The government giveth, and the government taketh away. Usually, the government just taketh away. But yesterday’s move by Federal Communications Minister Stephen Conroy tooketh away almost two billion dollars from Telstra’s market cap. That’s an impressive taking away, even by government standards.
The move we refer to is the forced breakup of Telstra’s retail and wholesale businesses. It will separate Telstra’s physical network from the services side of its business. The Minister announced legislation to achieve the split yesterday – and he did not make it in the form of a request.
We suppose Telstra doesn’t have too much room to complain. If you profit because the government gives you monopoly status, you can’t very well go and complain when the government (your former benefactor) changes its mind. This is why doing business with the government is so dangerous. It can change its mind…and the law…leaving you with no recourse.
But if Telstra the company feels hard done by, imagine how investors feel who paid as much as $7.40 for shares in the company when the Howard government sold off the government’s stake in parts. The shares closed yesterday at $3.11.
And before we forget, do you remember that the Future Fund sold 684.4 million shares of Telstra at $3.47 per share on August 20th? It netted the fund $2.37 billion. The shares were sold via a placement to institutional holders. Hmm. So what to make of this?
Well, one way of looking at is that the Future Fund has profited while private investors haven not. Remember, the Future Fund was been set up to manage the pension liability of public sector employees. By our reckoning, the Future Fund would have made at least $250 million less selling its Telstra stake if it sold it at yesterday’s closing price – after the government plan took a wrecking ball to the shares.
Mind you, no one forced anyone to buy Telstra shares when it was sold off to the public. You might be in for a spot of bad luck if you belong to superannuation fund that bought the Future Fund’s Telstra shares last month. But then, we’re not suggesting the private funds would have known ahead of time they were going to lose money on the shares. That would have been a bad deal, even for them.
But it’s hard to see that the interests of government employees seem to have been looked after in the last month quite well, while private investors who got into Telstra years ago continue to take a pounding. It makes you wonder…what did the Future Fund know and when did it know it?
And also, is this more evidence that we don’t live in a capitalist world or a socialist world but in an oligarchy? Are we moving to a world where the most job security and financial favour comes from being on the government payroll? What a world that will be…
By the way, the breakup should be better for consumers. The only real argument for a telecommunications monopoly in the first place is that Australia was never a big enough market to support multiple telecom companies capable of making the capital intensive investments to build nationwide networks. So the government picked the winner and backed it.
Even though it’s an island, there are now lots of foreign firms and capitalists willing to compete with local entrepreneurs. The argument for preserving Telstra’s legally mandated near monopoly evaporates. Consumers ought to get more and better services at lower prices. Here’s hoping it works that way.
And while we’re on the subject of government and absurdities, make some time to read Dr. Steve Kates’ article in the Australian earlier this week about GDP and recession. His article points out how handy a classical economist can be in a debate and how ridiculous is the government’s claim that the Aussie economy is better off because of the stimulus.
The first thing you try to do when you win an argument is control the definitions. Words and ideas are the “battle space” of public policy. If you control the definitions, you control the high ground of the engagement. That’s why names have consequences. It’s also why it’s interesting that the naming of things is one of the first things Adam does.
The government wants to equate avoiding a technical recession with doing something good for the economy. But as Dr. Kates points out, GDP measures the level of economic activity, but not necessarily the quality. He shows that there are three components of GDP measurement; spending, production, and the distribution of business receipts (through wages and investment).
By two of those three measures, Australia did have a recession. It only avoided a technical recession because the government stimulus spending – borrowed money that adds to the fiscal deficit – created the illusion that a dollar of public money spent creates a dollar of real economic growth. Although Dr. Kates doesn’t say it, we will: that’s bogus.
Spending borrowed money does not make an economy more productive or create new assets. To say it does is like saying that running in place can get you from point A to point B. Your arms are pumping. Your legs are driving. You’re literally going through the motions. But you’re literally going nowhere. It’s all heat and no motion.
Dr. Kates puts it this way, “While the stimulus package appears to have been able to distort one of the three sets of national accounting measures we use, beneath it all the Australian economy, in keeping with the rest of the developed world, has gone through a recessionary phase from which it is only now beginning to emerge.”
As you can see, there is still heaps of deliberate misinformation or just plain stupidity about the wisdom of fiscal policy. But along with bankers who had access to nearly infinite leverage, its these free spending politicians their interest rate fixers at central banks who created this financial albatross that hangs around the neck of the real economy. Do we really expect them to tell us how bad it is, or how much worse it could get?
If you’re looking for an explanation (and a prediction) of where we really at, mark Wednesday, October 14th in your calendar. At 6:30 pm that night Professor’s Michael Hudson and Steven Keen are going to “Lift the Lid on the GFC” at an event at the Melbourne Town Hall. It’s free, but you’ll have to RSVP to reserve a spot.
We haven’t met Professor Hudson in person yet. But along with Steve Keen, he’s one of the straight shooters on what got us into this mess. They’ve both written quite a bit over the last few years, and in clear terms that challenge the conventional wisdom.
And if you’re not in Melbourne there’s good news. It looks like similar talks are on the calendar for Brisbane, Sydney, and Canberra. You can find details on the events here.
Your editor is on his way to Paris today for a meeting of international financial publishers to discuss the state of the industry. We’ll be in the air for the better part of the next day, but will check in with you when we get to France on Thursday morning. Until then…
for The Daily Reckoning Australia