Australia’s Economic Growth Model Is A Mess

Australia Economy

Markets didn’t do much overnight. Stocks were up, but not by much. The big mover was iron ore. It fell 8.8%…just as the government started to count the money.

In a sign of how pathetically short sighted our political system is, the recent surge in the iron ore price had the government spending the money before it came in. From the Sydney Morning Herald:

The federal government is cautiously eyeing a windfall gain from soaring iron ore prices in recent days, fuelling hopes of billions of extra dollars flooding into Canberra, but the financial improvement is not being matched by a rise in political certainty.

The high iron ore price would not only undo much of the downgrade of the budget announced in December’s mid-year budget update, but would go along way towards pre-election spending commitments, with potentially $6 billion to $9 billion flowing from higher company profits and corresponding taxes paid.

What is going on? What planet are these guys on?

The iron ore price has been in a relentless downtrend for years. Too much supply and falling demand mean the market is fundamentally unbalanced. Falling prices are the only mechanism that will restore balance.

Yet a bear market rally over the past few months has the government rubbing its hands together and hoping for a pre-election spending bonanza! What the…?

And just as this happens, the iron ore price tanks again, as the Financial Review reports:

Iron ore dropped on Wednesday, eroding Monday’s record surge, amid a revival in concern that global supply is outpacing demand.

Ore with 62 per cent content delivered to Qingdao fell 8.8 per cent to $US58.02 a dry metric ton, according to emailed data from Metal Bulletin. The price dipped 0.2 per cent on Tuesday after Monday’s 19 per cent rally to the highest since June. The retreat was preceded by losses on futures in Singapore and China.’

While the price is still reasonably healthy at around US$60 a tonne, keep in mind that the 12 month swap price is just over US$40 a tonne. That tells you the market expects prices to be much lower in a year’s time.

Yet our idiot politicians want to lock spending in based on another Chinese stimulus fuelled bear market rally.

Seriously, the economic incompetence and the undergraduate narrative is breathtaking.

This country is in a mess. We run an economic growth model based on a housing boom, which is based on the need for increased indebtedness. And as soon the price rises for our biggest money earner, iron ore, politicians want to spend the proceeds and help perpetuate the unsustainable model.

Why isn’t there more indignation in the media and electorate about this stupidity? Are we all that captured by the housing boom and ingrained in our prejudices that we can’t see what’s good for the long term health of the country?

I’m not pretending to be an unselfish altruist here. When I say for the good of the country, I think about the type of system my kids will grow up in.

What opportunities will they have? Will they be able to work and save and have the pride that comes with being able to buy their own home? Or, like many kids these days, will they have to rely on their parents to ‘get them into’ the market?

Or, if they can’t, will they remain renting serfs forever?

Peter Martin, writing in the Fairfax papers today, raises this very point. He asks whether the obsession with negative gearing is turning Australia into a nation of landlords and serfs. In the article, he quotes Liberal member for Bennelong John Alexander:

“Some have said we are on track to becoming a kingdom where the Lords own all the land and the biggest Lord will be King and the enslaved serf tenant is paying rent to the Lord to become wealthier,” he told the Financial Review. “Is that an over-dramatisation or is it very, very close to the truth?”

This is what happens in an overly financialised economy. It becomes overly reliant on debt based growth. The economy rewards the borrower speculating on higher prices (in Australia’s case housing) because it needs more debt to survive.

But as soon as we run out of punters unable to get into the game, the system will stop working. This is the point that my mate and co-editor Vern Gowdie constantly bangs on about. You can read Vern’s stuff here.

Are we running out of punters yet? I don’t know. But I do know that it’s one of the reasons why the government runs a high immigration policy. More people coming into the country need debt and housing. It keeps the economic wheels turning.

But the pollies neglect to spend extra money on important infrastructure like transport, schools and health. They take the dividend from population growth fuelled economic gains and fail to reinvest it in the economy.

Instead, they spend it on special interest bribes to win the next election. In the meantime, the nation’s economic structure continues to deteriorate. It’s a perfect recipe for long term ruin.

But don’t just take my word for it. Based on the recent economic growth numbers for the 12 months to 31 December 2015 reported by the Australian Bureau of Statistics, real economic growth came in at 2.8%. But economic growth on a per capita basis was just 1.5%.

And judging by the more accurate measure of economic growth, ‘real net national disposable income’, per capita growth declined by 2.5% over the year. So if you feel like your living standards are falling, well, they are.

But don’t ever expect politicians to point this out. They’ll do their best to make sure you have no idea. They’ll focus on the politics of greed…the politics of not giving a hoot about your kids. And why not? It’s working!

It’s been pretty much the same message, couched in different ideologies, ever since Howard was in office.

Sadly, it comes back to my standard saying. You won’t see real reform in Australia until we get a real crisis. And so, we watch and wait for the inevitable.

Greg Canavan,

For The Daily Reckoning

Greg Canavan
Greg Canavan is the Managing Editor of The Daily Reckoning and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails. For more on Greg go here.

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