April 7th 2018


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Articles from this issue:

COVER STORY Free trade agreements leave us even more dependent on China

EDITORIAL Why Russia re-elected Vladimir Putin

CANBERRA OBSERVED Empty seat last vestige of minor parties' party

NATIONAL AFFAIRS Liberals take power but plan for none for SA

INTERNATIONAL AFFAIRS Sexual exploitation at Oxfam symptom of culture of death

RELIGIOUS FREEDOM General protection gives a false sense of security

PHILOSOPHY AND CULTURE On celestial politics

GENDER POLITICS Trans ideology awash with big money from big biomed and big pharma

REGIONAL AFFAIRS Taiwan stands up to Beijing's bullyboy tactics

CINEMA Outstanding film follows St Paul to his death in Rome

HUMOUR An Appetite for Diamonds: Porphyry Volpone investigates

MUSIC Power playing: Technique v musicality

CINEMA Peter Rabbit: More Bugs than Beatrix, but lots of fun

BOOK REVIEW We're doomed; but we're not alone

BOOK REVIEW Subcontinent set for Asian century

LETTERS

NATIONAL AFFAIRS The deeper causes of Australia's social malaise

GENDER POLITICS Queensland proposes transgender birth certificates

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BOOK REVIEW
We're doomed; but we're not alone




News Weekly, April 7, 2018

CREDIT CODE RED: How Financial Deregulation and World Instability Are Exposing Australia to Economic Catastrophe

by Peter Brain and Ian Manning

Scribe, Brunswick
Paperback: 224 pages
Price: AUD$29.99

Reviewed by David James

The warning that Peter Brain and Ian Manning sound in Credit Code Red: How Financial Deregulation and World Instability Are Exposing Australia to Economic Catastrophe, certainly makes sense. The indebtedness that they document does sound a warning that Australia is becoming stretched beyond its means.

Trouble is, nothing much makes sense in the global financial system these days. Yes, Australia is becoming more exposed because of rising debt. But so is the rest of the developed world. Global debt is estimated to be about $US220 trillion, which equates with over 300 per cent of world gross domestic product (GDP). It is unsustainable, which is why interest rates have fallen to negligible levels, effectively kicking the can down the street.

Japan’s debt-to-GDP ratio is a staggering 250 per cent, although almost all of it is owed internally. America’s debt is officially $US18 trillion, about equivalent to its annual GDP.

In Australia, government debt is comparatively low, at just over 40 per cent of GDP, about half the level for most European countries. But Australian household debt, according to the International Monetary Fund (IMF), is about 100 per cent of GDP, compared with an average of 63 per cent in other developed economies. The nation’s financial system, unfortunately, has become one giant property gamble.

That is bad enough, but there is worse news: a giant casino called derivatives is sitting on top of the financial world. Derivatives are based on “leverage”, which is not exactly debt but is similar. The idea is that to make a bet on one of these financial instruments, the trader only has to come up with a small percentage of the amount, and the rest is notionally agreed. If the bet succeeds, the trader makes a fortune; if it fails, there is a huge loss. Notionally.

Derivatives now are valued at over $US700 trillion, according to the Bank for International Settlements: a staggering amount. Although that is sort of notional, it is also sort of debt.

Brain and Manning capture well enough the Australian leg of this insanity. They pinpoint the fundamental scam that is behind it, financial deregulation, which they rightly identify as “the extension from free trade in markets to free trade in money”. As they observe, deregulation was supposed to increase the efficiency of the allocation of funds but instead it has tempted banks and other financial institutions into “the reckless misallocation of funds”.

They also identify one of the great flaws behind Australia’s supposedly strong economic growth. Finance appears in GDP statistics (GDP is just a record of transactions), but it does not produce anything. As Brain and Manning show, the finance sector is now “9-10 per cent of national income, more or less double the proportion it attracted during the post-war era of economic growth”. That increased “growth” is not higher production, it is income transfer to a privileged, often parasitical, sector.

Their attack on the neo-liberal ideology – that “all government is bad, therefore give everything over to the private” – is entirely correct. As Robert Reich explains in his book, Saving Capitalism, you cannot deregulate markets because “the rules are the economy”, they are not separate from it. This is especially so in finance, which consists entirely of rules. It is why the phrase “financial deregulation” is an oxymoron and why it is nonsense to see government as being necessarily in opposition to private industry.

The authors’ heavy focus on Australia leads to a limited perspective. For one thing, their claim that Australia’s indebtedness will soon mean that the country will find it hard to borrow overseas is highly questionable. The Australian dollar is the fifth most traded currency in the world, far in advance of what it should be for the size of the economy (partly because it is considered a proxy for investment in China). That does not suggest that there will be a shortage of demand for Australian financial assets.

The authors also, bizarrely, describe overseas equity investment as borrowing (p23). True, this silliness is embedded in the national accounts, which is one reason why the current account deficit/surplus is such a flawed figure. But equity is not borrowing. When you borrow, the risk is on the receiver of the capital. When you make an equity investment, the risk is on the provider of the capital.

The authors’ claim that we are in the credit “red zone” is no doubt correct. But so is the rest of the world. We are not going to be very different when the music stops in this game of musical chairs.


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