Five of Many Australian Headwinds
An arduous task for a modeler is to forecast that which cannot. One thing that the official forecasters have consistently got wrong is the price of commodities and the impact they will have on government revenue.
This is the price of these exports are determined in markets that are quite atomistic and subject to strong competitive forces and large geopolitical events.
I have some sympathy for those tasked with preparing these types of forecasts because they are required to balance between political undercurrents in their own country and random events around the world that constantly threaten to make a forecast immediately redundant.
It may be better to have a list of factors to look out for and think about what their impact would be if they came to pass.
Here is my list of five Australian headwinds, in no order.
Nuclear Debate
The nuclear debate has been heating up (pardon the pun) for some time and is finally reaching a position where it is likely to play a role in determining the next election.
Currently, there is a prohibition on the production of nuclear energy. Finally, what is lifting is the prohibition on the discussion of nuclear energy.
To date, the discussion has centred on its cost rather than its safety. The proof of its safety through intensive use in many parts of the world has inured us, for better or worse, to the character of its safety.
The opponents have pointed to its prohibitive costs as the reason to refuse to countenance its use. This is an odd approach to take given the propensity to put aside all cost arguments on a series of other positions when circumstances suit.
Two that come to mind are the response of the previous government to Covid-19. As a business broker, I have seen the staggering amounts of government support that appeared in the profit-and-loss reports of businesses that I have appraised over the last few years.
It was important to keep the wheels turning, and so it was done. At one point, the argument was for continued support rather than timely curtailment.
Another instance which pertains more directly to the nuclear energy debate and is driven by the gospel of having to decarbonise our economy is the cost of supporting industries that are required to move us from a carbon economy to a renewable one.
The policy to drive us in this direction is no longer a rational one but a Marxist one. We have set various targets to reduce the production of carbon in our economy and in the time-honoured manner of a Stalinist 5-year plan, we will throw whatever resources are required to meet those targets. In the meantime, we will ignore the opportunity costs that this imposes on us.
To see how this works, consider the Snowy II scheme, which would fail any cost benefit analysis but has taken on a political importance that puts aside any question as to the efficient use of scarce resources.
Deflationary Pressures
We are currently obsessed by the cost of living. We call it a crisis and we couch it in terms of inflation. This is an error. Even if prices stopped going up, we would be amid a cost-of-living crisis because our income, driven by low productivity, is static.
When we consider the condition of our major trading partner and the half dozen exports on which our current prosperity rests, it is easy to see that our locus of attention could easily shift from inflation to disinflation and deflation rapidly.
The Chinese economy is entering a liquidity trap that could easily lead to a deflationary spiral. It could resume its role of exporting deflation to the rest of the world as it was prior to Covid. It’s easy to forget that the RBA was struggling to get the inflation rate into its preferred target range of 2-3% but that in that case it was trying to increase inflation, not decrease it.
This is critical because the interest rate that is important to an economy is the real interest rate, less so the nominal one. As inflation rate drops, the real interest rate goes up and acts as a retardant on economic activity.
If the inflation rate is negative and our interest rates are close to zero as they were prior to covid, then we will be in a trap where we cannot lower interest rates below zero to stimulate our economy. We might then also enter the deflationary spiral.
Viewed in this way, our response to the covid inspired supply side constraints provided a respite that allowed us to reload the monetary cannons. While most consumers are keen to see the inflation rate and interest rates drop, they should be careful what they wish for. It is likely to lead to a much bigger set of problems.
Debt
Related to the point about China and deflation outlined above, is the level of public debt. Traditionally, Australia has been a country that has had high levels of private debt, which is supported by low levels of public debt. With Covid, we crossed the Rubicon, where we are prepared to take on higher levels of public debt.
This has primed us so that if a deflationary spiral ensues and we have no ammunition left in terms of monetary policy, we will need to turn to fiscal policy to do the heavy lifting just as Japan has been required to do for the last 3-4 decades.
If you think public debt levels are high now, brace yourselves. They could easily become staggering.
Defence
Speaking of staggering levels of debt, on top of the vigorous growth of welfare provided to Australians and the cost that will impose on the public purse, we are preparing to bake in a whole new level of expenditures.
We wish to buy and then build nuclear-powered submarines for the defence of the nation. I believe this is a desirable course to take given the low level of protection that we have to a host of threats. The problem is that we have gone for the rolls Royce when we don’t even have jeeps.
The back filling of this chasm has dawned on our elected representatives but has not yet filtered down to the public. It will require expenditures of monumental proportions out of an economy that is just not productive. The adjustments that this will require is likely to come as a nasty shock to many of us in consumer land.
While we are a middle power, our resources in terms of wealth are untapped, sitting in ever-growing piles of superannuation and higher home values. The need to tap into that wealth to support the many needs of our country will only grow. The easy mark is the superannuation funds of Australians. Largely because they are liquid and there will be an argument that they are now being used as bequeathments rather than supports for old age. The attacks have already started.
Housing may be safe for a little while, but it will be hard to keep justifying providing financial benefits to baby boomer homeowners who will require care in their old age as the younger generation cannot secure access to the type of life their elders are enjoying. User pays aged care with the home no longer quarantined from this calculation is on its way.
Immigration
Immigration is a good thing when the transaction costs are not too high. Clearly, we have passed the point with our given level of immigration where that is the case. The clearest transaction costs are the imposition of housing shortages across the population because of the significant level of Net Overseas Migration into this country.
Another instance of unacceptable transaction costs comes as a distorted national discourse. Incendiary views of some sections of our community towards others are now ignored. Even where they cross thresholds of civilised behaviour. The most prominent of these is the antisemitism that is now routinely promulgated in this tolerant country. The intolerant has found a home among the tolerant and this is corrosive to the notion of what it is to be Australian.
While I am loath to define what it is to be Australian, I have some notion of what being un-Australian looks like and that is appearing more and more in our news.
While we have control of our borders, unlike so many other countries, we have experimented with high levels of Net Overseas Migration relative to our population and need to be careful that we don’t lose control of it like the US or the UK or be too liberal with our intake like Germany did for a while. The effects are not always welcome and can take some time to overcome if ever.
There are other uniquely Australian headwinds that we need to contend with, but the list above is a good start.
