March 1st 2008


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Articles from this issue:

COVER STORY: The Australian economy a 'house of cards'

EDITORIAL: Timor troubles: the way ahead

CANBERRA OBSERVED: What remains to be done after saying sorry?

NATIONAL AFFAIRS: Brian Burke and Kevin Rudd cross paths again

ECONOMIC AFFAIRS: Economic policy-making in conflict

STRAWS IN THE WIND: Hysteria in the House / US election campaign / "Say sorry" segment / The economy

ISLAM: Uproar over Archbishop of Canterbury's Islam gaffe

AUSTRALIAN HISTORY: Why Australia's Christian heritage matters

HUMAN RIGHTS: The 2008 Olympics and China's Communist regime

TAIWAN: Chen: Almost over, but not out

INTERNATIONAL AFFAIRS: Australia and Japan set to draw closer together

AS THE WORLD TURNS: Global warming? It's the coldest winter in decades / Capitalism's enemies within

Reality gap between words and action (letter)

Wentworth's vision for Australian railways (letter)

Thuggery at Brisbane pro-life rally (letter)

The struggling Rudds (letter)

BOOKS: IT'S YOUR TIME YOU'RE WASTING: A teacher's tales of classroom hell, by Frank Chalk

BOOKS: CAPTAIN BLIGH'S OTHER MUTINY, by Stephen Dando-Collins

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COVER STORY:
The Australian economy a 'house of cards'


by Patrick J. Byrne

News Weekly, March 1, 2008
Debt and luck have kept the economy growing over recent years, while key sectors have been hollowed out, leaving the Australian economy a "house of cards", writes Patrick J. Byrne.

Last week, the international credit crisis caused ripples in Australia when the ANZ Bank chief Mike Smith announced that the ANZ's bad debts charge could hit $1 billion, in part due to the US sub-prime mortgage collapse.

Warning of the consequences, he said, "I would recommended you all visit London and New York in the near future, just to see the effect of what is really happening there. You know this a financial services bloodbath..." (ABC Radio National's PM program, February 18, 2008).

It will take until later this year to evaluate the full extent of this crisis and to assess if cutting interest rates and pump-priming by central banks around the world will counteract its effects. Should these policies fail, the US, and possibly other economies, may face a protracted crisis, like the 15-year stagnation of the Japanese economy after the bursting of the Japanese property bubble in 1989.

Market collapse

The ANZ's Mike Smith did go on to say that "the Australian banking system is in remarkably good shape in comparison" to the US and Europe, but that remains to be seen. We face a different problem from the US sub-prime market collapse.

The cyclonic-sized thundercloud overshadowing the Australian economy is the burgeoning foreign debt. It is now over $570 billion, growing at about $50 billion per annum.

Most of this debt is owned by the Australian banks, and most of this borrowed money has been loaned for mortgages or consumption by households. Today, household debt is 159 per cent of household income, one of the highest levels in the world.

Australians now have the least affordable housing in the developed world, according to a recent survey of 227 major cities by the US-based consultancy Demographia. It found that Australian housing prices are 6.1 times average incomes, compared to Canada (3.1) and the US (3.6). These figures do not include interest and charges. Australia's interest rates are among the highest in the developed world - and rising.

These figures indicate that Australian households are much more highly geared than the last time interest rates hit very high levels in the early 1990s.

In order to keep attracting hot foreign capital to fund our huge foreign debt, Australia has to keep interest rates about 2 per cent higher than in the US, which makes our nation's interest rates among the highest in the developed world.

The foreign debt is Australia's Achilles heel. Economic policy should aim to scale down this debt, or else, eventually, there will be demands for repayment. At that point it will be essential not only to cut imports but to boost exports, which means Australia will need strong manufacturing and agricultural sectors. Yet both these sectors are on their knees.

Agriculture

Consider agriculture. Almost all rural industries are in crisis. They have been negatively affected by:

• Successive governments failing to understand that the domestic market was the most important market for our rural products, not the export market;

• In falsely believing that the export market is the primary market for agriculture, governments have pursued free-trade policies in the World Trade Organization (WTO), despite the US, EU, Japan and many other nations making it clear that they will never support free trade in agricultural goods;

• Deregulation under so-called National Competition Policy, aimed at making our farmers more competitive on the export markets - a policy, however, which has had the perverse effect of dismantling rural marketing agencies, stripping farms of collective-bargaining ability in the face of the monopoly-like power of processors and supermarkets;

• Free-trade policies that have seen competing imports seriously undermine many industries - like pork, dried fruits, and some fruit and vegetables - in what, for farmers, is their vitally important domestic market;

• Disastrous water-trading policies that are forcing up the price of irrigation water, and leaving some irrigation regions high and dry;

• The serious weakening of quarantine standards which were designed to defend Australian farmers from imports that risk bringing in exotic diseases;

• Gross neglect of infrastructure in regional areas due to the neglect of decentralisation policies;

• Radical environmental policies that are stifling some industries;

• The loss of specialist banking services that provided for the particular needs of farmers.

The consequent weakening of agriculture has seen the halving of the wool flock, the rapid decline of the sugar, fishing, dried fruits and many other rural industries.

Rural debt is now at a record level - $53 billion, i.e., over 100 per cent of farm income.

There is an urgent need for the government to investigate the primary market for agriculture. When it is discovered that the primary market is the domestic market, not the export market, then there will have to be an overhaul of trade policy and competition policy, or else Australia faces a collapse of whole farm industries and a rising dependence on imports.

Further, there needs to be a three-year moratorium on the trade of permanent water off farms, before the price of water is pushed up even further out of reach of farmers; and the Federal Government must insist on curbing the tax breaks for farm managed investment schemes (MIS), or else these schemes will lead to over-priced water and over-production, forcing genuine farmers out of business.*

Manufacturing and oil

Manufacturing now makes up only 11 per cent of our economy, and risks further falling below critical mass. The most important sector is motor-vehicle production.

Last year, for the first, time Australians bought one million new cars, but only 19 per cent were domestically produced, compared to about 30 per cent as recently as 2000.

To be a developed first-world nation, a country must have hard industries - a motor vehicle, or aeronautical, chemical or electronics industry. Australia has only a motor vehicle industry, and it is at increasing risk of losing this industry offshore. Net imports in automotive vehicles and parts were $18 billion in 2005, and are growing fast.

Not only is Australia increasingly dependent on imported cars, but also on imported oil.

With crude and refined fuel at US$50 a barrel, Australia's net fuel imports were $12.8 billion in 2005-06, and will rise to $27 billion a year by 2015. Our already huge trade deficit will rise dramatically if the price of oil goes up to, say, US$100 a barrel, or if the Australian dollar falls dramatically in value, as is likely when the commodity boom ends.

Currently, oil and motor vehicle imports make up over half the annual growth in our foreign debt.

This underscores the urgent need for the Federal Government to mandate ethanol in our fuel as a necessary step towards building a major biofuels industry* in Australia, based on sugar-cane production. Uniquely, Australia has the land, water and climate for building a major biofuels industry that does not compete with food production and that could replace much of the nation's imported oil.

Equally, the recently announced federal inquiry into the automotive industry should, as a top priority, recommend measures to vastly expand small car production, using shared platforms across the different car companies. Australia is one of only six countries capable of designing and building world-class cars from scratch.

The objective should be to have Australia produce over one million cars per year - mostly flex-fuel cars that can run on ethanol - for both the domestic and export market.*

These two policies alone could massively reduce pressures on Australia's burgeoning foreign debt.

Minerals boom

Won't the mineral's boom save Australia's bacon? Australia has been riding on the back of an extended minerals boom, the result of the massive expansion of China, East Asia, India and Russia. In the short-term, this boom may even relieve our foreign debt slightly.

However, all mineral booms come to an end. New mines elsewhere come on line, expanding supply and bringing down prices to their long-term historical trend line.

Unfortunately, profits from a minerals boom can be like the curse of Midas, if we allow the rural and manufacturing sectors to shrivel.

The demand for our minerals has forced up the value of the Australian dollar to around US90¢, which has had the perverse effect of making our manufactured and rural exports dearer, and hence less competitive, on world markets.

Then, when world commodity prices eventually decline, the Australian dollar will fall dramatically, which risks triggering a crisis of confidence in the Australian dollar, and causing a major credit crisis for Australia.

While in theory a lower-valued Australian dollar should make the prices of Australia's manufactured goods more competitive on world markets, if those industries have moved offshore, as the car industry is steadily doing, the industries simply won't be here to take advantage of a more competitive Australian dollar.

Conclusion

Australia is enjoying an illusory prosperity built on debt, financed by the international financial markets. This has papered over the serious structural flaws that have developed in the Australian economy.

Farmers and manufacturing workers have suffered declining living standards. Others have found prosperity, but it is based on borrowing offshore to pay for goods that we no longer produce at home.

In this fragile state, a major shock in any one sector could have serious consequences for the rest of the economy. A trigger could be rising food and energy prices; or higher interest rates; or a bursting real estate bubble; or a major decline in the commodities market prices setting off a calamitous fall in the Australian dollar; or shocks originating in the US sub-prime mortgage market.

It is time for a fundamental policy rethink before "the house of cards" is put to the test by a friendly breeze turning into a hostile gale.

- Patrick J. Byrne is national vice-president of the National Civic Council.

* News Weekly has produced detailed policy brochures on the creation of a biofuels industry and domestic car industry, and a proposed solution to the water-trading crisis. These are available at www.newsweekly.com.au




























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