July 13th 2002

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Articles from this issue:

COVER STORY: Escaping our debt roller coaster

CANBERRA: Simon Crean's winter of discontent

BIOETHICS: Tell the truth about adult stem cells

AGRICULTURE: Sugar industry report: a mixed bag

STRAWS IN THE WIND: Victoria clones white elephant / The new boy scouts

TRADE: Globalism - an idea whose time has passed

LAW: Government approves ICC - with qualifications

Sexual misconduct in the church (letter)

Keeping couples together (letter)

"Censor" or "classify"? (letter)

ENVIRONMENT: Our future in our own hands

MEDIA: What of women traumatised by abortion?

ABC Media Watch: who judges the judges?

ABORIGINAL AFFAIRS: Mabo decision - ten years of frustration

AFRICA: Zimbabwe's agriculture, industry face meltdown

ASIA: Free trade agreements - what's in it for us?

FILM: Molokai: the story of Father Damien

BOOKS: Marriage, Health and the Professions

BOOKS: Afghanistan, Where God Only Comes to Weep, by Siba Shakib

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Escaping our debt roller coaster

by Peter Westmore

News Weekly, July 13, 2002
Last week's deterioration in Australia's trade performance - described as the worst monthly result since August 2000 - will put more pressure on Australia's soaring national debt, with uncertain implications for the future of the national economy.

The strength of the Australian economy over recent years has been largely based on government policies which have strongly encouraged domestic debt for spending, enabling it to weather the 1998 Asian economic meltdown, the September 11 attacks on the US, and the recent decline of the US dollar and US stock exchange indices.

Within Australia, loose monetary policy, coupled with low interest rates, have encouraged a dramatic increase in spending on homes, cars and consumer goods. One result of this, as the Melbourne Age's Tim Colebatch pointed out recently, is that household debt has more than doubled from $267 billion to $580 billion over the past seven years. (June 30, 2002)

House prices

A major part of this can be attributed to rising home prices. Bank leading for housing rose 19 per cent in the year to May, and home buyers' equity in their own homes declined from 81 per cent in 1995 to 74 per cent in 2001, and is still falling.

One consequence of this is that the Australian economy is becoming increasingly dependent on the good will of foreign lenders.

While economic activity continues at its present level, their confidence is likely to remain firm. If, for any reason, the wheels of business stop spinning, the consequences for many could turn catastrophic, as they have for many in Australia's agricultural sector, who have suffered sudden falls in income over recent months.

One troubling figure is that in May, the last month for which figures are available, the import bill rose two per cent to $13.1 billion, while exports were flat. That is the seventh successive monthly trade deficit, and the worst monthly result since August 2000.

This comes at a time when the United States, the engine of world economic growth, is under increasing economic pressure.

Mounting concerns about accounting scandals - in WorldCom, described as "the pre-eminent global communications company for the digital generation", earlier the energy giant, Enron, and more recently Xerox - have caused a sell-down in stocks on Wall Street, pushing prices down to levels seen after the bombing of the World Trade Center last September. The high tech Nasdaq index has reached its lowest level in five years.

One of the causes seems to be the withdrawal of Japanese investors, who have long provided capital to finance the American economic expansion, and coincidentally, the massive expansion of America's foreign debt.

Now, the Japanese have taken fright at the size of the debt which their lending helped to create.

Potentially, Australia faces similar problems due to its escalating foreign debt. According to the latest Reserve Bank Bulletin (June 2002), Australia's net foreign debt at the end of March was $332 billion, a figure which has doubled in the past ten years. If one looks at Australia's net foreign liabilities - which adds foreign borrowings plus foreign investment in the stock market - the figure is even worse, $420.9 billion.

The risk for Australia is that almost any bad news could trigger a collapse of confidence, which would cause the lenders to take flight, as they have done in the United States and a number of countries in South America, most particularly Argentina.

Throughout the 1990s, Argentina was regarded as the country in Latin America which had most closely followed the US economic model, based on free markets, a stable currency, and strict controls on government expenditure.

As the leading US economist, Paul Krugman, wrote, "Argentina, more than any other developing country, bought into the promises of US-promoted ‘neoliberalism' (that's liberal as in free markets, not as in Ted Kennedy). Tariffs were slashed, state enterprises were privatised, multinational corporations were welcomed ... Wall Street cheered, and money poured in; for a while, free-market economics seemed vindicated, and its advocates weren't shy about claiming credit."

Then things began to fall apart.

Krugman said, "When the economy went sour, the International Monetary Fund - which much of the world, with considerable justification, views as a branch of the US Treasury Department - was utterly unhelpful.

"IMF officials - like medieval doctors who insisted on bleeding their patients, and repeated the procedure when the bleeding made them sicker - prescribed austerity and still more austerity, right to the end."

Argentina needed IMF backing to repay its $US141 billion ($256 billion) foreign debt. When this was refused, banks collapsed, people lost their lives' savings, inflation soared, and unemployment has surged to 20 per cent.

If Australia is to avoid these disasters, it must urgently commence a program to rein in the foreign debt, based on rebuilding Australia's primary and secondary industries. Otherwise, we might as well sit back, and wait for the same calamity to hit us in turn.

  • Peter Westmore is President of the National Civic Council

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