economy
4 Mar 2009
Get Used To This Face
We're not going to be able to stop talking about the economy for some time, writes Ben Eltham. As Wednesday's figures show, Australia's downturn is only just getting started
The Australian Bureau of Statistics released its national accounts data today, which show that the nation's economy contracted for the first time in eight years during the December quarter, with GDP falling 0.5 per cent. We are on the brink of recession.
The rapidly shifting economic ground is transforming many of our shared assumptions about the politics of capitalism, based, as they were, on 17 years of growth and wealth creation. Despite going to the polls at the end of the second-longest boom in post-war Australian history, the Howard government managed to lose an election largely on the issue of industrial relations reforms which attacked the conditions and decreased the job security of workers.
Little more than a year later, companies are laying off workers in their thousands and both prices and economic growth are stalling. "Yes, times are tough," proclaims an ad for beleaguered car-maker Holden. When an advertising agency comes up with the idea of using an economic downturn to try and sell cars, you know matters are serious.
All of this suggests that the stakes for Kevin Rudd are serious indeed. While his Government certainly didn't cause the current recession — that was largely the result of problems overseas — he won't be able to count on voters to understand the nuances of economic causality if the recession is still biting in two years time.
And the chances are that it will be. As we have explored over the last year at newmatilda.com, the Australian economy is vulnerable to many of the ailments that have so sickened the US and European economies. While our banking system remains robust, our household debt and current account deficit are both worryingly high, and our export industries are vulnerable to falling production in the countries we trade with.
Times certainly are tough for the local auto industry, but the same can also be said for Australia's trading partners. As Wayne Swan rather plaintively pointed out yesterday, much of the rich world is in recession, and inevitably our economy is affected.
So far, we're doing much better than many first feared. As Reserve Bank Governor Glenn Stevens wrote in yesterday's announcement that the RBA was leaving interest rates unchanged, "in Australia, demand has not weakened as much as in other countries and, on the basis of currently available information, the Australian economy has not experienced the sort of large contraction seen elsewhere." Thank your favourite deity that we're not experiencing the sort of large contraction seen, for instance, in Japan, where an economy reliant on exports is suddenly plunging at an annualised rate of 12.7 per cent.
To make matters worse, the financial crisis in the US is far from over. The recent stock turmoil on Wall Street is in response to the uncontrollable haemorrhages at insurer AIG, which this week revealed it had lost an eye-watering $US61 billion in the three months to December, the largest quarterly loss in US corporate history. The sheer scale of the loss staggered markets worldwide and again forced the US Treasury to bail out the loss-making giant, which has now had so much public money tipped into it that it is essentially owned by the US taxpayer.
The AIG debacle in many ways encapsulates the story of the larger US financial crisis. The massive insurer is at the heart of the complex web of toxic financial instruments that have brought the world's financial system to the brink of ruin over the past 18 months. As Joe Nocera explains in the New York Times, it was AIG that offered and sold the now notorious credit-default swaps that many financial institutions used to insure their equally infamous collateralised debt obligations.
For this reason, President Obama's economic advisors, led by White House advisor Larry Summers and US Treasury Secretary Timothy Geithner, believe AIG cannot be allowed to fail — or even receive a downgraded credit rating. The result might well be a global implosion even worse than the crisis which followed the failure of Lehman Brothers in September.
The economic earthquake is changing the way economics is discussed by the media, politicians — and also by citizens. The current Queensland election campaign, for instance, has already taken on an unusually economic flavour for a state campaign. The election was called soon after Queensland was downgraded from a AAA credit rating by ratings agency Standard and Poors — a decision defended by Premier Anna Bligh as necessary to the continuation of her government's ambitious, debt-financed infrastructure program. Meanwhile, LNP Leader Lawrence Springborg has promised to slash $1 billion in public sector "waste" in order to pay down government debt and regain the much-coveted AAA rating.
Just why any Australian government should care about risk assessments by the very same ratings agencies which helped cause the current financial crisis is a question only John Quiggin seems to be able to ask. After all, no Australian government has ever defaulted on any bond debt — ever. Even so, Queensland's taxpayers will now have to pay more for their state's debt, owing to the ratings agency's decision. And the election is rightly being seen as a harbinger of what future federal campaigns might look like.
I went to a dinner party on Monday night in Brisbane. When it emerged that I am a journalist, one of the people I met there asked me if I liked Kevin Rudd. This is a question I am often asked when I tell people I am a journalist. For the record, I have never met Kevin Rudd and don't have an opinion on him as a person. This being a dinner party, I answered that I thought he was a "smart politician." I used to say this about John Howard too.
The next topic of conversation was Kevin Rudd's $900. My friends at dinner were rather horrified by the fact Kevin Rudd is giving away $900. One of them is on a PhD scholarship and so thinks she will not receive it (this is correct: she will not). Another was concerned that people would simply save it (the ABS data says we did spend the handouts we received in December), or that the money would go to things produced overseas, like flatscreen TVs.
Of course, dinner party conversations are well known traps for the journalist in need of an anecdote, but this story illustrates two broader points. Firstly, many people are confused about the current economic crisis. After decades of governments of all persuasions boasting about budget surpluses and being "economically conservative", few ordinary citizens understand the concept underlying Keynesian economic stimulus, even if they might intuitively grasp the idea of the paradox of thrift. Another example: because of the way the economic stimulus package was reported, my dinner party friends think that most of the $42 billion will go to the $900 payments, rather than to infrastructure projects like public housing and new buildings for primary schools, which is in fact where the majority of the package will go.
The second lesson I drew from this conservation was that the economic stimulus package is strongly identified with the Prime Minster. I hear people talk about "Kevin Rudd's $42 billion" and "Kevin Rudd's $900" quite a lot. This is a significant point, with both opportunities and threats for his Government. If Australia slides into a long and deep recession accompanied by a large government deficit and ballooning public debt, there is every likelihood that Labor — and Rudd — will be tarred with this association. Just think of the way that people still talk about "Paul Keating's 17 per cent interest rates."
But if Australia can somehow dodge the bullet, Rudd and Labor will have an excellent chance of repeating Peter Costello's boast after the 1998 Asian crisis that it was sound economic management that achieved this. In the meantime, the Rudd Government's strategists will be watching the Queensland result like hawks.
Delicious
Digg
StumbleUpon
Reddit
Newsvine
Facebook
Kwoff
Discuss this article
To participate in the discussion Sign in or Register
There is no way that Australia will "dodge the bullet". So,I suppose that Bligh displayed the rat cunning of her mentor,Beattie,in going 6 months early.
I have trouble believing that the Queensland sheeple have awoken to the possibilities of the coming economic meltdown.In that case other issues will predominate in this election.Not being an authority on the psychology of sheeple I have no idea what those issues might be.
What is certain,in my opinion,is that the Beattie and Bligh governments have been the most corrupt since the Bjelke Petersen shambles.
That said,a LNP goverment just might provide the new broom required.
Ideally,a minority LNP goverment with the balance of power held by the Greens and/or independents would provide a chance of good governance in a unicameral parliament with optional preferential first past the post voting - the least democratic in Australia.
Anyway,I am not holding my breath waiting to catch a glimpse of pigs sauring gracefully overhead.
Jane E
As I understand it, the whole accounting structure of nations (well, US, UK and AUS anyway) is based on something JM (later Lord) Keynes put together for the English to deal with World War 2. It reflects massive government spending on stuff which is expected to have a fairly high turnover rate (eg bombs), wage control, and a lot of voluntarism.
If you want a system that can deal with two types of energy constraints (peak oil and climate change), then I suggest it’s time for a new model. One that rewards conservation, not profligate waste of natural resources, as if they were unlimited. This includes stuff like breathable air and drinkable water.
douglas jones
Thirra it would seem that all governments are corrupt. Subject to their need to be re-elected which can only happen if certain parties are placated, the big end of town. You might find Peter Osborne’s book The Triumph of the Political Class entertaining reading. I think it is this book that talks of Voters Vault, the tool used to address each electorate with warm words designed to please words derived from a computer programme which sorts out the local wishes based on evidence gleaned for many sources. Democracy indeed!
I would like to take up the question of how and who made this crisis. Sure deregulation became reality starting with Nixon in 1971 and continuing to the present, with lobby and lax control, undoing all the legislation put in place around 1933 to ensure a 1929 never happened again.
Yet again it has allowed by the mistaken but maybe inculcated belief in the free market Laissez Faire, the result spoken of as an unexpected happening . Yet the origins were at least noted by a number of people even including testimony before the committee on financial services 2007 and earlier by our own Ian MacFarlane 2006 Boyer Lecture even earlier by non economist Jackie Corr writing in Counter Punch January 11 2003 and economist Ann Pettifor in2003, Dean Baker, Edward M Gramlich and others. Governments, regulators, economists took no notice though there were plenty of tools that might have been used Graham Turner The Credit Crunch 2008. Stiglitz concludes the problem was lack of regulation, whilst admitting that the hidden hand is so hidden as to be non existent.
Was the belief so strong that any threat was seen as mere exuberance Greenspan? Was Pusey correct after all? Harry Shutt puts it down to a kind of herd mentality, a situation in which only believers prosper. The Trouble with Capitalism 1998.
Had we been here before? It seems very probable for this ahs been the Laissez Faire of 1920 plus and perhaps as Ferdinand Pecora’ Committee found there were indeed rogues. Rogues whose belief in the necessity of profit subverted the system. Perhaps we should have another Pecora though now as then it may be difficult to find someone capable of standing up to the Corporations or banksters if you like.
Is the central problem an inbuilt fault in Capitalism as many argue and have done so for many years or can the system be corrected by regulation once again? Can regulation prevent the perversions resulting for profit with no placement providing satisfactory return available? Is the cause excess productive capacity or inadequate demand , and the money necessary for such demand to be successful?
Post 1930 came the New Deal, the kind of thing we are now doing except banksters were not bailed. Then came war with massive economic stimulus, and alone or with or unnecessary to recovery.
We also have a war. The need for a command economy, not only to allow the market to operate and those who were dishonest enterprises failing but also to act in a timely fashion with funds still sufficient for the task, but perhaps not for two tasks the war on climate and the bail out, even if like war footing deficit budgeting.
If Obama can bail out AIG thus rendering it a government owned insurance company, then why have we lost the GIO,government insurance organisation to private enterprise?
I don’t hear Swan telling the "banksters" (coining the term from the last poster) to lend their money to needy businesses and organizations rather than propping up the big end of town.
In fact in an interview this morning Swann refused to use the R word and side stepped it clumsily mouthing cliche’s like "We have great challenges, and we have to make sacrifices to meet these challenges.
When asked why banks were squeezing the credit to businesses, he refused to agree. In fact he said money was still available to most enterprises requiring money to keep staff in employment. In fact this is the line run by Pacific group, kingee and clothing manufacturers.
They are actually sacking staff, so they don’t have to sack more staff.
Great Kevin and Wayne, this is what you could expect from exports from the State that brought us Joh and Flo Bjelke Peterson.
LNP as an alternative, not in this life time.
People’s (or sheeple’s) memories are short, but not that short. We’ll see soon enough any way.
Cheers, Oli
Ben - "…So far, we’re doing much better than many first feared. As Reserve Bank Governor Glenn Stevens wrote in yesterday’s announcement that the RBA was leaving interest rates unchanged, "in Australia, demand has not weakened as much as in other countries and, on the basis of currently available information, the Australian economy has not experienced the sort of large contraction seen elsewhere…"
Ben, I put it to you that the above comment is similar to the claims that "our economy has never been stronger/better" made mere days before the first major crash.
Let me suggest to you that the RBA maintained its official rate despite the latest data from the Australian Bureau of Statistics which shows that the economy contracted by 0.5 percent in the December quarter, despite GDP growth for the year to December 2008 being at 0.3 percent BECAUSE Australia continues to access international funding and NOT because we "are doing much better than first feared" - Actually, we are doing much worse than feared.
Australia continues to run one of the world’s worst current account deficits and to do that takes international funding.
To preserve the flow of funds means maintaining an attractive rate for the lenders and that is why the RBA did not cut. Telling the "Great Unwashed" that we "are much better off than expected" is an insult to all Australians.
1- Australia posted a current account deficit of $A 6.5 Billion in the December quarter.
2- Australia is running up debts at a pace of $A 26 Billion annually.
3- Australia’s net foreign debt increased by $A 20.1 Billion to a liability of $A 678.3 Billion.
And that is why the interest rates were kept on hold - to prevent the world community from starting a run on Australia as our net external debts approach $A 700 Billion.
Australia must maintain an attractive rate of interest for foreign lenders Ben, for if Australia does not, the rest of the world will, at best, stop lending us any more money. At worst, they will demand repayment!
Bottom line? Bankrupt mate, the country has been run completely into the ground by a mob of hoons who call themselves "economists" and who did not see this crisis coming and who still claim they are capable of understanding how we got here and how to fix it.
Rubbish!
Bankrupt Ben, can you spare a dime for the RBA Ben?
Have you converted your "dollars" to gold yet?
The RBA may have run out of time, but for us there is still time to convert out of paper and into gold you know Ben!
Try coinex.com Ben, or open an account at the Comex and take delivery of some bullion while the paper in your bank still buys something.