The apparent growth of our economy hides deeper problems. Australia isn’t ready for another global crash, writes Mike Dowson.
You wake up. The sun is shining. You wander out to the kitchen, still a bit groggy, mulling over the day ahead, and someone – your partner, a housemate, a message on your phone – says: “The share market has crashed.”
How do you feel? What thoughts come to mind?
Your job, mortgage, savings. Perhaps that holiday you had planned.
Are you worried? It seems natural. But why?
Will wheat stop growing? Will cows stop producing milk? Will it no longer be possible to turn iron ore into steel, or cotton into clothing? Will no one need plumbers or teachers anymore?
Nothing has really changed in the material world. But somehow there is a sense that disaster has struck. What has actually failed?
In the days that follow, the news is dominated by the event and its repercussions. Chaos reigns on the stock exchanges. A bank goes under. There are rumours of retrenchments at work. One day, you receive an ominous envelope from your employer.
Yet all through this mayhem, the basic needs of the human beings who make up our societies did not change. Nor did our practical ability to fulfil them.
What evil spirit was unleashed? What makes markets crash?
Markets crash simply because a large number of investors try to exit at the same time. Yesterday they were bidding up the prices of shares. Today they’re trying to sell, sell, sell, so prices plummet.
So are the shares worth what they were yesterday? Or what they are today?
The thing is it doesn’t matter. This isn’t about the real economy, the place where we attend to our collective needs. What matters here is what investors think is happening. They switched in a herd from trying to milk rising prices for profit to getting out before they lose it all.
Consequences in the real world arise from how we respond.
During the GFC, anticipating a slump in revenues, companies around the world laid off staff to reduce operating cost. Projects went on hold. Commerce slowed. Businesses closed. People lost their jobs, homes, savings.
The trigger for this disaster was provided by the global banking sector. Having lured a lot of people into debts they couldn’t repay, they had packaged the rising mountains of dubious debt into obscure products known as derivatives which they had traded, repackaged, and traded again, each time extracting profit, while they hid the risk in a labyrinth of impenetrable accounting. When the risk chickens came home, there was nowhere for them to roost.
In Australia, the banks warned of an imminent credit freeze, a kind of financial power failure. To restore the power, the government guaranteed bank deposits and wholesale borrowing. The Reserve Bank cut the target cash rate to make borrowing easier. The government gave households money to spend, and created programs to employ people. This was like CPR for public confidence.
In the US and the EU, central banks bailed out failing private banks, and then bailed out governments as well. The chickens had somewhere to roost again. And the eggs? Ask the bankers.
Perhaps these don’t sound like acts of heroism. Weren’t the stewards of our economy just doing their jobs? You may well ask what they were doing before the crisis happened.
They were doing what we all tend to do. They assumed the system was working.
Australia was one of the few advanced economies that avoided a long recession. Many Australians may not have noticed much disruption. The companies who laid off staff were hiring again in no time. Mining and real estate boomed. Even reality TV ventured into home renovation.
We were told new regulations had fixed the system.
Did they?
Recovery in the rest of the western world, where it has occurred at all, has been painfully slow. Now growth in China is slowing dramatically too. Russia, Brazil, Canada and a number of European economies are already in recession.
The global manufacturing purchasing managers’ index tells us what companies in the world’s largest economy expect to produce in future. The message is much less.
The Value Line Geometric Index, which takes the pulse of the greater North American equity market, shows a fall of over 20 per cent for the preceding year.
These are signs the world is losing confidence again.
It’s also heavily in debt. Global debt has grown by nearly 60 trillion dollars since the GFC. No major economy has lowered its debt to GDP ratio.
Last year, leading US economist Robert Shiller pointed out that price to earnings ratios, which is one way of pegging share prices to the real world, suggest the markets are grossly overvalued. Now others like Andrew Roberts at the Royal Bank of Scotland are warning of another major correction.
Then there are the changes in the real world itself. Some big economies, including the US, Germany and even China, are soon to fall off a demographic cliff. Their populations are aging. As people age, they spend less and they spend differently. The economic stimulus that comes from a young, striving population falls away.
The world has been persuaded that its problems can be solved by growth. We’ve heard it so much, it sounds self-evident. There are, however, many things it doesn’t measure at all. Happy families, healthy children, safe communities and meaningful work, to name a few.
In practice, growth might demand we sacrifice these things when they get in the way. If damaged lives are left behind, the conversion of savings and income into alcohol, gambling, medical services and pharmaceuticals will, perversely, contribute to growth.
Growth measures quantity, not quality. But in the west, since the GFC, even growth has not materialised.
The data reveals that the last eight years have not strengthened the global economy. Nor have they prepared us for the future.
Whatever we thought was happening, the one truly impressive result is the massive enrichment of a small and shrinking elite. While billions of people plead in vain with the scornful god of growth, the wealth we all create is gravitating to the super-rich as if it was being sucked up by a giant harvester.
The system is not fixed.
Actually, it’s on life support.
Overseas, central banks have propped the markets up by creating money and keeping interest rates low, in many cases negative, to encourage borrowing. That would be where much of the debt comes from.
Some of it has been used to start new businesses, or improve existing ones. But the flood of cheap money has more often fed bank reserves and investors’ appetites for speculation. That would be where the overvaluation in the markets comes from.
Radical advocates of free market economics, like analyst Peter Schiff, say this is wrong. And doomed to fail.
They argue that market corrections are both necessary and inevitable to redistribute resources away from moribund enterprises to those that are mean and lean. If an industry persists in being uncompetitive, let it fail. If a bank takes too many risks, let it collapse. If a whole market is overvalued, let it fall.
By then the smart money will have moved on.
Schiff would say that’s how it’s supposed to work. It’s brutal, but it’s efficient.
And the people? The ordinary people who lose their jobs, and homes, and not-so-smart money? The ones who thought they were living in a society, rather than an efficient economic system?
During the first industrial revolution, in a time quite like our own, when rapid advances in technology were making many trades redundant, they went to debtor’s prison, or a workhouse, or retrained as pimps, prostitutes and pickpockets. Some of them came on convict ships to Australia.
As capital and technology, backed by military force, removed vast tracts of the earth from the care of native peoples and converted them into private wealth and goods for consumption, the displaced and their descendants found their labour was useful again. Usefulness gave them power. They did something revolutionary. They demanded the vote.
Laissez-faire capitalism is enjoying a resurgence, now that labour is being replaced again by new technology and workers in poorer countries. But modern governments survive on a popular mandate. So some form of regulation and intervention persists.
Greed has its foot on the accelerator. Democracy is tapping the brake.
But this is not the same as fixing the system.
Common sense should tell us that rising inequality is a bad thing. The research agrees. It’s bad for public health, bad for prosperity, and ultimately a threat to democracy.
But politicians and commentators don’t like to talk about it. Disproportionate wealth is often seen as something to admire, a sign of personal achievement that we should all aspire to. The prescribed remedy is growth and jobs.
Where do they think the expanding riches of the few are coming from? Personal enrichment doesn’t help growth. It might be a by-product. But how could simply owning more benefit the economy?
Wealth serves the greater good when it is taxed, spent or invested in new productive activity. If economic growth is negligible, that’s clearly not what’s happening. And if the rich are still getting richer, there’s only one place those riches can be coming from and that’s everyone else.
But how?
Most of the world’s money isn’t managed by individual investors. It enters the markets through funds, where it circulates like a great school of forage fish for the sharks to feed on. The financial sector, once the servant of the real economy, has grown into a giant predator.
Worldwide, investment in new productivity has faltered. Markets have simply lost interest. Why risk capital on new ventures when you can capture gains from unproductive asset price bubbles?
Company boards and senior executives have also lost interest. Instead, they lure the markets for short term gains by shedding cost, which usually means people, or capturing market share, which usually means other businesses. In some sectors, like supermarket retail, predation extends to supply chains and adjacent markets.
International retailers like Amazon and Uber operate at a loss while they put local operators out of business, then send the resulting profits overseas where they pay hardly any tax.
None of these actions increases net production. None of them adds value for consumers. They simply convert existing local jobs, small businesses, and taxation into bigger corporate profits and executive remuneration.
And we help them. As our regular jobs and businesses disappear and house prices escalate, our own time and money becomes more precious. A billion seemingly innocent and trivial decisions we collectively make each day for price and convenience propel the harvest.
The poor save and borrow. The rich invest and profit. The banks make a killing either way.
This is why the middle class is disappearing in the US, the UK and now Australia. And the biggest wave of job-eating technology is yet to come. A few are managing to clamber up to join the plutocrats, or their technocratic servants, but many are falling down into a life of low-paid, insecure jobs where they depend on cheap goods and credit.
And unlike the very poor, the very wealthy and the big corporates, they are the ones who have been paying tax. If this keeps going, what will happen to social services?
So where does that leave us?
The signs point to another correction. What we don’t know is how big it will be, how sudden, or when precisely it will happen. Or what the stewards of the economy will do this time.
We could, if we chose to, roll back the tax perks in super and real estate which have wasted decades and damaged the economy. We could reverse the policy decisions that have impaired our scientific capacity and shut down our renewables industry. We could claim back the billions used to subsidise fossil fuels to make environmental destruction appear cost-effective. We could curb tax avoidance and the avarice of the multinationals and the finance industry.
Perhaps we could do something useful with the savings. Soils are being depleted. Extreme weather events are increasing. Two and a half million Australians already live in poverty. One in ten, including children, doesn’t get enough to eat. The list goes on.
Let’s not be gullible fools. Big business and the rich won’t fix these things just because we cut their taxes. And we won’t be happy just because we hang onto some privileges while society crumbles around us.
In current circumstances, the carrot of growth and jobs politicians are dangling is a chimera, a bit of marketing spin that will not fix anything except, perhaps, the next election. Neither will a budget surplus, coal, privatisation or abolishing penalty rates. Politicians parrot these platitudes like ventriloquists’ dummies on the knee of vested interest.
Sooner or later, we are going to have to face our real predicament, in all its complexity, and demand real policies to deal with it.
We’re not in the same position we were in eight years ago. We’re not going to be able to sell our way out of trouble with natural resources. Manufacturing has declined. The private sector is laden with debt. The banks borrowed heavily from overseas to fund the real estate extravaganza and aren’t rock solid any more. Interest rates have only so much room to move.
But the wheat will still grow. The cows will still produce milk. Science and technology can still solve problems. Most of us still believe in a fair go. And we still have power at the polling booth.