The bad and badder news
Are you sitting comfortably? Got a nice cup of
tea?
I am about to put forward, if not the worst-case economic scenario, a pretty bloody bad scenario for Australia and the world.
So, you might want to stop reading now and just enjoy the tea
Not to say any of this written in the stars, history is littered with people who made bad predictions. Where the hell are our proper hoverboards?
But here are some worrying signs and patterns I see emerging.
Ever since the 9/11 attacks the world has been awash with cheap money.
The Fed dropped interest rates to the bottom and then dug a little deeper to keep the already ailing US economy from going into shock after the atrocity.
Cheap money burns a hole in investors’ pockets.
It can be used for productive investments, which tend to take a while to pay off, or you can try to make a relatively quick buck on shares or other financial instruments or housing.
Obviously, it’s been the quick buck.
Before the rates were dropped in the US some well-meaning government intervention made home-lending high risk.
Then Wall Street came up with ingenious ways to make what were diseased lemons of bad debt look like a fresh limes for a club soda.
When people wised up a little and stopped buying those bad debt lemons this led to the GFC and the “too-big-to-fail” financial institutions threatening to fall like dominoes.
The credit markets seized up and needed a massive injection of government cash to start moving again.
So, yet more money started sloshing around but there was also some deflation of the housing market.
The puzzle for economists since then has been with money so plentiful and “cheap" where is inflation?
We should have been looking at disco-ball and big-hair honest-to-goodness 1970s price rises.
The most obvious explanations of why this hasn’t happened have been that the surplus money has only inflated the value of only certain things – mostly housing and stocks.
Prices may also have been held down by the abundance of cheap goods coming out of China as they started using their greatest resource, lots of people, to work in factories but also held their currency at a low level to encourage export earning.
There are signs that after its long holiday inflation is putting back on its running shoes, swapping its 70s Dunlop Volleys for the latest Nikes.
Covid has created supply issues that force up prices.
Joe Biden's halting of US drilling, pipelines and fracking has pushed up oil prices.
The US and other governments remain addicted to spending money.
This is starting to fuel inflation, which puts pressure on central banks (independent or not) to raise interest rates.
If they don't their nation's money is in danger of losing value in terms of what it can buy.
In a US fried chicken outlet, near the southern border, I once was given a Mexican Peso as a token to use the toilets.
China is also facing rising costs.
Having grown quickly using surplus labour, China may have found that it needs to take the next step of reforming its economy or risk being mired in the middle-income trap.
The Communist Party did not gift the wealth that China has accumulated over the past 40 years. They simply got out of the way a little more.
That allowed the incredibly entrepreneurial Chinese, possibly the greatest “capitalists” on Earth, to enrich themselves.
But further market-oriented reform seems unlikely.
President Xi Jinping is turning himself
into the new Mao.
Openness is the enemy of tyranny, so China is likely to close up shop in a number of ways.
There will be probably be controls, as there already are to stop capital flight and there will be perhaps stricter controls to stop people flight.
In addition China may be facing its own property bubble.
The Chinese equivalent of Freddie Mac or Fannie Mae, Evergrande, is being bailed out each time the debts become due.
There is some debate over whether the Chinese state will allow Evergrande to fail and whether what is happening is a controlled demolition.
However, if this gets out of hand the worst-case scenario is the Chinese property bubble turns into a CFC (Chinese Financial Crisis).
If China goes bad, where does that leave Australia?
Nowhere good.
Covid has largely denied Australia some of its greatest earners in tourism and general growth from migration.
If that combines with the Chinese dragon losing its puff and a halt to Chinese capital and people coming here, well that’s ever worse.
Obviously if the Chinese juggernaut stalls that is not too good for our mineral and coal exports although perhaps Australia could find new markets.
When China tried to bully us through trade earlier this year they mainly hurt themselves.
But an end to the inflow of Chinese money and people would hurt. A lot.
Already we are seeing international cost pressures filtering through to Australia.
This will put upward pressure on rates.
A law of economics is what goes down can come up.
If rates go up so will the pressure on those who have high borrowing for a house.
Soon, especially if other economic conditions are bad people will be forced to sell property.
A housing shortage becomes a glut.
People learn that even with housing, what goes up can come down.
Naturally, this could all be wrong or overblown.
But, just in
case, if you have finished that cup of tea you might want to keep the teabag for reuse.
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