Bang Crash Again

Some much needed thoughts on Ken Henry's address re the "next wave"..

Are due for another wave of fiscal terror and financial woes???
Apparently Treasury secretary Dr. Ken Henry is.

How does the bush-walking top bureaucrat plan for such an eventuality? He dons his rose-tinted glasses.

Despite this, all the commentary in the mainstream press has been on Dr. Henry's use of the word "shockwave." However, it was this comment that was perhaps the most important:

"My thinking is simply that, in a world that pays more attention to fundamentals than herd-driven investor psychology, the Australian economy will be seen as possessing the best of the qualities - of governance and flexibility - of the developed world while also offering an abundance of real investment opportunities usually found only in the developing world. That is to say, the Australian economy may be seen as offering the best of both worlds."

Dr. Henry's argument is Australia may outperform other Western economies.

He used a slide to highlight that retail sales had collapsed in all other Western economies towards the end of last year, but actually grew in Australia.

This was of course due to the stimulus package. And looking ahead he seems to think it is Australia's governance that will see investors pour many into our local economy.

Here's a surprise for you. We agree with Dr. Henry that Australia may outperform other Western economies.

However, he's 3,318 kilometres wide of the mark with his reasoning.

You see, it's not Australia's governance (funny that a civil servant should try and take the credit for growing the economy!) that will continue to attract investors, it's Australia's resources.

It's Kalgoorlie not Canberra that the Chinese and other Asian economies are interested in.

Look outside Canberra!

Sure, sovereign risk is always a factor for foreign investors when investing offshore. But to think that anyone invests anywhere purely because governance is sound is nonsense.

In fact, it's the governance that prevents investment not encourages it.

Not according to Henry. He says:

"[T]he Australian economy might attract an even greater share of global capital flows, and quite possibly even larger capital flows in aggregate."

But even if we accept Henry's argument - which we don't - it's just a shame that Australian companies will miss out on a lot of these investment opportunities due to bureaucratic red tape. The constant meddling by both political parties in workplace laws and other regulations makes it almost impossible for Australian businesses to grow.

That's why we have monopolies and duopolies in almost every industry you can think of. Only mega companies have the resources to cope with the amount of regulation forced upon businesses.

Why grow your business from a small family run operation into something bigger when you know you'll get stung by the government from every angle.

Henry's claim that 'governance' is responsible for future Australian economic growth is a warning sign to prepare for the worst.

Clearly it will embolden policy makers to become even more interventionist. Here's the slide Henry showed highlighting the fabulous Australian retail sales figures:

Government bails out retailers

"What's the problem with that?" you may ask. "It averted a recession didn't it?"

Postponed it, reader, postponed it. I'll explain this more in a moment.

We've said for some time now that Australia has a 'get-out-of-jail-free' card thanks to the resources industry and China's seemingly never-ending demand for iron ore, copper and anything else it can get its hands on.

While that is good for Australia it potentially poses a problem too.

The problem is the resources industry is perfect cover for meddling bureaucrats. The 'guaranteed' demand from China and the flow-on effect this has on the Australian economy enables bureaucrats to constantly raid the cupboards whether it's through taxes or royalties.

These taxes and royalties are then used on pet projects - roads, hospitals, schools, bribes, etc...

This necessitates more spending to create bigger and better projects.

Then the government figures if it can improve everyone's quality of life it will make them more likely to vote for them. So, what do they do?

They increase rules and regulations.

They manipulate asset prices. They manipulate interest rates. They impose arbitrary rules on businesses. They impose minimum wage legislation. They set targets to get more people into university.

The more rules the better. The outcome is a short-term hallucination that living standards have improved. Everyone can become a home owner. Everyone can own a car. And no-one has to work in a factory again.

In fact, no-one has to work again because we can all invest in property.

This inevitably leads to the destruction of the economy. Companies are forced to send their manufacturing offshore - the lucky ones that is. The unlucky ones just go out of business.

Unemployment becomes institutionalized as minimum wage legislation makes it illegal for an employer to pay someone 1-cent below the minimum wage. Even though that lower wage may have given someone a job.

Instead of banks lending money to businesses to invest in machinery or new technology, the banks lend more and more money to the housing industry. We published a table last week by the Commonwealth Bank that showed 56% of their loan book is residential mortgages.

That's a lot of money being spent on consumption. And it's exactly the same path the US took. They stopped producing and instead consumed. The fact that Australia's retail sales increased is not a positive sign. It is a sign that the economy is well and truly a net consumer than a net producer.

Think about that figure from the Commonwealth Bank again. Not one dollar of that money is being spent on something that will benefit the Australian economy relative to our international trading partners. After all, you can't export a house!

The claim that 'governance' has saved Australia is false. It has done no such thing. Governance has merely postponed the effects.

It's a governance snowball. It's getting bigger and bigger.

You only have to look at most of the other resource rich economies around the globe. To varying degrees they've all done the same thing. They've leached the easy money from their natural resources and blown the proceeds on supporting their pals or wasting the money on pointless government projects.

If the Australian government continues to reap the rewards from the resources industry while simultaneously handicapping every other industry, the results will be catastrophic for the Australian economy.


Thanks to Chris Sayce of Money Morning