June 21st 2008

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Articles from this issue:

EDITORIAL: 'Peak oil': Apocalypse now?

CANBERRA OBSERVED: Whither the Nationals?

ECONOMIC AFFAIRS: What happens after cheap credit, oil and food?

SAME-SEX RELATIONSHIPS: Rudd grants special rights to same-sex couples

FAMILY POLICY: Home truths about working families

EUTHANASIA: Assisted suicide: safeguards or naivety?

NATIONAL SECURITY: Soviet bloc espionage: setting the record straight

DEFENCE: Should Australia have nuclear defence capability?

CHINA: Beijing muzzles protests over Sichuan earthquake

UNITED STATES: Is Obama equipped to lead the free world?

CULTURE: How political correctness threatens Australian culture

ART: The downward spiral of modern art

Barack Obama's oratory (letter)

Why cutting Australian emissions won't work (letter)

Baby imports? (letter)

Short-term stupidity (letter)

CINEMA: New Narnian epic Prince Caspian surpasses expectations

BOOKS: INKLINGS OF HEAVEN: C.S. Lewis And Eschatology, by Sean Connolly

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What happens after cheap credit, oil and food?

by Patrick J. Byrne

News Weekly, June 21, 2008
For 30 years, the world has been living on cheap credit, cheap food and cheap energy. That may be set to change, argues Patrick J. Byrne.

Billionaire financial market speculator, George Soros, has warned that the credit crunch, started by the US sub-prime mortgage market collapse, could mean that the "financial bubble" of the last 25 years could be drawing to an end and the post World War II "super-boom" era could also be over. (BBC News, May 19, 2008).

This period has been characterised by cheap credit which has been the product of deregulation of the financial markets, computerisation of financial markets and the creation of an array of new financial instruments capable of rapidly expanding the money supply.

Since this process began in the 1980s, financial markets have become more volatile, requiring bigger and bigger bail-outs with each new crisis.

Mr Soros partly blames central bankers for the current credit crunch because of their past behaviour in bailing out the financial sector whenever it got into trouble for over-lending - the so-called moral hazard problem.

He has argued that central banks should explicitly target asset bubbles such as housing booms and try to stop them getting out of control, which is something they have so far resisted.

Mr Soros says that tougher but smarter regulation would be needed in the future in order to reduce the excess supply of credit in the economy. These could include measures to force banks to put aside more reserves in good times to help cushion them in bad times.

The warnings of Mr Soros mean that the time may be over for cheap credit, which has fed the housing and stock-market booms, rising consumption and consumer debt. Australia, having to pay more for foreign borrowings, will need to bring down its burgeoning foreign debt. Or will it be forced to?

The age of cheap credit was also when Western governments kept fuel and food prices down. Responding to lower prices over the past 30 years, farmers haven't invested enough to expand food supplies to match rapidly expanding demand.

Similarly, there has been little incentive to invest in oil exploration and refining.

This lack of investment in agriculture and oil has resulted in world shortages today, causing sharp rises in oil and food prices.

Australia is facing an added problem with its oil supplies. In seven years, the country will be 80 per cent dependent on imported oil, which the country is unlikely to be able to afford.

Urgent action is needed now to 1) develop a major sugarcane-based ethanol industry, 2) build the infrastructure needed to boost the use of Australia's huge gas deposits, and 3) expand oil exploration.

In the meantime, world oil prices are likely to stay well above the levels of the past 30 years until supplies and refining capacity are expanded, both of which can require around a 20-year lead time.

In Australia, food prices have been kept low by government deregulation of rural industries under National Competition Policy, despite the growing concentration of market power with processors and supermarkets. Further, Australia's radical free trade policies mean that Australian farmers have been forced to compete in their domestic market and on the export market at prices that are heavily underpinned by subsidies.

According to figures from the Organisation for Economic Cooperation and Development (OECD), Australian farmers sell almost at the corrupt world price, which is underpinned by an average 27 per cent producer-support subsidy and a 15 per cent consumer subsidy. Further, some exports receive export subsidies and some are dumped, i.e., sold at below the cost of production to get rid of excess stock.

Forced to compete at the corrupt world price, the OECD notes that, "In Australia and New Zealand, domestic [farm-gate] prices were less than 1 per cent above world prices in 2004-06. (Agricultural Policies in OECD Countries: Monitoring and Evaluation 2007, p.47).

In short, the OECD figures show that Australian farmers receive the lowest farm-gate price in the developed world, and that Australian consumers receive the lowest priced food in the developed world.

Rudd's dilemma

The Rudd Labor Government now faces a huge dilemma, given its election promise to keep food prices down.

To increase much needed investment in agriculture and boost food supplies, farm-gate prices need to be allowed to rise, both to cover the huge rise in oil, fertiliser and other input costs, and to give farmers a return on investment. To get a fairer price for their product, farmers need preferential access to their domestic market.

Then, to keep the price to consumers from rising too fast, the Federal Government needs to take major steps to overcome the concentration of market power in just two supermarkets. In particular, governments need to bite the bullet and introduce divestiture legislation to break up the supermarkets and so bring serious competition into the grocery market.

Instead, indications are that the Government is moving in the opposite direction. The Government is about to capitulate to the supermarkets by emasculating the 2007 Birdsville Amendment to the Trade Practices Act, which outlawed predatory pricing.

Hence the dilemma. If governments won't act to give farmers a fair price and to bring about serious competition in the retail sector to slow price rises, then to keep food prices down, governments are likely to continue supporting deregulation of the farm sector.

This will have the perverse medium-term effect of driving more and more farmers out of business, reduce domestic food supplies and still force up food prices.

Soon, Western capitalist economies may need to adjust to major changes as the cost of credit, food and energy rise... and these changes don't include the huge expense of the proposed carbon-trading scheme.

Under this new scenario, eventually transport and carbon-trading costs may make it cheaper to produce food and more manufactured goods domestically, rather than to rely on high cost transport to ship goods from their cheapest source all over the world.

- Patrick J. Byrne

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