GLASS PYRAMID ‘EXCLUSIVE’ SEALED SECTION CONTENT
Note: An earlier version of this edition referred to “cretins”. That was unkind to the cretin community. References have been replaced with “snake oil merchants”. Apologies in advance to law abiding and legitimate merchants dealing in that fluid.
Now that the end of the mining boom is rapidly moving to the realm of undeniable fact it is important that the snake oil merchants who promoted the idea of a mining boom that would last for decades are held responsible.
We are talking about those who said that a balanced economy should be thrown overboard to accommodate a land of ‘sweeping mine holes’. Those who said that Australia’s fate was to be a destination for off-shore predatory capital – like some colony who never grew up. Those who said manufacturing was for the birds and we should just leave that to our “currency warrior” capital exporting trading partners.
Care must be taken not to fall for the line / nonsense, that the snake oil merchants are already preparing, and that is to blame the victims who swallowed the BS hook line and sinker. Who are the victims? All those individuals and small and medium sized businesses who made the mistake of accepting as reliable all the rubbish spouted by the mainstream press, over lobbied pollies, policy wonks and “pet economists” of the FIRE sector .
The lines run will be along the following lines “..no one was forcing them to borrow”, “..we did not think anyone would take us seriously”, “..people are adults and able to make their own decisions…”, “…It should have been obvious we were all self-interested spruikers or as clueless as the next guy…”. Basically the sort of stuff the tobacco industry and fast food industry rolls out when their products of addiction and disease cause injury.
The snake oil merchants know that by blaming the victim and “spreading the blame” it is more likely that they will be able to sneak away without censure or penalty. They also know it is more likely that the taxpayer will be called in to make their victims good rather than themselves be held to account.
Even worse we will get even more claims by people like Mr Robb and other sell-out cheerleaders in major news publications, that we now have no choice but to sell off assets and IOUs to foreign buyers and governments even faster than we already do. To assist the process the Federal Government has been signing FTA’s, as fast as it can, that lift the trigger on FIRB review to $1 billion for some items in the great post-mining boom Aussie asset garage sale.
The Glass Pyramid has some sympathy for all of those individuals and small to medium sized enterprises who believed that it was reasonable to base life and business plans on the ruminations, predictions, condescending assurances by the ‘pet economists’ and assorted mainstream soothsayers in government and the banks (where most of the pets live and are trained) that this mining boom would run for decades.
If there is one group that deserves the rough justice of insolvency it is the “blue sky for ever” crowd that spruiked the nation into delusion.
But as we know they are all tip toeing away and even have the hide to claim ‘they saw it coming’ or that the only problem is that the ‘proceeds of the boom were wasted’.
Dumping a mountain of capital into mining CAPEX that is now locked up behind chain link fencing is WASTING the proceeds and I don’t recall many of that crowd (especially the banks who were lending to those mining contractors) arguing against the housing asset price ponzi program either.
If anyone wants to know where the proceeds of the mining boom went need only look around the over capitalised residential dwellings and massive holes across the nation.
It is time to hold people accountable – before it all gets forgotten and rolled under history’s carpet.
Categories: Glass Pyramid Exclusive
The Glass Pyramid 
Correct me if I’m wrong but Australia’s Net Investment Position Liability is $866.1bn in the last quarter of 2014 (see latest balance of payments data ABS 5302). This figure has been flat in dollar terms over recent years while GDP has grown. In recent quarters, Australia actually has built up a net asset position of $58.7bn. Thus I don’t buy into the whole “Australia is selling all it’s assets” argument. Again correct me if I’m wrong!
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Your figures are correct but I am not sure why you do not see a cause for concern.
A Net Investment position of $866.1B is hardly something to crow about. Keep in mind that the Market Capitalisation of Woolworths is approx $37B and that recent sale of Toll to the Japan Post was only $6.5B.
$866.1bn represents a LOT of assets having been sold and IOUs issued already.
As for the lack of further deterioration in recent months – well that might have something to do with a once in the life time mining boom and the rare sighting over the last years of a few trade surpluses.
When the mining bust has been a fact for 12+ months and the garage sale kicks pursuant to all these new FTAs that lull will soon be a distant memory.
Your reference to building up a net asset position of $58.7bn is best read in the context of the full statement on the ABS site.
“..Australia’s net IIP liability position was $866.1b at 31 December 2014, a decrease of $7.8b (1%) on the 30 September 2014 position of $873.9b. Australia’s net foreign debt liability increased $38.0b (4%) to a net liability position of $924.8b. Australia’s net foreign equity increased $45.8b (356%) to a net asset position of $58.7b at 31 December 2014…”
But perhaps more importantly this comment on the aph site re the split between debt and equity with regard to net foreign investment,
“…By the beginning of the 2000s it had climbed to above 80 per cent, and by 2013 it accounted for 96 per cent of net foreign investment…”
That page also poses the question we are discussing and seeks to answer it directly – possibly in terms you would approve
“..Is Australia’s foreign debt too large?
While the size of Australia’s foreign debt is large, especially when compared with the Commonwealth’s net debt figure (expected to be $192 billion in 2013–14), it is not often talked about. One reason for this is that it hardly represents anything new. Australia has always been a net recipient of overseas funds because investment opportunities in Australia have always exceeded what can be funded from the domestic savings of its population. This has led to capital inflow that has built up capital, income and wages, but has also increased our net foreign liabilities, most of which are foreign debt rather than foreign equity.
The size of Australia’s foreign debt would be a cause for concern if it was mainly caused by increased consumption rather than increased investment, raising concerns that Australia was living beyond its means. However, Australia’s national saving and national investment levels are both above their long-term average, suggesting Australia is well able to cover the servicing of its debt.
Finally, while Australia has a gross foreign debt that is almost the size of its annual GDP, the more meaningful figure is net foreign debt which is just over half as big, and of this about a quarter is held by the public sector. Since only the portion of foreign debt held by the public sector is liable for repayment by the taxpayer, only this portion has budgetary implications.”
I will not deal with each of those arguments here other than note that the old classic myth heads up the batting order.
“… Australia has always been a net recipient of overseas funds because investment opportunities in Australia have always exceeded what can be funded from the domestic savings of its population….”
Hogswash. If anything a country as wealthy as Australia should be a major creditor nation not a leader in the debtor stakes.
For visitors to TGP interested in this issue the following links may be of interest.
http://en.wikipedia.org/wiki/Net_international_investment_position
http://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/rp/rp1415/Quick_Guides/AustForeignDebt
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*Hogswash. If anything a country as wealthy as Australia should be a major creditor nation not a leader in the debtor stakes*
And when you consider since 1966 you cant buy anything without “Australian Dollars” what does anyone need “foreign investment” except to fluctuate the exchange beneficently!?!? Crazy.
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inefficiently that should read
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“If anything a country as wealthy as Australia should be a major creditor nation not a leader in the debtor stakes.”
Yet the US, UK, NZ, Canada etc. are all debtor nations. Most of the creditor nations are the ones who manipulate their currencies lower. The currency manipulators build up savings from their trade surplus and invest that capital in other nations. Thus the non-manipulators become debtor nations. This by itself is not a problem. The problem arises when that capital is invested in unproductive investments (e.g. housing bubbles). Michael Pettis talk about this a lot. The main point is trade surpluses for some countries mean trade deficits for others. Thus Australia always being a debtor nation is the result of the currency manipulation and mercantalist policies of other nations.
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“..Thus Australia always being a debtor nation is the result of the currency manipulation and mercantalist policies of other nations….”
Keep in mind that it takes two to tango. A mercantilist can only pursue a strategy of exporting capital to manipulate its exchange rate if someone accepts those exports. You correctly note that it is unproductive capital exports/imports that are the problem. Unfortunately they are the stock in trade of the mercantilist and their ‘dancing partners’ like Australia.
The classic transactions used for mercantilist unproductive capital exports are purchasing government bonds, generalised lending (buying IOUs of the banking sector) and the mere transfer of ownership of assets.
Which is a pretty good description of the transactions driving Australia’s status as a debtor nation.
So why do we do it?
A combination of an ideology that claims unregulated capital flows are best because less regulation is inherently a good thing – even in an environment where our trading partners are openly manipulating flows – and the good old profit motive. Our banks and FIRE sector profit from the flows and naturally they run every argument they can think of that legitimises unregulated capital flows regardless of whether they are productive or unproductive. The weakness of those arguments can be seen in the flimsy excuses given on the aph site re the size of Australia’s external debt.
Finally, there is weird notion that somehow by ‘accepting’ those capital exports of our mercantilist trading partners we are getting something for nothing, we get their ‘cheap’ savings and it costs us nothing. That is probably the most dangerous attitude of all as there is nothing free in this world and the price is clear – an unbalanced economy riddled with asset bubbles, a work force dedicated to tending them or encouraging their continuance and steady decline in productive economic activity. None of that happened by accident. It is the inevitable result of the accepting imports of unproductive capital.
As has been noted in other Glass Pyramid posts, making a start on limiting unproductive capital flows is not hard, the first steps are to:
1. Wind down the sale of the government bonds to off shore parties. A system of registered ownership of government bonds will limit the use of govt bonds as a tool of exchange rate manipulation.
2. Wind down wholesale borrowing by our major banks related to their residential mortgage lending. Ideally as part of a process of ending the endogenous creation of money by our private banks.
Those two steps along with FIRB supervision that limits the mere transfer of ownership of key capital and land assets off shore would effectively address the majority of the unproductive capital exports to Australia by our mercantilist trading partners.
That would then leave productive capital inflows. If you are wondering what they might be, the answer is pretty straight forward. The most useful capital imports are not money at all. They are highly skilled and talented workers and managers and their know how, along with specific plant and machinery that cannot be currently produced locally. Look at the approach taken by those mercantalists like Japan, Korea and China and you will see they are keen to encourage joint ventures and other methods that allow intellectual property and technology transfer but they are HIGHLY restrictive about the sort of unproductive capital inflows that Australia’s FIRE elite and their flunkies think are the best thing since sliced cheese.
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Mining will last for decades but booms never do. Of course I’m a little gentler on the forecasters – to have had such good fortune with China pulling all stops to stimulate economic growth post GFC and to be a resource based nation – we hit double whammy. Perhaps a little hubris to be expected.
My one constant throughout this period has been the urging not to commit generational government spending on the back of cyclical revenues. This is simply prudent behaviour – but the corrupted nexus between politician and elector demands it.
So who is at fault?
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Too bloody right! Although I’ll still smile when all their IPs can’t buy a bl*wjob in Bangkok Bwaaahaaahaahaa
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