treasury
7 Nov 2008
The Rivers Of Gold Are Drying Up
As the budget surplus evaporates, will many of Rudd's election promises too — or does Wayne Swan have the political guts to run a deficit?
While most politically minded Australians were tuning in to the US election telecasts, Treasurer Wayne Swan chose the moment to reveal the Mid Year Economic and Fiscal Outlook from Treasury.It's not pretty. Australia's massive budget surpluses have evaporated in the white heat of the global financial crisis. The fat years of Australia's boom appear to have ended, and with them go a lot of the easy reforms that Kevin Rudd had been counting on.
Money has long been one of the chief policy levers of the federal government. Name a difficult policy area, and you can quickly find an accompanying federal bribe to make the whole thing stick: competition policy, automotive industry reform, tariff reductions, water policy, public hospitals, university infrastructure and, yes, even laptops for schools. And that's not to mention the huge pension and family benefits bonuses Kevin Rudd recently announced in the form of a special stimulus package.
For years, the Commonwealth could afford to do all of these things, plus shower taxpayers with annual tax cuts and family benefits payments, because the budget was awash in corporate and personal tax revenue. High commodity prices meant huge profits in the mining and resource sectors, which flowed through to the federal cofffers. As Ken Henry's tax review observed earlier this year, a growing economy meant low unemployment, growing GST and income tax takings, as well as low social security payments.
Now the economy is slowing, and the rivers of gold are drying up. Commodity prices are suddenly tanking, growth is slowing and unemployment is going to rise slowly. The result is that the budget will go from having fat surpluses to a serious case of anemia, and quickly. Wayne Swan may even have to announce a deficit next year.
You can just imagine the horror with which this news is being greeted by Kevin Rudd and Julia Gillard. Not only is the fiscal outlook deteriorating, but Swan's fumbling press conference on Wednesday now has many in the media speculating about his future in the job. On the policy front, nation-building projects like the Infrastructure and Education Funds were partly predicated on future surpluses. That money has suddenly disappeared. What should the Government do?
The answer is simple, actually: borrow money and keep spending. Thanks to Peter Costello's grave fear of it, the Australian Government has next to no debt. Consumers, on the other hand, are hocked to the eyeballs. Australia's households spent up big in the fat years, buying expensive houses for much more than they were reasonably worth, and running up some pretty serious credit card balances while they were at it. Now Australia's consumer sector is in the ugly process of de-leveraging, as belts are tightened to pay off debt.
Our Government has no such problems. It can borrow money cheaper than any business or family, and it has huge flexibility in its ability to repay it. In fact, no Australian government has ever defaulted — even in the Great Depression (although Jack Lang wanted to).
And this is precisely the point. Australia should borrow more to fund Kevin Rudd's infrastructure and education programs, because the long-term pay-off will be more than worth it. Fred Argy, who has worked as a senior official in the Treasury, made exactly this point in a recent paper. He called Australia's fascination with balanced budgets a "fiscal straitjacket".
You can almost hear the critics saying, "but what if we lose our AAA credit rating?". Indeed, the NSW Government has been "warned" of exactly this recently when contemplating whether to build its proposed north-west Sydney rail line. Actually, there's little chance of this. But even if there were, so what? Why the hell should we care what ratings agencies say? These are the same guys who told everyone that sub-prime mortgages were safe.
When you consider how ridiculously cheaply the Commonwealth can borrow, the shock-horror stories from the Opposition and its friends in the Murdoch press about a deficit are absurd. Sensible, well planned infrastructure not only pays for itself in increased productivity growth and a better functioning economy, it keeps on returning benefits long after the costs have been paid off. Australia's major cities are all serviced by dams built generations ago. The pipes in many of our cities were laid in the early 1900s. Most of Sydney's trains first entered service in the 1960s (and don't Sydney-siders know it!).
Much the same thing is true for Australia's investments in human capital. Our current higher education system was built predominantly by Menzies and Whitlam. For good or ill, John Dawkins further expanded the system in the 1980s. But there has been little investment in the sector since. Consequently, the academic workforce is ageing rapidly and many of our university's buildings are falling into disrepair.
In other words, large parts of Australia's economy are enjoying the fruits of capital investment that was paid off long ago. John Howard and Peter Costello were content to run down much of this infrastructure (except in defence, where they spent up big) and spend the proceeds of the boom on tax cuts for the middle and upper classes. Kevin Rudd and his Government now need to hold their nerve and keep their promises to rebuild Australia's public infrastructure. The penalty for not doing so will be felt in the decades to come.
What the government shouldn't do is worry about the political consequences of a deficit, as economic forecaster Chris Richardson pointed out yesterday. Of course, that's not easy. The Opposition and The Australian are already bleating about "fiscal irresponsibility" — but a deficit can be sold to the electorate, if properly explained. Some types of debt are sound investments, and it shouldn't be hard to argue that these include better education for our children and vital infrastructure for our railways and ports.
When Rudd announced his incoming Cabinet late last year, I asked of the new Treasurer: "If the economy runs into trouble in a couple of years time, will Swan have the guts to run a deficit? Let's hope we don't have to find out. " Now we are about to.
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Nice title Ben - when it comes to money a wad of paper really is outclassed by a nice bar of pure fine gold - hey Ben?
By the way, Steven Keen’s blog on this page :- http://www.debtdeflation.com/blogs/2008/10/06/debtwatch-27-october-08-th…
shows how even the good Dr Steven Keen is finally coming around and is finally "getting it". Here are Steven’s own words for you:-
"…it depresses me to say that I have actually started considering whether I might put some of my money into gold…"
And do you know why it "depresses" him Ben? Because it is really difficult to be brainwashed against gold by hokus pokus economics your whole life only to finally figure out the whole bunch of them have all been wrong since Lord Keynes baffled the world with his b/s.
No matter, Dr Keen has finally seen the light, and good on him too, just in time to get rid of that worthless paper and to convert to gold before the shtf!
One less person for our bankruptcy courts to sort out over the next few years Ben! Can’t have our leading economists on the wrong side of those hearings now can we Ben?
Say Ben, when do you think our Federal Government and our treasury are you going to come around and scrap this stupid central bank induced debt based monetary system for us all Ben? When do you think they are going to dissolve the RBA and restock our treasury with gold as a basis for our Dollar. That would really make our dollar "as good as gold"
You may want to join our Steven Keen and start alerting all your readers to the benefits of converting to gold as real money instead of all that paper debt which has got us into all this trouble we are in Ben.
By the way, Ben, you will find that there is a terrible shortage of bullion at present, so if you really want to do some "reporting" or some "real journalism" perhaps you may want to uncover, for your readers, the reasons behind this terrible shortage of bullion and discover for them some reliable source where they can all stock up and hedge against the very real possibility of this coming depression.
Thanks Ben, I knew you would finally see the light!
Rockjaw - believe it or not, I don’t actually support returning to the gold standard.
Quite apart from the fact that it would be almost impossible, given the current floating exchange rate for the Australian dollar, it also makes money supply dependent on a physical commodity that needs to be dug out of the ground.
What happens when, as may occur soon in the US and UK, serious deflation sets in? When interest rates reach zero, the only option for fighting deflation is printing money. This is rather hard when money is tied to gold.
I’m with Keynes on this one …
The great thing about gold is when everything collapses per Rockjaw’s dire predictions and he is sitting on a vast pile of Krugerand, he just needs a supply of milk. With a bit of sugar they taste surprisingly like cornflakes and hold their crunch to the last bite.
I’m sorry to hear that Ben, truly I am.
Printing money to create wealth is not the same as producing wealth the old fashioned way - through work and the production of surplus goods and services - because printing money is how we got into this mess in the first place and printing more money is only going to make the mess a whole lot worse.
"…Quite apart from the fact that it would be almost impossible, given the current floating exchange rate for the Australian dollar…" - you know Ben, impossible or not, if some of the participants at the current discussions concerning the "new Bretton Woods" have their way, we are just going to have to make it possible because it seems most of the SCO members as well as the Oil producing states have had quite enough of our worthless paper and they are seriously considering moving over to a currency with at least some asset at its base. This fact is no longer a secret and is already well documented.
Ben, if you are going to print paper in exchange for goods and services, sooner or later the poor schmuck who is producing all the goods and services is going to get sick of all the paper and he is going to want something a little more substantial in exchange for his products - I think we have already arrived at that point right now, don’t you?
I would personally like to know that I can offer him something a little more valuable than paper when he rejects Dr Dog’s paper and supplies me tonnes of cornflakes and sugar in exchange for bullion.
I suppose some people are simply never convinced until AFTER the shtf.
I guess we can always compare notes after the bankruptcy hearings Ben.
No Rockjaw, because money is *three* different things: a unit of account, a medium of exchange and a store of value.
If I can exchange my pieces of paper for bars of gold - and in 2008 in Australia, I can - then I don’t need to truck large treasure chests of Louis D’Ors around with me, now do I?
Last time I checked, the world is not wracked by hyper-inflation … so no, I don’t think the people producing goods and services will be asking for anything more liquid than paper money any time soon.
Dr Dog: I think I love you. I was going to say I knew what his hidden agenda was. And Lo! You said it a lot better than I could have. Olé.
Could someone please tell me why, all of a sudden, the Oz dollar is on a par, no less than, the money of Botswana Land, or Swaziland; or Pitcairn Island? What have they got that we haven’t got. I just don’t understand it. Another thing I am misinformed about. I thought that the overseas debt of Oz was meant to be horrific?
I just don’t believe Steven Keen would seriously consider a return to the Gold Standard. He was probably depressed at the time. I’m of the opinion that it’s the work that goes into the economy -minus the colossal debts which are allowed to occour- which counts, not the weight of the backing. BTW, I haven’t read anyone being in favour of returning to the Gold Standard.
If the return of the Gold Standard was to be remotely possible it would make far more sense to make it a diamond/ruby/jade standard. Merely on the basis of portability.
Based of what has happened in previous financial catastrophies, I’d think the market will-when it bottoms out- remain depressed for 5-10 years. Marginal goldmines will fold because they don’t have the output to sell at such low prices. And if things get as bad as some pundits are saying, we’ll be living a hand-to-mouth existence and incapable of carrying gold. What would really impress me Rockjaw. Would be for you to have your wealth in stamps.
Hey everybody: All the readers of NM could form a stamp club! Just kidding.
PS We’ve become such a Nanny State wherein all personal endeavour is throttled that we will never have the ability to fight our way out of this doozy.
I am not blaming the Rudd government. It just it is such a bleeding paradox. The more people being produced on this poor fragile planet: the easier it has become for governments-and their stupid lobby groups-to kick us into being a Nanny State.
Ben, nobody requires you to carry large bags of dubloons around to participate in a gold standard, and you know this to be so.
"If I can exchange my pieces of paper for bars of gold - and in 2008 in Australia, I can - then I don’t need to truck large treasure chests of Louis D’Ors around with me, now do I?: - Really Ben, you really ought to know much better than that.
The number of "pieces of paper" required for one ounce of gold has grown by 50% in the past few days/weeks already. Soon, you will need as much paper as it takes you to earn in a year to exchange for that same one ounce of bullion Ben - and we both know you are fully aware of that fact. That is when you really will know what the word "depression" means.
No Hyperinflation? Where do you obtain your data from?
Ben, I am sure you do not need an introduction to the name "Anna Schwarz", what with you being such a nice clean cut young and innocent Keynesian boy and all that.
Well here is a recent quote from that amazing woman on these topics:-
"…Since midsummer, Fed credit appears to have ballooned greatly and that’s behind the upward pressure in the Consumer Price Index. The Fed pooh-poohs inflation because of a perceived slowdown in oil and gas prices, but theoretically, any increase in a monetary base must be met with a tightening if inflation is to be avoided. Right now the Fed is pursuing a pro-inflation strategy by lowering interest rates and showering the banking system with liquidity. They’re not even considering inflation…" - really Ben, you ought to write that nice lady and apologise for embarrassing all those nice Keynesian economists with all your talk of no pending inflation when there is so much evidence to the contrary frontloading up the pipeline!!
Wall Street Journal also recently said this from Schwartz on the topic of inflation :-
"… Swartz said Fed Chairman Ben Bernanke, of all people, should understand this, Ms. Schwartz says. In 2002, Mr. Bernanke, then a Federal Reserve Board governor, said in a speech in honor of Mr. Friedman’s 90th birthday, "I would like to say to Milton and Anna: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again."
Ben Bernanke (and Secretary Paulson) not only will do it again, he has done it again - unless Congress acts here and now to stop him we will see a period of the worst hyperinflationary stagnation in our history.."
Anna Schwartz seems to get too Ben, and hey, she even wrote the book!!
Then there is the Keynesian’s "Pope", Dr Alan Greenspan, who said this in Belgium Ben:-
"You can’t create money without limit without consequences, backed by absolutely nothing. You can’t do that. There will be big consequences to that massive paper money printing" - and he said that just recently - remember this recent speech in Belgium Ben?
That does it Ben, I am all steamed up and hot under the collar now, I am going to rush off and buy another few kilogrammes of that barbarous relic to store nice and safely away in Singapore or Dubai.
Remember Ben, "buy an ounce a day to keep the liquidators away!!!"
Ahh monetarism. Apparently it can never die.
;-)
Ben, please give that lovely derivatives bubble the guernsey it deserves. It’s a doozey, and as expected, it’s a-blowin’ up. Where was it up to on that monetarist abacus again? Over the QUADRILLION mark?
But ah, "Jack Lang wanted to" declare the bankruptcy where it existed and nationalize fully! Yep, and he’d go for it again this time around, much to the oligarch’s eternal chagrin, even terror. Jack Lang was their ultimate Bogey Man, still the target of monarchists’ and speculators’ voodoo today in Australia. The derivatives bubble proves the system’s bankruptcy, so it is best to just go through the proceedings, while legislating protections for people involved in the REAL economy (you know, those who work for a living instead of sucking the blood of the same).
Does it ever occur to you guys how strange it is to keep the attention on government personalities and major party politics when those same circles refuse to actually take control of the finances? Notice how they refer to financial movements as though they’re dealing with unforeseen fluctuations in the weather! They’re never taking real initiative on the economy, but always reacting to vagaries of an unregulated finance sector.
If the politicos get the guts, the state can set the credit / interest rates at sensible, stable limits, with meaningful guarantees for infrastructure and associated national works. Just as the state can override processes of eviction and bank shutdowns where necessary to keep the society functioning. Instead, Rudd and Co gave us "destitution watch", where Lab reps report to Milky Bar Kid Kev on their constituencies’ respective saituations with homeless shelters and food kitchens. I bet that one went down a treat with those kings of ideological slapstick in the Ab-Fab society!
Ben: I think you missed the process at work now on hyperinflation. Notice that the oil price has plummeted, but keep in mind the reason why i.e., hardly anyone’s buying as the major centres of production and export are seizing up. The shipping figures alone are shocking. Therefore, the drop in oil prices is like the tide going out before a tsunami; it merely precedes the impending scarcity looming from the drop in production and trade - BANG! Of course, calling in the funny-money debt from the derivatives Death Star will really help that process along.
As I stated repeatedly before here: Weimar 1923, but global. The "leadership" (I use the term guardedly) elite refuse to do their job - unless that job is to try saving the rats on that sinking ship.
I think the Rudd government would be willing to go into deficit if the very biased Murdoch press and Turnbull, merchant banker extrodinaire and the bleating Bishop would not carp on and on. Somehow the government would need some positive support from some outside big guns amongst the policital commetariat.
If only it had been the nanny state we wouldn’t be in the state we’re in, with children dressed as adults throwing up all over the lounge-room after gorging themselves for 20 years on lollies and icecream. For that whole 20 years the newspapers have been howling in outrage at the idea that governments might spend money on anything. All that mattered was the credit rating, decided by the same wonderful people who set us up for the sub-prime mortgage fiasco by making the flimsy look solid, the sordid look respectable. We need more, not less, regulation. Bring back Nanny, pull some pants down and give her a wooden spoon.
KL Bedford Your corresponents are a peculiar lot. Swan giving his mid term address wedged between the American election and going to the G20 temporaily loses a paper which some media idiot has aked for, takes a bit of time to locate the answer amongst all his papers and suddenly he is part of a government that is falling apart. It reminds me of the responses the Labor Government was subjected to in the Whitlam Government by the usual conservative rabble who were born to rule. The current bunch and the media remind me of the Whitlam opposition bunch. The current Labor Government has run into a finacial mine field as did the Whitlam Government which ran into the oil shock. It is not of their making but very much of the conservative rabbles making. The all smirk and mirrors previous Treasurer did not detect the problem or did not disclose it. I expected it as I have never seen such a long boom since I first paid attention to these matters in 1949 so I knew that the slump would be large. My reading of JK Galbraiths book on the 1929 saw and sees elements of 1929 in what is happenning but the experience of what has happened should allow us to avoid the worst impacts of the current one. Going onto the gold standard is no answer and carping at the pepole we rely on to deal with it will certainly not help. I strongly doubt whether Turnbull or Bishop can help. I suspect we will get the best solution from the present government but I doubt whether your motley crew of odly named correspondents or the Australian Media will help or give them any credit for their successes
moggill - "It is not of their making but very much of the conservative rabbles making. The all smirk and mirrors previous Treasurer did not detect the problem or did not disclose it."
You don’t think our nice government would actually HIDE the truth from us do you moggill? Surely not! Especially with such crisp, sharp and bright "correspondents" to keep them on their toes.
I am, however, curious to know how you come to blame either the "conservative rabble" or any of our governments for this mess KL Bedford, since it appears more to be a bank induced failure committed from beyond the influence of any specific government, and on the back of a monetary system which is entirely unsustainable.
Mark Bahnisch takes up this topic in a post over at Larvatus Prodeo:
http://larvatusprodeo.net/2008/11/07/the-day-politics-changed/
Mark Bahnisch makes his point with confidence, but he is long on rhetoric and short on explaining exactly how the Rudd government will manage to stimulate the economy.
Mr Swan has already told us all that there is a $40 BILLION hole in our budget - and he should know! Like most of our Keynesian economists, he actually sounded SURPRISED!! Amazing.
Where was Mr Swan when Manly announced an exposure to $400 million of US subprime paper? The entire Keynesian community simply looked on in stunned silence and continued to woo their favourite girl, the "Goldilocks economy" - but she died a virgin only a few months later when news of $2.2 Billion dollars in losses was estimated throughout the length and breadth of Australia and the Queensland government admitted a $400 million loss in US paper.
Where is Mark Bahnisch expecting Rudd and Swan to fire up his proposed deficit? We are already out of pocket in foreign debts to the tune of $1 Trillion! - get you lips around that $1 T R I L L I O N!
Our current account deficit is already 6.5% of GDP (and that is a figure dating back to March of this year!)
Australia already has to raise $A5 Billion EVERY MONTH, from FOREIGN funding just to fund our CURRENT deficit and we are already rolling over $900 Billion annually!
We are bankrupt, and that is the reality which the Keynesians and the Marxists do not seem able to grasp, and bankruptcy is not a good condition to be in if you want to borrow more money!
We are soon to face an international balance of payments crisis as our vital earnings from our exports dries up. The foreign mining companies have taken us all to the cleaners as the profits from the commodities we produced are swept into banks on the Cayman Islands leaving us with the bills for the extraction costs.
Our economic twin, Canada, got the equation right, and they have managed to provide social services at a rate more or less similar to the rate of Canada’s capacity to produce and to pay for those services! Canada will emerge the wealthiest English speaking state in the world, and by far, as we languish in the death grips of our own spendthrift stupidity lending solid evidence to the accuracy of the adage that a fool and his money are soon parted.
Aussie households have gone from 165% debt to 182 % debt to GDP ratio. And the Keynesians want us to print up a new monetary storm? Take on yet more debt? When do these people suggest we should repay these already impossible debts?
10 years ago we had a 70% debt ratio! And Mark Bahnisch thinks the working Australian will be able to bail the government out? What bloody taxes? we already owe $1.82 for every $1.00 we produce, there is no more sweat left for taxes!
It is we, the Australian workers who need the bloody bail out, not that mob of snot nosed half wits in Canberra! If they carry on trying to milk any more from us, not only will there be no milk, but there is a very real prospect that blood instead of milk will flow.
If we can’t afford it why the hell are we spending all this money buying it?
Russia, China, certain European countries as well as various African and South American countries are whispering ever louder about putting an end to this debt based monetary system which has gripped the Anglo-Saxon nations of the world and if we are not very careful the remainder of the world might reject all our paper and demand real economic goods in exchange for their goods, services and loans to us. How many holes will we need to dig then?
Clueless!
Revenues will decline an estimated $4.9 Billion this financial year and a whopping great $12.9 Billion next year!! WOW!! And Swan presents these figures with a straight face?
If Mark Bahnish has any doubt about a recession, Wayne Swan will put to rest those doubts - Mark, we are not HEADING for a recession, we are already IN a recession, and as recessions go, this one is going to be one big mutha!
As for the rest of us it will bright and clear blue skies for all who have already converted their useless paper dollars to bullion and who have had the common sense to understand that to rely on the idiots in Canberra to manage our lives and our financial affairs for us is just downright bloody stupid!
Malcolm Fraser was right, if Hawke gets in we would have been better off putting our money under the bed.
Any way Gough’s old business associate, Khemlani might still be good for a loan, if not Leilani (who actually owned that horse) might have a descendant who could win a race or two, if you’re lucky.
Petro dollars, what are they again? maybe they will be like those woollies tokens , you know the one’s they put up the price by 5c a litre, before they take off the 4c.
As for Mr Swann leave him alone please, he is busily watching the fuel prices fluctuate.
Now we have’nt got the yanks to kick around anymore, we might just have to deal with our own home grown local issues.
The rapacious banks, the avaricious ATO and a public who think they are entitled to live the high life on what’s left after fags, beer and TAB. Maybe they can if they go to the Coogee Bay Hotel and order a S#!t sandwich and gelato and they mix up the order. $50000. I might even consider eating there for that kind of money.
Especially once the D word kick in.
Who will save us if we don’t save ourselves, Mr Obama or Mr Medvedyev?
The only thing we have to lose is our material wealth , when all is said and done it is only money.
The stimulus money is to keep consumers spending money on junk. We should evaluate the economy differently as it is addicted to growth. What say an interest rate of 7% so people are more likely to save and less likely to go into hock for overseas manufactured products or real estate bubbles. People will have to learn to save for things again instead of impulse buying.
Graeme - I believe yours is the only post which makes any sense