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My interview Razor Sharp 18 February
Me interviewed by Sharon Firebrace on Razor Sharp on Tuesday 18 February. http://sharonfirebrace.files.wordpress.com/2014/02/18-2-14-john-passant-aust-national-university-g20-meeting-age-of-enttilement-engineers-attack-of-austerity-hardship-on-civilians.mp3 (0)

My interview Razor Sharp 11 February 2014
Me interviewed by Sharon Firebrace on Razor Sharp this morning. The Royal Commission, car industry and age of entitlement get a lot of the coverage. http://sharonfirebrace.com/2014/02/11/john-passant-aust-national-university-canberra-2/ (0)

Razor Sharp 4 February 2014
Me on 4 February 2014 on Razor Sharp with Sharon Firebrace. http://sharonfirebrace.files.wordpress.com/2014/02/4-2-14-john-passant-aust-national-university-canberra-end-of-the-age-of-entitlement-for-the-needy-but-pandering-to-the-lusts-of-the-greedy.mp3 (0)

Time for a House Un-Australian Activities Committee?
Tony Abbott thinks the Australian Broadcasting Corporation is Un-Australian. I am looking forward to his government setting up the House Un-Australian Activities Committee. (1)

Make Gina Rinehart work for her dole
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Sick kids and paying upfront

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Save Medicare

Demonstrate in defence of Medicare at Sydney Town Hall 1 pm Saturday 4 January (0)

Me on Razor Sharp this morning
Me interviewed by Sharon Firebrace this morning for Razor Sharp. It happens every Tuesday. http://sharonfirebrace.com/2013/12/03/john-passant-australian-national-university-8/ (0)

I am not surprised
I think we are being unfair to this Abbott ‘no surprises’ Government. I am not surprised. (0)

Send Barnaby to Indonesia
It is a pity that Barnaby Joyce, a man of tact, diplomacy, nuance and subtlety, isn’t going to Indonesia to fix things up. I know I am disappointed that Barnaby is missing out on this great opportunity, and I am sure the Indonesians feel the same way. [Sarcasm alert.] (0)

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Australian economy grows, but global crisis still threatens

This article, by Ben Hillier, first appeared in Socialist Alternative.

The greatest economic crisis in generations and Australia didn’t endure even a technical recession.

And the good news seems to keep rolling in: Unemployment falling from 5.8 to 5.3 per cent, growth racing ahead at the fastest pace in nearly two years, consumer and business sentiment high, retails sales continuing to rise and business investment up.

Things are motoring ahead at such speed that the Reserve Bank has seen it prudent to raise interest rates 4 times since October 2009. They need to reduce the tempo of an economy that will be riding the back of a resource boom for the next decade at least, according to the Deputy Governor of the RBA.
What really needs to be restrained, however, is the discussion of the economic situation itself. Someone needs to firmly instruct the excited mass of bullish commentators to “hold the bus”.
Firstly, while Australia no doubt recorded GDP growth over the last year, when looked at in terms of growth per person and dated from the time of the international financial collapse, Australia saw a year on year decline of 1.2 per cent.
Unemployment jumped by one third. Underemployment jumped by 40 per cent. The decline in average monthly hours worked was greater than in the US.
Sure, it wasn’t a technical recession (two consecutive quarters of negative nominal growth), but in economics technicalities don’t count for much. After all “full employment” technically means that half a million or so people can’t find a job.
Technically, those people are probably considered to have “full stomachs” as well.
Yet even when taking these figures into account, it is clear that Australia actually has fared better than most of the industrialised world. So how did we avoid the calamity? And is everything now going to be A-OK?
There have been three key factors that contributed to relative economic resilience in Australia and all three rest on unstable foundations.

The minerals boom

With falling demand in the US and Europe as the crisis set in, Chinese exports fell by over 25 per cent. In the first months of 2009, 20 million Chinese were put out of work.

The Chinese government responded decisively to domestic difficulties with a massive stimulus program, forcing up investment to compensate for falling exports.

Chinese banks were directed to lend and state-owned corporations in turn directed to borrow and spend. New loans totalled over $A1 trillion in the first half of 2009, more than three times the total for 2008.

These measures accounted for roughly 75 per cent of growth in the economy, which quickly regained momentum.

While credit markets collapsed and industrial production plummeted in the US, Europe and Japan, industrial output in China expanded by 12 per cent and fixed asset investment by a third. China was by far the most important of the Asian economies, but it wasn’t the only one growing.

By mid 2009, Australia’s other key trading partners – South Korea, Japan and India – began growing or continued their expansion.

Initially, diving commodity prices had briefly threatened to blow the bottom out of Australia’s resources sector. The exports of other advanced economies dropped over 10 per cent (30 per cent in Japan’s case). But, in the year to September, Australia’s exports slipped only 0.2 per cent.

In the five months to November 2009 exports to China rose by over 10 per cent on the corresponding period in 2008. Commodity prices stabilised and began rising again, with some posting the biggest gains in 40 years.

The strength of the mining sector has been important to the economy as a whole. Since 2002 Australia has consistently had a higher rate of investment than other developed economies. Over the last four years it was 30 to 40 per cent higher.

Business investment has grown by almost 50 per cent as a share of GDP since 2001, with 50 per cent of that growth in the mining industry.

The taxes and royalties from the mining boom have also helped to fund stimulus measures and tax cuts, which flowed into retail trade, residential construction and the financial system in the form of savings and debt repayments.

The importance of this flow of revenue is reflected in the fact that, over the last three years, the movement of the Australian dollar “has become the mirror image” of Chinese electricity production.

Residential property

The second basis of Australia’s economic stability lies in the residential property sector.

Across the developed world, the total value of residential property is estimated to have risen by more than $30 trillion in the five years to 2005. The Economist concluded that “the global housing boom is the biggest financial bubble in history”.

There were clear signs that the Australian market was caught up in this frenzy. Australia had the highest house prices compared to rent and the third-highest prices compared to income in the OECD. Over-valuation was estimated at 51.8 per cent.

Like other developed countries, Australia saw a massive build up of household debt resulting from skyrocketing asset prices. From having one of the lowest household debt-to-income ratios in the 1980s, Australia had, by 2008, become one of the most indebted countries.

Household debt peaked in early 2008 at 159 per cent of disposable income (138 per cent being housing debt), up from 80 per cent (67 per cent) a decade earlier. Yet, defying many predictions, the Australian property market has weathered the global storm.

Residential property was the epicentre of the global financial crisis. Housing prices crashed in the US, Britain, Ireland, Spain and France. In Australia, however, prices only dropped moderately in 2007-08, before rebounding strongly in 2009.

A number of factors contributed to this growth. The first was the federal government’s stimulus program, which contained incentives of $14,000 to $21,000 for new homebuyers/builders.

While it was said to be a helping hand to those wishing to own a home of their own, in reality it mainly boosted house prices.

The government feared that fall in house prices would lead to more mortgage defaults and negative equity, which would have dragged down consumption and possibly the rest of the economy.

Combined with a precipitous drop in interest rates, the stimulus instead led to a significant increase in the growth of lending with finance to first homebuyers up 86 per cent from August 2008 to September 2009.

A second factor that kept house prices up was that demand outstripped supply.

Over the course of 2009 median prices rose a massive 17 per cent in Melbourne and 12 per cent in Sydney. This housing market buoyancy played a vital role in the stability of the Australian economy.

Price growth underpinned a general increase in consumer spending and ensured that bank balance sheets remained secure.

No financial collapse

The third factor that explains the robustness of the Australian economy was the absence of a collapse of any major Australian financial institution. Profits of the major banks were down 14 per cent in the six months to June 2009 compared with the same period in 2008, but they still made $8.6 billion.

Whereas “non-performing loans” approached 6 per cent in the US, in Australia they represented only 0.62 per cent of loans in the housing market by June 2009.

Without the precipitous decline in property values, the percentage of impaired assets (an asset that has a market value less than the paper value listed on the bank’s balance sheet) rose to only 1.5 per cent in June – far below the 6 per cent high of the early 1990s recession.

The toxic assets that polluted the rest of the world financial system were largely absent from Australia’s financial system. From the mid 1990s, securitisation of mortgages – selling claims to mortgage payments as assets – increased dramatically from less than 5 per cent of total outstanding housing loans to nearly 25 per cent.

However, these securities had not become part of the global “ticking time bomb”. This was in part because “sub-prime” loans to high-risk borrowers were much less common in Australia.

The situation appeared a triumph of good management and strong regulation. But the Australian financial sector was not quite as healthy as it appeared.

The difference between the Australian financial sector and those of the US and the UK was not qualitative. In Australia the local mortgage market was moving in the same direction as its overseas counterparts. Ross Garnaut noted that

“[A] transformation to US-style shadow banking was under way… Ian Rogers, editor of The Sheet, the Australian bank newsletter, says that ‘the major difference between Australia and the US is that we were four years behind’. Nonetheless, the metamorphosis was advanced enough that when the crisis began in late 2007, the Australian shadow bank sector was faced with insolvency.”

As the property boom proceeded, an increasingly large gap appeared between what the banks had saved (customers’ deposits) and what they were lending. Their ratio of deposits to total liabilities had dropped from 59 per cent to 43 per cent between 1994 and 2007.

This gap was filled by foreign borrowings, which rose from $30 billion in 1990 to $357 billion in 2008.

However, the global credit crunch saw funding sources dry up. Australian banks – like their US and European counterparts – were faced with insolvency and went cap in hand to government in order to secure a state guarantee on their loans.

The financial sector’s reliance on foreign borrowing ensured that the global credit crisis did flow through to the rest of the Australian economy. With the Australian banks quietly enduring their own problems, new credit approvals to business declined by more than 25 per cent between March 2008 and June 2009.

Yet companies were still able to finance most of their activities by cutting dividends and retaining earnings. For the remainder, where credit walked out, capital markets stepped in (i.e. companies issued more shares) to raise funds. Listed companies raised three times the amount of equity in 2009 than the average of the three previous years.

So despite the triumphalism about Australia’s financial resilience, the sector did face a crisis. The tsunami that swamped the rest of the globe sucked necessary funds away from Australian shores rather than dumping toxic assets.

It was not strong regulation that saved the sector (nor could it have), but government intervention in the face of international collapse.

Effect on the working class

Even with relative stability in the Australian economy, for those who lost their jobs, worked fewer hours or who were renting properties, things were tough over the last year.

Agency reports suggest that there was a significant rise in homelessness, to more than 100,000 over the last part of 2008 and through 2009, as unskilled workers became unemployed.

Tenants saw rents increase faster than incomes, with 65 per cent of low-income private renters experiencing housing stress.

Many older workers, whose superannuation was depleted by the crash in equity markets, were forced back into the labour market: the number of retirees contracted by 65,000, while the number aged over 45 saying they will never retire rose from 379,000 to 575,000 over the year.

Youth unemployment rose from 18 per cent in November 2008 to 25 per cent at the end of 2009.

On the other hand, many workers have come out of the crisis in a better position than when they went in, one report finding that

“The proportion of people finding it ‘very difficult’ or ‘difficult’ to get by on their current household income has dropped from 20 per cent in 2008 to 16 per cent in 2009… [T]hose ‘living comfortably’ or ‘doing really well’ has increased from 41 to 45 per cent in the same period.”

This has been due to a peculiar situation in Australia. In the midst of the greatest global crisis in generations, net national disposable income fell by 3.2 per cent and household wealth declined by 36 per cent.

Yet through a combination of stimulus cash handouts, falling interest rates and lower petrol prices, household disposable income rose by 5-9 per cent.

Can it last?

The way the crisis has flowed through has been quite uneven, and Australia’s current economic performance rests on unstable ground that could quickly give way.

In the housing market there are contradictory pressures. There continues to be a housing supply shortfall. But now that interest rates have started to rise and the housing stimulus measures are being wound back, the surge of buyers into the market has subsided.

There are high and unsustainable levels of household debt supporting the economy.

The Reserve Bank has reported that personal debt levels are up 71 per cent compared with five years ago and, at over 100 per cent of GDP, have overtaken per person levels in the US. This cannot go on forever: at some point the debt-driven expansion must come to an end.

The finance sector is dependent on global markets for funding and will feel any further shocks. The property boom, if it comes unstuck, will eat into balance sheets and consumption.

The minerals boom, it has been suggested, is only at the beginning of a cycle that could go on for another decade or more. But this is dependent largely on China, which is facing serious challenges both with its own growth model and due to the crisis in Europe and the US.

Internationally, asset price bubbles appear to have reformed as a consequence of loose monetary policy; write downs in the financial sector are not over; many advanced economies face severe fiscal crises and overcapacity in the manufacturing sector is endemic.

This is the prism through which Australia must ultimately be viewed. The stability that has been witnessed thus far must be seen as based on a lot of luck and exceptional circumstances.

Yet even if there were a slow but sustained recovery across the globe, for many workers in Australia times will be tougher than in the midst of the crisis. Rising interest rates, the end of the cash handouts and government cuts to rein in debt will hurt. That is the best-case scenario.

With the global crisis far from over, the coming years will most likely result in much more pain than this.

 An extended and referenced version of this article will appear at Marxist Interventions in the coming months.

 

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Comment from Arjay
Time March 11, 2010 at 6:17 pm

As you have noted John ,it only grows because of the demand from China.It has nothing to do with our innovations or efficiencies.

This crisis has just begun and they are trying to solve a problem by the same folly which created it.

Comment from Shane H
Time March 14, 2010 at 11:08 pm

So are we hoping for a collapse? So a socialist analysis of why Australian capital is basically the only Western country not in recession is that we were ‘lucky’?

Comment from John
Time March 15, 2010 at 12:02 pm

Shane H, no we are not arguing for a collapse. We are pointing out capitalism is crisis ridden. I and we don’t wish that consequence on people, and certainly don’t want crises to destroy the lives of workers across the globe.

But our analysis concludes this is the logical result of the capitalist mode of production.

The article doesn’t actually say we were lucky. It says demand from China, cutting working hours, and the stimulus had some effect. But it has to be seen in the context of the global economy and the longer term tendency to economic downturns and economic depressions.

Comment from Marco
Time March 17, 2010 at 8:40 pm

John,

The magnitude of the financial crisis is yet to be fully assessed. So far, the prevailing idea was that the banks had acted foolishly. Now there is plenty evidence that they acted in ways that deliberately violated the law:

Examiner: Lehman Torpedoed Lehman
http://online.wsj.com/article/SB10001424052748703625304575115963009594440.html

You will notice that this is not a radical leftist website, but the mouth piece of capitalism itself: The Wall Street Journal, now with the new Murdoch flavour.

And the financial crisis was just the second step in the global recession!

Here in Australia, the recovery is starting to stall. The latest ABS figures on employment, so trumpeted by all mainstream journos and commentarists, contained the fabulous news that, seasonally adjusted, full time employment increased by 11,400 positions.

What most forgot to mention is that part-time employment decreased by 11,000…

Yes, that’s right, net gain: 400 new full-time jobs.

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