Posts Tagged ‘SBS Insight’

Government’s contradictory messages

Wednesday, October 22nd, 2008

Back in Can China save Australia?, we mentioned about SBS’s Insight program, Greed. As we read the transcript of that program, we cannot help but realise that while the government officials are busy trying to deal with this crisis, they are sending out contradictory messages as a side effect.

For example, take a read at this:

JENNY BROCKIE:  But what sort of possibilities are we talking about here? I mean unemployment going up to 10%, 20% in the event of this taking hold in Australia? What could happen?

LINDSAY TANNER:  Definitely not. None of us can see into the future and the international crisis is obviously so unprecedented that it’s very hard to make predictions, but the fundamentals in Australia are very strong. We’re better off than virtually anybody else in the world to deal with these problems and we remain optimistic that we will be able to ride through this buffeting in reasonable shape.

On one hand, Lindsay Tanner ruled out the possibility of Australia’s unemployment going north of 10%. Yet, on the other hand, he said that no one knows the future and make predictions. If you notice, by saying “Definitely not,” he is already making a prediction!

Incidentally, in Jobless rate may double as China slows, JPMorgan Australia’s chief economist Stephen Walters said that

“We now expect the jobless rate to more than double to 9% in late 2010, from the current 4.3%,” Mr Walters said. “Softer growth in one of Australia’s leading export destinations means Australia’s export volumes will be lower, as will be the terms of trade.

“That said, on our forecasts, there will be 1 million unemployed Australians by the second half of 2010.”

The current way of measuring the employment rate includes those who are under-employed (see Nearly 600,000 Australians under-employed). When the economy slows down, it is those kinds of jobs that will be shed first, especially jobs in businesses that depend on discretionary spending (e.g. retailing). Therefore, a figure of 1 million unemployed people is not so unthinkable after all.

The next contradictory message from the government is on spending:

JENNY BROCKIE:   OK, there are quite a few things in what you’ve said that I’d like to pick you up on because we live in very contradictory times at the moment. You’re saying we should be thinking about thrift. You’ve just released a $10.4 billion package and you’re telling people to go out and spend. I mean, should Siobhan keep spending, keep getting into debt? What’s the message the Government is sending at the moment?

We believe that the government’s $10 billion stimulus package is a misguided Keynesian policy that will not solve the problem.

Firstly, as we said before in Will Australia?s own pump-priming work?, it is far too little to combat the deflationary force.

Secondly, even if it is big enough to induce the masses to spend, it is the wrong medicine. If such policies are carried out to the extreme, the outcome will be hyperinflation (see Bernankeism and hyper-inflation). As we explained in Supplying never-ending drugs till stagflation,

Students of the Austrian School of economic thought will understand that indiscriminate ?printing? of money will worsen the plague of mal-investments and structural damage in the economy. Like drugs, the more you ?print? money, the less effective it will be in stimulating economic growth (see What causes economic booms and busts?). Eventually, it will come to a point that the economy will not respond positively anymore no matter how much money is being ?printed.?

Without the liquidation of mal-investments and restoration of the structural imbalances that is brought about by deflation, applying bigger and bigger stimulus packages will only function in similar ways to drugs- more and more for less and less effect. The reason why Keynesian reflationary pump-priming worked during the Great Depression was that it was applied after the cleansing effects of the deflation had done its work. But today, in reaction to the financial crisis, governments all over the world are doing so before the purge of fire. As a result, the much-needed economic correction that the economy had to have will not happen.

Can China save Australia?

Tuesday, October 21st, 2008

Today, we watched SBS’s Insight program, Greed. It is basically a small forum where audiences and experts mingle together and talk about the global financial crisis. Near the end, Peter Schiff said that Australia will be fine because China’s insatiable demand for commodities will intensify as the Chinese revert to consuming their own produce. This will intensify China’s demand for Australia’s commodities, which means that Australia will be in a very safe position.

Here, we disagree with Peter Schiff. Our reasoning goes like this:

  1. Yes, in the very long run, as we said before in Example of a secular trend- commodities and the upcoming rise of a potential superpower, China’s demand for commodities will continue to grow. But the question is what happens in the interim (i.e. the short to medium term). The worst case is a epic bust for the Chinese economy (see Can China really ?de-couple? from a US recession?). The best case is a slow-down. In between these two scenarios is a major Chinese economic correction. Furthermore, we believe that this slowdown could be within the designs of the Chinese government in order to achieve their long-term plans. We will talk more about it in the coming articles.
  2. Australia has a very highly leveraged economy (see Aussie household debt not as bad as it seems?). It is this high leverage that can be the undoing of Australia’s economy in the interim.

This is a subtle point that eludes many people, including the experts. Sure, the end point may be a paradise in the mountain peak. But it is a mistake to assume that the path to the mountain peak is an upward slopping straight line. The current high leverage of the Australian economy can pull us down to a deep valley of hell in the interim. The problem is, many will not survive through the valley and for those who survive, they will be transformed (and even scarred) by the experience.