“To return to the first of my two charts, the current divergent trends between income and consumption spending are no more sustainable than the previous trends ultimately were. At some point, the two lines are likely to stop moving apart.”
– Glenn Stevens, Governor, Reserve Bank of Australia
Is this the Reserve Bank of Australia (RBA) admitting there was a credit bubble?
Seems that way to us.
Finally confessing the credit boom during the 1990s and 2000s was unsustainable.
But here’s the thing…
The credit boom really kicked off in the 1970s. It picked up pace through the 1980s. Exploded in the 1990s and 2000s. And then burst amazingly in 2007 and 2008.
By our figures this unsustainable credit boom lasted nearly 40 years.
Yet the current period of slow credit growth has lasted… two years.
And think about it. Credit is still growing… just at a slower rate. This makes us wonder…
Unwinding the credit boom
If it took 40 years for the credit boom to burst, what’s to say it won’t take 40 years for the credit boom to fully unwind?
Look, we’re not saying it will take that long. It could happen sooner. And it could happen later. But the way we look at it is there must surely be an equal and opposite reaction to the boom.
The equal and opposite reaction to the credit boom of the 1920s was the Great Depression of the 1930s.
Remember how that turned out?
Clearly the RBA wants to paint a rosy picture. After all, they’ve taken the credit for Australia’s strong economic growth. And they’ve taken credit for supposedly steering the economy through the 2008 economic meltdown.
If the RBA now says things will go to pot for 40 years, well, how will that make them look?
Not good.
So, they have to say what all bubble deniers say: there won’t be a crash. Instead they talk of a “soft landing”… the market will plateau for a while before… it takes off again.
This the RBA think will make you happy. As Mr. Stevens noted:
“Suffice to say that this is, at least potentially, the biggest gift the global economy has handed Australia since the gold rush of the 1850s. Yet it seems we are, at the moment, mostly unhappy.”
A happy consumer is a spending consumer. And a spending consumer needs more credit. Which is exactly what every banker wants – re-ignition of the boom.
Mr. Stevens also said:
“If we want to sustain the rate of growth of incomes, and hence lay the basis for a return in due course to the sorts of growth of spending seen in the golden period of 1995-2005, we will have to look elsewhere.”
What he’s saying is Australia can’t expect the commodities boom to give the economy the same rapid boost as last time. That even if the boom continues the rate of the boom’s growth won’t. That makes sense. We’ve no quarrel with that.
The argument we do have is that the Australian economy can come up with another boom that will provide similar growth rates.
No magic pill to refuel the boom
Mr. Stevens thinks he has the answer: improved productivity.
Here’s what he said:
“The thing that Australia has perhaps rarely done, but that would, if we could manage it, really capitalise on our recent good fortune, would be to lift productivity performance while the terms of trade are high. The income results of that would, over time, provide the most secure base for strong increases in living standards. That sort of an environment would be one in which the cautious consumer might feel inclined towards well-based optimism, and re-open the purse strings.”
It’s tempting to say we admire the optimism. But we don’t. Instead we despair at the ignorance.
In all honesty we can’t see where the productivity will come from. Put simply, productivity comes from innovation. But innovation only happens if there’s investment. And the ability for entrepreneurs and business people to take risks.
Trouble is, investors and entrepreneurs will only take risks if they believe they’ll get a reward for the risk-taking.
If they believe red-tape and other factors will rob them of a reward then why bother investing or taking the risk.
Besides, the best productivity gains are in industries Australia has in short and falling supply – manufacturing and technology.
In other words, it’s hard for Australian firms to innovate and improve. Not to the extent needed to create another economic boom anyway.
The productivity numbers don’t stack up
You only have to look at one of Australia’s biggest sectors – the retail sector – to see the problem. According to the Sydney Morning Herald:
“Retail sales currently account for around 18 per cent of Australia’s $1.3 trillion in annual gross domestic product (GDP), but that is down from 23 per cent before the global financial crisis.
“The sector is the second-biggest employer with nearly 10 per cent of all jobs. But again its share has fallen in the last few years with health, professional and mining employment growing far faster.”
You could argue retail employers have tried to increase productivity by cutting jobs. But it hasn’t worked. Income for retailers has dropped five percentage points in just three years.
The fact is, without credit growth and an innovative economy, consumer sectors can’t grow.
That means if the retail sector is dragging its heels, other sectors will need to pick up the slack. But when you remember that all levels of Australian government make up around 30-35% of the economy, you’re relying on less than 50% of the economy to provide the productivity growth.
That won’t and can’t happen.
But even if there is some productivity growth, it won’t be enough. Certainly not enough to repeat the “golden years” of the 1990s and 2000s the RBA yearns for.
That means lower asset prices. It means lower wages growth. And it means a shrinking Australian economy. And that’s even if the resources boom continues!
When you hamstring an economy with red-tape, fixing it isn’t as easy as hoping for more productivity…
Investment and innovation is the key. Unfortunately, there just isn’t enough of it in Australia to keep the economy ticking along at the growth rate the RBA would like.
Cheers.
Kris Sayce
Money Morning Australia
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SV, how did Howard’s government work out? How many ministries did he cut? How many less public service employees were there when he started. What was his tax revenue as a % as GDP?
What they were the same as every other government? NO! Say it ain’t so!
Spot on Kris
Australia’s private wealth has been invested in speculation and unproductive assets such as real estate. The government drove this by tampering with super (removing security and forcing people to create wealth in other ways) and then placing wealth generating tax breaks in the form of negative gearing. Together, this has sold Australia’s future by making us a nation of gamblers looking for the short term wins.
Innovation rolls of the tongue, but it is as poorly understood as science in Australia – and it will need big changes to make it real. Most science will not produce breakthroughs. Government and industry in Australia are preoccupied with the idea that you can invest in a sure thing and determine a good outcome by management and planning. One dollar in, two out in a year. Australia is not a leading innovator despite the spruiking. The real history tells a far different story. Comparisons with many other smaller countries make us pale.
Real breakthrough ideas and products come by virtue of investing and believing in a science/innovation culture that is almost chaotic in outcome. In order to create true innovation, you need to support innovators in the way they need it – then trust it. It might not produce what you expect, but given time it will produce some things that do change the world. The history of science is that you ask one question and answer another. Many of the great discoveries are happy accidents. We have not come to terms with this.
We have been lead to believe that science can be directed, tamed and driven by business – a bit like real estate and mining.
However, if Australia were a nation willing to bet on science and innovation like they have bet on house bubbles and tax breaks we would be an extraordinary country. Seriously, nothing could hold us back. Government is too busy giving us what we want rather than what we need to be a great country. In reality every day we become a lesser place as the spruikers who make money tell us that all is well – and why would they not?
Without a real culture of investing in innovation we will become a backwater. This is no longer a possibility. It is becoming a reality. The energy in Asia is palpable and people understand and have a thirst for innovation. That Australians think that their university system will attract students in 10 years without a reason for doing so is laughable. That we somehow think we influence a lot of the world in innovation is wrong. Pound for pound the Kiwis kill us in innovation. Maybe we don’t like this, but it’s true. They win the only trans Tasman game that really counts!
Look at the pace of change. Can you imagine that in 10-20 years digging up rocks and real estate will be the key to a prosperous country? You think that Asian students will come and spend mega bucks for degrees because they like our beer and meat pies?
Things are going to need to change and this real estate stupidity should be where it begins. People, wake up! Real Estate agents and financial gurus are part of the problem. You are the other part of it if this is what you really value. Be aware of the future you are throwing away by the decisions you support.
For God’s sake, get rid of negative gearing. Protect super funds and produce a pool of funds to invest in our young minds and innovation. If you don’t, you don’t trust this country. If you don’t then the future is lost for your kids and I’m afraid we are all lost.
Spot on Alexander ,
I totally agree about negative gearing being the problem with house prices, however innovation and productivity just aren,t part of the Australian psyche yet, we are more Alf Garnett than Richard Branson.
Australia absolutely has to pull itself out of the 1970,s.
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