First of all, I apologize for the lack of posts. This year is an election year in the USA, and there is not much there that I wish to discuss at this point in time. The US economy as far as I am aware remains weak and it continues to have a problem with burgeoning government debt, with no end in sight because the US Senate will not pass a budget!! There are some new developments in Europe and especially with a renewed Greek crisis. However, I do need to spend some time on the Australian economy.
For a long time, I have pointed out that much of what we have been experiencing is similar to the situation in the 1970s when Gough Whitlam came to power, and nothing has changed in the past year to change my mind on that subject, except of course we are now seeing the nastiness and ugliness of an attempt at class warfare that has been started by the Gillard government. I am not addressing the topic of the class warfare, rather I want to address the stupidity of the Gillard government and its introduction of a tax on the air that we breathe.
The US is already aware of what happens when some bright spark (read that rather stupid Nancy Pelosi) says that you have to pass the the legislation to know what is in it. Well, here in Australia something similar happened when the tax on the air that we breathe was introduced. Insuficient time was spent on vetting the legislation. It was introduced and passed at some haste. Needless to say the whole thing is a lemon, a white elephant and it will do nothing to save the world from the predicted doom and gloom of the green (really sick) doomsayers who claim that the world will end if average temperatures are raised by 1/2 of 1/4 per cent… or something like that, over the next century. The climate debate is also not the subject of this particular post. What is relevant is the impact of this tax upon the Australian economy.
It needs to be pointed out that a price on carbon of $23 per tonne is absolutely ridiculous, especially when those silly contracts in Europe are worth no more than about $5 per tonne. It is also worth pointing out that it is really ridiculous that some people seem to be self-satisfied and smug by letting the world know that they either drive a Prius or have purchased a timber plantation (or whatever the sign on the back of their car proclaimed that allowed them to claim that they were emission neutral – what a load of tosh!!). What is more significant is that the tax itself is going to have a very negative impact upon the Australian economy over the next 15 years.
Whilst in my view I continue to see indicators pointing to stagflation, not all of the indicators have pointed in the same direction so it would seem that my thoughts on the subject might still be a little bit premature…. or are they? Let’s take unemployment as an example here. In the 1970s unemployment was very high. By the time that I graduated from university even graduates were not guaranteed finding employment in their chosen field. In fact the positions available to accounting and economics graduates were extremely tight because the big accounting firms were not hiring new staff in any great numbers. The level of unemployment for graduates by 1976 was at an all time high. The lack of jobs for graduates was indeed a signal that something was very wrong within the economy. Whilst I am not up with the current situation for graduates I can comment upon a slightly different aspect – the hidden unemployed. It has remained pretty much the same, and the percentage right now is probably as high as it was in 1975-1976. The hidden unemployed is usually defined as those who have given up looking for work. It should include all those who are not eligible for unemployment benefits but who want to work. These are people who are enrolled with employment agencies. The discrepancy in unemployment numbers as determined by say Roy Morgan research and the official figures from the ABS is something like 5%, and this actually takes in some of the hidden unemployed (those enrolled with the employment agencies). Australia has other structural employment problems as more and more people find themselves in part time work rather than full time employment. In other words, the number of under-employed has been rising.
Another indicator for stagflation is rising inflation. Surprisingly inflation remains a non-problem, or does it? What I would look at here is the basket of goods. The basket of goods since the 1970s have changed. What the government has done, to disguise the inflation rate has been to remove items from the basket of goods and add others. This is not the whole story because in the electronics side of the equation there have been decrease in the prices of goods. Normally, this takes a few cycles after a product has been introduced. As an example take the price of HDTVs which are imported from Japan, South Korea, Malaysia and other Asian nations. When they are introduced the price is normally high, but leave the purchase for a year or two after introduction and the prices have dropped dramatically. This can be explained by at least 2 factors: a change in the exchange rate that has made imports cheaper, and an increase in competition for the goods. So perhaps this is a reason that the level of inflation has not been so dramatic, but then again I have my doubts because items such as doctor fees and prescriptions have continued to rise, as have increases in the price of petrol, the cost of our utilities such as gas and electricity as well as rates. The Reserve Bank continues to moniter inflation, adjusting the interest rates as required. All the same at this point in time there is no measurement available relating to the impact of the tax on the air that we breathe.
The remaining indicators are related to any increase in industrial disputes as well as increases in wages that is not justified by a rise in the cost of living. There has been an increase in the number of industrial disputes after industrial laws were changed to once again favour the unions. Of anything we will see a greater impact from this industrial down the track because of lags in the economy. I would think that within the next 12 months we will have a better idea about what effect, if any industrial disputes have had on the economy. One thing is certain, and that is we do not have right now the kind of disruption that we had during the 1970s when it was a union free-for-all.
Despite the fact that the indicators do not totally suggest stagflation, I continue to believe that if Australia does not reverse some of its policies then we will have stagflation and the effects this time around will be even more prolonged because of the impact of the rise in government debt for our nation. This is probably what David Murray, the former Future Fund Chairman and CEO of the Commonwealth Bank means when he warns about the difficult economic times ahead in Australia.
As a result of these developments I will be keeping a sharper eye on the Australian economy than I have done in the past 12 months, because I forsee that Australia could be heading for a downward spiral and it is not in a strong enough position for a fast recovery. This is not 2008 when we had the GFC in full swing and Australia was relatively insulated because of the budget surpluses of the Howard Government – these surpluses were wasted by the Rudd Government and in particular by that goose, Wayne Swan. There are other problems such as the fact that the expenditure on the NBN white elephant remains off balance, and then there is the over-estimation for taxation reciepts by billions of dollars.
The BBC reports that there has been a very big drop in Government borrowings in the present year. The financial position is being helped by two things: (1) the levy on bank balance sheets and (2) a significant drop in public sector borrowings.
It is my contention (and yes it is just theory not necessarily fact), that when the Public Sector have the lion’s share of the investment dollar, that the private sector suffers. This is because the Investment pie is limited, which means any increase in Public Sector borrowings reduces the amount of investment dollars available for the private sector. When the private sector is not able to borrow money to expand this leads to a contraction of the economy as the private sector will not be able to employ more people, or it has to let staff go in order to meet other debt requirements.
In other words, what I am contending is that Government Stimulus action does not work because it takes investment money out of the private sector, which means that the economy is disrputed. What I am arguing here is that the “stimulus” money does not come from tax receipts but from further public sector borrowing. In other words, Government action does not impact in a favourable way within the economy and it actually makes matters worse, not better.
My theory is not based upon the current experience, but upon the experience of the late 1960s, early to mid 1970s when there was global stagflation. Most economists address the stagflation by referring to the oil price shocks, however, I see this as a miniscule reason for the stagflation. There were two price shocks, one around or prior to 1972 and other during the Iran Revolution. In recent years we have experienced more oil shocks for a variety of reasons, but Saudi Arabia has actually pumped out more oil to keep the market smooth. The price of oil is really not as important as some believe, because we do not have any real control over the prices that the cartel (an oligopoly) agree to charge for their output.
One thing that was common in that period, in Australia, the USA and in the UK was that each country had a government that was into prolifigate spending. In the USA it started under LBJ, and Nixon had to try and rein in the spending, followed by Carter, another profligate spendder. In Australia it started at the end of the 1960s when McMahon was Prime Minister, followed by the prolifigate spending of the Whitlam era. In the UK it was the Wilson years of profligate spending. It is my view that the stagflation arose because of the difficulty of providing investment dollars to the private sector because the money available for investment was being swallowed up by the public sector.
During that same period, especially here in Australia, we had rising inflation, strikes and demands for higher wages which were granted because the ALP were in charge, followed by a further rise in inflation. Even though this looks simplistic, by 1974 the stagflation was actually quite evident, and these factors explain why it was a wage-price inflation which was fuelling the problems within the economy. By the end of 1975, and beginning of 1976, here in Australia most jobs had dried up, especially with regard to the requirement for newcomers in the field of accountancy (there were no jobs available for the majority of graduates). This was the point where we had the beginning of the Fraser government which also led to a wages freeze being implemented. (Nixon also imposed a wages freeze).
The turnaround in Australia occurred only when public sector borrowings began to drop and the budget was balanced or was turned into a surplus. Here in Australia this was a gradual process because we went from the Fraser government to the Hawke-Keating government when public sector borrowing got out of hand once again. Note: under Keating as Treasurer there were extremely high interest rates which were very, very painful for mortgagees. We got through those extremely high interest rates, which were greater than 17% before they began to fall again. Credit card borrowing interest rates were above 20%. Under the Howard government the Federal Budget went from deficit to surplus, but that has been frittered away by the KRUDD-Dullard governments.
So long as the rise in wages is kept under control, that is, it is related to a shortage of skills and not from some annual or bi-annual increases, then inflation itself is more or less kept under control. The way in which the Reserve Bank has been handling any inflation has been to increase interest rates, but in the present conditions the policy of the Reserve Bank which is to operate through interest rates alone can be quite harmful. The uncertainty that exists today has led to consumers holding off their major and minor purchases as long as possible.
We are yet to see the impact of the proposed carbon-dioxide tax. I have no doubt that the imposition of such a tax will have devastating consequences upon the economy. It will not bring about prosperity. It will cause massive increases in some commodities (which the government model has not predicted), and this is because a number of unknown factors have not been included in any modelling. Take for example the cost of refrigerant for supermarkets. This is something that will be taxed. Can you see how the price of frozen items will rise? Can you see how that will impact upon the cost of meat and dairy products?
As we continue to head towards stagflation, the last thing we need is this particular tax which will cause a massive downturn in the economy. (again this is theory, but so is any model that claims an opposite scenario).
Public sector borrowing eats into the investment dollars, which in turn leads to a decrease in private sector borrowing and expansion within the private sector. The end result of this cycle is that business is not in a postion to continue to hire. At the same time taxes on employment also hold back businesses from permanent hiring. Most businesses have to keep below a certain staff level in order to avoid the higher taxation costs. A reduction or the dropping of such taxes would increase the levels of employment.
I am posing this question, not because I consider J.M.Keynes to have had the answers, but because the alleged followers of Keynes are not paying attention to what Keynes actually wrote!!
First of all, it is necessary to be very clear that the application of Keynesian theory had failed by the late 1960s. I have always maintained that the Keynsian solutions for unemployment were only useful in the short term, not the long term and I look to the way in which Australia applied the levers to the economy prior to the election of Gough Whitlam in 1972. The pattern prior to 1972 was: inflation, credit squeeze and stable employment. The goal had been full employment and for the most part after the second world war the Australian economy had been relatively stable. Then the electorate, who had no idea about a number of issues that had torn the ALP apart in the 1950s decided that there was a need for a change. What a mistake.
Second, my theory is that when government takes “initiative” and “stimulates” the economy when it is not necessary, this actually has an adverse affect on the private sector. In the long term the result of such measures in inevitably the drying up of available investment dollars for the private sector. When investment dollars for the private sector dries up, this ultimately leads to an increase in unemployment, but at the same time it also leads to a lack of consumer confidence because workers begin to fear losing their jobs. Ultimately the lack of consumer confidence leads to a lack of spending for goods and services, which then leads to the necessity of more lay-offs, thus increasing the number of unemployed.
Third, individuals who claim to be Keynesians, such as Dick Krugman, do not in fact expound Keynesian theory. Instead what they offer is like a Prius – it is hybrid Keynes, with a large dollop of Marxism added into the mix. Keynes actually wrote that he thought that his theory worked best in a Communist style economy, but he never advocated that western economies such as the UK, Australia, New Zealand, Canada and the United States should in fact become Communist or Marxist. Keynes was in reality a capitalist. His proposals for unemployment via government assistance were only meant to be implemented in the short term, not the long term. Keynes was not responsible for the measures undertaken by Roosevelt, neither is he responsible for the twit ideas of Krugman and co who have been advising the worst President ever in the United States.
The world has been watching the kabuki theatre that took place in Washington D.C. To be honest, from an outsider point of view, this debt ceiling and the way in which a “budget” is determined is very foreign. Here in Australia, because our Parliamentary system is based upon the Westminster system, it is the Government, that is the party with the majority that must produce a budget. This happens once a year. For a very long time the budget was announced in August, but this was changed to about May each year. The budget is actually prepared by the Public Servants who run Treasury, with some input from the governing politicians.
For the most part the budget gets passed by both houses of the Parliament. The one time in my memory where there was a refusal by the Senate to pass the budget was in 1975 and the drama was all a part of the dismissal of the Whitlam Government – the majority of Australians gave their verdict on December 2 1975 when Malcolm Fraser was returned with a landslide victory. The reason that this happened was to do with the various scandals that had erupted at the time, and in particular the Khemlani affair.
The whole process in D.C. seemed to not make a lot of sense and for a variety of reasons. Østupid has been pushing for tax increases, but my question here is: what would J.M. Keynes recommend? Keynes had advocated that in a time of war taxes needed to be increased to pay for wartime equipment and the increase in defence personnel, and at other times taxes should be lowered. What Keynes had not factored into his economic theory was the Welfare State. There was no real welfare state when Keynes was alive. He did recommend that the government needed to provide short term assistance for the unemployed, but he did not factor in for long term unemployment. The truth is: a country cannot support or sustain the welfare state unless there is full employment. I think that this is something that has been neglected by the Socialist governments everywhere. They see workers, especially the middle class as some kind of cash cow to be squeezed, but they never seem to see the full picture.
The absurdity of the kabuki theatre in D.C. would have to be Østupid lecturing Americans about “living beyond their means”, when in fact the national debt is not about what the general public borrows and spends, but is about what government is spending which is well beyond the level of the taxes that are being collected. There are many issues involved. Probably the most important that arose in 2009 was the ramming through of the health insurance Abominablecare bill. Health insurance should be a matter for the individual, not government. If government wants to provide assistance for the less well off, then that should be done through the programs already in existence – Medicare and Medicaid. Here in Australia we have had the same kind of thing, and quite frankly the government interference has led to a product that is not affordable for many people. On top of that the quality of the service provided has deteriorated whilst there are people who think that they should get assistance for things like IVF. Paying out for these expensive IVF treatments, and at the same time paying for abortions (in my view this seems to be hypocrisy) ultimately means that fewer dollars are available to treat cancer patients or patients with other diseases. It is a vicious cycle.
Australia is facing yet another form of kabuki theatre – the proposed tax on the air that we breathe in the belief that this will somehow change the climate – which has had the ultimate effect of reducing consumer confidence. The reduced consumer confidence has led to a decrease in sales, which in turn has led to job losses, which has led to a decrease in tax revenue collected. Ultimately if the tax is implemented, the effect will be prices going through the roof. I have no doubt that this will lead to the double digit inflation that we have not seen since the 1970s.
The conditions for stagflation are: high interest rates, high unemployment and high inflation. The governors of the Reserve Bank are keeping a lid on the high interest rates by their decision to not increase those interest rates in response to the changes in the consumer price index. However, what will they decide once this tax is implemented? If they decide to try and stop the inflation by raising interest rates then we will have a return to the 1970s which we have been avoiding. Any rise in interest rates will in turn hurt small business owners in Australia with many making the decision to leave the market place due to the rising costs caused by price increases in utilities such as electricity.
So again, in these circumstances, what would Keynes recommend? Would Keynes agree with the appalling government decisions that have allowed government debt as a percentage of GDP to get out of hand? Would Keynes recommend a tax on the very air that we breathe? Would Keynes go along with the “green economists” who advocate for such a tax? Would Keynes advocate something like the ETS scheme? Or would Keynes have seen through this kind of scam, and have been one of the economists who speaks up against it? Would Keynes have recommended going off the gold standard?
I just noted this article relating to the expectations of the Board of the Australian Reserve Bank. The Board meets monthly to consider the need for corrective action for interest rates. At the moment the rates are holding but that is not always the case – interest rates had risen considerably over the past two years, but at least not as far as in the 1970s and 1980s when they soared.
DISASTERS in Japan and Queensland have not changed the medium-term economic and inflationary outlook for Australia, the central bank says.
The minutes of the Reserve Bank of Australia’s (RBA) April 5 board meeting said while these disasters created some uncertainty, strong economic growth in Asia, rising oil prices and European sovereign problems were also creating uncertainties over the recovery in parts of the global economy and putting pressure on inflation.
The board kept the cash rate on hold at 4.75 per cent at that meeting after last raising in November, citing rising commodity prices as the main reason for that move, and said in the latest minutes that it saw no case to move interest rates in April.
The central bank uses its control over the interest rate to keep inflation between two to three per cent on average over the course of the economic cycle.
This is probably the thing that we need to watch in the near future:
The RBA board is expecting inflation for the March quarter to be quite high while economic growth would be lower than previously thought due to some lost coal production and delays in resuming mining operations after the Queensland floods.