Australia, you’ve officially jumped the shark

No one enjoys being unpopular, especially in our vain, materialistic and often dull contemporary Australia. Popularity is as important to Australians as soy flat-whites, low-hanging filament light bulbs, and the eponymous weekend real estate lift out. Oh, and having 24 craft beers on tap is pretty important these days too. But I digress. Our beverage-and-decor-obsessed nation has forged a whole economy and society around selling expensive food, drinks and houses to each other, and I’m pretty sure we even managed to sell a few rocks to China for a time.

Jeez we’ve had it good these last 20 years. While half of the developed world collapsed into financial and economic meltdown under the largest pile of debt the world has ever seen, we kicked back with our first home owner grants and solar panel rebates, and threw another shrimp on the barbie out the back of our half a million dollar mortgage. I mean house.

No one wants to be the party-pooper that rains on this epic fun parade. But someone’s got to do the shitty jobs, else they don’t get done, see. Us Aussies shouldn’t have to do the crap jobs. So let me be that guy that everyone hates, the barbecue-stopping fun policeman banging on about something to do with tax policy and the price of iron ore, as though the two were somehow related.

Allow me to unapologetically rip on my own country for its towering failures, as if I were the first guy on the internet to have thought of doing so. I want to indulge in the cliché of telling some simple home truths. Some cultural, social, economic and financial truths that no one wants to hear, but need to know. Like that old chestnut: “Sorry guys, the esky has just run out of beer, it’s midday on Australia day, and the local bottle shop doesn’t open on public holidays”. Serious. Issues.

Contrary to my normal award-winning attention to detail, for this exercise I’m not even going to aim for a pretence to quality ‘journalism’ by citing sources, evidence and facts. I’m just going to assume that you’ve arrived at this blog because either you have a sense of the plain-as-day troubles on the horizon and fear that not all is well in the land of bearded cafe workers and renovation game shows (a land once better known for its dangerous animals and large fruit sculptures), or you were simply curious about this angry guy who writes 5000 word essays on why he’s hard done by. Or maybe like me you just enjoy the national pastime of ragging on hipsters, despite the irony that hipster is only now a marketing term, and filament bulbs reached saturation point in New York five years ago. Some scapegoat.

Anyway, whatever you came here for, I will attempt to please all above mentioned audiences without deference to complex explanations, and hopefully inspire some standard-issue derogatory comments to help me feel important, the kind that take issue with lengthy articles and sarcasm. I like to feel like I’m making a difference by providing a temporary home for folks with axes to grind, like myself. We can grind them together. So to that end, why don’t we start with the fair assumption that my baseline supporting arguments are correct (they are), and save the real debate for the veracity of my depressing conclusions.

Ponzi economics, the Aussie ailment

Most people agree that economics is boring. And finance is even more boring. And don’t even get me started about tax. Bloody hell who cares right? Except if you’re trying to take more tax from me than the next bloke, in which case it turns out I’m an expert, and my expert opinion is that tax is un-Australian.

In Australia, this is the prevailing attitude, and when coupled with the staggering levels of prosperity enjoyed in the last 25 years or so, we have trained ourselves to not question the true foundations, nature and likely future of our prosperity. Why would I need to understand economics if I’m rich baby?! Economics, finance, and tax seem to be working pretty well when we can all become millionaires just by purchasing a place to live. What could possibly go wrong? History proves that if I’ve gotten rich so far, then I’m going to always be rich, aren’t I…?

Well no, sorry, the world doesn’t work like that. You don’t need me to tell you that it doesn’t, and yet the best way to characterise the current national psyche is exactly that myth – it’s been great so far, how could it possibly change for the worse? And when it finally and inevitably does, we will seek to lay blame at anyone’s feet but our own. But our own failure to understand and respect history, economics, and most importantly risk, is to blame.

If we don’t take the time to understand at least the basics of economics, finance and tax, especially in the current context, those that do understand can continue to use our ignorance to inflict bad policy, bad advice and self-serving mythology on us, in order to further their own political careers, personal wealth and commercial interests. It’s very easy to sell policies and financial advice (to the citizen and the country) that are extremely detrimental to our long-term wealth, social fabric and economic and financial stability, when it’s making us rich in the short-term.

Most of the developed world discovered that fact in the last 5 or 10 years. But owing to some extraordinary set of circumstances, Australia got off scot-free, leading us to arrogantly embrace our good fortune as a clear sign of providence and management ability, an incredibly short-sighted attitude that morphed into the lazy, greedy and jealous exceptionalism that we can see all around us today.

So then, some boring background facts on the last couple of decades. How did we achieve this, our all-encompassing get-rich-quick pyramid scheme?

Bubble 1.0:

• Firstly, we organised a commodities boom – a once in a century super-cycle based on extraordinary growth in emerging economies.
• Australia got stonking rich on mineral wealth, digging that dirt up faster than we could ship it out.
• Nearly everyone assumed that these mining riches would go on forever, permanently paving the streets with iron ore and gold.
• Based on that monumental and staggeringly ignorant assumption, the powers that be ‘made way for mining’, allowing the whole economy, and monetary and policy settings to be reshaped to allow for the export of expensive rocks above all else.
• We gave ourselves enormous pay rises with the proceeds, via rising wages, tax cuts and tax transfers, turning a temporary income windfall into a permanent recurring liability, massively eroding our future tax base.
• We said to ourselves “Hey, thanks for the cash”, and piled it into residential real estate post-haste.
• Mostly we didn’t actually have the cash we needed, so we just borrowed the rest, mostly from overseas lenders through our big banks. Not my problem.
• The government in its infinite wisdom decided this housing horniness needed more fuel, and variously proceeded to slash capital gains taxes on housing, erode land taxes and council rates, and hand out free money to impressionable youngsters missing out on the sexy housing boom action.
• Surprise, surprise, house prices exploded over the last two decades, outstripping our so-called ‘economic fundamentals’.
• Governments and citizens embraced and became addicted to the ‘wealth effect’ of exponential price growth, and houses became ATMs. “Equity maaaate…!”.
• Household debt levels ballooned rapidly, reaching levels never before seen in our history.
• The GFC nearly derailed the whole shebang, before the plunge protection teams were sent in to rescue the bubble.
• The government handed out new wads of cash to first home buyers, allowed super funds to leverage up into residential property, and relaxed laws for foreign investment in established housing, sending the housing bubble to new all time highs, and temporarily helped ‘rescue’ the economy in the process.

Bubble 2.0:

• As the bubble again started to fail in 2011 – 2013, the Reserve Bank of Australia intervened by slashing interest rates to the lowest levels in 50 years, claiming that a housing construction boom would rescue the economy from a mining boom suddenly past its peak.
• The bubble re-inflated in one last giant blow-off, sending investor lending straight to Pluto, as the scale on everyone’s graphs broke.
• Economists had to come up with ever more ridiculous defences of one of the most expensive housing markets and indebted private sectors in the world.
• In the process, the twin columns of the Aussie economy – mining and housing – sucked the life out of every other possible means of making money and generating economic prosperity.
• The Aussie dollar rose to record highs, along with land prices, wages, rents and nearly every input cost in the economy.
• Productive enterprise became increasingly starved of credit, as ever-expanding mortgages became the lowest risk and most profitable lending for banks.
• Nearly the entire sum of new credit loaned since the GFC went to housing instead of the business sector.
• Existing businesses became fat and lazy, easily defending their monopolies with the lack of competition to drive innovation and productivity.
• ‘Pro-business’ policies became the very opposite, protecting the interests of rent seeking non-value-added business and making it extremely difficult for new and small to survive and flourish.
• Blue-chip manufacturing, services and tourism businesses were crippled by the inflated currency and high cost economy
• Economic and political protectionism became the soup-du-jour, with any sort of reform agenda grinding to a complete halt as the squeals of vested interests skewered any chance of salvaging worthwhile enterprise and progress.
• Anyone or anything threatening this politico-housing quango was booed out of school, marginalised or fired.
• Political and social culture hardened into an ill-tempered, petulant, and often parochial class war, where jealously guarded wealth and entitlements meant that it was suddenly ok to be cruel to those without means or fortune, and a virtue to be selfish.
• A once diverse and dynamic economy and society was completely transformed into a one-trick pony, funneling diminishing mineral wealth into dangerously inflated asset prices, with private debt tapped out, a deeply souring cultural psyche, and darkening economic clouds on the horizon.
• Worst of all, everything became much more bland, self-conscious and fearful, as denial set in, and the people became incapable of facing their own distorted image.

Australians have been sold a pup. Endlessly rising real estate values and mineral wealth exports are no longer virtues. They are the original cause of the majority of our current ailments, and the only things really left to either make or break us. They are the millstone around our necks, and will take us down as fast as they took us up, because that’s the cyclical nature of the world that we’ve ignored for too long. A country that has for a long time claimed bragging rights for the strength of its economy, now has its taxpayers spend 20 times more on subsidising unproductive loss-making investment in established housing than it does on subsidising new business and innovation. Let’s not kid ourselves, we are sunk folks.

Those that still like to kid themselves, claim that the are a lot of reasons that Australia will continue to prosper, avoid recession for the first time in human history, and avoid the housing crash that is as inevitable as the rising sun. This is so clearly a rear view perspective. These things are no longer going well, and are incapable of propping up the bubble for much longer.

Things that were good, but now, not so much (in no particular order):

• Our once strong and proud manufacturing sector decimated by high costs.
• A highly educated and innovative culture, now underfunded and starved of oxygen.
• Previously high productivity growth grinding to a halt.
• Competition in the gutter, with protectionism and monopolies as far as the eye can see.
• Favourable demographics that helped drive consumption and housing booms going into reverse.
• Previously safe banking and financial system eroded by subprime lending at the fringes, too-big-to-fail government guarantees, inadequate credit buffers and massive mortgage and offshore credit exposure.
• Cheap imports from the high dollar turning into imported inflation as the currency crashes back to earth, and standards of living fall.
• Record high wage growth quickly becoming the lowest wage growth on record.
• World class infrastructure becoming a world-class infrastructure deficit.
• A decade of budget surpluses and windfalls now drowning in red ink.
• Low public debt threatening to break out and destroy our AAA credit rating, dangerously driving up the cost of servicing that mountain of private debt.
• Record high population growth now falling for the first time in years, as opportunity and prosperity dry up.
• The long and grinding rise in unemployment chipping away at consumer and business confidence.

The bad news is everywhere right now, and yet the tendency is to view the individual issues in isolation, pretending that the most expensive housing in the world has nothing to do with the lowest growth in decades of income, employment, rents, productivity, competitiveness, employment etc, etc. Who are we kidding seriously? Our destiny is a product of our past, and nearly all of the current issues we face are interconnected and share a common origin.

Things that are not good, or if as I prefer to say ‘stupid shit’ (again, in no particular order):

• Paying $12 for a beer.
• Record high house prices compared to economic fundamentals.
• Convincing young people to blow their financial futures on a lifetime of unprecedented debt slavery, and disingenuously calling it the ‘property ladder’.
• Tax breaks for unproductive assets, mostly housing, instead of tax breaks for useful shit.
• Record levels of household debt, threatening to cause an economic depression.
• A massively bloated financial sector, which slows growth and widens inequality.
• Using population growth to drive business expansion.
• Rising income taxes courtesy of bracket creep.
• Slashing investment in education, health, science, small business and innovation.
• Running manufacturing out of the country to make way for mining and housing.
• Inaction on climate change.
• Shunning renewable energy despite it being one of the only sectors with high growth potential.
• Steadily rising wealth inequality.
• Racism, jealousy and selfishness.
• The loss of egalitarianism.
• Putting all our eggs in one basket.
• Thinking that things will never change.

As we know, things do change. For better or worse. And who would have guessed that in Australia’s case, it’s going to be for the worse before it’s for the better. There’s a whole mess of stuff about to shake our world view to the core.

Things that are about to f*** us up (not exhaustive):

• China’s rapidly slowing economy.
• Crashing mining investment.
• Crashing iron ore and commodities prices.
• The destruction of our completely fictional budgets.
• The loss of our AAA credit rating.
• Record low-income growth.
• Rising unemployment.
• Our ageing population and falling participation rate.
• Our suddenly slowing population growth.
• A massive pending oversupply of residential units in big cities.
• Record low rental yields.
• Macroprudential controls on housing and investor lending.
• Tightening rules and enforcement of foreign investment in residential real estate.
• Liar loans, real estate spruikers and subprime lending being exposed on the margins.
• Negatively geared interest only property investments turning to shit when prices start to fall.
• Highly leveraged self-managed super accounts going bankrupt when property crashes.
• Housing and rental markets in Western Australia and Northern Territory already beginning to crash.
• Housing markets in South Australia, Queensland, Tasmania and ACT going nowhere and ready to fall.
• The last remaining bubble markets in Melbourne and Sydney going stratospheric just as everything else in the economy and housing market turns to shit.
• The next global economic and financial shock just around the corner, with the global business cycle ready to end.

Fear, the most dangerous and human factor of all is about to prove that all economic and market fairy tales come to an end eventually. Greed is what makes the market on the way up, and fear is what destroys it. When the shit really hits the fan, history proves that people are above all else impatient, weak-willed and afraid. Everyone does what they can to protect their money, and thus our fate is sealed.

All of these factors are a lot to take in, and even harder to quantify in a meaningful way that paints the big picture of contemporary Australia, recent formative history, and the many forces shaping our future. So to try to help achieve this wide perspective, I plotted the above data points on a single chart, which clearly demonstrates the converging trends that Australia faces:

 

History rhymes, the depressing certainty of boom and bust

Unfortunately the twin commodities and real estate booms of the last two decades that lifted the fortunes of working class Australians, was also the very phenomena that destroyed egalitarianism in this country, and led to a brand new set of class anxieties.

It is a well established and long observed process where a country that experiences staggering emergent wealth in the form of extractive tradable resources, restructures its entire economic, social, cultural and political world view around the assumption the boom will never end, and that ever greater prosperity is the new normal. Taxes are handed back like they’re going out of fashion, and an intractable entitlement culture emerges that spoils political, social and economic processes and systems. (Not the Joe Hockey variety of entitlement, but the now entrenched middle / upper / business class rent seeking pull-up-the-ladder-behind-you variety of entitlement).

This wholesale restructuring of our affairs around the assumption of endless prosperity and exceptionalism requires the maintenance of an immense delusion that things will never change, unless some external force ‘comes and takes it from us’. So we are naturally left with a deep-seated anxiety of anyone who might threaten this world view, and perceive them as the enemy – be it refugees, bogans, hipsters, academics, economists, scientists, treasurers or prime ministers. ‘Talking down the economy’ becomes treasonous, no matter the accompanying scientific, economic, or political qualifications, and suggesting that reform is needed is like saying that we have to give back all the mining money and you can’t be rich any more.

The real threat of course is the internal contradictions that develop in this process – the massive imbalances that work for us on the upside of the boom, but destroy worldviews, wealth, political careers and class consciousness on the downside. Our original and continuing mistake is identifying that a cyclical change was a structural change that would last forever, and thus spoiling ourselves rotten in the process. It’s just human nature; confirmation bias that the good times will continue because we want them to. Two prime ministers have already been felled for trying to take away the punch bowl, by actually attempting tax reform, and it looks like one term Tony will suffer the same fate at the hands of economic realities beyond his control.

The silver lining is that the process of realising the temporary nature of staggering emergent wealth, and the likely economic, social and political fallout will probably reset our egalitarianism to some extent, as we again realise the need for shared sacrifice and evidence based policy and reform. It’s just a fact of life that commodities booms throughout history ensure that these lessons are only learnt when the tide goes out on the resulting exceptionalism, and the damage has already been done.

The much respected economist Ross Garnaut wrote a book about this process called Dog Days. He gives a detailed account of how the ‘Salad Days’ destroyed political process, and left us completely unprepared and unwilling to face the ‘Dog Days’. Couldn’t have said it better myself. Indeed, it only took me 3000 words to say what he eloquently explains in a single sentence. But hey, I’m angry alright.

You might not believe it, but deep down I’m an optimist. The best thing that the people of this country have going for us is that we are generally adaptable and resourceful, and multi-faceted in our cultural, social, political and economic views and ways of life. We’ve nearly always bumbled our way through, eventually recovering our dignity after eating another giant shit sandwich that we made for ourselves. We have a great ability to look out for each other when stuff gets real, and stare down corrupt and inept authority when finally pushed into a corner. But I do fear that we’ve temporarily forgotten how to be adaptable, resourceful, innovative, productive, generous, tolerant, and compassionate. I can’t believe how much we seem to have lost in our transition to becoming a bunch of spoilt brats. When will this garbage end?

Australia, you’ve officially jumped the shark. Someone urgently needs to push the reset button on that shit.