Splashing the cash

April 30, 2009 at 2:00 am Leave a comment

Regular ThinkingShift readers would know I think the future will be dark for many reasons. And I’m getting pretty worried about Australia- not only how we’ll navigate through the GFC but also how we’ll come out of it at the other end (who knows when that will be). I’m no pointy-headed Economics expert but I’ve been reading heaps on the global financial hissy fit and I’m starting to wonder about a few things.

So the Australian Federal Government is throwing squillions of dollars at stimulus packages, hoping to tempt consumers to spend up and give the retail industry a boost; increased infrastructure spending is proposed and AU$900.00 bonuses for qualified people have been handed out in an attempt to avoid a long, slow, painful recession (well, heck, let’s just admit it – AUSTRALIA IS IN RECESSION). Where is this money coming from and for how long can the Rudd Government keep throwing money at failing industries and households (who most likely squirrel any bonus payments into their bank accounts rather than shopping until they are dropping). As I understand it, to finance Government spending on infrastructure, bailouts and stimulus packages, it has three ways to get its hands on money:

  • selling Australian Government bonds. These are attractive to buyers because when they mature, the principal sum is guaranteed by the Commonwealth Government;
  • borrowing overseas capital from say the IMF or Asian Development Bank; and
  • importing capital from a foreign country

But the global financial hissy fit is shrinking capital flow leading to a global solvency problem. Banks are reluctant to lend money as they stagger under the weight of financial losses on real estate. I read somewhere that the amount of money banks have in reserve that is non-borrowed funds is at a 50-year low.

Won’t this mean two things for Australia –  humongous national debt and a capital flow crisis because we won’t be able to find overseas capital? I heard on a TV program that our national debt will mean that every Australian will “owe” $10,000 each. Our Finance Minister, Lindsay Tanner, said the other day that the government’s deficits would exceed a total of $100 billion over the next three years. Crikey!  And how will the country get out of debt? Well, surely that means raising of taxes and interest rates or less government spending or both. Rudd has hinted that the rich might get slugged with a higher tax rate (following the UK’s lead). And if taxes go higher and the banks raise interest rates, then this means the bonus payments to Australians who qualified will eventually get paid back to the Government! So I’m getting concerned about what is quite clearly a debt binge that’s going on and I wonder if our Government shouldn’t be thinking of something else.

Rather than throwing $42 billion at stimulus packages that may or may not work, my view is that when a nation is in deep crisis, a responsible Government should do two things:

(1) baton down the hatches and prepare for a rough ride. After all, the IMF has just released its World Economic Outlook (grim reading) and expects the Australian economy to contract by 1.4%  in 2009 and unemployment to rise to 7.8% by 2010. So it’s no good doing the PR spin and talking about how Australia will be largely shielded from the global financial hissy fit because we’ve always been the “lucky country”.  The fact is we’re in the pickle with the rest of the world, so let’s admit it and get on with it. And getting on with it in my view means that the Government should be providing for its citizens to weather the storm – forget job creation, this is about survival and means providing housing, shelter, health care and transport, income support for those most severely affected. Then…..

(2) think about how to position Australia so that when the hissy fit is over, this country and Australians are ready and able to bolt out the gates and not be held back by a sluggish recovery. I think this means the Government taking over a lot of things – the banking system, infrastructure such as communications and rail transport that have been privatised. I have never been convinced that privatization of public utilities has increased competition (the raison d’être for privatization) and I think it is against the public interest. It is no longer about “serving the public” when something is privatized it’s about “getting profits and paying humongous salaries to CEOs” (and you finance the CEO salaries by raising prices).

So I think the Government needs to consider the following:

  • the first home owner’s grant of $14,000 – I get that the Government is trying to encourage young people to buy their own home. But how about tying this grant to the condition of ensuring that the home is sustainable. Not the McMansion that takes up a whole block of land but a home that has energy efficient insulation, energy efficient lighting, sustainable building materials etc. Most Australian homes are not built with our harsh climate in mind (well, bung in an airconditioner and she’ll be right mate) or with an eye to global warming. Developers don’t care, they just want the profit.
  • it has always struck me as BIZARRE that this Government does not seem to support the renewable energy industry. The previous Government gave rebates to householders who installed solar power or photovoltaics – we did both and now sell back our unused electricity to the grid. Germany apparently leads the world in renewable energy, yet here we are, a large continent full of sunshine and funding for research into renewable energies has contracted.
  • throw squillions of dollars at public schools (and not just for assembly halls) – after all, it’s the kids of the future who will have the skills to seize opportunities, create industries and jobs. At the moment, we are saddling them with enormous future debt.
  • set an executive salary cap – not just for companies that are bailed out.
  • get tough on banks. Don’t allow banks to get away with not passing on a cut in interest rates and don’t allow them to lend money they simply don’t have.
  • get smart about copper – I’ve said before on this blog that copper will be the resource of the future. There’s a black market in copper. It gets stolen from construction sites, off railroad tracks, from household plumbing systems. China is particularly thirsty for copper. Why? The main reason I think is that copper is used in hybrid cars and hybrid cars are the future. The increasing price of fuel and the dramatic impact of fossil fuels on our planet will drive the uptake of hybrids.  In 2008, Rudd said that the Government would get behind hybrid car research and development  – is this happening or was the intention cast aside by the GFC?  Australia is a leading producer of copper with many copper mines, such as the Mt Isa copper mine in Queensland. Chinese companies are busy snapping up mining and energy assets around the world, including copper mines. You only have to peruse Chinalco’s (Chinese resource company and aka Aluminium Corp of China) website to see they already own 100% of Peru’s copper industry. And we know they are salivating at the thought of investing in Rio Tinto who own 30% of the Escondida copper mine in Chile and have agreed to sell 49.5% of that 30% stake to Chinalco. This is a controversial deal that would see Rio Tinto get US$19.5 billion and help repay its huge $US38.7 billion debts from the acquisition of Canadian aluminium giant, Alcan, in 2007. Personally, I’d like to see the Australian Government stop a major source of this country’s wealth from going overseas. Chinalco is not a private corporate; it is a Chinese government-owned company – so any future disputes, say over how a mine is operating, are at a level beyond a corporate cat fight and could affect diplomatic relations between Australia and China. We need to think long and hard about our resources, particularly copper in light of what I’ve suggested, before we open up to foreign investment. Chinese foreign investment is not necessarily the smartest way to ride out the GFC. How does flogging off a mining company or two help unemployment? And another thing: wouldn’t details of Rio Tinto’s pricing structure and negotiations pass into the hands of the Chinese Government and put BHP Billiton into an unfair negotiating position??

These are just some of my questions and thoughts. The issue to me is where to best put Government spending and so far, I don’t think we’re getting much bang for the buck by throwing bonuses at households and praying they will take that money and party at the local shopping mall.  What do you think?

UPDATE: June 5 2009: Rio Tinto spurns Chinalco bid due to shareholder protests and will joint with BHP Billiton in an iron ore joint venture.

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Entry filed under: Australia, Economics. Tags: , , , .

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