Down Under May Literally Become Down Under

The history of Australia is interesting from an economic point of view.  First it was a prison colony, a sort of clean out the jails of England and get rid of the riff-raff experiment.  The only other time that was tried was when the King, through his friend George Oglethorpe sent the unwanted criminal and political prisoners to Georgia.  For those of you short on knowledge of geography, that’s in the southeast United States of America.  Since that time of relocation, the resourceful malcontents found gold and opals, thus bring to his or her majesty’s attention the need of closer supervision.  Soon the colony became a vital export source for wool, men for fighting several wars, and raw materials.  It is this last export that has given Australia its biggest fit.  The turn of last century saw exports of machinery to Asia, from India to Japan and China.  This output continued until the depression years of the thirties when exports of manufacture and raw materials were hit hard.  The war years revived the prosperity and added wool and wheat to the export menu well into the sixties.  But the emergence of Japan as an economic powerhouse greatly reduced the manufacturing industry while expanding raw material exports.  By the nineties China started her consumption that would push raw material exports to the point of dependence for Australia.

Wheat and Wool exports have been greatly reduced in importance as manpower has fled the farm and ranch for the high paying jobs of mineral extraction.  The asset bubbles that hide in plain sight everywhere in Australia now threaten to overwhelm the financial sector, much of which is responsible for encouraging such bubbles.  Housing has already started to pop and reflate and pop again.  But who wants to listen to Steve Keen?  China is Australia’s largest trading partner, buying mega tons of raw materials, much of which is iron ore and coal.  Japan is the second largest trading partner and together the two countries make up far more than 50% of Australia’s export trade while being about thirty percent of the imports.  The US is the other large import country.  Australia manufactures very little of its own goods, one of the reasons being the higher than average union wage schedules.  This will prove a problem in the future since neither Japan nor China can continue to import Australia’s raw materials is quantities that will keep so many union workers employed.  Already we have seen the decline of raw material exports to China from Brazil and many other exporting countries.  Australia’s economy is about to nose dive.

But China is still going to grow GDP by 7%.  Fairy tale told to gullible children.  Assuming the top government officials can rely on the statistical reports from the province and city level, and it can’t, far too many lies have been exposed to show that underlings will tell the bosses what they want to hear. then you might be right to depend on their pronouncements. But the Chinese have a long history of not exactly telling the truth.  The energy consumptions figures do not support anything close to 7% and that is the first clue.  Second are the reports of the number of factories that were built but never operated and of those that are being shut down for lack of output due to lack of consumption.  Oh yes, they still make Apple iPhones, but not enough to feed the the city, let alone the nation.  Then there is the small matter of some ten trillion RMB in local government debt.  Seems the locals have been a bit prodigal in their business dealings, what with robbing farmers of productive farm land just to build huge cites where no one lives.  And due to Chinese building codes and standards those cities are starting to fall apart.  The amount of Chinese interbank lending and non performing debts, the pollution that is literally chocking the cities and suburbs, and the amount of public graft that has reduced public coffers, well, I don’t think China is in any position to rescue Australia’s exports.  When you, as a country have com to depend on one export that is almost 40%, not much chance that the union members will get a raise this year.  And it’s hard to go on strike when you’ve been laid off.

As I like to point out, when you live beyond your means there is the devil to pay when the money stops and that devil is called depression.  I read where a number of economists and economic pundits still pin their hopes of China to pull us through the fire.  I guess that is why they make the big bucks and I exist on a pension.  But the information is there only if you seek it out.  The numbers aren’t good and these people need to pay more attention to Michael Pettis and others who are close to the Chinese economy.  Most of the pundits are too busy reading Paul Krugman and learning how debt has never hurt a fly.  His cat might have, but debt didn’t do it.  And when your central bank keeps lowering rates and does the QE shuffle, well, there goes the old ball game.  The problem with ZIRP and gobs of QE is that it only encourages the big banks to chase after high risk high yield assets.  When the government bonds pay little to no interest and you’ve got to show a profit to Wall Street, you have to chase junk.  And junk always defaults and leaves you holding the bag.  It’s a game of musical chairs, one man’s junk is another man’s profit when you are the last man standing.  So, as China goes, so goes Australia.  But look on the bright side, China may start a few wars and the demand for raw materials will pick back up.

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