We wrote a couple of weeks ago that Australia is perhaps in an enviable position. That thanks to our abundance of natural resources and our close proximity to Asia, the country could emerge from the global financial shenanigans in reasonably good order.
There were only a couple of minor little things that could stop that from happening.
One of those was if Australia pursued the same stimulatory (or inflationary, take your pick) path as the US and UK. Well, it looks as though the deal has been well and truly done.
The stimulus packages in December and February were bad news for the economy and specifically bad news for private enterprise. But they were still small enough that it wasn’t too late to turn back.
But now it seems that the bright lights of London and the G20 summit have convinced the Fairy Ruddfather that he needs to stand shoulder to shoulder with O! Bama and Gordon Brown.
“In both the White House and in No. 10, Australia has strong friends and allies who together will shape the content of this global strategy for economic recovery.”
In other words, “we’re with you brothers!”
And then you only have to turn to page 5 of today’s Australian Financial Review (AFR) to see Wayne Swan’s smiling chops as he pitches Japanese investors to buy up Australian government debt.
It truly seems as though they have learned nothing from the past. The US and UK are in this hole because they forgot how to produce things – how to be productive. Instead they thought being productive was too time-consuming.
Why bother setting up your own business or working when you can borrow hundreds of thousands of dollars and buy assets that always go up. Then you can just realize some of the capital and spend that. It was the Macquarie model at a micro level.
It worked for a time both for individuals and Macquarie, but eventually it was proven to be unsustainable.
The value of “things” can’t possibly rise forever without a break. It has now taken that break. But everyone is trying to stop it.
But still it isn’t too late for Australia. Although at the current rate of government spending it soon will be. Because even though the economy is trying to tell everyone to slowdown and stop, the hapless politicians are still trying to force-feed it.
A letter to today’s The Age newspaper sums up perfectly how governments has no idea what to do:
Fiscally confused
THE Brumby Government has just slashed my basic pay rise and told me to tighten my belt because of the economic crisis. The Rudd Government is about to give me $900 and has told me to go out and spend because of the economic crisis. Does anyone else wonder which decisions are for the benefit of the economy, and which are for the benefit of the government?
Leonie Dukes, Ringwood
We couldn’t have put it better ourselves. The only problem is that state governments aren’t tightening their own belts. They may be cutting pay rises but that is only so they can spend the money elsewhere.
Specifically to spend it on big infrastructure projects that will do little more than keep the inflationary fires burning, waste billions of dollars of money, and increase the debt and tax burden on taxpayers for years.
Odds are that foreign investors will happily tuck in to some Australian government debt. With interest rates higher here than in other comparable developed nations investors should see the debt as attractive.
The Australian government will then use this money to go on a spending binge to ‘stimulate’ the economy. But how will it pay the money back?
The government wants to spend money to ‘create’ jobs and ‘nation build’ but all it is really doing is debt building. The projects it has in mind are new buildings for schools and new roads and bridges. But where is the revenue stream from any of those projects to pay back the debt?
The answer is, there isn’t one. Even worse, these massive projects will gain short term electoral approval and they will be encouraged to take on even more debt for even bigger projects.
That will mean even more loans outstanding to China and Japan. Eventually Australia’s natural resources won’t be an asset anymore, they will merely be the means to repay debt.
The balance sheet has firmly become weighted down on the wrong side.
What Next for the Future Fund?
We’re not sure what’s going to happen to it, but its chairman David Murray has put himself about recently. We wonder if this is the first step in the transformation of the Future Fund.
If you recall, the Fund was set up to cover the underfunded public defined benefit pension fund. The main sources of the funding were from government profits (ie. It taxed more than it spent) and the transfer of the last batch of Telstra shares.
The first issue with the Future Fund is a moral problem of taking money and assets from the many and giving them to the few. The government over-taxed and instead of giving the money back to those that paid it, it’s set it aside for public sector employees.
In other words taking money mostly from the productive private sector (aside from taxes paid by public sector employees of course) and handing it over to the unproductive public sector.
Secondly, it’s taken an asset that was nominally owned by the public (not that we are in favour of state owned companies) and quarantined it to provide a benefit exclusively for the public sector.
Again, rather than selling it and distributing the proceeds back as tax cuts, it has kept the shares for its own benefit.
In addition, the whole concept of defined benefit pension schemes has been shown to be unsustainable over time. Actuarial models predicting life expectancies have been way off, and investment returns on the funds have also been way off – how else can the underfunding be explained.
Therefore, while the private sector has largely abandoned defined benefit schemes as unworkable, the public sector continues to enjoy the over-inflated payouts at the expense of the taxpayer.
So why the sudden increase in David Murray’s profile? He’s been pouring forth on the global economy, on the Australian banking system, and now according to The Age newspaper, credit ratings agencies.
Our guess is that with billions of dollars under management, and the clamour for more stimulus packages, the temptation for the government to dip into the Future Fund and spend it ‘in the national interest’ will be too much to resist.
Again, the taxpayer loses out as the government will need to keep taxes high and even increase them in the future to pay back all its debt – including the public sector pension liability.
Of course, we could be wrong, but we certainly know a fishy smelling rat when we smell one.
Other Stuff on the Markets
How quickly a new bull run turns bearish again. We warned last week in the Weekly Update to Australian Small Cap Investigator subscribers that the market had seen plenty of bull rallies in the recent bear market.
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