The world media are a fickle bunch. Only six months ago, there were apparently “green shoots” popping up across the economy as commentators stretched to find positive news. A few months later, and it appears that Ben Bernanke’s green shoots have wilted, only to be replaced by austerity and double dips.
To a contrarian, or an investor who values history, the notion of a stimulus-led recovery envisaged by the likes of Bernanke (and more locally by Kevin Rudd) was unlikely to be successful. This was because the great crisis of 2007-2009 was not a typical recession, but as Bill Bonner describes it, a Great Correction. The process was never able to be completed because politicians and business leaders never allowed the correction to actually occur, instead, they pumped the economy with money.
In the US, they literally printed the stuff while in Australia, courtesy of low public debt levels, Rudd and Wayne Swan were able to borrow from younger generations to pay for promises that would allow them to keep their jobs (sadly, that didn’t work out too well for everyone).
The major share indices in the United States have now slumped for seven days in a row — in Australia, the S&P200 index has fallen from 5049 in April to 4250 now — a fall of almost 16% in less than three months.
Meanwhile, property prices, the last bastion of fiscal insanity, have finally started to ease of their record levels. Auction clearance levels (generally considered a leading indicator of demand for housing) have dropped in Melbourne from more than 80% to about 65% in recent weeks. Clearance levels are even lower in Sydney and Brisbane. House prices had been boosted by an easing in monetary policy by the RBA and a spate of fiscal initiatives, led by the first home owner’s grant. The grant had the direct effect of raising the cost of housing for younger Australians (and tipping extra dollars into the pockets of lucky vendors), requiring them to borrow more money to afford their first home.
But it wasn’t just equity and property markets that benefited from fiscal attempts to prevent a correction.
The Financial Review this morning reported that business car sales plummeted in June, down 7.4% from May figures (private sales were up though). The AFR quoted a Brisbane prestige car salesperson who noted that sales dropped from 14 last Saturday to only three this week. The reduction in business vehicle demand (and it is likely to reduce far further) was largely due to the drop off in the government’s 50% tax deduction for business asset purchases of more than $1000. That policy, of course, provided no lasting benefit for the economy. Rather, it had the simple effect of “bringing forward” demand. Businesses that would have otherwise purchased a vehicle in late 2010 or 2011 did so in 2009. That appeared to make everyone happy. Car dealers sold lots of cars and made lots of money while businesses were able to save thousands of dollars through the tax breaks.
Of course, the people picking up the tab — all other taxpayers, probably didn’t even realise what was going on. They saw that headline “economic growth” was improving and simply assumed that the government was doing a good job. The problem was, the Australian government (like those across the world) was trying to cure the problem of too much debt, but boosting “growth” through the use of additional debt.
While the business asset tax break failed basic principles of fairness, it was at least a step up from Kevin’s and Wayne’s other fiscal policies. Especially the tax break for households to install insulation, even though there weren’t enough qualified people to install the insulation and there weren’t enough companies who were able to manufacture the insulation itself. The cost of that policy wasn’t only felt by taxpayers (who not only paid for the initial roll-out, but are also paying billions to fix the mess), but also by four deceased tradespersons.
Eventually for Rudd, he picked a fight he couldn’t win. The resource super tax was intended to be a way of taking money from a few (largely foreign-owned) companies and spreading the wealth across many voters in the form of company tax reductions and superannuation guarantee increases. While deeply flawed in design, the RSPT was in reality no worse that the government’s other policies, like the insulation grant, or FHOG or asset investment allowance. It was simply another in a conga line of economic policies, designed not to benefit the nation’s long-term economic well-being (and ultimately, the standard of living for Australians) but rather, an attempt to improve the government’s political standing.
While Australia’s public debt levels, when compared with the US or many European nations are low, household (or personal) debt, especially mortgage debt, are among the highest globally. Mortgage debt as a proportion of GDP has risen from 40% a decade ago to be 90% now.
Australia may have looked like a miracle economy until now, but a worldwide double-dip recession will hit Australian families, especially those who have accumulated significant leverage, especially hard.
Disclosure: The author has a “short” economic position on the S&P500 index.
Dear Adam
Oh what a fortnight it’s been Adam, Australia out of the World Cup, a new Prime Minister for Australia in Mrs Gilliard Mathieson, that gushing oilwell is still gushing over in the Mexican Gulf…agghhhh,will it ever stop Adam? Julie heard that it’s a 100,000 barrells a day and climbing…and now we see that Australian Mortgage debt as a proportion of GDP has risen from 40% a decade ago to be 90% now…My God Adam!!!…whose gonna save us?
*****a Great Correction. The process was never able to be completed because politicians and business leaders never allowed the correction to actually occur, instead, they pumped the economy with money.*****
Yes Adam, it was the correction we had to have, but did n’t have it, and now we’re gonna have it anyway. ..Hmmm
I know you have probably been wondering about our house hunting but not much to report really.
Chris Stabarakis from real estate agency Coniatis, Lialls & Deceto keeps calling us up and taking me and Julie down to the auctions.
You wanna see this guy in action Adam, just amazing!!! Julie loves it when he calls the auction and drives himself into a frenzy…and then he gyrates wildly back and forwards with his hips and often winks and points at Julie and me, well, mostly at Julie actually, but I dunno why he does it anyway, especially since Julie and I have no interest in that particular property.
Chris Stabarakis reckons that we can maintain mortgage payments no problem at all, simply by using our credit cards to make payment when things get a bit tight…he just explains things so well Adam.
And just yesterday he put me onto a friend of his…Don Forsythe from real estate Valuation Company,…Vagra, Upton & Daprikee, who said that when we finally decide on a house and make a purchase and need to have a redraw facility or borrow against the property for an overdraft, we can call him for some honest help.
Where would Julie and I be without the support from these people Adam?
Oh yes!!!…and i just found out that it was n’t just Chris Stabarakis and Julie at his house that night of Julies hens party when she crashed at Chris’s place….No!!!..the old bloke who owns the deli underneath Chris’s apartment, old Bill Dottera…told me that Kim faithfull and Don Forsythe were there as well. How reassurring is that Adam?…that altogether there were 3 very honest and well respected men who stood guard over Julie while she slept it off….I am just so appreciative Adam.
Anyway, better go now….but both Julie and I certainly hope that our comments have not detracted anything from your extremely informative and bone-jarring article.
Yours Sincerely
Kevin & Julie Harris
Kevin & Julie, if you have any suspicions of dummy bidding at auction sites around Melbourne or any where else in Australia then phone the Victorian realestate institute immediately or call the police.
This of course has nothing to do with “Vendor” bidding, which is perfectly legal.
Who said Vendor Bidding is legal?
It’s common practise I am sure, but it might not be exactly legal. And why call it Vendor Bidding? It’s not the seller/vendor who is actually bidding but somebody nominated by the auctioneer on behalf of the seller who makes the “dummy” bids….and yes, it’s utterly disgraceful and the most deceptive of practises.