EDITORIAL by Peter WestmoreNews Weekly
Can Australia avoid economic stagnation?
, October 25, 2014
Could Australia soon be facing a downturn similar to that afflicting many other countries since the global financial crisis? If so, what can be done about it?
Six years after the onset of the global financial crisis (GFC), the International Monetary Fund (IMF) has warned that the global economy faces a further five years of stagnation (The Australian, October 8, 2014).
The IMF’s statement comes after the influential Harvard economist, Professor Lawrence H. “Larry” Summers, stunned the IMF’s 14th Annual Research Conference on the Economic Crisis in November 2013, when he said that a combination of asset “bubbles” and debt-funded consumer spending may have masked economic stagnation in Western nations from the late 1990s to 2007/08 (see News Weekly, February 15, 2014).
Once the GFC burst the bubble and debt-burdened consumers were compelled to rebalance their budgets, overall spending collapsed and the illusion was exposed, revealing what Summers called “secular stagnation” — which, in layman’s language, means “no real growth”. Summers said that the U.S. economy may have been bogged in this state for more than 30 years.
The solution proposed by Summers also startled his audience. He argued that if the population of consumers was not growing at a pace needed to sustain economic growth, then governments may have to inject financial capital into their economies permanently.
This analysis represents a dramatic turnaround for Summers who was one of the influential architects of banking deregulation in the United States.
So could Australia also be facing economic stagnation? For the past decade we have ridden on the back of the mining boom; but now coal and iron ore prices are falling dramatically, while a host of high-valued industries are in decline.
Australia’s car industry is closing, as Ford and Holden wind down.
Australia’s oil refineries are closing. There will be none left by 2030.
We will soon be importing all motor vehicles and nearly all our liquid fuel requirements, except gas.
Most of our major agricultural industries are in decline, as explained in our Canberra Observed column in this issue of News Weekly.
The international competitiveness of Australian companies is being challenged by rising electricity and gas prices and the high value of the Australian dollar. Our aluminium and other smelting industries are winding down as Australia’s rising energy costs make them less competitive.
So, despite Australia having survived the GFC relatively unscathed, many of our key industries have nonetheless been “hollowed out”.
How can Australia rebuild its key industries and build new industries to generate sustainable growth in output and employment?
A comprehensive nation-building program would require many components, but one key element would be providing the capital needed for industry investment.
Karl-Theodor zu Guttenberg is a former German Minister of Economics and Technology, and Richard A. Werner is professor of international banking at the University of Southampton.
Writing recently in Project Syndicate (August 18, 2014), they argued that the GFC and accompanying economic stagnation are the result of the world’s major banks creating money to buy assets and to speculate on financial markets.
This led to bubbles in the property and financial markets, creating boom-bust cycles that have destabilised the global economy and stagnated many major economies.
However, Guttenberg and Werner say that recent insights by the Bank of England (BoE) on how banks create and lend money show a way out of this long-term economic stagnation.
The BoE explained how, “by extending credit, banks actually create 97 per cent of the money supply”. This means that banks are not merely financial intermediaries, making savings available for loans; rather, banks are money-creators.
Guttenberg and Werner say that the proper recognition of the true role of banks will be a “game-changer”, providing investment for productive businesses, as well as allowing governments to more effectively tackle recurring banking crises.
Part of the solution, according to the authors, can be “a network of small not-for-profit local banks providing universal banking services, and loans to small and medium-size firms.…
“Such schemes underpinned Germany’s economic strength and resilience over the last 200 years.
“Beyond making the banking sector more robust, such an initiative would boost job creation per dollar in bank credit.”
While the large banks are likely to resist the creation of new banks, as Guttenberg and Werner point out: “The unfettered creation of money by large private banks has generated overwhelming instability, undermining the fundamental principle that money creation should serve the public good.
“By implementing safeguards that ensure that credit serves productive and public purposes, policy-makers can achieve debt-free, stable and sustainable economic growth.”
This is a fundamental policy change that Australia needs in order to build its industries and provide long-term, high-skilled jobs for its young people.
Peter Westmore is national president of the National Civic Council.