The Fragility of the Australian Economy: Second Rate Solutions Exposed!

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Australian Economy Outlook - The Economic Policy of Australia

Today’s Australian Financial Review (AFR) leads off with some gratifying hilarity.

It says Australia’s big banks are continuing to act as ‘shock absorbers’ for the economy.

Yes…you can’t help but hold your stomach from laughing at such idiocy.

Really…I’m wiping my eyes.

A while back I explained it was bank credit creation that gave the Australian economy its fragility in the first place.

All that private debt lent against unproductive assets…called houses.

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The banks should thank the Australian taxpayer that they’re still solvent.

If the Aussie government weren’t subsidising their client base, they probably would be.

And let’s not forget that the RBA now has $280 billion of assets on its balance sheet.

Back in December 2019 it was about $100 billion less. Hmm. Seems to me the RBA has been playing shock absorber too.

And yet the scribes at the AFR act like we should be grateful.

Unless…do they think we’re stupid? Surely not.

Pray, from where doth this stem?

The banks are giving their distressed customers another six-month payment ‘holiday’.

That sounds so kind and generous.

Let’s run an alternative scenario…

Remove the RBA backstop and government JobKeeper program. No free pass from APRA about the banks not classifying their bad loans as ‘arrears’.

Then see who needs a repayment holiday…

It would be the banks…from their creditors!

But some businesses in Australia are a protected species. Banks are one of them.

Anything connected to defence is also having a riotous time as the Aussie government hands out contracts.

Can this largesse last forever?

The worry for the market now is that the support programs will be removed in September.

I suggest it’s inevitable that the government will keep JobKeeper in place in some way. Or ramp up deficit spending to offset the change.

And Australia’s national debt will ratchet up…

Modern Monetary Theory and the Australian Economy

But wait!

There’s Modern Monetary Theory (MMT) sprung to life to justify it anyway! I’m seeing this creep into the mainstream media, with rather favourable coverage.

The tenet of this is that sovereign governments don’t need to finance their spending via issuing debt.

Yes…this is the kernel of truth that makes it credible. This is quite true…in theory.

Banks create credit from nothing…so why not a government?

And yet MMT does not question the logic of the government issuing interest bearing bonds.

It’s a kind of ‘we owe it to ourselves’ la la land.

The reality is, even under an MMT dynamic, society will split, like always, between creditors and debtors.

Its frame of reference doesn’t include the economic rents of land and natural resources…and therefore as a unifying theory of the economy, is entirely useless.

However…

Clearly, it is idiotic for a government to pay interest on debt when it could issue the money debt and interest free.

But also: how to stop the politicians lining their own pockets?

Australia’s politicians are gaining fame as they go from ‘serving the public’ (*cough*) to highly paid gigs in private equity, corporate firms, and as lobbyists.

The MMT crowd seem to think Canberra and Washington are lined with Pollyannas and Mother Teresas that will spend wisely.

Take the proposed gas pipeline from Western Australia to the east coast.

This idea is already redundant and they haven’t even thought about laying a brick yet. Technology is coming to wipe the traditional grid and blow the fossil fuel industry apart.

But even before we get there, the stupidity of Australia shipping out gas to the world market at under $3 while leaving our manufacturers here to pay $8–10 under contract defies belief.

This is what you end up with when you let politicians and big business get cosy. MMT doesn’t have many answers there either, as far as I can tell.

And don’t make me laugh about that gas ‘Commission’ the Morrison government set up. The guy running it was also on the board of a gas company.

What was the recommendation? It’s going to be a ‘gas-led’ recovery, folks!

Stay tuned over the next few days where a man much smarter than me will show you why Australia’s politicians are promoting a redundant solution…and don’t even know it.

He’s also sounding the warning that technology is coming to blow apart society…and the second rate crowd in power all over the world don’t have a hope of coping with it.

Best wishes,

Callum Newman Signature

Callum Newman,
Editor, Profit Watch

PS: Our publication Profit Watch is a fantastic place to start your investment journey. We talk about the big trends driving the Australian Economy. Learn all about it here.