Don’t Forget To Get Rich


–Oh no, there’s been a huge China/mining boom and the government forgot to get rich! Treasurer Wayne Swan says Australia will experience “boom conditions without boom revenues” in the next phase of the perpetual Mining Boom. Tax revenues are already about $4.5 billion lower than Mr. Swan expected, thanks to people not going out and buying things they don’t need.

–Spare a thought for our own Greg Canavan who pointed out that resource booms tend to lead to underinvestment in everything but the booming asset class or sector (the Dutch Disease). In Australia, the mining boom has churned along nicely, with lots of capital investment, job growth, and wage growth. The worry now is that the rest of the economy may soon be headed in the opposite direction.

–The Treasurer essentially said even if the boom goes on (in terms of export volumes and values) all of the benefits have been enjoyed.  Oh really? He said, “During mining boom Mark I, revenues were boosted by a sharply rising terms of trade, rapid credit and consumption growth, rapid asset price growth, and solid corporate profitability across the board.

–Today, credit and consumption growth is slowing, the strong Aussie dollar is hurting exporters who aren’t miners, and the government has yet to find a way of getting its hand on the vaunted “rivers of gold” generated by the once-in-a-lifetime boom.

–Well that’s no good. You can’t have a once-in-a-lifetime boom and end up going from a big surplus to a big debt, can you? Or can you? Or how can you? Ah, yes you can!

–Mind you, it doesn’t bother us that the government doesn’t have a surplus. We don’t want the government to get rich because it means it’s taking a lot of money from everyone else. The idea that a big surplus is prudent management implies the government is entitled to tax revenues and is better at allocating capital than households or businesses.

–If the government has a surplus, it means it’s probably taxing too much to begin with. By the way, we exclude Wall Street as a better custodian of capital than the government because Wall Street’s primary function is to make itself rich, not to allocate capital from investors to good businesses.

–But on the subject of how to “manage a boom” our advice is to “get the hell out of the way and quit being busybodies and economic illiterates”. Of course that won’t happen. But don’t be surprised if any future Australian sovereign wealth fund winds up being compelled to buy government bonds in order to finance structural deficits.

— And if the money is directed to roads, bridges, home insulation schemes or other projects, it is sure to be mismanaged, wasted, or otherwise invested for political and not economic reasons. These people couldn’t run a lemonade stand. And they think they know how to “manage” a complex system like an economy? Hubris in pinstripes.

–It’s a truism that for most of us, expenses tend to match income. It doesn’t matter what your annual income is. You seem to find more ways to spend it so that the ratio between the two remains roughly constant.

–The only way to really change it is to live beneath your means and save and invest. This means delaying gratification and consumption. This might be confusing if you’ve been led to believe that consumption drives an economy. But it does not. Production does. And investment. And the accumulation of capital.

–If you can somehow reach “escape velocity” in your personal finances, you can escape the rigid grip of the income/expenses ratio. For the Baby Boomers, a once-in-a-lifetime inflation in house prices made this possible. This is why so many Australians are so resistant to the idea that house prices are in a bubble.

–For millions of Australians, buying a house helped them get rich, at least on paper. Property worked. There’s empirical evidence for millions of Boomers. It’s hard for them to imagine that what’s worked so well for 30 years might not work now, or work at all for the next 30 years.

–But households will adjust. When you are spending more money than you make, you either make up the difference with credit, or you find ways to cut your expenses and/or raise your income. That’s where most people find themselves today.

–The trouble for the Aussie government is that so many people are recipients of government welfare either directly (through the dole) or indirectly (through tax breaks and negative gearing). The government never manages to cut its expenses when its income drops. Instead, it tries to increase its ‘income’ by raising taxes.

–But somebody has to pay for things around here. We can’t all live at each other’s expense. If an economy isn’t creating wealth and value, it will eventually shrink. And if it overinvests in an asset class (as Australia has in housing) it makes the economy even more vulnerable (especially if its fiscal situation at the end of the boom is worse than its fiscal situation at the beginning of the boom).

The Australian Office of Financial Management (AOFM) is still using your money to subsidise the housing industry. A big tip of the cap to all those bloggers and know-it-alls who champion this cause. Non-bank lenders, or lenders set up by banks to suck at the government teat are selling residential mortgage-backed securities (RMBS) to the AOFM when proper investors won’t buy them.

–The AOFM has spent (borrowed?) $12.3 billion on 45 separate RMBS issuances since the program to keep the bubble alive and bankers happy began in 2008. It’s prepared to dole out another $7.5 billion (borrowed?) so that you don’t see a bunch of mortgage brokers begging for change at the junction between Punt Road and St Kilda Road.

–This is the kind of regulation that only price fixers and bankers could love. It’s nice to know that despite the entire GFC, the banks, the government, and the housing industry still know how to bleed the tax-payer dry and burden him with all the risk of irresponsible lending.

–China will save us! Or will it? New Beijing house prices fell a whopping 26.7% month-over-month according to Beijing’s Housing and Urban-Rural Development Commission. The same source reports that home purchases fell 50.9% year-over-year.  Pop!

–This information is probably not telling you what it seems like it might be telling you. There is no housing bubble in China’s big cities. The Chinese, like Americans and Australians, have a tradition of home ownership. It is a great national dream. And besides, as millions move from the country to the city, there is probably a big shortage of affordable housing, putting a floor under Chinese property prices.

–It is simply not possible that the massive price gains in an entire asset class could almost entirely be explained by a credit bubble.

–Finally, returning to yesterday’s question…if the Saudis are using oil as a weapon…who are they using it against? Well isn’t it obvious. Barack Obama!

–Our theory is that the Saudis are punishing Obama for being publicly complicit in the ouster of Mubarak in Egypt. From their perspective, what good is it having a friend if your friend leaves your side the minute your enemies show up? The Saudis could also be indirectly punishing Ben Bernanke, Timothy Geithner, and BHO for devaluing the dollar.

–However, our suspicion is that the decades-long agreement to price oil in dollars is breaking down on the Arabian Peninsula. One factor is the weakness of the dollar. A second-order effect is that a weaker dollar means a weaker America. And if the Saudi’s main security patron has neither the money nor the will to look out for their monarchy and their interests, it will start doing so itself, beginning with production cuts and higher oil prices.

Dan Denning
Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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6 Comments on "Don’t Forget To Get Rich"

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5 years 6 months ago

Please explain for me if you can because I do not understand.
Mining boom 1 ended when exactly ? And as a consequence when did mining boom 2 start.
I heard Swan talking about this on the ABC last night and pondered why it was the first time I had heard these terms mentioned.
Are they not just a political ploy to explain away the drop in government revenue?

5 years 6 months ago

Exactly right Joe. But that’s how it is in this Orwellian world. One day we’re at war with Eurasia, then the next day we’re perfectly allied with it (we always were you numb-skull!). One day we’ve got a mining boom and life’s dandy so let’s live it up like it’s 1999, the next it’s wrist slashing time, purely because that’s what suits the government to have us believe.

As for Saudis, Obama, Mubarak. As if!

Ned S
Ned S
5 years 6 months ago

Mining Boom I for Oz ended late 2008 didn’t it? Though in a lot of ways they pretty much did do the equivalent of spinning on a top for such orgs. Slash and burn jobs in the expectation of being hurt. With CQ’s alumina industry particularly coming to mind. Only to find China’s stimulus saved them maybe?

And in the interim lots of new deals have been signed for LNG and stuff. So Mining Boom II is regarded as being in the pipeline/anticipated I guess?

Matt Farmer
Matt Farmer
5 years 6 months ago


Please keep writing these articles they are music to my ears compared to the drivel put out by the media.

5 years 6 months ago

Great article Dan.

Thanks for bringing up the issue of RMBS. This is a tax-payer funded gift to the banks designed purely to prop up the housing market. After the lessons from the GFC, I cannot believe the government is encouraging the banks to on-sell mortgages and, therefore, lend without risk. I’m also surprised this hasn’t received more media attention.

I’ve created a GetUp campaign. Please all vote and spread the word!! We need the government to know they cannot continue to get away with discreetly pumping up the bubble, while crapping on about affordability.

5 years 5 months ago

“By the way, we exclude Wall Street as a better custodian of capital than the government….”

Hmmm…. Personal opinions really should not be used to cloud your judgement.

Wall Street (may as well include London) not good at allocating Capital? Really? Are you really saying that? Wow. Ignorance is sometimes bliss… but not this time.

“It’s hard for them to imagine that what’s worked so well for 30 years”

Yep. Property ownership is a recent phenomena. 30 years. All land investment goes only back 30 years.

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