By Mark Westfield*, ninemsn Money
December 16, 2008
"Those who cannot learn from history are doomed to repeat it " — George Santayana
As 2008 draws to a close, people are looking forward to a break and some levity over the festive season. However, in the back of everyone's mind, they are worried about 2009.
They have every right to be. The very toxic coalition of powerful forces that have wrought havoc in the US and Europe over 2008 are heading for Australia. We are only feeling the early gusts of the cyclone about to hit.
Perhaps the outstanding feature of 2008 was not the chaos, catastrophic losses, and uncertainty unleashed by the global financial crisis, but that it was so readily predictable and that governments and central banks took so long to react. It is 1989 and 1981 all over again, but this time with banks, major corporations previously considered indestructible, and whole economies collapsing worldwide, the impact will be far worse.
In Australia, the federal government's belated recognition on October 14 — more than 12 months after the subprime crisis began to unfold with such menace in the US — that our economy should brace for some big shocks, inevitably means the so-called "stimulus package" will be too little, too late to prevent a nasty recession .
On top of looming unemployment, a slowdown in business activity, and the need to finance a big budget deficit, probably in the order of $10 billion to $20 billion, the Rudd Government has created a few of its own problems. These are:
- An emissions trading scheme (ETS) that will add further burdens to sections of the economy, yet will over-compensate many households to the point that it will encourage them to be reckless in their use of fossil fuels.
- A bungled national broadband network (NBN) policy that has, at the time of writing, excluded Telstra. The result? Communications Minister Stephen Conroy may need to throw billions of dollars more at one of the other bidders to ensure the network is completed.
- An ill-conceived bank guarantee that has created havoc in the financial services industry amongst those non-bank institutions not so fortunate to receive the guarantee, and even amongst state governments who can't raise money now they are all tumbling into deficit.
History's lessons tell us that when oil prices rise sharply, as they did in 1973 and 1979, that global recession follows. The most recent rise, which took the oil price from US$50 a barrel in early 2007 to a staggering US$148 in July this year (in 1973 the price rose from US$5 to US$15) suggested that the world in 2008-09 would follow the same course as in 1973-74 and 1979-80.
The price has dropped back to where it was in early 2007, but still remains double its long-term price range of US$20-US$25 at which it settled after the 1979-80 increase.
On top of the relentless price forces that an oil price rise unleashes, the world has been hit with the estimated (by the Bank of England) US$2.8 trillion in losses from the US subprime disaster. This amount is the equivalent of the gross domestic product of the UK. This amount of money can't be lost without a fairly major impact on all global economies, as has been the case. Iceland, Hungary, the Ukraine and Ecuador have all collapsed and more will follow.
The situation is far more serious this time than in 1973-74 and 1979-80. Yet, until August this year Treasurer Wayne Swan was urging the Reserve Bank of Australia (RBA) governor to be resolute in the war on inflation and the governor, Glenn Stevens, obligingly sent signals into the market as late as August that he wanted to raise interest rates further.
Interest increases became the second biggest contributor to inflation by the June quarter this year. Stevens was waging a war against himself. Work that one out.
The sharemarket falls over January, February and March this year, which wiped around $500 billion from share values, signalled to everyone, including the Treasurer and the RBA governor, that something terrible — most likely a nasty recession — was going to happen.
Interestingly, when the sharemarket collapsed in 1987, central banks flooded global markets with liquidity to stave off recession. The situation is far worse this time because the governments, central banks and investors also have to cope with the debt crisis and the impact of the oil price rise this year.
The RBA didn't move this time, perhaps because it might have jarred with the Treasurer's fulminations about the evils of the "inflation genie" for several months, as the equivalent of a bomb was going off in financial markets.
Kevin Rudd's belated realisation in October that the economy wasn't the bed of roses he had been telling everyone, produced the knee-jerk policy reaction of a $10.4 billion "stimulus" package targeted at sensitive voter groups. This is unlikely to touch the sides given the scale of the losses suffered in Australia and elsewhere.
"We learn from history that we learn nothing from history" — George Bernard Shaw
Hindsight makes geniuses of us all, but in 2008 hindsight was not needed. We had plenty of warning of what was coming and one can only speculate whether, if the politicians had opened their eyes to look above the grubby politics and acted earlier, that 2009 might be looking a little better.
The observer can only speculate as to the motives of the RBA and the Rudd Government through its mildly contractionary budget (now in the process of being blown to the four winds) in exacerbating the pain that is about to be felt in the "real economy" in 2009.
Did Treasurer Wayne Swan try to provoke the RBA to increase interests rates further in the first half of 2008 in order to have rates fall again in tune with the electoral cycle?
This was speculation at the time, and only Swan knows his true motives, but he looks not only silly, but quite reckless now.
"History repeats itself, first as tragedy, second as farce" — Karl Marx
Another interesting aspect of 2008 has been that employment has remained resilient in the face of indicators such as housing finance and employment ads all falling sharply in recent months, suggesting jobless numbers should be rising.
The published November unemployment rate of 4.4 percent, an increase of just 0.1 percent on the previous month, largely reflects what happened in the economy two to three months ago. Despite this, and given the firestorm that has incinerated large parts of the financial sector, the jobs market appears to have held up very well. This is the one indicator the federal government can point to in supporting its claimed credentials as an economic manager.
Everything else looks shaky indeed.
Another factor that hasn't fed into the economic numbers yet (or perhaps it has been masked by the many adverse influences afflicting the economy) has been the sharp, 35 percent fall in the Australian dollar since July.
If anything can save Australia going into recession (forget "stimulus packages") it will be more competitive exports and import-competing industries as a result of a US$0.64-0.65 Australian dollar.
The last time the dollar fell as much, in 1998 and 2001, the benefits flowed quickly into the Australian economy in the form of increased export income, a slowdown on imports and improved tourist numbers. A weak dollar is a dynamic and powerful factor in support of economic growth.
The RBA's interest rate increases, and market speculation of further rate rises, sent the currency to an unsustainably high rate of US$0.98 mid-year, crippling the inbound tourist industry, hurting exporters and local manufacturers — the opposite effect of a weaker currency. The RBA simply didn't see this unfortunate consequence of their monetary policy aggression.
"The past is malleable and flexible, changing as our recollection interprets and re-explains what has happened" — Peter Berger
Kevin Rudd and Wayne Swan have kept the RBA governor and the Treasury secretary Dr Ken Henry close to them in an attempt to bask in the glow of the credibility of these office holders. The only consequence of this is that Stevens and Dr Henry have not had their reputations enhanced at all.
It has certainly resulted in the two bureaucrats becoming political targets. Surprisingly, given the government has been quite shameless in "using" these two bureaucrats to try to lend credibility to their policies, or lack of them, Rudd seems to have been surprised that Stevens and Henry have become politicised. The surprising thing is that Henry and Stevens have allowed themselves to be used like this.
"History will be kind to me for I intend to write it" — Winston Churchill
Global economic forces and the belated response by the federal government and RBA ensure that Australia is in for a rough ride in 2009.
The big hope held out during the year for the country was the expected demand for Australia's resources from China. This hope is fading fast as China itself struggles to maintain momentum and the centrally planned economy cuts off those bits and pieces that are dragging down the economy.
China is a 40-year growth story, but every trajectory has its temporary downturns. China's sudden weakness is not surprising given the collapse in demand by its biggest customers, the US and Europe. But it has come at a bad time for Australia and will compound our economy's problems.
The Rudd Government is enjoying continuing high popularity ratings despite its miscalculations. The population at large won't focus on the government's performance until households are affected by rising unemployment and lack of opportunities. They will have enough to worry about on this front next year.
As for the polls, people aren't focusing much yet on the next election, which is two years away, so there is probably not a lot to be read into them.
The history of the Rudd Government's term is unlikely to be written or assessed until election year. Twelve months is not enough time to chronicle a government's achievements or failures , particularly one that seems determined to take as much time as possible to implement policy.
Clearly, there will be more than one interpretation of the government's handling of the economy and how it has positioned itself with its neighbours.
As Gough Whitlam found out when global events (the trebling of the oil price in 1973-74) caught up with the Australian economy, there was very little his government could do to control the dynamics unleashed. Instead, his government was torn apart by internal politics and a vengeful Opposition.
This time, the events are more far-reaching, more numerous and potentially more catastrophic. The latest oil price rise makes the price jump to $15 that Whitlam had to deal with appear a minor hiccup in comparison.
Rudd and his party machine also have to deal with the fact that Labor's deeply unpopular Rees Government of Australia's most populous state will still be presiding over a surly and unforgiving electorate when federal Labor goes to the people.
By late 2010 many of Rudd's bright and electorally appealing 2007 election promises will likely come back to haunt him. The ETS, the NBN (Rudd loves acronyms), computers for every student, FuelWatch, GroceryChoices, etc will probably be in disarray or dishonoured.
His claim to be fiscally conservative will be overshadowed by likely deep deficits.
Rudd and his ministers are still enjoying a prolonged honeymoon, despite the federal government's shortcomings. They are assisted by the obvious divisions within the Coalition.
As the year comes to a close, the economic and policy challenges in 2009 are already taking shape. This will be no time for spin and superficiality.
*Mark Westfield is a Director of C|T Financial
The views represented in this column represent those of the contributor
