|CPDS Home Contact||Competing Civilizations Defusing a Clash of Civilizations? Discouraging Pointless Extremism The Second Failure of Globalization? (Beyond the GFC Restricting the Role of Financial Services) Are East Asian Economic Models Sustainable? Babes in the Asian Woods (China may not have the solution, but it seems to have a problem Getting out of the Economic Quicksand Soros might also see the world through blinkers) Fixing Economics New Economics: Some Pragmatic Suggestions Supporting the Disadvantaged when Government's Can't Afford to Do So The Resurgence of Ancient Authoritarianism in China Increasing Understanding of Secularism and Freedom Improving Democracy Should Donald Duck? Economic Babes in the Asian Woods Taking Political Populism to an Extreme is Arguably How Donald Trump Gets Away with It If You Are Right Australia is in Deep Trouble Australia Must View Chinese Investment and Other Activities Through a Geo-political Lens More on Rethinking the Government's Northern Development Plan Will China Again Become the 'Middle / Coordinating / Organizing Kingdom'? The Need to Understand China's Lack of Principles A Different Financial Crisis in Asia? Adapting to Changing Geo-Political, Civilizational and Economic Relationships Globalization has Been Under Siege for Years The Western Path to Progress It is the Economy, and It Needs More Than the PM's Attention Big Four Bank Chairmen Need to Get on with Federal Budget Repair Donald Trump is Not Alone in Facing Dilemmas China's Desperate Need for More Foreign Investment Can President Trump Contain China's Hierarchical Authoritarianism? Take a Closer Look at China Strengthening Innovation in Australia By Challenging Interests Who Resist Change The Need to Study More than the 'Origins' of Western Civilization Will Donald Trump Unofficially Accept China as the 'Middle Kingdom'? If There is Too Much Risky Debt, Why Not Do Something About It? Christianity is the Necessary Foundation for Applying Rational Thought in Practice Donald Trump and the US's Allies Need to Think About North Korea|
Seeking a Liberal International Order (Draft March 2010)
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.
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.
This document, which deals with both democracies worldwide and Australia in particular will consider:
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:
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:
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.
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:
Towards a New Economic Understanding
There have been increasing attempts by professional economists to revise their understanding of economics as a result of:
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.
In brief attention is drawn below to:
A highly simplified context to the need for a review of conventional economic understanding is presented below. This suggested that:
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+).
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:
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:
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:
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:
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:
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 (see Also Geo-political Indicators of a Potential Crisis)
Various observers have speculated about the decline of Western civilization. For example:
|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+)
Defending Australia from the Financial Crisis (2008) - Economic / Financial defenses
Babes in the Asian Woods (2009) - Understanding
Comments on Australian's Strategic Edge in 2030 (2011+) - Geopolitical
Competing Thought Cultures (2013)
Sources on Strategic Options
Competing Civilizations (2001+)
How Durable is Australia's Luck?
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 
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 
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 
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  [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 
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 
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 
By 2014 Australia had had 2 years of declining GDP / capita - and this perhaps explains its low consumer confidence 
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. 
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  [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 comparisons - 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 ratio is now 217% - overwhelmingly because of private debt. National debt totals about $3.5tr (comprising debts of commonwealth $284bn, states $231bn, non-financial corporations $1.06tr, households $1.7tr) while GDP is around $1.5tr. 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 in writings on what can be done to boost competitiveness 
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  [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 
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 
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 .
$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 
Australia's GDP growth in first quarter of 2014 exceeded expectations 
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 
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 
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 
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 
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. 
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 
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 
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 
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. 
Multinational who recently acquired Wesfarmers plan to repatriate profits overseas - because tax rates that are lower than those in Australia are available elsewhere 
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 
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)  [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 
Rising costs have killed off another potential $5bn gas project in Northern Territory 
The federal budget (to deal with deficits) has caused a significant loss of consumer confidence 
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 
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 .
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 
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 
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 
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. 
Even though Australia's mining investment boom will end, Australia is likely to experience a soft landing - because investment has been well directed 
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 
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 
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) 
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 
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. 
While the resources boom has ended, opportunities are emerging in other areas. Sectors of particular interest include: transport, food and beverages and information technology 
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 
While consumer demand is rising in Australia, only the rich are really increasing their spending 
Employment could increase strongly in Australia because, while the mining boom is ending it was not a large employer and residential construction has escalated 
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 
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 .
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 
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  [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 
Australia has gone from having second lowest unemployment rate in the English-speaking world to having the (equal) second highest 
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 
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 
'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 
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 
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 
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 
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 
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 
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  [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 
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 
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 ratio 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 
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 
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. 
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 
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 
The chairman of a Chinese agribusiness group argues that Australia can replace its China's stimulated resources boom with an agricultural boom 
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 
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 
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 
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 
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 
House, apartment and commercial construction have been expanding strongly - indicating that Australia is undergoing an economic transition 
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 
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) 
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 
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 
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.  [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. 
Australia is experiencing falls in real income. because of the ending of the commodity boom. This adversely affects consumption levels 
The US / China commitment to reduce the growth of greenhouse commissions could adversely affect Australia's steaming coal exports to China 
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 
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 
Australia needs to think seriously about its economic future to avoid falling behind - according to PM's top business adviser 
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 
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 
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 
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 
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 
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 
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 
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 
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. 
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 
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.  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 
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 
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 
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. 
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 
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 
Over 20,000 Australians are working in Silicon Valley because the environment there is conducive to entrepreneurial activity 
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 
Australia's coal industry [a major source of export income] is seen to be facing severe setbacks 
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 
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 
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 
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 channel 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 
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 
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 
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 
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 
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 
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 
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. 
A 35% downturn in mining investment and a 10% decline in other forms of investment is seen as 'recessionary' 
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 .
[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 
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) 
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 
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 
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 
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 
Many Australian companies are struggling to find revenue growth. Thus corporate earnings downgrades are increasing 
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 
Australia's banks see sluggish domestic growth because of a slow transition away from dependence on mining investment 
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 
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 
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.
A NAB survey of trading conditions showed an improving outlook in mid 2015 - after 7 slow years 
Consumer confidence in Australia is continuing to decline as it did in 2014 - and this is undermining efforts to reinvigorate Australia's fragile economy 
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  - 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 
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 
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 
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 
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 
Foreign investors are losing enthusiasm for Australian government bonds as low interest rate era ends, and Australia faces economic difficulties 
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 .
Private wealth in Australia is heavily concentrated in property - and this lack of diversification makes Australia vulnerable to increases in interest rates 
Australia has a large services' sector that is starting to perform well 
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 
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 
China's decline is at the worst possible time for Australia given the falls in domestic capital spending / investment and wage stagnation. 
Australia national accounts show that weak income growth is translating into weak household spending and business investment. Growth is slowest since early 1970s 
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 
Housing construction, which has provided support to Australia's economy as resource investment boom fades, is predicted to decline 
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 
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. 
Australia's economic growth rate has depended on population growth - and this is now easing 
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 
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 
Australia's economy is better than national accounts show - with growth in services, exports, confidence 
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 
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 .
A property developer argued that devaluation of $A will discourage foreign investment in Australia 
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 .
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 
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. 
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 
Australia's main trading partners face slowest growth since GFC but with no prospect now of counter-cyclical measures 
Improvements in batteries to store electricity are soon likely to make solar power competitive with or cheaper than that from coal fired power stations  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 
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 
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 
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 
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. 
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 
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 
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 
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 
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 
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. 2016 GDP is likely to be $1.63bn while private debt will reach $3.4bn 
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 
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 
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.  [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 ratio 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 
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 
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 
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 
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 
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 
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 
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 
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 
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 
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 
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 
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 
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 
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 
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. 
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 
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. 
APRA is more concerned about banks' risks associated with loans to property developers than it is about loans to house buyers 
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 
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 
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 
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 
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  [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
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 
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
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 
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 
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 
Australia has the potential for another 'mining' boom - related to
innovation in mining technologies 
Australia has the potential for another 'mining' boom - related to innovation in mining technologies 
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 
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 
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
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 
Australia major banks will probably need to further increase their
capital to remain amongst world's best capitalized lenders - according
to APRA 
Australia major banks will probably need to further increase their capital to remain amongst world's best capitalized lenders - according to APRA 
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 .
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 .
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)
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) .
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 
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 
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 
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 
In July 2016 it was noted simultaneously that: (a) business
confidence was rising - presumably because, despite uncertainties, firms
see their own prospects improving ;
and (b) consumer confidence was falling because of uncertainties about
the economic outlook 
In July 2016 it was noted simultaneously that: (a) business confidence was rising - presumably because, despite uncertainties, firms see their own prospects improving ; and (b) consumer confidence was falling because of uncertainties about the economic outlook 
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 
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 
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
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. 
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 
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 
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. 
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. 
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. 
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. 
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. 
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 .
Australia could experience a $100bn blow-out in government debt if optimistic Treasury forecasts about economic growth are not realised 
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).  [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 
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 
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 
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  [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 
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  [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 
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 
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 
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 
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 
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 
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 
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 
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 
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 
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 
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 
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 
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 
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 
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 
Trump's victory in US election will benefit Australia economically (eg large infrastructure investment which demands iron ore and coal) 
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 
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 
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.  (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 
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 
Non-mining investment has boosted growth in NSW and Victoria because of increased infrastructure investment 
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 
The founder of Atlassian has expressed concern about Australia's complacency on innovation, and suggested more emphasis on maths and science education 
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  [See CPDS comments in Adapting to Changing Geo-Political, Civilizational and Economic Relationships]
Australia's GDP declined in the September 2016 quarter 
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 
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. 
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 
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 
Regional towns in Australia are being reinvigorated because of increases in food prices 
Rising commodity prices will probably allow Australia to escape a recession (ie two quarters of negative growth) - just 
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 
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 
$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. 
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%. 
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  [CPDS note: To put this in context: (a) total foreign investment in Australia was reportedly $US537b in 2015  with about 13% ($95bn) directed to real estate ; (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) ; and (c) China's total foreign investment in Australia was $29.6bn in 2015 down from an earlier peak of $58bn pa) 
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 
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 
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 
Australia's dependence on borrowing to build homes has prompted warnings about attempts to tighten screws on fragile housing market. RBA faces difficult choice as regulatory efforts to cool market failed. Saul Eslake suggested that 10% property price fall was likely cause of next recession. Homes are now 52% of household assets compared with 33% in US before GFC. Leverage and risk built up in housing sector implies that household incomes could be affected and make a recession worse. $A fell as consumer confidence decline. Tight control on credit growth could adversely affect whole economy. Building / altering houses has been 15% of GDP growth 3 times its share of GDP. The number of new houses and apartments being built has risen from 141,000 in 2008 to 230,000 in 2016 - and employs 2/3 of construction workforce. APRA has been forced to tighten lending standards because government has not moved on tax concessions 
If Australia's debt-fuelled property boom proves to be a bubble, it will lead to devastating crash. No major countries' fortunes are so linked to property as Australia. It would be the result of years of government encouragement of banks to issue large quantities of cheap mortgages. [Mortgage debt has risen from 15% of GDP in late 1980s to 95%]. Over 20% of economic growth during past 4 years has been home building - spurred by rising house prices, population growth and ultra-low interest rates on which 600,000 jobs depend. And rising real estate prices underpinned the confidence that fuelled consumption growth. Whether this is a problem is hotly debated. A sharp fall in prices coupled with recession would obliterate household / bank / government finances as happened earlier in Spain, Ireland, US, Japan and Sweden. High leverage can cause things to become very ugly (according to James Kahn (NY economist who has studied crashes globally). Concern has been expressed by David Murray and Greg Medcalf. Jonathan Tepper (Variant Perception) concluded that Australia was in the grip of an historically unprecedented housing bubble. In Ireland, Spain and US house prices peaked soon after building approval permits fell sharply. In Australia they peaked in early 2015 and have fallen ever since. Melbourne and Sydney house prices rose 100 after 2008. Household debt has risen 3 times as fast as wages for a decade and is about 190% of GDP - the highest in developed world. 40% of outstanding $1.65tr mortgages are interest only - suggesting that expected capital gains were the basis of buying. No other banking system is so exposed to house lending. It is the only game in town. Most Australian wealth is tied up in housing and then in the shares of banks that lend for housing. On the other hand loan delinquency rates are low and Australia's banks are resilient. Australia's weather. lifestyle and relatively strong growth is making Australia more attractive as international travel costs fall. Foreign buyers (mainly Chinese) make 20% of purchases in Sydney and Melbourne. Tepper dismisses this in relation to housing market generally. Survey shows that 1/3 of those taking out new mortgages had not been completely truthful in loan applications. Shortage of supply is not the problem - surging demand is. New supply concentrates in areas where people don't want to live. A fall in mortgage rates from 5% to 4% would cause prices to rise 15%. Mortgage rates have fallen 3 times that much since 2011 - and thus has fuelled latest house price surge. A person earning $105,000 could borrow $980,000. House price and debt boom is just a continuance of trend that started in late 1980s - when house prices and credit decoupled from other relevant factors (incomes, rents, wages).. In 1988 bank regulators signed the Basel Capital Accord - which defined prudential rules that assumed that banks would not game the system for their own benefit. Basel rules arbitrarily presume some loans safe (mortgages to households and loans to governments) and require only 25%as much capital for such loans as for business lending. Business loans were 2/3 of total in late 1980s but only 1/3 now. This encouraged a rise in household debt and house prices - the main effect of which was to transfer wealth to property owners. Other economic distortions by government include implicit promises to bail out banks - which allows them to underprice risk and charge lower interest rates. Capitalism is meant to weed out unproductive and damaging businesses - but was prevented from doing so in 2008-09. Banks now can offer low cost funding to speculators who are unlikely to be able to repay their loans if markets decline - because their creditors / depositors know they will get money back regardless of what banks do. This provides a huge subsidy. APRA changes to limit risky lending will have little effect relative to Basel Accord. It tried to limit investor lending in 2014 and recently had to require interest-only loans to fall from 40% to 30%. Australia interest-only loans share are much higher than elsewhere. regulators can't raise rates or eradicate interest-only loans without damaging Australian economy. Regulators are seen to have been captured by banks. Australia sailed through GFC due to China's demand for resources - and has yet to experience sharp fall in house prices like that in US, Spain and Ireland 
Australians expect wealth in exchange for hard work - yet many are now finding it hard to get ahead. They are right to be anxious. The steady improvements in living standards are not guaranteed. Rapid technological change and mobile capital are disrupting established business models; wages are static while basics (eg energy and housing) are no longer cheap. Rising national debt makes Australia vulnerable to external shocks - yet mounting costs of government services makes debt repayment ever harder. Outlook is poor if challenges are not met. Taxes and energy costs will rise - driving up the price of almost everything. The alternative is to create an environment in which businesses thrive and government stops wasting money. The rewards would be jobs, higher wages, affordable energy and opportunity to pursue peoples' dreams . Overview: This statement is first stage of Shepherd Review commissioned by Menzies Research Centre. Australia can't stand still in in an era of market disruption and increasing international competition. It benefited from long period of growth and wealth generation. It must now capitalize on new opportunities and avoid complacency. Confidence in a Growing Economy: budget must be balanced and national debt repaid. Australia suffers structural deficit - given growing spending and an aging population. Australia relies on personal and corporate taxes more than most. Current government spending is unaffordable. Gross debt is increasing steadily - and structural deficit increases. Two key challenges are recurrent / unsustainable government spending and narrow tax bases. 'Unproductive' debt has risen because of legislative commitments to unfunded programs. Also Australia has an aging population which decreases revenues and increases welfare and other payments. The dependency ration was 7.3 in 1975 but will be 3.7 in 2025 and 2.7 in 2055. At the same time social security, welfare, defence and health spending will rise faster than GDP. Japan shows what can happen when pension costs rise as a share of GDP. Australia could suffer external fiscal shocks as governments AAA credit rating is not assured. Balancing the budget is vital to maintain AAA credit rating. Australia's fiscal challenge is worsened by reliance on narrow / volatile taxes that depend on world economic growth. 90% of revenue comes from GST and personal / company tax. And only a few companies and individuals provide most of the tax revenues. Australia's reliance on corporate taxes (17%) is double OECD average - and relies less on more efficient / less volatile consumption taxes. Effective and Accountable Government: Effectiveness of government programs is seldom reliably assessed. Inputs rather than outcomes tend to be measured - and little attention is paid to inefficient / duplicated spending between Commonwealth and states. Australia is low in WEF index measuring public sector efficiency. There is a significant vertical fiscal imbalance between states and Commonwealth. States' current position is better - but they face unsustainable increases in health and education costs. States rely on inefficient taxes. All jurisdictions rely on tax systems that confuse accountability and damage national economy. Vertical fiscal imbalances are higher in Australia than in other jurisdictions. There has been little comment on the consequent lack of accountability within the federation. Transfer payments must reflect values of fairness. Current transfers systems must change because of weakening tax base and aging population. Workforce participation is falling. Income support and work incentives are complex. Eligibility for entitlements is rising. Higher workforce participation must be encouraged. Income support is highly targeted and thus hard to understand / administer. Competitive Economy and Open Markets: Australia is a trading nation and needs competitive economy, open markets and free trade. There are challenges in maintaining a competitive economy (where innovation, productivity and growth rise). WEF ranks Australia's competitive as 21st - down from 16th five years ago. Decline is mainly due to taxes and industrial relations system. Major challenges are attracting foreign investment; maintaining free / open trade; encouraging innovation and investment. There could be a national funding shortfall if foreign investment continues to fall or a global freeze on capital movements as during GFC. 
Australia would be badly affected by an economic slowdown in China. If China's growth halved, Australia would be forced into recession - as it no longer has any ammunition to resist this. Effects would include: loss of national income; higher unemployment; a house price decline; sharemarket losses; devaluation of $A; reduced business profits / investments. A China crisis is not certain - but it has too much debt, is over-built, has overcapacity in many areas and an economy that still relies on stimulus. Compared with GFC in 2007-08 Australia's ability to resist recession is reduced by already low interest rates and $A, federal deficits, high household borrowings. Alternative scenarios can be developed that are far more promising 
If $A loses its status as high-yielding currency it could fall to US62c (generating a significant inflationary shock) and force RBA to raise rates despite still-weak growth. Australia has offered higher interest rates to attract international capital - but the yield advantage is disappearing as US engages in monetary tightening while RBA keeps rates steady 
|Are Unfinished Apartments a Risk for 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 , 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 .
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  - 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:
^ 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 - email sent 12/5/12
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:
I would be interested in your response to my speculations.
|Must Authoritarianism Triumph This Time?||
Must Authoritarianism Triumph The Time? - email sent 26/8/13
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.
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.
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:
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:
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
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.
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:
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+).
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:
The dominance of democratic capitalism had started to be seriously challenged after World War 2 when Japan:
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:
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.
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).
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:
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).
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:
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 
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 
Viability of Democratic Capitalism
Restoring The Viability of Democratic Capitalism - email sent 8/5/14
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.
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:
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:
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.
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.
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.
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:
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.
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 .
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:
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.
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).
Many observers seem to have increasing concerns about this situation. For example:
Anecdotes that the present writer was exposed to also pointed to a significant existing problem, eg:
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.
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.
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.
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
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) 
Other contending views on the subject have emerged.
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.
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.
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.
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:
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:
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:
Community-based initiatives (see also Supporting the Disadvantaged when Government's Can't Afford to Do So) would perhaps best involve:
If such initiatives are not taken, social dissatisfaction with governments' likely inability to meet community expectations could well result in political instability.
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
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.
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:
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:
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:
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.
|Don't Look at the Delirium: Look for Alternatives||
Don't Look at the Delirium: Look for Alternatives - email sent 26/8/14
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
|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
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.
|Standing Up for Freedom Before It is Too Late||
Standing Up for Freedom Before It is Too Late - email sent 22/10/14
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?
|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
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
|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.
|Piketty's Perspective is Too Narrow||
Piketty's Perspective is Too Narrow - email sent 5/1/15
Professor John Quiggin,
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
|Decline and Fall of the West?||
Decline and Fall of the West? - email sent 16/5/15
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.
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).
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
See also Should Donald Duck?
Dysfunctional Democracy - email sent 13/1/16
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.
|A Royal Commission and a Potential Banking Crisis at the Same Time?|
|An Authoritarian or a Liberal Future for the World||
An Authoritarian or a Liberal Future for the World - email sent 22/4/16
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.
Email From: XXXXX
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
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.
|Will Populism Fix What Ails Democracies?||
Will Populism Fix What Ails Democracies? - email sent 3/5/16
Professor Chantal Mouffe,
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:
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
|The Need to Look Beyond Neo-Liberalism||
The Need to Look Beyond Neo-Liberalism - email sent 2/7/16
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
|International Regulation of Lending Standards||
International Regulation of Lending Standards - email sent 12/7/16
Dr Luci Ellis,
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.
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?).
|A Made-in-China Disaster Waiting to Happen||
A Made-in-China Disaster Waiting to Happen - email sent 10/8/16
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.
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).
|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:
|Complicating Welfare Calculations||
Complicating Welfare Calculations - email sent 27/8/16
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:
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).
|International Dimensions of Perceived Banking System Problems||
International Dimensions of Perceived Banking System Problems - email sent 29/8/16
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.
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? ).
|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,
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.
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.
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
|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
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.
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.
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.
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.
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 have the potential to have severe effects on global economy.
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.
|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
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:
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.
Making Democracy Work Again
Making Democracy Work Again - email sent 27/10/16
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.
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:
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
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.
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
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).
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.
|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 
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  - 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  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  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
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).
|Will China Solve Australia's Housing Affordability Problem?||
Will China Solve Australia's Housing Affordability Problem? - email sent 11/1/17
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:
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.
|Capitalism is Not Where Reform is Most Needed||
Capitalism is Not Where Reform is Most Needed - email sent 12/1/17
Professor Klauss Schwab,
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).
Putting China-US Tensions in Context
Putting China-US Tensions in Context - email sent 19/1/17
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:
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).
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.
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.
|Building a Case for Democracy||
Building a Case for Democracy - email sent 18/3/17
Hon Ms Julie Bishop, MP,
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.
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.
|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
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.
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.
Reducing Immigration Would Not Just Solve the Housing Affordability Problem
Reducing Immigration Would Not Just Solve the Housing Affordability Problem - email sent 28/3/17
Re: A population crush is pushing up Australian house prices, New Daily, 21/3/17
I should like to support your contention that reducing immigration is likely to be the best short-term way to overcome Australia’s housing affordability problem, and suggest that it would have other current benefits.
As well as easing housing affordability problems, reducing immigration could be the best short term step to overcome the severe problems that observers have identified in managing urban and infrastructure development (see Bring Infrastructure into the 21st Century: Some Suggestions). The latter accepts that there are diverse institutional causes of problems in urban and infrastructure development that need to be fixed. However major institutional reforms will take a lot of time. In order to provide time without escalating crises, reducing immigration (and thus the pressure of rapidly rising urban populations) seems likely to be very helpful. It would not however be desirable for more than a few years because high rates of migration by younger people seem essential to deal with the challenge of an aging population.
It is noted in passing that your suggestion that China has ‘cut to a trickle’ the capital outflows that resulted in unrestrained purchases of some new housing may be outdated (see China's Clampdown on New Debt and Capital Outflows).
An Observer's View of Interest Group Opposition
CPDS' Comment; There is no doubt that Australia has again been headed towards a 'banana republic' status because of its dependence on economic growth driven by rapidly increasing population (and natural 'comparative' advantages'). Determined efforts were made in the late 1990s to avoid this through micro-economic reforms. However these were always going to be inadequate to make the necessary transition (see Defects in Economic Tactics, Strategy and Outcomes, 2000+).
As suggested in Bring Infrastructure into the 21st Century: Some Suggestions, there are options to do much better by authorizing the use of processes to accelerate the development of 'competitive' advantages. As noted in the same place, there has also been widespread interest group opposition to any such reform - which is the usual fate of societies that suffer a 'resources curse'.
|Cultural Intelligence is Needed to Frame Successful Strategy||
Cultural Intelligence is Needed to Frame Successful Strategy - email sent 7/4/17
Bernard F.W. Loo,
Re: Strategy – Not Weapons – Wins Wars, RSIS Commentary 6/4/17
I should like to support your contention that strategy (not weapons) is most likely to lead to success in wars – and to also suggest that the absence of relevant strategic intelligence is the most likely cause of poor strategy.
Your article drew attention to two situations (ie Vietnam and Afghanistan) in which superior weapons did not result in strategic success (ie winning wars).
The US’s failure to really understand the effect of cultural differences had a major effect on its failure in Vietnam. Its strategy was to support the South Vietnamese regime as a bastion against the spread of ‘Communism’. The trouble was that the ‘Communists’ were an ‘Asian’ variety that (like their current Chinese counterparts) were more ‘communitarian’ (ie oriented towards building on social relationships within communities) rather than ‘collectivists’. Social relationships between (say) employers and their particular employees were emphasised, rather than political relationships between separate ‘collectives’ of employees and employers.
The absence of strategic intelligence that took account of cultural issues was further reflected in the lack of US consideration of the nature of traditional East Asian ‘Art of War’ strategies. The latter emphasise deception and ‘winning beforehand’ and off the battlefield. Mao Zedong had won China’s Civil War in 1949 by first winning the support of local leaders in the country side as a base for overwhelming the cities. Ho Chi Minh did the same in Vietnam. Traditional East Asian ways of thinking tend to be more about dealing with the whole of a system and strategy involves pre-building a system of relationships that will impact on where a ‘battle’ may ultimately be fought. Western strategists have tended to focus more on individual things that they might bring to a battle (eg the weapons and tactics) rather than on affecting the environment in which it might take place. In order to have been more successful in Vietnam the US arguably needed to Look at the ‘Forest’ Not Just at the Trees. There was a top-level US desire to 'win hearts and minds' in Vietnam, but on the ground a naive slogan seemed to dominate: 'get them by the balls and their hearts and minds will follow'.
Will the US now take a broader approach? If the US has remains narrowly focused (as the Trump administration seems likely to) it will clearly not understand China’s current (indirect) approach to winning an even bigger strategic contest by building relationships with local leaders worldwide who are prepared to accept a tributary role. However some US strategists will presumably have learned something from Vietnam and Iraq. The latter also showed that the ‘wheels can fall off’ if proper account is not taken of the implications of non-Western cultural traditions (see Fatal Flaws). The notion of ‘strategy’ in the corporate world has changed dramatically in recent decades – so perhaps it will also have changed amongst some US strategists concerned with how to win geopolitical contests. Time will tell.
|This is Hardly the Time to Be Timid||
This is Hardly the Time to Be Timid - email sent 5/5/17
Senator Penny Wong,
RE: This is hardly the time to be timid in our region, The Australian, 2/5/17
There is no doubt, as your article suggested, that Australia needs to do things differently in a changed world. However there is a need for serious consideration of what should be done, not just conformity with what aspiring powers such as China and India (or established powers such as US) might prefer. Reasons for this were alluded to earlier in Malcolm Turnbull Needs to Get with the New Reality: But What Will That Reality Be? and The Risks from China and 'Trumponics' Both Matter.
I should like to suggest that the uncritical compliance with China’s plans that your article advocated would not be in Australia’s interests. For example:
In developing a response to the changing international environment, Australia would probably be well advised to collaborate with nations worldwide who share Australians’ vision of a desirable world – not just with ‘major powers’. For example, Australians value an egalitarian society – but this is by no means universal (eg see Communism Versus Confucianism: The Continuing Contest in China, 2011).