Does the Australian Economy Have the Stomach for Reform?

I’ve put in a request to have your daily email renamed ‘Ye Olde Daily Reckoning’. That’s because of my quaint and doltish focus on data like the trade balance, things that don’t really matter anymore but are still fun to monitor.

Yesterday, the Australian Bureau of Statistics (ABS) released trade data for the month of May…and it was a shocker. Instead of an expected deficit of $200 million, it came in at a whopping $1.9 billion. Following a series of surpluses in the early part of the year, this is the second monthly deficit and will drag down second quarter economic growth unless we see a big turnaround in June (unlikely after the big falls in the iron ore price).

The Australian stock market certainly didn’t care about the trade deficit. It surged higher yesterday on…we’re not sure what…probably short covering. In the past three weeks we’ve had three such vicious rallies, all of which ran out of steam pretty quickly. Will this one be different?

Phillip J Anderson, Port Phillip Publishing’s newest recruit, no doubt doesn’t care about quaint notions like trade balances either. Phil looks at cycles, and he couldn’t care less what happens in the meantime.

I’ve just finished his first issue, and it’s an intriguing read. For Phil, it’s all about the real estate cycle. The monetisation of land value via debt is the key to understanding how these cycles work.

‘The land market, and the credit created against it, is what drives the real estate cycle, which drives the economy, which ultimately drives stocks and property. If you do not understand the land market, then you are blind to the risks you are taking when you invest.

‘At the very heart of the real estate cycle, chasing the unearned wealth that is the economic rent drives most real estate investment (speculation). The banks love this process. Banks capture this economic rent via mortgage payments — creating credit against the land price. Land price, is, in reality, the capitalised annual rental value of the land.

‘This means banks have become a far larger (now enormous) part of the economy than they otherwise should be. We are, in effect, mortgaging the earth to them. It’s a very profitable system for those who control it.’

Until they blow it up, which they inevitably do. Phil reckons the next explosion isn’t due for a while, so get on board. If you’re interested in Phil’s ideas, click here.

But let’s get back to Ye Olde Daily Reckoning, and wring our hands over old-fashioned notions like economic prosperity and budget sustainability.

Funnily enough, the old pugilist Mark Latham got me thinking about this after reading his piece in the Financial Review today. Latham points out that in life, as in markets, people think the past is prologue.

‘In public opinion, it is widely assumed the economy is running itself and our future prosperity is guaranteed. No matter how frantically governing parties ramp up their rhetoric about the importance of economic management, few people are listening.’

In other words, we’ve had it too good for too long. This is not a new claim. But Latham makes the point to introduce a new essay by former Rudd economics adviser Andrew Charlton called Dragon’s Tail. Charlton says we’ve been enjoying a ’precarious sort of prosperity’…the result of a big fat Chinese credit boom that resulted in a huge misallocation of (our) resources.

Read the rest of this article at The Daily Reckoning