There is something really distasteful and perverse about the amount of attention the Australian press dedicates to analysing the government’s annual budget. It’s obscene in some undefined way, and offensive at some visceral level we can’t quite define.
Maybe it’s the implication that state tax and spending policies have such a huge sway in our everyday lives that we have to pay attention to them whether we like or not. Maybe it’s how seriously the politicians take themselves while exhibiting a comprehensive level of stupidity about markets.
Either way, the whole thing makes us want to gag. Literally, the gorge is rising in our throat just thinking about having to analyse it. So we won’t. You can read that everywhere else anyway. But we will confine ourselves to two things you should know about yesterday’s fiction announced in Canberra.
First is that it projects a return to surplus in 2012 and 2013 – three years earlier than last year’s budget – based on a tax it hasn’t passed and assumptions about wage and employment growth that haven’t happened and probably won’t, if we’re right about what’s going on in China.. And lest we forget with yesterday’s fiscal triumphalism, the so-called improvement in next year’s figure is STILL at $40.8 billion deficit. That’s a fail.
The current Prime Minister, Kevin Rudd, took the airwaves to explain why the deficit was necessary in the first place. “Remember,” he intoned, “the job of government when the private economy is under stress is to expand the role of government so that we keep people in jobs.”
Gag. With policy makers like this, who needs morons? It’s odd that so many people still celebrate a return to deficits and wasteful government spending as a policy triumph during the GFC. You could only really say this if it wasn’t your money that was being wasted.
Keeping people in jobs might help you win elections. But the government ultimately reduces the productivity of the economy and the growth of the work force when it consumes a larger share of private capital. The Prime Minister’s position is textbook sanctimonious Keynesianism, so we wouldn’t expect anything less from someone who believes in government more than he believes in markets.
At least he’s consistent. But it does show, in our opinion, how little he understands about wealth creation and how little he respects wealth creators. To be fair, he IS proving to be a first class wealth-confiscator/redistributor.
But the real blind-side in the budget forecasts and the second big point is what Wayne Swan calls the “commodity boom II”. That’s the projected scenario where GDP grows faster than expected over the next three years and terms of trade drive return to 60-year highs and produce huge growth in national income and where the resource rent tax captures a “fair share” of rising resource prices for the government to parcel out like a haughty but benevolent Auntie on Christmas Day.
Good luck with that. Obviously our position on the durability of the China-driven resource boom is now a matter of public record. If you haven’t seen the “Exit the Dragon” report yet, you can read it here. But yesterday’s budget simply highlighted how much the Australian political establishment is counting on China to deliver good times and delay tough decisions about domestic spending and the realistic services Australians can expect from their government in the coming years.
As an investor and a free person, you don’t have the luxury of counting on China to solve all your personal retirement problems. So we’d suggest taking a closer look at them now and deciding if you can afford to base your retirement plans on forecasts that assume there is no credit bubble in China. If there IS a credit bubble in China, then the government’s forecasts and its projects are exactly what you’d expect: rubbish.
So is there a credit bubble in China?
“China’s Bubble Risk Adds Tightening Pressure Amid Debt Crisis,” reports Bloomberg . China’s accelerating inflation and surging house prices are adding pressure on policy makers to raise interest rates and allow yuan gains even as their concerns over Europe’s debt woes persist.
Property prices rose at a record pace in April, consumer prices climbed at the fastest rate in 18 months and new lending exceeded the forecasts of all 24 economists surveyed, figures showed yesterday.”
If you believe – all things being equal – that stock markets lead the economy, please note that the Shanghai Composite index is down 21% from its highs last November. It was down 1.9% yesterday. So is the stock market telling that China’s policy makers are going to tighten credit to pop the speculative bubble in real estate?
You know what we think. But tomorrow, we’ll answer some specific reader mail about why we could be wrong. Stay tuned.
Meanwhile, the euphoria from the ECB bailout announced over the weekend was short lived. The euro fell and gold rose to a record high in U.S. dollar terms as investors contemplated just what it means to print money and buy government bonds from banks. It means, most likely, a whole lot of inflation and an effective devaluation of the euro.
Nassim Taleb – whose second edition of “The Black Swan” we just got in the mail – says, “The crisis came from debt and you don’t escape it with more deb. We’re in a situation where we had a patient who we discovered had cancer a year and a half ago and all we’ve been giving the patient is painkillers. The tumor is getting worse because we are transforming private debt into public debt and public debt is not manageable.”
Investors increasingly understand this. The only ones that don’t seem to understand it are government officials. Tucked behind the walls of their sovereign castles, they seem oblivious to the precariousness of their financial plans and, indeed, the whole funding model of the fiscal welfare state. It’s failing and they’re fiddling.
Writing in Newsweek, U.S. economist Robert Samuelsson says, “The welfare state’s death spiral is this: Almost anything governments might do with their budgets threatens to make matters worse by slowing the economy or triggering a recession.”
“By allowing deficits to balloon, they risk a financial crisis as investors one day — no one knows when — doubt governments’ ability to service their debts and, as with Greece, refuse to lend except at exorbitant rates. Cutting welfare benefits or raising taxes all would, at least temporarily, weaken the economy. Perversely, that would make paying the remaining benefits harder.”
He was speaking of Europe, of course. But he might as well have been speaking of the U.S., the U.K. and Japan as well. Here in Australia, we predict there will be no surplus in three years. As the global cost of capital rises, Australia’s net foreign debt will increase, as will the cost of paying interest on it. And having banked too much on China and unintentionally sabotaging resource investment by an attempted looting of resource profits, the government will find itself with a lot less revenue than it expected.
And then just you wait until it will be compulsory for you to buy government bonds with your super annuation. It will be disguised as an “income security” measure. But by increasing your compulsory super contribution from 9% to 12%, the government is really only guaranteeing that it can confiscate more of your money to pay for future deficits, without your consent of course, and all for your own good.
But that’s for later! For now, investors still have time to position themselves for these trends and do something about it. Better hurry. If the last few days are any indication, it’s getting harder and harder to fool the bond market about the real state of sovereign debt crisis. It’s not good. And it didn’t get much better on the weekend.