latter advocated giving serious consideration to: the obstacles to effective democracy that can exist in non-Western contexts (see Effective Democracy); values and metaphysics (see Ethical Renewal); cross-cultural communication; and reform of the global order. Though the actual suggestions about those goals were over-simplified and are now out-dated, the issues in that list do need attention in seeking solutions.

A Paradigm Shift in Economics?

There is arguably a need to shift the notion of what economics is about from just ‘understanding’ an economy towards also systematically ‘changing’ the way it works by empowering apolitical institutions to do so under democratically approved protocols (eg see Probable Breakthrough in Understanding Economic Development, 2004; A Case for Innovative Economic Leadership, 2009;  Fixing Economics, 2012; Economics Beyond the Limitations of Science, 2013; and Non-CEO tells business to get on with reforms (2014).

Such a paradigm shift in economics might require a parallel revolution in the philosophy of science generally.

Seeking Scapegoats is Inadequate

Independent profit-focused investment (ie ‘capitalism’) has been viewed by some as the primary source of the GFC and subsequent social and economic problems. However the issues involved seem to be far more complex than such claims appear to be based on.

For example a 2009 movie, Capitalism: A Love Story, presented the view that the dominant role of 'capitalism' had been primarily to blame for the adverse effects on American citizens of the then-recent financial crisis. A review of that movie suggested that:

Filmmaker Michael Moore examines the impact of corporate dominance on the everyday lives of Americans. Moore asks the question: What is the price that America pays for its love of capitalism? He finds that families pay the price with their jobs, their homes and their savings. Michael goes into the homes of ordinary people whose lives have been turned upside down; and he goes looking for explanations in Washington and elsewhere. What he finds are the all-too-familiar symptoms of a love affair gone astray: lies, abuse, betrayal - and 14,000 jobs being lost every day.

A similar perspective seems to characterize the Occupy Movement, which is said to involve a protest against social and economic inequality - and to have a prime concern with how large corporations and the global financial system disproportionately benefit a minority.

While problems are all too real, the causes are arguably much more complex than seems to be considered (see New Economics: Some Pragmatic Suggestions). There is, for example, a critical need to focus on the ever-increasing role that ‘non-capitalism’ had played in the international financial and economic system (eg as suggested in World facing 'Crisis of non-Capitalism': Non-economist) yet this an issue that receives essentially no consideration.

Capitalism’ is undoubtedly experiencing problems (eg consider Restricting the Role of Financial Services). However it needs to be remembered that ‘capitalism’ (ie independent profit-focused investment that is hopefully influenced by Adam Smith's 'moral sentiments') also seems to be on the front line in an undeclared financial / economic ‘cold war’ between liberal Western institutions and their ‘soft-fascist’ East Asian competitors (eg see A Generally Unrecognized 'Financial War'? , Currency War? , Broader Resistance to Western Influence? and Creating a New International 'Confucian' Financial and Political Order).   

A case against independent profit-focused investment (ie ‘capitalism’) has emerged in relation to rising social inequality. However once again it is necessary to look at the global environment to properly understand the problem (see Who Is Failing the Lower and Middle Classes?). Simply blaming convenient scapegoats (because the issues are more complex than generally recognized) is understandable but inadequate.

Bridging these difficulties in understanding is part of the 'genius' of democracy - in that it allows disaffected outsiders to gain representation so that their grievances can be heard and complexities that they may not have been aware of can be clarified (eg consider Assessing the Implications of Pauline Hanson's 'One Nation', 1998).

The biggest current obstacle to understanding global economic difficulties arguably lies in the failure of the humanities and social science faculties of Western universities to investigate the practical consequences of non-Western cultural traditions. 'Postmodern' ideologies seem to dominate those institutions and those ideologies naively / conveniently regard claims about truth and knowledge in human affairs to be simply ‘social constructs’ that suit dominant elites (ie whomever the post-modernist wishes to scapegoat) rather than having any practical consequences (see Confusion of Knowledge; Cultural Ignorance as a Source of Conflict and A Case for Restoring Universities).

Visualizing the Decline of the West

Visualizing the Decline of the West

Various observers have speculated about the decline of Western civilization. For example:

Europe seems to be disintegrating. Spain and Britain are headed for constitutional crises. France is too paralyzed by economic depression to play a serious role. German political hegemony is the best option available - as it has been a bastion of rationalism. If it collapses Europe will be vulnerable to a resurgent Russia that plays by different rules. A break-up of UK could set up Balkanization / national breakups across Europe - while leaving UK (the West's second military power) and Scotland with much reduced capacity. Europe has effectively disarmed - as its military spending does not include new equipment as Russia has launched major military spending programs. [1] .

Western civilization is facing a profound crisis. To understand this it is necessary to recognize a diversity of challenges (none of which are being solved at the moment) and the risk that they compound one another. Islamist terrorism could have serious effects if: nuclear weapons were used; mass atrocities crippled social cohesion; disorder in the Middle East became a disaster. The war against Islamist extremism is not being won. Islamic State is more murderous than al Qaeda - and attracts many recruits. Russia is seeking to slice territory from its neighbours. Russia and China are testing both US resolve and the efficacy of the US alliance system. Most countries in Asia are increasing military spending. Nuclear proliferation is a third threat. The digital economy has the potential to yield destructive technologies (eg that disrupt infrastructure). Numerically small and weak players have increased capacity to do a lot of damage. Internal weaknesses in the West are also factors. The West has not provided economic leadership since GFC. And there are interlinked problems of governance, budgets, social and economic sustainability. Europe illustrates chronic misgovernment and the limits of budgets and entitlements. The US has a milder version of the same problem. Australia lacks political effectiveness. Also the West is living off moral capital of religious conviction that it is now abandoning. Societies that lack overarching ideas beyond the individual are unlikely to be successful in the long run [1]

in the 1980s Jean-Francois Revel (in How Democracies Perish) wrote about possible Western loss of Cold War against Soviet communism. He was wrong. Western democracy triumphed - but it was close. Many Third World nations became Communist - and democracies were seen to lack stregth of will to prevail.Then Reagan, Thatcher and Pope John Paul II emerged to embody Western will. The West won for two other reasons also: a superior economic and political model - which resulted in massive difference in economic power and a consequent loss of confidence by communists themselves. Paris attacks indicate a new level of threat tto Western democracies. Some see terrorism as a terrible criminality that could never prevail. But Paris attacks need to be seen in the light of multiplying / interlocking threats the West faces. And the West is also gripped by a crisis of belief and governance. terrorism threat is a risk to West because of its interaction with other threats. Terrorism exists in all Western and Muslim societies - and is based on jihadist view that Islam is persecuted by West and needs to establish a pure / fundamentalist Islam. While many jihadists are disturbed / alienated people, there are many successful people who also believe. In the Middle East and North Africa there are tens of thousands of such people. They may not have acquired nuclear weapons after 911 - but they have succeeded beyond wildest dreams. Many in the Middle East and Western societies subscribe to their basic paradigm. And they share many ideas (ie of resentment and paranoia) with many non-violent Muslims. The Grand Mufti of Australia is not a supporter of terrorism - but the causes he nominated for Paris attacks validated Muslim paranoia and sense of grievance. The first big threat to West is from Islamic terrorism - and this will become more sophisticated over time. This threat is multiplied by role of Islamic State in Middle East. Strong Western military action against Islamic State would be wrong - as this is viewed by major regional powers as part of Sunni-Shia conflict rather than as related to Western terrorism. Those conflicts have sen huge numbers fleeing towards Europe. Attempts to integrate Muslims into Europe have failed. Unlkie US, Canada and Australia Europe has never successfully integrated large numbers of immigrants from foreign cultures. And all Western societies have become post-industrial and service oriented - while industrial components are high-tech. In the past they could provide jobs for masses of unskilled migrants - but this is no longer possible. Unskilled immigrants with language problems now typically spend years without a job - and have to be supported by the welfare system. And welfare dependency feeds islamist narrative of Western oppression. West can't just leave Middle East alone - because its political culture generates hatred of West and finances Islamist extremism worldwide. However Islamist terrorism is not the West's main threat. Entanglement in the Middle East exhausts Western and especially US strategic resolve - and makes West unwilling to get involved in security actions anywhere. US resolves is tested by Russia, China, Iran. At the same time the West faces crisis of belief and governance. There has been a loss of transcendent belief and the death f God has resulted in a loss of purpose for many. A civilization can't sustain itself on the basis of an ideology of self and entitlement liberalism. Western society is moving away from the idea that sacrifice is justified. Internal liberalism is oppressive, while standing against external enemies is in question. Televised cage fights between women are featured, while an archbishop is hauled before thought-police for propounding traditional Catholic sexual morality. At the same time there isa crisis of governance across the Western world. No Western nation can bralance its budgets - because of entitlements' crisis. health and welfare spending are ballooning. And the prestige of democracy - in terms of government competence - is under severe attack. Taken all together this constitutes a crisis of Western civilization

The West's immune system is down. Attacks in Paris were met with a 'sensible' and 'measured' response. Australia's Prime Minister argued that freedom stood for itself in the face of terror. These timid responses suggest weakness and unpreparedness - reflecting decades of postmodern experiments which have disarmed parliaments, schools, universities, churches and the law have been disarmed by 'progressive' thinking. The politics of envy create division. Border have been thrown open. Values that were seen as key to civilization and for which millions sacrificed their lives have been discarded in favour of moral relativism and instant gratification. On the day of Paris attacks to imam of Montpellier mosque said that 'Muslims can't live a life of apathy and do nothing' - and suggested that others wanted to install flags over mosques to control Muslims - and that the latter (a sleeping giant) need to restore glory to humanity. That imam agrees with 74% of French people who believe that Islam is incompatible with Western society. His goal is to create one world under Islam - and exploits Western tolerance to achieve this. The Left intelligentsia have joined the Islamic crusade against West - attracted by common contempt for democracy and that they will benefit when order emerges from chaos. Western leaders are slow to understand. Europe's borders are open. No-go areas are tolerated where islamic colonies exist in parallel and where sharia law replaces civil law. Sweden has 55 such areas. High birthrates give Islamic students a growing cultural impact in schools, while generous welfare and employer prejudice mean few will find jobs - and thus have grounds for claiming victimhood. US president Obama carefully avoids being drawn into conflict with militant Islam - in stark contrast to France's president. It is hard for freedom to stand up to terrorism when the West's collectivists, multicultural vision keeps knocking it down - when values constantly change. The radical giant in the midst of the West is waking up to its weakness (ie to moral and economic decline). It has no respect for Western civilization. In this contest waffle can't win. To avoid offending Muslims British movie houses have refused to show Christian advertisements and the motto on Australia chaplains badges has been removed. Religious diversity defeats religious supremacy. When will West draw the line?

Liberal international order that stabilized world after Cold War is under strain - given revanchist Russia, Middle Eastern chaos, and south China Sea tensions. Drivers include economic power shift from West to East, weakening institutions and disaffection in Western democracies. But key issues are US withdrawal from global leadership and Europe's crisis. US has recently started re-asserting itself (eg with Paris climate accord, reining in Iran's nuclear program and increased military support for Europe given Russia's actions). But the US has to act because Europe hasn't. And Russia's president could fan the flames of nationalism by lashing out again (as in Crimea / Ukraine) - because of weak oil revenues. US share of global economy is falling. EU used to be US's partner of first resort - but it is now sidelined [1]

 

Extras to Process

 

CPDS Documents on the Challenge of Asian Authoritarianism

CPDS Documents on the Challenge of Asian Authoritarianism

Documents on the CPDS web-site that deal with the nature of the challenge to a liberal international order by Asian authoritarianism are listed below - followed by those that include suggestions about strategic options. Documents whose dates are highlighted provide the most substantial analyses

About the Strategic Challenge

Asian Financial Crisis (1998)

Competing Civilizations   (2001+)

China's Development: Assessing the Implications (2003+)

Structural Incompatibility Puts Global Growth At Risk (2003)

The Second Failure of Globalization   (2003+)

Defending Australia from the Financial Crisis (2008) - Economic / Financial defenses

Are East Asian Economic Models Sustainable? (2009+)

Babes in the Asian Woods (2009) - Understanding

Comments on Australian's Strategic Edge in 2030 (2011+) - Geopolitical

Competing Thought Cultures (2013)

Seeking a Liberal International Order (2010+) 

Sources on Strategic Options

Competing Civilizations (2001+) 

The Second Failure of Globalization (2003+)

Seeking a Liberal International Order (2010+)

Lifting Productivity: Consider the Bigger Picture (2010+)

Infrastructure Obstacles and Opportunities: Submission to Productivity Commission (2014)

  • Alternatives to Monetary Policy (20/4/16) - there are limits to monetary and fiscal policies in stimulating economic growth. Better alternatives are available

 

How Durable is Australia's Luck?

 

How Durable is Australia's 'Luck'? (Notes in 2014, 2015, 2016, 2017) >>

Australians are more prosperous than ever. Capitalizing on geography and geology, Australia has benefited greatly from Asia's growth - providing many raw materials for new industry and infrastructure in China and other emerging markets. As commodity prices spiked Australia attracted a flood of investment into mining / processing / pipelines / ports. Asia's demand is likely to continue - but dependence on resources carries risk (eg vulnerability to China slowdown, market volatility or price crash if supply exceeds demand). The boom has occurred despite weak fundamental (eg very slow productivity growth - despite rapid wage growth and substantial capital investment). Growth is being driven by one-off factors - eg capital investment and terms of trade rather than productivity gains; 10% of economy accounted for 30% of income growth; over half income growth has been due to temporary boom factors; capital productivity is poor). Without productivity growth Australia will have little future income growth. Changes need to be made to: boost capital productivity in resources sector; improve efficiency is resource related sectors such as transport / professional services; new emphasis on micro-economic reform for local services; and build foundations for long term manufacturing competitiveness  [Beyond the Boom]

There is concern that Australia could face a jobs' vacuum for a couple of years and that Australia may be unable to fill the growth vacuum left by the mining boom. Housing, retail and tourism have been hoped to fill the gap, but (though they have surged) they may be unsustainable in the long term. A 'tidal wave' of unemployment has been seen to be likely because of shrinking mining activity, cuts to car / airline / telecommunications industries as well as in manufacturing and government. The rising cost of living pressures in mortgages, food, energy, education and health will also have an effect [1]

In the first four months of 2014 Australia's employment growth was relatively strong and, if continued, would reduce unemployment to 5% by the end of the year. This reflects improvement in consumer confidence and thus higher retail spending, as well as a surge in building approvals [1]

Economists expect it will be hard to maintain the rate of growth in living standards Australians expect - because of the slowdown in productivity gains, the expected fallback in mineral export prices and the reversal of the ''demographic dividend'' delivered by the baby boomers. To keep average incomes growing at past rates would require a doubling of productivity growth to 3% pa according to head of federal Treasury [1]

Australia is the fourth most expensive country in the world in terms of the costs of goods and services, and the most expensive in the G20 - because of the mining boom, high exchange rates, 22 years of sustained growth, oligopolistic major industries, relatively low unemployment and high labour costs [1] [Comment: High production costs adversely affect industrial competitiveness. However some of the factors (eg exchange rates) which affect relative costs are likely to change]

The price of Australia's largest export commodity (iron ore) had fallen 20% in a month to May 2014 as the market becomes over-supplied. Iron ore demand in China (the most important market) has declined as the property boom ends - and large stock-piles have accumulated. Though volume has increased (as mines go into production) weak demand implies low prices and thus that government revenue forecasts will prove over-optimistic [1]

After two decades of solid growth Australian business is uncertain about the future. Budget repair is seen to be necessary - but desirably done gradually with more attention to the need for structural change in economy. Different sectors have varying prospects - with trade exposure a source of problems. The biggest resources' boom in history has left a legacy of a high exchange rate and high costs generally. The change of government in 2013 led to an immediate boost in confidence but this is now fading [1]

Growth in full time jobs in Australia was about 200,000 pa in mid 2011. Now there is an annual decline of about 25,000 [1]

By 2014 Australia had had 2 years of declining GDP / capita - and this perhaps explains its low consumer confidence [1]

Australia faces economic peril as the resource boom (the cash cow that has sustained Australia for a decade) ends - yet this is being ignored as attention is given only to what people do not like about the federal budget. [1]

Companies (especially in the resources' sector) are increasing productivity significantly by reducing costs - a response which is needed as the environment becomes harder. However this is also constraining their ability to engage in new investment spending [1] [Comment: Productivity rises when value added increases. Cost cutting to try to match declining product prices may not imply any gain in productivity]

Australia does well in many international comparison - but not in those related to economy (eg links to global economy, infrastructure, tax / regulatory complexity, supply chains and industry clusters). There is a worldwide problem of indebtedness which constrains growth and is not being reduced. Where total public and private debt is over 260-275% of GDP, there is a depressive effect on an economy. In Australia this is now 217% - overwhelmingly because of private debt. It is wrong to focus mainly on commonwealth debt. Household debt matters a lot because it is brought-forward consumption. To reduce debt there is a need to constrain spending, Much of Australia's debt did not result in productive investments (eg households invest mainly in housing). So far deleveraging in Australia has been low by international standards - and debt remains high. This makes growth difficult.  There is a need to focus on writings on what can be done to boost competitiveness [1]

Wages will need to fall across the board in rich countries such as Australia as capital is free to be invested and make significant profits in low wage economies [1] [Comment: Wages are not the only factor that affects the profitability of investment. Regions with significant competitive advantages can maintain high average wage rates]

Australia is facing increasing competition from countries such as China and India in high value manufacturing - and needs new strategies to cope [1]

Job-shedding and mine closures will not be enough to provide Australia's mining industry with a route to long term prosperity as the mineral boom ends. High labour costs and a lack of productivity (eg related to inflexible labour market) also require attention [1]

Australia obsession with housing has crowded out more productive forms of investment - thus reducing international competitiveness. Business credit as share of total outstanding credit has halved and fallen to its lowest level in 25 years [1].

$195bn worth of LNG projects in Australia are due to start producing in 2014 - and this could have a big macroeconomic impact. It will produce benefits for producers, and royalties. Some see this as also driving $A back to parity with $US and generating a trade surplus. High $A would adversely affect other industries' competitiveness [1]

Australia's GDP growth in first quarter of 2014 exceeded expectations [1]

Household spending is slowing and the building construction boom is a myth. Time is running out for a stimulus by the RBA before mining investment collapses [1]

Australia's economy mainly had a LNG boom - as investments in this dramatically outweighed those in iron ore and coal. Committed LNG projects were about $200bn with only (say) $20bn in other commodities. About $268bn pa was being invested in LNG in 2013. [Australia's GDP is about $1500bn pa]. By 2017 the annual LNG investment will be $5bn pa [1]

There are positive features in Australia's March quarter 2014 GDP data. 106,000 jobs were created in past 4 months and more hours are being worked overall. GDP / hour (productivity) is increasing. GDP / capita is also increasing [1]

[CPDS Comment: If, as indicated above and below, the rise in GDP (and GDP / capita) was almost entirely due to the start of mineral exports associated with an investment boom that is now being phased down, it is invalid to suggest that this has anything to do with an increase in productivity generally]

Australia's year on year growth was a solid 3.5% pa (1.1% for quarter). GDP = Consumption (up 0.3%) + Investment (flat) + Government + (Exports - Imports) (up 1.4%).  Most of the growth reflected mining exports [1]

An improvement in Australia's GDP on the basis of mining is a problem for policy makers, because there is a need for improvement in other sectors. Official figures covered a period in which prices for important commodities fell. Resource exports are not labour intensive and do little to support employment / wages growth. Rising mining export volumes are expected to offset declining prices.  [1]

While there was strong growth in March quarter this was very narrowly based. There are signs of weakness in June quarter. Iron ore price has fallen, and China's growth which drives much export demand seems shaky [1]

Profits of the world's biggest miners fell 72% last year. They have strategies geared to cost reductions - but this has not actually been put into practice. There is a need to radically change how mines are developed and operated to reduce costs - not just to defer costs [1]

Australia's trade balance fell to a deficit of $122m in April 2014 following a surplus of $902m in March because of worse-than-expected falls in the price of coal and iron ore [1]

Though the mining investment boom has recently delivered good economic figures for Australia, there are major problems in global mining business and investment will rapidly fall over next two years. This would normally see $A fall, but because Australian interest rates are well above Europe and US, the $A will remain strong - and make it harder to justify new mining investment. The mining boom allowed Australia to have 23 years without a recession. Chinese banking scams have been features of the boom and bust in commodity prices. Copper stockpiles were used as security for apartment blocks with no one in them. Now this is being shown to have been fraudulent - as the same copper was used for many different mortgages. Copper prices will slump. China is also moving away from coal as a source of energy - and has a cut-price gas deal with Russia which will make most Australian gas projects uneconomic and cut returns on others. It will be hard to get new mineral and energy projects off the ground - and returns will be much lower than expected. [1]

Multinational who recently acquired Wesfarmers plan to repatriate profits overseas - because tax rates that are lower than those in Australia are available elsewhere [1]

Australia's venture capital industry [which is necessary if technology-based start-ups are to be supported] has been described as an 'unmitigated disaster' [see Modernising Australia].

The GFC continues to affect global employment and growth. Recent research has implications for Australia. The crisis may have permanently lowered OECD countries' growth prospects. Recession leads to a decline in capital accumulation and technological progress - while skills atrophy. Long term unemployment has particularly serious consequence. Australia faces problems related to: and long term unemployment; and hollowing out of non-mining sectors. Outside mining Australia's fundamentals are not healthy [1]

A 'tidal wave' of Asian money is pouring into inner city residential property markets - especially in Sydney and Melbourne. Any sites with development approval have been bought and projects are being developed using funding from Chinese banks (thus circumventing the prudential requirements that Australia's banks apply) with the resulting developments being pre-sold to offshore investors who may not expect the properties to be occupied (a common practice in China for some years) [1] [CPDS Comment: if valid this implies a significants short term economic stimulus and a probable long term collapse in property values through over-supply]

Australia faces a shortage of skilled workers despite the likely weakness of economic growth because the baby boomer generating are now retiring - and this could hamper Australia's ability to maintain its standard of living [1]

Rising costs have killed off another potential $5bn gas project in Northern Territory [1]

The federal budget (to deal with deficits) has caused a significant loss of consumer confidence [1]

Retailers have experienced tough times. There is now now que of retailers wanting to get into major shopping centres - and thus a need to offer very low rentals to avoid the appearance of too many empty spaces. This is not an immediate crisis, but shows that problems exist. Other problems will arise from: motor vehicle retrenchments; end of mining investment boom; and retail retrenchments as shopping shifts increasingly to the Internet [1]

Australia faced depressed economic conditions in the 1840s, 1890s and 1930s. There was a recurrent pattern of boom-bust credit and asset cycles which heralded financial instability, particularly following speculation in commercial and residential land markets. A financial stability model (based on Georgist, post-Keynesian and behavioural finance schools of economic thought) can be used to predict economic downturns, based on data from 1830 to 2013. The trends in Australia’s current trade settings, residential property market and banking sector are similar to the key precursors to Australia’s ‘Great Depression’ of the 1890s. A recession or depression may now be imminent. ‘Rentier economics’ prevails and requires discarding the dominant neoclassical economic paradigm [1].

[CPDS Comment: This analysis presumes that the probably-very-real difficulties associated with property speculation are a by-product of the abandonment in the 1980s of social democracy in favour of neo-liberal policies. This does not seem to take into account the international competitiveness issues that contributed to that transition - see A Simplified Historical Context ]

Counter-arguments to those concerned about Australia's economy have been advanced in Beyond the Boom by John Edwards a former adviser to Paul Keating as Treasurer / PM (eg the mining boom is not ending, as there wasn't one - and increased volumes will offset declining prices anyway; incomes rose less in the decade to 2012 than before; Australia is not complacent / high cost country; export price windfalls were saved; budget deficits are due to falling revenues (mainly due to tax cuts), not increased spending). Australia is seen to have been harder working and more frugal during resources boom than previously (eg in terms of savings / investment, creating human capital, workforce participation, moderating household consumption) - though there is a popular view that is quite different. Not much is seen to be needed to ensure Australia's continued prosperity - and what is needed must mainly involve business in engaging with a vast China-centred regional economy [1]

[CPDS Comment: This analysis is based on the perhaps-simplistic view that:

Over many years the present writer has observed that when there is a real need (and opportunity) to improve economic performance there are always influential groups who produce statistics to 'prove' that everything is already OK. This is desirable in terms of boosting business and consumer confidence - and thus preventing economic reversals. However it also blocks changes that might have made a significant difference over the next decade.

One of the causes of the (so called) 'resource curse' (ie that resource rich countries tend to be relatively poorly developed) is that business and political leaders who profit from resource exploitation have no interest in improving the position of the community generally. Resource riches tends to be an obstacle to quality political and business leadership in developing the capabilities / income of the broader community].

Australians have been saving / investing / working / learning more according to John Edwards. Savings (by governments, households and business) now amount to 25% of GDP - now ahead of Japan and Germany. This matches investment of 27-28% of GDP and thus explains modest current account deficit. 1/4 of investment is in mining; 4-5% in housing - with much of the rest in non-mining business / roads / hospitals and other infrastructure. There has been little change in government spending as a percentage of GDP (ie 24-25%). Deficits have emerged from a collapse in revenue - and the problem should be allowed to solve itself over time through bracket creep. Despite this Australians have been obsessed with mining boom. To boost Australia's performance requires integrating into production / consumption chains in Asia beyond commodities. Current free-trade agreements with China are valuable - though the Regional Comprehensive Economic Partnership would be more important. It includes China which US-led transpacific Partnership does not. Success in Asia does not come down to reducing trade barriers but effective delivery of clever services. 3/4 of schoolchildren do very well - while the lower quartile does not - a problem that Gonski reforms should remedy [1]

[Further CPDS Comment: Trade deals with China would not be simply about commerce (see 'Free' trade with China: Not Likely Under a Neo-Confucian Regime). The Gonski reforms would be limited in their ability to deal with educational inequality - see Gonski Review: An Example of the Limitations of Government Initiatives) ]

Employment is more likely to rise than at any time in the past 10 years. 20% of employers expect to take on staff over the next 3 months. This is happening across the board because of expectations of continued low interest rates, Despite rises in rent, electricity and petrol, falls in other areas kept inflation in year to June 2014 at 3% - ie at top of RBA's 2-3% target range [1]

Treasury chief (Martin Ferguson) says budget position is unsustainable without major reform ((Uren D., 'Block on savings will damage our future', Australian, 1/7/14)

Australia's sources of national prosperity and living standards are uncertain given global unpredictability and political rancour. Growth in living standards could fall sharply. Changes to current political cultures are likely to be needed to achieve necessary reforms. At a recent conference on 'Pathways to growth' there was dispute about whether Australia had a budget problem. The conclusion was that the budget was not in crisis, but needed much more repair than many realized. The government believes in its reform agenda - and does not agree with concerns of the  policy community about risks. Global risks were seen to include: weak global recovery; incredible liquidity injections into financial systems; Europe's budget / jobless numbers. Australia could be seen as a safe haven - and attract capital inflow that raised exchange rates and reduced competitiveness.  [1]

Even though Australia's mining investment boom will end, Australia is likely to experience a soft landing - because investment has been well directed [1]

Australia's productivity growth has been seen to have increased to 2% pa from 0.9% pa a few years ago - but this simply reflects shift between sectors as not all have the same productivity - and mining is relatively highly productive [1]

RBA has argued that complacency about Australia's economy (ie the belief in a 'miracle' economy - or the strength of its policy settings) is dangerous. This could create major problems when the next international crisis strikes - as it must in a turbulent world [1]

Australia's perceived budgetary crisis is only a symptom of broad economic problems (eg those related to a too-high currency, low consumer confidence, low business confidence, weak investment, weak credit demand, the resources ‘capex cliff’ and inadequate job creation for a growing population) [1]

In May 2014 lending to owner-occupiers and housing speculators amounted to 60% of total credit outstanding - compared with 24% in 1990. Since start of GFC credit growth has been driven almost entirely by mortgage lending. Australia's tax arrangements and financial system regulations primarily promote mortgage lending - and the Murray inquiry recognises that this may crowd out lending to more productive uses. Banks favour mortgage lending because it carries the lowest risk weight - and thus imposes less requirement for banks to hold core capital to guard against those risks [1]

Very different political battles are being fought in US relative to Australia. In the US campaigns against big business, Wall Street and complacent politicians are gaining support - because of concern about workers living in poverty. The working poor are a huge problem in US. Australia is doing much better. If comparable criteria were used the US would have three times the number of families in poverty compared with Australia. This shows how different Australia's situation is. Campaigns on behalf of US working poor target fat incomes on Wall Street and bail-out of collapsing businesses during GFC. Australia has not been through property crash - and did not need to leverage government balance sheet on large bailouts. A China-driven resource sector boom was what Australia experienced instead.  Unions have sought exceptionally high wages for some workers on that basis. The 75% boom in Australia's terms of trade over past decade must decline and the economy requires huge structural transformation to maintain high real wages. But politicians pretend this is not needed. Governments' focus is on fiscal problems - where it should be on how to develop new competitive trade-exposed industries. US Fed recently endorsed continued loose monetary policy because of the lack of wages growth in US - again quite different to Australia. Former AWU boss (Paul Howes) called for business / union compact in Australia to allow necessary structural shifts. But no one took any notice. What is ignored is that attack on people's wages comes from outside Australia not from the Abbott Government or Paul Howes. Jobs have declined in resources, auto manufacturing, aluminium smelting, retail, manufacturing generally and parts of banking / telco sectors. Under-employment hides unemployment. Consumer confidence is rising but a stronger appetite for imports won't compensate for problems in tradeable sectors. Howe's successor at AWU (Scott McDine) does not support the idea of a business -union compact to address these issues. The road that Labor's great reformers took in the late 1980s seems unlikely to be travelled now. [1]

While the resources boom has ended, opportunities are emerging in other areas. Sectors of particular interest include: transport, food and beverages and information technology [1]

Gloom surrounding Australia's mining industry increased with the collapse of a labour hire company and declining company profits in the face of falling demand [1]

While consumer demand is rising in Australia, only the rich are really increasing their spending [1]

Employment could increase strongly in Australia because, while the mining boom is ending it was not a large employer and residential construction has escalated [1]

Australia's GFC2 started in July when middle class families who had lost jobs but not actively started looking for work (and so been 'hidden' unemployed) realized that there were no easy options and so started registering as job seekers - thus pushing up the official unemployment numbers. Hidden unemployment has been increasing because only 100,000 new jobs have been created annually - while 210,000 are needed to maintain employment levels. Most middle-class 'hidden' unemployed would not qualify for Centrelink benefits because of asset tests or redundancy payments. In the absence of economic leadership the economy has come to depend on real estate, construction and manufacturing to supply construction. There are no substantial industries to provide jobs. Housing prices and the stock market are being boosted by low interest rates. The government has announced an intent to turn off the taps in creation of public administration, health and education. Other significant industries (eg agriculture, mining, tourism) are experiencing difficulties    [1]

Australia is facing a massive wave of house repossessions after thousands of 'sub-prime' loans were given to low income earners and the latter are now defaulting on their repayments. There may be 200,000 households who were provided with 'low doc' loans which perhaps sometimes exceeded their capacity to repay [1].

Business confidence has risen to its highest level in four years - according to NAB survey. This was supported by better business conditions / rising sales / rising profits. The recovery is however generally jobless. The recovery is narrowly based - propped up by high levels of building approvals. Other sectors vary - with mining and tourism the weakest [1]

While house-hunters complain, a phenomenal influx of Chinese money into Australia's residential property market may be the best thing to happen to Australia's economy - in making difficult transition from mining boom. Foreign investor demand is driving a boom in apartment construction - and the profits of proerty companies. Many warn that this is pushing property values beyond prospective local homeowners, it may catalyze the necessary growth of non-mining sector [1] [CPDS Comment: Chinese investment seems to reflect the flight of capital from China as the latter seeks to prevent the chronic corruption that was associated with abuses of power by Communist Party insiders, and those with dubious wealth seek to get it beyond authorities reach. That investment boom may be anything but sustainable]

Recent data shows that Australia's economy is likely to accelerate just as the Reserve Bank cuts interest rates again. Mining investment (6% of GDP) will fall while other sectors expand - because most other sectors are already at recessionary levels. Consumer savings has been high and credit growth slow. In the face of this business and consumer confidence have improved. If this continues growth could accelerate. Low interest rates reduces the constraint imposed by high debt levels [1]

Australia has gone from having second lowest unemployment rate in the English-speaking world to having the (equal) second highest [1]

Australia is likely to experience a recession at some point - according to RBA. Though this would require some trigger the economy is seen to be vulnerable because: (a) the mining investment boom is ending; and (b) low interest rates have encouraged households to take on very high levels of debts. Households have high leverage / elevated debt service costs - and face house prices amongst the world's highest. It is hard to see any drivers of growth any time soon. There is little pent up demand except for housing [1]

The mining boom had a major impact on Australia's economy. Research has been conducted to explore what the economy might have been like without it. The boom increased living standards significantly for a decade. It resulted in a vast shift of resources and the composition of Australia's production and employment. The boom was costly for sectors not exposed to China and the resources boom. The RBA is now concerned that a sizeable amount of Australia's mining capacity is likely to be unprofitable at current prices - and that increased production is leading to further price declines. The production phase of the mining boom may not be as profitable as presumed - and the phase out could come faster than expected [1]

'Subprime' mortgages (ie those provided to people with patchy financial histories) led to an economic meltdown which triggered the global financial crisis. These are growing in Australia - with $3bn worth of non-conforming home loans issued in last 18 months. Sub-prime lending is viewed with suspicion by countries hit by GFC - but this does not seem to be so in Australia [1]

Almost 70% of lending by Australian banks is for mortgages - which is much higher than the 15-40% that applies in other OECD countries - and this exposure by banks causes the RBA to issue warnings about risks to financial stability [1]

Banks have warned that if 'bail in' provisions are introduced under which their creditors could be responsible for bank losses, the banks' credit rating could be downgraded and they could face higher funding costs - and this could exacerbate a downturn [1]

The persistent strength of the $A in the face of falling commodity prices and a declining gap between local and overseas interest rates is a drag on economic growth. Continued strong overseas investment seems to be preventing currency changes acting as an economic 'shock absorber' as it has done in the past [1]

While GDP data is likely to show a contraction in Australia in the June quarter, strong and improving business and household confidence suggests ongoing improvement. Non-resource investment is rising for the first time in 6 years [1]

Investors in hot property market are setting themselves up for a payment shock when interest rates rise - and this will impose stress on Australia's banking system associated with riskier loans. There is also concern that banks' credit rating could be lowered (as occurred in Canada) if 'bailing in' provisions are adopted for those with debt investments in banks [1]

Australian business leaders will need to be a lot smarter in future. The yield boom has boosted share prices for their companies. It is unlikely that rises in non-mining and non-housing corporate investment will now drive the economy. Since the 1970s Australian incomes have risen on average 2.3% pa. That steady growth in per capita income meant that companies could ride out tough times. But the latest Treasury budget showed that national per capita income growth was likely to fall to nil over the next decade. In the past gains were due to better terms of trade and productivity growth, Now with an aging population and weak terms of trade, a productivity increase of 3% pa (twice the long term average) is needed to maintain 2.3% per capita income rises. In the June 2014 quarter real disposable income per head fell 0.6%. The result is that salaries don't rise. Companies make profits by cutting costs. Club memberships fall. Cafes have problems paying staff. Retailers face problems. The federal budget is not to blame - as most of its impacts won't happen for a long time. Businesses are going to have to be very clever in chasing declining national income. Governments won't be able to announce large new expenditure programs and presume that underlying revenue growth will fund them [1] [CPDS Comment: Difficulties in the international economic environment seemed likely to compound these requirements for smart leadership]

Australia's GDP growth in last quarter was at 3.1% annual rate. But this may not be a good guide to economy. The resources boom is over but commodity exports are now strong to raise GDP. But employment in this sector is limited. National income has been growing at less than half the GDP rate - and income / capita has fallen for past two years for first time since early 1990s. Employment growth correlates best with income / capita. Consumers don't spend to compensate for decline in mining investment [1]

Former BHP executive has argued that Australia faces permanent fall in iron ore and coal prices because China is increasingly reliant on private consumption. Reliance should not be placed on LNG to fill the gap, as it is expensive and exposed to cheaper competing sources in US / Russia. The prices of Australia's bulk commodity exports have fallen as supply has risen rapidly. Now about 80% of coal production is unprofitable. Iron ore producers will face the same sort of pain as the aluminum and nickel industries - as China has worked to create an oversupply. Oversupply was seen as the main factor in the collapse of prices [1

Australia will experience either a sharp fall in $A or a recession. The end of the mining boom and the closure of some manufacturing was always going to cause problems - through this might be offset by infrastructure. Now iron or process have collapsed - and there is a massive overcapacity in the industry. If China continues to boom this will be a temporary problem. But Greenspan argues that China's credit bubble is about to burst. China has become over-leveraged - with debt /GDP ration rising from 140% to 230%. Growth requires ever more public debt. Chinese companies are not innovative - and this puts serious pressure on China. China is hitting its growth ceiling. China's hierarchy knows this and is planning on letting some companies fail to give a message to others. Most institutional lending has Chinese government backing - though shadow banking does not have full protection. Government will let some companies fail (eg in seriously over-extended steel sector. Australia is not ready for a combination of excess iron ore production and a China downturn [1]

China's declining demand for coal is having a significant effect on Australia's exports - second only to the effect of declining iron-ore demand. China is also considering a quality-based ban on steaming coal imports which would be a lethal move for Australia's steaming coal exports to China [1]

Businesses seem to be waiting for signs of increased consumer confidence before investing - but households are suffering the effects of stagnant incomes and uncertain job prospects. Real per-capita incomes are now likely to decline, while uncertainty has encouraged a rising in the savings rate. Declining sales of new cars is a symptom of the problem. Falling terms of trade, sluggish wages growth and the end of the wealth effect due to buoyant asset markets is causing consumers to suffer 'financial traumatic stress disorder'. Recovery won't be helped by 2014 federal budget and could take sometime. [1]

Former Treasurer, Peter Costello, has warned of widespread hardship when property sector's growth slows in economy with consumers facing falling real wages. Ausrlia's luck is running out and there are big questions to face. Consumers are saving money as real wages fall, and they don't trust political class where there is no consensus. BIS and RBA have both warned Australia faces property bubble. Foreign investors have increasingly taken up Australia's limited real estate supply. This is supposed to be restrained by FRB - but there is evidence it has been ineffective. The era of low interest rates is likely to end and markets will either 'tank' or fall to normal growth rates. There is a need for enormous adjustment in Australia [1]

Australia's banks are seen to be at risk as they rely on large amounts of debt to fund their businesses - and despite government efforts to improve the situation they lack the reserves to cope in a difficult situation [1]

The chairman of a Chinese agribusiness group argues that Australia can replace its China's stimulated resources boom with an agricultural boom [1]

Citi investment bank argues that strengthening of $US and or US economic growth will help compensate for adverse commodity effects of slowing Chinese economy. Australia's economy is seen as more linked to US (eg with common financial cycles) even though China is Australia's biggest export market [1]

Six companies illustrate the sorts of opportunities that Australia could develop in future. These involve groups dealing with: (a) involving wealthy Chinese in purchase of real estate in Australia; (b) purchasing Chinese manufactured products and selling them under an Australia trade mark; (c) manufacturing pipe products for gas fields; (d) a food producer targeting Asian markets; (e) a farmer's cooperative proposing to export milk to China; and (f) companies involved in transport / warehousing operations [1]

A survey of audit reports indicated that 1/3 of ASX listed companies were at risk of 'financial catastrophe' (ie at risk of ceasing to operate as a going concern) in 2013. This is 11% higher that at the height of the GFC [1]

The investment world is turning its back on Australia's economy - with the exception of Chinese / Asia property investors. Australia has been a source of profitable investments - because money could be borrowed elsewhere at token rates and invested in high yield debt and equity in Australia (especially in bank shares). This is now changing because the end of US QE will send interest rates higher elsewhere and push up the cost of capital for investing in Australia. Overseas investors are unwinding their positions. The widespread overseas belief that Australia's banks are lending into a housing bubble will gain more traction and snowball. The $A is weakening. China has drawn attention to slow growth in steel production. The world is facing a large increase in the need for defense spending. The weakening $A will improve competitiveness for some industries but bring risks of inflation. ASian investors may seem to be at risk from investing in Australian property because of falling $A - but this has not fallen much against yuan [1]

Open pit gold mining in Western Australia might be uneconomic in future because of the need to develop deeper and more difficult deposits. Exploration is being discouraged - and proposed increases in royalty rates exacerbate this problem [1]

House, apartment and commercial construction have been expanding strongly - indicating that Australia is undergoing an economic transition [1]

Many people now want to sell Australian businesses.. Europe's economy is also weak - and US is the most attractive place to invest. There has been a massive decline in capital spending on resources - and there is a need for infrastructure to pick up the slack. Governments are slow to get projects off the ground. Business is waiting for this and also to see what US Fed does about QE [1]

Falling real incomes and global growth concerns are undermining corporate / consumer confidence - and this puts government's fiscal goals at risk. Economy has been slow to recover from end of resource investment boom. There are no obvious growth drivers apart from increasing commodities exports and housing construction. The private sector has no motive to invest, and is engaging in deep cost cutting (which about 50% of listed companies are doing) [1]

China is at risk of financial collapse and this could turn Australia's budget deficits into a disaster. Current forecasts suggest that China's growth will slow, but worse outcomes are possible (eg because of its dodgy finance companies and high priced property bubble). China now takes 38% of Australia's expored. Falling coal and iron ore prices have not yet made Treasury budget estimates wrong (as those estimates were very conservative). But if the downturn overshoots expectations (which is what tends to happen) then there could be major fiscal problems [1]

Goldman Sachs suggests that the worse is yet to come for Australia. Housing bubble concerns will fade as concern shifts to slowing jobs growth and inflation. The RBA would adopt an easing bias except for concerns about property boom. Mining investment, raw material prices and government revenues are all likely to fall. The fall in mining investment is yet to take effect - and will probably have a bigger-than-expected impact. Falling coal and iron ore export prices will deliver an income shock to economy over the next year [1]

It has been a long time since Australia experienced what is now happening to its exports - an enormous rout. Demand is falling / stationary while supply is exploding. $A could got to US75c and bring on recession. One result is low wages growth. But there could be real problems in 2015 unless commodities demand rises. China is Australia's biggest market. While it will try to keep demand high, it is trouble. Province after province are in deep financial trouble and the banking system is cracking. The GFC resulted from similar banking problems in the US. China can't repeat the enormous infrastructure-driven commodity demand growth of recent years - because it was funded with borrowed money and this can't continue. China's problems are at the heart of the commodity rout in iron ore and coal. This is compounded by problems in Europe and the fact that, while US is doing well, this can't drive the rest of the world. On the supply side, low cost producers are raising production to try to drive out high-cost producers. Possible options to reduce Australia's problems could be Chinese investment on the East coast and a further rise in tourism. [1] [CPDS Comment: If China is Almost Broke How Can Chinese Investment Save Australia?]

A slump in commodity prices has never caused a recession in Australia. A commodity price fall now could be beneficial. Profits for commodity exporters will fall. Most are run by foreign investors. And prices are falling not because of weak demand - but because China's demand is consolidating and because $US is rising due to sound growth. Commodity exporters are only 10% of economy - and the other 90% benefit when lower commodity prices reduce exchange rates. And this is likely to encourage investment. [1]

Australia is experiencing falls in real income. because of the ending of the commodity boom. This adversely affects consumption levels [1]

The US / China commitment to reduce the growth of greenhouse commissions could adversely affect Australia's steaming coal exports to China [1]

Australia has entered a technical income recession and GDP rose just 0.3% in September quarter (below 0.7% expectation). $A has dropped sharply as a result. Growth was led by strong export volumes - but held back by weak business inventories and public / private investment. Real net disposable income fell for second quarter in a row - largely because falling commodity prices reduced terms of trade [1] 

Australia, especially Sydney, is participating in a global ICT innovation boom (with many start-ups building on venture capital) - but there is very limited associated patent activity [1]

Australia's quarter century of sustained growth is over. This not back to 'banana republic' territory - but the future is new / uncertain / challenging / threatening. Australia is in income recession. The obvious cause was a plunge in iron ore prices. But there is a bigger story. It is not just about boosting non-resource sectors / cut interest rates / reform taxes / boost productivity / increase infrastructure spending / cut government spending / balance the budget etc. Those measures will help. But past quarter century has been an aberration. The first half of the 1990s involved Australia benefiting from Hawke / Keating reforms just as the world started the 'Great Moderation' (broad solid growth, low inflation, easy money and rapidly rising asset values). This really took off in the 2000s - until it was upset by the GFC - while being complemented by the flowering of China. China gave the world cheaper goods - and also completed the (ultimately disastrous) financial circle. China poured its goods into the world and its surplus into US capital markets. This in turn fed into sub-prime lending and other wealth creation financial innovations. Australia shared in this with the benefit of feeding resources to China. The first part of this came down with the GFC - until it was put on lfe support by zero interest rates / money printing. China stopped briefly in 2009 - but then restarted with China's stimulus. Australia's national income has risen rapidly for most of this century. It has now gone negative after lagging GDP for two years. A declining $A will boost competitiveness - but reduce Australian's spending power. Living standards will fall. Will this only be temporary if necessary reforms are put in place? This is unlikely because China can't go back to its prior rate of expansion, while the broader world can't reclaim the great moderation. The latter was built on sand while the former has encountered the limits of geometric progression. Australia is probably at the start of a very different, poorer future [1]

Australia needs to think seriously about its economic future to avoid falling behind - according to PM's top business adviser [1]

Australia could be headed for a lost decade. It has avoided recession for two decades. The government has a sound fiscal position compared with others. Vast resource deposits exist with infrastructure to support exports in place. But China's slowdown due to government efforts to rebalance the economy have devastated commodity prices. The federal government has reduced Australia's ability to deal with a difficult future. The budge has been needlessly austere - cutting education / health / welfare spending. Nothing has been done to diversify from dependence on China. Government has encouraged the reserve bank to loosen money policies - which may be pushing Australia towards a subprime crisis. There has been apathy about frothy real estate prices. The Financial System Inquiry called for reductions in housing tax breaks. Austerity policies need to be reconsidered - as large spending on education and training as well as on infrastructure may be the only way to turn Australia around. [See comments in Turning Australia Around]

Australia's children face a bleaker future than their parents - according to Wealth of Generations (Grattan institute). Over the past decade older people have gained most of wealth - while younger have gone backwards. The housing price boom is part of the problem. And while older people have gained most benefits, they have left tax burdens for younger people. Population aging makes this unsustainable. Inheritances are most likely to benefit already-wealthy households. Those who have benefited from past government largess should be the ones who pay to fix budget problems [1]

Young Australians are likely to be much worse off relative to their predecessors because of stagnant incomes, missing out on the housing boom and having the pay the high costs of an aging population.

Australia is headed towards a perfect storm due to a combination of local and global factors. The Treasurer announced a financial crisis but doesn't know what to do about it. Australians' incomes are job prospects are worsening. This will adversely affect businesses affected by discretionary spending. A recession is possible. Similar things are happening in most countries apart from US - and US recovery won't get the world out of trouble. The commodity price fall reflects over-production and tough international conditions. Europe, Japan, China are facing problems. Economic leadership like that expressed by the Andrew Robb plan is needed for Australia [1]

Everyone is gloomy about Australia's economic prospects - yet the data are good. Growth is on trend. Unemployment is low. Though there is supposed to be an income recession, in the same quarter that this was supposed to occur household incomes reached a new record. Household wealth has increased significantly over the past year - with only about half this due to property prices and nothing much due to share value rises. Savings have increased [1]

2015 does not seem promising for Australia. Below trend growth is likely. Rising LNG exports could improve economy in second half. $A is expected to decline further. Interest rate cuts are likely. However the most important influences will be US recovery and China slowdown [1]

Non-mining investment is well below that in previous economic cycles. If it does not improve, interest rate cuts are likely. Investment downturns accompany broader economic downturns - but are more volatile that consumer / government spending and thus tend to warn of coming tough period. Firms need to see increased demand before they commit new investment. Also there may be a structural shift to sectors requiring less investment [1]

2015

RBA has downgraded Australia's economic outlook for the third time in a year. Falling fuel prices have had adverse effect. Weakening demand for Chinese real estate is also significant. Lower commodity prices are risks. The overall picture of Australia's economy is depressing [1]

Senior economic officials have told the federal government that a lack of confidence is the main obstacle to improvement in Australia's economy. The $A is weaker. Interest rates are low. Wages are stable. Inflation is under control. Services and agriculture a poised for growth. But business confidence fell after 2014 budget - and has remained down reducing the prospects of investment / job creation [1]

Property has been a major focus of investment for Australians. This could be significantly affected by proposed changes to world banking regulations which would require that borrowers capacity to service debts be assessed without taking account of income derived from rental property [1

 Australia's economy is well placed to resume strong growth - but faces risks. The resources boom lasted a decade - and had side effects (eg increased exchange rate, resource states boomed / others didn't). The boom is over - normalcy returns (with lower exchange rate and option of more broadly based trade with Asia). Short term risks include: government panic (eg related to temporary deficits). However overall debt levels are low. Second risk is that states fail to continue necessary reforms (in taxation, health, education, transport and energy - perhaps including privatizations). Scope for reform exists in congestion charging; removing impediments to economic sharing; better analysis of benefit / cost for infrastructure; real-time electricity pricing. Governments need both the willingness to reform and compassion for the most vulnerable. A commitment to not leaving people behind (reflected in redistributive programs) is also necessary. Australia's next 10 years could be better than the last. [1]

Australia's PM has another chance to prove that he is 'in touch'. Many people feel that Australia is at a cross-roads. Reform is needed because of globalization and technology disruption. In many critical industries Australia is trade exposed, under-skilled and over-paid. It is ill-prepared for competition from China, SE Asia, Latin America, tech-savy entrepreneurs and 21st century multinationals. Profits and jobs are being stripped from many sector. Aimless and technologically-illiterate government leadership is inadequate [1

A $90bn funding line for Australia's banks in the US is starting to close as a result of tough new financial crisis regulations. Local banks will need to seek short-term money in more expensive markets. The US's biggest money market operator, Fidelity Investments, announced that several mutual funds will cease buying bank paper and instead only buy government securities. Such funds are major investors in short term Australian paper (with maturities up to 12 months). Australia's banks have over $90bn of short term debt issued to such US funds. Australia's banks have $750nnof foreign debt on their balance sheets - with short term funding just under half that.  [1] This is significant because Australia relies on foreign capital. Last year the Murray financial system inquiry recommended strengthening the balance sheets of Australia's banks - yet this has not been done [1

 RBA's cut to interest rates shows Australia is in trouble. A 2015 recession has seemed likely. Australia has a post-industrial economy. Mining is the main game in WA and Queensland, while Sydney and Melbourne feature finance, insurance and real estate that build on coal / iron ore export revenues. Australia has done well for 12 years.  Now it faces income recession - and this is exacerbated by falling $A. Also the world is facing a Great Deflation.  Agriculture and manufacturing - mainstays of employment since federation, have been replaced by services. The word is experiencing deflation due to weak demand - caused by over-supply and low wages. Many jobs were lost in great recession - and those that re-emerged paid much less. Australia's wages hit a brick wall in 2014. The Eurozone crisis won't be fixed by ECB - as this will merely refinance banks  [1

Australia's economy is sliding down the precipice because of slow reforms - according to JP Morgan. Nothing is replacing decline in mining investment. The RBA is trying to mask the problem with monetary stimulus. Poor non-mining investment is seen as due to: low / fragile business sentiment; setbacks for infrastructure investment 9in Queensland); high business costs; reform inertia; rigid labour markets' wages that in 2-13 were 70% above global mean. Political instability is making reforms even harder.  Small business is feeling pessimistic. Problems are seen to include: business taxes; government charges; inadequate demand; import competition; and non-wage labour costs [1]

Little in the way of economic reform is likely from governments anytime soon - though reform is increasingly urgent. Busienss had advocated a 'big-bang' approach to reform - so it was good to see tax reform, workplace relations, federal-state relations, budget repair and infrastructure being considered. Now governments are only concerned with survival. There will be little appetite for tax reform. Budget repair will be slow. [1

Australia's interest rates and wage rates are about double the global average. Business confidence has slumped - and the economy's main problem is a lack of investment - despite the fact that many companies are currently profitable. The real problem is the cost of doing business in Australia [1]

Since 2007 the private sector has generally de-leveraged, while governments have leveraged up. Given that the GFC was largely sourced in unsustainable debt burdens of households, current household indebtedness is important. The size and nature of Australia's cities correlates with high household debts worldwide. Australia is one of 7 countries where household debt may be unsustainable [1]

Over 20,000 Australians are working in Silicon Valley because the environment there is conducive to entrepreneurial activity [1]

Easing interest rates by RBA is unlikely to do more than further inflate a real estate bubble and household indebtedness - because of fiscal constraints on government and a lack of reform by governments [1]

Australia's coal industry [a major source of export income] is seen to be facing severe setbacks [1]

New Treasury head (John Fraser) argues that Australia faces a future of low economic growth, weak tax revenue and rising debt - and unless these problems are confronted it will be impossible to protect the vulnerable. There is no budget crisis yet - but one could come. Tackling middle class welfare is needed - or else debt will rise and become serious when interest rates rise. Multiple factors are now combining to slow world growth (eg Europe's malaise, China's efforts to make growth sustainable. A lower exchange rate helps but is not enough. Expectations on government were shaped by 23 years of uninterrupted growth. This is no longer happening [1]

Australia is getting poorer for the first time this century. Economy is growing 2.5% pa - but income went slightly negative. Also population is aging - so more needs to be spent on health and social welfare. Australia has experienced prosperity since early 1990s. This started with productivity gains from Hawke-Keating era reforms. Growth then accelerated as China boom gathered pace. This was slowed by GFC until China went on major spending binge. Now there is a post-boom hangover and incomes are falling. Something is needed from non-resource side of economy. A property boom in Sydney / Melbourne has been disguising the problem . The post-boom era will be fully visible in 2015 [1]

Australia's banks would pull through severe economic shock to households - according to new RBA research. Even a 25% fall in house prices would not severely damage banks because most debt is held by high income-earners. Households are also likely to be financially resilient because household debt is concentrated amongst those with highest incomes. This is despite large increase in aggregate household debt and effect of GFC [1]

Household debt (130% of GDP) is higher in Australia than anywhere else in advanced world (average 78%) - thus exposing economy to risks. Those debt levels are rising (due to latest interest rate cuts) while debt levels fall elsewhere. Debt was 116% of GDP before GFC - and increased again from 2013 when property investment boom re-emerged. The RBA has trouble stimulating economy, because leverage is key chanel through which lower rates boost economy. Household debt is high because real estate investment is more popular here than elsewhere - and this crease vulnerability in the even of another global shock [1]

In the 1970s the chaos of the Whitlam years was followed by Fraser's prime ministership. There was a clear need for change, but the political capital to achieve it was not available for a decade. The same applies now. The GFC precipitated unsustainable spending increases, which governments now need to reverse. But they lack the political capital to achieve this. Now governments can't win elections. They merely gain power because the electorate distrusts their predecessors [1]

There is concern about the high valuations of Australia's banks and the risk of a housing market correction. Unlike last recession, record household debt (not corporate debt) is the problem. Property prices and bank valuations are still in pre-2007 paradigm. What happened in US when property prices fell could be worse here because property dominates Australia's balance sheet - and property prices are so high. An expensive asset that has a lot of debt against it is dangerous [1]

Australia's economy continues to be underpinned by strong population growth - but this is easing. A soft $A and the end of mining investment boom will slow immigration. Unless productivity growth fills the gap, this points to a weak economy [1]

The numbers of Australians expecting to lose their jobs in the next 12 months (1.2m) is at a 10 year record as economic uncertainty rises [1]

Australia's economy needs a recession to clear out exuberances, inefficiencies and excesses - and to purge resource misallocations during good times. Australia side-stepped the 'Great recession' thanks to China's commodities super-cycle. Thus the day of reckoning could be particularly painful. Australia's markets (eg the ASX 200) are now floating on vapours that are hard to justify. Debates about interest / exchange rates are inconsequential. There is a need to clear broader fogs that block efficiencies and productivity [1]

Australia's financial system inquiry chairman (David Murray) suggested that banks are undercapitalized and pose an economic risk in the event that Australia loses its AAA credit rating because of rising government debts and the fact that major banks are underwritten by the federal government. The government's AAA rating is vulnerable because with a fragile economy it is difficult for government to cut spending to balance its budget. The global monetary environment (involving central banks holding down interest rates for long periods to stimulate economies, was seen as a cause of concern [1]

The new normal for Australia's economy has been bumpy. Commodity prices and $A value have fallen. Budget prospects are poor and AAA credit rating is on the line. Unemployment is over 6%. Asset values are rising but real economy is weak. The GFC had little impact - but needs to transform its economic structure. Before GFC world economy was had a demand / supply imbalance (with US as debtor country and China / Japan / Germany as creditors). Gross surpluses and deficits rose from 50% of global GDP to 150% in 2011 (ie from $15tr to $100tr). China produced much more than it could consume. This worked only because China financed US debts, and this was used to purchase China's products. Australia benefited as an energy / resource provider to East Asia. However the GFC has required rebalancing. Global centre of economic gravity shifted from Atlantic to indo-Pacific. While US will recover, it will trail China - as it needs to deleverage through rising productivity and monetary manipulation. EU faces severe difficulties. In Indo-Pacific, different factors apply as China will be world's biggest economy - and seeks to climb the value chain. Parts of China's manufacturing capability with be relocated within its region. Also India could become another global economic hub. Australia can benefit, through establishing itself as key member of bilateral (eg with China, Japan and Korea) and multilateral trade arrangements. China's move to create AIIB will boost demand for resources - as will India's rise. China's president refers to 'new normal' in post-crisis era focused on stable growth. China seeks to shift from exports to domestic consumption - and produce output from innovation and technological progress. Its growth will be slower 9eg under 5%pa). Australia can benefit from this, but in new ways. Australia's two speed economy will rebalance - with more growth associated with agriculture and services. Transitions to the 'new normal' will require adjustment. [1

A 35% downturn in mining investment and a 10% decline in other forms of investment is seen as 'recessionary' [1]

The RBA has issued a warning about Australia's economic growth - arguing that fiscal stimulus is needed (by boosting infrastructure spending) is needed because monetary policy can't be sufficient [1].

[CPDS Comment: The stimulus from infrastructure investment that is seen to be needed can't be effective. Counter-cyclical public spending was seen as the best option for balancing the business cycle until the 1970s - but was then recognized to be inadequate because the time taken to arrange responses was so great that government action turned out to be pro-cyclical (ie to amplify booms and busts - rather than minimize them). Also Australia's machinery for planning and developing infrastructure is a disaster area - and the effect of rushing new projects through dysfunctional machinery has already been demonstrated by Queensland's debt binge which led to large-scale waste and a lowering of its credit rating - see Comments on 'Australia Dollar will Head into the 60s'.]

Australia experienced a 16% rise in paper wealth in 2014 (mainly in superannuation) - but this is not benefiting the economy. Lower interest rates have required baby boomers to save rather than to spend - and this reduces the stimulatory effectiveness of rate reductions, though the latter remains positive. More than 1/3 of Australia is in recession with only a few locations generating wealth (especially Sydney / Melbourne CBDs and WA's Pilbara). Australia is now like many developed countries where near recessionary economy is supported by asset price speculation (and the industries associated with this). Lower and lower rates are needed to keep asset speculation viable. A possible option overcome this problem involves infrastructure investment funded partly by taxing businesses who gain economic rent from the infrastructure provided [1]

Productivity Commission has criticized the trade agreements with Japan, South Korea and China that the federal government has entered into - on the grounds that they increase complexity and cost. Multilateral deals are preferred to those that involve preferential arrangements with individual countries [1, 2]

Rapid population growth has been a major driver of economic growth in Australia but this has been slowing (because of end of mining boom and weaker economic prospects) [1]

Australia is experiencing a fall in business spending which is historically almost unprecedented. Similar falls (eg in 1991) have been associated with recessions in the past  [1]

Australia has had 24 years without a recession. Though it is not as capable of responding with policy changes as it was 8 years ago, it still has room for adjustments when recession hits [1]

Australia has had nearly 25 years without recession - one of the longest periods in OECD world. It is however reliant on past momentum and political inertia is now strong. Major policy changes have been shunned for 15 years. No one under 43 has experience of recession as an adult. There is a high level of complacency amongst managers, employees, voters and politicians. Change is increasingly urgent - yet politicians can't take the lead - because voters will not trust them [1

Decline trade across Asia is a threat to Australia as China's economic slowdown spreads across the region.. Exports and imports in developing Asia have fallen 7% since September 2014 - countries that take 2/3 of Australia's exports. IMF analyses show that trade tends to decline before a financial crisis. China's economy has been unsustainable because of high export and investment dependence. Though China recognises this, it economy seems to have been slowing more than wanted. The effect will be severe for commodity exporters ike Australia [1]

Many Australian companies are struggling to find revenue growth. Thus corporate earnings downgrades are increasing [1]

Australian exports have fallen - to reduce GDP growth. Export value to China has fallen 7% pa - and could fall further as China seeks to move away from coal. Exports are down because of lower commodity prices - 36% below peak  Exports to China have fallen 20% from peak - and in future will be affected by China's housing surplus that will take to 2020 to clear. This will flow through to economy in terms of weak wage / employment growth. The effects will be strongest in WA and Queensland [1]

Australia's banks see sluggish domestic growth because of a slow transition away from dependence on mining investment [1]

Australia recent employment growth is unlikely to be sustained - because growth in household incomes has been slow (given the growth of lower wage positions) and this will impede further growth [1]

Australia has had rapid employment growth - but a major wage shock (ie a slowdown in wages growth). This is a world-wide problem. It constrains recovery from the end of resource investment boom ending [1]

A one day summit in August 2015 will seek a consensus on dealing with major challenges facing Australia's economy and federal budget. The summit parallels the 1983 National Economic Summit and 1985 Tax Summit. The summit will focus on four issues: fiscal sustainability; tax reform; lifting productivity growth; and a sustainable retirement incomes policy. Entrenched political mindsets have made it impossible in recent years have made reform impossible in recent years and voters need to understand why business-as-usual is unsustainable. Fiscal sustainability is vital to repair federal budget and position Australia to withstand future economic shocks. The GST and eliminating inefficient state taxes needs to be considered as part of tax reform package. Improving productivity is likely to focus on industrial relations and the importance of innovation and business management. Australia's retirement incomes policy needs o be overhauled as soon as possible and government refuses to reduce generous tax concessions while opposition blocks pension reform. Australia has had 24 years of recession free growth and the community expects this to continue. But this is not certain - and the consequences of not responding to that risk could be serious. The summit should help refocus the economic debate.[1]

CPDS Comment: The proposed summit is belatedly confronting very real problems but does not seem to be taking a very sophisticated approach to doing so. Australia has budgetary challenges (eg related to structural deficits and unaffordable social expectations) and these largely (though not solely) are a reflection of a changing, difficulty and risky international economic and political environment. However the main focus of the proposed Summit is on the (fiscal) symptoms rather than the (economic) cause. Thus the Summit may of value in promoting understanding that there is a problem, it is unlikely to be effective in dealing with the underlying economic cause.

Efforts have been made to improve Australia's performance since the 1980s - and while these have improved the situation to some degree, there is still a long way to go (eg see Defects in Economic Tactics, Strategy and Outcomes, 2000) . Economic options being put to the Summit appear to be primarily a continuation of past 'reforms' (ie more market liberalization and attention to the influence that government has on the economy through taxes and services). These would be quite inadequate because they do nothing to sufficiently strengthen the other 3/4 of the systemic influences on the economic environment. Some suggestions about what else probably needs to be done were outlined in Australia's Competitiveness: Some Suggestions (2013).

A NAB survey of trading conditions showed an improving outlook in mid 2015 - after 7 slow years [1]

Consumer confidence in Australia is continuing to decline as it did in 2014 - and this is undermining efforts to reinvigorate Australia's fragile economy [1]

A weakening of China's economy is the biggest threat to Australia's ability to adjust smoothly to the end of resource construction boom. If China's authorities are able to stabilize their economy, then increasing export revenues will compensate to some extent for declining investment. However China faces risks and may be unable to do so [1] - see also Ongoing Uncertainty regarding China

A prolonged period of low commodity prices coupled with slashing of commodity investment could expose Australia's economic vulnerability - because of escalating debt and continued dependence on capital inflows. Australia could experience a problem somewhat like Greece [1]

Australia has a significant problem and needs to prepare to deal with a world riddled with risks and uncertainty - but its political system is proving incapable of addressing these issues [1]

Australia's budget deficits will be $170bn greater over the next decade (and a budget surplus impossible to achieve) if growth continues at current rates - rather than rising as Treasury has forecast. RBA has indicated that Australia's potential growth rate may have fallen permanently [because of slower population growth]. Some economist blame a lack of ongoing economic reform as the reason for slow-down in growth (to 2.5-2.75% pa down from 3-3.25% pa before GFC). The resources boom discouraged an emphasis on reform. Treasury projections are still based on the assumption that China's growth will leave commodity prices on a permanent high. If productivity growth remains low, government tax receipts will also be low [1]

Australia was supposed to experience a bust following the mining boom - but there is not yet much sign of it. Without serious reform (ie tax hikes) growth is supposed to be lower while living standards fall. Growth is 2% pa - less than before GFC and national income is falling. But the statistics don't tell the full story. There are signs of health in economy (eg overseas travel, car sales). Residential construction is booming. Growth by major trading partners is solid. Inflation / interest rates are low. The problems facing mining companies have little impact on community generally - as this is small part of economy.  An emphasis on economic problems is used to boost the case for government spending cuts. Australia can have a positive growth narrative based on educated / highly paid workforce and diversified exports (with services as the major exports). Business conditions and confidence are strong. Australia is still lucky - but not because of sole reliance on natural resources. They merely complement a diversified service-based economy [1]

The recession in Australia that followed the 2008 financial crisis was comparatively weak - yet its adverse effect on Australia's future economic prospects has been very severe [1]

Foreign investors are losing enthusiasm for Australian government bonds as low interest rate era ends, and Australia faces economic difficulties [1]

RBA does not expect normal (ie 3-3.25% pa) growth rates in Australia to resume until 2017 - thus leaving a decade of weak growth since the GFC. Unemployment has remained unexpectedly stable [1].

Private wealth in Australia is heavily concentrated in property - and this lack of diversification makes Australia vulnerable to increases in interest rates [1]

Australia has a large services' sector that is starting to perform well [1]

Asia's emerging economies (on whose growth Australia depends) are facing problems because of declining trade. Growth in emerging Asia has been extraordinary (ie from 10% of global GDP in 1985 to 30%). It became the heart of world manufacturing. But this won't necessarily continue. Exports were critical - rising 12% pa. But since GFC world trade has slowed - and is now likely to decline. Asia can't participate in the new growth industries. Rapid growth in Asian trade largely involved Asian nations trading with one another. But now China is reversing outsourcing to bring manufacturing in-house. Import volumes in Asia are contracting rapidly. There is concern about the problems facing export industries - because they have been funded by debt whose repayment required never-ending growth. Property development was another growth driver - and this was also debt financed and often involved poor lending practices (eg related to cronyism and corruption). This was not critical when times were going well. China has long understood the need for change - but this will never deliver past levels of rapid growth. Australia's Treasury had convinced itself by 2006 that Asian growth would continue indefinitely - and lead to strong demand and high prices for commodity exports. Treasury economic / budget forecasts still reflect this view. The Treasurer relies on the ability of China's leaders to deliver unlimited growth - despite their recent ham-fisted economic management  [1]

Australia's economy is in real trouble and this is being reflected in concerns about investment in Australia. Australia is only OECD economy that has avoided recession since 1991. This is of concern to major investors - because recessions clean out inefficiencies. Productivity growth is also important but lacking. Recent events in China have not helped. Iron ore is oversupplied. Its long run price is $10-20 per tonne - and current $50 seems still high - and to be the result of supply bottlenecks. Since 2013 there have been no significant private sector investments in Australia - except in real estate. This and Australia's links with China have seen difficulties emerging in borrowing by semi-government bodies. These problems will increase further when US Federal Reserve raises interest rates [1]

China's decline is at the worst possible time for Australia given the falls in domestic capital spending / investment and wage stagnation. [1]

Australia national accounts show that weak income growth is translating into weak household spending and business investment. Growth is slowest since early 1970s [1]

Australia has had a significant increase in its current account deficit, and this affects net exports in GDP calculations - potentially  implying that the economy was contracting in second quarter of 2015 [1]

Housing construction, which has provided support to Australia's economy as resource investment boom fades, is predicted to decline [1]

Australia could be headed for recession. It is now recognized that China has a major problem. Queensland and WA are already in recession - and NSW and Victoria are highly reliant on massive Chinese investment in real estate. Any recession would have a staggered impact - with lower interest rates as first stage; currency devaluation which will boost competitiveness and also increase inflation ris; then ending of capital inflow if federal government does nothing to reduce large structural deficits [1]

Consumption (by government and households) has been the main driver of Australia's economic growth. But now retail sales have fallen yoy - because household income s atr down. The largest fall was in household good - which followed from evidence of declining dwelling construction. Australia is caught in low growth environment - though Federal treasurer denies this. Foreign capital inflows are vital to maintain current spending. It comes in through banks and goes into property. [1]

Australia's economic growth rate has depended on population growth - and this is now easing [1]

Australia's economic performance is better than it looks. Output is crashing in developing new mines in remote parts of WA and Queensland - but elsewhere economy is doing better now that exchange rate is not as high as it was during commodity boom. Increases are arising in; government spending; exports (at low prices); tourism; agriculture; manufacturing [1]

Australia's economy faces tough times - but perhaps not recession. It has been a long time since Australia had a recession - 25 years. There is a possibility now because of ending of decade long mining boom. Joblessness has risen, real wages growth has disappeared, government debt has ballooned. Budget estimates of return to past growth are highly unlikely. The government's focus on security scares people. China is growing more slowly - and becoming less resource hungry. Home values are exposed to any decline in foreign capital inflows. Sharemarket ructions are however unlikely to lead to recession - as this merely affects equity markets without stressing credit markets. However Australia is more vulnerable to shock than at time of GFC (eg in terms of economic momentum and policy ammunition). Confidence is lacking. Government policies have been inadequate for problems being faced. Situation would improve with major infrastructure spending / increased migration. There is a need for difficult times to force policy changes [1]

Australia's economy is better than national accounts show - with growth in services, exports, confidence [1]

An apartment building boom funded heavily by China has been responsible for a fith of Australia's economic growth over the past two years - and helped Australia adjust to the end of mining boom. Apartment approvals have doubled over the past 2 years - and apartments have accounted for 95% of the growth in housing construction. Australia's big four banks are only funding 30% of developments in Melbourne. the rest is mainly financed off-shore. Chinese investment in Australian real estate reached $6bn in the first 6 months of 2015 - 25% of all Chinese property purchases [1]

Australia's Treasurer has argued that disruptions in China's share market will encourage Chinese investors to support Australia's economic growth by investing more heavily in apartments in Sydney and Melbourne [1].

A property developer argued that devaluation of $A will discourage foreign investment in Australia [1]

The development of apartments has become critical to Australia's economy. This is being supported by Chinese investment - without which Australia would be in recession. While this was originally endorsed by Chinese state, the latter is now seeking to inhibit capital outflow [1].

Foreign investors have developed a uniformly negative view of Australia's economic prospects. Concerns include: commodity price falls, downturn in China's prospects and growing dependence on house-building and investment. Foreign (mainly Chinese) enthusiasm for residential property could cools [1]

IMF argues that Australia will be hardest hit developed economy from China slowdown. China boom turned Australia into a near emerging economy - as strong $A and high wages hurt many industries [The is usually called the 'Dutch Disease']. IMF forecasts Australia's post 2020 growth to be 2.5% pa - well below Treasury estimates of 3.5% which would reflect return to boom era growth and be necessary to restore budget to surplus. [1]

It has been suggested that housing activity in Australia has peaked - increasing the risk of recession when combined with sharp fall in resource investment. A slowdown in immigration (by 30,000 pa to 150,000) and raising rates for investors are responsible.  A supply overhand (particularly for apartments) is likely [1]

Australia's main trading partners face slowest growth since GFC but with no prospect now of counter-cyclical measures [1]

Improvements in batteries to store electricity are soon likely to make solar power competitive with or cheaper than that from coal fired power stations [1] This is significant given Australia's / Queensland's significant economic reliance on coal exports.

Australia's technology start-ups are increasingly attracting US venture capital funding [1]

Australia's new prime minister has suggested that Australia's future must lie in innovation. But Australia ranks last in OECD countries in terms of business R&D [1]

Australia's banking system is geared to providing credit based on real estate - because of requirements related to loan security. It is poorly positioned to provide funding for business based on its intrinsic credit-worthiness - because of the much higher coverage required from the banks' own capital [1]

There has been an assumption that major emerging economies (eg China and India) would continue to drive strong demands for fossil fuels (and thus support fossil fuel production) however even they seem to have committed to reducing CO2 emissions in the context of the 2015 COP21 climate summit in Paris [1]

Failure by government and Treasury means that Australians are due to major shock about the state of the budget - according to Ross Garnaut. There will be no easy answers. [1]

Australia's housing boom was encouraged with lower interest rates to coincide with end of resource investment boom - but is now at an end. Services are now likely to support growth - perhaps support by a lagged wealth effect from rising house prices [1]

IEA has noted that China's coal consumption has fallen two years in a row - and 'peak coal' is approaching. Costs for wind and solar power are falling - but the main obstacle that coal producers face is changes in China. China is moving up the technology ladder and electricity link to growth has ended. China's coal consumption (about 50% of global demand) is expected to flatten to 2020 and then decline. This could happen very quickly if it becomes a matter of government policy [1]

The federal government's budget could lose $20bn over 2 years as a consequence of slump in commodity prices and sharemarket losses - that in turn are due to difficulties in important economies such as China's [1]

2016

Housing investment has played a big role in Australia's transition from mining boom. However forecasters suggest that this now seems likely to come to a halt. This will have a particularly significant on employment [1]

Kate Carnell (Aust Chamber of Commerce and Industry) warned about Australia's economic future in the absence of tough reforms and spending cuts. Government spends about $1.1bn daily - of which $100m is borrowed. This can't continue indefinitely.  There have been 8 years of deficits that have been 2-3% of GDP - and 1% of GDP pa looks likely for the next few years [1]

For 25 years governments have claimed that they enabled Australia to avoid recession. This is likely to end soon - with a prolonged recession. Recessions have been avoided because private sector was encouraged to borrow / spend. Since GFC private sector in advanced economies have reduced debts - from 170% to 160% of GDP. But in Australia percentage rose 20% to about 210% of GDP. Rising debts lifted demand and income. However this can't continue indefinitely. GDP is growing 2.8% pa at present, while private debt grows 6.9%. A debt crunch is coming Australia's way. This can be delayed by encouraging yet more borrowing - yet the problem is not officially recognised. The 2016 election could be a good one to lose [1]

High property prices are a major factor in Australia’s high cost structure – which undermines international competitiveness. To promote growth in Australia's post-resource-boom environment it is thus in government's interest to ensure a big fall in house prices - and both major parties have (different) policies proposals that would have this effect [1]

For 5 years Australia's banks have ignored predictions that the resource super-cycle would come to an end. However this is now happening and banks are facing significant resource related losses. Problems are also emerging with consumer loans. Capital requirements have increased with no capacity to generate additional interest income [1]

Australia is one of seven countries that Forbes magazine says is the "most likely to suffer a debt crisis" within the next three years. China, whose economy has faltered in the past two years, comes No. 1, but Australia is No. 2. This is based on the existence of a rate of growth in private debt that is higher than the growth of GDP, where total private debt is also over 175% of GDP.  The BIS publishes data on this and that data suggested that this criteria could have been used to predict the 2008 financial crisis that started in US. When what had been a very high rate of debt growth started to fall (because investors would no longer take on more debt), debt-based financial schemes failed – and the effect of declines in the rate of debt growth was to reduce (rather than continuing to increase) demand – thus generating recession. In 2015 China’s private debt to GDP ratio was 290% while Australia’s was 190% - implying a significant risk to those economies if the very high rates of growth in debt (mainly for property investment in Australia’s case) are not maintained. [1] [CPDS Comment: China’s risk associated with its very high rates of debt growth has received attention for several years – and China was clamping down on this from mid-2014 (and was facing potentially catastrophic domestic economic consequences by late 2015 which spilled over to affect other countries strongly linked to China – as Australia is). Then in early 2016 that clamp-down on escalating debt ended – and China’s credit growth again became the key driver of its economic growth. Some indicators existed in April 2016 that this policy might have been reversed again]

Capital Economics rejected claims by Steve Keen (published in Forbes) that Australia is the second most likely country to experience a debt crisis / recession. Keen suggested that this risk existed if debt by non-financial private sector exceeds 175% of GDP and debt-GDP ratio rises over 10% in a year. However Capital Economics argued that the risk of debt crisis is receding. The real risk is in housing [households?] where debt / GDP ration is a record high 125% - of which 70% is for housing. Housing debt looks higher than it actually is because of cash in offset accounts - which has been increasing as lower interest rates allow faster repayment of loans. Also lending standards have tightened since GFC - reducing the share of risky loans . The fact that 40% of mortgages were interest only was a risk that is now reducing. There is unlikely to be a problem until RBA starts raising interest rates and this won't occur for a couple of years  [1

Environmental and other approvals given by governments for the Adani Carmichael mine in central Queensland (potentially the largest coal mine in the world) which is supposed to contribute to employment / economic growth are irrelevant. No financial institutions are lined up to provide capital, and coal is likely to be replaced (eg in China) by renewable energy as the latter is becoming increasingly cost competitive [1]

While Australia's foreign debts have growth and now exceed $1tr, there are reasons to suggest that the risk these pose is limited: (a) the rate of growth of net foreign debt has slowed (eg because some mining investment was equity financed); (b) more debt (including all government debt) is now written in $A than in 1980s' (c) more debt is now longer term - while banks rely increasingly on deposits; and (d) Australia has now become a net owner of foreign equity - because of offshore investment by superannuation funds [1]

Australia's GDP keeps rising because of the amount of building being done. The number of cranes in use in Australia increased 20% in six months to the end of March 2016 - mainly in Melbourne, Sydney, Brisbane. This reflects building approvals 3 years years ago. Major buildings are often sold during a property bust because of this lag. Building activity is likely to keep Australia's economy moving until 2019 - when a recession is likely [1]

Australia faces a looming banking crisis related to banks' funding of a boom in apartment developments (mainly for overseas investors) where there may be considerable difficulty in getting purchasers (who have paid 10-30% deposits) to pay for settlement -  because declining values being assigned for those apartments makes banks reluctant to fund settlements (see below)

Problems in monetary policy by central banks imply that Australia's economy is built on unstable foundations. Cutting interest rates to bring forward future consumption has been used to reduce current weaknesses. This policy has now obviously reached its limit in many countries. Monetary policy is now achieving little in Australia also. Low interest rates have encouraged a boom in property prices and borrowing that has take household debt to all-time highs. That debt needs to be repaid from future earnings. After the mining boom Australia seems to be speeding growth in broader economy. Growth in final quarter of 2015 was largely based on consumer spending / reduced savings. But households are now less willing to run down savings. This does not indicate immediate problems. But there is a structural problem.  The pre-GFC experiment of reliance on finance for growth failed.  APRA has seen the dangers of reliance on investment lending. Australia's banks face growing problems from investment (especially property) lending. Declining rental yields (which make property investment ever more dependent on capital gains) further increases investment risk. Australia's post-resource-boom economic transition is based on borrowing from the future and the wealth impact of finance and housing. But household debt will need to be repaid sometime [1]

Australia's governments have since GFC failed to confront the issues of budget restraint, deficits and debt that Moodys now warns puts government's AAA credit rating at risk. Many countries with much worse positions at the time of GFC have made a lot of fiscal progress - yet Australia is trapped in a cultural / political dead end [1]

Australia is facing serious economic challenges - particularly because of international risks that are never discussed in relation to Australia's economic options / policies

The global economy is at risk (eg in IMF view) - and this means Australia's economy is at risk. In Australia political debate is limited to the budget - yet the economy is also important. Economy could either be in upswing - or down because of currently obvious risks. China is a key risks. Australia's exports rose (mainly because of iron ore) from $6bn in 2000 to $94bn in 2013 - before falling to $81bn in 2015. If China suffers widely feared hard landing this will impact Australia. IMF identified risks with financial markets (ie another 2008 style financial crisis); division / stagnation in Europe; US isolationism (under a Trump presidency). Two of biggest developing countries (Brazil and Russia) are in deep recession. Japan's efforts to recharge economy have failed. China and India are major remaining drivers of global economy. There is a chance that world could keep staggering along. There is also that China's mountains of debt will cause it to collapse. Australia's GDP growth since 2008 (2.5% pa) looks good but is mainly due to population growth. All net new jobs over past decade have been taken by migrants. The effect of immigration was boosted by currency devaluation in 2014-15 - but this has not continued. Low interest rates have not generated new service-industry jobs - merely an investor-driven boom in property (in Sydney and Melbourne). Those booms have peaked. Construction will decline over the next few years. High property prices restrict consumer demand for other than real estate. Household debt has escalated - from 35% of GDP in mid 1970s to 94% in 1995 and 186% now - mostly reflecting housing debt. The burden of this is bearable if interest rates remain low. ALP proposals to reduce property investment tax advantages could improve affordability in long term - but risk investor backlash and rapid decline in property value in the short term. Commodity exports now contribute significantly to Australia's economy - but are dependent on state of global economy. IMF suggested that Western nations need to speed up economic reform, provide short term spending stimulus and seek longer-term savings. For Australia priorities were seen to involve tax reform and infrastructure spending. However most tax reform options are not on the table. There is reluctance to deal with IR problems. And while there are many infrastructure options that would raise productivity - these are seldom the ones that are chosen. Also infrastructure spending has been falling. Infrastructure could be key to getting Australia through the next 3 years [1]

Private / household debt in Australia ($A2.4tr) is 160% of GDP ($A1.5tr). In 1950 it had been 20%. It has grown very rapidly by international standards since 1990. The simple average world-wide is 80%. At the same time government debt is $379bn - while governments face a long list of unfunded entitlements. Increasing debt (as well as the China boom) has been a significant factor in allowing Australia to have relatively strong economic growth (eg compared with US) and be free of recession for 24 years [1]

Constraining investment in Australia's apartment market by Australia's biggest trading partners (China) will have adverse consequences for banks and increase the risk of a recession. (see Could A Chinese Property Bubble Burst in Australia Also?).

Australia's $1tr foreign debt is a concern for credit ratings agencies - who see it as a risk to Australia's AAA credit rating. That debt is more than twice its foreign income from exports / dividends / royalties and is more than any other country apart from Greece and US. Over 5.6% of foreign income is being spent on interest - which is more than any other country apart from Spain. If ratings agencies lose confidence in Australia then it would be hard for banks and governments to refinance foreign debts - and this is serious because of their reliance on overseas financing. High levels of household debts and high property prices are not of immediate concern - though they could amplify the effect of external shock Australia's AAA rating reflects the quality of its institutions and economic performance. However the fact that international income has always been less that imports and financial transfers has been of concern - especially as commodity prices fell. A decline in China's growth would cause further problems - and is seen as possible [1]

The 2016 federal budget has left Australia poorly placed to deal with any global slowdown and rests on optimistic assumptions about economic growth. This is indicated by Treasury / Finance Department's Pre-election Economic and Financial Outlook [1]

Financial stress amongst dairy farmers have added to the problems in big banks loan books [1]

The flood of easy money available around the world has reduced Australian banks' cost of capital - and lowered lending rates. However with Australia's $1tr foreign debt this is not a good thing - though it benefits banks so long as they don't pass on savings. This costs $40bn pa in interest, which combined with current account deficit results in $125bn pa capital outflow which has to be offset by capital inflow. This inflow covers: (a) costs of bank borrowing to fund property boom; and (b) selling assets to maintain current spending levels. No one seems to be interested in the problem - and it has not been considered politically. Every time there is disruption of international financial markets the $A weakens because of reduced capital inflow. Lenders are nervous because of Australia's high debt levels (ie about 243% of GDP) and the fact that it has not been incurred productively. Morgan Stanley has estimated that $9 of debt is needed in Australia to increased GDP by $1 - which is three times the rate in US - and even higher than China's 6 times ratio which has led to fears about the sustainability of China's economy [1]

Australia relies on foreign investment because of persistent current account deficits. However interest in Australian bonds has been waning. The absolute amount of foreign owned bonds has increased - but the rate of issuance has exceeded this. Falling demand reflects lower returns and $A devaluation - with US Treasuries being preferred [1]

Australia's economic problem is illustrated by the fact that an apartment builder has overtaken iron ore miners as Australia's richest person. Apartment approvals are now running at 10,000 per month - up from long term average of 4000 / month over past 7 years. Over the same period Australia's debt / GDP ratio has taken off. China is of concern because GDP increases take 6 times as much increase in debt - but in Australia the ratio is 9 (up from 1:1 seven years ago).  Australia's economy is still export focused - net exports probably accounted for 100% of March 2016 rise in GDP - but capital investment to support this has ended. Doubling Australia's terms of trade between 2000 and 2012 was a bubble based on unsustainable China-driven rise in commodity prices.  This has collapsed and will remain weak for a long time. But that bubble has been replaced by one in apartments - which is bought with Australian debt (whereas iron ore exports were bought with Chinese debt). Australia's (243%) and China's (240%) debt / GDP ratios are similar and near the world's highest. Both these debt mountains are a danger for Australia. If (as many expect) China's economy buckles as a result this will affect Australia's exports. And when Australia's interest rates start rising house / apartment prices will fall (and have started falling in some places) - with borrowers coming under stress.  Morgan Stanley argues that Australia needs to find growth drivers that are less dependent on increasing debt. The boom in household borrowing has peaked - even though distortions remain in place which discourage savings and encourage debt-based property investment. Australia would be better off if growth were coming from competitive advantages - rather than debt-funded apartments [The Trouble with Harry]

House construction is expected to moderate - following: record house / apartment approvals and buyers becoming more rational; problems with labour supply; bank clampdowns on lending. But slowdown will adversely affect economy - as growth in construction has been key driver. Brisbane is of particular concern with 3000 apartments due to become available over next 3 months - giving a total of 9 months supply on market. There are now 2800 off-the-plan apartments for sale - and construction levels have not yet peaked. Housing construction nationally contributed 25% to 2.6% pa average economic growth between 2014 and 2016. Commencement rate of 220,000 far exceeds underlying demand [1]

A high profile investor has warned about the poor quality of technology businesses being listed on the ASX - citing little management experience, great complexity and limited ability to forecast earnings [1]

While there is frequent concern about Australia's public debts, private debt seems to be a more serious problem.

There is often concern about rising public debt in Australia - but little is said about rapid increase in private debt - which has doubled to 160% of GDP over the past 20 years. Public debt peaked at 170% of GDP during Great Depression - but private debt has never risen anywhere near current levels. The previous peak was 60% of GDP during 1880s property bubble. Almost all of the increase in private debt has involved housing investment. Ever falling interest rates and financial deregulation fuelled self-reinforcing explosion of dwelling prices and debt. Banks are supposed to invest in business which invest in economy - but in practice they lend to households to buy houses. Over the past 20 years, credit for business has fallen from half to one third of the total.  Australian households overtook the Swiss last years as the world's most indebted relative to GDP. The latest national accounts showed that gross national income fell 0.4% over the past year and that housing credit rose 7.2%. Australia's household debt has grown above levels where housing bubbles formed and burst (eg in Ireland, Spain and US). Australia's housing market is so highly leveraged that even small price declines will have adverse consequences - according to Philip Soos and Lindsay David (LF Economics - in Australia's Addiction to Debt). Concern about excessive debt goes back to Irving Fisher - a leading pre-WWII economist. Increased leverage based on belief that asset prices will continue rising has serious consequences - as spending is throttled to repay debt, prices fall and the real value of debts increases. Concerns about excessive debts have re-emerged as economists try to understand poor post GFC economic growth. The BIS and IMF argue that debts above 100% of GDP will have adverse effects. Some believe that households are prudent / rational - but this was a poor assumption both before and after the GFC. Ongoing increases in debts are sustainable as long as asset prices keep rising - even where household income growth is weak. It could be years before the bubble bursts. The RBA seems determined to lower interest rates - to boost borrowing and rising asset values. Average weekly mortgage interest payments rose from 53% of weekly in 2013 income to 66% in December 2015.  Significant interest groups benefit from continuing this process. The bigger problem is that the economy seems to need debt to grow faster than income to generate growth rates that are considered normal [1

 Australia's leaders point to 3.1% pa economic growth - but 3% of this came from exporting more LNG and iron ore at lower prices. However Australia has real income recession - household incomes have been falling. Employment growth has been weak since GFC; wages growth has slowed since 2012; household disposable income growth is worst in 25 years. Rising housing prices may have boosted spending - but that seems to have peaked. Per capital income has fallen 6% since 2011. These problems can be fixed - but only if leaders face up to the truth.  [1

Australia's debt problem is similar to that in China where the IMF has warned of the need for substantial adjustment

Australia and China adopted mirror strategies to deal with GFC - and both now face similar problems (which the IMF has highlighted in China's case). Both invested heavily after GFC in resource industries as well as housing and construction. IMF warns that China needs to deal with rising corporate debt or face dangers. China may have $1.3tr lent to borrowers who lack income to repay it. China has accumulated debt (now 247% of GDP) faster than any other country - but Australia is close behind. Vimal Got (BT) argues that during commodity boom Australia's banks borrowed heavily - mainly through long term bonds in foreign markets. This borrowing against future income assumed that rising commodity prices would continue forever. The money went to housing credit - which rose 20% pa - so benefits of Australia's mining boom mainly went to funding Australian house prices. The income windfall from rising commodity prices was spent as soon as earned. The balance sheets of CBA, Westpac and NAB more than doubled from 2003 to 2008 - as foreigners were happy to provide loans. Banks are now restricted from borrowing - but federal government borrowing is replacing them in allowing Australians to live beyond their means. Australia's current account deficit remains large - and more is being borrowed than earned. Australia thus needs to make adjustments like China is facing - but this does not seem to be understood politically. BT suggests that Australia's inability to tackle debt will force $A down to US40 cents. China's transition away from commodity-driven export industries will compound the problem [1

It has long been argued that people quickly forget the lessons of history related to finance. Extreme current asset values so soon after GFC illustrates this. Governments and reserve banks have been reckless. Malcolm Turnbull promotes a vision of good times without solving government financial constraints - despite the claimed budget emergency of 2014. ALP promises to put people first and have fully-costed / funded programs - though details are not available and likely to be best-case estimates. No one mentions World Bank warnings and IMF about limited demand in advanced economies, weak trade, falling capital flows and slower world growth. Budget forecasts ignore these risks. Europe is fragile. Asia / China is slowing. Japan is near recession. Australia faces debt, aging demographics and deflation. Politicians are waiting for credit downgrades to force a crisis. In the meantime markets are being crowded out by big government programs. [1]

APRA is more concerned about banks' risks associated with loans to property developers than it is about loans to house buyers [1]

Funds are being set up to lend to foreign apartment buyers who have been left stranded by banks' lending bans - a move that will create a new class of subprime lending [1]

Despite Australia's links to China's economy and dependence on commodity exports its currency is gaining a safe-haven reputation - especially as a consequence of the turbulence associated with the Brexit [1]

The RBA is likely to be forced to reduce interest rates - as this is being done world-wide as a protection against the effect that Brexit is having on financial markets [1]

Australia's economy has had 25 years of uninterrupted growth - and will have to cope over next year with effects of: Brexit; slowing China; and US political instability. Reserve Banks can't solve the problem, Interest rates are now low / negative. The problem is that supply is outstripping demand - so companies have little incentive to invest. Rather they use cheap credit to buy back shares - which has made equity investing popular. Consumers are cautious - because central bank policies have led to low wage growth, job insecurity and over-indebtedness. Australia has experienced declining national income - reflecting falling commodity prices, government revenues and investment returns. Wages have been constrained (eg by globalization). There is confusion because national production is strong but incomes weak. Low wages / prices that have caused problems elsewhere, have now come to Australia. Though the real economy is strong, the RBA is now concerned about deflation as a possible reason for reducing interest rates. Others include: effect of Brexit; slow growth in China; US Fed's reluctance to raise rates; threat of Trump presidency. Most threats to Australia's economy come from offshore [1]

Australia's banks have no excuse for out-of-cycle rate rises because of potential international financial crisis sparked by Brexit - because they have been active in prefunding their requirements for 2016 [1] [CPDS Comment: The amount of funding that would need to be ‘locked in’ to cope with the multi-dimensional crisis that seems to be on the horizon would be huge. If banks have locked in huge amounts of pre-funding does this mean that they have actually got the money, or that they have options to get it? If the former this implies a large reduction in their profitability (and thus in their ability to attract funding). If the latter, the money may not actually ever be obtained if the other parties to those agreements suffer failures].

Australia's federal election has worsened risks to public finances. The parties have either pretended to do something about the problem or ignored it. While Australia's debt / GDP ratio is lower than in some other places, the rate at which it is being increased [a consequence of budget deficits] is dangerous and predictions that deficits will be reduced are fictitious [1]

Australia's banks and economy face serious risks because property prices are falling in the face of end of mining boom and a flood of new construction - see here

 Investors are downgrading Australia's major banks because of the inconclusive federal election - and the possibility of a banking royal commission and that RBA will reduce bank's earnings by reducing interest rates [1]

Australian government's AAA credit rating could be at risk / is likely to be lost because of the political deadlock that resulted from federal election [1, 2]

Rating agencies who will decide if Australia retains AAA credit rating are closely watching electoral outcome - because it may become impossible to pursue budget savings. The current AAA rating is based on the assumption that conservative efforts to improve budgetary position will continue [1]

Australia has the potential for another 'mining' boom - related to innovation in mining technologies [1]

If Australia's federal government loses its AAA credit rating this would adversely affect Australia's bank, corporations and states by increasing their wholesale funding costs [1]

S&P put Australia on notice in relation to risk of losing government's AAA credit rating. But it is not just about government debt. S&P considers that government debt levels need to be lower than in other countries because Australia's economy carries a high level of external debt. External debt net of public and financial sector assets is over 3 times GDP. Current account deficits are 5% of GDP pa. Australia's gross external financing requirement in 2016 is over 50% of GDP [1]

Australia major banks will probably need to further increase their capital to remain amongst world's best capitalized lenders - according to APRA [1]

S&Ps has warned of downgrade to Australia's AAA credit rating because of expected lack of political determination to reduce government debt. Because of Australia's high levels of external debt strong government finances are needed to reduce potential risks [1].

The growth of Australians' incomes stalled over past 5 years. In some places rising house prices have allowed perceptions of rising financial well-being. But there is a big difference between states (with NSW and Victoria experiencing better times than mining states of WA and Qld). Over the 5 years to 2001 real incomes rose 17% - but then only 1.2% over next 5 years. Living standards have been falling for many households. The resources boom helped households with both rising incomes and a strong $ - which boosted purchasing power. Now costs are rising significantly and incomes are declining (especially in WA and Qld) [1].

The additional capital raised by Australia's banks last year is unlikely to protect than from a credit rating cut (and thus higher borrowing costs) if government loses its AAA credit rating [1]

10 years of large budget surpluses will be needed to cut public debt enough to no longer be a risk to future prosperity. Treasury forecasts that net debt stabilizes in four years rely on accelerated economic growth and continued low interest rates. The usual swing from deficits to surplus following GFC did not occur because spending was not kept under control [1]

In July 2016 it was noted simultaneously that: (a) business confidence was rising - presumably because, despite uncertainties, firms see their own prospects improving [1]; and (b) consumer confidence was falling because of uncertainties about the economic outlook [1]

Reserve Banks have used monetary policy for macroeconomic management to encourage or discourage borrowing for investment (by lowering or raising interest rates). However this failed with GFC - and reserve banks then went further with quantitative easing. Much of this resulted in the purchase of government bonds whose yields went down (and prices went up). Now yields in many cases are negative. Australia can thus attract capital because bond yields are 2% or so. However if interest rates are raised this might no longer be so easy [1]

Interaction between central banker and prudential regulators' response to financial crisis could be unintended / counterproductive. ECB policies (to lower rates) reduce bank's profitability - and thus their ability to get capital to lend. Though RBA has not reduced interest rates as much, it is headed in same direction at the same time that prudential regulators are requiring banks to hold much more capital - which is hard to obtain as rates fall. Banks need to be able to offer savers some sort of reasonable return or else they will withdraw deposits. [1]

There is a need to rethink RBA's role in controlling inflation. RBA and treasurer are formulating new agreement on RBA's role / goals. However as RBA prepares to further cut interest rates - and wonders what it will do when rates reach zero, there is a need for a rethink. Finance ministries worldwide have relied on Reserve banks to lift growth and inflation. Seven years after GFC, inflation rates are still falling and growth is stagnating. Savers are being punished. Some economists argue that inflation target should now be lower. However while goods and services prices are stagnant - as are wages - asset prices (especially bonds and real estate) are rising to levels beyond any estimate of reasonable return. And the GFC showed that excessive asset prices can generate financial system failure. While reserve banks are trying harder to conjure demand, finance ministries have been doing little and have lost skills. Glen Stevens (RBA) has pointed to the limits of reserve bank capabilities (which are limited to dealing with monetary problems). Governments need to emphasize structural reform and infrastructure investment he argues. However RBA has contingency plans for purchasing bonds when rates are down so low they can no longer be of benefit. New agreement with RBA needs to recognise new and uncertain circumstances. There should also be provision for RBA and treasury consultation [1]

Comments on innovation as center of government policy has turned negative. Did innovation have potential to transform Australia's economy? Innovation is critical to modern economy (because of competitive pressure) but hard to manage. There are no simple rules for success - as it always involves doing something different. At national level establishing effective R&D / engagement / commercialization systems is difficult. Australia performs poorly in innovation. It is least complex economically of OECD economies - and has low levels of analysis and policy reform. Innovation requires creativity, space to experiment and fail, modest financial support, supportive environment and risk taking. However is political context the meaning / role of innovation is complex. While Australia depends on innovation, few know anything about it. It is only ever a means to an end (new products, jobs, growth profitability). However it is often seen as end in its own right. To get public understanding, there is a need for presenting innovation in broader context than facilitating start-ups and venture capital investment. [1]

The RBA has expressed concern about the serious economic effect of a housing crash. Bank's failure to take a cautious approach to lending has been a problem - though a slowdown in the property market suggests that lower interest rates will be less of a problem. Higher property prices result in a wealth effect that encourages demand. However if oversupply reduces prices / rents off-the-plan purchases could fail to settle. A substantially weaker property market would also reduce consumption - and also reduce CPI inflation. [1]

An inquiry was seen to be needed into what went wrong with Chinese buying of apartments in Australia - as it seemed that many Chinese have been the victims of a dirty game by agents and Australia's Banks [CPDS Comment: However while the problem seems very real (and the construction of huge numbers of apartments for Chinese buyers poses significant risks to Australia) the primary cause of the problem lies elsewhere - see A Made-in-China Disaster Waiting to Happen].

RBA warned government of the need to reduce budget deficit - not just rely on economic growth to do so - as a crisis was otherwise likely. Monetary policy has reached its limit. Government needs to invest productively to make a difference - but can't do this as long as it borrows heavily to fund welfare. Monetary policy worked through boosting housing prices and thus encouraging consumer spending. But this can't work any longer as gross household debt is now 125% of GDP. Government debt is only 40% of GDP - so it could borrow to fund productive investment providing it is not borrowing to meet recurrent spending. [1]

Australia's household debt is 125% of GDP - a record and more than almost every other country. But RBA is confident that banks could survive a large fall in house prices. China is RBA's biggest concern - because it is trying to transition from export-dependent growth while managing huge debts. A property price fall can be damaging if there is a lot of debt behind it. Leverage is no longer increasing rapidly. Some losses are emerging - but the system is coping. RBA's confidence about Australia does not extend to China. RBA's biggest concern about high house prices was the effect that this would have on the next generation [1].

Australia could experience a $100bn blow-out in government debt if optimistic Treasury forecasts about economic growth are not realised [1]

Australia can't have a recession for 5-10 years because so much has been invested ($24bn / quarter over 2 years) in resource exports. This will add 2% pa to GDP growth for 15-20 years so a recession would require more than that. Real GDP and unemployment data now measure the wrong things. The latter ignores under-employment. The former ignores the decline in GNI (because of falling prices) while GDP has been increasing. However 90% of commodity exports are contracted - and so will account for 2% of real GDP no matter no matter what. The only risk to domestic economy is housing - as apartment construction can't continue at present rate and will result in huge oversupply in 18 months. However this may not be the case as the flow of money from China has probably just started. The collapse in sharemarket last year led to property bubble in China's cities - which is now collapsing and leading to Chinese money coming to Australia. Thus Australia's housing boom won't come to screeching halt - but will complement ongoing resource exports and likely increases in state government spending (especially to services areas with major apartment investments).  [1] [CPDS Comment: This seems a bit misleading as the 2% contribution to GDP from resource exports only creates one increase (and then continues at much the same level) - and one 2% overall increase is not significant over 10-20 years if (say) 2-3% increases are expected to be achieved each year. Also the hazards associated with Australia's dependence on exports to, and investment from, China should not be ignored]

Australia's government debt has quadrupled as a percentage of GDP (to 40%) since 2007 and is putting Australia's AAA credit rating at risk [1]

A former Treasury Secretary (Ken Henry) has drawn attention to the need to bring Australia's budget back into balance. Australia could lose its AAA credit rating - and there is no certainty that foreign capital will cover the difference between investment and domestic savings. Australia would be badly placed in another GFC. The $A would fall, unemployment would rise into double digits, business would fail, banks would be unable to provide credit to homeowners / businesses, infrastructure funding would cease [1]

Federal Treasury has shifted away from its emphasis on 'wellbeing' measures in recent years (ie possible level of consumption / its distribution / risk / complexity / freedom-opportunity). It will  in future emphasis the budget, productivity [1]

Scott Morrison says that Australia has 5 years to increase its resilience because of China debt problem - but we may not have that long.  China have been innovator in global finance - socialism with a credit bubble. China has discovered risks of financial excesses 8 years after US did so. Treasurer reasonably mentioned predictions of a Chinese financial crisis to emphasize fixing Australia's budget. The question is whether China's obvious debt / housing bubble burst or will Karl Marx cope. Morrison acknowledged the difference it makes who has the debt (eg SOEs, local governments or central government) - as the latter's debt levels are less dramatic. The banks and SOEs are probably broke - but the central government could recapitalize them perhaps at a cost of $US1-2tr (11-20% of GDP) now and double this by 2018. Fitch believes that government sources will need to be drawn on the solve the problem and sees this as already happening. The BIS argued that China's credit-to-GDP is 30% - the world's highest. Australia's by contrast is 5% and the US's is -10%. China's problem is not the level of debt - but that so much has been wasted - so that credit intensity (the amount of debt for any given GDP rise) has collapsed. This is because 50% of China's debt is in unreformed / inefficient SOEs. China's socialism is not the cause of the problem - as there is a similar problem in Europe where all of Europe's banks are probably technically bankrupt. China's need for economic reform is more urgent than Europe's but has been resisted for two years. Interest rates have been cut, reserve ratios reduced and prudential controls loosened. Banks have been told to roll over loans to highly leveraged borrowers no matter how much overcapacity there already is.  Changes are unlikely in the short term - so growth will continue to be driven by rising debt. China recognised the problem - but change has not been made/ Does Australia have the 5 years that Treasurer mentioned to get its act together before China blows up with a financial / banking crisis. Official figures on China's NPLs are 1.8% of GDP - while Fitch's is 21%. And if there is a crisis, China's government would probably step in the recapitalize the whole system. As the Treasurer said, the question is who has the debt [1]  [See CPDS comments in Toeing the Party Line]

Australia's economy is at risk (as interest rates are likely to rise and property values are inflated) given the very high household debt levels that households have taken on because of low interest rates / expectations of rising incomes and expectations of rising asset values. When households net borrowings (ie borrowings less principal repayments) exceed interest costs, households have a net positive cash flow. However the reverse has applied 3 times in the past 25 years (early 1990s; 2008-09 and 2011-2013) - and required the RBA to slash interest rates. The growing imbalance between debt and cash disposable income makes households now vulnerable to interest rate rises - and in 2016 the RBA has again been compensating with reduced interest rates. A real problem will arise when this becomes impossible due to rising interest rates elsewhere - eg in the US [1]

Australia's net foreign debt ($1.045tr) has been rated as extreme by S&Ps. Australian government risks losing AAA credit rating if this is not fixed. This debt gives Australia one of the weakest positions of 130 nations that are rated - and rose from $976bn to $1045bn over 12 months to June 2016 - reflecting government and private borrowings and a $70bn to $9bn fall in the value of net foreign equity holdings.  Former and present RBA governors have expressed extreme concern. S&Ps suggested that Australia's surge in house prices and property investment is similar (though not as pronounced) as that in Spain before its credit troubles a decade ago [1[A Note on Spain’s experience: What happened in Spain is outlined here and here – while more details (including indicators of both a conservative banking system and some irresponsibility) are here. Property values fell 10-20% after its boom busted - though reliable figures are unavailable. Mortgage interest rates did not seem to rise significantly. However for years after the bubble burst it was apparently hard to get a mortgage from Spanish banks. An account of Spain’s recovery (characterised by an emphasis on exports and ongoing high (eg 30%) unemployment) is here].

Australia is one of the few countries with increasing debt levels (according to IMF). Government debt has increased in many countries since GFC - but private debt has only increased in a few - notable Australia, Canada and Singapore [1]

Private sector debt is increasing faster in Australia than almost anywhere in the world - and the IMF is concerned that record debt levels could set the stage for a future economic slowdown [1]

Australia's economy is in a 'bust' mode for the second time in 2 decades - but there might not be a hard landing as economy has proved resilient in the past. The two biggest problems relate to terms of trade and mining investment - while house prices and apartment approvals are high. House prices are supported by low interest rates. The latter are usually rising by this stage in the property cycle [1]

While the media class pays a great deal of attention to climate issues, that related to the 'business climate' is poorly covered. The ABC's World Today program had only 10 participants out of 70 that worked in private sector - and this distorted debate. Many media provide little reference to the need to create wealth. In this context there are complaints that groups such as Business Council of Australia are not fighting for their cause. However there is no enthusiasm for discussing this in the ABC. Journalism has been contaminated by critical theory -- and so would view anything said as the self-serving arguments of powerful vested interests. And why would the BCA concern itself with this when the Liberal Party is doing this on their behalf. However the Liberal Party does not actually defend the big end of town as they are capable of looking after themselves. It used to be believed that the role of government was to create an environment in which business could flourish. Most journalist and corporate staff now have no memory of a shrinking economy. When a nation turns it back on enterprising culture, it needs to rely on miracles to avoid problems [1]

Morgan Stanley is now also warning about economic dangers associated with the apartment market. Flat or declining prices will have broad effects on wealth. Companies will fail and adversely affect suppliers and unsecured creditors. This underscores RBA's need to consider exposure of the whole Brisbane-Sydney-Melbourne markets - not just inner-city areas.  Prices are expected to weaken. Construction will slow down. rental conditions are deteriorating. Transaction volumes and price growth have weakened while auction rates remain high - because of their bias to top-quartile Sydney/ Melbourne property. There are settlement risks for the 160,000 apartments that will be competed by the end of 2017. This is being contained at present but failures will create a negative feedback loop. There is no direct link with house prices - but the latter are likely to be flat in 2017 [1]

A study of financial crisis across 66 countries over 8 centuries (This Time is Different by Reinhart and Rogoff) suggested that a common set of leading indicators included: asset price inflation (especially real estate); rising household debt; high levels of foreign borrowing; a deteriorating current account balance; and slowing economic output. All these preconditions now exist in Australia [1]

Standard and Poor's has reduced the credit rating of 25 smaller Australian banks / lenders to negative because of concerns about swelling house prices and high private sector debt [1]

Stresses are emerging in the housing market as mortgage delinquencies are rising. In some states (WA, Tasmania and NT) the numbers behind on payments have reached record levels. In eastern states the rates are significantly higher outside capital cities [1]

RBA has warned that housing prices could come under pressure because of the numbers of new dwellings that are to come on the market. Settlement risk is rising in major markets. Brisbane and Melbourne are most at risk over oversupply due to apartment completions. Except in WA housing supply has recently been absorbed by population growth. RBA said that weakening housing market could have negative economic effects nationwide - as consumption may be lower than now expected in response to wealth / income effects of weaker housing prices / rents and increased off-the-plan risk [1]

Trump's victory in US election will benefit Australia economically (eg large infrastructure investment which demands iron ore and coal) [1]

Macquarie Bank has downgraded expectations about Australia's economic growth - given delay in US expansion under Trump and uncertainties from worldwide elections in 2017. Consumer spending is weakening [1]  

Australians are deeper in debt than ever and wages are growing at slowest pace - a recipe for disaster. RBA governor warns that debt / income ratio is the worst ever weakening Australia's ability to withstand a financial shock. 2008 financial crisis in US arose because many households had too much debt [1]

APRA is conducting important stress test on Australian banks. This is showing that banks are afraid of catastrophic internet / computer failure - potentially due to external attack. Banks no longer have paper back-ups.  The second concern related to substantial collapse in Australia's economy - in the commercial property market - rather than for housing. The most probable cause of breakdown would be China pulling the plug. Trump intends to build US defense strength against China - and China might react by attacking Australia's economy.  [1]  (see CPDS Comment in Risks Facing Australia's Banks)

Governments and major companies will no longer have access to the lowest ever interest rates. Investors have sold the ultimate risk free asset - US government bonds. The era of ultra-cheap credit is over. This affects how companies view investment projects. Large companies raise $100bn pa in Australia - mainly from banks but increasingly from bonds. Yields have risen rapidly since Trump election in the US - but are still low by historical standards so companies can still roll-over maturing debt at rates below the original cost of capital. The inflation which will drive up bond yields will also probably indicate economic growth - and thus encourage corporate investment. Highly geared infrastructure businesses, utilities and REITs could be affected by rising rates - as well as financial sector. Modest rises in bond yields could be economically beneficial - but in 1994 a 2% rise in yields on 30 year US Treasuries triggered a major rise in yields globally and blew out borrowing costs. Anything k this would now upset global economy.  However with stagnant wage growth, the inflation needed to drive this looks unlikely  [1

 Pressure on wages and profits will deepen federal government's deficit by $24bn by 2020 - and increase pressure on all sides of politics to find savings to prevent the loss of Australia's AAA credit rating. The ALP blames Treasurer for the problem while refusing to support his proposed savings measures  [1

Non-mining investment has boosted growth in NSW and Victoria because of increased infrastructure investment [1]

Australia's control over government spending has been the worst of any G20 nation since GFC, and lost the opportunity its strong growth provided to bring deficit under control  - according to IMF. Deterioration of Australia's debt was almost as bad as in Italy - which is suffering recession and a blowout in interest costs [1]

The founder of Atlassian has expressed concern about Australia's complacency on innovation, and suggested more emphasis on maths and science education [1]

In the face of political change in Europe and US, Australia's political system is a farce. There is a huge gap between political elites and the public interest. The PM endorsed the TPP that president elect Trump had withdrawn from.  He endorsed free trade though large segments of western electorates have been ravaged by globalization and turned to populist slogans in anger. Both parties endorse free trade yet ignore growing inequality. Glib references to innovation are no substitute for planned / targeted support for environmentally / socially sustainable industries. There is increased debate about reviewing Australia's alliance with US. Yet PM continues to endorse old mantras about US role. He criticized shadow foreign minister for proposing a slight shift towards greater Asian engagement - even though she had not referred to military / intelligence connections; involvement in military deployments; support for US nuclear strategies; and the Pine Gap facility. While the number of people displaced by persecution and conflict is 65m, the immigration minister questioned the wisdom of Malcolm Fraser's refugee legacy. Legislation has restricted civil liberties. The Greens are not offering policy alternatives. No one has a coherent narrative on Australia's past and future. This must address economic changes over the past 20 years and current global shifts in geopolitical, civilizational and economic relationships [1] [See CPDS comments in Adapting to Changing Geo-Political, Civilizational and Economic Relationships]

Australia's GDP declined in the September 2016 quarter [1]

A slump in construction is a major factor in the worst quarterly growth recorded for a decade - but this is just a 'pothole' before a more permanent downturn late in 2017 as building approvals weaken and the property market softens [1]

Business leaders say the unexpectedly weak GDP figures should provide a wake-up call for governments and corporations on the dangers that lie ahead if they fail to convince the community of the need for urgent reforms to stimulate investment. [1]

Australia could be on the point of official recession. Government deficits are expected to worsen. Thus a fiscal stimulus to counter any downturn may be hard to justify. Also increasing debt with rising interest rates will have future fiscal costs. No one addressed Australia's the economic problem. Until 1980 global debt rose at the same rate as global GDP. Since then it has risen much faster.  Australia has avoided recession for 25 years simply by going further into debt. Australia's households are the world's most indebted. A major part of the problem is that an increasing share of the population is not equipped for work (because of problems in education) - while life expectancies rise. This does not just affect the unskilled. Under-employment is rising - and technological changes are reducing employee requirements.  The global economy is more unbalanced than at any other time (ie in terms of entitlements). Australia has had a dream run for 30 years - through constant borrowing. That era is at an end [1

When the industrial revolution hit in the 1800s countries with large disparities in wealth, low property ownership, deficient democracies and disparate education systems were life behind. A new industrial revolution is now due - related to AI and robotics - and Australia could be left behind for reasons related to suffrage, education and land policies. Population grew in Western Europe from 24.7m in year 0 to 25.2 m in 1000 - while GDP declined. Things improved a bit over the next 800 years and then a lot from 1820. Fuelled by technology, ideas, resources and slaves European powers made themselves great. Different colonies had different results related to factor endowments and institutions. Extractive economies failed to take advantage of new economies and were left stranded as the industrial revolution brought wealth to others. A key difference involved a broad franchise (equality / equal opportunity) or a narrow franchise (inequality / lack of social mobility) Countries that did well were those where citizens could vote / were educated / access to land. Rapid growth in US and Australia coincided with widespread voting and educational opportunities for many. Now Australia is becoming more unequal. Home ownership rates are falling - and societies with these characteristics performed poorly during last industrial revolution [1

2017

Regional towns in Australia are being reinvigorated because of increases in food prices [1]

Rising commodity prices will probably allow Australia to escape a recession (ie two quarters of negative growth) - just [1]

Mining and energy exports set a record of $204b pa that could help prevent a downgrade of the nation's AAA credit rating. The surge of coking coal and iron ore prices added $47bn to export income. This is not expected to last for long [1]

Australia will need to adapt to the impact to the economic changes that President Trump hopes to make in the US (see here)

Australia could benefit from President Trump's move from multilateral trade arrangements to bilateral deals - because it is a reliable US ally in a strategically significant position [1]

$US denominated debt (that in the world's reserve currency) is an asset in the hands of foreign central banks because it provides a base on which the local banking system can create more credit.  Unlike China Australia does not run a trade surplus and have large foreign exchange reserves as a basis for creating more credit. Australia's household sector is one of the most indebted in the world. Government is relatively frugal - but its credit rating is at risk because most household debt is with banks and government would be on the hook if anything goes wrong. With a current account deficit, Australia borrows from overseas - and net debt is $1tr. Australians can borrow because debt is backed by Australian real estate and AA-rated banks who are in turn backed by AA rated government. Australia is clean, peaceful, not at risk of invasion, has good education / health systems / rule of law / respect for private property. As long as banks have good capital reserves they can keep borrowing and RBA increases the amount of money in circulation when needed. There is no problem while global economy is growing - but Australia will be in trouble in next crisis because it relies on $1tr foreign money to support house prices. In a credit crunch no one will want to lend - and Australia will not be able to borrow on favourabe terms. $A will collapse, interest rates will rise. This happened in 2008 but problem was contained by bailouts and China's credit boom.  [1

Australia needs to cut company taxes in order to be internationally competitive according the federal Treasurer. living standards will otherwise be eroded. Australia has 9th lowest corporate taxes 15 years ago but is now one of top 5 taxing nations and was 22nd in terms of competitiveness. Much of the world is seeking to stimulate investment with lower tax rates and Australia, a net importer of capital, risks falling behind. US President Trump wants to cut corporate tax rates from 35% to 15% - while Austraia's is 30%. [1]

Australian financial intelligence officials investigated $3.3bn in suspect transfers in 2015-16 by Chinese investors (including $1bn in property) raising concerns that foreign ownership laws are being sidestepped by people desperate to get money out of China [1] [CPDS note: To put this in context: (a) total foreign investment in Australia was reportedly $US537b in 2015 [1] with about 13% ($95bn) directed to real estate [1]; (b) China has become the largest source of approved foreign investment in Australia (investing $12.4bn in real estate in 2014 out of a planned total approved investment of $27.7bn) [1]; and (c) China's total foreign investment in Australia was $29.6bn in 2015 down from an earlier peak of $58bn pa) [1]

Australia is headed for economic crisis (with record household / foreign debt and massive housing bubble) if there is a global shock - according to corporate governance specialist John Adams. Household debt levels were last this high in lead up to 1929 depression. Expansion of broad money supply, low interest rates, tax incentives and welfare provisions have encourage record personal debts, asset bubbles (especially in housing). Indicators of risk are: (a) household debts 187% of household disposable income; (b) net foreign debt of $1tr - being 63% of GDP which makes Australia vulnerable to international developments; (c) interest rates are at record lows; (d) housing debt / GDP has risen from 21% in 1991 to 95%; (e) significant rise in global debt; (f) major international asset bubbles; and (g) a bubble in global derivatives [1

The OECD has warned of a rout in Australian house prices leading to an economic downturn - because both house prices and household debt have reached unprecedented highs   [1

US Fed's interest rate increase is a reminder that US learned from housing crash while Australia's leaders have created record bubble of mortgage debt. Through years of super-low rates Fed set scene for 2009 housing crash that hit global markets. It is now trying to normalize them while Australia's remain at historical lows. Problem is that political leaders have skewed economy towards real estate investing. Instead of investing in businesses, investors seek capital gains by buying and selling houses. 1999 cuts to capital gains tax were a major mistake. US house prices collapsed with GFC and US has sought to rebuild - yet Australia did everything possible to keep credit bubble growing. Henry Tax Review recommended reigning in negative gearing and capital gains tax discount - but this was not done. Australia is now stuck in a self-imposed debt bubble [1]

 

Are Unfinished Apartments a Risk for Australia Also? 

Are Unfinished Apartments a Risk in Australia Also? >>

In China, The Unsteady Skyscraper (Colebatch T., Inside Story, 25/8/15) attention was drawn to the huge numbers of unfinished buildings that litter China’s cities because of a lack of demand.

Something similar is possible in Australia – because of the massive influx of Chinese investment which has driven a boom in apartment construction. It is understood that the increase in apartment construction in Australia has roughly equaled the increase in capital inflow (mainly from China) into real estate investment. It seems very likely that this has been driven by something like the unrealistic surge in China’s real estate and share 'markets' that China's government encouraged. China's growth has been highly dependent on rapidly escalating debts - and this had put it at risk of a financial crisis unless some means can be found to generate 'profits' as an alternative way to fund investment in an environment where 'profit' is not traditionally the driver of investment. However in trying to achieve this China's domestic property and share 'market' booms were still both driven by state-orchestrated social consensus (rather than investors' estimates of likely profit) and high levels of leverage - and this is a formula for a boom and bust (see Context to China's Share Market Boom and Bust).

As the latter implies, there is likely initially to have been high levels of leverage and state-driven social consensus involved in Chinese offshore real estate investment just as was the case in the domestic property and share 'markets' and presumably a similar motivation.

And, as was the case at the start with China's state-encouraged property and share-market booms, the result of offshore property investment has initially been very profitable. Though many offshore investors in Australia have suffered losses due to the decline in $A value in recent years [1], those who bought apartments off the plan in early 2013 were seeing about 40% gains in mid 2015 when both capital appreciation and exchange rate variations are considered [1].

An Estimate: Chinese investors who bought off-the-plan apartments in Sydney (Australia's strongest market) in early 2013 would have seen their purchase increase about 30% in value in $A terms (ABS: Attached Dwelling Prices - Sydney) while the yuan cost of completing their purchase, most of which was not required until 2015, would have fallen by about 30% (as yuan / $A exchange rate fell from about 6.5 to about 4.5). The value of the property in yuan would also have fallen about 30% due to exchange rate changes - resulting in a net gain of (say) 30%.

 However China's efforts to avoid the the huge-bad-debt constraints that derailed Japan's economic ambitions in the late 1980s by gaining profits in state-orchestrated 'markets' don't seem to be working at home (see Financial Systems: Where the Rubber Hits the Road).

And if the offshore apartment boom that China stimulated suffers the same fate as China's domestic property and share 'market' bubbles, there is a risk that many projects in Australia will be abandoned as they have been in China (ie investors will write off their small initial payments leaving developers and financial institutions to decide whether they want to throw good money after bad).

The market the present writer is most familiar with is Brisbane – and what seems to have happened is as follows. Historically something like 500 apartments have been sold per month. In the last 6 months of 2014, an average of 1500 apartments were being approved each month. This then rose to 3000 / month in January and then declined to 2000 / month in mid 2015. The total number of units, townhouses, apartments, etc in greater Brisbane at the time of the 2011 census was about 148,000 [1] - so new approvals of 2000 / month involves a 17% pa increase compared with a 2.1% pa increase in greater Brisbane's population. While not all approvals will translate into real buildings many do seem to be doing so. At the same time:

  • It was suggested in March 2015 that:
    •  Brisbane had had a surplus of apartments since 2006 - and that that surplus was likely to rise from 5000 in 2014 to 15,000 in 2016 [1];
    • Brisbane's inner city apartment market would crash in 2016 because of oversupply driven by belief in inexhaustible international demand. Gluts in CBD, South Brisbane and West End will cause dramatic price falls. There is an assumption that Asian demand will remain strong - but as can be seen from resources this is uncertain. Apartments are marketed overseas and many in China want to buy them - but government might stop money flowing out of the country. The Gold Coast boom in 1990s depended on endless demand from Japan - but when Japan's economy crashed, developers were left with stock that took years to clear, Development approvals have been increasing (8-10 per week - both small and large blocks). There is no inexhaustible supply of tenants and empty apartments deteriorate as fast as those that are occupied. Crash will come in 2016 when large apartment blocks now being started come on line. Those who buy city apartments off the plan for $600,000 may only resell for $400,000. Overseas buyers pay $560,000 for new apartment that is similar to existing stock that sells for $300,000 - so on resale price reductions will be needed [1]
  • In April 2015 it was reported that apartment prices had started falling in all Australian major cities except Sydney [1];
  • 4000 new home bought by Chinese investors remain vacant and derelict - potentially creating eye-sore in some suburbs. A further 10,000 new homes are expected to be left vacant over the next 5 years. Homes have been bought, not to be used, but to invest in Australia [1]
  • Australians had reportedly concluded in August 2015 that it was no longer a good time to buy real estate;
  • In September 2015 it was noted that:
    •  developers were pushing back projects to ease Brisbane's apartment boom. There were 2277 off-the-plan apartment sales in Brisbane in the 2015 June quarter up 48% on the previous record in December quarter 2014. [It can be noted that a market analyst had previously indicated that 90% of off-the-plan apartment sales were going to investors]. New approvals fell 37% in the June quarter (2790 instead of expected 4450), before rising to 3200 in the September 2015 quarter. Banks were tightening credit especially for investors and constructions costs were rising [1];
    • Australia's banks have funded apartment construction on the basis of 10% deposits and buyers' commitments to purchase on completion. However, if banks conclude that an over-supply is developing, they have the option to withdraw funding and, if many did so, a massive collapse in apartment values could result [1;
  • some major Asian investors were reported to be pulling back from investment in Australian commercial property;
  • Huge amounts of Chinese money is being poured into the development of apartments in Australia (primarily in Sydney, Melbourne and Brisbane). The capital outflow from China was initially supported by the Chinese state. However the latter is now seeking to inhibit capital outflow Thus Chinese investors' ability to buy apartments in Australia is falling. The numbers of unoccupied new apartments is rising - and discounts on buying are rising. Clampdowns on locals' ability to borrow means that they can't take up the slack. In late 2016 large numbers of Australian and Chinese investor will need to pay the remaining 90% of their purchase price. They have assurances that banks will provide the additional capital - but no binding agreements. Apartments are developing as a powder keg [1].
  •  Builders in capital cities (especially Sydney and Melbourne) are finding it harder to get finance from banks - even though they may have massive pre-sales - unless Chinese banks provide the funds. Many builders in desperation are going to non-bank lenders who charge higher fees. As this requires charging higher prices for properties and prices seem under pressure, the risk of bankruptcies by developers is rising. Australia's banks are being forced to be more cautious in their lending because (as shown by CBA's 50% shortfall in capital raising) it is getting harder for banks to access equity capital [1]
  • It was suggested that there will be no property bubble in Australia associated with an over-supply of apartments because banks have constrained lending to developers in accord with banking regulator's requirements to limit investor loans. From August 2015 partly built / stalled apartment buildings have come on the market. However where high rise towers with many apartments are involved, an oversupply could happen quickly [1]
    • [CPDS Comment: Restricting loans to investors will not only constrain the development of new apartments but reduce overall demand and thus the rapid price growth which has led to high levels of investor demand for apartments. This in turn could create a significant apartment over-supply (because investors then have no speculative motive for buying) even where the rate of new developments declines]
  • A crash in Brisbane's inner-city apartment market is expected in 2016 due to over-supply associated with belief in inexhaustible international demand [1]
  • In Australia wages are stagnating while housing debt to income levels are increasing. This is seen to be unsustainable [1];
  • The RBA has forecast an end to Australia's housing boom, pointing to falling confidence and a glut of inner-city apartments and office building that could fuel price slumps and significant losses for developers and lenders [1]
  • The RBA has argued that banks' exposure to property developers and investors is the main risk facing Australia's financial system [1];
  • major developers and financiers nationally expect property prices growth to slow and decline (say 10-20%) in areas where large numbers of apartments are being built. The top of market is approaching - and buyers know that vendors will need to drop prices to get sales [1].
  • Chinese demand for global property could fall 30% in 2015 because of its domestic economic weaknesses - and compound constraints on Australian property demand associated with potential housing over-supply, regulatory crackdown on investors and poor affordability. Foreign buyers are however still in the market - buying 1/6th and 1/10th respectively of new and existing homes according the NAB. However it is hard to get reliable official data [1]
    • [CPDS Comment: Suggestions that an 'over-supply' of housing were emerging was soon disputed - as it was argued that there had been a large shortage which was merely being reduced [1]. However the very real shortage of housing relative to the number of households who need accommodation is less relevant to the housing market than whether there was a shortage relative to the number of household who could afford to buy. Affordability constraints have been severe. Claims of a 'shortage' that would support the housing market probably need to be viewed with caution];
  • Some parts of real estate market are experiencing fear - mainly overheated markets in Sydney and Melbourne. It uncertain if this could spread. Markets were exuberant in early 2015. Warnings about extent of investor activity and record low affordability were ignored. Then APRA rules changed and banks started raising interest rates - and observers became cautious. Traditional financiers expect 20% of off-the-plan investors to be unable to settle on completion. This will apply mainly to flood of one-bedroom apartments that were never designed to be lived in but just to meet investors' price points. Some people will lose money. Apartments designed for owner-occupiers will be less exposed - but contagion is possible [1];
  • a building boom is bringing a huge number of new apartments onto the market just as sentiment about whether this is a good time to buy has collapsed [1, 2];
  • a marketing group reported continued strong apartment sales to Chinese buyers [1];
  • Chinese demand for Australian property has fallen 15% yoy - with a particular fall in investor interest in Sydney and Melbourne [1]
  • Fear has crept into the housing market because of a significant and rapid decline in auction clearance rates - at the same time that large numbers of new properties are being built and migration rates are low [1];
  • lending for investment in Australian property has fallen significantly (ie down 19% in October 2015 from lending in April) [1]
  • Very large numbers of new homes are vacant in Australia because foreign buyers neither use them nor rent them. Their goal seems to be to make capital gains [1];
  • a developer argues that there is no housing shortage because councils have approved too many developments. He argues that migration rates need to be increased to overcome the problem of oversupply and because economy depends on housing construction. About 20% of investor-owned properties in Melbourne are unoccupied [1;
  • Increasing construction of new apartments (especially high density units) has affected price growth - because it has accompanied affordability constraints, slowing migration, low wages growth and restrictions on investor lending. Prices are declining in some locations. In Melbourne a limited study found that about half of units sold in 2014 and 2015 are worth less than they were bought for (with average loss of $40,000 / 10%). 1% had increased in price. Over-supply seems to be becoming a problem in inner-city areas of Melbourne and Brisbane - where rental markets are also soft. High-rise apartment approvals has been rising rapidly to mid 2015 (the latest time for which data is available) - eg to about 13,000 (over previous year) in Brisbane [1]
  • over-supply of units in Sydney and Melbourne (which makes it hard to rent units and discourages investors) has led to significant declines in new approvals. The same is likely soon in Brisbane [1]
  • Changes in China were seen as likely to affect apartment market in Australia
    • China is tightening rules related to foreign currency trading in order to stem the flow of yuan out of the country (eg into foreign real estate) - because China's economy is weak and outflows increase pressure on yuan value - which is already being devalued [1]
    • China's restrictions on capital outflow (which limit transfers to $50,000 pa) are starting to affect Sydney property market. Only those with businesses to arrange transfers are likely to be able to purchase expensive properties [1]
    • Australia's apartment market is on verge of sharp decline - which China's crackdown on illegal foreign currency transfers will exacerbate (according to Asia-specialist broker, CLSA). Pressures on apartment market include: increased loan rates for investors; ATO takeover of enforcing foreign investor regulations; China's new capital controls; high level of apartment development; and rising mortgage rates. China's citizens can only legally exchange $50,000 of yuan for other currencies annually. China and Australia are to collaborate in identifying illegal transfers. CBRE described the CLSA report as overly simplistic because only 18% of sales were to Chinese [1]
    • Chinese developers are still keen on expanding in Australian market despite restrictions on capital coming out of China as: (a) many customers have Australian residency; (b) funds for Chinese buyers are mainly raised in Australia; and (c) they are adapting product lines to suit domestic buyers [1]
    • Any restriction on offshore investment by China was seen as likely to have a dramatic impact on Australia's apartment market [1];
    • Westpac believes that the credit quality of Chinese companies has not fallen and that they have an increasing desire for foreign investment [1];
    • House sellers in Sydney's northern suburbs have had to drop prices 10% because of the absence now of the Chinese buyers whose demand had previously driven prices higher [1]
    • Chinese Australians have widely (ie in 50% of cases) made use of foreign money (from extended families) to buy property in Australia (especially in Sydney and Melbourne). Demand still seems to be strong in Melbourne's east. How many of these sales are legal is unknown. [1]
  • disruptions in global financial markets in early 2016 (due to: losses from investments in commodities / oil emerging market; uncertainties related to the effect of derivatives; China's potential credit crisis and capital flight; 'bail-in' provisions for investors in Europe; and the inability of reserve banks to counter these problems) led to expectations of rising interest rates;
    • Global banking risk could hurt Australia's largest lenders because of the extent of their outstanding bonds [1]
  • The RBA warned banks against unofficial interest rate increases - on the grounds that rising costs of funds was not sufficient to justify this and global financial system could stabilize;
  • Chinese property developers bring risks to property markets elsewhere with them - because of their exposure to a potential property crash in China

Yingkou (near the Korean border) is an example of the cities that have been built in China that are essentially deserted. Vanke is the world's largest home builder by sales and it sees this over-supply of housing (ie the empty developments that existing in all major Chinese cities) as a problem. Developing them drove China's rapid economic growth for years. But Vanke believes that city development will be subsidized by the Ministry of Finance so that companies and local governments can spend knowing that government will support them if things go bad. This has inflated the world's biggest debt bubble. But now Vanke's profits have slowed, and its borrowing costs are rising. Eventually everyone will realize that a significant part of the existing inventory of China's empty housing will need to be removed. The bad debts of China's banks will escalate. Vanke is looking for new opportunities by investing in property development abroad. However this is increasing the risk that other countries face because the Chinese companies bring with them an exposure to a Chinese property crash. While China's government may back Chinese property developers, they may not be willing or able to do so indefinitely [1] 

  • Brisbane based builder Trac Construction has placed itself in liquidation, revealing problems for city's saturated apartment market. Such companies increasingly operate on very thin margins. Its collapse has left several building projects incomplete [1]
  • House prices in Brisbane increased in the December 2015 quarter - but median unit / townhouse prices fell 2.1% while sales activity fell 16% [1]
  • Brisbane's inner city apartment market is likely to crash in 2016 - because oversupply has been driven by a belief in inexhaustible overseas demand. This will hurt developers / off-the-plan buyers and some banks - but benefit renters and buyers. Experience shows that offshore demand can moderate. Many Chinese want to buy - but may be prevented by their government. Gold Coast boom in 1990s was based on belief in inexhaustible Japanese demand - but when Japan's economy crashed developers were left with stock that took years to clear. Development approvals have been increasing (8-10 / week recently). Investors need to recognise that there is a limit to tenants also.  Off the plan buyers will face big price falls in an over-supplied market [1]
  • High property prices are a major factor in Australia’s high cost structure – which undermines international competitiveness. To promote growth in Australia's post-resource-boom environment it is thus in government's interest to ensure a big fall in house prices - and both major parties have (different) policies proposals that would have this effect [1];
  • Lucy Ellis, head of RBA's Financial Stability Department, spoke of the drivers of booms and busts. This provided a very useful way of understanding why Australia is soon likely to experience a crash in apartment markets - though her address did not mention property or any other specific sector  [1]
  • Long anticipated slowdown has hit Melbourne's property market - and central city unit buyers have no hope of capital gains to compensate for low rental yields. The risk is that buyers of new units might choose to forgo their deposits and walk away. If developers get into trouble this will increase bad debt risks for banks. In China efforts to tackle the glut of vacant housing by encouraging home lending have created a bigger problem - a surge in risky sub-prime loans that is alarming regulators [1]
  • credit squeeze by APRA (ie constraint on increases in investment lending by banks) has combined with ASIC actions (related to requiring better quality of bank lending) to create concerns in apartment markets. This threatens dwelling prices, banks and the broader economy. Tightening control of money coming out of China compounds the problem - as Chinese who have paid deposits now find it necessary to seek Australian bank funds. Some buyers who put down 10% deposit are likely to walk away. Any decline in the big (eg 30%) share of apartment demand coming from China could lead to major price falls in Sydney and Melbourne. Banks' losses in resource sector will then be compounded by losses in residential construction and dwellings [1]
  • the bubble has burst in terms of price and rental income for inner Brisbane apartment owners. Sales can be up to $45,000 less than were paid 'off the plan' three years ago. 15% of units sold in the December quarter involved a loss - much more than the 5% for houses. Declines in rental income have also been significant (eg from $500 pw to $420) [1]
  • The number of cranes in use in Australia increased 20% in six months to the end of March 2016 - mainly in Melbourne, Sydney, Brisbane. This reflects building approvals 3 years years ago. The world's biggest buildings are often sold during a property bust because of this lag.  [1]
  • Australia faces a banking crisis like that in 1990s - though Chinese banks also carry an unknown share of the risks. Foreign investment accounted for most recent new property investment in Australia rising sharply in 2014-15 - and the total for 2013-14 and 2014-15 was about $65bn (concentrated in Sydney / Melbourne apartments). This is very significant as mining boom investments had been about $100bn. Unexpectedly it appears that Australian banks (not just Chinese banks) have funded as significant (but unknown) share of this. The problem is that the security for loans to developers is forward sales. Buyers provide a 10-30% deposit - but there is usually no bank agreement to fund to final purchase. In funding settlement banks are now setting values much below original purchase prices. It is now hard to get money out of China and Australian bank's ability to fund investment is being squeezed by APRA. Banks are worried about their $1bn exposure to Arrium - but are likely to have much greater exposure to apartments. There may be no problem if banks fund the ultimate settlement - but they don't have to even though other parts of banking system carry potential losses on loans to developers. [1]
  • foreign investment in housing rose 75% over past years (to $61bn) - raising concerns about impact of housing correction on banks. Economy has been boosted by this in post-resource-investment-boom era. However some are concerned about the effect of $65bn investment pipeline in Sydney / Melbourne nearing completion. Opinions differ on the potential risks. Reduced capital outflow from China could pose risks - but official efforts to restrict this have had little impact to date. Some argue that developers settlement risks are exaggerated - as they would be well ahead (given deposits less agency fees) if properties could again be sold at earlier prices [1;
  • Australian apartments are in over-supply. The number built has doubled over past 4 years. This starting to hurt. Central Melbourne apartments are being sold 30% below off-the-plan price. The finance provided for housing has increased 65% over the past 4 years - but has now peaked and is likely to fall significantly as number of building approvals roll over [1]
  • the rapid rise in house prices in recent years has driven down rental yields, and thus made investors increasingly dependent on capital gains to avoid losses. This increases the risks for residential property investors and for residential mortgage-backed securities [1]
  • the growth in Australian property prices has almost stopped - and modest declines seem likely in future. This may be the end of the last major property boom that Australia will see for many years. Interest rates have been low for many years and many marginal investors are already in the market. Others are now increasingly reluctant. [1]
  • investors get carried away with every asset boom - but when the market tops it is clear that there is no more chance of easy money. Average property investors now will lose money over the next few years. Residential boom peaked in June 2015. There might be sight increases in property prices over the next few years (eg 2%) but these won't compensate for investment / maintenance costs and low rental yields available [1]
  • banks warn that Australia's AAA credit rating is at risk because of rising debt levels - though perhaps not for another year. Losing AAA rating would make it more expensive for banks to borrow internationally to lend for property [1]
  • Chinese demand for Australian property is expected to be higher in 2016 than in 2015. China is now Australia's largest foreign investor - investing $46.6bn in 2015 of which $24bn was for real estate (double the previous year's amount). Australia is a preferred investment destination - and risk minimization is the major motive. Government efforts to slow offshore capital flows have made it harder for some to get money out of China. [1]
  • there is concern about Chinese investors' ability to provide funding to settle on the large numbers of properties that they have paid deposits for.

Sydney businessman (Andrew Su) who is involved in facilitating cash transfers for major real estate transactions expresses alarm about growing problems in getting money out of China. Investors have been able to get 10% deposit out but are unlikely to be able to get out what is needed for settlement. FIRB data shows the extent of reliance on foreign (Chinese) capital inflow. There is thus concern about what will happen when foreign investment slows to a trickle and there is and unprecedented new supply on the market. Offshore investment in property had doubled to $60bn in 2014-15. A point of weakness could arise if borrowers can't access funds to complete their transactions. Property analyst (Andrew Johnson) argues that Australia's largest developers depend on apartment sales to drive their earnings (eg this is the basis of 60% of Lend Lease's earnings). New home / apartment starts in Australia reached a record of 220,000 in 2015 mainly in very small geographic areas. Chinese government is clamping down on very popular method of getting money out of China (using UnionPay to buy insurance policies and falsifying invoicing). Saul Eslake argues that though it is harder now to get money out of China, devaluation of $A has made properties more affordable. Invoices from Hong Kong (a proxy for China's capital outflows) remain strong. Charles Pittar (Juwai) argues that 70% of Chinese buyers will settle with cash - ie not require foreign capital. Also investment inquiries are continuing to rise. Confusion arises because: (a) there is no certainty about the extent of foreign purchase of Australian property (perhaps 40%); and (b) Australia's banks only fund 30% of apartment transactions in Sydney and Melbourne - and no one has any idea who funds the rest. Andrew Su's biggest fear is that buyers who have put down 10% deposit will disappear when it comes time to settle. Local developers sell no more than 20% of apartments offshore - yet foreign developers are have no such constraints. Sam Elbana (CPM Realty) doubts that problems in new new apartment market could affect other areas - because of underlying shortage. However surveys show that now is not seen as a good time to buy dwellings. Approvals have fallen 5% to 210,00 pa. Completions keep rising  (192,000 in 2015 - an 11% increase and a record high and more expected in 2016). There is a slump in sentiment towards buying just as completions are rising rapidly to record high. Professor Steve Keen argues that China's demand is driven by many factors and is not necessarily stable and able to mop up excess supply. He also believes that China faces a financial crisis risk. Also China's anti-corruption drive could lead to a sudden fall in Chinese buying [1]

  • RBA has warned of apartment price shock as new developments swamp demand and banks tighten lending requirements - especially in Sydney / Melbourne / Brisbane. The extent of the risk depends on whether capital outflows from China are maintained. If this slows property prices would be under pressure and banks' risk exposure would rise. Meriton groups argued that the problem was tighter bank lending conditions as demand was strong and Chinese investors always settled. However banks could cause problems if they advanced less of settlement than they had agreed on when contracts were signed.  Lend Lease said there was no sign of rising defaults. Residential Development Council agreed with RBA view - and noted that Chinese buyers were well aware of apartment over-supply in Australia.  [1]
  • A record number of apartments are due to settle in a slowing market - leading to disputes between buyers and developers. Banks are requiring buyers to put up more equity. An agent reports 25-30% fall in listings in N / NW Sydney starting in April 2016 because Chinese buying has declined. Australia is likely to suffer housing led slowdown.  RBA engineered property construction boom to offset effect of resource investment slowdown - but succeeded too well [1];
  •  Apartment market is significant to Australia's economy (given $65bn in approvals). The way it is financed creates risks - as many developers have weak balance sheets and rely on off-the-plan sales to Asian / local buyers. Asian buyers are the majority. They pay 10% deposit - then banks lend 45-50% with the balance coming as second mortgages. Local banks are the main source of funds for Chinese buyers. If they can't get funds this will lead to losses by developers / banks. Banks feel safe because arrangements with buyers have escape clauses. Chinese buyers were told that if they provide an extra 20% deposit - then bank would lend 70 (subject to valuation). This is now becoming a problem because: (a) valuations are falling, Brisbane / Perth developers are having trouble getting pre-sales - so developers have borrowed much more of construction costs; (b) APRA has required banks to hold extra capital because of concern they are leveraged too far and chose borrowers very carefully; and (c) it is harder to get money out of China. If off-the-plan apartment buyers can't raise money, apartment prices will fall 20-30%. This will cause problems for developers / second mortgage lenders to developers - some being banks. A major bank / apartment crisis is brewing. This will undermine Chinese confidence in investing in Australia, and Australia's economy [1]
  • Foreign buyers have fallen to  11.8% of market from 16.8% as a result of tighter laws related to foreign purchases [1]
  • confidence in Queensland's property industry about future investment is low by national standards as the apartment building boom ceases [1]
  •  Australia's housing market slowdown will continue this year - but will not lead to a household debt crisis. An apartment market meltdown is however possible. Property prices had been rising rapidly since 2012 - but have now stabilized. Household debt should be manageable given low interest rates, jobs growth, favourable distribution of debt (ie the households with debt can service it) and tighter lending standards - even though household debt / income has risen to 186% (from 167% in 2011) putting it amongst world's highest. Australia also: has full-recourse mortgages;  has not had sub-prime lending; has mortgages typically 2.5 years prepaid; and reducing loan / valuation ratios. Home-loan arrears are likely to remain low. The risk from apartment over-supply is greatest in Melbourne and Brisbane - where apartment building has been at record highs relative to existing stock. Falls in apartment prices would be unlikely to be matched by falls in detached housing - where the market was not oversupplied [1]
  • Australians are starting to fall behind on mortgage payments [1]
  • By emphasizing the need for negative gearing to enable families to buy a home (through first acquiring one or two rental properties) the Prime Minister was actually highlighting Australia's housing affordability crisis [1
    • [CPDS Comment: in relation to this it can be noted that a housing affordability crisis in the UK has been seen as likely to lead to a property market crash [1]  ].
  • Westpac announced in April 2016 that it would no longer provide funding for foreign property investors - and that those with residential status but offshore income / financial sources would be limited to loans of 70% of a property's value [1]
  • Japanese insurance companies (who control $US3.2tr in financial assets) are reportedly considering offshore investing to gain a yield (currently zero or negative for money invested in Japanese government bonds). This could result in capital flows to Australia (because of higher yields and secure property rights) - eg for infrastructure that could potential boost real estate [1]
    • [CPDS Comment: If Japanese insurers sell government bonds offshore and invest the proceeds offshore, this has the same effect as China's initiative to encourage offshore purchase of bonds which are of dubious value because of China's unreliable financial practices. A key question is what price Japanese insurers would be able to get for selling government bonds with zero / negative yields to maturity - when Japan has a presumably unsustainably high debt / GDP burden]
  • a survey by REIQ suggested that 79% of landlord property owners would abandon property as in investment strategy if the ALP's proposed changes to negative gearing (ie to limit negative gearing to new housing from 1/7/17) were introduced. This would reduce property prices and increase rents [1]
  • Asian home buyers have retreated from buying in Sydney's upper north shore because of tighter bank conditions on lending and China's constraints on capital outflows. Property values have fallen 3-8% [1]
  • house prices will be boosted by: (a) RBA's interest rate cuts; and (b) federal budget that left negative gearing intact and discouraged investment in superannuation [1]
  • A lot of apartments are being built in Australia. Estimates suggest that 231,000 will be built in capital cities over next 24 months. Some are concerned about a housing glut. Increased supply is being accompanied by tighter restrictions on investors and overseas buyers. Properties are likely to be worth less than they were off the plan - and this is already happening with 30% discounts on some apartments in central Melbourne. RBA warned last year of potential risk - particularly in central Melbourne and Brisbane [1]
  • analysts question whether buyers will be able to settle on the tidal wave of new apartments that are headed for completion in eastern Australia. Core Logic RP Data have flagged settlement risk in Sydney / Melbourne / Brisbane where over 200,000 new apartments are excepted to be completed over next 2 years. To absorb this would require a new spike in demand. In Melbourne and Sydney even past demand peaks would not be enough. Developers face settlement risks as investor and offshore buying slows to a trickle. Though default rates are still below 1% analysts are cautious - because tighter lending environment. slowing capital growth, geographic concentration could cause some buyers to just walk away [1]
  • two trends have recently emerged in apartment market in Sydney (which are likely to spread to Melbourne and Brisbane). Chinese / Asian demand (which had accounted for 80% of apartment purchases) has halved. At the same time domestic demand has been increased because: (a) the federal government has significantly reduced the appeal of superannuation as a savings vehicle; and (b) the RBA has started cutting interest rates. Domestic investors don't seem to believe that ALP (which would cut negative gearing) will win election. Chinese buying has fallen because it is harder to get money out of China and local banks have tightened lending requirements for offshore investors. Unless domestic buying increases there will be a significant fall in apartment development / prices - and this will have economic implications because Chinese buying of apartments have underpinned Australia's economy in post-commodity-boom era. [1]
  • RBA has expressed concerns about settlement risks for apartments - and a prominent research firm supports this given glut of new home units. In Melbourne and Brisbane a recurrence of peak yearly sales would not cope with unit completions over the next two years - and over-supply leads to lower prices and increase buyers' incentive to walk away. This creates problems for developers and banks. 231,000 units will be completed over next 2 years in major capitals compared with 95,000 sales last year (or which over half were re-sales not new units). [1]
  • real estate agents are concerned about property market given reductions in listings / auctions / auction clearance rates [1];
  • declining Chinese appetite for new apartments and tighter restrictions on lending to foreign developers could collapse a market facing a flood of 250,000 new units within two years. There is a risk that investment buyers (who make up 70% of residential unit market) won't be able to settle under tighter restrictions. Off the plan apartment sales have weakened severely in Melbourne, while Chinese developers are selling apartment sites they bought in recent years - because banks would not finance development. Chinese demand is declining because it is getting harder to get money out of China - and local banks are not lending as much to such people. The Brisbane market faces major adjustments with many proposed towers not going to happen. Sales of new apartments in Brisbane are strong - but sales of established apartments have fallen 17% over the past year. No one is buying established apartments in Brisbane [1]
  • Constraining investment in Australia's apartment market by Australia's biggest trading partners (China) will have adverse consequences for banks and increase the risk of a recession [1].
  • constraints on Chinese property investment in Australia (because of local concerns about the effect on affordability) is resulting in a shift towards investment in the US [1]
  • an apartment over-supply is likely to result in falling prices. Australia's 18 month oversupply is more than the 12 months overhang in the US before its housing market bubble burst. An oversupply of 200,000 dwellings is expected by the end of 2016. The volume of new apartments being constructed exceeds average number of apartment sales overall over past 5 years. In the US before the housing bubble burst in 2007, there had been a record level of housing construction to keep up with demand. Australia is not exposed to a sub-prime risk to the same extent that US had been. None-the-less the apartment over-supply will exacerbate the already starting fall in property prices [1]
  • Sales of new residential properties to offshore buyers could be much higher (eg 25%) than local banks estimate - raising risks for banks / economy according to Fitch Ratings. National property market is slowing faster than usual. Andrea Jaehne (Fitch) was shocked by 8 fold increase in approvals from 2010-2015 - though the true number was unknown because buying off the plan did not require approval. 25% might be too low -as some developments in Sydney involved 80% offshore buyers. Regulators and banks have restricted offshore buyers - leading to concern by property developers. 250,000 new apartments will hit the market over next 2 years. Fitch downgraded 5 residential mortgage-backed bonds [1]
  • 'herd' behaviour (ie where what people do is mainly influenced by what others are doing) has been a factor in housing booms and busts (eg the US sub-prime crisis) - and can be identified in relation to Australia's apartment market [1]
  • China's property bubble as reemerged - and there is discussion amongst those involved of the advantages of foreign purchases. There has been worry about Australia because of problems in getting money out of China and crackdown by major banks on loans based on foreign income. The ATO is also tightening conditions. Developers suspect that the impact of this will be clear in 2-3 months when many big city projects are due to settle. New starts on apartment development will slow in future - and (Qualitas suggested): (a) this could force prices higher at some point; and (b) while there is unprecedented supply in Brisbane / Sydney / Melbourne this could be absorbed by high migration levels. The proportion of foreign buyers has been increasing over past 2 years - with many projects now having 40% of foreign buyers. Chinese buyers see tighter rules as a political reaction to foreign competition for owner occupiers. A similar situation has emerged in Canada. And China has tightened enforcement of its rules related to getting capital out of China. Bank clampdown may have emerged because of spate of bad loans through mortgage brokers in Sydney - though this has not happened everywhere. Foreign banks will fill the gap left by Australian banks in lending for Australian property [1]
  •  Young Chinese residents in Australia used family money to buy real estate in Australia. This has increased over past 5 years - and propped up markets in Sydney and Melbourne. This is seen to protect parents' money from inflation and foreign-exchange risk. Properties could be resold later to repay parents. Despite China's crackdown on getting money out, this has been possible by breaking transfers down to small amounts and reliance on friends and relatives. Chinese origin buyers who are resident / citizens are biggest group inspecting properties - and sign contracts without indicating that getting money is a constraint. Properties are a lot cheaper and bigger than those available in Beijing [1]
  • Loose lending standards by Australia's banks have been seen to possibly lead to decline in house prices - but Australia's lending practices have been good relative to (say) US - so US style collapse won't happen. And the trigger for this (ie rising RBA interest rates) won't happen til 2018. Stagnant prices are all that is likely over next couple of years.  [1]
  • Capital Economics has forecast a 10+% fall in house prices - after 2 years of stagnation. However this assumes that RBA, APRA, banks don't adjust their policies and practices  [1]
  • a sharp jump in property prices (especially in Sydney) occurred in May 2016 - but this was entirely due to houses as unit prices were stagnant [1]
  • over the past 20 years there have been many factors that have driven a three-fold increase in property prices and a 2 fold rise in rents. 20 of these factors can be suggested - and very few of them are likely to apply in future [1]
  • Australian house prices resumed increasing in May 2016 (especially in Sydney). This may be due to prospect of ALP election win and changes to negative gearing rules [1]
  • The share of foreign buying in Australian residential policies has fallen to a 2.5 year low in first quarter of 2016 (ie to 11.8%) - as a result of various tightening measures. However that share has continued rising (to 21.9%) in Brisbane [1]
  • The RBA has again warned about the investment risks associated with an oversupply of apartments in major Eastern cities [1]
  • OECD has warned that Australia's housing market may be on the brink of dramatic and destabilizing developments - rather than a soft landing [1]
  • Banks are cutting the values assigned for settlement of apartments bought off the plan - raising the risk that more deals will fail in the face of Australia's 70,000 apartment glut. High density units made up 70% of residential work under construction. A sharp fall has occurred in unit sales / completions because of over-supply and rising settlement times. Given household debts of 125% of GDP even small falls in prices could have serious economic consequences  [1]
  • Property developers are pulling back - in the face of tighter lending, rising building costs, reduced Chinese buying and an apartment oversupply. Investor lending has fallen sharply and there is international and RBA concern about bank's exposure to Australia's high house prices. Investor home loans fell another 5% in April 2016 - to 21% less than a year before. Moody's sees rising house prices and leverage as a credit negative for Australia big banks - because of potential for price slump. Several large-scale apartment projects in central Brisbane (and in other cities) have been delayed [1]
  • Standard and Poor's has warned about threats to inner city apartment prices - because of many new units coming onto market and difficulties that off-the-plan buyers have in settling. It did not however expect an increase in the number of defaults. [1]
  • Issuance of residential mortgage backed securities decline 68% over a year previously in first quarter of 2016 - because expected returns rose and RMBS prices fell. This has been an important source of finance for mortgage lending especially for smaller financial institutions [1]
  • Huge commissions are being paid by developers to agents who can sell apartments to Chinese investors. This may indicate end of apartment bubble. Australian investors are standing aside [1]
  • high property prices make home purchases impossible for many young people without the support of (parental) guarantors. Guarantor loans were very popular in Spain during the 1997-2007 bubble - which is similar to Australia today. Property prices rose to 6 times average incomes - and foreign investor participation in the market rose from 0.5% to 12%. Property values have since fallen 55% - and there has been a 52% default rate on properties bought at the height of the boom. This has often resulted in parental guarantors also losing their home [1]
  • slowing of Chinese demand (because of curbs on capital outflows and increased stamp duties for foreign buyers in some states) could have more serious adverse effect on apartment market than supply glut. 15-25% of apartment buyers are from offshore - and if they are taken out of market it will make a major difference. Chinese buyers have lost the ability to get money out of their country - just as major banks have limited lending to foreign buyers. Chinese are buying property in Australia because they want to get money out of China. This is not a good reason - and can potentially lead to disaster. A national over-supply of 70,000 apartments are leading to off-the-plan purchases being revalued well below purchase price. Increased stamp duties in some states combined with high commissions on sales to China meant that 25% of sale prices had nothing to do with value of properties. The biggest source of defaults on property purchases is job-losses - not falling prices. [1]
  • one in six apartments sold to Chinese buyers did not settle [1]
  • mortgage lending to investors is likely to be further tightened. Investors can still commit a larer share of their income that owner-occupiers. Some banks are aggressively targeting investors. Banks are less conservative than those overseas. Banks are also offering deeper discounts off mortgage rates - which will reduce their profitability. There was some tightening of mortgage lending to investors in 2015 - but a significant gap to owner-occupiers still exists [1]
  • Apartment prices in Australia are falling (0.8% decline in March quarter) just as 230,000 new apartments are coming on the market (ie about 10,000 each month) [1]
  • There are many factors to blame for problems in apartment market. Not all projects are in trouble - but many good projects are suffering collateral damage. The real problem is poor match between market and what is being built. Property should not be built to sell offshore - or just to create jobs. Half new 'homes' being built are in high rise 'boxes' and up to half are sold offshore. The local (real) demand for this 'product is 10%. Homes should be built for people - not for capital flight. Up to 30% (more in some cities) have been sold offshore. Developers claim economy will crash if this were to stop. Also 1 in 10 established home sales have been offshore - though this is illegal. And policy changes are being made to facilitate this. The 'solution' to building product for which there is no real demand is to pay much higher commissions to sell it. But even flight capital is not that foolish. A better approach would be local market match.  Receiverships are likely [1]
  • During 2016 March quarter 20% of apartments sold at a loss, as did 10% of houses. In some mining regions the figure was 50%. And many other properties are now worth less than was paid for them.  This reflects both end of mining boom and flood of apartment construction. If continued this would adversely affect home prices, banks and economy. Prices had risen rapidly in Sydney and Melbourne. Now lenders are devaluing property assets in their portfolios - which reduces the amount they can lend to others. A major downturn could be economically catastrophic - and investors are now pricing this in. Major banks have been hit with 49% rise in bad debts. Glencore Mortgage Insurance is priced well below its book value. Bad debts are already a disaster in regional areas. Risk areas include: spread of mining town problems into Perth; Chinese capital which had supported construction boom / house prices is drying up; and supply is exploding just as demand is collapsing. Big banks face about $21bn mortgage loss - $9bn after mortgage insurance and tax reduction.  Mortgage insurers may be unable to cover the cost of larger falls. And RBA might then find it necessary to cut interest rates which would further reduce bank's revenues. ALP proposals to cut negative gearing would further reduce property demand from investors - and much new construction has been built only for investors not for owner-occupier market. [1]   
  •  NAB suggests that 30% of foreign (mainly Chinese) owned apartments will remain empty after splurge. 60% of off-the-plan apartment sales in Melbourne CBD (and 50% in Sydney) were financed outside big four banks - probably through offshore institutions / banks. This has made Melbourne's market being 3x oversupplied (while Sydney's in 2x). No one knows who is financing 60-70% of Melbourne's apartment market. China's government has tried to limit capital outflows - but there are ways around this. Chinese investors have been forced to delay settlement on apartments because of tightening by local banks [1]
  • Investors and foreign buyers of Australian residential property (especially apartments) are being hard hit by difficulties in getting funds and by additional taxes. And as they account for over 50% of apartment purchases, this will adversely affect the market. Whether particular areas will be affected depends on: amount of supply; numbers of offshore buyers; and cost of apartments (with lower cost areas worst affected) [1]
  • Australia's house prices may be boosted by Brexit vote [1]
  • The property market could improve as investors react to election uncertainty and sharemarket volatility. Also loss of Australia's AAA credit rating could move investors away from financial markets. Property went up after GFC. However others are concerned about the adverse effects of higher interest rates if the credit rating was downgraded [1]
  • as interest rates have fallen from 18% in late 1980s to 4% now, property prices have rising relative to incomes. Apartment oversupply and failed settlements suggests that developers will have to sell stock to meet debt obligations - and thus lead to fall in apartment prices. While development applications have been mothballed, construction is continuing unabated. Dwelling construction is 3.5% of GDP - double that in 2000. Multi-story apartments' construction is now $40bn up from $5bn in 2001. And commencements will continue to increase rapidly for at least 6 months more. Higher prices for property imply lower returns - irrespective of whether interest rates now remain low or rise [1]
  • Steep falls in housing prices and rentals are likely before mid 2019 because of wave of apartment developments and fall in population growth - according the BIS. Falls for apartments (eg 5% in Sydney, 8% in Melbourne and 6% in Brisbane) are expected to be double that for detached housing. AMP capital expects 5-10% falls for houses by 2018-19 and 15-20% for apartments. However buyers are still taking advantage of low interest rates - despite concern about possible downturn. Economists don't accept suggestions that widespread prices falls could undermine stability of Australia's banks. To cause a big problem there would need to be a recession and rising unemployment [1]
  • in 2017 apartment prices are expected to fall  in Perth, Melbourne Brisbane and Sydney according to NAB survey [1]
  • Property prices are likely to fall in Australia over next three years because of: (a) falling confidence; (b) oversupply; (c) falling rents; (d) already falling prices; and (e) buyers' reluctance [1]
  • the average Australian home is about 25% overvalued - a situation that could unwind dramatically if China's economy deteriorates further (according to Chris Richardson,  Deloitte Access Economics). Brexit will have little effect. China is the biggest threat. China's borrowing has surged and debt levels are already very high. China has deferred its need to shift away from construction and rising debt. It is taking on more debt to deal with problems created by too much debt.  China has built and borrowed too much [1]
  • 20% of apartments sold at a loss in March quarter 2016 - as 10% of houses also did [1]
  • The price gaps between houses and units in Brisbane is the highest in over 10 years. In June 2016 quarter units fell 1.8% while houses rose 1.2% [1]
  • Australian investors are concentrating their risks in housing market. Over 10% of home loans are now interest only. Foreign investors have dominated residential property investment. There are two different claims about the extent of negative gearing of investment properties (49% / 62%). The percentage of population involved in property investment remains about 5.6-7%. Interest only borrowing for buying properties has increased rapidly (to now about 40%) indicating reliance on capital gains. Interest-only loans are being taken for more expensive properties. Fixed rate mortgages have become increasingly popular (now about 17.9%). [1]
  • There is an inconsistency between the fact that about 2/3 of Australians believe that now is a good time to buy property and that 2/3 believe that prices are likely to fall [1]
    • [Comment: The discrepancy might be explained by the fact that interest rates are very low and buying now offers scope to lock those low rates in - which could offset the effect of declining property prices providing the falls are minor]
  • The large number of cranes in Australia's eastern cities either supports (or tears down) concerns about whether Australia faces catastrophic housing bubble. Crane 'index' has risen 145% since 2013.  Some are also concerned about increased mortgage arrears. The issue has significant implications for banking system as housing underpins the financial system. APRA keeps increasing mortgage security requirements - despite long history of no major problems. Capital city housing prices have risen 32% since last trough in 2012 - and 22% compared with last peak in 2010. The latter growth is the same as rise of after-tax household income after the same period. Low-doc lending (equivalent to US subprime mortgages) has negligible role [1]
  • The number of households facing default on mortgages has increased to 10% up from 5% in December 2015 [1]
  • The rate of approval of both houses and apartments fell about 5% over the year to June 2016 [1]
  • dwelling rentals are falling nationwide as a symptom of a tightened economy. If this continues those who have been forecasting a decline in prices will be vindicated. Prices have been able to rise while rentals fall because of low interest rates and Asian buying. Rentals depend on people's capacity to pay. Wage growth has been low and real unemployment has been rising [1]
  •  There is now fundamental change in business world (as illustrated by US trend to protectionism and banks' decision to raise deposit rates when RBA was lowering official rates). The post GFC era is ending. Another change involves the retreat of Chinese capital that has been boosting North American and Australian real estate. There are thousand of apartments Chinese buyers secured on the basis of 10% deposit whose purchase they may not be able to complete.  However in this respect Australia is just a sideline - as the major issue has involved the effect on prices in major US cities of huge flows of legal and illegal Chinese capital. Real estate prices have all the appearances of a bubble. China's crackdown on illegal capital outflows is now starting to affect North America. The real estate party seems to be over in North America and Australia. Concerns about the results of stress tests by European banks (which multiplied fears about failure in a crisis) explains Australian banks' lifting of rates for depositors. Many banks (especially in Italy) are badly capitalised and still have bad debts on their books. Thus Australia's banks now believe it is too risky to rely on borrowing in Europe to fund local lending [1]
  • Chinese buyers would bought apartments 'off the plan' with 10% deposit have started walking away en masse. This is unprecedented. The problem is likely to be much greater in Melbourne than in Sydney - because that is where huge numbers of one-bedroom apartments were built for Chinese investors. However other Asian and Australian investors are filling the gap. It is not clear how the other Asian investors will fund their purchases - but it seems that people in Hong Kong are becoming alarmed about aggressive stance of mainland China. It is possible to get money out of Hong Kong now - but this might not continue. Developers can sell apartments at the same or higher prices because contracts were not broken because of price falls - but because buyers could not finance purchase. In 2014-15 bank lending for new construction in Australia had come from foreign investor ($42bn), domestic investor ($10bn) and owner-occupiers ($21bn)  [1]
  •  Queensland's two biggest lenders (BoQ, Suncorp) have raised concerns about wave of inner city apartments coming on the Brisbane market. The rate of defaults by buyers (especially foreign buyers) has increased - though there was no evidence of a dramatic price drop in the short term.   [1]
  • The RBA has warned that developers may be sitting on a flood of apartments that fail to settle - noting that the supply glut will worsen given that developments under way are still at record levels. Housing construction (especially apartments) continues to boom and support the economy. There are years of housing investment activity already in the pipeline - which puts prices and settlements at risk. The RBA believes market faces weaker conditions. It dismissed data showing strong price growth in April and May - saying 5% jump in June quarter resulted from changes in methodology. Prices seem to have weakened in July. While there has been price pain in Perth, increased supply in Melbourne and Brisbane has been absorbed by population growth. Starts will increase to 207,000 in 2016 before falling to 190,000 in 2017 and correcting in 2018 as apartment approvals dry up. [1]
  • RBA disagrees with major banks' claim that increasing term deposit interest rates can be claimed as part of passing on RBA's cut in official interest rates - as domestic deposits provide only 2% of their capital [1].
    • [Comment: Perhaps the fact that term deposits only provide 2% of bank funding is the problem - and needs to be increased for safety in an environment in which it becomes ever harder to obtain offshore capital]
  • the reduction in RBA interest rates has led to a frantic surge in house buying as people believe that prices will continue rising - so it is now or never [1]
  • people who continue to buy overpriced real estate face 30-50% losses. Returns are low but investing seems attractive because falling interest rates are expected to generate benefits from price growth.  The RBA will continue to cut interest rates - but banks are likely to go in the opposite direction. They are facing a margin squeeze and also have to adhere to responsible lending standards - and they have been lending for risky investments. And the more they cut rates the more risky loans would wind up on their books. How will people buying at cheap rates cope with a large rate increase? And what will increasing mortgage stress do to the numbers of properties for sale and property prices? [1]
  • An inquiry was seen to be needed into what went wrong with Chinese buying of apartments in Australia - as it seemed that many Chinese have been the victims of a dirty game by agents and Australia's Banks
    • [CPDS Comment: However while the problem seems very real (and the construction of huge numbers of apartments for Chinese buyers poses significant risks to Australia) the primary cause of the problem arguably lies elsewhere - see A Made-in-China Disaster Waiting to Happen].
  • Australia's banks' biggest risk lies in residential mortgages. Households are taking on large debts to pay for properties whose values are likely to collapse - when rates rise due to banks' funding costs and the apartment market starts to collapse. Bank's risk exposure is shown on their latest Basel III disclosures. Those risks won't see banks collapse due to a property crisis - but many properties could lose 50% of their value virtually overnight.  ANZ's past-due mortgage loans rose from $1.6by to $2bn over the 6 months to June 2016.  Westpac's rose from $1.8bn to $2.5 billion over 12 months. The banks see this as a problem. For all banks the figure is probably about $10bn - up 15% over the past year. Given any significant increase in interest rates or households' costs the figure could double or quadruple. Australia is in the early stages of a property crisis [1]
  • inner city apartment prices in Brisbane could fall 25% in 12-18 months because of restrictions on capital outflow from China - according to Chris Eves (QUT). Developers who are now 2-3 months from completion may be unable to settle - and some are likely to go out of business. [1]
  • an inner city apartment development site is to be sold by mortgagees - as the project was no longer viable. Brisbane is seen to be one of the first to be hit by the numbers of units being built - because it has a relatively limited buyer market [1]
  • there is concern in the US that low interest rates could make the provision of mortgages unprofitable and thus lead to a liquidity crisis (ie a lack of funding) in the property market [1]
  • There has been concern that the exploding in apartment building in Australia's eastern states will exceed demand. A new study suggests that oversupply will continue into 2017 and 2018 - and intensify currently low settlement risks. Apartment construction has supported economy in post-mining boom era. The presence of foreign buyers has made a difference. Federal approval for foreign housing investment was $61bn in 2014-15 up 75% on the previous year. Also households may be getting smaller in some areas.  Oversupply will be significantly greater risk in some particular areas. Brisbane is already over-supplied and Melbourne is on the way to this. The problem is lesser in Sydney because of prior significant under-supply [1]
  • tightening regulation of apartment building in Victoria (related to open space and glass) will increase apartment costs by $100,00 and be an obstacle to apartment construction until prices increase significantly. This will lead to recession with national consequences. In the past Melbourne saw more apartment construction that Sydney - because regulation was easier to deal with [1]
  • Australian building approvals jumped 11% to 20,987 in July 2016. This was entirely due to increase in high density approvals - despite concerns about over-supply.   [1]
  • despite the reductions in interest rates 50% of those in NSW with mortgages on their properties are worried about making repayments [1]
  • NSW government claims to have a solution to problems with housing affordability - ie by boosting housing supply. However this isn't working and can't work because housing (unlike 'bananas') can be subjected to demand from investors - and the effect that the latter's search for capital gains have on prices is increased by low interest rates. In the housing market demand is not driven by need but rather by access to housing finance. The price of money is a major determinant of the price of housing. Homes are unaffordable because the market is flooded with cheap capital - which increasingly is channeled to existing home owners to buy second or third properties - and unavailable to intending first-home buyers. [1]
  • Australia's housing market has peaked and a correction is coming - because of problems with household debt and housing affordability. The market had been held up by foreign capital [1]
  • More buyers are now expected to forfeit their deposits and fail to settle off-the-plan units. The strong rate of settlements to date has been underpinned by 2 years of surging prices which meant that those who settled had already made a lot of money. Without strong price growth the rate of defaults would rise [1]
  • despite near perfect financing conditions many are warning about problems in property. Australia has an oversupply of apartments -  especially in inner-city areas - and 15-20% falls in prices are expected in Sydney and Melbourne. But there is a shortage of houses and this is where market action is now likely to concentrate [1]
  • apartment prices in Australia are already starting to fall. There are still a lot of cranes completing apartment developments in Sydney and Melbourne. A month ago a major developer would get 100 deposits on a new project - but now only gets 50. And only half the settlements expected from Chinese buyers actually proceeded. Apartment prices are thus starting to fall. 6-7 months ago market was rising - then it stagnated. Chinese buyers set off a massive building boom for apartments - and the consequences of mass forfeitures will be huge. Bank shares are falling because the extent of the problem is starting to be felt. First home buyers have been priced out of the market and prices will have to fall a long way for them to enter the market [1]
  • the mass failure of Chinese buyers to settle on apartment contracts is looming as a bigger catastrophe than markets expect. Settlement failures of $1bn - $1.5bn per month are expected from Chinese buyers - and this will cause local buyers to try to walk away also.  Apartment developers take off-the-plan deposits and use this for security to obtain bank loans of 40-60% of building costs (while also obtaining credit from other suppliers). Chinese failure to settle will be a big problem - perhaps a catastrophe. This will be equivalent to collapse of mining investment boom. A similar situation in Vancouver led to 10% fall in residential property prices - more for more expensive properties [1]
  • Construction and demand for apartments have fallen in Brisbane. Developers have paused some projects. Sales fell for third successive quarter - and sale prices have fallen steadily since the end of 2015. The weighted average fell just less than 3% in June quarter 2016. 25 new projects are still to launch in 2016, adding 2850 new apartments - half the level for same period in 2015 [1]
  • Dwelling prices in Vancouver are down 20-30%. Vancouver is like Sydney and Melbourne as all have been subjected to unprecedented Asian buying of real estate - which has made prices so high that young locals can't afford to buy. In Sydney Chinese buyers have been rescinding their off-the-plan buying contracts - but being replaced by other Asian and local buyers.  Banks had backed away from funding foreign purchases - so a large-scale Sydney apartment developer started providing credit. But this did not happen in Melbourne or Vancouver. The latter has been hit by China's constraints on getting money out and a 15% tax on property tax (which is much greater than that in Sydney - 4% and Melbourne). When the Vancouver tax was introduced local buying stopped - as prices were expected to soften. The volume of sales fell 85% in August 2016.  Average apartment prices fell 21% over 28 days - while average detached home prices fell 7% over 3 months. There is a fear in Vancouver of a repeat of the 1980 (40-60%) housing price crash which took 6 years to recover from. If Vancouver's property slide continues, it will cause alarm bells to ring world-wide  [1]
  • HSBC argues that measures RBA uses to suggest that housing market is cooling are valid - though compositional shifts make it hard to be sure. [1]
  • Chris Bowen (ALP) expressed concern that Australia can no longer house its young people. The surging wealth of the rich and the relative decline of middle class incomes has caused the rise of nativist parties such as One Nation in Australia, Trump in US and Brexit in UK. Middle income earners can't support globaization and outward looking policies when it does not seem to be working for them. Bowen will outline ALP's proposals (including winding back negative gearing and changing capital gains taxes) to deal with this. Declining home ownership amongst young people is seen as a major issue [1]
  • RBA governor (Philip Lowe) is feeling more comfortable about housing market because prices and credit growth for housing are rising more slowly - and there is more supply on the horizon. Some claim housing market is cooling - but people on the spot would generally disagree (except in Perth / Darwin / some units' areas in Melbourne and Brisbane). Some predict a crash but others expect Sydney market to remain strong for at least a year (eg because housing supply is relatively fixed in short term - while demand is increased by income growth, falling interest rates and rising borrowing power) . Productivity Commission had argued much the same in 2004 - ie that price escalation resulted from general surge in demand to which supply was inherently incapable of responding quickly. Sydney now has lowest unemployment rate, biggest infrastructure spending, most crowded trains, highest new vehicle sales, most FI-FO work, strong international tourism / migration. The standard response to these pressures has been to try to increase supply. But this takes a long time - and except for units in a few areas rising supply has had little effect on prices. Given what the RBA has tried to do with little help from government it is not surprising that it is increasingly defensive about the role that monetary policy has played in raising demand and thus prices - and recognizes the need for more care in future [1]
  •  Brisbane's apartment market will shift from oversupply to balance in a tear according to developer, Don O'Rorke. The market faces challenges related to thousands of units coming on the market, tighter bank lending and rising financial / construction costs. There is an oversupply - but this should be short-lived as there is underlying growth. Off-the-plan sales in Brisbane fell from 2277 in June 2015 quarter to 810 a year later. Projects have been delayed - and few projects not yet under construction will proceed.   [1]
  • Developers have dismissed any need for an inquiry into the effect of foreign buying on property prices - following the establishment of such an inquiry in London. Foreign buyers were seen to be mainly interested in cheaper product of little local interest. Low interest rates were seen to be the main reason for high prices [1]
  • a major price correction for apartments was seen ti be possible in any of the cities where low interest rates have driven rapid price increases in recent years (eg Vancouver, London, Sydney, Stockholm, Munich and Hong Kong [1]
  • House prices rose in September 2016 in Sydney and Melbourne because of low interest rates, were stable in Canberra and Adelaide and fell in Brisbane, Perth and Darwin. [1]  
  • Despite reports of moderating house price growth, prices have started rising again in early September 2016 in Sydney and Melbourne . Affordability is already overstretched by four years of extreme price rises. This could be due to limited availability f properties relative to demand. In Perth the reverse applies. Investor loans have been rising rapidly due to falling interest rates; expectations of further cuts; and the poor returns available from other investments. Increases in the supply of apartments are not overcoming wider shortages of houses [1]
  • More than 1/4 of those who apply for mortgages in Australia stretch the truth on their capacity to pay [1]
    • [CPDS Comment - this was a factor in the sub-prime financial crisis in the US in 2008]
  • The apartment oversupply will hit Melbourne and Brisbane hardest - according to CLSA - with $16bn in settlements at risk over the next 1-2 years. Oversupply could start a downward spiral in apartment prices starting in specific developments with highly geared developers and spreading to upper end of the market. Melbourne will have 19,000 apartments above normal demand - while Brisbane will have 15,000. The property development industry (and property buyers) are highly leveraged and sensitive to price changes. The problem is exacerbated by the 2 years it takes from committing to a development to getting cash from buyers. Foreign buyers will have put down 10% deposit and will walk away if prices fall over 10% - because they have no enforceable contractual obligation to settle. China is critical as about 50% of apartments were sold to Chinese buyers in 2015. Capital outflow from China has tightened - and states are imposing special tacos on foreign buyers while banks tighten lending to foreign buyers. When new apartments are sold at fire-sale prices this will set a new benchmark for bank valuations [1]
  • Westpac can see problems emerging in property markets and has been adjusting its lending criteria accordingly - and so expects to be OK. However the apartment market may represent a risk to Australia's economy - because of 42% jump in units under construction. Settlements have slowed but not by much  [1]
  • Australia's treasurer suggested that concerns about Australia's housing market were exaggerated - and does not see RBA as likely to further reduce interest rates especially as there is growing international recognition of the limits to what can be achieved through monetary policy [1]
  • Banks are requiring larger deposits (eg 30%) for properties in danger zones - or refusing to provide loans. This applies in mining towns, Brisbane City and some SE suburbs. Their concerns relate to effect of apartment oversupply on the economy and a belief that Queensland's unemployment rate is yet to peak. Federal Treasurer has told US investors that Queensland would become more affordable as large numbers of units come on the market.  [1]
  • Queensland's Government has been criticised for imposing a foreign-investor tax (ie a 3% stamp duty surcharge) which has discouraged foreign property buyers. This has had a major effect as buyers have decided to go elsewhere. One source referred to a fall from 5 inquiries / week to one per month.  [1]
  • Many people / organisations are trying to avoid a meltdown in Australia's apartment market. Australia faces the risk of Chinese investors walking away from apartment settlements of $1-1.5bn per month for 1-2 years. Many apartment developers / suppliers could fail while banks takes large losses. In Sydney Meriton can cushion the impact - but Melbourne / Brisbane will feel the full force of any disaster. Apartments have been bought off the plan - and buyers can no longer get funding for settlement from banks or out of China. In Melbourne a consortium of lenders has been set up to provide bridging finance at high interest rates - so that apartments do not become Australian owned which would lead to much lower prices. An online website has been set up to enable overseas buyers to sell to other overseas buyers. However with 230,000 apartments being built there is a huge problem. Developers were told they could be funded if they obtained 75% Australian buyers -but now banks are panicking an refusing to honour this.  Many developers nearing completion realize their Chinese buyers can't settle - and so are seeking funds to enable them not to have to force settlement - as doing so would create a horror scenario. Local financing for this will take time to achieve and result in very high interest costs [1]
  • AMP expects a 20% fall in apartment prices in Sydney and Melbourne over next 2 years - but does not believe this will lead to general property market crash (ie lack of oversupply of houses generally; record low interest rates and higher lending standards than in countries hit by GFC)  [1]
  • Aofun is an online portal that seeks to allow Chinese buyers to find new overseas buyers as Australian banks have been unwilling to provide funds for settlement [1]
  • The numbers of foreign investors in Australia's property market has fallen sharply because of strict new lending standards and taxes implemented by three state governments (NSW, Victoria, Queensland). Foreign purchases are expected to fall from 25% to 20% over three months. Interest is likely to be strongest in Melbourne, Sydney and Canberra - and weakest in Brisbane and Perth where the state economies are performing worst. Increased taxes were having less impact in Victoria and Queensland because construction of new homes was exempted from higher charges[1]
  • QBE expects apartment markets to come under sustained pressure over the next three years as Sydney / Melbourne / Brisbane face challenges with high prices, oversupply and affordability. Brisbane's house prices are forecast to rise 6.5% over 3 years while apartment prices fall 8%. Brisbane faces apartment over-supply as 50,000 new apartments come on line over the next 2 years. Apartment price falls of 7% and 9% are expected in Sydney and Melbourne [1]
  • RBA is more relaxed about soaring house prices - despite warnings that a property downturn now tops Australia's economic risks. RBA believes that risks in housing market (eg from lending to households) have fallen over past 6 months - though risks have shifted towards property. Borrowers ability to repay has improved - and lending for new housing has slowed. House price growth has slowed and bank lending has become more prudent. Fitch Rating recently said that economic risk from property downturn now exceeded that from China's debt levels.   House prices have risen 40% since 2012 - raising household debt to record levels and growth in Sydney / Melbourne is strong despite efforts to stem investor loans and foreign buying. Lower interest rates and falling unemployment have supported prices - though government deficits have reduced Australia's ability to fight off any global shock. Australia is building record numbers of apartments - and there are oversupply risks (especially in Melbourne and Brisbane). However delays / cancellations in settling on apartments are not high. If there is a slump in apartment market different banks will suffer different effects.  [1]
  • The risk of apartment oversupply in Melbourne and Brisbane are becoming apparent according to RBA. However financial system is in good shape overall given slower home price growth, tighter lending standards and slower household credit growth. In inner-city Brisbane and Melbourne increased apartment supply is greatest relative to existing stock. Developers face risks that apartment off-the-plan sales may fail to settle - due to tighter lending standards and settlement valuations below contract price. Some settlements are coming in below contract prices - though the numbers are small. Banks restricted lending to those reliant on foreign income. Banks have also boosted capital in line with new standards, and reduced their focus on lower-return activities [1]
  • RBA has warned that the massive numbers of new apartment blocks approaching completion could send some developers broke and leave banks with big losses. About 40,ooo units will be completed over next 2 years in Melbourne, Brisbane and Sydney - and buyers may default because of problems in obtaining finance. The risk of sales falling through had been increased by bank restrictions on lending to buyers with foreign incomes and more rigorous requirements for mortgage borrowers generally. Some settlements are taking longer and lending valuations are below contract prices. The apartment building boom contributed to strong economic performance in Eastern states and was driven by Chinese buyers who were allowed to buy 'off-the-plan' properties. Foreign banks (rather than Australia's banks) have the biggest exposure to the apartment boom. Completions in Melbourne over the next 2 years will add 18% to apartment supply with 15% in Brisbane and 6% in Sydney. The real estate industry believes new supply can be managed without disruption. If apartment prices fall 25% bank losses would only be about $200m. During GFC house prices fell 30-50% but Australia is not facing the same financial economic headwinds as Spain / ireland did at that time. [1]
  • 'Everyone' now expects trouble in the property market because of over-supply of apartment towers. Yet the prices of other housing continue to rise because of  poor returns from other asset classes (eg cash / bonds / shares) [1]
  •  RBA sees housing risk as smaller than it was. It sees problems in some areas and overseas threat to Australia's financial system 9eg due to China's debts; poor performance by EU banks; Brexit). There are however unstated risks - eg due to: short term interest-only mortgages overall - which will need to be refinanced; increases in unemployment / rates of mortgage delinquencies in an economic downturn; writing mortgages on the basis of prices that are dethatched from national capacity to pay; and  dominance of housing loans on banks' books; .   [1]
  • RBA has substantially under-estimated Australia's banks exposure to Brisbane-Melbourne-Sydney apartment oversupply. Its material is accurate but only deals with inner-city apartments. Its reference was to issues related to 38,000 apartments being completed over the next 2 years - where 200,000 apartments are due for completion in 18 months. In Melbourne one developer has 5000 apartments due for completion by 30 June. Sydney's largest developer is reporting a 50% non-settlement rate for off-the-plan sales - though this is cut to almost zero by provision of in-house financing. Arrest of Crown executives in China could upset Chinese demand. RBA says that 1/5 of banks' total residential lending is in inner-city areas - but as inner city areas only account for 1/5 of the total apartments banks apartment exposure could account for most of its residential development lending. There is a need to find solutions to the problems associated with high Chinese non-settlement rate and possible danger due to Crown arrests. This is possible - by finding new buyers. Completions due by April 2018 are twice annual apartment consumption in Sydney (2.6 times in Melbourne and 3 times in Brisbane) [1]
  • a major property developer has declared that Brisbane and Perth apartment markets in particular are headed for a major bust with falling prices and major over-supply [1]
  • The number of cranes involved in high rise building construction in Australia has risen 300% (to 528) over the past 3 years - and the total in Brisbane, Melbourne and Sydney now exceeds the combined total in New York, Boston, Chicago, San Francisco, Los Angeles, Toronto and Calgary. [1]
  • Morgan Stanley has warned about inner-city apartment glut - eg in relation to swift halt to apartment construction; an expected oversupply of 100,000 properties in 2 years (mainly creating problems in Melbourne, Brisbane and Perth; and an imminent credit crisis for developers related to settlement and development [1]
  • it was suggested that falling apartment prices should now reduce the affordability constraint that has blocked first home buyers from the market
    • [CPDS Comment: This may be overly simplistic for reasons suggested below);
  • a survey showed where in Australia the greatest growth in the number of available apartments is likely to occur over the next two years [1].
    • [CPDS Comment: Brisbane stands out with a 25% increase with Melbourne next at 16%. These increases can be contrasted with roughly 2% pa population increases (ie a total of 4+% over 2 years]
  • Mirvac reports that the percentage of apartments that have failed to settle in September 2016 quarter is above its long term(1%) average. This is seen as a threat to housing industry and national economy. Apartments that fail to settle are classified as 'second hand' by ATO and thus can't be sold to foreigners. Over 20% of Mirvac pre-sales are to mainland Chinese. [1]
  • Median house prices jumped again in Sydney and Melbourne in September quarter despite signs of dwelling over-supply. This undermines RBA view that low interest rates will not re-ignite bubbles in those cities' housing markets. Population growth is also a factor. But prices are out of reach of first home buyers - and an apartment bust seems likely. Buyers seem to be assuming that property bubble will continue. Treasurer tried to blame prices on a lack of supply though there are more obvious causes (eg). There is now a clear over-supply of dwellings. And the price of credit is also a factor in the supply-demand balance. 'Over-demand' (eg from speculators looking for short term gains) can be a cause of problems just as much as under-supply. With too many apartments hitting the market over next 18 months Morgan Stanley believes that a 'hard landing' in apartment prices is likely - with a less pronounced effect on detached dwellings. This will occur at the same time that renters and buyers suffer stagnating wages growth - and reduced working hours.[1]
  • There is widespread concern that the world is headed for a debt-fuelled crash - but Phil Anderson does not agree. He implies that such views only prevail amongst old / white audiences (eg in Australia and country UK) and not amongst younger / ethnically diverse audiences in London, US and Asia.  The world is on the verge of a massive boom over the next decade driven by an 18 year property cycle. [This arises because governments tax labour and capital but don't tax land]. After a bust the rent of established buildings rises; then it becomes cheaper to build more; then more credit follows - and this is where the world is now. [1]
    • [CPDS Comment: It would seem that the provision of ever more credit (which drove property prices higher) started in the late 1980s to prevent the 1987 share market crash affecting the real economy and has been escalating ever since with low / ultra-low interest rates and QE]
  •  A clampdown on lending has slowed the development of apartments in Brisbane but there is little evidence to support concerns that buyers would not settle. Median apartment prices fell 1.2% in the year to June 2016. Building approvals for inner-city apartments rose 13.8% in the year to August with 13,000 now under construction - though not all will be completed. Over 5000 apartments will be completed this year with more to come until 2018. Another 6200 are being actively marketed - but not all pre-planned projects would proceed  [1]
  • Regulators might need to tighten lending criteria further just as major cities are exposed to a glut of apartments about to hit the market. SQM research suggests that double-digit price growth is possible in 2018 - and this would exacerbate the housing affordability crisis. The RBA risks being behind the curve. There is a current shortage of houses for sale - despite a likely oversupply of apartments over coming years [1]
  • RBA has been warned that the effect of Brisbane's apartment over-supply could spread to established unit market. As supply rises, developers would offer rental guarantees to generate sales and drop rents on company owned properties, increasing the risk of higher end rental vacancies. Inner Brisbane outside CBD and Inner Melbourne were emphasised in the report. The flight to quality is reflected in rise in rental vacancies from 2.5% to 4.5% last quarter. Guaranteed rental returns (5-7%) are being offered to encourage apartment buyers. [1]
  • Australian property market could benefit if foreign investors shun US investments following Trump victory [1]
  •  Bond market reaction to Trump's election win suggests that he will burst Australia's east coast housing bubble by causing interest rates to rise. Starting  a trade war with China would have the same effect.  [1]
  • IMF has backed ALP call for reduced negative gearing - as this encourages people to take on too much debt for housing investment - pushing prices higher. [1]
  • Apartments in Melbourne sell well below what Chinese off-the-plan investors paid for them (eg fetching $161,000 for a unit that probably listed for $550,000). This will have adverse effects on Australia's economy and banks' problem loans. Tens of thousands of off-the plan sales will come up for settlement soon Australia wide. About 75% of settlements are completed - higher than previously estimated. Money often comes from Chinese banks that have money out of China. There is a risk if developers pull the plug on those who can't settle. Policy changes are needed to reduce this problem  [1]
  • In Brisbane 1/3 of proposed apartment developments have been shelved by developers [1]
  • Australia's property market is still strong.  Low interest rates have boosted property prices. Trump's election could change this because of the end of interest rate cuts in US. He criticised Fed's low interest rate policies. Rises in US would spread worldwide - and burst Australia's property bubble. Former RBA governor (Warwick McKinnon) drew attention to repricing of assets worldwide - as assets (such as housing) that are driven by long term interest rates fall. Low interest rates have affected bank's profitability. And negative rates in Europe have undermined the stability of banks. Some of Australia's biggest non-bank lenders have started raising rates. Trump has promised tax cuts and infrastructure spending in US - but US has little room for increasing debt. US Government debt / GDP ratio is already high (104%). A lot of inflation will be needed to make it possible to increase debt. Rising interest rates could put Australian mortgage holders in trouble. Households have been binging on debt to keep up with rising property prices - with total household debt / GDP ratio 125% - which has caused IMF to express concern. A correction is expected in housing market - which many observers claim will be modest. However similar suggestions were made in Spain in 2006 before a 45% correction [1]
  • Rental vacancies in Brisbane have risen giving pricing power to tenants [1]
  •  Two prominent fund managers have warned about the end of cheap money, a cooling property market and the advent of isolationist / protectionist policies. With 35% of government bonds on negative yields there is a low starting point . Isolationist / protectionist policies can only be funded by further monetary expansion. The eurozone is on the point of collapse.  [1]
  •  Westpac is not concerned about looming apartment glut in Sydney and Melbourne because neither city faces an over-supply of housing overall. Price growth will slow - but apartment over-supply will simply balance previous housing under-supply [1]
  •  government policies that favour the creation of an over-supply of apartments were seen as shortsighted because nothing was being done to overcome shortages in traditional housing   [1]
  •  Rapidly rising real estate prices have created an environment in which owners are unwilling to sell - because of fear of being locked out of the market [1]
  • Chinese demand for global property has become the world's biggest real estate frenzy. One estimate was that the amount spent in the first 6 months of 2016 was the same as in 2015. Money is getting out despite the Chinese government's efforts to stop it. Middle class Chinese buyers are following the lead of China's elite. This could run for years given the size of Chinese middle class. [1]
  • There has been a strong return of Chinese buyers to Australia's rising property market - undaunted by lending restrictions. New avenues for getting into market include: targeting cheaper homes; and settling in cash. Others turn to wealth individuals or foreign banks for funding. This is reigniting fears of bubble. A Melbourne agent reported that most buyers were cash buyers. [1]
  •  Treasurer announced that off-the-plan apartment sales on which foreign buyers defaulted could be resold to other offshore buyers. Some saw this as significant in facilitating Chinese investment. others saw only marginal impact [1]
  • Banks are raising mortgage interest rates as a consequence of rising yields on US Treasuries which are a critical global benchmark [1] 
  • Home sales in Australia fell sharply in October 2016 (8% for houses, 9% for apartments) - back to lowest level in 2 years. The sharpest falls (20%) were in Melbourne. This is expected to be followed by a fall in housing starts [1]
  • Apartment building approvals have fallen 42% in a year - because of tighter bank lending and constraints on funds from China. Housing construction will be weaker over the next two years [1]
  • ANZ believes that parts of Sydney, Melbourne and Brisbane will have too many apartments. As apartment approvals fall, ANZ is taking a cautious approach. BOQ warns that a surge in apartment settlements is a stress point for economy. BOQ is cautious given settlement risks and high prices. 16,000, 12,000 and 10,000 apartments (in Melbourne, Brisbane and Sydney respectively) will settle in the next two years and growing numbers of buyers are struggling to obtain finance. And bank valuations are below what buyers had agreed to pay [1]
  •  China wants to convert its store of $US reserves into foreign assets but is concerned that outflows could turn into a tsunami unless tightly controlled. Families have been investing because of concern about yuan devaluation. Until now families could get around the loose restrictions on investment in foreign real estate - but those routes are now being blocked off [1]
  •  Australia's mortgage rates are now likely to rise - eg because of the effect that bond market losses worldwide will have on banking systems. Australia's banks obtain 30-40% of their capital offshore.  Infrastructure assets in Australia are losing value. A fall in housing prices is also likely - and this will create buying opportunities especially if regulators continue seeking to restrict the supply of apartments [1]
  • Australia's property price boom has been driven by lack of new housing supply and unprecedented demand from local buyers rather than foreign investment - according to federal Treasury research. Property values have risen 42% over 4.5 years. 70% of foreign investment approvals were from Chinese citizens - and strongest in Melbourne. FIRB estimated overseas buyers accounted for $61bn in property purchases in 2015 financial years - up 75%. It is hard to separate effect of foreign purchases from other factors (eg low levels of building approvals). States have implemented discriminatory taxes against foreign buyers. Charles Pittar (CEO of Juwai.com - the world's largest Chinese international real estate web-site) argues that foreign investment should be encouraged to boost supply [1]
  • ANZ has now issued a grim warning on Australia's property market. Rates are set to rise. Property prices are going to fall. Latest figures show that apartment prices are falling nation-wide and house prices that have managed to keep pushing higher are finally starting to crack (ie they fell 1.5% in Melbourne last month). And even if prices don't fall, rising interest rates (which the RBA may not be the first to initiate) will cause problems.  [1]
  •  interest rates will be the main influence on property markets in 2017. They have shown no sign of losing steam despite warnings from the RBA and others - because interest rates are still low and only marginally tightening. If Australia loses its AAA credit rating this will adversely affect prices. Low stock levels in the market (especially in Sydney and Melbourne) are blamed for continued heat in the spring market [1]
  • Australia's auction clearance rate continues to be strong at the end of 2016 [1]
  • Economists believe that Australia's property market is overheated by low interest rates. The RBA should hold rates low as long as possible. Big shakeouts are likely in financial markets. Low rates have pushed investors into property, stocks and bonds which drive up market prices while doing little to fuel economic growth. The anticipated property market shake-out may already have started (eg for off-the-plan apartments in Sydney and Melbourne). Those buying off the plan often find that the retail price is much lower. Significant corrections for some dwelling types are likely [1]
  • The OECD called for higher interest rates to 'rein in' Australia's resurgent  housing market - and this raised questions about whether reserve banks should try to do this. Alan Greenspan has made a case for doing so - and pointed out that he had been unable to do so as Fed chairman because of problems in dealing with fragmented regulatory bodies [1]
  • Australia's property market is now like one of the worst speculative mania's in human history (ie the rise of price of tulip bulbs in Holland in 1630s)- according to former Commonwealth Bank CEO who chaired 2014 financial system inquiry. The whole economy is vulnerable because of overvalued houses in Sydney and Melbourne. Given the huge rises in Sydney / Melbourne prices - a Dutch-style price collapse in possible though not assured. However it needs to be monitored / managed. If a crash occurs many investors could be forced to sell at the same time. There are now more investors than ever before - even people on lower incomes, and owning multiple properties.  [1]
  • In late 2016 China announced efforts to block off the ways in which Chinese people had been getting around government controls on transferring money abroad - though phone apps and online platforms were being used that can make international transfers that do not go near China's banking system and will hard to control;
  • Australia's banks are raising mortgage rates across the board [1]
  • Chinese buyers have finally greatly reduced their buying of Sydney apartments because of China's controls on capital outflows - but investors have compensated by emphasizing negative gearing as their preferred method for retirement savings vehicle because of government changes to pension changes which have discouraged saving through superannuation. However the situation seems different in Melbourne because of problems in settling off-the-plan purchases. other capitals have been less affected by Chinese buying. Governments are creating other obstacles to affordable housing  [1]
  • The OECD again warns that rising borrowing costs could wreak havoc on the global property market in 2017. Prices have risen in Canada, NZ and Sweden in ways that are inconsistent with a stable property market. Australia is in the middle of the pack in terms of price / incomes ratio and is thus as least as likely to be affected by US-Fed led rises in global rates [1]
  • Demand for housing rose 17% in 2016 but peaked in late November and then fell 7% because banks increased interest rates [1]
  • Governments have boosted house prices for 30 years (because it was in their interests to do so because of the link between house prices and banking system) but may not continue doing so.  If house prices collapse it would be bad news for the banks - and there would be a need for US / UK / European style bank bailouts. Australia would have had a banking collapse in 2008 if CBA had not taken over Bankwest. Support may not be in government's interest when many Baby Boomers shift from large homes to smaller homes - to access tied-up value for retirement - they may introduce housing price controls. Steve Keen argues that Australia faces a large housing bubble - and will see a price crash. He also believes that there will be a need for a complete reform of banking / debt system to help make bubbles a thing of the past. A 'people's quantitative easing' could reduce private debt levels from 120% of GDP to 50-100% of GDP. Rules would be needed to limit what could be lent against an asset to some multiple of the income-earning capacity of the asset. Others are also likely to advocate limits on borrowing. This will bring the debt binge to an end [1]
  • a developer (Cullen Group Australia) collapsed because of delays in settlement of townhouse sales to Brisbane's west.  Insolvency experts claim the building industry is braced for further insolvencies as a building boom, especially high-density apartments and town houses, outpaces demand. Major banks are increasingly tightening their lending for such projects [1].
  • Major changes in Sydney apartment market is spreading nation-wide - and patterns of dwelling ownership will have major political implications. 2-3 years ago 80% of Sydney apartments were being bought by Chinese investors some of whom had Australian residence, Non-Asian Australian's were not significant in the apartment market. Melbourne was similar except that large numbers of small / 1 bedroom apartments glutted the market. Many Chinese are now having trouble settling 'off the plan' purchases. Now in Sydney Chinese purchases are only 50% of apartment market and the percentage of Australian-resident Chinese buyers has risen. This has not however caused a price fall because Chinese buyers have been replaced by negatively-geared Australia investors who have lost faith in the superannuation savings system. Apartment demand is being boosted by tourists, student migrants and those who want to rent themselves and invest in negatively geared property. Sydney apartment prices have risen 50% over 5 years - which help from Harry Triguboff in financing Chinese who can't fund their 'off the plan' purchases. Similar trends are spreading to Melbourne. Other capitals did no see such strong Chinese demand. ALP's plan to reduce negative gearing concessions will hit far more opposition in future because of these trends. To change negative gearing without collapsing market, it might be desirable to allow some superannuation money to be used for deposits. As apartment land has risen 3x in Sydney the price of next round of apartments will be much greater. Regulatory changes in Victoria will have a similar effect  [1]
  • there was a large increase in investor property loans from April to November 2016 [1]
  • banks are expected to raise variable mortgage interest rates in 2017 because they face higher funding costs [1]
  • Property prices in Sydney and Melbourne partly depend on China's success in propping up its dodgy banks. Chinese citizens sending money to Australia are scared that China's banks / currency could collapse. China has been trying to block these flows - but many underground routes exist, China's money exodus has caused a fall in its foreign exchange reserves and in property values elsewhere. . [1]
  • Brisbane's apartment market is ominous because of reduced foreign investment (which is the main source of demand in this area) and tightened lending. Queensland builds double the number of apartments as during its last peak in the late 1990s. The state government's new surcharge on foreign buyers could compound the problem.   [1]
  • In February 2016 it was noted that HSBC (a UK based subsidiary of the Hongkong and Shanghai Banking Corporation) intended to establish branches in Australia to seek a share of the mortgage market [1]
  • Sydney's property market may have peaked - as buyers drift away and sellers don't list properties. The big concern is the big drop in the numbers of Chinese buyers because of crackdown on capital outflows. Individuals now taking out maximum $50,000 have to commit to not spending it on real estate. The numbers of Chinese on property tours is only half that of a year ago. [1]  
  •  Chinese government's campaign to stop citizens exporting money to buy apartments is biting - so Chinese money is ceasing to drive residential property boom in Australia.  However changes in Australia's superannuation system convinced so many that they could not rely on superannuation - so many have shifted to property investment to take up the slack.  There was a big clampdown on Chinese money exports on 1/1/17 - because this can be linked to corruption and result in jailing. 2 years ago Asian / Chinese buyers were buying 80% of apartments in Sydney and Melbourne. In late 2016 this was down to 50% and is now only 25% and falling fast. But the negative gearing surge is so strong it will absorb the shortfall.   [1]
  • Many expect house prices to always rise - but most experts now expect less than rises of past few years. NAB industry survey shows expectations of capital city house price rises of 3.4% and 0.8% unit price fall in 2017. This was increase on earlier forecast because of response to lower interest rates. BIS Schrapnel (Robert Mellor) expects stagnant / falling prices to be best case for 2017 and 2018. Sydney houses would be flat while apartments fall 4-5%. In Brisbane and Melbourne apartments could fall 15%. Economist Stephen Koukoulas has similar view. Stephen Keen expects a house price crash because debt levels are so high that further growth in credit is impossible. BIS Shrapnel did not expect a crash - because this would require a significant rise in interest rates. SQM Research expects continued price rises in 2017 with potential crash in 2018. RBA was seen as likely to raise rates to counter potential ongoing boom [1]
  • mortgage stress is rising amongst mortgage holders - and calls for help are escalating. Total mortgages are $1tr and private debts are 187% of income rather than 70% in early 1990s [1] [See CPDS comment in You Ain't Seen Nothing Yet  ]
  •  Inner city sales of apartments in Brisbane have fallen 30% over past year - amid warnings that high prices may not stack up at valuation time. Many announced projects may not proceed. 12,200 apartments are under construction and due for completion before end of 2019. 76% are pre-sold. A further 6300 are being actively marketed with 40% committed - though all of these won't be built. There is little evidence of settlement risk for foreign buyers. Over-supply is expected to be short-lived as apartment approval numbers have fallen 27% in year to November 2016 [1]
  • The huge increase in apartment supply in Brisbane has resulted in a 2.7% fall in value in the year to January 2017, Declining values are causing problems at settlement time - with buyers needing to provide larger deposits. With large numbers of units coming onto the market there is a risk that when people start to walk away a 'flood' develops. Brisbane's problem won't last too long as the supply of new apartments is already easing. This will have adverse macro-economic effects as apartment construction had become a major stimulus to SEQ economy  [1]
  • Investors need to seriously consider China - as government has established controls that will have a dramatic effect on capital outflow.. This needs to be recognized by property investors. China's forex reserves have been falling quickly. While $1tr of foreign exchange had flowed out of China over previous 18 months, this fell to nil in December 2016.
  • 50% of apartments approved in Brisbane are not expected to be built.  25,000 apartments in 110 projects have been approved by only 44% were being marketed. Sales rates have fallen to Brisbane's 10 year average - with 60% fewer in 2016 than in 2015.  In 2011 there were 49 projects marketed and 1278 unconditional sales - which rose to 84 projects / 4128 sales in 2014; 86 projects and 5366 sales - and down to 81 projects and 2149 sales in 2016. Total sales value fell from $3.19bn in 2015 to $1.3bn in 2016 [1]
  • 80% of Chinese buyers can't settle on Australian apartments they bought off the plan - and want to walk away from contracts. Off-the-plan market is now the worst in 10 years. A major factor has been tightened lending by Chinese financial institutions on lending for overseas property purchases. The perception of a problem is making more difference that actual problems in moving money. However Chinese investors still believe that investment in Melbourne is better than in Beijing and Shanghai  [1]
  • There has been a stunning reversal of Chinese buying of Sydney / Melbourne off-the-plan apartments. Chinese government is expected to ease clamps on smaller investors taking money out of China in late 2017 - thus allowing off-the-plan purchases now to be settler in 2-3 years. Melbourne does have a major problem with off-the-plan sales that are due to settle now for which buyers only have 30% deposit. There is a $7-10bn funding shortfall - which is being dealt with through emergency measures. Overseas Chinese are now buying around 50% of off-the-plan apartments, with Australian-born Chinese buying another 25% - with the balance being taken by domestic investors. [1]
  • RBA is considering tighter bank lending standards amid concern about how financial system would deal with collapse of house prices - beginning with Brisbane apartments. Assistant governor (Michele Bullock) expressed concern about looming apartment over-supply in Brisbane (and perhaps in parts of Melbourne). In the event of a downturn there could be systemic problems in financial system - related to whether it is adequately provisioned / lending standards have been appropriate / anticipated. Apartments have been purchased in anticipation of rising rents and prices - but this may not happen with a glut. Lending standards were tightened in 2014 - but investor housing growth a started speeding up again [1]

^ The potential for a massive apartment over-supply from mid-late 2016 and the dependence of demand on China's very risky methods of trying to gain 'profits' by stimulating asset booms (because of its inability to do so any other way) suggests that numbers of projects could be left partly completed in Australia also. ^

Saving Democracy

Saving Democracy - email sent 12/5/12

Paul Monk

RE: How we can save democracy, The Age, 11/5/12

I should like to offer some suggestions in relation to your perceptive and useful article. Specifically:

  • There is little doubt that liberal democracy is in trouble, though it also needs to be recognised that the alternative systems that are currently most successful (ie the neo-Confucian systems in Japan and China) are also experiencing severe difficulties (eg see Heading for a Crash?). Winston Churchill may well again prove perceptive in suggesting that ‘Democracy is the worst of all systems, except for the alternatives’ (see also Effective Democracy for comments on the advantages of democracy relative to the available alternatives);
  • One manifestation of liberal democracy’s problem is the fiscal incapacity to meet public expectations that your article mentioned (which is apparent in parts of Europe and to a lesser but increasing extent elsewhere including Australia). This problem has arguably emerged because:
    • In some respects modern democracy, which was introduced initially in the UK in the mid 19th century, can be seen as a means for redistributing the wealth generated by capital through mechanising production at the time of industrial revolution and through mass production in the first half of the 20th century. It can thus be expected to be in some trouble in a post-industrial environment in which the deployment of capital alone is not the primary factor in wealth creation in developed economies (eg because mass production functions migrated to low wage / moderate skill emerging economies, and emerging (eg Internet-based) opportunities often require very little capital). It was the economic problems associated with de-industrialization in Europe and North America in the 1960s and 1970s that led to market liberalization strategies in the 1980s in an effort to restore stronger growth. There were serious difficulties in Europe in adopting such strategies – noting the phenomenon that was called ‘Eurosclerosis’ in the 1970s (ie an inability to get agreement amongst competing interest groups). This is arguably a consequence of the (eg proportional representation as compared with first past the post) electoral systems that make it harder to take decisions with adverse effects on any interest groups;
    • The key role in wealth creation now is knowledge, and this is even more difficult for governments to tie down and tax than capital;
    • An ageing population must increase demands on public spending relative to national income;
    • Traditions of community-based support for aged or disabled relatives (eg in Asia) reduce costs and provide a competitive advantage relative to societies where such costs are socialized;
    • [Added later] very substantial defence costs have been incurred (especially by the US) when it is likely that a greater emphasis on 'soft power' methods might have reduced the level of spending needed (eg see suggestions in Discouraging Pointless Extremism, 2002; Comments on Australia's Strategic Edge in 2030, 2011). This problem seems largely due to: (a) the irresponsibility of humanities and social science faculties in Western universities (see Ignorance as a Source of Conflict); and (b) the successful lobbying by defence industry advocates
    • Global financial imbalances, whose origins and implications are generally very poorly perceived and understood, have in the past required high levels of spending and rapidly increasing debts in many countries (eg see Structural Incompatibility Puts Global Growth at Risk). The key issue is that: (a) excess savings and current account surpluses have been vital to protect emerging economies with poorly developed financial systems (especially those in Asia such as Japan and China) from financial crises; (b) maintaining global growth in the face of structural demand deficits elsewhere has required excess demand elsewhere; (c) this excess spending has been financed by increased government debts in many countries, and by high levels of consumer spending in the US (and in many other economies) supported by asset bubbles created by very easy credit (eg see Impacting the Global Economy and Comment on European Sovereign Debt Crises). After the asset bubble burst, giving rise to the global financial crisis, governments found themselves obliged to add further to their debts;
    • [Added later] Europe has faced wider difficulties related to attempts to promote regional economic integration through the creation of a common currency (ie the euro) in the absence of other features of a unitary / federal state in an environment involving unsustainable international financial imbalances (see Sovereign Defaults). The latter suggested, for example, that:
      • The adoption of the euro by countries with widely different economic capabilities has: (a) boosted the international competitiveness (and thus economic growth and trade surpluses) of countries with well developed economies (eg Germany) because the euro has been weaker relative to other currencies than (say) the Deutschmark might have been; and (b) eroded the competitiveness (and thus growth, employment, trade balances, tax revenues) while requiring increased welfare spending in countries with poorly developed economies (eg Greece, whose major export earner has been tourism);
      • provided the governments of countries with weak tax bases (eg Greece) with an ability to borrow to finance welfare costs in a 'strong' currency (ie one which lenders saw as unlikely to be associated with default) to finance more public goods and services than would otherwise have been possible;
      • after the 2008 financial crisis European banks and bondholders concluded that southern European countries  would never be able to repay their debts, and thus demanded higher bond interest rates. Ultimately this required bailouts from richer European countries, and also that bondholder take 'haircuts' [1]
  • However democracy’s difficulties are broader than fiscal constraints. Some suggestions about those broader problems and possible solutions are outlined in Australia's Governance Crisis and the Need for Nation Building (2003+). This includes suggestions related amongst other things to: (a) boosting the quality of support available to the democratic political process; (b) getting serious about economic development; (c) coping with a (possible) ‘Asian century’; and (d) ensuring that legal and governmental institutions based on individual liberty can remain viable. Some parallel suggestions about a possible US response to the economic aspects of the difficulties facing democracy are in Getting out of the Economic Quicksand;
  • Boosting the quality of inputs to the political process can’t be achieved by merely gathering a consensus if those involved are ill-informed (which seems to be a risk with YourView that is all that I can find as a possible public face of the OurView Foundation). Collective views can be better than those of any individual (eg as reflected by the outcomes in a competitive market) because they take some account of the circumstances and knowledge of many individuals. But this method fails if almost no one knows key facts about a situation. Thus arrangements to increase strategic awareness and understanding would be vital if the ‘informed, sifted and aggregated thoughts of the citizenry’ are to be worth gathering, and this demands a lot of serious hard work. For example, current efforts to develop a White Paper on the (possible) ‘Asian Century’ are constrained because of the apparent lack of information about what this means even amongst those supposedly most expert (see attached email).
  • This lack of Asia literacy is significant in relation to assessing the future of liberal democracy because the possibility of an ‘Asian century’ implies that Western-style rational / responsible individuals will prove less capable than Confucian-style intuitive, autocratic and hierarchical groups in dealing with economic and political challenges. Democracy is one of the institutional arrangements that Western societies have developed to empower ‘rational / responsible individuals’ (along with a rule of law and capitalistic enterprises), but these play no significant role in East Asia (eg see Asian Millennium or Asian Decade?).

I would be interested in your response to my speculations.

John Craig

Must Authoritarianism Triumph This Time?

Must Authoritarianism Triumph The Time? - email sent 26/8/13

Jeffrey Tucker,
Laissez Faire Today

Re: The Turning Point Against the American Empire, Daily Reckoning, 24/8/13

Your article suggests that the ‘data-mining’ methods being used by US security agencies to reduce the risk of terrorist attacks should be made to fail.

My interpretation of your article: A cornered rat is dangerous – and so is a cornered empire. It is dangerous to stand up for basic human rights against the empire. Edward Snowdon revealed that the US national security state examines all communications without any legal authority. This did not cause embarrassment to the bureaucracies – as they would if the government was accountable to the governed. But the national security state believes it is above the law / congress / courts. Snowdon thus had to go on the run – and seek security in Russia. And the state is now seeking to take down anyone who might have assisted him (eg the email provider Lavabit; the internet service Silent Circle; and the reporter who revealed Snowdon’s NSA leaks). The latter’s domestic partner was detailed under law intended to counter terrorism – but its use seemed just like mob tactics. The FBI, NSA and Homeland Security believe that they are invulnerable. They obey no one, and operate in secret. However nothing is secret anymore. What NSA and Homeland have done to others, others are now doing to them. The empire is panicking. It is desperate to preserve its power and privilege in a world that is moving beyond search and destroy tactics. The national security state has data-mining centres, but the internet is working to bring accountability to such tactics.

However it would seem irresponsible to do this unless one simultaneously identifies the alternative (and better) methods of dealing with those security risks that are probably available. Unfortunately neither Edward Snowdon nor his various supporters seem to be doing so.

My reasons for suggesting the need to do more than criticize unsatisfactory security tactics, and one possible version of what better alternative methods might involve (based on serious efforts to understand the cultural foundations of authoritarian challenges to the post WWII liberal international order) are on my web-site (see Details).

I would be interested in your response to my speculations.

John Craig


Details

Your article did not suggest any alternative to the methods currently being used by security agencies (in the US and elsewhere) for dealing with the challenge to the liberal post-WWII international order that Islamist extremists appear to represent (eg see Speculations about Extremists' Manifestos).

The article thus (presumably inadvertently) implied that responsible citizens should prevent US administrations, who have championed a liberal (democratic and capitalist) international order since WWII, from continuing to do this. This seems remarkably similar to the opposition that liberal voices raised in the 1930s to the hardening security and military reaction in liberal democracies to the fascist responses that emerged (at that time in Germany, Italy and Japan) to the severe political and economic stresses they faced - opposition that only ceased when open warfare broke out.

However if the US does not oppose authoritarianism in its various modern forms, the authoritarians could well triumph this time (as was possible but did not eventuate in the 1930s) because no other country or group seems willing or able to take over this ‘liberal order’ leadership role.

A breakdown in the post-WWII liberal (democratic capitalist) order is anything but impossible (eg see The Second Failure of Globalization? 2003+). The latter drew attention to the breakdown in the late 19th century of the economic globalization that had been made possible by the British Empire – and the way this contributed to WWI. It also dealt with two current threats to the post-WWII liberal international order, associated respectively with:

  • the risk of attacks by terrorists (eg Islamist extremists) using weapons of mass destruction that became apparent in 2001; and
  • the financial / economic crisis that the world has experienced since 2008.

There is no doubt that the hard-power / Cold-War-style methods that US administrations (and their various allies) have used in endeavouring to reduce the risk of terrorism by Islamist extremists have been poor. In the absence of any international consensus about responding to that risk (see Diplomacy Failed), the US (and a ‘coalition of the willing’) acted unilaterally. Invading Iraq (where a brutal regime claimed to have weapons of mass destruction) appeared to be based on the hope that ‘liberation’ would enable a successful democratic capitalist system to be created as a model for the Middle East and thus prevent the Islamist revolutions against authoritarian regimes that were otherwise likely – and which would have created geo-political tensions likely to lead to much larger wars in future (see Unilateral Action). However the hope that ‘liberating’ Iraq would have such an outcomes was naive – for reasons suggested in Fatal Flaws (as success by a liberal (democratic capitalist) regime depends on many cultural and institutional preconditions that were not already present in Iraq, and could not be created by an invasion). The flaws in that simplistic strategy are further illustrated by the turmoil that the ‘Arab Spring’ now risks generating (ie everyone wants 'democracy' but the requirements for competent democratic government are not in place).

And dealing with a global financial / economic crisis that partly has its origins in profound differences between Western and East Asian cultural traditions has also not really been effective in the absence of understanding of:

Attacking the unsatisfactory methods that US administrations (and their allies) have used to try to deal with challenges to the liberal international order without proposing alternatives is not helpful.

The situation could probably be significantly improved if serious effort were devoted to understanding the practical consequences of the cultural factors that are involved in the various current authoritarian threats to a liberal international order (eg factors such as those suggested in Competing Civilizations, 2001+).

It is inappropriate and futile to blame ‘security’ organisations in the US and its allies for failing to use methods that are well outside their area of competency. Rather the blame for the inadequate methods that have been used should be sheeted home to the post-modern desire to pretend that cultural differences have no important consequences that has pervaded the humanities and social sciences faculties of Western universities. Amongst many serious consequences of that academic irresponsibility (see Cultural Ignorance as a Source of Conflict) has been that:

  • security agencies (eg the NSA or Homeland Security in the US) have been left with with no way to properly understand the more effective methods that are potentially available to (say) counter terrorism threats; and
  • concerned citizens have also been unable to fully understand the cause of the social, political and economic problems they perceive (eg see Soros might also see the world through blinkers).

Thus, as well as pointing to any problems associated with the methods being used by US administrations, it would be desirable to suggest better alternatives - for example as speculated in:

Who Is Failing the Lower and Middle Classes?

Who Is Failing the Lower and Middle Classes? - email sent 1/5/14

Professor Peter Morici
University of Maryland

Re: Democracy, Not Capitalism, Is Failing the Middle Class, 28/4/14

Your email took issue with Thomas Piketty’s suggestions (in Capital in the Twenty-First Century) that: (a) capitalism is responsible for increasing wealth inequality; and (b) a major emphasis on wealth redistribution in thus justified (ie increases in taxes, transfer payments and public services). Your email suggested that inequality is rising mainly because of irresponsible democratic institutions.

My interpretation of your email: Thomas Piketty’s new book (Capital in the Twenty-First Century) presents an apocalyptic view of capitalism – as Malthus, Ricardo and Marx had done earlier. The US middle class and workers suffer stagnant wages and rising taxes, and Piketty advocates confiscatory taxes on the wealthy as a solution. He argues that over time capitalistic economies naturally concentrate ever-more wealth in the hands of the few. There is nothing new about such arguments – and understanding their weaknesses requires a PhD in economics. Pikertty proposes very high taxes on high incomes to finance more redistribution programs and public services. Without this he suggests society will be ever more stratified, and economies will stagnate because marrying into wealth (rather than working or starting a business) will seem to best path from relative poverty. However Piketty ignores features of capitalism. The 1920s were an era of exception optimism / opportunity, yet the heirs of the Rockefeller and Ford fortunes no longer have mega incomes. Rather members of the middle class rose to wealth by become entrepreneurs or in other ways. Some of the ways in which wealth has been acquired may be unsatisfactory – but this can’t be solved by taxes on high incomes and on wealth. Rather there is a need for government regulation of natural monopolies and to eliminate abuses in corporate governance. It is the failure of democratic governments to act responsibly that is mainly failing America’s workers and middle class.

I should like to suggest that in one respect your observations are like Thomas Piketty’s speculations. The latter I gather revolve around the view that inequality must increase where the return on capital exceeds the rate of economic growth. Both views are both extremely valuable in starting a long-overdue debate. However I suggest they are merely part of a much more complex story.

Some of the complexities that arguably need to be taken into account are outlined in A Simplified Economic Context on my web-site. This suggested that:

  • There was a critical complementarity implicit in the combination of capitalism (ie independent profit-focused enterprise) and democracy (to promote the ‘public’ interest, provide services and reduce gross imbalances in wealth) that emerged from the industrial revolution as an effective system of political economy. Though such systems were subject to ongoing change and challenges, they long remained globally dominant. However:
  • Following World War 2 such systems encountered a serious challenge when low wage East Asian economies (initially Japan) started to become unexpectedly successful in the economic function (ie mass production manufacturing) which had previously been the major source of high economic productivity and broadly-based high wage opportunities in more developed economies. Traditional sources of high-wage job opportunities were thus at ongoing risk, and democratic governments’ scope to provide services or redistribute income without borrowing was progressively reduced;
  • The non-capitalistic and not-seriously democratic methods used to achieve 'real economy' ‘miracles in East Asia had roots in traditional Confucian / bureaucratic education and governance systems. Significant economic features of those systems included: a lack of emphasis on profitability in the use of capital; a consequent unrecognised form of industrial protectionism; a need for ‘financial repression’ to suppress domestic demand because of the risk otherwise of financial crises; and a long term risk of financial, economic (and thus potentially political) failure;
  • The inability of democratic systems of government to facilitate the adjustment into higher productivity functions that was needed from the 1960s eventually led to the adoption of market-liberalisation methods to facilitate adjustment, ie by reducing the primarily redistributive effect of democratic institutions. This was successful to an extent but:
    • The ‘middle class’ came under pressure because the numbers of middle-management job opportunities were reduced by the necessary shift from hierarchical management styles (which had suited mass production) to networked organisations (which suited post-industrial economic activities);
    • There were limitations in market liberalization on its own in facilitating the creation of new highly productive industries and high wage job opportunities;
  • New (monetary) methods of macroeconomic management largely replaced Keynesian concepts of counter-cyclical public spending after 1987. This shift:
    • allowed two decades of sustained global economic growth – by reducing the effect that financial crisis traditionally had on the real economy;
    • facilitated high demand from developed economies (especially the US) to counterbalance the demand deficits that non-capitalistic East Asian economies needed to avoid financial crises – an arrangement which was the basis of: (a) unsustainable international financial imbalances; (b) ever rising government and private debt levels in developed economies; and (b) a global financial crisis that started the US in 2007-08 when poorly-understood and poorly-regulated sub-prime mortgages proved unsound;
    • generated a ‘wealth effect’ amongst those with significant existing assets which not only encouraged high household consumption but also increased social inequality;
  • Monetary policies are now a key factor in launching and responding to a generally unrecognised and financially-focused challenge by East Asia’s authoritarian neo-Confucian systems to the universalist values and emphasis on individual welfare and capabilities that have been the foundations of democratic-capitalist systems.

It is unrealistic to suggest that one side or the other of the democratic capitalism ‘coin’ is primarily to blame for the difficulties that many ordinary workers and members of the middle classes are now enduring. If ‘blame’ is to be sheeted home, it must go to Western universities – as to date there has been no serious effort to understand (for example): (a) the implications of radically different and authoritarian East Asian alternatives to the democratic-capitalism that was a product of the West’s liberal and universalist traditions (eg see Babes in the Asian Woods, 2009+); and (b) ways to complement market liberalization in facilitating the development of high productivity industries and increasing governments’ tax bases (eg see A Case for Innovative Economic Leadership, 2009).

Some suggestions about how such challenges might be met in an Australian context were in A Nation Building Agenda (2003+).

John Craig


A Simplified Historical Context

While mechanisation of agriculture had had some earlier effect, rapid economic growth became possible for the first time in history as a consequence of the late 18th century industrial revolution in Britain. Mobilizing profit-focused but hopefully-morally-responsible capital to support mechanised production in factories significantly increased economic productivity. However it also led to social problems (a risk that had been recognized by the earliest advocate of 'commercial society' / capitalism). The solution to this adopted in the UK in the mid 19th century involved the creation of more broadly based representative (ie democratic) government to: (a) reduce the risk of social and political instability by taking more account of the interests of those in the middle and lower levels of society; (b) regulate capitalistic industry and society generally to promote the ‘public’ interest; and (c) redistribute the new wealth that capitalism provided (eg through the provision of previously-unaffordable public goods and services).

The combination of profit-focused capitalism (which can raise productivity in a competitive environment and thus generate wealth) with democracy (to promote the ‘public’ interest and redistribute wealth) dominated the world politically and economically until after World War 2 – though it was periodically changed and disrupted. For example:

  • business-cycles led to periodic booms and painful busts;
  • countries with non-democratic political cultures exploited capitalism in authoritarian ways that conflicted with ‘liberal’ Anglo traditions – and this contributed to ‘hot’ wars;
  • from the early 20th century mass production displaced mechanisation as the major focus of capitalistic Western industry and thus as the source of the high productivity which had sustained fairly broadly-based high wages in democratic capitalistic societies;
  • from time to time many other major technological breakthroughs contributed to rising productivity;
  • socialist / communist ideologies arose (eg in Russia in the early 20th century) which held that state-provided capital and state-owned industry could be both economically successful and more socially equitable – and a Cold War developed as a result after World War 2 when nuclear weapons systems made ‘hot’ wars between major powers too dangerous;
  • after the Cold War ended when Communism's failure was recognised by affected countries (in about 1989) the global spread of market economies and investment boosted global growth and took billions out of extreme poverty;
  • environment constraints progressively created the need for ever more significant economic innovation.

The dominance of democratic capitalism had started to be seriously challenged after World War 2 when Japan:

  • started to achieve ‘economic miracles’ through the use of non-capitalist and not-seriously-democratic methods that were based on variations on East Asia’s traditional Confucian / bureaucratic governance (see Understanding East Asia's Neo-Confucian Systems of Socio-political-economy, 2009); and
  • then encouraged other East Asian countries to also use similar methods. China was arguably very late to do so because Mao's Cultural Revolution had apparently sought to purge Confucian influences from China, as they were seen by those Chinese who sought social equality to have been the vehicle through which China's people had been oppressed for centuries.

The most important of those systems were non-capitalistic in the sense that capital was mobilized by state-linked banks and provided to state-linked enterprises with limited regard to profitability (see Evidence) because East Asian cultures do not traditionally rely on ‘abstracts’ (such as profitability) as the basis for western-style ‘rational / individual' decision making. Because of this lack of concern for return on (or return of) capital those systems:

  • constituted an unrecognised form of industrial protectionism for several decades;
  • would have led to financial crises, if domestic demand had not been suppressed sufficiently to avoid the need to borrow in international financial markets by generating current account surpluses - an arrangement that led to structural international financial imbalances that put global growth at risk and created risks of future global financial crises (see below); 
  • may now lead to financial, economic (and perhaps political) failures in affected countries (eg see Japan's Predicament, 2009+ and China's Predicament, 2009+).

Starting in the 1960s one result was that more-developed Western-style economies faced increasingly severe challenges from low-wage economies in the mass production industrial functions that had previously been a critically important source of high productivity and high wages. De-industrialization as well as slow productivity, employment and income growth caused increasing concern, and over the next couple of decades this became a source of pressure for diversification into other high-productivity economic activities. Experiments in the 1970s (especially in Europe) with democratic government protection of, or ‘help’ in changing, industry were found to exacerbate the problem by slowing adjustment (eg as democratic governments responded more to interest group pressure than to market demand) and contributing to high public debts.

An inflationary surge in the 1970s (arguably a product the peaking of oil production outside OPEC which gave that cartel power to dramatically raise the price of a not-easily-substitutable commodity that was foundational to the price of many others) proved highly disruptive - and was apparently only suppressed by a recession that was induced by extraordinarily high interest rates in the late 1980s (and by ending inflation-indexed wage fixing that had provided a feedback mechanism to amplify any inflationary surge).

The spread of market economies after the failure of Communism in the late 1980s permitted rapid economic growth in many emerging economies outside East Asia - often with: (a) a significant role being played by multinational corporations; and (b) considerable difficulties in quickly creating a viable institutional framework for domestically-based economic-initiative (eg sound financial systems).  Thus many emerging economies came to depend on current account surpluses to defend their under-developed financial systems and thereby compounded the international financial imbalances that made sustaining global growth hazardous (see A New World Order: Leadership by Emerging Economies?) .

In the face of low wage competition, maintaining traditionally higher high income levels requires a continuous market-focused process of developing competitive advantages (eg by innovation).

A general view emerged in the 1980s that de-regulation to reduce public-interest and redistributive political interventions would be more likely to be successful in facilitating adjustments to meet these challenges. The need for structural change and higher productivity increased as market economies spread more widely around the world after the economic failure of Communism. This lifted many out of poverty in emerging economies, but increasingly put the less economically capable in developed economies into direct competition with low wage workers elsewhere and thus restricted their income potential while at the same time creating competition for industrial location that limited governments' ability to impose high tax rates.

It can be noted in passing that Australia also had a need for structural change though it had never succeeded in developing high value-add mass production manufacturing - as manufacturing had been promoted through tariff protection at the expense of the economy generally. Australia's requirement for the development of new sources of competitive advantage derived from its long history of a steady decline in relative income levels because of its reliance on natural resource based comparative advantages (ie in agriculture and mining) - see Defects in Economic Tactics, Strategy and Outcomes (2000+).

From the 1990s market liberalization facilitated diversification into post-industrial (mainly service or knowledge-intensive) functions in traditionally more-developed economies. And the knowledge-intensive post-industrial industries (especially financial services) offered options for the rapid growth of industries which achieved the productivity needed to maintain relatively-high wage rates. However the shift from hierarchical organisation structure (which had been appropriate for industrial mass production) to networked structures (see New American Economy, 1997) reduced the need for middle management (and thus the numbers of ‘middle’ income job opportunities). Moreover market liberalization created pressure on individuals / enterprises to compete, but by itself this did not ensure that the capabilities to succeed in high productivity industries existed (eg the complementary functions within industry clusters that can be needed for individual enterprises to succeed would not necessarily exist because of a 'chicken and egg' constraint) – see also Defects in Economic Tactics, Strategy and Outcomes (2000+). There was arguably a need for more than profit-focused individual enterprises (ie more than capitalism).

A fundamental problem in theories of economic growth: One source of the difficulty in doing more was mainstream economists’ theories of economic growth. Information / knowledge was seen as the key input into an economic production function in 'new growth theories'. However its potential to act as a way of changing production functions was not recognised (see Probable Breakthrough in Understanding Economic Development, 2004) – though using information to change production functions had arguably been the core of East Asian economic ‘miracles’ as a by-product of cultures which held that there were no such things as immutable social or economic ‘laws’.

The overall result of confronting successful low-wage completion in previously high-productivity industries and of reliance on market liberalization in isolation to facilitate adjustment was that:

  • traditionally developed economies became less able to generate highly-productive job opportunities;
  • government tax revenues were constrained by relatively weak tax bases, and by much stronger competition for industrial location as companies had access to many relatively low tax environments (where expectations about 'public' services and government wealth transfers were much lesser);
  • privatisation was seen as a key component of market liberalization but was not limited to functions which could be undertaken through a competitive market economy but (as government tax capacity declined relative to the demands on it) often included functions subject to significant market failures (and which thus, if not publicly owned, required strict regulation if market power was not to be abused). Private ownership and control of such functions: (a) reduced the ability of governments to know what regulatory environment would be appropriate; and (b) encouraged distorting the processes of government for private gain (see Distorting / Corrupting Government) .

The ability of democratic governments to carry out their role (ie promoting the ‘public’ interest and sharing wealth around - without borrowing and thus generating ever-rising debts) was thus seriously constrained.

This created the potential for social problems because liberal markets tend to reinforce individuals' initial advantages and disadvantages (ie those who start life with a stable family, a culture that facilitates learning and change, a good education and in a well-developed region are more likely to succeed and pass those advantages onto their children than those who lack those starting advantages). There are, of course, exceptions. Individuals can rise to success from unstable / poor backgrounds; the third generation of wealthy families reputedly often loses that wealth; and very few enterprises are successful for more than a century (because whatever they are good at is eventually overtaken by technological change).  None-the-less the ability of democratic governments to use part of a societies' wealth to counter trends towards social inequality was important. And the need for market-liberalization to facilitate faster economic change in the face of low-wage competition, reduced governments' ability to do so.

Moreover at the same time communities in 'developed' economies became ever more dependent on governments' ability to share wealth through services and transfers because: (a) the public expected that this would be available; (b) the need for transfers to those with limited education / skills increased as the latter faced competition from low-wage workers elsewhere in the world; and (c) many individuals' sense of responsibility for their own behaviour and for their family's / neighbour's welfare declined. Serious social  dysfunctions (eg self-centeredness, family breakdown, drug abuse, violence, child neglect and abuse, multi-generational jobless families) increased in many 'developed' societies and (though not the only factor) this contributed to growing dependence on direct government support by more and more members of those societies.

In 1987 major changes in the methods used for macro-economic management were initiated. Monetary policy was emphasized as an alternative to Keynesian counter-cyclical public spending (which was seen to have problems because such efforts often turned out to be pro-cyclical). The US Federal Reserve showed in 1987 that increasing liquidity could prevent a financial crisis from affecting the real economy. The use of such methods allowed an unprecedented two decades of fairly strong global economic growth. However it also had significant unforeseen side effects.

For example easy monetary policy became a component in a growing problem of international financial imbalances (for reasons suggested in Structural Incompatibility Puts Global Growth at Risk (2003) and Impacting the Global Economy (2009). Such policy permitted: (a) high levels of public spending to be maintained despite weakening tax capacity because the costs of government borrowing were minimized; and (b) rapidly increasing asset prices (ie a ‘wealth effect’) which in turn allowed overall household spending to exceed household incomes. This provided a source of strong demand (and current account deficits and rising debts) in many developed economies (especially the US as the world's 'consumer of last resort'). This counter-balanced the demand deficits / 'savings gluts' / current account surpluses in countries (especially in East Asia) that had non-capitalistic or poorly developed financial systems. The demand deficits in the non-capitalistic systems were: (a) achieved by so-called ‘financial repression’; and (b) necessary to avoid financial crises. However in the medium to long term severe constraints on household and government spending in traditionally developed economies were an inevitable consequence of providing the excess demand needed to sustain global growth in the face of the structural demand deficits in major non-capitalistic economies and emerging economies with poorly developed financial systems.

Easy money policies also probably contributed to growing economic inequality because they made it easier for those with existing assets (and thus a good credit rating) to acquire other assets that would appreciate in value as long as the easy money policies prevailed. This reinforced existing wealth disparities because those with limited assets could not obtain the benefit of artificially cheap credit. The US Federal Reserve’s “strategy of pumping up the value of risky assets and trying to stimulate the economy through the wealth effect [was recently criticised because] wealth effects are just for wealthy people. …. the real problem in America is middle-class structurally unemployed workers and their families, and that worsens an already seriously imbalanced income distribution in America.” (Baker P. ‘China-US at critical turning point, says economist Stephen Roach, Financial Review, 13/4/14).

Other Observers Views: The flood of cheap money since the 2008 crisis has not only failed quell deflationary pressures, it has also probably worsened the other modern scourge - inequality [1]. Robert Murdock argued to G20 finance ministers that quantitative easing has increased the gap between rich and poor. Where reserve banks attempt to stimulate the economy by buying assets with newly minted money, this could increase inequality by pushing up the price of assets and thereby disproportionately rewarding wealthier households [1]

Though easy money policies have probably been a major factor in growing inequality, this can’t be easily remedied because: (a) they have become a critical factor in financial markets (because the private banking sector's capacity to provide credit was eroded by the GFC); and (b) there has also been a geopolitical dimension. Monetary policies have become a major component of challenges from East Asia to dominant Western-style (ie liberal democratic capitalistic) systems of political economy (eg see A Generally Unrecognised 'Financial War'? and Currency War?). What is involved has been virtually invisible to most observers because of the complex cultural issues involved, and because deception is the core feature of traditional East Asian ‘Art of War’ strategies. The key issue at stake in this geopolitical contest is that Western societies have subscribed to universalist values and have valued the capabilities and welfare of individuals (eg see Cultural Foundations of Western Progress: The Realm of the Rational / Responsible Individual) – and this is incompatible with traditional East Asian values (eg see East Asia: The Realm of the Autocratic, Hierarchical and Intuitive Ethnic Group?). Those differences: were arguably the basis of Japan’s efforts to create an ‘Asian Co-Prosperity Sphere’ in the 1930s; and are also likely to be: (a) the real meaning behind the poorly-defined ‘China Dream’ recently endorsed by the General Secretary of the Chinese Communist Party; and (b) the goal of developments which are seeking to undermine the post-WWII international order based on universalist Western values (eg see Creating a New International 'Confucian' Economic and Political Order?).

Exceeding Governments' Capacity?

Over many decades community expectations about services and transfers in excess of tax revenues contributed to progressively rising deficits and debt levels in many developed economies - and this ultimately made those deficit and rising debt levels potentially unsustainable (eg as indicated by the US's 'fiscal cliff' debates and the debt crises in peripheral European economies). Factors other than community expectations had involved:

  • constrained tax revenues given the need to compete for industrial location with countries with lower costs and lower service / income transfer expectations;
  • the difficulties that democratic politics has in resisting interest group pressure;
  • the need for someone to borrow to maintain growth where economies face current account deficits - deficits which are vital if global growth is not to stagnate when other countries find it domestically necessary to practice 'financial repression' (ie suppressing consumption) so as to achieve current account surpluses to protect their non-capitalistic financial systems (see Structural Incompatibility Puts Global Growth at Risk, 2003)
  • the cost of financial dislocation after 2007; and
  • a demographic transition as the 'baby boomers' retired creating a situation in which the ratio of the non-working (and potentially dependent) / working share of the population became much greater than it historically had been.

In mid 2014 it was argued that US federal deficit was improving because of: improving revenue as economy strengthens; higher tax rates; a broader tax base and declines in spending related to cuts made in 2013. However longer term the deficit is expected to begin climbing again. Entitlement programs will squeeze out discretionary spending - and, as the former are mere transfers to the community, government's economic impact with thus decline [1]

In mid 2015 it was suggested that while the goals of the US's social security system were noble, the system is incredibly complicated / unfair and it is also 'flat broke' - as it faces unmet liabilities of $25.8tr (1.5 years of US GDP). Detroit had been bankrupted because its pension system was 20% underfunded - and the US Social Security system is 32% underfunded [1]

 

Restoring The Viability of Democratic Capitalism

Restoring The Viability of Democratic Capitalism - email sent 8/5/14

Bernard Salt
KPMG Demographics

Re: Democracy not the best system to manage $1.5tr economy, The Australian, 24/4/14

I should like to try to add value to your suggestion that Australia’s democratic system of government (with its universal suffrage) now makes it difficult to bring government tax revenues and services provision into balance - because democratic politics makes it hard to resist interest groups.

My interpretation of your article: By mid-century there may be a view that democracy is not the best way to deliver peace, prosperity and social cohesion. Democracy has long been around, but universal suffrage is new. Australia’s federated economy is only 100 years old – and the idea that it could be managed by the will of entire citizenry is only 30 years old. Australia’s economy has GDP of $1.5tr. The federal government raises $400bn taxes (24% of GDP – and state / local governments bring to total to 33%). Government tax capacity increased when income taxes were introduced. More tax was paid so that people could get social services. To get social benefits to levels like that in Scandinavian countries would require federal tax to be above 30% of GDP. Australia’s tax revenues have grown for the past 60 years – because of population growth / immigration and the youth of workers in 1960s; women’s entry to workforce in 1970s. Democratic suffrage means that politicians need to appeal to masses. In early 20th century, the electorate traded off their wants for group survival. Now governments need to serve / appease short term / me-focused masses – and this has not happened before. This problem faces all Western democracies. Immediate pain for long term gain is hard to arrange. Structural reforms are thus hard to make. Over time progressive economic failure / social turmoil will presumably allow reform. Australia has only just started to suffer from structural debts. Probably a decade of pain will be needed before it will be possible to achieve the reforms needed to bring the tax base and service provision into sync.

Your article noted (in effect) that democracy has difficulty dealing with public expectations that exceed the resources government has available. This clearly has relevance to the federal government’s current attempts to bring Australia’s budget into longer-term balance (eg by its emphasis on reducing ‘entitlement’ spending).

However there are many other reasons to question the long term viability of Australia's current democratic arrangements. Democratic institutions (ie elected representative governments) have been seen to be facing difficulties for decades (eg see Challenges to Australia’s Democratic Institutions, 2003+). The latter drew attention to a large number of examples of apparent problem areas. It also suggested that these problems could be due to:

  • public policy issues becoming too complex for traditional machinery to deal with;
  • the need to operate in an increasingly globalized environment in which unfamiliar cultures and practices need to be taken into account;
  • inadequate support in dealing with governments’ new challenges from civil institutions and from politicized Public Services; and
  • the retreat by many elected representatives into ‘populist’ politics because anything else seemed too difficult.

The methods being used to deal with Australia’s current budgetary challenges illustrate the deficiencies of traditional methods. In trying to deal with the long term consequences of a structural deficit emphasis is being given almost exclusively to financial considerations (eg through establishing a Commission of Audit) whereas a coordinated whole-of-government approach is arguably needed. There are non-financial factors that will have a big impact on long-term budget outcomes that can’t be dealt with properly by those who focus and skills are limited in non-financial areas.

The need for a broader approach was illustrated in More Important Choices for Queensland (2014 This noted non-financial issues that needed attention in relation to improving a state’s budgetary outcomes, such as:

  • recognising that whether functions subject to serious market failures should be privatised cannot validly be determined simply on the basis of financial criteria;
  • accelerating economic development to boost the tax base and thereby increase government revenues at any given tax rate;
  • dealing with the costs and inefficiencies associated with current federal financial imbalances; and
  • the creation of more effective / efficient machinery of government – eg by bringing an end to politicisation and reviewing the relevance of business-like methods in undertaking non-business-like functions.

These (and presumably other) aspects require a lot of work by appropriately qualified and experienced individuals and organisations. Mere mention in passing of such issues by those focused on fiscal options will achieve little. Moreover Australia’s history suggests that the vigorous pursuit of a ‘reform’ agenda that is based on an overly-simplified understanding of other government responsibilities can generate a huge amount of collateral damage (eg see Decay of Australian Public Administration, 2002).

The probable need for even more that a coordinated whole-of-government approach to the budgetary challenge can also be illustrated by the fact that significant problems seem to be emerging from a direction that simply isn’t being considered by current fiscal reviews. The fiscal reviews primarily emphasise the rising costs of an aging population and the fact that Australia faces structural budget deficits because its past economic ‘luck’ (and consequent strong public revenue on which public programs have been based) is unlikely to continue. The probability of another fiscal (and non-fiscal) problem which could make the situation even worse than has been assumed is explored in The Challenge and Potential Cost of Inequality and Insufficient Income. The latter suggests moreover that even a whole-of-government response is likely to be too narrow.

There is substance in your article’s suggestion about the need to think carefully about the effectiveness of democracy in preventing run-away public debts. However this should not be done in isolation. Australia’s overall system of political economy arguably needs improvement. Solutions to such challenges seem to be available (eg as speculated in A Nation Building Agenda, 2003+) but they can’t be found merely by fiscal adjustments to bring government revenues and expenditures into balance or by considering the limitations of democratic institutions.

John Craig


The Challenge and Potential Cost of Inequality and Insufficient Income

Concerns have been expressed about the ability of democratic governments to fund the expectations of their citizens. Moreover inequality and its side effects (which include a perceived need for increased government transfer payments) have been increasingly recognized globally in developed economies and now seem likely to impact significantly on Australia also as the 'luck' runs out.

It is argued below that governments may no longer have the resources to provide the support needed to minimize the social consequences of inequality or to meet community expectations about income transfer more generally. Community-based support may need to be emphasized.

Outline of Key Points: In brief it will be suggested below that:

  • international competition from countries with relatively lower wage rates as well as limitations in policy responses have played a role in the growth of inequality and deprivation in many developed countries. Australia is behind in the process, but is likely to catch up. The problem is not primarily a reflection of fundamental failures by democracy or capitalism. And it can't be addressed just by changing domestic political ideologies or government budgets;
  • governments in developed economies have a declining ability to meet community expectations about public services and welfare transfers for several reasons - eg restrictions on tax revenues in competition with countries with lower expectations as well as structural budget deficits and rising debt levels;
  • maintaining traditionally-higher incomes and tax revenues in the face of low-wage competition requires a continuous process of developing competitive advantages (eg by innovation);
  • significant inequality / poverty is potentially economically and politically disruptive;
  • in Australia there is both: (a) concern that inequality and financial stress for those on the margins is already a significant issue; and (b) statistical 'evidence' that this concern is unfounded. In part this reflects the fact that the situation is not yet as bad as it has become elsewhere. It also probably reflects defects in estimating increases in living costs (eg the effect of rapidly rising accommodation costs may not be adequately factored in to CPI ). Methods of assessing CPI inflation have been adjusted since the early 1990s for complex reasons which may well have had dysfunctional side-effects;
  • there is a complex relationship between: (a) the easy money policies that have been seen as needed to sustain economic growth in the face of high levels of household and government debts; and (b) the growth of inequality and difficulties in adequately assessing poverty levels. Monetary policy has also been a component of a geopolitical contest between liberal Western economic and political systems and the authoritarian quasi-Confucian systems that have been the basis of economic 'miracles' in East Asia and which are now being promoted as an alternative international order administered from China;
  • the impact of inequality and poverty has been minimized so far in Australia by: commodities, migration and infrastructure booms; rising wages due to those booms; government stimulus measures; and commitment of the (resource) boom era tax revenues to strong and targeted wealth transfer measures;
  • Australia's inequality / poverty problem is likely to escalate because: the income and tax benefits of past booms won't continue; the economy is not well developed in terms of generating income and tax revenues in other ways; a rising lack of individual responsibility contributes to generating disadvantage; environmental costs are rising; and the population is aging. And the problem could become even worse if threatening global economic and security crises escalate;
  • as well as more conventional policies, self and mutual help within the community could be promoted to reduce the risks (and to increase national income and tax revenues) by: apolitical leadership in the development of economic and community systems through  which individuals and organisations gain support; and increasing individuals' motivation and ability to help themselves and one another.

The International Debate

There is a rapidly escalating international debate about what is responsible for the significant rise of social inequality in many developed economies. In simple terms it seems that the rich have gotten richer over the past couple of decades while those on the bottom have stagnated.

Some observations about the growing and serious inequality that is now being recognised in many developed countries are in Who Is Failing the Lower and Middle Classes?. The latter refers to a political debate about this that escalated in 2014 as a result of claims by Thomas Piketty from France that: (a) capitalism (ie independent profit-focused investment which is the primary driver of Australia’s market economy) is to blame because return on capital has exceeded economic growth; and (b) substantial increases in taxation and transfer payments are thus needed to remedy the problem. One alternative view from the US that was mentioned at the above link was that such claims were overly simplistic (for reasons that were only obvious to those with a depth of economic understanding) and that weaknesses in democratic governments were primarily to blame for the escalation of inequality.

Concerns about Inequality in the US

US Federal Reserve saw US economic recovery as disappointing in April 2014 - and suggested that the labour market was not behaving as expected. But this is understandable. There has been a 65% fall in inflation-adjusted median income of lowest paid male workers over the past 45 years. Not only were median incomes for full-time workers reduced but the percentage that did not have full time stable work had escalated. This suggests that: (a) accessing credit became a substitute for income; and (b) welfare became relatively more appealing compared with work. In the US now 20% of families have no one working [1]

One analyst suggested that only the top 20% of US households could now afford to have a 'middle class' lifestyle [1]

The democratic process might be contributing to inequality in the US because a business 'oligarchy' is gaining dominance - and public policies are being adjusted to suit their interests [1].

[CPDS Comment: While this would not seem to be a major factor in the Australian environment, factors which could cause this to be come a problem are in place eg: (a) the limited number of major enterprises in many important sectors; (b) the politicisation of Public Services which reduces the chance of 'whistle blowing' in relation to abuses of power'; and (c) the emphasis that has been given to private ownership and control of functions subject to major market failures (and for which public sector influence thus has to be strong). Concerns about the distorting influence of the (so-called) military industrial complex in the US indicate the risks that can arise when there is a close linkage and interchange between business, politics and the bureaucracy - and private firms become the best source of information (and thus the most influential) in relation to 'public' goods and services.]

In mid 2014 US had finally recovered all of jobs lost following post-2007 recession. However this had come at a cost of job quality. Jobs in manufacturing, construction and government (which are typically well-paid) have shrunk while low-wage work has grown [1]

Despite the US economic recovery, the labour market lags the pace of previous recoveries. There is now a demand for professional / high-skill employees which requires post-secondary education or high levels of expertise. This is partly because low-skill jobs have been exported to lower wage economies. Many US workers lack the required qualifications and tend to become the long term unemployed [1]

There has been a correlation between changes in political polarization and income inequality in the US - with the latter lagging the former and thus suggesting that the effect of political polarisation may be driving changes in inequality [1]

Income inequality is increasing in the US and elsewhere. This is usually seen as negative. But it could arise from many causes (eg from innovations that raise overall income or from increases in monopoly power). Changes in income distribution reflect many pressures on economy - and it is necessary to understand the causes to find constructive solutions. There is a need to recognize the difference between labour and capital income; the effect of technological change; the effect of equality of opportunity. Technological change has often been a cause of increased inequality [1]

Income inequality in US not only because rich are getting richer but because typical households have been getting poorer. The inflation adjusted wealth of median household declined 36% between 2003 and 2013 [1]

The need to overcome problems associated with income inequality was seen in September 2014 as the US's greatest challenge - and as vital to maintaining its credibility as a global leader status [1]

There is a massive difference in income in US between different races [1]

Though US is the world's richest country, the poverty rate has remained the same for decades [1]

Concerns about Inequality in UK

The number of impoverished families in the UK has doubled over the past 30 years according to largest ever study of deprivation. Rising living costs now make a full time job inadequate to prevent some falling into poverty. one in six adults in full time work is now poor. Government's poverty Tsar (Frank Field) says current policies aren't working. Poverty and Social Exclusion Project found: families could not afford to feed 500,000 children properly; 18m lack adequate housing; 12m can't afford to engage in social activities;  5.5m adults lack adequate clothing. The percentage of households that lack three or more of the basic necessities of life has increased from 14% in 1983 to 33% in 2012. This was the method used to study poverty / deprivation in 1983. Poverty is not caused by a lack of work - as almost half the 'employed poor' worked 40 hours per week. Professor David Gordon (University of Bristol) said Economic and Social Research Council project showed that government was not tackling the root cause of poverty. Department of Work and Pensions said that there is strong evidence of improved incomes over the past 30 years - and the reports conclusions are misleading. Independent statistics show a 1.4m reduction in the numbers living in poverty since 1998. [1]

In the UK there has been debate about whether eliminating government budget deficits could be achieved without elimination of the post WWII expansion of the welfare state (eg of the National Health Service) [1]

Other Suggestions about Democracy, Capitalism and Inequality

There have been many examples of recent broken promises in democracies (eg adverse effect on economic welfare of less affluent by Australia budget). What is the point of elections if problems of socio-economic inequality can't be solved - no matter which party is in power, Critics suggest that capitalism is to blame for democracy's problems. The relationship between democracy and capitalism has changed over the past 40 years - with neo-liberalism / deregulation / globalization and financialization. Denationalization has weakened the power of elected governments. MPs may merely act on behalf of financial CEOs - and did little to monitor supranational bodies (eg WTO / IMF / ECB). Electoral participation has declined - with a income bias. Left wing parties have great difficulty achieving their social justice rhetoric. If given effect, their nominal policies could shift capital abroad. Governments depend on voter confidence - and this in turn depends on economic performance and the confidence of financial markets.  Elections can be biased towards authoritarianism driven by religious or ethnic divides - because lower income males will more readily accept authoritarians. Democratic elections are now powerless to challenge social inequality. Also protest movements now tend to focus more on cultural than economic issues - and their main supporters come from middle / upper classes. Representative democracy will fail if solution to socioeconomic and political inequality can't be found. The cultural emphasis of progressive politics has sacrified the problem of economic redistribution on the later of capitalist progress.  (Merkel W., 'Failing union of capitalism and democracy fuels rise in inequality', The Conversation, 2/6/14)

In the 19th century marrying up was a better life strategy than study, effort or enterprise. But in the 20th century average real wages rose, and inequality collapsed. Ordinary people could aspire to become wealthy through their own efforts. This supported free market capitalism's ideas - but Thomas Pikketty sugges this was false. He suggests that the 1914-18 war broke down concentrated wealth (where the richest 10% had owned virtually all wealth). Private wealth had been 8 times GDP before WWI and fell to about 3 times by 1945 - and has edged up since. High upper echelon salaries have led wealth share of top 1% in English speaking countries double to 14% since 1980s. Piketty argues for a massive increase in tax - as rate of return on capital is much greater than GDP growth. Financial and academic elites seem to be separating from the rest of society. Children at Harvard have parents with average incomes about $500,000 pa. Piketty's work has been seen to have little relevance in Australia. Andrew Leigh (in Battlers and Billionaires) showed that average net wealth had grown by 38% to $684,000 from 2002 to 2010 - with the median rising 50% to $399,000. Roger Wilkins (Melbourne Institute) argues that Piketty's analysis has little relevance for Australia over the past 30 years. Deeper question is whether all this matters. Inequality has been falling in all countries - and Marx's remise (falling real wages) was discredited as soon as it was written  [1]

As tension about inequality simmers, multinationals and the super-rich seem to be hoarding cash because of concerns about remedial action. The numbers of rich and their collective wealth have been increasing rapidly - much faster than global output. And ordinary taxpayers have taken the biggest hit in efforts to repair government budgets. Policies to respond to the GFC have not improved the situation. Corporate taxes have fallen, while personal taxes have risen.  Major companies are now sitting on huge quantities of cash - which keeps money liquid and mobile. This may reflect concerns about a lack of productive investments - or concern about possible redistributive action [1]

The top 10% of world's population controls 87% of wealth. There has been an ongoing rise in inequality. From 2000-2007 inequality was typically falling, but since then it has been rising [1]

There is increasing concern about inequality. Rupert Murdock blames monetary policy - on the grounds that this has made the rich richer by increasing asset value. Chair of US FED also expressed concerns about inequality without blaming monetary policy. QE benefits the rich - but this was not where the problem started. Rising inequality started in the 1980s was the direct result of Reaganomics (ie cutting tax rates for rich). Inequality had declined in US after 1931 when top marginal tax rates were significantly raised. A middle class existed only for about 40 years. The financial crisis of 2008 (which produced the monetary policy that is now blamed for inequality) had its roots in repeal of Glass Steagall Act in 1999. This had been another part of the 1930s' New deal. The global banking system seized up less than a decade later. Too many mortgages had been sold to the lower classes - which they could not repay and their inability to do so both caused the crisis and drove them deeper into poverty. US taxpayers then bailed out the banks, but did not help the mortgagees. Destructive Republican ideologies have since than blocked government spending on infrastructure / social programs. Thus pulling US out of recession was left to the reserve bank. The fact that leaders are now worried about inequality is encouraging. Maybe something will be done [1]

The view that quantitative easing was the major cause of inequality has been disputed, with the increasing skill-requirements for employment being suggested as an alternative [CPDS comment on that view follow]

Rising Inequality - email sent 4/11/14

James Morley
UNSW Business School

Re: Quantitative easing is over, but can Joe Hockey stop worrying about rising inequality?, The Conversation, 4/11/14

As I interpreted it your article suggested that theories about inequality being due to QE are invalid (because without QE there would have been a much more serious economic disaster) and that changes in work-skill requirements are primarily to blame.

I should like to submit for your consideration that:

  • both QE and changes in required work-skills have been factors in rising inequality. Moreover these developments have to be viewed in a global economic context. Rising work-skill requirements (and the need for market liberalization which also made it harder for governments to support the relatively disadvantaged) were a product of increasingly effective international competition. And easy money policies have been needed since the late 1980s because the ‘bureaucratic non-capitalist’ systems of socio-political-economy that have been the basis of East Asian economic ‘miracles’ would otherwise have caused global economic growth to stagnate. After the high debt levels that easy money policies had induced (combined with poor financial management practices) had led to the GFC, QE was needed (as your article suggested) to prevent a major economic disaster. However, while it kept the global economy afloat, it also contributed to a rapid rise in inequality. Reasons for the above suggestions are developed in Who Is Failing the Lower and Middle Classes? and Towards a New Economic Understanding.
  • it seems likely that the inequality / insufficient income issue is going to become much more serious that is currently apparent (see The Challenge and Potential Cost of Inequality and Insufficient Income);
  • QE is not yet necessarily at an end (see Putting Japan's New QE in Context ).

I would be interested in your response to my speculations

John Craig

It was inevitable that the destruction of the middle-class and rapidly rising wealth inequality would become a political issue in a democracy (especially the US). Wall Street and its investment banks are a major target (especially of Elizabeth Warren - a potential presidential candidate). Americans don't trust government to do the right thing and expect things to get worse and economy favours the wealthy. Warren speaks of income inequality, lack of functional government and the declining US middle class. Six years ago 53% of Americans considered themselves middle-class. Now it is only 44%. The problem is worst for youth as too few can get good jobs. The situation is worse in Europe. Australia has been relatively good - but now companies are outsourcing good-paying jobs offshore or replacing them with technology.  Political change has been sought in US because existing politicians are unable to change the situation - and this means more extrem left / right candidates. Australia's political leaders do not understand 'Warrenism'. [1

However there are many aspects to the problem. Merely blaming one side or the other of the ‘democratic capitalism’ coin is unrealistic, while suggesting that the problem can be remedied by governments' increasing taxation to fund transfer payments is naive. In particular, as A Simplified Historical Context (an appendix to Who Is Failing the Lower and Middle Classes?) suggested in some detail, it seems that:

  • Though here will be exceptions, free market capitalism will on average tend to reinforce the initial relative advantages that some individuals gain as children (eg as a result of a culture that facilitates learning and change, stable / supportive families, a good education and a well-developed regional environment);
  • There is thus an essential complementarity between capitalism (ie independent profit focused investment to raise productivity in a competitive environment and increase overall wealth) and democracy (to reflect the overall ‘public’ interest and use some of that wealth to provide services and to ensure against gross imbalances in wealth);
  • Manufacturing (which initially emphasised mechanisation, and later mass production) had been the area of highest productivity that developed economies had enjoyed since the industrial revolution – and the basis of fairly broadly based high wage job opportunities;
  • De-industrialization eliminated a significant percentage of high wage manufacturing job opportunities in 'developed' economies from the 1960s. Low wage economies in East Asia (initially Japan) were unexpectedly able to succeed in mass production manufacturing using non-capitalistic methods that: (a) were a variation of traditional Confucian methods of elite bureaucratic government; (b) contained an unrecognised form of industrial protectionism – because capital was used with little regard for profitability; (c) required financial repression to suppress domestic demand so as to avoid financial crises - and this contributed to some of the distortions mentioned below (such as unsustainable international financial imbalances) in relation to easy money policies; and (d) are a likely source of future economic and (perhaps also) political crises in the major non-capitalistic economies (whose commodities' demand has become critical to Australia's economy) unless the post-WWII liberal democratic capitalistic international order is disrupted;
  • In the face of low wage competition, maintaining traditionally higher high income levels requires a continuous market-focused process of developing competitive advantages;
  • Market liberalization was used with some success in more developed economies from the 1980s to facilitate diversification into higher productivity functions - by reducing democratic (ie public interest and redistributive) influences that can slow / impede market-responsive economic adjustment. However: (a) democracy's role in complementing capitalism was thereby distorted and weakened; (b) middle management jobs were squeezed by the shift to the networked (rather than hierarchical) organisation styles that post-industrial functions often required; and (c) market liberalization by itself was insufficient to create a general environment for highly productive (high wage) job opportunities (as this primarily encouraged adjustment only at the level of individual enterprises);
  • In many developed economies, community expectations (ie about public services and income transfers - that tax systems were too weak to support) combined with other factors to create structural deficits and rising public debts over several decades that eventually were recognised to be unsustainable;
  • easy money policies have replaced counter-cyclical spending as the primary tool of macroeconomic management since the late 1980s. While this allowed two decades of sustained global growth, it also played a role in: (a)  enabling large rises in public debts in developed economies that were likely to be unsustainable when interest rates normalized; (b) a 'wealth effect' which boosted both average household demand and social inequality (because the wealth of already-wealthy households was mainly boosted); (c) temporarily sustaining large international financial imbalances - because of (a) and (b); (d) an initially hidden geo-political challenge by East Asian authoritarianism to Western societies' traditional universalist values and emphasis on individual welfare and capabilities; and (e) the emergence of the 2008 global financial crisis.

Moreover, as the latter notes, there are also potential geo-political issues involved - and it has been suggested that unless community expectations about income transfers generally are moderated, Western democracies are likely to lose their global leadership role to more authoritarian regimes in Asia and elsewhere. 

A Geopolitical Dimension?: For the past 500 years successive revolutions in the role and functions of the state have helped make Europe and America the primary drivers of world progress. However, if the state is not reformed and reduced, Western democracy could suffer while the appeal of innovative authoritarian regimes (mainly in Asia ) could increase - according to British writers from The Economist.. Three revolutions created the present situation: Thomas Hobbs as philosopher of nation state and sovereign power; John Stuart Mill on liberty of the individual; and pioneers of the welfare state (eg Beatrice Webb, a Stalinist). But it was not just socialists who encouraged the growth of the 'providential' state. The Fourth Revolution argues the state must take a haircut - and ensure that public entitlements are directed to those who most need them, while the tax system must cease to target mainly the rich. Sweden might provide an example of change - from unsustainable welfarism to an affordable half way house. Singapore is another example, because it exhibits levels of self-discipline and authoritarianism that Anglo-Americans would not tolerate. The necessary drastic action to trim governments proved too hard for Reagan and Thatcher. If the state promises too much to too many, cynicism growth. Unless ballooning state is punctured, wealth will shrivel, power will decrease while more focused and less democratic regimes rise (Walden G. Book Review: 'The Fourth Revolution' by John Micklethwait and Adrian Wooldridgee, Wall Street Journal, 29/5/14)

Some speculations about the nature of the geo-political challenge suggested above are in Asia's Challenge to Individuals

And while inequality is a problem in developed economies, the share of wealth held by top 10% has been fairly stable since 2000. However in countries such as China and Russia inequality has been rising rapidly - and in Russia now the wealth share of the top 10% (ie about 85%) is now the world's highest [1].

The Cost of Inequality and Insufficient Income

In the UK one group suggested that spin-off costs emerge from rising inequality because of: reducing healthy life expectancy; increasing mental health problems; and an increased rate of crime and imprisonment (see The Cost of Inequality).

However the costs are potentially vastly more than this. For example:

  • social instability and political disruption can emerge. This was illustrated by the rise and political impact of the One Nation phenomenon in the 1990s which was arguably the first indication of the emergence of an underclass in Australia. Disadvantaged groups in marginal regions sought scapegoats when they found it difficult to cope with the more challenging environment that market liberalization (whose justification they could not understand) created (see Assessing the Implications of Pauline Hanson's One Nation, 1998). Groups such as the Occupy Movement and Anonymous could easily become their successors in reflecting grassroots' reactions to the effects of adverse economic developments which are far more complex than such groups' scapegoating political rhetoric envisages (for reasons suggested in New Economics: Some Pragmatic Suggestions (2012);
  • the environment for business can become less 'friendly' in the face of social stresses and instabilities;
  • the costs of government programs to support the disadvantaged would increase; and
  • those who are disadvantaged (especially when disadvantage is long lasting) are likely to be less able to contribute to a productive economy. At the present time it seems that young people (whose lifetime contribution has massive future economic and budgetary implications) are being heavily disadvantaged;
  • economic demand is likely to be distorted - because those with the lowest incomes will tend to devote almost all of their income to simple consumption. The effect of constraining their incomes will have more impact on consumption than will a similar percentage constraint on high income earners;
  • aspirations to egalitarianism could be at risk (and recognisable social classes could emerge) if serious inequality leads to the widespread emergence of domestic service.

In late 2014 the adverse economic consequences of rising inequality were starting to be recognized, though only traditional options for dealing with that problem seemed to be being considered.

Rising Inequality: A Problem that Requires New Methods - email sent 14/12/14

Ross Gittins
Sydney Morning Herald

Re: Widening income gap is dampening growth, Brisbane Times, 13/12/14

Your article has usefully highlighted the growing worldwide recognition that inequality need attention from an economic, as well as a welfare, viewpoint. However there is a need to address this problem at its source – and the source is not just in past domestic policy changes in countries such as Australia.

My Interpretation of your article: Significant developments in applied economics are occurring that have attracted little attention in Australia. A trade-off has long been seen between economic efficiency and equity. If governments seek to make income less unequal (eg by using taxes / government spending to reduce inequality, or setting reasonable minimum wage) this has been believed to reduce economic efficiency / growth. Avoiding income redistribution is seen to increase work incentive. Many tax 'reforms' in recent years have been based on this theory (eg cutting top tax rates; taxing capital gains at half the normal rate; ending double taxation of dividends; introducing GST to allow income taxes to fall). However academic research is now finding evidence that inequality is bad for economic growth - and international agencies are recognizing this. IMF researchers (Jonathan Ostry, Andrew Berg and Charalambos Tsangarides in Redistribution, Inequality and Growth) found that lower inequality was associated with faster growth - and that redistributive efforts have no adverse effects on growth except in extreme circumstances. Now Federico Cingano (OECD) has reached similar conclusions (in Trends in Income Inequality and its Impact on Economic Growth) . In most OECD countries the gap between rich and poor is at the highest level in 30 years. Cingano notes that this has become a top policy issue in many countries. Inequality potentially leads to political instability. And it also reduces growth and thus impedes economic recovery. It is possible to argue that government measures to redistribute income will make no difference - though Cingano argues that they would. The biggest obstacle to growth lies in the increasing gap between low income household and the rest. It is likely that those on limited income find it hard to invest in education and training and thus increase the value of their labour and the size of their contribution to growth. Gonski proposed making sure the socially and economically disadvantaged get a good education. Others in Australia have proposed large increases in university fees. Which is likely to be most beneficial?

An attempt to put the problem that Australia has with rising inequality in context is in The Challenge and Potential Cost of Inequality and Insufficient Income (2014). This suggested viewing the issue primarily in an international (rather than a domestic) policy context because:

  • Tough international competition in traditional industries (from low wage economies with growing skills) has reduced the prospects of low and middle income earners in more-developed economies;
  • Domestic policy responses to that competition has involved: (a) market liberalisation to facilitate economic change; and (b) an emphasis on the efficiency, rather than the public benefits, of government operations. These have: (a) reduced income transfers by governments; and (b) made it much harder for democratic governments to carry out in other ways their essential role of compensating for the wealth imbalances that must inevitably increase under capitalist systems;
  • Easy money policies, which have come to be the main tool of macroeconomic management, have arguably been the most significant source of rising inequality (as they have primarily increased the wealth of those with existing assets);
  • International financial imbalances have made those easy money policies necessary to maintain global economic growth over the past couple of decades. And those imbalances have largely had their origin in the cultural difficulties that major ‘non-capitalist’ economies in East Asia (whose economic motivations tends to be mercantilist, ie power-seeking) have in operating within the ‘capitalistic’ (ie profit-seeking) international financial system;
  • International competition imposes limits on governments’ ability to provide support for the relatively disadvantaged. Thus community-based support may increasingly need to be mobilized if this problem is to be resolved. The Gonski review illustrated the limits on what governments can achieve - because a lack of government spending is not the only constraint on educational achievement by the relatively disadvantaged.

Traditional methods of addressing inequality are arguably too narrow in this context. Some suggestions about dealing with Australia’s domestic economic challenge as a whole are in Turning Australia Around, while the need to also create a stable international financial environment is suggested in Will China's Presidency in 2016 End the G20's Chronic Failure?.

I would be interested in your response to my speculations

John Craig

What is Happening in Australia

Though the issues involved are complex and disputed there are grounds for expecting a rapid (but not-yet-officially acknowledged) increase in the demands on the general community (and the costs to government) from the need to cope with the large numbers of people on the margins of society who are experiencing financial and other stresses that they find difficulty coping with (eg because they face rising costs but can’t find well-enough-paid jobs either because the economic environment is deteriorating or because they are unable to participate effectively).

Past indications: There have long been claims that Australia is headed for problems with poverty – and these claims have been challenged (see Some Themes in the Poverty Debate, 2004). The latter referred, for example to concerns about: the emergence of an underclass – eg involving multi-generational welfare dependence; homelessness and housing stress; long term unemployment; child abuse; suicide; poverty becoming more entrenched and intractable; a toxic environment for children (related to family breakdown, rampant individualism and inequality); increasing wealth concentration; obstacles to moving up the social ladder; the side effects of poverty (eg increased crime, educational and health inequality); and the disappearance of the middle class.

There were also objections to such suggestions (eg because of concerns about what was being measured in reaching such conclusions and the need to take account of social mobility).

Many observers seem to have increasing concerns about this situation. For example:

 Australia’s egalitarian tradition is seen to be under threat from rising inequality over the past generation [1]. Australia’s average living standards are seen to be falling [1]. Social change has been seen as 'progress' in the post-war period, but this is now starting to change [1]. In Queensland teenagers not in education have faced steep falls in employment since the GFC [1]. Rising youth unemployment has been seen to create significant future risks [1, 2, 3]. Many reportedly face serious problems with housing affordability [1]. First-home buyers have been priced out of the housing market - while housing costs have risen from 13% to 18% of household disposable income over the past 3 decades [1]. Housing stress is seen to be reaching crisis point in some regions indicating a significant rise in homelessness [1]. Many families have reportedly become reliant on foodbanks because of rising costs – and the foodbanks are struggling to cope [1]. 5% of Australians have been suggested to experience ‘food insecurity’ (ie inadequate access to or use of food) [1].  Official criteria for being 'unemployed' (which yield unemployment numbers around 6%) are unrealistically restrictive - more realistic criteria yield unemployment rates around 10% [1] . Young Australians are likely to be much worse off relative to their predecessors because of stagnant incomes, missing out on the housing boom and having the pay the high costs of an aging population. Australians pride themselves on being the 'land of a fair go' but Australia is no more egalitarian than average OECD countries - in fact it may have above average inequality in wealth distribution [1]. Inequality is becoming the source of political instability in Australia just as in the US [1] . A 2016 NAB study showed that 2m Australians are experiencing high financial stress which prevents them from coping with unexpected expenses. Some also lack social support in coping in times of crisis and may have poor financial knowledge [1]. In the 'Broady Bronx' in Melbourne's outer north children are entering their third generation of welfare dependence, their prospects stunted by aimless role models who themselves had little to cling to when learning about the world of work [1]

Anecdotes that the present writer was exposed to also pointed to a significant existing problem, eg:

  • there has been a large increase in problems affecting children because of adult irresponsibility in the way money is used. It is no longer necessary to struggle to earn. Welfare support is readily available - but is misused (eg on drugs). One generation of children was brought up without being given a sense of responsibility - and they are now the ones having children - so the problem is escalating. [Source: a contact who has had extensive involvement with agencies dealing with children in distressed circumstances];
  • affordable accommodation is very scarce in Brisbane; and house sharing has become very risky as it is no longer possible to trust potential house-mates [Source: a contact who had periodically faced homelessness with her child despite almost having an income reputedly sufficient for a single person to enjoy a 'comfortable' retirement]

And those without strong family support who find themselves with even slightly insufficient income to meet their necessary expenses are standing on a precipice - as unexpected costs can have catastrophic consequences. 

Illustration: a person with a modest income would find that the 30% of this that would be considered to be the maximum affordable would not allow any reasonable property to be rented in major cities. However, if modest accommodation could be found, rental and tightly-controlled living expenses might equal their income. If there are no cash reserves, there would be a constant risk of being forced to the loan sharks by either unexpected expenses or a week of unusually high outlays. And if substantial emergency borrowing was required the 30% pa interest the loan sharks demanded for short term financing could cause expenses to exceed income - and, even if the gap was only (say) $10 per week, this could lead eventually to an inability to pay debts, a loss of the credit rating needed to rent and a spiral down to homelessness.

Moreover there have been frequent political campaigns based on reducing household costs and improving housing affordability -  which suggests that household cost / housing affordability issues are frequently being raised with political representatives by their constituents. And analysts are increasingly focusing on the issue of housing affordability.

Comments on Housing Affordability

Australia's housing market is a mess. Policy has favoured home ownership over affordability - and created an intergenerational divide which threatens Australia's social fabric. The Australian dream is no longer affordable for most young couples. Housing debt has peaked at 173% of gross disposable income (almost unequally in any other developed countries). Prosper Australia has analysed the problem and proposed reforms to make housing affordable. Investor activity dominates household lending in Australia. Since GFC 95% of bank lending has been for real estate. Outstanding credit for real estate is now 60% of total credit - up from 45% in 2000. This reflects low interest rates, short-sighted financial system and favourable government policy. Tax exemptions worth $36bn pa are seen to have turned dream of home ownership into a vehicle for financial speculation. Home ownerships rates have fallen over past 20 years - especially for those under 45. Government housing policy results in intergenerational wealth transfers. It also benefits the politicians who own property. Current policies are seen to erode living standards of future generations. High land prices damage competiveness and create barriers to entry for new businesses. A day of reckoning must come with next recession - or when enough baby booms decide to cash out their investments. Prosper Australia suggests that the problem can be overcome by changing tax / supply / monetary policies. Land taxes should have more emphasis - rather than stamp duty.  A broad based land tax would reduce incentive to hold real estate that is not in active use (as 27% of residential properties are). This should be accompanied by abolishing stamp duty - as this harms labour mobility and makes it harder for people to downsize. A bond system could be introduced so that infrastructure levies could be recouped over time rather than up front. Greater emphasis on public housing is also suggested [1]

RBA argues that there is a huge transfer of wealth from younger to older Australians because house prices are rising faster than incomes. Homeowners and investors have gained windfall profits from rises in land / property values. Renters and non-home-owners are worse off. Older people now need to use the benefits of rising property values to assist children rather than boosting their own consumption. Household balance sheets have become more risky than they used to be. Low interest rates were helping Australia through economic transition - but there needs to be investment in new assets that would provide for sustainable economic expansion (which property investment does not) [1]

However at the same time statistics are available which suggest that there is no significant problem (as outlined below). Moreover there seems to be a similar discrepancy between statisticians' conclusions and field observer's views in the UK also. The source of this discrepancy needs to be examined.

A debate about poverty in Australia strengthened after the federal Treasurer argued (in defence of 2014 budget proposals to reduce the scope of welfare payments in the face of structural deficits) that Australia's welfare system has involved levels of income transfers to the relatively disadvantaged that are very high by international standards.

35% of federal government spending is on welfare - and this is the largest single policy area. More than half of Australia's households receive some form of payment. Australians with the lowest 20% of income have the highest reliance on government for income of any country. They have less private income and more government income than countries where government is a much larger component of the economy. Australia's transfers of income from taxes to tax receivers is the most comprehensive and broadest in the world. 13% of households rely entirely on income from government. Over 70% of those over 65% receive the Age or Service pension. 5% of working age Australians receive the Disability Support pension [1]

A counter view was that the benefits of Australia's long period of sustained growth had been widely shared, and that poverty and welfare dependence had been falling

Australia has had a decade of prosperity that has halved the poverty rate, increased self reliance and reduced dependence on government welfare (especially amongst aged and those on lower incomes). Increased self-reliance reduces the Treasurer's case for tough budget measure to end the 'age of entitlement'. A study shows that the share of income from government benefits has fallen from 24.4 to 21.2% over the past decade. Household, Income and Labour Dynamics in Australia (HILDA) Survey suggests (via Roger Wilkins)  that over the past 20 years (and even in recent slowdown) welfare dependence of working and retired people has fallen. This contradicted Treasurer's case for reining in the welfare system - though the Treasurer's office noted that the HILDA survey only included data to 2011 and the situation had deteriorated since then. The HILDA survey showed that the productivity gains of 1990s and resources boom had made people more self-reliant. The numbers living in poverty fell sharply. Fewer were claiming unemployment / parenting benefits - though disability claims were rising. The poorest 20% of population depended on government for 66% of incomes, down from 70% ten years earlier. For the next poorest 20% - the government share of their income fell from 33.4% to 26.4%. The proportion of working age people who live in households where someone gains welfare benefits fell from 41.3% to 34.7%. All groups have experienced significant rises in living standards - though inequality has risen slightly. Real incomes of the top 20% rose 31.8%. Income fro the next 60% rose 27.4% while the poorest 20% had a 25.9% rise. Most income growth for the latter came from work earnings. Increasing incomes has led to a reduction in absolute poverty. Incomes of the elderly have done best (ie rising 35-40%) partly because of superannuation and Rudd Government's increases in pensions, but even more due to working longer. Fewer people are now retiring early. Most over-65s still receive the Age Pension but the percentage of their incomes from the pension has fallen from 67.8% to 59.8%. The requirement for single parents to go onto Newstart Unemployment benefit when youngest child reaches 8 reduced single parent benefits. Disability support pension recipients rose from 4.5% to 5.6% of the population [1]

In response the Treasurer's office pointed out that this was only based on data up to 2011. Moreover it was noted that the potential for problems had been hidden by favourable economic circumstances (ie by the rapid productivity gains of the 1990s which since have been replaced by stagnating productivity, and by the boom era prices that had been paid for Australia exports but which were now falling) [1]

Other contending views on the subject have emerged.

Debating Inequality and Poverty in Australia: Some Examples

Inflation in Australia has been very low (eg 2.2% during 2012). This is the best way to improve the purchasing power of wage earners and to help those in retirement with fixed incomes. The low inflation rate also validates the continuation of low interest rates [1]

Talk of poverty in Australia insults those overseas who experience real privation. Australia's problem is addiction to welfare which is socially and economically destructive. The Henderson Poverty Line was set at $62.70 / week for family of two adults and two children. This is equivalent to $28,600 pa in 2014. An unemployed couple with two children would now receive $37,190. ACOSS claims that 21% of Australians live below a poverty line. But this is farcical as some fraction of median income. Australia's welfare system has become so generous that it discourages employment and self-reliance - while creating a permanent underclass of welfare recipients - who feature in crime statistics. A full time worker would need to earn over $60,000 pa to have post tax income of single mother with four children. Welfarism has spread to broader segments of society - even though broad community has become riche and better able to fend for themselves. From 1969 to 2002 share of population dependent on unemployment, disability or single parent allowances rose from 2% to 14%. In mid-1960s 5% of population received some form of government payment - this is now 30% 900,000 Australians are now on disability support pensions. The class of unemployed, disabled single mothers is now much larger than in 1960s. Crude politics is the problem. The life choices that many make is guided by the incentives that the welfare system creates [1]

Claims that welfare addiction is the problem are unrealistic. ACOSS's Poverty in Australia report suggested that 2.2 people (12.8% of population) were in poverty . The problem lies in low allowance payments such as Newstart. This has been frozen in real terms since 1994 - though overall household living standards have risen by 1/3. Many others have found Newstart to be inadequate - and inadequate to meet basic housing / food / clothing and job-search costs. The 2010 poverty line (based on OECD standard) is 50% of median income. This is well below community standards. Australia spent 8.6% of GDP on cash benefits in 2013 - which is the lowest level of all OECD countries. Australia's safety net system has prevented the levels of poverty that exist in other countries. [1]

Treasurer argued that Australia's welfare system is more generous to lowest 20% of population than any other country in the world. However Australia spends less on welfare than any other OECD nation (ie 8% of GDP - relative to (say) 18.9% by France). Australia's system is more targeted towards the poor. In some other countries nearly everyone pays (ie via social insurance) but then everyone receives. The Melbourne Institute's HILDA survey shows that half of those receiving some form of income support payment are off it in a year - while 75% are off within 3 years. A social safety net is not a dead weight on economy. Welfare system to spread risk costs less than self-insurance. And where Asia countries rely on families rather than state for social support, excessive savings can result with inadequate consumption (which is a major distortion of world economy). The cost of Australia's welfare system did have to be addressed. Economic growth is the best option. Australia's welfare dependency fell over the past decade because of strong growth. However population ageing is increasing welfare costs. It is not helpful to suggest that welfare reform is needed to deal with a 'culture of entitlement' because Australia's welfare system is well targeted. [1]  

People are now talking about inequality. One question is whether the goal should be equality of opportunity or outcomes. However equality is a long way off. The richest 20% control 60% of household wealth, while the poorest have 1%. This has grown much worse since the 1970s. More equal societies are more healthy and happier, have stronger democracies and less drug use. If there were equality of opportunity then wealth should not depend on types of homes people come from - but those from poor homes in poor areas with limited educational opportunities do worse. Income correlates strongly with fathers income. Those from high income families have advantages that are well established by age 4. What should government do. Australia is a rich country and getting richer. GDP / capita has roughly doubled in real terms over 20 years. But prosperity is not equally shared. Poverty is caused by some of the policies making Australia rich (eg economic deregulation increases wealth but requires higher skills / education. The bottom 20% largely rely on government for income. But cutting welfare - which will increase inequality - is the federal governments main response to budget deficit [1]

A US economist (Joe Stiglitz) has argued that inequality will be crippling unless the Robin Hood principle is applied. While relevant in the US, this would be wrong in Australia. Australia's economy has historically has been high / rising wages driven by strong labour productivity and labour scarcity. Wages have been high since the start of European settlement - and this has driven innovations such as mechanised shearing and automated mining. The US and other OECD countries have had steady inflow of unskilled labour through migration. Australia by contrast have has emphasised skilled migration. Demand for labour has been strong through Australia's history due to massive ongoing investment in various primary industries. This started with wool in the 1830s and transitioned to minerals and energy after WWII. Labour has been scarce and productive for most of Australia's history. Treasury Secretary explain recently how important this has been. In most OECD countries wages have been stagnant for decades - despite rising labour productivity. The problem has been worst for those earning least - especially in the US. Australia is different. It has had strong increases in labour productivity and even stronger rises in real wages. Labour shortages resulted from private investment (mainly in mining and construction). If there is a problem it is that excessive real wage growth has driven unemployment and under-employment. Only a small percentage of recent gains in labour productivity came from improved skills and education. Real wages have risen almost as much for the lowest earners as for high earners. Stiglitz's idea that redistribution will be at the heart of future success / prosperity is a lemon. A skilled / motivated workforce and strong demand for these workers in highly productive industries can assure Australia future prosperity in an egalitarian way. Sustaining Australia's proven economic  methods are needed - not redistribution [1]

[CPDS Comment: While the 'Robin Hood' solution is not useful, this article's suggestion that Australia's economic welfare is assured by strong foreign investment in mining and infrastructure is rubbish. Australia traditionally suffers from the 'resources curse' (ie poor economic leadership in countries with rich natural resources by the interests who profit from those resources). While the article describes labour shortages and resulting high wages over the resources / infrastructure / migration booms of recent years, in the 1980s it was recognised that Australia's GDP / capita had been in constant decline by international standards for all of the 20th century because of reliance comparative advantages in natural resource wealth, and that to reverse this there was a need for economic reforms to create competitive advantages in areas more dependent on knowledge and skills. Though such reforms were attempted and were partly successful, there remains a long way to go - see Defects in Economic Tactics, Strategy and Outcomes, 2000+]

12% of households have to draw upon savings or borrow against home equity because their spending exceeds their income. Another 42% spend all they earn. About 1/3 of households experienced rising incomes over the past year while 1/3 experienced a fall [1]

While there are many causes of homelessness, the growing cost of accommodation is a significant issue. Incomes have grown 57% over the past 10 years, but housing prices have risen 147% [1]

Australia's superannuation system has made Australia richer overall - but it has not helped many Labor supporters. Many asset poor Australians over 65 are living on less than 60% poverty line defined by ACOSS (ie 60% of median wage). 60% poverty line is $24,648 pa - and current maximum age pension is $22,000 pa. Those who don't own their own home face great risks as rental assistance only takes pension income to $25,000. The divergence between incomes (from which 'poverty line' is calculated) and property prices (which determine rent or mortgage repayments) means that those who don't own their own home when they retire face problems. People in Australia aged over 65 have the lowest disposable incomes amongst OECD countries. More than 1/3 of those over 64 live below 60% poverty line. The problem might have been reduced by increasing the super contribution from 9% to 15% of incomes, but the need to deal with government debts made that more difficult. However Australia's large superannuation savings pool has also been beneficial (eg in helping fund corporate balance sheet repairs during the GFC) [1]

Middle class families have not benefited from Australia's economic growth. In the US there has been a 10% decline in median per capital income since 1998 at the same time as a 25% fall per capita GDP incomes. For a long time Australia was different - but recent data show a similar phenomenon in Australia. Governments believe that the middle class is well off and increase taxes - which is not a reflection of real world. New technologies create wealth for top executives and those essential to new process - but not for those involved in traditional transactions whose jobs are in jeopardy. Blue collar works with inflexible unions find that their employers just close down. [1]

A new study by ACOSS has concluded that 2.5m people in Australia are living below the poverty line [1]

Australians are the richest people in the world because of their houses according to a new study. Only 6% of Australians have less than $10,000 as compared with 29% in the US and 70% globally. Household wealth is heavily skewed to 'real assets' / property (60% of gross assets - the second highest in the world). The distribution of wealth is relatively good by standards elsewhere. Global wealth gains have been uneven recently. Inequality has been rising particularly in developing countries. The financial crisis was a breakpoint - as inequality had previously been declining [1]

A generational decline in wealth and living standards is likely for young Australians as Grattan Institute has warned. Inequality between young and old has become apparent in UK and US - and something similar is likely here unless policies change. The problem arises from: slower income growth for young; missing property price surge over past 20 years fuelled by low interest rates; and sharp rise in government payments to older citizens. Young Britons have higher education levels than predecessors, yet are paid less. Income growth has stagnated in UK over past decade - and this is likely in Australia because of worsening terms of trade. Similar trends exist in US. In Australia incomes for those over 55 grew fastest over past 9 years. Part of this is due to housing boom of past 20 years that put housing out of reach for young, and dramatically increased wealth of households that already owned property. At the same time government spending on older Australians has increased dramatically. In the UK the fiscal crisis hit earlier, and older people have seen large cuts in benefits. Despite this older people will take a lot more from government than they contribute - the reverse of prospects of young. Very high marginal tax rates will need to be paid to cope with intergenerational debt [1]

Three studies of wealth distribution  all showed an increasing divide between have and have-nots. In Australia, Canada and Sweden avoided the widespread crunch in middle-incomes experienced in most advanced and some large emerging economies. Average wages have generally risen more slowly than productivity growth). But in Australia there is a large gap between rates of savings that far outstrips variations in incomes. The top fifth in Australia receive 1/3 of income but own 3/4 of all savings. Millionaire families are 8% of total - but hold 50% of savings [1]

Part of the discrepancy in different assessments of inequality probably arises from difficulties in determining whether significant deprivation exists. Some accounts of how this is being done are outlined below.

Issues in Measurement

Poverty lines are income levels for various types of income units. They are based on a $62,70 benchmark income for December quarter 1973 established by Henderson poverty inquiry - for a family of two adults and two children. The poverty line is updated using an index of disposable household income (ie the poverty line rises from $62.70 based on relationship between current average household disposable income and that in 1973 - based on ABS data ). This produces a relative measure of poverty - ie poverty lines rise as community incomes rise. An alternative is to adjust poverty lines using the ABS consumer prices index. This results in an absolute poverty line. When adjusted in terms of household disposable income the poverty line for a family of two adults and two children becomes $926.30 per week, but only $$527.8 when measured in terms of the CPI index. This reflects the fact that the purchasing power of average household disposable incomes rose 75.5% between 1973/74 and 2012/13. [1]

Poverty in Australia is contentious. It can be measured as relative or absolute poverty. A 2012 ACOSS report used poverty lines set at 50% and 60% of median household income. Absolute poverty was set by World Bank in 1990 is the minim cost of life in the world's poorest countries (ie $1 / day). As costs vary in different countries the absolute poverty line varies between countries. The Henderson Review set $62.70 as an absolute poverty line for a two adult / two children family in 1973. This figure has been updated regularly by the Melbourne Institute in line with average incomes. Relative poverty is set at a percentage of average incomes. There are many different ways to calculate this and different groups using different methods can reach different conclusions. There are also problems with poverty measures that focus on income as there can also be poverty in terms of education, health, access to services / infrastructure, vulnerability, social exclusion, access to social capital [Poverty in Australia, Wikipedia]

ABS data (seems to the present writer to) lead to somewhat different conclusions about inequality that the HILDA surveys. The former show persistently rising levels of inequality and levels that (especially recently) are greater than the HILDA work. Moreover the effect of 'Market' income is to increase inequality according to ABS data - and to reduce it according to HILDA Survey. Earnings changes also increase inequality - particularly using ABS data - while government transfers reduce inequality.  [1]

An account of the methods used and limitations of ABS surveys of household income (which are the basis of estimating the adequacy of income) and methods used for assessing poverty are in NATSEM, An Introduction to Poverty Measurement Issues, 2001)

Methods that could be used to assess inequality / poverty issues in a regional environment were outlined in Measuring Poverty and inequality from Highly Aggregated Small Area Data 26/4/13

It is the present writer's impression (based on a preliminary examination of the various methods that are being used) that there are problems in the methods used to measure inequality and poverty that account for at least some, and perhaps much, of the difference between no-real-problem statistical views and there-is-a-problem field observations. Moreover there seem to be defects in popular there-is-a-problem statistical methods also.

Those problem areas arguably involve:

  • the process used for updating the Henderson poverty line estimate. The latter was an 'absolute' poverty line that was calculated in 1983 (ie of the minimum reasonable actual costs that an indicative family faced) - yet it its being updated supposedly to give a current 'poverty line' through the HILDA process (see above) either:
    • by adjusting for changes in average household incomes - the result of which can not reflect a current 'absolute' poverty measure; or
    • by reference to changes in the consumer price index (CPI) - which may be a problem because of claimed limitations in conventional CPI measures due to:
      • changes in the composition and quality of the items included in the index [1] - a change which is necessary according to supporters though opponents argue that it results in an under-estimate of real CPI [1];
      • the apparent exclusion from the Australian CPI of the effect on household costs of rapid escalation in land values - an exclusion which was estimated to imply that the official rate of CPI inflation for Sydney between 1998 and 2003 was only half what it would have been if cost-of-use data had been used [1];
  • the use by ACOSS of 'relative poverty' measures based on median incomes - because the conclusions reached depend heavily on the distribution of  income - as illustrated in How Useful is Relative Poverty?

Part of the discrepancy between there-is-a-problem field assessments and no-real-problem statistical data is that Australia's inequality / poverty situation is not yet all that bad and there are expectations that it should be even better.

However a perhaps significant and worrying cause of the discrepancy between field reports of household deprivation and statistical assessments is the the way in which CPI statistics are determined has been subject to ongoing changes since the 1990s. The CPI no longer measures the cost of a basket of goods that a household might need to buy to achieve a certain standard of living. Rather it is adjusted to take account of changes in the composition and quality of such goods that economic analysts believe is appropriate. Moreover the effects of increasingly significant housing costs seem to be inadequately reflected in the CPI.

Changing the Treatment of CPI in US

The producer of ShadowStats argues that adjusting the CPI for changes in composition (rather than measuring the cost of a fixed basket of good) and quality (which meant that the prices tracked were not the prices consumers actually paid) results in statistics that lose contact with the actual cost of living and are typically seen by consumers as not reflecting their experience. Such adjustments started to be made in about 1990 when the US Federal Reserve suggested that CPI inflation seemed too high. The Bureau of Labour Statistics argues that the statistical adjustments since 1990 have made a cumulative difference of about 5% to CPI. The alternative view is that much larger differences are involved (eg a cumulative (say) 25% from 2000 to 2013). It was also argued that the use of Homeowners equivalent rent (an assessment of what homeowners would pay to rent their own homes) does not reflect actual costs [1].

The use in US of methods for assessing the cost of accommodation that may under-estimate that cost [1].

If US GDP fell 0.8% on annual basis in first quarter 2014 and CPI is rising at 2.1% pa, then real inflation adjusted growth was -2.9% pa. Median household income is now $50,000 - which is 7% less than in 2000 if official inflation rates are valid. Barron's argues that official inflation rate is unrealistic. Rising costs of necessities makes personal inflation rate much higher. CPI is up 47% since 2000, the Everyday Price Index (which only tracks commonly purchased items - ie many fewer than CPI) is up 69%. The Everyday Index includes cost of car, housing, health care [1]

Changing the Treatment of Accommodation Costs in Australia: How, Why and Consequences

The effect of a land price boom (which resulted in much higher accommodation costs) seems to have been largely excluded from the CPI in Australia because it has been argued that this reflects investment rather than consumption activity by households. The effect of rising land values were excluded because the ABS argued in 1998 that adding mortgage interest rates into the CPI would result in an inflation measure that was amplified by the monetary policy response to inflation (ie in an era of rising inflationary pressure interest rates would be increased to combat those pressures, and the interest component of the CPI would then rise to add to headline inflation) [1]. As suggested above, something similar seems to have been done in the US - and the consequences have been seen to be serious [1].

Excluding land price rises from the CPI makes sense from one viewpoint - ie because of concern about what their inclusion would do to monetary policy. An artificially low CPI figure due to low interest rates would be seen seen by Reserve Banks as the justification for even lower interest rates (ie there would be a feedback effect from monetary policy into the CPI which made it impossible to know what monetary policy was appropriate).

However excluding the effect of rapidly rising land values has significant equity implications because monetary policy has a major impact on property values (ie low rates can justify significant price increases by resetting the benchmark against which investment returns are assessed). For households who own residential / investment property in an era of super-low interest rates rising land prices may reflect an investment return, but for non-property-owners they reflect rapidly rising real accommodation costs (costs that are to some extent excluded from the CPI). 

These adjustments seem to have arisen because Reserve Banks were using CPI inflation to guide monetary policy and monetary policy had two not-necessarily-consistent objectives. It was used both: (a) to keep inflation within a desired range; and (b) as a tool for macroeconomic management. If inflation was high, raising interest rates was expected to reduce it (and visa versa). If economic growth were slow, reducing interest rates was expected to increase demand for credit, and thus boost growth (and visa versa).

There was concern (said to be initially from the US Federal Reserve) that that traditional CPI inflation based on a basket of goods (ie the actual costs households faced) was too high - so adjusting the way it was measured was suggested. The reason that a problem was seen with the traditional methods for assessing CPI inflation was perhaps that the high CPI inflation this revealed (even if a realistic measure of household cost inflation) required high interest rates that would suppress (rather than stimulate) economic growth. 

However the overall effect of the adjusted methods for CPI inflation has arguably been:

  • increases in the costs of living facing households could be somewhere between 5% and 25% greater that indicated by CPI statistics between 2000 and 2012 (based on estimates in US - and assuming that somewhat similar methods have been used in Australia). Though some adjustments to earlier (basket of goods) methods were probably needed, the incentive Reserve Banks had to encourage low estimates to justify stimulatory monetary policy settings (and governments had to reduce increasingly-unaffordable claims for welfare payments) may have resulted in excessive adjustment;
  • estimated of real GDP growth are likely to have been over-estimated;
  • it has been difficult to realistically assess household financial stresses (if real cost-of-living increases have been understated); and
  • to increase wealth inequality because low interest rates (which could be rationalised by 'low' inflation) have been used to boost growth despite their likely adverse effect on equality.

It was suggested in 2014 that since 2008 the richest 1% of Australian households have seen their percentage of total wealth fall from 17.5% to 13.8%. Rises in sharemarkets have increased wealth in Australia by an average of $1bn per day in 2013 - so the wealth of those exposed to sharemarkets has risen. One in 50 households have more than $1m (where measured 'wealth' excludes businesses, residences and luxury goods) [1].

Though overall wealth has increased substantially in Australia in recent years this seems to be to at least some extent a product of the ultra-low interest rate policies that have been put in place to stimulate recovery from the GFC and these seem unlikely to be worth sustaining because their economic stimulus is now low (because of the high household and government debts they have already encouraged) and their adverse effect on social equality seems to be serious.

Rising Wealth Driven by Easy Money Policies is a Problem: The effect of easy money policies by overseas' Reserve Banks has apparently been been to boost asset values and create a 'wealth effect' that stimulates an economy party by allowing benefited households (mainly those with significant existing assets) to increase their consumption spending. The impact of easy money policies on house prices has arguably been similar to that related to sharemarkets. There have been real reasons for increasing asset values (eg rapid population increase and urban 'footprints' that limit land availability for environmental reasons in the case of property values). However steadily declining interest rates over two decades has amplified those 'real' factors - because this resets the standard against which price / earnings ratios are assessed.

Unfortunately asset price rises driven by easing monetary policy seem likely to increase inequality between those households with and without net assets (see A Simplified Historical Context).

And, as easy money policies have been in place for a couple of decades, average household debt levels have become VERY high by traditional standards, so cheap money is no longer encouraging high consumption levels. It is unlikely that low interest rate policies will be continued if the main effect is just to boost asset inflation and social inequality - see An Approaching Crisis?]

The Effect of Carry Trades on Bank Profits and Housing Stress: One factor that may have a significant unrecognised impact is the effect of the cheap credit that is available to Australian banks via carry trades from countries with interest rates lower than those maintained by the RBA. This: (a) presumably helps banks to make good profits; (b) makes cheap credit readily available for real estate investment; and (c) increases the value of property - and the levels of housing stress and homelessness risk facing those on modest incomes.


Sky High House Prices - email sent 13/6/14

Callam Pickering

Re: Why Australia is floored by sky-high house prices, BusinessSpectator, 13/6/14

In relation to the reasons for high property prices in Australia it is worth considering the effect of ‘carry trades’ – ie borrowing offshore at the ultra-low interest rates that quantitative easing allows in order to provide loans at much higher rates to those wishing to buy real estate in Australia. This arguably accounts for both the very high profits enjoyed by Australia’s banks, and the ‘sky-high’ character of Australia’s property market. The risk that Australia faces if this process were to unwind was suggested in Maintaining Capital Inflow (2008).

John Craig

A view of international concerns about the growth of inequality and its implications for Australia was expressed by the Federal Treasury in 2013 [1] along the following lines:

"There is a keen national and international interest in the topic of income inequality. The release by the Organization for Economic Co-operation and Development (OECD) of their reports Growing Unequal (OECD 2008) in October 2008 and Divided We Stand (OECD 2011) in December 2011 sparked international commentary and led the World Economic Forum to declare that inequality was a top economic risk.  Over the past twenty years, Australia has experienced a period of sustained economic growth. This has resulted in an increase in earnings from both labour and capital, which has benefited households across the income distribution (Greenville et al. 2013) and has led Australia to have the second highest ‘average’ income growth between the mid-1990s and the late 2000s amongst OECD nations. During this period, Australians in the bottom 10 per cent of the income distribution have experienced the fifth highest income growth in the OECD, at 3 per cent per annum. It is this strong growth across the income distribution that sets Australia apart from other OECD countries. Nevertheless, while labour income inequality has been on the decline, overall income inequality in Australia has been rising since the mid-1990s. Measures that focus on the very top income earners show a strong gain in their share of national income, as is the case in most OECD countries. Despite all the research by the OECD and many others, the policy implications of income inequality remain unclear" [for reasons which the Treasury paper then elaborated].

While, as the Treasury suggested, the bottom end of Australia's income distribution may have experienced income growth that was high by international standards (and thus constrained domestic inequality), the resulting incomes translate into a constraint on competitiveness and job creation in a post-resources-boom environment as Australia's economy has not yet been well-developed in addressing other high value added functions. Observers' views of Australia's resulting challenges are outlined in How Durable is Australia's Luck? and in Are Unfinished Apartments a Risk for Australia Also?

The rise of inequality and poverty has presumably been minimized (so far) in Australia by:

  • economic luck in avoiding the worst of the GFC because a commodities' (especially coal and iron ore) boom resulted from the extraordinarily high level of infrastructure and property investment that was China's main GFC response;
  • rising average wages for many as a labour shortage resulted from a simultaneous: (a) resources boom; (b) surge in infrastructure investment; and (c) need to provide housing and services to unusually large numbers of migrants (see Does Rapid Migration Cause or Cure Labour Shortages);
  • substantial government stimulus spending to counter the GFC and government guarantees of bank deposits to avoid the risk of capital flight that was perceived at the start of the GFC; and
  • using revenues derived from the investment booms to increase transfer payments to compensate those whose positions were being left behind (see The Long Term Impact of the Global Financial Crisis).

On balance it seems that the problems facing those on the margins of Australian society are greater than no-real-problem statistical assessment indicate (see above).

Moreover those problems likely to escalate (and require a community / government response) primarily because:

  • Australia's strong economic performance over the past two decades won't automatically continue (see How Durable is Australia's Luck?);
  • it is difficult to maintain high incomes (especially for those without high levels of education and skills) in the face of international competition from countries with low income levels. Likewise it is difficult to maintain government tax revenues sufficient to sustain high levels of public services and income transfers in competition with countries with much lower expectations (see A Simplified Historical Context and note suggestions that Australia's current tax rates are too high to be internationally competitive [1]).  Moreover:
    • it was noted in 2014 that real per-capita (federal?) tax receipts had been rising strongly in Australia from 1996 to 2007 ($11,444 to $16,729) and that governments had been using those gains to pay off debts and increase public service and income transfers. Those per capita receipts then declined significantly to 2009 (to $14,628) before starting to rise again (to $16,180 in 2014) [1];
    • in 2015 it was argued that new methods of conducting businesses make it hard for governments to get tax revenues (eg money is more mobile; goods ordered on the internet can be delivered by drone; disruptive technologies emerge constantly). Tax reform in Australia is slow. After 5 years few of Henry Review's proposals have been implemented - and none of the hard ones. The Intergenerational Report shows the importance of reducing spending. Bracket creep will raise tax revenues. But federal tax revenues are stagnant. Falling export prices are only part of the problem. Demographic change / intensifying international tax competition ' increasingly digitalized-globalized economies are issues. Global average corporate tax rates are below Australia's. Tax rates are being cut elsewhere and Australia will have to respond. Global supply chains and increased significance of intellectual property allow companies to choose where they pay taxes. Debates about tax reform in Australia have been naive. Corporate tax is waning because it is hard to work out where profits are earned. Personal income tax will become increasingly important. Reforms to track individuals offshore incomes have increased. Population aging means that more income will flow through to concessionally-taxed superannuation schemes [1]
  • Maintaining traditionally-higher income levels and tax revenues requires a continuous process of developing competitive advantages (eg via innovation), but Australia's efforts to develop such capabilities over the past three decades achieved little as they were politically motivated, rather than market driven (eg see The Economic Futility of 'Backing Australia's Ability 2');
  • easy money policies by the world's major reserve banks, which seem to be needed to stimulate economic growth, are probably contributing to inequality and encouraging high government debt levels that will severely constrain other spending when interest rates normalize;
  • disadvantage can be self-inflicted (and inflicted on families and communities) by a lack of individual responsibility - signs of which have been escalating;
  • the population is aging; and
  • environmental costs are rising - and thus the share of income that human populations can use for their own benefit is declining.

The situation will be even worse if the global economy deteriorates badly - as seems possible if / when the 'drag' from the world's large accumulated (and sometimes suspect) debts  become too much for the 'pull' provided by new economic policy and business initiatives or if rising geo-political tensions prove economically disruptive (see An Approaching Crisis?).

The Probable Need for a Community-Based Solution

Though there are many conventional policy responses that would help in dealing with the above challenges high priority needs to be given to promoting self and mutual help within the community - because:

  • the problem of inequality and insufficient income is likely to escalate (as noted above) and the resources through which governments have traditionally tried to remedy this are likely to contract. For reasons suggested above all governments in developed economies have faced increasing financial constraints in trying to solve such problems through providing services and wealth redistribution.
  • the problem will be compounded if it proves that reserve banks' 'easy money' policies have been a significant driver of increasing inequality (and thus need to be wound back to limit the risk of social / political instability) because values in asset markets as well as economic growth, community wealth and the debt-service capacity of both governments and households have come to depend on those 'easy money' policies. [A significant decline in inequality could then result if the currently-rich, and the society as a whole, became poorer];
  • the major ways in which Australia’s risk that inequality and poverty could become a big problem has been contained (ie economic 'luck', substantial public spending and generous / targeted transfer payments) are now likely to disappear. Though Australia's debt problems remain low relative to many countries significant structural deficits have emerged, and been compounded by the end of the 'luck'.  At the same time: (a) increasing environmental costs are both putting demands on governmental resources and increasing the needs of the relatively disadvantaged; and (b) demographic shifts are increasing the dependent / working age population ratio;
  • simply cutting back on government support for the relatively disadvantaged is likely to generate problems - because such government support will often have substituted for the family / community support that would traditionally have been available. The latter will not automatically re-emerge in the short term if state support for the relatively-disadvantaged is withdrawn; 
  • even with unlimited financial resources, governments by themselves could not adequately deal with the problems associated with inequality and poverty.

One reason for this is suggested in relation to overcoming problems of educational inequality in Gonski Review: An Example of the Limitations of Government Initiatives. Inequality in education (as in other areas) partly reflects social dysfunctions that result from a lack of individual responsibility - and it is beyond secular governments to deal with this. The situation would be further complicated if there is validity in suggestions [eg 1] that government welfare itself can contribute to the explosion of the social dysfunctions (eg single parent families, drug addiction, crime and loneliness) that can impede individuals' success in life.

Democratic governments are also constrained in dealing with other factors that impacts on the ability of individuals to get ahead - such as:

Community-based initiatives (see also Supporting the Disadvantaged when Government's Can't Afford to Do So) would perhaps best involve:

  • apolitical leadership in the development of economic and community systems through which individuals and organisations gain support (eg using methods suggested in A Case for Innovative Economic Leadership). In an economic sense, such efforts would complement enterprise-level innovation in creating the competitive advantages required for relatively high income levels and government tax revenues. In practice apolitical leadership might, for example, involve: (a) sponsorship by civic leaders of 'learning' about options to create community services or deal with environmental challenges; or (b) the development of regional economic capacity by system-wide economic 'learning' sponsored by (for example):
    • those with strategic land holdings - as their property value would rise if high value added economic activities are undertaken on it, or nearby;
    • financial institutions seeking profitable investment opportunities noting: (a) the role that bank-entred business groups played in Germany's rapid post-WWII economic recovery; and (b) observations that an exceptionally high percentage of bank lending in Australia in 2014 was directed towards real estate - and this probably would need to be diversified if economic highly productive economic opportunities were to emerge in a post resources-boom environment;
    • service providers to a potential new or enhanced industry;
    • regional development bodies - though their ability to carry out this role will be constrained by the difficulty of keeping political (ie interest group, rather than market) demands from driving outcomes;
  • increasing individuals' motivation and strength to help themselves and others. This challenge to boost individual responsibility must be met by Christian churches if Australia's liberal social, economic and political institutions are to be maintained. Those liberal institutions depend on widespread Christian adherence in the community - because the Judeo-Christian tradition alone promotes a sense of individual moral responsibility that does not depend on state / communal coercion (see also Why Tolerate Tolerance? and Religious Education: The Need for a Bigger Picture View).  Churches can not have the resources (financial or otherwise) to provide enough support to the relatively disadvantaged -  but they have something much more valuable (though this is not always appreciated) - see Matthew 26:6-16. History shows that carrying forward the Church's Great Commission has the potential to not only bring eternal benefits to individuals but also to provide recipients with the strength and motivation to better support themselves and others in the here and now (eg see Refugees; What did Jesus Do?).

If such initiatives are not taken, social dissatisfaction with governments' likely inability to meet community expectations could well result in political instability.

The Unsustainable Cost of Charities - email sent 9/8/15

Max Wallace
Rationalists Assn of NSW

Re: The Greek Orthodox Church, and our big, fat, Greek-style economic funeral?, Online Opinion, 7/8/15

Your article suggested (reasonably) that Australia has a serious structural budget deficit because: (a) there are problems in the tax system; (b) Australia has huge amounts of capital tied up in unproductive property bubbles; and (c) income from major iron ore and coal exports is declining and other industries are not adequately compensating. It also suggested that the tax exemptions given to religious charities should be reviewed.

I should like to submit for your consideration that, because of changes in the economic environment which relate to the economic points that your article made, that there is likely to be a need to find new ways to deal with disadvantage and social difficulties in developed economies generally and Australia in particular (see How Durable is Australia's Luck?; outline of key points in The Challenge and Potential Cost of Inequality and Insufficient Income; What is Happening in Australia; and The Probable Need for a Community-Based Solution).

The latter speculated about:

  • the inadequacies of the resources that governments are likely to have to meet social need (ie through transfer payments and social services – even if significant non-government resources can continue to be mobilized through charities);
  • the probable consequent importance of emphasising apolitical economic and community development to increase self and mutual help; and
  • the need for Christian churches to play the leading role in boosting self / mutual help if Australia’s liberal social, economic and political institutions (and their advantages) are to be sustainable – because the Judeo-Christian tradition alone promotes a sense of individual moral responsibility that does not depend on state / communal coercion to adhere to human claims of moral authority (a point that is further developed in The Re-emergence of 'gods').

John Craig

Complementary Initiatives

Other initiatives to strengthen Australia's institutional capacity to deal with its coming challenges are suggested in A Nation Building Agenda. Enabling emerging economies to understand how they develop successfully in ways that are compatible with a liberal international system would also seem highly desirable (eg see Defusing a Clash, 2001 and and A New 'Manhattan' Project for Global Peace, Prosperity and Security, 2001).

Could A Chinese Property Bubble Burst in Australia Also?

Could A Chinese Property Bubble Burst in Australia Also? - email sent 17/5/16

Robert Gottliebsen
Business Spectator

Re: Banks risk blowback on Chinese burns, The Australian Business Review, 16/5/16

Your article points realistically to the likely adverse effects on the financial system and economy of the apparent collapse in Chinese investment in Australian apartments. However it is unrealistic (as your article did) to blame this on Australia’s regulators and financial institutions. Booms and busts are anything but unusual in Chinese investment in anything. And there are other reasons that Australia was unwise to allow its post-resource boom economy to depend heavily on Chinese investment.

My Interpretation of your article: Constraining investment in its apartment market by Australia's biggest trading partners (China) will have adverse consequences for banks. Governments are simply not prepared for the realities of the world they confront in 2016-17. A 50% fall in Chinese apartment purchases is being partly offset by increased local buying. However there is a risk that a recession could result. China is making it hard for people to get money out. Australia's banks are tightening up on lending - partly because their expectations about how people would have acquired their money are not being met (ie banks have been told 'half truths' about where the money came from). Maximum LVRs are now 60% - and market prices are below the 'off the plan' prices. Thus Chinese buyers are staying away. China's boost to Australia's economy has not just come from apartments (eg also from education and tourism). The inner suburbs of major cities are surrounded by cranes at buildings Chinese investors bought on 10% deposit - without any guarantee that local banks would fund the balance. Thus many contracts are in danger of lapsing. This will break many property developers - and hurt the banks that have financed them. These problems will become severe in 18 months and can be blamed on APRA and the banks that backed the developers and then refused to finance settlement. The looming ASIC / Royal Commission inquiry into banks will take place in an era of crisis

Apartment developments near the centre of Australia’s major cities have provided post-resource-boom support for Australia’s economy. A very high percentage of these have been for Chinese buyers. This has created significant risks for Australia for reasons outlined in Importing Risks from China. For example: (a) China’s financial system has operated on the basis of mobilizing capital through political channels for nationalistic over-investment in everything with limited regard to return on capital; (b) when (in about 2013) this was recognised to be unsustainable China tried desperately to create financial systems that did not simply depend on suppressing consumption to maximize national savings; (c) in the absence of financial emphasis on ‘profit’ (as compared with politics) those attempts resulted in state-orchestrated booms in China’s property and share-market which ultimately collapsed – and the property boom left China’s cities littered with unfinished and excess real estate; (d) the methods that China used to achieve ‘economic miracles’ from the late 1970s allowed insiders to corruptly acquire huge wealth; and (e) the anti-corruption campaigns that (to quell political instability) have also been part of China’s recent ‘reform’ agenda have created incentives to get corruptly acquired wealth into offshore havens. Those doing so have brought with them China’s domestic willingness to fund growth on the basis of undisciplined borrowing – which creates booms for a time and ultimate busts.

That there has been a problem with large-scale Chinese real-estate investment in Australia has been obvious for nearly two years (eg see Overcoming Australia’s Corruption Shortage, 2014; "Mum and Dad" Chinese Investors - You Must Be Joking, 2015 and Are Unfinished Apartments a Risk for Australia Also?, 2015+). The latter highlighted the possibility that (as with China’s domestic property booms / bubbles) significant numbers of apartment complexes in Australia’s major cities could be left incomplete. Your article implied that, if something like this now happens because Chinese buyers are evaporating, large losses will accrue to Australia’s developers and the banks who financed them.

Your article was however spot on in suggesting that:

John Craig


Email response from Peter Boyce, Imenca (18/5/16)

John, more hard data is needed to draw your conclusions. Around 15 years ago household formation (driven by population growth) greatly exceeded new dwelling construction and did so for many years. More recently the gap has narrowed and I’m anecdotally led to believe, has now reversed. How the maths adds up over the long haul but such data is central. I’m not sure by how much, but population growth (especially in Melbourne) got a long way ahead of new dwellings at one time and would have taken some significant pegging back. In the absence of hard data, the claims reported in the ABR are a well-argued but unsubstantiated scenario. Also, it matters not who buys them so long as there are enough households forming (who may be buyers or tenants).


Email reply to Peter Boyce (18/5/16)

Thanks for your feedback – which (if you have no objection) I will add to Could A Chinese Property Bubble Burst in Australia Also? on my web-site.

The issues you raise are worth consider. In simplest terms my response is:

  • Comparing population with dwelling numbers is overly simplistic – because affordability (as well as other factors such as household size) have an influence on whether there is an over or under supply of dwellings. Affordability has been poor (associated with increasing social inequality due to poor prospects of a significant segment of population and escalating asset prices due to the effect of declining interest rates). Thus despite the shortage relative to population there was probably much less of a shortage (or perhaps no shortage at all) relative to financially qualified buyers. More recently investors have been the dominant buyers (ie >50 overall and 80-90% in ‘off the plan’ apartment blocks). This is a consequence of rising prices driven both by declining interest rates and the start of an apartment boom apparently largely driven by foreign (primarily) Chinese buyers. The latter’s’ investments have been driven by domestic Chinese reasons (which have to do with securing hard assets outside China) rather than whether there is ultimately any demand from anyone to occupy the dwellings. Very frequently properties bought by Chinese investors have been left vacant. Property investors have created huge over-supplies of apartments in many cities in China that will take 5 years to clear – because they strongly prefer ‘hard assets’ as financial assets are unreliable;
  • As you suggest, there may well be enough households to occupy all properties being developed – if not now then sometime. However the affordability constraint (which does not only apply to owner occupiers but to investors in an environment of declining prices) means that prices will fall (perhaps a long way) before demand balances the supply – and those price falls are going to damage Australian developers and banks given the extent of the apartment investments involved (apparently 60% of what went into resource investment boom). Also there is a risk that some (perhaps many) complexes will remain incomplete – which would further damage values. This has often happened elsewhere – and seems to have already started in Australia. Another complication is that apartment complexes have apparently been built to meet the expectations of (Chinese) investors (at least some of whom intended to leave them vacant) – and many would not suit domestic buyers / renters in terms of size or style. Once again this would be likely to translate into significant losses for developers / banks if the offshore investors lose interest.

Email response from Peter Boyce, 19/5/16

You’re welcome to use what I wrote. Your response makes good logical argument but in the absence of 10 or so years of tracking data it’s impossible to say what’s happening other than based on anecdotes. Any short term slowdown could be for example, for several reasons including an election, talk of a downturn, policy debate about negative gearing, the Chinese buyers becoming more cautious and more. To make the supply & demand argument needs the time series data.


Email reply to Peter Boyce (22/5/16)

Thanks. However my understanding is that 10 years of ‘tracking data’ will only tell us something useful in a system that is stable. Where cause and effect relationships are changing significantly, historical data won’t tell much unless the various driving influences that were dominant at various times are identified and taken into account. And, in terms of trying to identify future developments when one needs to take account of significant influences that did not exist in the past, the best that can be done is to try to understand those influences (eg on the basis of anecdotal evidence) and thereby estimate what effect they might have.


Putting Australia's Speculative Bubble in Context

Putting Australia's Speculative Bubble in Context - email sent 25/6/14

Paul Egan and Philip Soos

Re: Bubble Economics

Your analysis is a very constructive initiative. There is little doubt that (as your book suggests) there are risky features in Australia’s current economic situation – such as a speculative property bubble. Some other observers’ recent views of Australia’s emerging economic difficulties which parallel yours have been drawn together in How Durable is Australia's Strong Economic Performance? Though most observers do not go so far, the parallels you suggest with past depressions (eg that in the 1890s which resulted when an external financial crash triggered: capital flight; a collapse in local property values; and bank failures) really do need to be considered.

As I understand it you are basically ascribing the emergence of diverse indications of a speculative, rather than a substantial, Australian economy to the post-1970’s shift from social democracy to neo-liberalism.

However (for reasons suggested in A Simplified Historical Context) there have arguably been other factors involved, such as:

  • The perceived need, in an increasingly challenging environment, for market liberalization to increase international competitiveness, and thereby maintain the income and tax revenues Australians expected;
  • The resulting expansion of knowledge intensive post-industrial functions (which often involved those connected with finance) to achieve the productivity needed for relatively high wage rates;
  • The post-1987 shift from fiscal policy to (easy) monetary policy for countercyclical macroeconomic management; and
  • The existence of international risks of financial crises – and their relationship with increasingly obvious geo-political challenges to the post-WW2 liberal international political and economic order.

I submit that your report’s proposal for domestic reform need to be complemented by (for example) reference to such broader issues (eg how Australia’s international competitiveness can support the social democratic outcomes that you are advocating). Some suggestions about the need for a broader domestic reform agenda, and what this might involve, are in Restoring The Viability of Democratic Capitalism,

I would be interested in your response to my speculations.

John Craig

Don't Look at the Delirium: Look for Alternatives

Don't Look at the Delirium: Look for Alternatives - email sent 26/8/14

Greg Maybury

Re: Delirium in the Imperium: the new masters of war in the New American Century, Online Opinion, 25/8/14

I was interested in the issues that you mentioned in this article.

There is no doubt, as you suggest (and as Chalmers Johnson had pointed out), that the US had over-emphasised the development of security and military capacity in the course of the Cold War with Communism – as revealed (for example) by: the role of the CIA; the US’s global military presence; and the domestic political influence of the ‘military-industrial-complex’.

Communism was an authoritarian system that had challenged liberal Western style political and economic institutions on the basis of state ownership and control of economic assets. It failed because of the economic weaknesses and political abuses it generated.

However even before the Communist challenge declined, the advocates of some ancient authoritarian cultures (most notably in East Asia and the Muslim world) had started mounting challenges to the individual liberty and initiative that were the core of the Western systems that the US had championed since WWII. The risk of conflict over ‘culture’ (rather than over political ideology as in the Cold War) was the subject of Samuel Huntington’s Clash of Civilizations. An attempt to identify the cultural foundations of the major new challenges to liberal western traditions is in Competing Civilizations (2001+) . It is not possible to gain a realistic view of what has been happening since the Communist challenge collapsed by focusing on what is left of the US’s Cold War era methods. Rather one must focus on what has been happening elsewhere, and consider the changes to the methods the US and its allies have used in that context.

The first publicly obvious manifestation of the ‘clash of civilizations’ involved the 911 attacks in America by Islamist extremists in 2001. The response to this by the US and its allies was an ‘idealist’ version of the Cold War tactics that had been used against Communism. Foreign policy ‘realists’ (who had taken the view that it was necessary to collaborate with anti-Communist authoritarians to defeat Communism) had been challenged by (so-called) foreign policy ‘idealists’ (who highlighted the ‘blow-back’ associated with supporting authoritarian regimes and favoured using US power to change, rather than form alliances with, authoritarian regimes) – see Unilateral Action. This ‘idealist’ agenda was attempted in Iraq. However the tools that you associate with the ‘Imperium’ were quite inappropriate for the emerging challenge from cultural, rather than merely political, authoritarians (eg see Fatal Flaws). The latter drew attention to the absence in Iraq of the cultural and institutional preconditions that are required for liberal (eg democratic capitalistic) systems like those that the US and its allies tried to introduce. Neglect of the cultural preconditions needed for liberal institutions had led to the quagmire of Vietnam. Something similar happened again in Iraq.

However there were also more subtle challenges from East Asia’s mercantilist economic systems (ie those which sought to boost the power of ethnic communities rather than to benefit their citizens as individuals) – see A Generally Unrecognised 'Financial War'?, 2001+; Are East Asian Economic Models Sustainable?, 2009; Comments on Australia's Strategic Edge in 2030, 2011; and Are Analysts Making a Big Mistake about China and Japan? 2014).

Under the Obama administration it seems that the methods for resisting authoritarianism that you identified as those of the ‘Imperium’ have been changing. One of Obama’s clear commitments was to extricate the US from foreign military entanglements. He also sought to reduce the role of the ‘military industrial complex’ in domestic politics. More subtle methods have been used to resist authoritarianism. The ‘financial war’ is being fought with financial tools (eg see Currency War?). Economic sanctions have been used (eg to contain Iran and Russia), The conflicts in the Middle East related to uncertainties about what system of political economy might enable Muslim dominated countries to overcome their centuries’ long stagnation are being treated as matters that (as far as possible) require local political solutions. Attention has continued to be placed on ‘hard power’ capacity (and doing otherwise would be foolish), but ‘soft power’ methods are being developed and implemented.

Those methods may prove successful. However there are also financial / economic risks and potential / escalating conflicts that could result in global disaster (see An Approaching Crisis?). Thus, rather than criticising inadequate US methods, I submit that priority should be given to finding more constructive ways of dealing with existing challenges (see also Must Authoritarianism Triumph This Time – which criticised the apparent lack of any positive progressive agenda by groups such as WikiLeaks).

I would be interested in your response to my speculations

John Craig

The Chart is Important: Understanding What is Means is Not Easy

The Chart is Important: Understanding What is Means is Not Easy - email sent 15/9/14

Greg Canavan

Re: The most important chart in the Investing world, Daily Reckoning, 15/9/14

Your article suggested that Australia is merely slavishly following the US lead into further military adventuring in the Middle East and that the strengthening $US is an important trend.

I should like to draw you attention to an email that was sent today to a fairly prominent US economics professor who has close links with the military industrial complex who: (a) believes that Obama’s soft approach to ISIS not good enough; and (b) that mercantilist economic practices are a major source of the economic problems the world now faces.

My email tried to suggest why Obama’s tactics (which apparently include a significant ‘soft power’ component) were a significant breakthrough, and to put what is happening in financial markets into a geopolitical context.

This relates to quite complex issues that I have had the opportunity to study for decades. This leads me to suspect that:

Unless the geo-political dimension (which requires a depth of understanding of the consequences of cultural difference) is recognized I submit that it is almost impossible to make meaningful comments on what is likely to happen now.

Regards

John Craig

Standing Up for Freedom Before It is Too Late

Standing Up for Freedom Before It is Too Late - email sent 22/10/14

Shae Smith

Re: Why I Won’t Shut Up About the Government Stealing Our Freedom, Pursuit of Happiness, 22/10/14

Freedom is important not only for its own sake but because it allows individuals to contribute their best to society as a whole (eg see The Emergence and Advantages of Responsible Liberty).

And freedom is under increasing threat.

For example, the loss of freedoms that Hong Kong’s people face as China’s resurgent authoritarianism increases its influence is highlighted in China: No Turning Back Now????. And that ancient East Asian authoritarianism is seeking to expand its influence . Australians are unlikely to remain unaffected unless people are well aware of, and work to counteract, the threat (eg see Babes in the Asian Woods and Comments on Australia's Strategic Edge in 2030).

And the authoritarianism that is implicit in the way that Islamic religious requirements can be enforced has a devastating effect on Muslim communities (eg see Please Don't Trivialize Oppression). Though a coercive approach to religious law is not universally regarded as necessary or desirable (see Is There Coercive Religious Legalism in Islam?), the fact that some Muslims believe that this is necessary and apply extreme (sometimes lethal) force to suppress freedoms (ie to ensure other’s conform) arguably has devastating consequences (see Blame Religious Legalism for the Middle East's Problems).

Thus I suggest that your useful ‘pro-freedom’ message should not simply record constraints imposed by governments in countries such as Australia – for reasons suggested also in Must Authoritarianism Triumph This Time?

John Craig

Bringing Freedom Down is a Moral Question

Bringing Freedom Down is a Moral Question - email sent 28/10/14

Jean-Paul Gagnon and Mark Chou
Australian Catholic University

Re: Bringing the free market down is a moral question, The Conversation, 1/10/14

Your article pointed to very real problems. I should like to suggest however that these issues need to be considered in a much broader context.

My Interpretation of your article: Five years on governments’ responses to the GFC are criticised. Promises made during GFC have not been fulfilled and the system that generates inequality has not been reformed. Democratic government is a moral issue. Questions are now being asked about equality. Why is dangerous risk-taking for private profit still the status quo? Can governments show that justice has been served? Answers are emerging (eg Tom Malleson’s After Occupy: Economic Democracy for the 21st Century, Joseph Stiglitz’s The Price of Inequality and Thomas Picketty’s Capital in the 21st Century). These focus on the ‘democratic economy’ or ‘economic democracy’ – related to increasing citizens’ participation in economic matters (eg in relation to redistributive taxation and economic regulation). But such mechanisms are not the norm in countries like USA / UK whose decision makers were complicit in triggering the GFC. Poor / weak regulation and a lack of citizens’ participation is a moral issue. There is a need for a democratic response to the crisis. Participedia illustrates methods to increase citizens’ prticipation. Inequality is damaging democracy – by setting fire to the delicate social fabric on which democracy depends. Blocking people’s ability to decide about public and private capital binds citizens’ hands. There is a need for a less-extreme style of capitalism. Economic democracy could eliminate the distinction between free market and people – noting that huan beings are the market. These are ways which illustrate how citizens might participate and have a deciding influence over the economy. The democratic economy would bring the market down within people’s reach.

The undoubted problems that your article highlighted are not entirely (and arguably not even primarily ) a consequence of what has been done by governments and businesses in countries such as UK / US / Australia (for reasons suggested in Towards a New Economic Understanding). The latter argues that the GFC (and the many other developments that your article canvassed such as rising inequality) can’t be properly understood without considering the whole global economic environment For example, hard-to-understand structural incompatibilities between the international financial / economic systems that has been established on ‘liberal’ (ie democratic capitalist) Western traditions and the authoritarian alternatives that have been re-emerging in East Asia in the form of what might be described as ‘bureaucratic non-capitalism’ have arguably had significant implications.

The sources that your article quotes are criticising policies in democratic capitalist environments without any apparent recognition of the broader issues involved - which include also those mentioned in Must Authoritarianism Triumph This Time? and Standing Up for Freedom Before It is Too late.

There is no doubt about the need to improve citizens’ ability to deal more effectively with the current economic situation (and its social consequences) through the democratic process. However the difficulty of making democracy effective is not limited to economic issues and requires a huge amount of effort to improve support to the democratic process.

Fixing Democratic Institutions: Reasons for suggesting the need to improve support to the democratic process were speculated in Australia's Governance Crisis and the Need for Nation Building (2003+). The latter referred (amongst other things) to: the increased complexity of policy issues; the need to take account of the hard-to-understand impact of unfamiliar cultures in a globalized economy; the weakening of public service support to the political system; the adverse effects of academic idealism; and the weaknesses of Australia’s civil institutions (that have to provide the raw material for public understanding and democratic debate) because of Australia’s ‘lucky country’ history of reliance on natural resource wealth and on simply copying policy ideas developed in other parts of the Western world.

Getting together citizens to make decisions affecting the economy (unless they have a very sound understanding what is actually going on) would not be helpful. The issues involved are very complex (eg see Who Is Failing the Lower and Middle Classes?) and can’t simply be decided just by applying ‘moral’ criteria (for reasons also suggested in A Social Democratic Alternative to ‘Neo-liberalism, 2006 and Restoring 'Faith in Politics', 2006). Moral criteria must be applied, but unless and until the whole of the problem is properly understood, there is a risk of doing more harm than good.

I would be interested in your response to my speculations

John Craig

Is the 'Free World' in Decline?

Is the 'Free World' in Decline? - email sent 12/11/14

Is America in decline? (Funnell A., ABC, 11/11/14) raises interesting issues. Some observations follow.

Obama’s statement about a lack of IS strategy was in fact a strategic statement – ie that it was not just up to the US to deal with the problem. He has consistently and sensibly taken the view that US military power was not the way to deal with international problems – and this has been continued recently through efforts to strengthen others in the Middle East to enable them to deal with the (so-called) Islamic State.

The US has indeed championed a ‘free world’ since WWII – and been increasingly frustrated by the lack of support it has gained in doing so. The question is how the rest of the world will react now that authoritarian / quasi-fascist alternatives are emerging with an obvious ambition to dominate the world (eg see Must Authoritarianism Triumph This Time? and The Resurgence of Ancient Authoritarianism in China). In the 1930s the US turned inward and adopted a policy of isolationism as conflicts emerged between liberal and authoritarian systems until the Pearl Harbour attack in 1941. I am not sure that it will try ‘isolationism’ again, but this is possible.

What I suspect is more likely is that the US will adopt a smarter approach to promoting a ‘free world’ by: (a) pushing others to take responsibility; and (b) emphasising the use of financial / economic (rather than military) power. It seems very likely that the economic game is on the point of changing (eg An Even Scarier Story for Emerging Markets) – and that the liberal options can be satisfactorily re-engineered (eg see Towards a New Economic Understanding).

However it is also possible that the notion of a ‘free world’ could prove to have been a passing phase in human history. Islamists and East Asian nationalists (as well as would-be elitist-authoritarians elsewhere) certainly hope so.

John Craig

Piketty's Perspective is Too Narrow

Piketty's Perspective is Too Narrow - email sent 5/1/15

Professor John Quiggin,
University of Queensland

Re: How Thomas Piketty found a mass audience, and what it means for public policy, Inside Story, 30/5/2014

I should like to suggest for your consideration that attempts to analyze the growing problem of inequality purely on the basis of domestic economic policies are too narrow. There are international and geo-political factors that need to be considered for reasons suggested in Who Is Failing the Lower and Middle Classes? and Restoring the Viability of Democratic Capitalism (which refers to Australia’s situation in particular). And unless the international and geopolitical factors that have been background drivers of the policies that contributed to inequality start to get serious attention, the consequences seem likely to be far worse than rising inequality (see Reducing the Risk of Financial / Economic / Political Crises).

Those who believe that Piketty’s book is pointing to adequate public policy options need to take off their blinkers.

I would be interested in your response to my speculations

John Craig

Decline and Fall of the West?

Decline and Fall of the West? - email sent 16/5/15

Jim Penman,
Biohistory Foundation

Re: Fitzsimmons C., ‘We’re all doomed’: Jim’s Mowing founder Jim Penman , BRW, 8/5/15

I was interested in the thesis developed in Biohistory: Decline and Fall of the West (ie that a biological analogy suggests that citizens' changing 'temperament' means that Western civilization must decline relative to others) because I have made a study for some decades of the cultural differences between various major civilizations, and how this affects their progress / development. This suggests to me that it is more important to focus on cultural issues rather than on biology.

The online Biohistory presentation starts by posing questions about how civilization develops. It then suggests that civilization is characterised by: a willingness to work long hours; a desire to innovate; and adherence to ideas and abstract principles (such as the notion of money and a constitution).

These features have been characteristic of Western civilization in recent centuries – but not necessarily of other civilizations and certainly not in the same way (see Competing Civilizations, 2001+).

The latter points to the origin of the features that permitted rapid progress by Western societies in recent centuries (see Cultural Foundations of Western Progress: The Realm of the Rational / Responsible Individual). The key to that progress arguably lay in the Judeo-Christian emphasis on the welfare (and capabilities) of individuals which permitted rationality (ie the use of abstract concepts such as money and law) to be a reasonably reliable guide to individual decision making in economic and political contexts. Abstract concepts fail as a reliable method for problem solving in complex environments (eg where central authorities try to ‘plan’ an economy or where family / communal coercion (rather than individual consciences) is relied upon to ensure responsible individual behaviour).
It also points to the rejection in traditional East Asian religions of the notion of both individualism and abstract concepts which affects societies with an ancient Chinese cultural heritage – and the consequent use of quite different methods for solving problems and achieving change (see East Asia: The Realm of the Autocratic, Hierarchical and Intuitive Ethnic Group? and also Competing Thought Cultures, 2012). The former also refers to the dislocation of the international financial system and global economy that has resulted from East Asia’s lack of reliance on the ‘abstract’ called money / profit as the basis for resource allocation (see also Structural Incompatibility Puts Global Growth at Risk, 2003; Impacting the Global Economy, 2009 and This Could Be the Year We Acknowledge the Weaponization of Finance, 2015). Resources are deployed by the elites who head the 'family' (which could be the nation as a whole) without serious concern for return on savings and subordinates are expected to work hard for limited reward out of a sense of 'family' loyalty / ethnic nationalism. Without serious attention to return on, or return of, capital, ‘financial repression’ is needed in East Asia’s non-capitalist systems, to avoid the need to borrow in international financial markets where money (ie 'profit' as compared with market-share / cash-flow / social-economic-political status) is considered to be significant – and this in turn requires that trading partners must be willing and able to perpetually compensate for East Asian demand deficits by increasing their debt levels.

In relation to Muslim societies, reference is also made to the apparent cultural obstacles to the difference / initiative / innovation (features that are vital to cope with change and to achieve economic prosperity) that seem to a consequence of the way the Islamic religion has been enforced (see Islamic Societies: The Realm of the Self-Repressive Tribes?).

It has recently been apparent that China is seeking to create a new international order based on authoritarian (arguably quasi-fascist) ‘Asian’ practices that are incompatible with ‘liberal’ Western concepts and institutions (see Creating a New International 'Confucian' Financial and Political Order, 2009+). This presumably reflects a desire to both: (a) avoid the financial crisis and breakdown that faces China (as had previously affected Japan) if ‘liberal’ Western financial institutions remain dominant (see Understanding the Cultural Revolution, 1998 and Heading for a Crash or a Meltdown?); and (b) give effect to something like the ‘Asian Co-prosperity Sphere’ aspirations that East Asian nationalists expressed militarily in the 1930s.

The global economy is in severe difficulties largely (but not only) because of the financial imbalances that have arisen largely (but not only) from the mercantilist practices of East Asian economies (most notably Japan and China) and the total failure of the G20 to come to grips with the cultural origins of their need to manipulate their financial systems to achieve such imbalances (see Will China's Presidency in 2016 End the G20's Chronic Failure?, 2014). And the use of easy monetary policy to compensate for those imbalances has both: (a) provided a temporary (ie about 25 year) ‘solution’ by boosting their trading partners’ ability to sustain rising debts (see Putting the Economic Risk of Deflation in Context); and (b) generated adverse side-effects (see note on Monetary Policy).

Democratic governments are facing problems related to community ‘temperament’ because: (a) those governments have rendered themselves increasingly incompetent – partly because (in Australia’s case) poorly-advised methods have been used in an attempt to ensure unquestioning compliance and boost competitiveness (see Australia's Governance Crisis and the Need for Nation Building, 2003+); (b) East Asian ‘non-capitalist economic systems have constituted an unrecognised form of industrial protectionism (see Resist Protectionism: A Call That is Decades Too Late, 2010); (c) inequality (and thus a risk of political instability) has arisen from the use of easy monetary policy to compensate for international financial imbalances (see Who Is Failing the Lower and Middle Classes?); and (d) it has proven difficult to achieve the productivity to sustain high wage job creation and a strong tax base in the face competition from economies with rising skill levels and low wage and income transfer expectations (op cit).

And, at the same time: (a) environmental obstacles to economic and population growth are rising – and imposing very real costs; (b) failures in societies at the global margins are leading to failed states and Islamist extremism; and (c) the international institutions that were established after WWII have been increasingly incapable of successfully fulfilling their roles, leading to a risk of a break down in international order like that at the end of the 19th century that led to WWI (see The Second Failure of Globalization?, 2003+).

However there is no determinism involved (biological or otherwise). These challenges have solutions. The solutions suggested below would undoubtedly have been easier to implement a couple of decades ago when the need first started to become obvious - but even now it should not be too late.

Institutional reforms can dramatically improve the effectiveness of democratic governments (eg see Australia's Governance Crisis and the Need for Nation Building, 2003+ and Saving Democracy, 2012).
Competitiveness, income levels and tax revenues can be increased by effective apolitical leadership (eg by business leaders) in the development of economic ‘systems’ (see Developing a Regional Industry Cluster, 2000; A Case for Innovative Economic Leadership, 2009; Reinventing the Regions. 2010; and Lifting Productivity: A Bigger Picture View, 2010 – which amongst other things suggests the need to rethink economics to recognise that information can have its most powerful economic role in changing, rather than by merely being an input to, an economic production function).
Similar democratically-endorsed apolitical leadership can potentially stimulate practical adjustments to cope with environmental and social challenges (eg as suggested in The Probable Need for a Community-Based Solution, 2014)
The challenge to ‘liberal’ Western concepts and institutions by East Asian authoritarianism can be met by: (a) making a serious effort to understand its intellectual foundations – rather than by continuing to deal with such influences without understanding (see Babes in the Asian Woods, 2009+); (b) recognising that ‘containing’ the new feudalism / fascism that China currently represents is primarily a cultural rather than a military challenge (see Comments on Australia's Strategic Edge in 2030, 2011); and (c) applying that understanding in dealing with reforms to international institutions (eg see China may not have the solution, but it seems to have a problem, 2010 and World Economics Association - Rethinking the International Financial Architecture, 2015).

Understanding of the practical implications of cultural difference can be gained by encouraging the humanities and social science faculties at Western universities to cast off their ‘post-modern’ ideologies and do some serious work on the practical consequences of different cultural assumptions (see A Case for Restoring Universities, 2010). As noted in Competing Civilizations (2001), culture is the principal determinant of a community's ability to be materially successful and to live in relative peace and harmony. Culture affects: people's goals and aspirations; the way they understand reality (and thus how they go about solving problems, and whether they can develop technologies); their ability to learn, to cope with risk and to change; the way people relate; the scope for initiative; and the institutions their society maintains. Serious efforts to understand the practical consequences of cultural assumptions would also help overcome the disadvantages that those on the global margins experience (eg see UN Declaration on the Rights of Indigenous Peoples: Perpetuating Disadvantage?, 2007) and reduce the violence that can result when people are unable to understand the causes of their disadvantage and thus believe that they are being oppressed (see Cultural Ignorance as a Source of Conflict , 2001 and Discouraging Pointless Extremism, 2002).

Finally serious attention to a number of key issues (eg democracy, ethics, communication, global institutions, development practices and the role of finance) has the potential to reduce the ‘clash of civilization’ that has been emerging (see Defusing a ‘Clash’, 2001). And a process to enable those issues to be understood within diverse cultural contexts is probably possible (eg see A New 'Manhattan' Project for Global Peace, Prosperity and Security, 2001).

Thus, while your work is useful in highlighting the fact that liberal Western societies face a challenge, I suspect that institutional reforms and a focus on culture have the potential to enable solutions to that challenge to be found. And doing so seems more constructive than claiming that failure is biologically predetermined.

I would be interested in your response to my speculations

John Craig

Dysfunctional Democracy

See also Should Donald Duck?

Dysfunctional Democracy - email sent 13/1/16

Mark Triffitt,
University of Melbourne

Re: US democracy trumps all as a dysfunctional disgrace, The Conversation, 12/1/16

Your article is undoubtedly correct in highlighting the ineffectiveness (and indeed weirdness) of the US’s current federal political environment. However there is nothing unique about the US in relation to having a dysfunctional democracy – eg see Australia's Governance Crisis and the Need for Nation Building (2003+).

And there is nothing unique about democracy in generating dysfunctions – as I am not aware of any system that is currently doing any better. Certainly, as in the 1930s, attempts are being made to gain power through non-democratic systems (eg see Competing Civilizations, 2001+; Creating a New International 'Confucian' Financial and Political Order, 2009+; and Discouraging Pointless Extremism, 2002+). But China, which seems to be leading the so-far-most-successful non-democratic system, appears to be in serious difficulties. Perhaps Churchill was right in suggesting that democracy was the worst political system – except for all of the others.

Donald Trump’s current influence on US politics seems similar to that of Pauline Hanson’s One Nation in Australia in the 1990s (see Assessing the Implications of Pauline Hanson's One Nation, 1998). Both appear to reflect the views of those who have been disadvantaged and thus disaffected by ineffectual / dysfunctional past policies. However it can be noted that democracy overcame One Nation’s naïve proposals because, on gaining some political influence, it quickly became obvious to everyone (including One Nation members) that while the latter represented people with grievances, One Nation did not have any practical policy solutions to those problems. And this is by no means the only occasion in which bringing the disadvantaged and disaffected into a position of real potential power has defused their concerns. This, in fact, seems to be one of democracies’ strengths.

Some (evolving) speculations concerning options to repair democracy (and thus reduce the risk of ineffectual / dysfunctional policies in the first place) are in Australia's Governance Crisis and the Need for Nation Building (2003+); Seeking a Liberal International Order (2010+); and Saving Democracy (2014).

I would be interested in your response to my speculations.

John Craig

A Royal Commission and a Potential Banking Crisis at the Same Time?

A Royal Commission and a Potential Banking Crisis at the Same Time?

Click here to access

An Authoritarian or a Liberal Future for the World

An Authoritarian or a Liberal Future for the World - email sent 22/4/16

XXXXX

In response to your email (below) I should like to suggest for your consideration that the case presented by Professor Michel Chossudovsky (The Globalization of War, America’s ‘long war’ against Humanity) and YYYYY’s interpretation of the situation are overly simplistic. The issue at stake is whether liberal or authoritarian social, economic and political institutions should prevail.

The US’s Cold War response to the authoritarian system (ie Communism) that had challenged the liberal international order that it had championed since WWII (ie a system built on democratic capitalism) had involved so-called geo-political ‘realism’ (ie the US would support any regimes that would collaborate in opposing Communism – irrespective of their failings). This support for authoritarian anti-Communist regimes was recognised very early to lead to ‘blow-back’ against the US – and widespread concern about this (especially in the 1980s) ultimately led to advocacy of geo-political ‘idealism’ (ie using US power to seek to transform, rather than rely on cooperation from, unsavoury regimes). The US-led invasion of Iraq was based on the geo-political ‘idealism’ of the so-called Neocons who were influential in the US Bush administration at the time of the 911 attacks in America.

‘Freeing’ Iraq and then building a liberal (ie democratic capitalist) system was apparently hoped to create a model that could be successful and copied across the Middle East as an alternative to Islamism (which al Qa’ida advocated). However it could never do so because liberal political and economic institutions can’t really be successful without a liberal social foundation – which has not existed in Muslim majority states (see Fatal Flaws). The problem was compounded by the fact that, while military forces were expected to implement the ‘idealist’ transformation of Iraq (and presumably Afghanistan also), they had no basis for understanding the issues involved. Even though the world was now involved in a ‘clash if civilizations’ (rather than in a clash between liberal / authoritarian concepts of political economy within Western style contexts), the humanities and social science faculties of Western universities had turned a blind eye to the issues involved (see Cultural Ignorance as a Source of Conflict).

The US’s Obama administration has sought to extricate itself from attempts to use military forces to impose ‘idealist’ options in the Middle East or elsewhere. It has sought to strengthen and support international institutions (such as the UN) rather than pursuing unilateral action. It has also reverted to a form of geo-political ‘realism’ by trying to: (a) strengthen relationships with regimes that are less-than-perfect from a US viewpoint (eg Iran and Cuba); and (b) encourage others to militarily resist the forces of emergent authoritarian systems (eg Islamic State). As the latter notes Islamic State is seeking create a regime on the foundation of pre-modern authoritarian social systems – and others (eg China) are also seeking to do so (see Islamist Extremists are not Alone in Favouring Pre-modern Social Systems and The Resurgence of Ancient Authoritarianism in China).

And China’s current regime does not only parallel Islamic State in terms of its currently-desired pre-modern authoritarian social system. China is also: (a) seeking, like Islamic State, to base state power on religion (Merging Political Power and Religion Can Create Problems); and (b) extend its domestic authoritarianism into the international arena through the establishment of trade-tribute relationships like those by which Asia was administered from China prior to Western expansion (see Creating a New International 'Confucian' Financial and Political Order; US’s Most Significant Intelligence Failure? and Smarter Authoritarians).

Though the methods being used by China and its allies are less brutal than those adopted by authoritarian fascist regimes in the financially / economically turbulent 1930s, the issues involved are ultimately the same – ie whether authoritarian or liberal social, economic and political institutions should prevail.

John Craig


Email From: XXXXX
Sent:
Friday, 22 April 2016
Subject: The Globalization of War, America’s “Long War” against Humanity

From: YYYYY
The Globalization of War, America’s “Long War” against Humanity

Peace is so difficult to reach by Willful Blindness of the US leaders in Foreign policy.

In contrast, the current Chinese President Xi travels around the world to build peace alliance and economic collaborations.

What would you prefer Food vs Weapons? This would be a Win-Win strategy vs a Lose-Lose strategy.


The above comments were followed by Preface of ‘The Globalization of War, America’s “Long War” against Humanity’ by Michel Chossudovsky (Global Research)

An 'Asian' or a 'European' Future

An 'Asian' or a 'European' Future - email sent 29/4/16

Rowan Dean

Re: Australia at the crossroads of innovation or slow decline, Courier Mail, 25/4/16

Australia’s option of becoming an ‘Asian-style’ nation (which you suggested involved a ‘forward-looking, dynamic nation with great prospects for the future’) is by no means as simple as your article suggested.

Becoming an ‘Asian-style nation’ would involve a massive cultural shift away from individualism and towards the acceptance of a quasi-feudal social hierarchy (as is illustrated by comparing Understanding East Asia's Neo-Confucian Systems of Socio-political-economy with Cultural Foundations of Western Progress: The Realm of the Rational / Responsible Individual).

Efforts have been made to encourage Australia’s elites (and elites in many other countries) to accept the advantages they themselves would gain (at everyone else’s expense) through accepting a tributary role under a renewed ‘Asian’ trade-tribute system (see Creating a New International 'Confucian' Financial and Political Order).

However the economic benefits of making the massive cultural adjustment needed to be an ‘Asian-style’ nation are anything but certain as many of Australia’s and the world’s current problems have been created by or imported from ‘Asian-style’ systems (see Impacting the Global Economy, China: Heading for a Crash or a Meltdown?, Importing Risks to Australia from China, Importing Global Risks and World facing 'Crisis of non-Capitalism': Non-economist).

The ultimate choice is whether Australians prefer to live in an authoritarian or a liberal social, economic and political system (see An Authoritarian or a Liberal Future for the World). In WWII Australia favoured the liberal option over the authoritarian alternatives that were then on offer. My suspicion is that most Australians will make the same choice this time around.

How it should be possible to avoid the authoritarian option is suggested in Alternatives to Monetary Policy.

John Craig

Will Populism Fix What Ails Democracies?

Will Populism Fix What Ails Democracies? - email sent 3/5/16

Professor Chantal Mouffe,
University of Westminster

Re: In defence of left-wing populism, The Conversation, 30/4/16

I should like to put forward a couple of observations in relation to your article on the basis of: (a) many years study of competing government and economies systems (see CV); and (b) more recent speculations about the problems facing democracies (eg see Australia's Governance Crisis and the Need for Nation Building, 2003+) and what might be required to fix those problems (eg see Seeking a Liberal International Order, 2010 and An 'Asian' or a 'European' Future, 2016).

Your article implied that the idea that there is an alternative to neo-liberal globalization has disappeared from political discourse. However, while that idea is not discussed politically, the reality is that (as mentioned in Seeking a Liberal International Order, 2010) very active efforts have been underway in East Asia for decades (perhaps since the late 1940s) to try to give practical effect to an authoritarian alternative to neo-liberal globalization, and more recently to spread and increase its influence worldwide (see Understanding East Asia's Neo-Confucian Systems of Socio-political-economy, 2009; Creating a New International 'Confucian' Financial and Political Order, 2009; and Coalitions of Interests?, 2011). What has been being attempted by China in recent years is an updated / broader version of the trade / tribute system by which Asia was administered by China’s Confucian elites prior to Western expansion – an arrangement whose methods of exerting power (ie influencing what is done through ethnic social hierarchies behind whatever political and economic institutions are nominally put in place) are quite different to anything Western observers are familiar with or would easily recognise.

There has in fact arguably been an undeclared and undiscussed ‘cold war’ between the East Asian authoritarian / hierarchical models and the post-WWII Western liberal international system – eg see A Generally Unrecognised 'Financial War'? (2001+) It has been undiscussed and unrecognised because:

  • Western academics have failed to try to understand the practical consequences of different cultural traditions – despite the existence of what amounts to ‘clashes of civilizations’ (see Competing Civilizations, 2001);
  • political debate and helping others to ‘understand’ is not part of East Asian traditions (eg see What does an Asian Century Imply?, 2009). The Art of War tradition is to ‘just do it’ and deceive enemies in the hopes that they will be caught unawares;
  • US authorities (who were on the receiving end of the main mercantilist attacks) had huge difficulties understanding what they were dealing with (and clearly did not even start to understand until about 10 years ago) – see also The US's Most Significant Intelligence Failure? (2015); and
  • the US authorities (ie the Federal Reserve) who probably eventually did start to understand the implications of East Asia’s chronic ‘savings gluts’ have chosen not to publicly discuss what is involved (because doing so could turn what has been a ‘cold war’ into ‘hot war’). Rather the latter have (perhaps) sought to mount their own undeclared mercantilist counter-offensive ('Currency War': A Counter-move by the Federal Reserve?, 2010).

Neo-liberal ideologies first emerged in the 1980s as a reflection of this ‘clash of civilizations’. Neo-Confucian methods (in which people are primarily viewed as members of ethnic social hierarchies rather than independent individuals) were used to achieve economic ‘miracles’ in East Asia (Japan initially in the early 1950s). Learning within whole industry clusters (in mass production manufacturing) was accelerated through social hierarchies by highly-educated bureaucratic elites – and finance was provided through state-linked banking systems with limited regard to return on / return of capital (which did not lead to financial crises so long as domestic ‘savings gluts’ made it unnecessary to borrow in international financial markets). This challenged developed Western economies in mass production manufacturing which had previously been their area of highest productivity (and thus the foundation of fairly broadly-based high community incomes). De-industrialization was the European / North American experience in the 1960s-70s – and the OECD concluded in 1979 that government attempts to intervene speed diversification simply slowed the necessary economic adjustment into new higher value-added functions. Thus in the 1980s market liberalization (ie reducing the constraints that interest groups imposed on economic change through the democratic process) was wrongly seen as the only viable alternative (see also Defects in Economic Tactics, Strategy and Outcomes, 2000+).

However there was a bigger problem because the demand deficits (‘savings gluts’) needed under the neo-Confucian systems would have stifled the global economy if their trading partners (especially the US) had not provided excess demand by creating a wealth effect amongst those with significant existing assets with ever-easier monetary policies (see Structural Incompatibility Puts Global Growth at Risk, 2003). However this had serious adverse long term consequences (ie creating the risk of financial instability; encouraging speculative rather than ‘real economy’ investment – because easier monetary policies inflated asset values; boosting social inequality; and ultimately creating the risk of democratic political instability / irresponsibility – see Alternatives to Monetary Policies, 2016).

Any ‘left-wing populist’ policy agendas that are developed need to be based on an understanding of what they are dealing with. Their concern can’t safely be just with ‘capitalism’ and domestic political issues – as those who are playing capitalistic games in financial systems are, if fact, on the front line in a battle against what has parallels with something like the fascism that used military (rather than financial / economic tactics) to try to win global power in the 1930s. This apparently reflects Japan’s initial approach to creating a Greater East Asian Co-prosperity Sphere before the process was militarised.

‘Left-wingers’ need (apart from anything else) to focus their policies on boosting their societies’ economic competitiveness / productivity more than their ‘right-wing’ competitors have been able to do. And ‘left-wingers’ who believe that what is being done under a ‘Communist’ regime in China can’t be bad should remember that: (a) Mao’s cultural revolution was primarily about purging Confucian influences from China because they were perceived to have oppressed the people; and (b) neo-Confucian methods were the basis of organising East Asian post-WWII economic ‘miracles’ (initially in Japan by the same ultra-nationalist factions that had been responsible for the Pacific War) – and seem to have been re-introduced to China after Mao’s death.

And ‘left wingers’ also need to be cautious of ‘populism’ (ie of pursuing policy agendas because they sound trendy to the uninformed even though they are unlikely to work in practices) – see On Populism (2007) . There is now emergent recognition that ‘right-wing’ populism would be disastrous for the US (eg see Turkel D., Trump is an extinction-level event’, Business Insider, 3/5/16)

Some suggestions about what might work in practice (with reference to the Australian context) are in Alternatives to Monetary Policy (2016)

I would be interested in your response to my speculations

John Craig

The Need to Look Beyond Neo-Liberalism

The Need to Look Beyond Neo-Liberalism - email sent 2/7/16

Thomas Palley,
New America Foundation

Re: ‘Brexit: The day we entered the eye of the maelstrom’, WEA Newsletter, Vol 6, Issue 3, June 2016

While your observations about potential global risks are reasonable, I suspect that it is inappropriate the lay the blame at the feet of neo-liberalism – as the latter was a response to an even more profound obstacle to sustainable economic growth – namely the (very hard to understand) non-capitalist / neo-Confucian methods used to achieve economic ‘miracles’ in East Asia – see Understanding East Asia's Neo-Confucian Systems of Socio-political-economy (2009), Impacting the Global Economy (2009) and Understanding East Asia Requires More Than a Study of Confucian Values (2016).

The rise of neo-liberalism was a consequence of the post-WWII ‘real economy’ successes achieved in East Asia by market-oriented 'bureaucratic' leadership (while their state-owned banking systems became undisclosed disaster areas that were only protected by ‘financial repression’ (ie constraining domestic demand to maximize the savings available to state-owned banks) to prevent any need to borrow in international financial markets). East Asian 'real-economy miracles’ led to de-industrialization in Europe and North America in the 1960s and 1970s (ie to the erosion of the mass production industries that had been the basis of the high-value added activities in the most developed economies since early in the 20th century) – and thus a need for economic adjustment to boost employment / incomes (eg by a shift to knowledge-intensive industries). OECD showed in late 1970s that government attempts to speed adjustment in Europe were counter-productive (ie they slowed adjustment and thus further increased unemployment) – so neo-liberalism became the new economic orthodoxy in the 1980s (ie to get interest group politics out of the way of vital economic adjustment).

However the international financial imbalances that resulted from East Asian financial repression (to protect non-capitalist state financial systems) created a requirement for excess demand in US in particular (as the world’s at-that-time-deliberate ‘consumer of last resort’). This was only sustainable because increasingly easy money policies were used (initially by US) to create a wealth effect amongst those with significant existing assets to boost demand. However easy money policies distorted investment (ie favoured speculation over real-economy investment) and thus increased the risk of financial instabilities, boosted inequalities and the potential for political instability) – see Do Low Rates Help?.

The ultimate source of increasing inequality and thus social / political instability (ie a clash of civilizations) is suggested in Who Is Failing the Lower and Middle Classes? (2014). There is thus probably a need to look beyond Western neo-liberalism in seeking explanations of the problems your article reasonably identified. A possible way forward is speculated in an Australian context in Alternatives to Monetary Policy.

I would be interested in your response to my speculations

John Craig

International Regulation of Lending Standards

International Regulation of Lending Standards - email sent 12/7/16

Dr Luci Ellis,
Financial Stability Department,
Reserve Bank of Australia

Re: Yeates C., RBA's Luci Ellis plays down credit rating fears, Brisbane Times, 12/7/16

I should like to endorse your call for international regulators to pay more attention to the quality of lending practices and the total quantity of credit in an economy in their efforts to ensure financial stability. Failure to address this has arguably been largely (though not solely) responsible for the financial instabilities and economic disruptions that have plagued the world for many years.

My Interpretation of the above article: Luci Ellis (RBA) argues that if Australia loses its AAA credit rating this would have little impact – because markets will have tended to already have priced in same concerns that led to the downgrade. She said that it was extraordinary that global regulators did not place more focus on the lending standards of banks and the total amount of credit in an economy in their efforts to promote financial stability. There is a lot of emphasis on credit quantity but not on credit quality - and the latter is harder to measure. Australia’s regulators have put an emphasis on boosting lending quality – after quality had been driven to a low level by competition amongst bank.

Extremely poor lending quality has been characteristic of the banking systems that underpinned the post-WWII ‘real-economy miracles’ in countries with an ancient Chinese cultural heritage (especially Japan and China) – see evidence. The systems of socio-political-economy used to achieve those ‘real economy miracles’ were quite different to liberal Western traditions. They placed little emphasis on lending quality because resource allocation depended on elite consensus rather than on profit-driven initiative by independent enterprises. And they placed little emphasis on total credit levels because domestic consumption was long suppressed (creating so-called ‘savings gluts’) to ensure against any need to borrow in international markets where banks’ / corporate balance sheet quality was taken seriously. This has had serious consequences not only domestically (as illustrated by Japan’s financial crisis in the late 1980s and China’s similar current risk) but also for the international financial system and economy - and thus ultimately for political stability (for reasons suggested in Structural Incompatibility Puts Global Growth at Risk, 2003, Impacting the Global Economy, 2009 and Who is Failing the Lower and Middle Classes?, 2014)

Attention by international regulators to the quality of lending and to the total quantity of credit in an economy could allow the G20 to finally get to grips with the obstacles to international financial stability that have been constraining the global economy for decades (see also Will China's Presidency in 2016 End the G20's Chronic Failure?).

John Craig

A Made-in-China Disaster Waiting to Happen

A Made-in-China Disaster Waiting to Happen - email sent 10/8/16

Robert Gottleibsen
The Australian

Re: The Chinese seeds of the next banking scandal, The Australian, 8/8/16

There is no doubt that your article is pointing to very real dangers associated with China’s over-investment in apartments in Australia. However, contrary to your suggestion, the main villains are not the Australian agents, banks and regulators who have played a role in this process. Rather the problem probably arises from the Chinese Government’s intervention in Australia’s economy.

My Interpretation of your article: Another banking 'scandal' is likely in Australia in which Chinese will be victims. This could create problems for the Treasurer - because it would lead to an economic downturn, damage the education industry / Australia’s international reputation and complicate dealings re Chinese investment. Australia's banks played a big role in the apartment building boom - which involves 230,000 apartments mostly bought by Chinese / Asian investors on 10-20% deposit. RBA has warned of risk - but not pointed to role of Australian banks and APRA in creating it. In many cases there is no legal agreement for banks to fund settlement of purchases. Banks may not have had direct contact with buyers - as assurances were given to them by agents. If RBA is right about the apartment glut damaging the building industry, the education industry and Australia’s international reputation - there may be a need for a royal commission to find out what went wrong. APRA required banks to restrain credit in March - and this involved a severe clamp on lending to Chinese buyers. Then it was revealed how important banks had been to Chinese buyers - and that there could be a national catastrophe (because banks and second mortgage lenders had been major funders of developers) if banks walk away from their non-binding assurances when it is hard to get money out of China. APRA ignored this and intensified their credit squeeze. In Sydney many Chinese are being forced to rescind on their contracts - but are being replaced by Australian and other Asian buyers. The bigger risks are in Melbourne and Brisbane. Many Chinese have been the victims of a dirty banking / agent game.

The risks associated with overinvestment in Australian apartments that your article highlighted have been fairly obvious since mid-2015 (see Are Unfinished Apartments a Risk for Australia Also?). There cannot be sufficient user demand for the flood of apartments that have been built, mainly for Chinese investors, in Australia’s eastern capitals. Thus (as occurred with China’s domestic property boom / bubble) the result is likely to be unoccupied (perhaps incomplete) buildings and large financial losses. The fact that this was laying the foundations for a crisis in Australia’s banking system (because of local banks’ involvement in financing often unnecessary projects) has also been fairly obvious since early 2016 (see A Royal Commission and a Banking Crisis at the Same Time?). The latter suggests that Australia is at risk of a banking crisis not only because of an apartment bubble but also because: (a) national debt levels are dangerously high; (b) economic growth has been dependent on rapidly increasing those debts; (c) it is becoming increasingly hard to obtain international capital to finance Australia’s ever-rising national debt; and (d) Australia’s economy is highly dependent on China which seems to be on the point of a financial , economic and political crisis.

It is inappropriate to suggest that Australian regulators (eg APRA) and banks have created the problem. It is rather arguably a consequence of severe difficulties and weaknesses in China’s financial, economic and political systems – difficulties and weaknesses that are outlined in China's Problem is Neo-Confucianism not Hypothetical 'State Capitalism'.

Firstly China’s (corporatist / mercantilist) economic system has been dominated by elite social networks linked to, and centred in, the (so called) Communist Party. A ‘real economy’ miracle was achieved in China by methods similar to those Japan’s bureaucracy used to achieve ‘real economy’ miracles in the 1960s and 1970s. It was also accompanied by the same financial irresponsibility that led Japan to a crippling financial crisis in the late 1980s. One consequence of the use of those methods by China’s ‘Communist’ Party was that many in key positions abused their power to enrich themselves. Thus, to reduce the risk of political instability, China’s reform process since 2013 has included a clamp-down on official corruption and this, in turn, led to a desire by corrupt officials to get huge amounts of money out of China. Thus to some (unclear) extent Australia’s apartment boom has been a reflection of corrupt capital flight (see Overcoming Australia's Corruption Shortage, 2014) and also (to some equally unclear extent) a reflection of a loss of confidence in China's regime both because of official corruption and China's risky financial situation.
A second source of Australia’s apartment boom / bubble has probably been an international extension of the Chinese regime’s recent increasingly-desperate attempts to orchestrate a financial-market ‘miracle’ to deal with the fundamental weakness in its financial system. China’s problem is that: (a) strategic resources have been allocated by elite consensus with no significant regard for return on / return of capital (see evidence); and (b) China has thus been headed for a financial crisis like that Japan suffered in the 1980s (see Heading for a Crash or a Meltdown and Importing Risks from China ). China’s response has apparently included trying to stimulate a recovery in its national balance sheet by orchestrating investment in domestic property and in China’s sharemarket. It seems to have been assumed that a ‘miracle’ could be achieved in financial-markets if investment by Chinese people was stimulated through China’s state-centred hierarchical social networks and financially supported by the Chinese state as had been done to achieve ‘miracles’ in China’s real economy (see Context to China's Share Market Boom and Bust). Unfortunately the intended financial-market ‘miracles’ turned into bubbles that burst. This compounded China’s financial problems – and its regime now seems to be resorting to belligerence in the South China Sea to divert Chinese people’s attention from their domestic problems.

Ordinary Chinese have been the financial victims of the way China’s political, financial and economic systems have been controlled. Your article is unrealistic in suggesting that Australia’s institutions are to blame for the problems Chinese people have experienced as a result of being encouraged to invest in Australian and North American apartments – encouragement which incidentally bears some resemblance to Mao’s Great Leap Forward exhortations to ordinary Chinese people to themselves do what Mao believed was needed to fix China's economic problem from 1958 to 1961.

China’s response to its financial problem has included an attempt to expand its domestic methods of economic and political control into the international arena. It was apparently hoped to re-create an international order like that by which Asia was administered from China prior to Western expansion (see Creating a New International 'Confucian' Financial and Political Order, 2009+). A feature of those arrangements involved the Chinese state orchaestrating economic activities in other countries in the same way that it does domestically (ie through hierarchical social networks). This is likely to be what was happening when the apartment boom in Australia and north America started (ie it presumably involved an international expansion of the methods that China’s regime used in its first (domestic) attempts to prevent the holes in China’s national balance sheet from triggering a financial crisis by stimulating financial-market ‘miracles’).

It is unreasonable to suggest that Australia’s institutions are to blame because they tried to reduce the financial risk from a property bubble (ie APRA tightened regulations; the RBA warned about the risk of a financial problem; and banks tightened up lending conditions) as soon as the distortions in Australia’s apartment market became obvious – even though they probably did not recognise source of the problem.

If anyone in Australia is to be blamed for the potential banking crisis that your article referred to, it should be the humanities faculties in Australia’s universities. Their continued resistance to studying the practical economic and political consequences of differences in cultural assumptions and traditions make it essentially impossible for governments, banks and other institutions to understand what they are dealing with in East Asia (see Babes in the Asian Woods, 2009+ and What is Soft Power, 2016).

Your suggestion that any inquiry into problems in Australia’s banking system needs to include reference to the apartment boom is valid. However the primary focus needs to be on the role that features of China’s financial, economic and political systems have played. It can be noted that the latter also probably needs to be the main focus of any attempt to stabilize international financial systems and prevent another global financial crisis (see International Regulation of Lending Standards).

John Craig

About the Source of and Solutions to Rising Inequality

About the Source of and Solutions to Rising Inequality - email sent 10/8/16

Christopher Sheil (UNSW) and Frank Stilwell (University of Sydney)

Re: Land of the 'fair go' no more: wealth in Australia is becoming more unequal, The Conversation, 9/8/16

Your article highlighted evidence of growing wealth inequality in Australia (largely due to changes in asset values) and suggested that;

“An emphasis on narrowing wealth inequality needs to be present in all public policies. These range from pensions and superannuation to disability services, housing provision, transport, regional policies and taxation. “

While an emphasis is needed on wealth inequality it is necessary to understand the source of problem – and that source arguably lies in international financial and economic arrangements rather than in inadequate domestic wealth distribution policies. Some items that may be of interest in relation to this issue are:

John Craig

Complicating Welfare Calculations

Complicating Welfare Calculations - email sent 27/8/16

Peter Whiteford,
Crawford School of Public Policy, ANU

RE Is Welfare Sustainable, Inside Story, 26/8/16

Your article presented a case for disputing suggestions (eg by present and past Social Services Ministers, Christian Porter and Scott Morrison) that Australia’s welfare spending is excessive / growing too rapidly. While I am not in any position to express a view one way of the other about your calculations, I have to point out that they depend on assumptions about Australia’s economic prospects that may not apply much longer.

Reasons for this suggestion are in Who Is Failing the Lower and Middle Classes? (2014), Restoring the Viability of Democratic Capitalism (2014), and A Royal Commission and a Banking Crisis at the Same Time? (2016).

In brief, these respectively suggest that:

  • social inequality, and thus expected government transfer payments, have increased in many Western societies because of structural incompatibilities in financial systems (while potentially crippling financial crises build up especially in major East Asian economies);
  • Australia has, so far, been less affected by social inequality (and thus by destabilizing political instability) than has been the case in Europe and North America. China’s response to the GFC (ie massive industrial, infrastructure, and property investment) led to a commodities’ boom which: (a) sustained Australia’s economic growth; and (b) raised tax revenues thus allowing increased welfare spending and transfer payments to counter the then-minor effects of rising inequality. Economic prospects will now deteriorate while inequality and welfare expectations rise. The latter thus require solutions that depend less on public spending;
  • Australia is facing growing risks of a banking / financial crisis. It has a near-global-record national debt / GDP ratio and current growth patterns that depend on rapidly increasing that debt. National debt (especially household debts incurred for property investment) is a much greater problem than government debt. Chronic current account deficits (now about $80bn pa) are covered by capital inflow – as banks borrow to fund real estate investment. There has been increased concern about Australia’s bank’s ability to continue obtaining cheap international capital, given Australia’s high national debt levels and the dependence of household and bank balance sheets on real estate values which now exceed the capacity-to-pay of much of the community. At the time of the GFC, the federal government guaranteed all bank creditors to prevent any risk of a slowdown of capital inflow, a collapse in real estate values and bank insolvencies (a pattern of events that had led to a depression in the 1890s). The federal government’s credibility in providing such guarantees was excellent because of its then very low debt levels. However the latter have since increased significantly and are continuing to rise rapidly – thus casting a shadow over Australia’s banks’ credit rating. The situation is further complicated by China’s escalating risk of a financial crisis – and Australia’s economic dependence on exports to and finance from China.

Calculations of the future sustainability of welfare payments can’t be meaningful just on the basis of manipulating past data about government revenues and social needs. Rather they need to be built on a broad view of Australia’s overall economic and financial position and potential structural changes to perceived social needs (eg those associated with rising inequality if little is done to boost national competitiveness and growth continues to be sustained by the increases in asset values that easy monetary policy encourage).

Moreover I would suggest that it would be desirable not only to calculate governments’ ability to meet welfare needs but to change it (eg by stimulating the development of social environments in which reliance on public spending will be reduced, and by stimulating the development of economic environments in which competitiveness, productivity, wage rates and government tax bases are increased). Some speculations about how the latter might be achieved are in Alternatives to Monetary Policy (2016).

John Craig

International Dimensions of Perceived Banking System Problems

International Dimensions of Perceived Banking System Problems - email sent 29/8/16

Wesley Widmaier
Griffith University

Re: It’s not just the economy, stupid: it’s whether the economy is fair, The Conversation, 29/8/16

Your article makes a case for an emphasis now on reform of Western banking systems. However this is based on the assumption that the financial crisis has abated and that the problems that give rise to pressure for banking reform have domestic roots – assumptions which unfortunately are not valid.

My Interpretation of your article: After the GFC the Obama administration faced a dilemma. The public wanted banking reform – but US Treasury Secretary (Timothy Geithner) feared this might threaten recovery. However even as growth has revived and unemployment fallen, populist pressures for banking reform have increased. Groups such as Tea Party, Occupy, Bernie Sanders and Trump have all emerged because of US administration’s ties to Wall Street and concern about fairness. There were calls for reform soon after GFC (eg related to executive bonuses). However Geithner argued that it was important to repair banking system rather than become involved in vilifying it. In the short term emphasis on recovery was smart. In the 1930s emphasis was first given to restoring confidence in banking and only then did Roosevelt launch the New Deal that would break the power of banks for a generation. Roosevelt recognised that repressing pressures for change does not make them go away – as they may merely re-appear in a distorted / darker form.

There is no doubt that the measures put in place to achieve recovery from the GFC have been unfair. Some segments of the community (especially those connected with financial services and those who were already relatively affluent) have done better than many others. However there are issues involved in this that can’t be resolved by domestic banking system reforms (for reasons suggested in More of Should Donald Duck? and Who Is Failing the Lower and Middle Classes?).

In brief: profound cultural differences between Western societies and East Asian societies with an ancient Chinese cultural heritage have led to significant differences in the role that finance plays in their economies – and this has created a constraint on global economic growth. Western economies emphasize independent profit-focused investment. East Asian economies, if they have adopted variations of the neo- Confucian methods that Japan used as the basis for its post-WWII economic ‘miracle’, emphasise investment to boost ‘real economy’ strengths (as estimated through state-centered social hierarchies) with limited attention to return on / return of capital. The result is poor corporate / bank balance sheets and these make it hazardous to borrow in international profit-focused financial markets. Thus domestic consumption had to be suppressed to ensure (by generating a ‘savings glut’) that it was only necessary to borrow domestically. This however generated: (a) global macroeconomic imbalances (ie a structural demand deficit); and (b) large international financial imbalances. Growth could only be sustained so long as Western economies (especially the US) were willing and able to tolerate current account deficits and rising debts. And the latter could only be sustained by reducing interest rates to boost asset values and thus create a ‘wealth effect’ amongst those with significant existing assets to allow demand to temporarily exceed domestic income. Easy money policies (which in various ways have been required to sustain global growth since the late 1980s) have had adverse side effects including: (a) contributing to the financial instabilities that led to the GFC; (b) boosting asset values but doing little to strengthen ‘real economies’ – because ever easier monetary policies made speculation in financial / asset markets the easiest way to earn profits; (c) increasing social inequality by boosting the wealth of the already wealthy; and (d) creating a foundation for political instability related to inequality and the poor income prospect of those dependent mainly on the ‘real economy’.

The problem can’t be resolved by reform of banking systems in Western economies. Rather the primary need is for: (a) reform of the international financial system (eg as suggested in International Regulation of Lending Standards); and (b) improving ‘real economy’ performance by methods that rely less of on financial markets and more on effective use of strategic information (eg as suggested in Alternatives to Monetary Policy).

In Australia’s case (and perhaps also in the US) it would seem hazardous to try to simply reform the banking system (see A Banking Royal Commission and a Potential Financial / Banking Crisis at the Same Time? ).

John Craig

 A Broader View of the 'Social Determinants of Health'

Want to Reduce Inequalities and Improve Living Conditions? Start by Taking a Broader View of the 'Social Determinants of Health' - email sent 2/9/16

Professor Kathy Baum,
Flinders University

Re: Want to improve the nation's health? Start by reducing inequalities and improving living conditions, The Conversation, 1/9/16

I should like to try to add value to your interesting suggestions about improving health outcomes by creating a better social environment. Your article noted that poor social environments create health problems for many people and argued that these are a consequence of past public policies that could be reversed. However that is not the full story. For example poor social environments (with adverse effects on community health) can result from international influences and from circumstances that can’t be changed simply by public policies. Those broader aspects also need to be considered as part of the case that you are developing.

My Interpretation of your article: Health reflects the environments people live in (eg those who live in richer areas or have higher incomes live longer). To promote better health one of the best ways is to address ‘social determinants of health’. This requires upfront investment but will produce health and other benefits. Investment can be beneficial in: (a) education (which increases social mobility); (b) early childhood education in particular; (c) urban planning (to create more social and exercise-friendly places and increase security); (d) promoting healthy workplaces (eg by stopping bullying / reducing sitting time / giving workers a voice / and providing good working conditions); (e) ensuring opportunities for meaningful work / reducing unemployment – which gives people purpose; (f) reducing indigenous incarceration. South Australia has built on work by EU and WHO to institute a health in all policies (HiAP) approach. This includes emphasis on: healthy parks; healthy weight targets; healthy community plans by local authorities; and parental literacy. Reducing health inequalities requires public policies that reduce economic inequities. More equal societies are healthier and score better in social determinants of health (such as child poverty, homelessness and unemployment). Both sides of politics advocated measures to reduce economic inequality at the last federal election (eg by changes to superannuation and negative gearing policies). Other options would include: a modest wealth tax; death duties; removing the private health insurance rebate; and removing diesel tax exemption for mining. Inequalities are increasing – but aren’t inevitable. They result from changeable policy decisions.

Australia’s social environment has been deteriorating. Social inequality and financial stresses on the least affluent have increased. Though the effect to date has been limited it is likely to increase and (unless corrected) to have large adverse health outcomes and increase health services’ costs and government transfer payments generally (and thus add to governments’ fiscal challenges with an uncertain economy and an aging population).

Increasing inequality and financial stress problems for the economically-marginal seem to be mainly a consequence of influences that will need to be corrected: (a) in an international political context; and (b) by taking a more serious and apolitical approach to the development of Australia’s economy. Recognition of the effects that worldviews can have on different ethnic communities’ economic prospects would also be constructive.

Why: In brief, for reasons outlined here, here and here, inequality has been rising in many developed economies because: (a) easy money policies have been needed to maintain global economic growth; (b) these tend to make it more profitable to invest to benefit from asset appreciation (rather than from ‘real economy’ investment); and thus (c) most wealth gains accrue to those who are already affluent while the position of those dependent on the ‘real economy’ stagnates. And it has been necessary (for reasons that are not easy to understand) to use easy monetary policies to generate a ‘wealth effect’ amongst those with significant existing assets to drive global growth because of structural incompatibilities between: (a) the financial systems that have given rise to ‘real economy’ miracles (and huge financial system risks) in East Asia; and (b) the international financial system.

To overcome these problems arguably requires reforms to the irresponsible financial systems associated with ‘economic miracles’ mainly in East Asia (see International Regulation of Lending Standards) – an issue that is foundational to a stable international financial system which the G20 should have emphasised years ago.

Compared with major European and North American economies the impact of increases in income inequality and constraints on real income growth has been relatively modest to date in Australia because: (a) a resource investment boom was stimulated by the huge but poorly-directed post-GFC industrial, property and infrastructure investment in China; and (b) the large increases in capital-gains tax revenues at the start of this boom was seen to allow reduced taxes and increased transfer payments which turned into a structural budget deficit as capital gains moderated.

Australia’s economy is now at risk - as is governments’ ability to maintain generous tax rates and transfer payments (for reasons suggested here). The resources boom is over. Though new areas of industrial opportunity are emerging that will be important in future, economic growth worldwide is now impeded by deflationary stagnation, debt constraints and a political retreat from economic globalization. The difficulties facing Europe and Japan are globally significant. Their attempts to stimulate recovery with negative interest rates are not only producing no economic benefits but also increasing the risk of banking failures. China on whose commodity markets and investment Australia has become dependent faces an almost inevitable financial crisis like that which crippled Japan’s economy in the late 1980s. Australia’s economy has a very high ‘national’ (as compared with ‘government’) debt / GDP ratio and a dependence on rapidly increasing its national debt (especially for real estate investment). Financing higher national debt depends on Australian banks’ ability to borrow internationally – and there is concern (in an increasingly unstable international financial environment) about the banks’ exposure to a probably-unsustainable property boom and the federal government’s declining ability (because of its rapidly increasing debts) to provide a guarantee to investors in the event of a property market crash. Market liberalization economic reforms in the 1980s and 1990s increased Australian’s incentive to be competitive and economically productive but did not ensure their ability to do so in high income activities. Chronic disadvantage for many individuals / regions resulted. No attention was paid during the commodities boom to the further reforms needed to boost Australia’s international competitiveness and productivity.

In order to reduce these constraints it seems desirable to consider an option to boost: economic competitiveness and productivity; business and employee incomes; employment opportunities; regional development; and governments’ tax bases. That option is suggested in Alternatives to Monetary Policy. It involves an emphasis on accessing strategic market and technological intelligence through democratically endorsed but not-government-controlled processes to stimulate market-oriented innovative changes at the level of whole regional industry clusters – to complement innovation at the level of individual enterprises. The latter reference also points to the severe current constraints on fiscal or monetary policy as options for boosting Australia’s economic performance.

Finally it is noted that the worldviews that are part of some communities’ cultures can constrain their ability to learn and to change – and thus increase their risk of material disadvantage. And cultural change in Australia’s mainstream community  seems to be the source of increasingly serious social dysfunctions that undoubtedly lead to adverse health outcomes (eg the innate sense of morality and individual responsibility that is needed as the foundation of liberal social, economic and political institutions have weakened). Culture needs serious consideration as a ‘social determinant of health’.

While there will be options to boost the ‘social determinants of health’ through government policies like those you suggest, most attention now arguably needs to be given to overcoming: (a) the financial and economic causes of poor social environments; and (b) the gaps between governments’ revenues and spending. Considering the culture of various communities as a ‘social determinant of health’ would also be constructive.

I would be interested in your response to my speculations

John Craig

Why Does the World Have a Debt Crisis and What Could be Done to Fix It?

Why Does the World Have a Debt Crisis and What Could be Done to Fix It? - email sent 12/10/16

Bob Bryan,
Business Insider

Structural Incompatibility Puts Global Growth at Risk (2003), Impacting the Global Economy (2009) and More on: Should Donald Duck? may be of interest re your article The world economy is stuck in a 'rolling cycle of crises', Business Insider, Oct 12, 2016.

Some suggestions about a solution are in International Regulation of Lending Standards.

John Craig

Housing Risk

Housing Risk

 Housing risks a little lower: Reserve Bank of Australia (The Australian, 14/10/16 which is summarised here) suggested that the RBA believes that Australia's banking system faces limited risks overall. However there are indications that a diversity of interacting risks that have been apparent for some time (which include but are not limited to housing) are increasing and are potentially anything but trivial.

Apartments: There are, for example, indications that overdevelopment of one type of housing (ie apartments) in Australia could have significant consequences.

The apartment oversupply will hit Melbourne and Brisbane hardest - according to CLSA - with $16bn in settlements at risk over the next 1-2 years. Oversupply could start a downward spiral in apartment prices starting in specific developments with highly geared developers and spreading to upper end of the market. Melbourne will have 19,000 apartments above normal demand - while Brisbane will have 15,000. The property development industry (and property buyers) are highly leveraged and sensitive to price changes. The problem is exacerbated by the 2 years it takes from committing to a development to getting cash from buyers. Foreign buyers will have put down 10% deposit and will walk away if prices fall over 10% - because they have no enforceable contractual obligation to settle. China is critical as about 50% of apartments were sold to Chinese buyers in 2015. Capital outflow from China has tightened - and states are imposing special taxes on foreign buyers while banks tighten lending to foreign buyers. When new apartments are sold at fire-sale prices this will set a new benchmark for bank valuations [1 – 9/9/16]

Westpac can see problems emerging in property markets and has been adjusting its lending criteria accordingly - and so expects to be OK. However the apartment market may represent a risk to Australia's economy - because of 42% jump in units under construction. Settlements have slowed but not by much [1 – 17/9/16]

Many people / organisations are trying to avoid a meltdown in Australia's apartment market. Australia faces the risk of Chinese investors walking away from apartment settlements of $1-1.5bn per month for 1-2 years. Many apartment developers / suppliers could fail while banks takes large losses. In Sydney Meriton can cushion the impact by financing buyers directly - but Melbourne / Brisbane will feel the full force of any disaster. Apartments have been bought off the plan - and buyers can no longer get funding for settlement from banks or out of China. In Melbourne a consortium of lenders has been set up to provide bridging finance at high interest rates - so that apartments do not become Australian owned which would lead to much lower prices. An online website has been set up to enable overseas buyers to sell to other overseas buyers. However with 230,000 apartments being built there is a huge problem. Developers were told they could be funded if they obtained 75% Australian buyers - but now banks are panicking and refusing to honour this. Many developers nearing completion realize their Chinese buyers can't settle - and so are seeking funds to enable them not to have to force settlement - as doing so would create a horror scenario. Local financing for this will take time to achieve and result in very high interest costs [1 – 12/10/16]

AMP expects a 20% fall in apartment prices in Sydney and Melbourne over the next 2 years - but does not believe this will lead to general property market crash (ie because of a lack of oversupply of houses generally; record low interest rates; and higher lending standards than in countries hit by GFC) [1 – 12-10/16]

The numbers of foreign investors in Australia's property market has fallen sharply because of strict new lending standards and taxes implemented by three state governments (NSW, Victoria, Queensland). Foreign purchases are expected to fall from 25% to 20% over three months. Interest is likely to be strongest in Melbourne, Sydney and Canberra - and weakest in Brisbane and Perth where the state economies are performing worst. Increased taxes were having less impact in Victoria and Queensland because construction of new homes was exempted from higher charges [1 - 13/10/16]

QBE expects apartment markets to come under sustained pressure over the next three years as Sydney / Melbourne / Brisbane face challenges with high prices, oversupply and affordability. Brisbane's house prices are forecast to rise 6.5% over 3 years while apartment prices fall 8%. Brisbane faces apartment over-supply as 50,000 new apartments come on line over the next 2 years. Apartment price falls of 7% and 9% are expected in Sydney and Melbourne [1 – 13/10/16]

RBA has substantially under-estimated Australia's banks exposure to Brisbane-Melbourne-Sydney apartment oversupply. Its material is accurate but only deals with inner-city apartments. Its reference was to issues related to 38,000 apartments being completed over the next 2 years - where 200,000 apartments are due for completion in 18 months. In Melbourne one developer has 5000 apartments due for completion by 30 June. Sydney's largest developer is reporting a 50% non-settlement rate for off-the-plan sales - though this is cut to almost zero by provision of in-house financing. Arrest of Crown executives in China could upset Chinese demand. RBA says that 1/5 of banks' total residential lending is in inner-city areas - but as inner city areas only account for 1/5 of the total apartments banks apartment exposure could account for most of its residential development lending. There is a need to find solutions to the problems associated with high Chinese non-settlement rate and possible danger due to Crown arrests. This is possible - by finding new buyers. Completions due by April 2018 are twice annual apartment consumption in Sydney (2.6 times in Melbourne and 3 times in Brisbane) [1 - 17/10/16]

A survey showed where in Australia the greatest growth in the number of available apartments is likely to occur over the next two years [1 - 25/10/16]. [CPDS Comment: Brisbane stands out with a 25% increase- with Melbourne next at 16%. These increases can be contrasted with roughly 2% pa population increases (ie a total of 4+% over 2 years]

See later indicators as they are added here.

And at the same time:

Risks from China: The effect of a walk-away by Chinese buyers from apartment purchases in Vancouver (which has been one of the major destinations for Chinese property investment) has been severe.

Dwelling prices in Vancouver are down 20-30%. Vancouver is like Sydney and Melbourne as all have been subjected to unprecedented Asian buying of real estate - which has made prices so high that young locals can't afford to buy. In Sydney Chinese buyers have been rescinding their off-the-plan buying contracts - but being replaced by other Asian and local buyers. Banks had backed away from funding foreign purchases - so a large-scale Sydney apartment developer started providing credit. But this did not happen in Melbourne or Vancouver. The latter has been hit by China's constraints on getting money out and a 15% tax on property tax (which is much greater than that in Sydney - 4% and Melbourne). When the Vancouver tax was introduced local buying stopped - as prices were expected to soften. The volume of sales fell 85% in August 2016. Average apartment prices fell 21% over 28 days - while average detached home prices fell 7% over 3 months. There is a fear in Vancouver of a repeat of the 1980 (40-60%) housing price crash which took 6 years to recover from. If Vancouver's property slide continues, it will cause alarm bells to ring world-wide [1 – 22/9/16]

China, which is expected to provide a major (the major offshore) source of buyers for new Australian apartments, seems to be headed for a financial / economic crisis like that in 1990 which crippled Japan’s economic development model and ended its 1980s’ foreign-investment splurge.

Scott Morrison says that Australia has 5 years to increase its resilience because of China debt problem - but we may not have that long. China have been innovator in global finance - socialism with a credit bubble. China has discovered risks of financial excesses 8 years after US did so. Treasurer reasonably mentioned predictions of a Chinese financial crisis to emphasize fixing Australia's budget. The question is whether China's obvious debt / housing bubble burst or will Karl Marx cope. Morrison acknowledged the difference it makes who has the debt (eg SOEs, local governments or central government) - as the latter's debt levels are less dramatic. The banks and SOEs are probably broke - but the central government could recapitalize them perhaps at a cost of $US1-2tr (11-20% of GDP) now and double this by 2018. Fitch believes that government sources will need to be drawn on to solve the problem and sees this as already happening. The BIS argued that China's credit-to-GDP is 30% - the world's highest. Australia's by contrast is 5% and the US's is -10%. China's problem is not the level of debt - but that so much has been wasted - so that credit intensity (the amount of debt for any given GDP rise) has collapsed. This is because 50% of China's debt is in unreformed / inefficient SOEs. China's socialism is not the cause of the problem - as there is a similar problem in Europe where all of Europe's banks are probably technically bankrupt. China's need for economic reform is more urgent than Europe's but has been resisted for two years. Interest rates have been cut, reserve ratios reduced and prudential controls loosened. Banks have been told to roll over loans to highly leveraged borrowers no matter how much overcapacity there already is. Changes are unlikely in the short term - so growth will continue to be driven by rising debt. China recognised the problem - but change has not been made/ Does Australia have the 5 years that Treasurer mentioned to get its act together before China blows up with a financial / banking crisis. Official figures on China's NPLs are 1.8% of GDP - while Fitch's is 21%. And if there is a crisis, China's government would probably step in the recapitalize the whole system. As the Treasurer said, the question is who has the debt [1 – 1/10/16]

Ending the Era of Cheap Credit: Economic growth has been stimulated worldwide since the late 1980s by central banks through easy money policies (ie reducing official interest rates and bond buying programs). This is has driven growth primarily by boosting asset (ie shares, bonds and property) values. It has also boosted social inequality by making the already-rich richer (because the value of their existing asset holdings rose) – while the prospects of those dependent on the real economy stagnated. This has been leading to political instability in many places. Experiments with more extreme monetary policy options (ie with negative interest rates in Japan and EU) are likely to be phased down because they are seen to increase the risks facing banks / insurance companies by making it harder for them to generate income. There is now general agreement that the era in which easy money policy could be economically beneficial is over. The US Federal Reserve seems to be determined to raise rates. The shift from ever-falling to rising interest rates could trigger a bond market crash which erodes the base capital that banks need for making loans.

Higher interest rates are starting to have an effect and will lift the cost of money globally. $US Treasury bond 1- year yield rose to 1.8% up 32% from June 2016 low. This is causing sickening fall in bond values - and institutions worldwide are suffering. However an even more tense drama is playing out in London market where the situation is complicated by regulatory changes and interest rates have risen 43% since the start of 2016. This will cause severe disruption of money markets and large losses. Big banks are being squeezed in their ability to provide loans by the shrinking pool of available funds. $US1tr has been shifted from prime money market funds into safer assets - eg US short term debt. What is happening in London will spread worldwide because it is the centre of global money markets [1 – 13/10/16]

Higher interest rates have the potential to have severe effects on global economy.

The effects of 2008 financial crisis persist. A massive debt build-up led to the GFC and the effects remain. Total debt is now 350% of GDP. The world hit the debt wall in 2008 and unleashed what will be a series of crises. The real problem will emerge when costs of debt service start to rise - eg if Fed raises rates because of inflation in US. Even slight increases in rates will have a big effect on debt service costs. Even now more and more tax money goes into debt service. When this forces a cut to services there will be political ramifications. There is already a start to a 'revolt' worldwide. [1 – 12/10/16]

Australia's Overall Debt Exposure: Australia is particularly exposed – given that it has a chronic current account deficit and that banks traditionally cover the deficits by borrowing offshore mainly for lending to property investors.

Australia is one of seven countries that Forbes magazine says is the "most likely to suffer a debt crisis" within the next three years. China, whose economy has faltered in the past two years, comes No. 1, but Australia is No. 2. This is based on the existence of a rate of growth in private debt that is higher than the growth of GDP, where total private debt is also over 175% of GDP. The BIS publishes data on this and that data suggested that this criteria could have been used to predict the 2008 financial crisis that started in US. When what had been a very high rate of debt growth started to fall (because investors would no longer take on more debt), debt-based financial schemes failed – and the effect of declines in the rate of debt growth was to reduce (rather than continuing to increase) demand – thus generating recession. In 2015 China’s private debt to GDP ratio was 290% while Australia’s was 190% - implying a significant risk to those economies if the very high rates of growth in debt (mainly for property investment in Australia’s case) are not maintained. [1 – 28/3/16]

Australia's economic problem is illustrated by the fact that an apartment builder has overtaken iron ore miners as Australia's richest person. Apartment approvals are now running at 10,000 per month - up from long term average of 4000 / month over past 7 years. Over the same period Australia's debt / GDP ratio has taken off. China is of concern because GDP increases take 6 times as much increase in debt - but in Australia the ratio is 9 (up from 1:1 seven years ago). Australia's economy is still export focused - net exports probably accounted for 100% of March 2016 rise in GDP - but capital investment to support this has ended. Doubling Australia's terms of trade between 2000 and 2012 was a bubble based on unsustainable China-driven rise in commodity prices. This has collapsed and will remain weak for a long time. But that bubble has been replaced by one in apartments - which is bought with Australian debt (whereas iron ore exports were bought with Chinese debt). Australia's (243%) and China's (240%) debt / GDP ratios are similar and near the world's highest. Both these debt mountains are a danger for Australia. If (as many expect) China's economy buckles as a result this will affect Australia's exports. And when Australia's interest rates start rising house / apartment prices will fall (and have started falling in some places) - with borrowers coming under stress. Morgan Stanley argues that Australia needs to find growth drivers that are less dependent on increasing debt. The boom in household borrowing has peaked - even though distortions remain in place which discourage savings and encourage debt-based property investment. Australia would be better off if growth were coming from competitive advantages - rather than debt-funded apartments [1 – 1/6/16]

Property developers are pulling back - in the face of tighter lending, rising building costs, reduced Chinese buying and an apartment oversupply. Investor lending has fallen sharply and there is international and RBA concern about bank's exposure to Australia's high house prices. Investor home loans fell another 5% in April 2016 - to 21% less than a year before. Moody's sees rising house prices and leverage as a credit negative for Australia big banks - because of potential for price slump. Several large-scale apartment projects in central Brisbane (and in other cities) have been delayed [1 – 9/6/16]

Australia's banks' biggest risk lies in residential mortgages. Households are taking on large debts to pay for properties whose values are likely to collapse - when rates rise due to banks' funding costs and the apartment market starts to collapse. Bank's risk exposure is shown on their latest Basel III disclosures. Those risks won't see banks collapse due to a property crisis - but many properties could lose 50% of their value virtually overnight. ANZ's past-due mortgage loans rose from $1.6by to $2bn over the 6 months to June 2016. Westpac's rose from $1.8bn to $2.5 billion over 12 months. The banks see this as a problem. For all banks the figure is probably about $10bn - up 15% over the past year. Given any significant increase in interest rates or households' costs the figure could double or quadruple. Australia is in the early stages of a property crisis [1 – 13/8/16]

Australia's economy is at risk (as interest rates are likely to rise and property values are inflated) given the very high debt levels that households have taken on because of low interest rates / expectations of rising incomes and expectations of rising asset values. When households net borrowings (ie borrowings less principal repayments) exceed interest costs, households have a net positive cash flow. However the reverse has applied 3 times in the past 25 years (early 1990s; 2008-09 and 2011-2013) - and required the RBA to slash interest rates. The growing imbalance between debt and cash disposable income makes households now vulnerable to interest rate rises - and in 2016 the RBA has again been compensating with reduced interest rates. A real problem will arise when this becomes impossible due to rising interest rates elsewhere - eg in the US [1 – 7/10/16]

Australia's net foreign debt ($1.045tr) has been rated as extreme by S&Ps. Australian government risks losing AAA credit rating if this is not fixed. This debt gives Australia one of the weakest positions of 130 nations that are rated - and rose from $976bn to $1045bn over 12 months to June 2016 - reflecting government and private borrowings and a $70bn to $9bn fall in the value of net foreign equity holdings. Former and present RBA governors have expressed extreme concern. S&Ps suggested that Australia's surge in house prices and property investment is similar (though not as pronounced) as that in Spain before its credit troubles a decade ago [1 – 10/10/16]

See later indicators as they are added here.

Little chance for first home buyers as apartment prices fall

Little chance for first home buyers as apartment prices fall - email sent 22/10/16

James Kirby

Re: A chance for first home buyers as apartment prices fall, The Australian, 22/10/16

First home buyers would be able to get into the market as apartment prices fall if they can get affordable credit from somewhere (eg banks) to do so. But this may not be possible.

Why? Low interest rates have passed their use-by date and there is a rising consensus that official rates need to be raised because: (a) easy money policies have distorted investment towards assets whose values are increased by falling rates; (b) social inequality has risen as those with existing assets thus became wealthy while others’ incomes were stagnant / falling; (c) political instability has been increased by rising inequality; and (d) negative interest rates (eg in EMU and Japan) do not seem to have had useful economic stimulatory effects but rather reduce / eliminate banks to earn profits and thus weaken their capital base and ability to provide credit.

Any increases in interest rates will require a commensurate further fall in property prices for first home buyers to afford them. But much higher rates will probably be needed to obtain credit in future.

Why? Global debt / GDP levels are at an unprecedented high. All asset values have been bid up to extreme levels by investors borrowing to gain a positive yield.
There is now a major shift in bond markets towards dumping what have been very low yield bonds – because of the large losses that holders will experience when interest rates start rising (given their current low yields and long terms). The effect is: (a) to erode the capital base of banks and other financial institutions (which reduces their ability to provide credit); and (b) to start an unofficial process of raising interest rates.
The risk of losses from other classes is high because even very risky assets with a potential yield (eg in emerging economies) had been sought with limited concern for risk. As losses are experienced a sell-off similar to that now under way for bonds can be expected. Losses will have direct or indirect effects on the capital base that banks need to provide credit.
Because of the cost of covering GFC losses and later stimulatory spending, governments can no longer afford to provide guarantees to those who invest in / deposit with banks – thus the notion of ‘bail ins’ has been accepted. This will increase investors’ nervousness about providing capital to potentially risky institutions (as Europe’s largest bank, Deutsche Bank, is apparently now seen to be).
The global economy and international trade are weak. Monetary policy is almost universally seen to be unable to stimulate recovery. Large increases in public spending are being advocated to compensate. But government debt levels are already high. A decline government spending / investment is more likely than a large increase – because now-expected higher bond yields constrain further government borrowing.

In that environment the availability of low interest rate credit for Australian property buyers is anything but certain because:

  • Australia's  national debt / GDP level is very high by world standards (ie second only to China’s). Concerns have been expressed about reliance on rapidly increasing debts to sustain Australia’s economic growth and about the federal government’s ability to provide reliable guarantees of capital advanced to Australia’s banks – given the federal government’s structural budget defects and rapidly rising debt levels. Thus banks’ ability to borrow internationally at low rates to balance Australia’s chronic current account deficit (and thus provide loans traditionally mainly to those who want to buy property) is not certain. The UK, which has been providing 17% of Australia’s capital inflow, now seems to be suffering a post-Brexit current account crisis – so its ability to now provide significant capital inflow to Australia is uncertain;
  • Australia’s economy is highly dependent on China – and China is widely expected to experience a financial crisis associated with extreme debt levels and economic reliance on rapidly rising debts. Since the mining investment boom slowed, Australia’s economy has become highly dependent on property investment and Chinese investors provided at least 25% (and perhaps over 50%) of the demand for new apartments;
  • banks’ balance sheets are heavily exposed to property and to property developers. The availability of credit for property investment is now being constrained by banks (as APRA has required). This constraint is currently focused on former mining boom areas and inner city apartments. The latter make up only 20% of the total currently being developed in major cities, and there are indications that apartment developments at risk could actually be city wide (and thus 5 times greater than currently being considered in reducing banks’ loan risk). The availability of credit for property has also been constrained by China’s efforts to block capital outflow – and Chinese investors are either walking away from off-the-plan purchases or relying on high interest rates non-bank finance. The effect of banks’ constraining credit for property is not only to reduce banks’ risk with new loans but also to accelerate any market downturn in the problem areas that were seen to require reducing risks on new lending;
  • If bank’s balance sheets are seriously weakened or Australia starts to follow the UK into a current account crisis, banks’ ability to provide credit to home buyers or anyone else will be further reduced. In the 1890s Australia’s inability to borrow in the face of an international financial crisis led to a property market crash and a major depression.

There may now be a significant over-supply of some type of property – and a likely fall in prices as a consequence. However the ability of first home buyers to get into the market (which was long affected by a physical undersupply) has mainly been related to affordability – rather than to any absence of supply at the prices property investors were willing afford to pay in the hope on easy-money-policy-driven capital gains. If interest rates rise at the same time that prices fall, first home buyers affordability constraint is just as likely to increase as it is to disappear.

John Craig

Making Democracy Work Again

Making Democracy Work Again - email sent 27/10/16

Toby Ralph

Re: Why some voters embrace Hanson and Trump, On Line Opinion, 26/10/2016

Your observations about the probable recovery of democracy as a result of the destabilization of the political establishment that is indicated by support for Hanson and Trump seem reasonable. However the required adjustments are likely to be more complex than your article indicated.

My Interpretation of your article: Many misunderstand the intentions of Trump and Hanson voters. Many voters support them, not because of their policies or because they want them to win, but because they object to current cozy / narrow political focus in Canberra and Washington. Society is changing much faster than the political establishment. Globalization is making the world more efficient / equitable but there are pot-holes on the road (eg problems in wealth distribution). Those in the First World must learn to have relatively less – while those in the Third World will have more and also demand free choice, democracy, separation of powers (which will reduce corruption / oppression / abuse of power while increasing transparency / safety / fairness). Globalization requires looking for the best value – which is why high wages in Australia led to a fall in manufacturing as share of economy. The First World has been importing poverty and exporting manufacturing jobs – while poverty elsewhere has fallen dramatically over the past 40 years. At the same time the rich are getting richer. While the world’s richest and poorest are both winning, those in the First World middle are losing. Australia’s ethnic-mix is also changing – and this can be a scapegoat for those losing advantage / opportunity. As hope evaporates, lawlessness / drug abuse / gang violence / poor diets / poor health / poor education outcomes / poor opportunity increases. Political parties have not kept up worldwide. Free trade agreements are misunderstood / resented. Grand gestures on refugee policy that elites advocate would adversely affect others. Many feel that governments have lost control of expenditure – and governments should only spend what they have. Those affected or concerned believe that their leaders have lost empathy / connection (and so look to Trump / Brexit, Le Pen, Hanson etc). A call for transformation represents opportunity – but if political parties don’t change they will go the way of fixed-line phones. Trump will probably lose the US election – but his supporters will get what they wanted (ie a destabilized and thus re-invented Republican Party). Democracy may thus be in better shape than many imagine.

Undoubtedly support for Hanson and Trump is mainly based on perceptions by the relatively disadvantaged that current policies and political institutions are not producing adequate outcomes from their point of view (eg see Should Donald Duck? and Will Pauline Hanson's One Nation Again Force the Political Mainstream to Think?). In Australia the potential for poor economic and political outcomes has been apparent for many years.

However the issues involved, and thus the adjustments needed ‘make democracy work once again’, are anything but simple.

First your suggestion that globalization is making the world more efficient, equitable and committed to freedom is incorrect( eg see More on Should Donald Duck?). Globalization has been accompanied in East Asia by the use of methods to achieve ‘real economy’ miracles that are variations of traditional social, economic and political arrangements in countries with an ancient Chinese cultural heritage and that are hard to comprehend from a Western perspective. They are not based on understanding / initiative by free individuals but rather on collaborative efforts by state-centred ethnic social hierarchies. Those methods also involved distorted financial systems that both: (a) invisibly subsidised production at competitor’s expense; and (b) put ongoing global growth at risk.

Attempts are now also being made to use methods like those by which China administered Asia as the ‘middle / coordinating / organizing kingdom’ prior to Western expansion to create an authoritarian alternative to the liberal order that your article presumed will prevail in future – see Creating a New International 'Confucian' Financial, Economic and Political Order. That endeavour may well fail due to internal weaknesses. However understanding and countering those attempts (eg as suggested in Comments on Australia's Strategic Edge in 2030, 2011) will be needed to ensure that the Western values you mentioned prevail internationally (eg free choice, democracy, separation of powers). Reforms to ensure that financial systems are reliable worldwide will also be required (see International Regulation of Lending Standards).

Second the wealth inequality and poor prospects of the economically marginalised in Western countries are not only due to (what you point out are) the ultimately-constructive effects of globalization. They are also due to deficiencies in policy responses to the challenges that globalization created. For example:

  • To boost competitiveness emphasis has been primarily placed on market liberalisation to increase competition. There was however no parallel process to increase the ability of individuals / enterprises to gain the support they need from others to compete successfully in high value added activities (see Defects in Economic Tactics, Strategy and Outcomes, 2000 and Lifting Productivity: Considering the Bigger Picture, 2010). A shift in economists’ emphasis towards how to speed qualitative changes in economic systems (rather than just quantitatively analysing what happened in the past) is arguably needed (see Fixing Economics);
  • Obstacles to sustainable global economic growth were implicit in the savings gluts / demand deficits that East Asia’s state-manipulated financial systems arranged to avoid financial crises (eg by suppressing household incomes). This received no official attention though this was probably the main obstacle to an effective international financial system that the G20 was created to promote (see Will China's Presidency in 2016 End the G20's Chronic Failure?, 2014). Rather than fixing the international financial system, ever-easier monetary policies were put in place to counter the effect of the structural demand deficits that non-capitalistic financial systems required. Ever-easier monetary policies stimulated real or perceived ‘wealth effects’ in Western economies to boost consumption and government spending above available income for some years – but this: (a) increased the risk of financial instability – as the 2008 GFC demonstrated; and (b) was always only ever a temporary ’solution’.

There have been increasingly tense debates about which side of the West’s democratic capitalism ‘coin’ is mainly to blame for economic stagnation and rising inequality. However the reality is that this question needs to be considered in the light of the effect of the non-democratic-capitalist coins that are also in the fountain (see Who Is Failing the Lower and Middle Classes?) .

Third drawing attention to ethnic changes is not merely about scapegoating. For example, features of Islam create very significant problems for Muslims and in their relationships with others – while also providing religious ‘oxygen’ for Islamist extremists. The British Equalities official who invented the term ‘Islamophobia’ now highlights the difficulties that Muslims have in fitting in. Fifty percent of Australians reportedly agree. These issues require attention (eg see Encouraging Reform of Islam: Mr Turnbull's Opportunity to Counter Islamist Radicalization) despite the need for a more sophisticated approach to multiculturalism that this implies.

Finally social dysfunctions such as those you mentioned (eg lawlessness / drug abuse etc) are as much a consequence of a declining sense of individual responsibility as they are of the poor economic prospects of some individuals, families and communities (see Erosion of the Moral Foundations of Australia's Liberal Institutions). Efforts to overcome the latter source of social dysfunction are also needed.

Some suggestions about the sorts of changes that may be needed to ‘make democracy work again’ in Australia are in Playing Political Games When Major Reforms are Needed. In brief this suggested that: (a) Australia’s machinery of government has long needed to be upgraded; (b) there has been a relationship between poor machinery of government and the prevalence of inadequate economic policy; (c) both fiscal and monetary policy face limitations as ways of stimulating Australia’s economy; and (d) improving Australians’ access to and ability to use strategic economic intelligence is most likely to make the necessary difference.

I would be interested in your response to my speculations

John Craig


Email Response of 27/10/16 from David Truman to a Copy of the Above Email

 I looked long in your reply to Toby Ralph before I found anything which begins to capture the core of One Nation’s appeal.    You did – eventually – talk about Islam, AND even then, you bent over backwards to be “nice” in talking about Muslims, and distinguishing them from the alleged moderates.  You talked about “significant problems for Muslims”.  Derrr ..... Islam creates problems for EVERYONE who isn‘t Muslim, as well as trashing the lives of those unfortunate enough to be born into it or lost and stupid enough to convert to it (and the Muslims have the stupid audacity to refer to these as “reverts”, from the lie that Islam was the original  state of mankind!!!!)

Yes, Trump in America is appealing to white blue collar workers hurt by globalization, and even Michael Moore (....) is saying he’s on a winner when he tells the CEOs of Ford and General Motors that if they shift their production to Mexico, and he becomes President, he’ll hit their cars with a 35% import duty.  Now that sort of hardhat politics hasn’t hit here yet – though Nick Xenophon has done just about that with the submarines for Adelaide!   

Trump appeals also for his strong border control policies, including BOTH clamps against Mexicans AND restrictions on Muslim immigrants.

The appeal of One Nation in Australia is only in part, and I think minor part, economic.  Your posting to Toby Ralph reflected a mindset not all that far from Malcolm Turnbull’s out-of-touch election mantra of “jobs and growth”, which oozed Big City globalist elitism just as disconnected from suburban Mums and Dads as the latte and chai sipping Greens in Fitzroy and Newtown and Paddington. 

One Nation’s appeal is overwhelming CULTURAL.  Desire to affirm and defend our Australian values, culture and institutions from a tidal wave of (dare I say it) Cultural Marxism reflected in the execrable “Safe Schools” program and “Building Respectful Relationships” program;  and from the seemingly inexorably progress of Islamization with more and more concessions being made to this one, loud, shrill, greedy and subversive minority which uses our utterly stupid multiculturalism avenues to parasitize us and use our laws and institutions against us.

As it happens, I am a very highly educated person.   I have studied the history, scriptures and doctrines of Islam for over 13 years.  I watch with increasing despondency what is happening in Europe.  I am a history buff and I TEACH Russian history as well as language and literature (at U3A).  I keenly observe the rise and fall of civilizations, and am acutely aware that the West is currently in most dangerous decadence.  

One Nation is overwhelmingly CULTURIST as opposed to multiculturalist.  It affirms and defends our traditional values, the primacy of our language, British-derived institutions and Constitution, and our Judeo-Christian roots and beliefs.   There are millions of ordinary Australians out there who feel totally ignored by Labor and the *&^%$ Greens and also by an out-of-touch elitist one-dimensional-economic Turnbull who sups with extremist Muslims and rabbits on in ILLITERACY about the “great debt” that the West owes to Islam.  That is bollocks.  The Dark Ages were CAUSED by Arab Muslim depredations and destruction of the trade routes in the Mediterranean in the seventh century.  And the so-called Golden Age of Islam was not an Islamic golden age at all – because the great producers, and the translators of the classical texts, were not Muslims but Jews, Sabians and Christians living under Islamic rule.

I have an Honours degree and a masters degree and speak six languages, so I am most decidedly not the typecast redneck.  But after the last election, I have come to the view that the only way for Australia to get out of its self-destroying political correctness and the continued whiteanting of our culture and values by the Left, which enables Islam, is One Nation.   They are not politically correct,  They talk to real people.  They express authentic sentiments of millions of people.  And many of those sentiments – especially the rejection of the worst aspects of globalization – are very sound.

Think about it.


CPDS Reply of 30/10/16 to David Truman

Thanks for your response which, if you have no objection, I will add to Making Democracy Work Again on my web-site.

I am sure that I do understand One Nation’s popular appeal – and also its lack of sophistication in the pursuit of its goals.

My email started by commenting on the major threat (ie that from East Asia) to the values, culture and institutions that One Nation values.. Another comment on that threat is in Avoiding Structural Social Inequality. As far as I can see One Nation has little understanding of that risk. And, if you look at the comments that I put forward (politely) about Islam, you will find that they accord with the sorts of points that you made. The difference is: (a) that I have done a lot of work to identify in an intellectually-defensible way why Islam creates problems for itself and others; and (b) done so in a way that the conclusions can be (and frequently are) presented to Muslim leaders as offering opportunities to improve their own position (by becoming in effect Christian). Jesus changed people by showing them a better future – not by merely criticising their past.

There is no doubt that Trump is on a political winner in proposing increased tariffs to hopefully deal with the competitive challenges in a globalized economy. However he is on an economic loser because his understanding of the source of the problem and what could be done about it is incredibly weak (eg see More on: Should Donald Duck? ). What would arguably be more effective is outlined in an Australian context in Playing Political Games When Major Reforms are Needed. Once again a lot more work than One Nation seems to have done is needed to properly understand either the challenge or the (probable) solution. The attached response to another observer’s comment on my original email presents more detail of what I suspect is needed.


Response from A Melbourne University Professor and CPDS' Reply

....... The big question for countries like Australia and the USA is how, in the face of globalization and the increasing concentration of great wealth in the hands of the very few, how do we maintain democracy and civil society?


CPDS Reply

As far as I can see the key (but by no means only) requirement for doing something about inequality (and thus reducing the risks to democracy / civil institutions) is to take a more serious approach to economic development – and thus to create a much broader base of high value added economic activities.

How this might be achieved was amongst the matters referenced in my email Playing Political Games When Major Reforms are Needed (ie in Defects in Economic Tactics, Strategy and Outcomes, 2000 and Lifting Productivity: Considering the Bigger Picture, 2010). The latter includes a brief account (in Accelerating Market-Oriented Development) of a method whereby it should be possible to arrange economic ‘miracles’ in a democratic capitalistic environment. A process to achieve this that I experimented with in Queensland in the 1980s (see CV) was described in a practical sense in Developing a Regional Industry Cluster (2000) and in theory in A Case for Innovative Economic Leadership (2009) and Reinventing the Regions (2010).

Unfortunately the ‘wheels fell off’ those attempts because: (a) economic success required that outcomes be market driven, but the political system wanted outcomes to be determined by themselves (ie by interest groups – rather than by the latter’s potential customers); and (b) government in Queensland has been a disaster area as suggested in Smart State: Some Informal History. In order to overcome the political obstacles, there would be a need to implement methods for accelerating market-oriented economic learning in the real economy through institutional arrangements which (eg like companies) operate under democratically-endorsed protocols but which are not directly politically-accountable for outcomes.


The fact that suburban mums and dads don’t understand what Malcolm Turnbull is on about with his proposed economic actions is a major part of the problem. It needs to (and could be) solved by raising their level of understanding. Only then would they really understand why Turnbull’s proposals are weak and inadequate. Exactly the same thing applied in the 1990s. Trendy economy strategy of that era was inadequate. One Nation’s mums and dads knew that there was something wrong – but they could not offer informed critique and thus could not get constructive policy changes (see Assessing the Implications of Pauline Hanson's One Nation, 1998).

There is no doubt of the need to deal with problems implicit in political correctness and naïve versions of multiculturalism. However the only way to do this is to win the intellectual argument. This is potentially possible as suggested here and here – but One Nation is not yet up to doing so as far as I can see. Crass populism (like Trumps) can gain political support from the under informed – but is unlikely to result in effective actions.

Can China Avert an Australian Housing Crash?

Can China Avert an Australian Housing Crash? - email sent 29/10/16

Jason Murphy

Re: A housing crash looks inevitable except for one thing, Courier Mail, 29/10/16

Your article suggested that if a property crash looks likely (because of over-investment in apartments) then foreign investors (especially those from China) could come in to stabilize the market. However I would like to suggest that it would be desirable to look in more detail at the role of foreign capital in creating a potential property crash in the first place (see A Made-in-China Disaster Waiting to Happen).

My Interpretation of your article: Thousands of new apartments will soon be completed in Australia’s biggest cities (especially Sydney, Melbourne, Brisbane). Will this cause a price crash? The RBA is watching closely. In inner-city Brisbane and Melbourne about 4% of existing housing stock will be completed every 6 month for the next 2 years (with about 2% the corresponding figure in Sydney). Will such changes affect the whole market? There would be no price effect if there is a shortage – but an effect could be possible if there is an over-supply. Other advanced countries (eg US) have had price crashes due to supply booms. However Australia’s market is more stable because owners here can’t just turn the keys over to the bank if they can’t afford a loan. However off the plan sales create ‘settlement risk’ if buyers can’t get finance when apartments are completed. Apartment prices have not risen as fast as those of detatched houses. One big uncertainty is the role of foreign investment. Some Australian apartments are owned by offshore investors. What will they do if prices fall? It Chinese investors also sell any apartment price fall is likely to intensify and spread to housing more generally. But if housing looks weak the $A will fall and perhaps make local assets look cheap to foreign investors. A new wave of foreign money could come in to soak up excess supply. Government policy is likely to encourage foreign investment because of the adverse effect of a big house price crash. This might prevent younger Australians getting the cheaper properties that have been looking forward to.

No one knows exactly what percentage of Australia’s apartment boom has been arranged to meet expected Chinese demand. Available statistic suggest that it is about 25%. However some observers have suggested that it could be as high as 80% as off-the-plan purchases don’t need to be recorded with the FIRB and many / most Chinese purchases have been made with family money so Australia’s banks have no records either.

Some recent indicators of Australia’s potential for a housing bust are in Housing Risk. The inability of Chinese investors to settle is a major factor in that risk. Other indicators of China’s limited prospects of coming to the economic rescue are in Importing Risks from China. Indicators of the role that systematically misleading others about what is going on plays in traditional East Asian ‘soft power’ tactics may also be of interest.

You are probably right that younger Australians won’t be able to get the benefits from buying cheaper housing (see Little Chance for First Home Buyers as Apartment Prices Fall). It is not only China that could become unable to sustain foreign investment and Australia’s high national debt levels are already causing concerns about importing the capital that banks traditionally rely on to provide funds for domestic property investment.

John Craig

Debating Housing Affordability

Debating Housing Affordability

Treasurer Scott Morrison has put states on notice over booming house prices - indicating that Turnbull Government is wanting an increase in supply to help first home owners buy their own home. Next meeting of federal / state treasurers will focus on how states can do away with planning rules that stop / delay new houses being built Incentives may be available to states to reform laws and release more land. He argued that it was simplistic to suggest that cheap credit is creating an investor-driven housing bubble. Housing in Australia (especially Sydney / Melbourne Brisbane is expensive and increasingly unaffordable - though not necessarily unsustainable. The problem does not just affect prospective home buyers - as this place pressure on private rental market / concessional and asocial housing. Prices in Sydney and Melbourne have grown much faster than elsewhere in Australia. He implied that there were problems with ALP plan to reduce negative gearing / capital gains tax concessions as these would affect housing markets everywhere not just in problem regions. The government wants to solve problem by increasing supply rather than by restraining demand [1]

Treasurer's statement about housing affordability sank like a stone with many property experts. Treasurer suggested that the problem is that not enough homes are being built. The ALP criticised him for being late in saying the obvious.  Home ownership is becoming harder for each new generation. Home ownership amongst under 40s is falling, housing costs rise as percentage of income and affordable houses are harder to find. John Daley (Grattan Institute) praised the idea of encouraging urban infill - but criticised failure to deal with generous tax concessions for property investment. he had said that reducing concession would reduce prices while not improving affordability - and both these can't be correct. Matt Grudnoff (Australian Institute) says that freeing up land for property development will fail without funding public transport - and that record low interest rates should be used to borrow to fund this. Tony Dalton (RMIT) suggested that boosting supply will raise ownership but won't help low income earners who need cheaper rents closer to work - and that institutional investors need to be encouraged to build affordable rental properties. Andrea Sharam (Swinburne) said that property tax concessions should be shifted from mum and dad investors to institutional investors. This would both take heat out of the market and increase supply of rental housing  [1] - Jackson Stiles / John Daley (Grattan) / Matt Grudnoff / Tony Dalton / Andrea Sharam

Federal governments take a long time to affect Australia's housing price problems. Howard vowed to increase housing supply 10 years ago - yet some of those homes are only coming on the market now. Treasurer is now again talking about the problem without having a solution. Land supply is part of the affordability problem but can't be enough on its own. Housing is unaffordable for the young. This is a social problem as many more people will grow old with pension system stacked against them. ALP and Greens tap into frustration with negative gearing proposals. Hanson also hints at explosive power of this problem - through blaming immigration / population growth. Morrison hints at solutions. Angus Taylor (assistant minister for cities) spoke of new housing around transport hubs. Federal agenda taking shape involves: pressure on states to release more land; federal funding to rebuild urban areas; transport spending linked to 'value capture; incentive payments to states who can show they are delivering more housing [1] angus taylor - fed cities minister / david crowe

More than 60,000 of China's richest people plan to pour money into Australian real estate over the next three years - giving new life to a property boom that had been tipped to fade. A Chinese survey of people with over $1.5 m found that 800,000 planned to invest offshore with Sydney and Melbourne being a preference for many. Many Chinese millionaires also hope to move to Australia. The depreciation of the yuan and the attraction of Australia has been blamed for this. Chinese rich-listers are also motivated by overseas education opportunities - with Australia ranked second behind the US. If the yuan becomes convertible more Chinese can be expected to invest in offshore housing [1] maggie lu yueyang

 

How Does Treasury Know How Much Property Investment is Foreign?

How Does Treasury Know How Much Property Investment is Foreign? - email sent 5/12/16

Scott Murdock
The Australian

Re: Aussies drive property boom amid ‘marginal’ foreign effect, The Australian, 5/12/16 (see outline here)

This article implied that Treasury concluded that offshore / Chinese property investment in Australia has had only marginal impact on prices – and thus on home affordability.

In debates about these issues over recent years, reasons have been suggested for doubting the reliability of the data that the Treasury seem to be relying on in drawing conclusions about the effect of foreign / Chinese investment in Australian property (eg because off-the plan purchases did not need to be recorded with the FIRB and banks would have no records of the apparently large number of purchases using only family money).

John Craig

Will China Solve Australia's Housing Affordability Problem?

Will China Solve Australia's Housing Affordability Problem? - email sent 11/1/17

Robert Gottleibsen,
The Australian

Re: New pattern of home ownership looks set to play big political role, The Australian, 10/1/17 – which is outlined here

When account is taken of the changes that are being forced on China by its potential debt crisis, your article implies that China is now likely to make a useful contribution to improving housing affordability in Australia.

Your article suggested that about 80% of new apartments in Sydney and Melbourne had been being been bought by Chinese investors (with lesser percentages elsewhere). This was partly due to capital flight from China because of concerns about its financial / banking / political system (see Importing Risks from China). As the latter noted, though reliable data is hard to get, it seems that:

  • China’s total debt levels: (a) have been rising about 3 times faster than GDP growth (ie about 20% pa or $US1tr / quarter) to sustain the 6-7% pa rate of economic growth that China needs to avoid political instability; and (b) have now reached around 300% of GDP (ie about $US30tr);
  • China’s dependence on rapidly rising debt and its overall debt level are universally seen by external observers as posing risks of a debt crisis – though this risk is can be managed in ways that would be impossible elsewhere because China’s government has extensive control over the financial system and China has significant foreign exchange reserves that can be shifted to any area that is currently exposed;
  • Despite determined government efforts to prevent this, China’s foreign exchange reserves have been eroding quickly as a result of capital outflows due to both repayment of offshore debts and capital flight (ie falling by 25% from their $US4tr peak in early 2014 to $US3tr – ie an average of around $US30bn / month with a November 2016 fall of about $US80bn);
  • The IMF believes that the minimum foreign exchange reserves China needs for safety, because of its managed exchange rate, is about $US 2.7 tr.

Your article also noted that the percentage of Chinese purchases of new apartments in Sydney has now fallen from 80% to 50% (because of constraints on the availability of credit both from China and from Australia’s banks acting under regulatory oversight from APRA). You also suggested that this has not resulted in any fall in prices (and thus any improvement in housing affordability) because non-Asian investors, who have lost faith in the superannuation system, have been making up the shortfall.

Though China has been trying and failing to block capital flight, there were recent indications that it needs to toughen further. It’s government now reportedly accepts behind the scenes that its extraordinarily high debt / GDP ratio and heavy dependence on rising debt to sustain growth create unacceptable financial risks. It will thus accept a slower rate of economic growth in the interests of stability.

However any reduction in China's rate of increasing debt directly subtracts from demand growth, and thus from economic growth. It is thus very hard to reduce dependence on rapid debt growth and potentially very economically disruptive to do so. To stabilize its debt / GDP ratio at its current very high level, China would arguably need to reduce the rate at which new debt accumulates by (say) $US2tr pa – eg by a 10% cut in final demand by slashing the creation of new debt for industrial, infrastructure and property investment and by widespread debt-write-offs. The same problem applies to capital outflows (ie outflows also have the same contractionary economic effect on China as a reduction in final demand associated with the creation of new debt). Thus to have the economic slowdown that is needed for political stability rather than a hard landing, China will have no choice but to crack down even more heavily than it has already been doing on the (say $US500bn pa) 'private' capital outflows that have been allowing large scale Chinese purchases of apartments in Australia and North America.

This will put downward pressure on apartment prices both: (a) directly; and (b) indirectly by discouraging the apartment construction which has become a significant source of ‘growth and jobs’ (and thus of household incomes) in Australia. If China fails to achieve a ‘soft landing’ then the adverse effects on Australia’s commodity export income will be significant.

As it will presumably take domestic investors some time to work out the implications for Australia’s urban apartment markets, it is unlikely that the last of ‘bigger fools’ who will enter what is presumably the tail end of an apartment price boom have yet done so. However improved housing affordability should emerge over the next year or two because of both: (a) significant price falls for what has become a significant segment of the housing market in Australia’s major cities; and (b) the adoption of more affordable pricing points for future construction.  Australia will also, presumably, face various financial and economic hazards as this occurs (eg losses by property developers / banks / property owners) which will need careful management.

John Craig

Capitalism is Not Where Reform is Most Needed

Capitalism is Not Where Reform is Most Needed - email sent 12/1/17

Professor Klauss Schwab,
c/- Schwab Foundation

There have been media reports on your recent case to the World Economic Forum against ‘populism’ and in favour of reform of capitalism (eg Acton G., Davos founder criticizes populism, wants urgent reform of capitalism, CNBC, 11/1/16).

Some suggestions about the inadequacies of ‘populism’ (and what might be done about it) may thus be of interest (see Preliminary Conclusions About Donald Trump's Policy Agenda, 2016).

I should also like to draw your attention to comments on reform of global economic and political systems that were produced in response to the raising of similar issues at the 2010 World Economic Forum (Seeking a Liberal International Order, 2010+). This basically suggested that the issue could not be dealt with without recognising that the world does not now operate solely on liberal Western principles. Despite this no attempt was being made (see Babes in the Asian Woods, 2009+) to understand the implications of the radically different approaches to the use of information and social organization in East Asian societies with an ancient Chinese cultural heritage (eg see Will China's Presidency in 2016 End the G20's Chronic Failure? , 2014). Other suggestions along similar lines are in An Alternative to Scapegoating Capitalism (2010); World facing 'Crisis of non-Capitalism': Non-economist (2011); Who Is Failing the Lower and Middle Classes? (2014); The Need to Understand China’s Lack of Principles (2016); and More on: Should Donald Duck? (2016).

Reform of capitalism is needed (eg along the lines suggested in 2010 in Restricting the Role of Financial Services?). But this is not where reform is most needed - eg for reasons suggested in Importing Risks from China (2016).

John Craig

Putting China-US Tensions in Context

Putting China-US Tensions in Context - email sent 19/1/17

Andrew Browne
Wall Street Journal

Re: Donald Trump, China tensions and Armed Conflict, The Australian, 18/1/17 (also here in WSJ)

Your article made very a useful contribution by trying to put what is now happening in East Asia in context. I should like to try to add value to it in relation to its starting observations, ie that:

“China didn’t invent the brand of mercantilism that Donald Trump rails against; it copied the playbook from its neighbours. Japan grew rich by promoting exports while protecting its own industries. So did South Korea. They both manipulated their currencies and showered favours on politically connected business cartels, skewing domestic competition.

But here’s one major difference: these trading powerhouses together with Taiwan, Singapore and others in Asia who aggressively pursued export and investment-led growth were friends and allies of the US, whereas China is a strategic competitor and military rival. That’s what raises the stakes in a looming trade showdown between the US and China.”

There is no doubt that China’s economic ‘miracle’ involved the use of methods that had been developed and used elsewhere in Asia previously. However it is not correct to suggest that the cartels were ‘politically’ connected in anything like the way that might apply in a Western context. Rather they were ‘bureaucratically’ connected – and this made it possible for them to be economically successful because outcomes were able to be market driven rather than being determined by interest group pressure. Some suggestions about how this worked are in Understanding East Asia's Neo-Confucian Systems of Socio-political-economy. This basically argued that the methods used (initially in Japan) were variations of the way elite bureaucracies had governed Asia on behalf of emperors prior to the arrival of Western influences. I started my career with an involvement in top-level central coordination in a government in Australia and subsequently had an opportunity to use similar methods to stimulate market-oriented change in a market economy context. Having actually ‘done it’ I have no trouble understanding how it is done in East Asia. Chalmers Johnson (author of ‘MITI and the Japanese Miracle’) described my early write-up of what was involved as ‘on the leading edge of the social sciences’.

It is not necessarily correct to suggest that all the other Asian countries that used those methods were friends and allies of the US. This may well not be so in the case of Japan for reasons suggested in Is Japan for Real? As noted above the methods used to achieve economic ‘miracles’ in East Asia involved variations on the way elite bureaucracies had ruled on behalf of emperors. Japan’s post-WWII financial and economic institutions (ie MOF and MITI) were bureaucratically controlled and not subject to any democratic ‘political’ influence from Japan’s so-called ‘Liberal Democratic Party’. There is strong documentary evidence that those arrangements were put in place by ultranationalist factions (Japan’s Yakuza gangs) who also sought to maintain Japan’s imperial tradition that US Occupation Forces were trying to eliminate because of its association with Japan’s war-time ideologies. Those ultranationalist factions (who had their origin as masterless samurai and have always acted as the enforcers of discipline on behalf of Japan’s ruling system) were clearly also central to establishing Japan’s ‘liberal democratic’ political system. This would only have been possible given Japan’s cultural traditions if they were acting as agents of Emperor Hirohito. A close Japan-watcher suggested that Japan’s post-WWII economic methods had previously been used and found to work by the Japanese army in Manchuria. Japan’s current prime minister is notorious in Asia for his ultranationalist rhetoric (ie concerning themes of racial superiority) and praise of Japan’s war criminals for having created the foundations for Japan’s future.

It can also be noted that state-connected business cartels that operate in Japan and China reflect a ‘corporate state’ ideology (ie the view that the ‘private’ sector is an extension of the state). Corporatism was the essence of the economic ideology of the Axis of fascist powers in the 1930s and 1940s (including Japan). And while China is recognised to be a strategic competitor and military rival to the US, it is necessary recognise the quasi-fascist character of the way its economy (and Japan’s) are organised in order to see what is probably the main issue involved in China’s attempt to establish itself as the centre of a new international order (see Creating a New International 'Confucian' Financial, Economic and Political Order).

John Craig


Email Response from Andrew Browne - 19/1/17

A thoughtful and insightful analysis, as always.

I read your commentaries very carefully, and have learned a lot from them over the years. You have a perspective that few in the region possess.

I'm fascinated by the roots of Japan's post-war miracle in Manchukuo, and indeed I have written on the subject. In many ways, the fascist experiment there was the template for the whole East Asian model of rapid industrialization. It is where Park Chung-her and other leaders gained their experience.

I've read the Chalmers Johnson book. Also "planning for Empire" by Janis Mimura, "offspring of Empire" by Carter Eckert and "Manchuria Under Japanese Dominion" by Yamamuro Shin'ichi. It is shin'ichi who has the most profound insights into the bureaucratic model you outline.

Anyway, thanks so much for taking the time to critique my column.

Let me ask you: given the entrenched East Asian development model you describe, do you think trump has any hope of changing Chinese trade behavior?


CPDS Reply to Andrew Browne - 19/1/17

Thanks for your feedback which I will add to my website (ie with Putting China-US Tensions in Context) if you have no objection.

In relation to your question about Donald Trump’s prospects of changing China’s behaviour, my suspicion is that (as his prospective administration seems to be unfolding) he has almost no chance of changing anything (see Preliminary Conclusions About Donald Trump's Policy Agenda).

The core problem in relation to changing China lies in a general failure in the US / West to understand what it is dealing with in Asia (eg see Babes in the Asian Woods). What you were starting to do in your recent article (ie trying to promote real understanding of East Asia) has more potential to make a BIG difference than anything Mr Trump currently seems to have in mind.

Given understanding of ‘Asia’, the Trump administration should: (a) recognise that, if merely left alone, China is in huge amount of financial trouble which would probably force it to change the behaviour that Mr Trump’s supporters object to); and (b) be less likely to be misled by traditional ‘soft’ methods of exerting power in that part of the world (see Donald Trump is Not Alone in Facing Dilemmas).

Others are already headed in that direction. China’s president, Xi Jinping, made a presentation to the World Economic Forum (see overview here) which argued that China is the ‘answer’ in terms of taking the lead in ongoing economic globalization. This was apparently well received by many European and emerging economy WEF participants. However some observers (eg see example below) are now starting to point out that what he said was not realistic, because (as your article noted) China has not exactly been a model global citizen in terms of its trade methods.

“Xi Jinping, at the World Economic Forum at Davos no less, posed as the champion of globalisation, even preaching against protectionism and populism. “Just blaming economic globalisation for the world’s problems is inconsistent with reality, and will not help solve them,” he said. You have to admire Xi’s chutzpah. If every nation in the world practised globalisation in the way China does, it would be a world of constant chaos and near inevitable conflict. Let’s be clear: China does not practise free trade. It rigidly and politically polices foreign investment, frequently showing investors the door once it has achieved technology transfer. It controls its currency. It directs capital from its banks, often unprofitably, to favoured industries. It shamelessly subsidises industries. If foreign businessmen transgress often extremely opaque regulations, and fall out with the local powers that be, they can find themselves in jail with months and months going by ­before charges are even identified, much less laid.” (Sheridan G. Trump’s triumph explained: Xi and Obama fuel America’s revolt, The Australian, 19/1/17)

Building such critique on a foundation of a serious attempt to understand East Asia in its own terms (and that what China is offering the world is a form of authoritarian quasi-fascist rule) would make a big difference.

John Craig

Building a Case for Democracy

Building a Case for Democracy - email sent 18/3/17

Hon Ms Julie Bishop, MP,
Minister for Foreign Affairs

In response to your recent comments about China’s lack of democracy, its Foreign Ministry reportedly argued that China’s global contribution has been very constructive. The Ministry, in effect, made a case for the advantages of the hierarchical and elitist system of government that has prevailed in China, and which China has been seeking to expand globally as an alternative to Western-style liberal democracy.

In order to build a strong counter-argument I submit that there is a need to: (a) clarify and objectively analyse the strengths, weaknesses and consequences of China’s non-democratic and illiberal system; and (b) make democratic governments more effective than they have been becoming.

My Interpretation Articles in Which You Were Quoted: China’s foreign ministry responded in a philosophical tone to a controversial speech by Australia’s Foreign Minister (Julie Bishop) in which she lamented China remaining a ‘non-democracy’. Ms Bishop had said that, while non-democracies such as China can thrive in the present system, democracy is an essential pillar of a preferred order and the most successful foundation for economic prosperity and social stability. While Chinese international affairs experts had criticised this [see following article] , the Foreign Ministry only made general remarks about China’s positive global impact. China sticks to peaceful development and devotes itself to the concept of cooperation to achieve win-win outcomes for all countries and to build a community with a common future for mankind. This benefits the region and the world. China has always advocated world affairs being discussed by all countries, and that global order be maintained by all countries. China hopes that others will abolish prejudice and see China’s development with an objective and fair attitude (Callick R., ‘China responds to Julie Bishop’s ‘non-democracy’ speech’, The Australian, 15/3/17).

Chinese foreign policy experts criticised a speech in Singapore by the Foreign Minister (Julie Bishop) as provocative and puzzling. It was interpreted as mainly an appeal to US president Trump to rethink his foreign policy – rather than as an attack on China. Zha Daojiong (Beijing University) said Ms Bishop sounded like she wanted to be an adult supervisor in relation to governance in the region. Few would object to highlighting democracy yet care should be taken in using this as a pretext for a regional arms race – using the South China Sea as an excuse. While Mr Trump was testing his ‘America First’ foreign policy, Japan, Australia and Singapore preferred a return to the drum-beating US ‘pivot’. Cheng Hong (East China Normal University) saw the comment as directed to the US in relation to so-called shared values. Ms Bishop’s ‘bold’ calls for democracy in China and ASEAN have boosted calls for foreign aid cuts and more regional engagement to balance China. In a major speech Ms Bishop: (a) warned China that it could not reach its full potential without moving away from authoritarianism; (b) encouraged ASEAN countries to foster democracy and (c) called on the US to increase its Asia-Pacific engagement. Euan Graham (Lowy Institute) noted that the South China Sea was not mentioned – indicating that the main emphasis is now on alliance building. China is investing increasingly in SE Asia (eg via massive loans for infrastructure) which undermines those countries’ ability to stand up to China’s lawless island-building in the South China Sea. The Trump administration has not defined its Asia policy – but would not pursue Obama’s ‘pivot to Asia’ (Callick R., and Riordan P., ‘Puzzled’ Chinese take issue with ‘bold’ Bishop’s speech, The Australian,, 15/3/17)

Suggestions about the nature and cultural foundations of China’s current non-democratic and illiberal system are outlined in Understanding East Asia's Neo-Confucian Systems of Socio-political-economy (2009) while the nature of the international order that China apparently aspires to create on a similar basis are suggested in Creating a New International 'Confucian' Financial, Economic and Political Order (2009). Official failures to even try to understand the practical consequences of traditional social organisation and ways of using information in societies with an ancient Chinese cultural heritage have been chronic and disastrous (eg see Babes in the Asian Woods, 2009+, Australia in the Claytons’ Century, 2012 and The US’s Most Significant Intelligence Failure? 2015).

China’s Foreign Ministry was correct in pointing to China’s emphasis on involving others in discussions and implementation related to world affairs. However it was not completely open. The ‘others’ involved in discussions would be social, political and business elites who accepted China’s dominance. And China’s unrepresentative political elite would be the ones who: (a) organised those discussions and controlled the way conclusions were implemented; (b) benefited in diverse ways from a renewed ‘middle kingdom’ (ie coordinating / organising) role; and (c) encouraged the spread of misinformation and disunity in other countries through their social networks so that alternative systems of political economy were weakened. China claims to be encouraging its private sector to take a more significant economic role, yet China does not really have a ‘private’ sector. Rather it seems to be a corporate state (ie one in which the ‘private’ sector is expected to act as an extension of the state in the much same way that this was expected in the Axis powers in the 1930s and 1940s). Those from tributary states who participated in ‘implementing international affairs’ under a China-centred neo-Confucian international order would presumably be subject to similar pressures to conform.

The Foreign Ministry also said nothing about the fact that China’s system is in some danger of failure. Its system of socio-political-economy seems to make it structurally impossible to avoid rapidly building up national debts if economic growth is to be strong, and to face political instability if growth weakens (see China as the Failing Hegemon: The Need for Global Cultural Understanding, 2017 and Reform Proposals in Early 2017).

However, so long as democracies remain as ineffectual as they have tended to become, China’s non-democratic and illiberal system could be seen by many to be a ‘least worst’ alternative. Some suggestions about how those problems might be reduced were included in a now-somewhat-dated document on my web-site (Australia's Governance Crisis and the Need for Nation Building, 2003+). The latter suggested, for example, that it might be desirable to promote up-to-date and realistic public understanding of policy issues and use new methods to boost real-economy strengths so as to allow politics to be about sharing, rather than cutting, benefits. Democracy became the basis of government in the UK in the mid-19th century because it was a way of promoting the public interest and reducing the social inequality that a competitive market economy generates.

John Craig

Housing Affordability is not the Only Problem due of 'Financialization'

Housing Affordability is not the Only Problem due of 'Financialization' - email sent 24/3/17

Dr Dallas Rogers (University of Sydney) and
Dr Emma Power (Western Sydney University)

RE: Explainer: the financialisation of housing and what can be done about it, The Conversation, 23/3/17

You argued that ‘financialisation’ (ie treating housing mainly as a financial asset) erodes people’s right to acquire affordable accommodation. Increased provision of social and public housing was seen as a solution.

I should like to suggest that ‘financialisation’: (a) has not just affected housing; and (b) has adverse effects for reasons related to financial systems as a whole that need attention no matter what is done about housing.

My Interpretation of your article: A recent UN report on the right to adequate housing has identified the financialisation of housing (ie treating it as a commodity; a means of accumulating wealth and as a security for financial instruments) as an issue of global importance. Treating housing as a repository for capital rather than as place for habitation is a human rights issue. Financialisation of housing has been central to wealth creation in Australia since WWII. Governments have subsidised housing investment through tax incentives on home ownership (eg with capital gains exemptions, exclusion in pension calculations, negative gearing, tenancy policies favouring owners, less restrictive mortgage financing, first home-owner grants). This affects the benefits of property investment; the way people think about homes; and decisions about buying / selling. Owner occupiers / investors have benefitted most from financialised housing. Property owners are amongst the wealthiest in society. Foreign investment also affects housing markets. Children of those who rent or have large mortgages are increasingly shut out of home ownership. Pensioners face housing insecurity and difficulties in making ends meet. People living in ‘affordable’ social / public housing face disadvantages due to not building up capital and the risk of eviction. David Madden and Peter Marcuse have called for de-financialising housing by increasing public and social housing and an end to eviction / rehousing of public and social housing tenants. Rentals need to be pegged to income and new ways to finance affordable housing found. Private rentals also need to be more secure. Reform of tax system is also needed – slowly to reduce risks to current home owners and investors. Slow reduction in tax breaks should encourage investors to shift to other assets – and thus reduce current distorted investment patterns.

The ‘financialisation’ of assets has been escalated in recent decades by the adoption of ultra-easy money policies as the major method of counter-cyclical macroeconomic management. Decades of steady reductions in interest rate targets by reserve banks have provided relatively effortless returns to investors by increasing price / earnings ratios. This has distorted investment, ie investment has been biased towards assets likely to experience relatively risk-free financial capital gains such as housing and bonds. It has also significantly increased social inequality because: (a) investment in the ‘real economy’, which are more likely to boost household incomes, has been made relatively less attractive; and (b) the main benefits of rising asset values have been those who were already the most affluent (as your article noted in relation to housing).

There seems to be increasing agreement by analysts that ultra-easy monetary policies can help in the immediate aftermath of a financial crisis, but that their long term effects can be harmful (see Do Low Rates Help?). Problems that have been identified include: suppressing global economic demand (by encouraging ‘savings gluts’ in emerging economies that are the destination of those seeking high-yields in a low rate environment but face risks of financial crises unless they accumulate foreign exchange reserves); encouraging very high levels of government and household debts; stimulating asset inflation in developed economies, but limited real economy activity; and thus boosting politically-destabilizing social inequality and the risk of financial instability.

Normalizing interest rates (which the US Federal Reserve seems to be seeking) would help in reducing problems associated with the financialisation of assets. Because some assets have become very highly valued only because of ultra-easy monetary policies, normalization creates risk of financial crises unless the adjustment is slow (as your article noted in relation to housing without reference to ultra-low interst rates as a cause).

However there is a more fundamental issue requiring attention. International financial imbalances related to distorted financial systems in major East Asian economies gave rise to a need for ultra-easy monetary policies to sustain global economic growth in the first place. Reasons for this are suggested in More on: Should Donald Duck? Societies with an ancient Chinese cultural heritage have achieved economic ‘miracles’ by using financial systems in which profitability has not been a significant consideration in making investments. They thus needed to suppress demand to reduce the risk of financial crises. This created international financial imbalances and a global demand deficit that would have made global growth unsustainable unless compensated for by excess demand in their trading partners (especially the US). That excess demand could only be financed by easier monetary policies to allow household / government debts to rise and create a wealth effect due to rising asset values. The latter then led to distorted investment and long term social / political problems as noted above.

The US Federal Reserve is attempting to normalize interest rates. However eliminating the distortions in major East Asian financial systems that caused the problem in the first place is also needed (eg as suggested in International Regulation of Lending Standards and GDP is a Critically Important 'Sustainable Development Goal'). Reform is particularly important to Australia because of its economic relationships with China, and China’s likely inability to sustain strong economic and financial relationships because of the debt-crisis that its distorted financial system has produced and is continuing to produce (see China as the Failing Hegemon: The Need for Global Cultural Understanding and Inadequate Reform Proposals in Early 2017).

While it is highly desirable to consider issues related to housing affordability, it is essential to recognise that solutions are unlikely to be found by considering housing in isolation. Because ultra-easy money policies seem likely to have had the main adverse impact on housing affordability (and on social equality generally), reforms to financial systems are likely to bring the biggest benefits.

John Craig

End