China's woes aren't the main cause of ours
True, China is Australia’s most important trading partner, but it’s not good for business owners saying it’ll automatically be “no worries” once the Chinese get their flagging economy back on track.
It’s also true China significantly affects economies worldwide. Although it only generates a sixth of the world’s gross domestic product (GDP) China has accounted for a third of global growth in the past decade.
However, of greatest significance to economies everywhere is that governments’ monetary policies dealing with the global financial crisis (GFC) of almost a decade ago have almost reached the limits of effectiveness.
Thus central banks are tending to go their separate ways to deal with situations as perceived in their own spheres of influence, and by so doing are perpetuating share market volatility.
Surely now’s the time for the Federal Government and Australian businesses to forsake second guessing what the rest of the world might or might not do about all this, and focus much more sharply on achieving a sustainable economy. So here’s what needs to be done.
First know what not to do
As monetary policy loses efficacy, governments worldwide have been turning on taps that increase money flow, especially when there’s an election in the offing.
The world’s most indebted developed democratic economy is Japan’s, where the ratio of public debt to gross domestic profit (GDP) has risen from 67% in 1990 to almost 250% today, provided for in a record 96.72 trillion yen budget – as elections loom.
However, in just a third of that time the US ratio of debt to GDP increase, has risen from 35% in 2007 to the current 74% while over the same period Australia’s has increased from 9.7% to 34%.
In other words the rate of increase of America’s federal debt relative to GDP since the global financial crisis (GFC), has a little more than doubled, while Australia’s has more than tripled. China’s has almost quadrupled.
Over the same period the increase of global debt to GDP has gone up 17 percentage points, pushing total government indebtedness to $57 trillion, with no major country registering a decrease – although Australia is travelling a fraction better than most.
But clearly no country, and particularly Australia, has any justification for blaming China for their woes when it’s obvious their governments are unwilling to put in place structural restraints necessary for their return to sustainable economic growth.
So what Australians must NOT do, is allow themselves to be swept with the herd to perdition along a path of unsustainable debt.
Who should be doing what?
“In democracies people get the governments they deserve.” That’s as true now as when Joseph de Maistre (1753-1821) first said it – a quote so often wrongly attributed to either contemporary, political thinker Alexis de Tocqueville, or Abraham Lincoln. Be that as it may, currently it challenges Australian voters to face the fact they will get the government they deserve some time this year.
Polling in late February showed Labor and the Coalition neck and neck in popularity (although Malcolm Turnbull was clearly the preferred Prime Minister). The result heightens challenges facing both Government and the governed.
Mr Turnbull has said Australians can stabilise their wobbly economy and grow it by exercising their capacity for innovation, flexibility and exploitation of technology. He’s said his government will facilitate this with a tighter and more equitable budget backed by tax reform.
But because the Prime Minister is widely perceived to be dithering, polls are as they are, and because successful politics in democracies involves astute employment of the art of the possible, it’s become increasingly likely Mr Turnbull will create cause for a general election soon after the May budget.
Furthermore, it’s entirely possible Mr Turnbull believes revealing the full scope of his long range intentions for the economy now, to incorporate some of the more far reaching of these in the May budget, could endanger, if not make it actually impossible, for the Coalition to win an election.
So, what the Government should be doing is clear. It should be putting together a budget that convinces voters it can be trusted to move the nation towards a sustainable economy, and that it’s making an effective start. Whether or not that trust is given, will depend to a very large extent on business owners, their employees, and other stakeholders in businesses.
However, should they decide to help provide the Prime Minister with the mandate he’s seeking, they must realise the Government will henceforth undertake -- in tax reform and in other ways -- substantial hard-nosed reforms, all of which they won’t necessarily like.
What voters should do, depends very much on whether they believe it’s necessary this Government put a stop to escalating debt – and if they believe it can, whether they’re resolved to live with consequences of their belief that could, among other things, be uncomfortable.
A quick look at historical context
It’s not just a problem in Australia. There’s universal erosion of trust in governments to do what’s best for a nation. Too often, lacking clear mandates, governments become embroiled in battles for mere survival.
Macks Advisory is saying they were right or wrong, but not since Margaret Thatcher’s clarity of thought and purpose, or Ronald Reagan’s eye for opportunism, have there been leaders able to put together political packages of such appeal that voters were willing to confront and deal with painful choices.
As global debt worsens it’s become a reflex action for most people to point an accusing finger at China’s massive, uncertain economy and blame it for their woes. (In just three years to 2014, more cement was used in China than was used in the US for the entire 20th century. But should reasonable people expect the economic growth signified by that, to continue indefinitely – seriously?)
We watch with bated breath as the heavy handed Chinese Government bumbles about in the face of market-oriented reforms it knows are necessary but won’t impose for fear of losing power.
Our angst increases as economists’ opinions are divided on whether China’s debt to GDP ratio in excess of 240% ($25 trillion) is manageable, and if it’s not, whether this, combined with Europe’s fiscal mess, could trigger another GFC.
But it’s no good pointing an accusatory finger at China. China’s woes – including those in a transitional economy - are essentially a reflection of ours and a lot of other countries. They, like Australia, have had successive governments afraid to attempt to right obvious wrongs and populations unwilling to shoulder the burdens of reforms.
For more information, contact Macks Advisory on 08 8231 3323 or visit our office on Level 8 West Wing, 50 Grenfell Street, Adelaide SA 5000.
