Finding a Pathway Through the Economic Labyrinth

David Keane, 24 September 2008

Following the meltdown in the American sub-prime mortgage crisis, how does America or Australia deal with that crisis and turn the economic ship in the right direction again?

It is simpler I think to answer this question in terms of what is not the right pathway for a long-term solution. It is not a long term solution for President George Bush a fund of 700 billion US dollars to rescue banks and insurance agencies on the verge of bankruptcy. I am quite surprised at the popular outcry in America immediately after this supposed “solution”. This outcry is a sign of real change. It signifies that the American people have at last realised the insanity of the free-market/deregulation/globalisation drive that has gripped America and the global economy over the past forty years. The American people are truly disillusioned. There is panic on Wall Street, and the awakening of the American people from this illusion must be a true turning point in global economic thinking.

The illusion that has been shattered is the promise that feeding the greed and competition of big business would eventually lead to a trickle down effect bringing prosperity to the poor. All thinking people can now see so clearly that this experiment has been one of privatising the profits and socialising the losses. Over the past few decades we have witnessed massive profits going into the hands of a few very wealthy economic manipulators. And now at last we see in full clarity the true nature of the trickle down. The middle class are getting desperately poor, many now unable to meet their mortgage payments, and many others are on the verge of losing their jobs.

In truth, the 700 billion US dollar rescue package it at best a short term fix. It temporarily saves the banks while doing nothing to ease the pain of the middle class Americans. Its weakness is that in drawing upon a vast fortune of public funds, government will be less able to respond effectively the time the next economic downturn comes along. And it seems that with the disillusioning of the American people, that will now happen sooner rather than later.

So what is the real solution to find a pathway through this labyrinth? Our minds have become collectively so befuddled by ideas streaming from the economic spin-merchants, that it is not easy to think clearly.

To put the solution simply, in terms that the common thinking man or woman can understand, the economy must revert to empowering the manufacturing and production sector, instead of strengthening the financial sector as has been government policy over the past forty years. The results of strengthening the financial sector is the promotion of gambling and speculation, casting the nation’s wealth into the hands of greedy manipulators. The very definition of wealth needs to be re-defined. It is not true wealth to boast of speculation bubbles as contributing to the nation’s GDP.

We need to develop a Green GDP, taking into account the volunteer economy, and social factors, and we need to bring in full-cost pricing embracing measures for pollution/toxic wastes, resource-depletion, inefficient and wasteful practices, and effects upon culture and living standards. And we must remove subsidies made out to powerful lobby groups, including TNCs. Methods of assessing unemployment rates and consumer-price increases (CPI) need to be overhauled.

Such a solution will apply equally to America or Australia. Australia does not yet feel the pinch acutely, but it will. At the moment, the hedge funds are eating into the American banking sector, but it probably will not be long before the hedge funds turn their attention to the American dollar, and then the Australian dollar. Australia is not at all well set compared with other nations, as Kevin Rudd assures the Australian people. The Achilles’ heel of the Australian economy is our massive overseas debt. With the oil peak now seemingly reached, and super-inflation about to take off globally in response to the soaring price of oil, Australia’s point of vulnerability is very near to becoming fully exposed. It may well happen very soon after the collapse of the American economy.

That point has not yet been reached. I see no sign in the recent Australian economic statistics that the hedge funds are ready to focus upon attack of the Australian dollar. The Australian economy is in an interlude period before the great fall.

 

Recent Australian Economic Trends

OK, so how has the Australian economy reacted to the sub-prime mortgage housing crisis in America? I have delayed addressing this question, because the recent figures published by the Reserve Bank suggest no clear new trend yet.

Moreover, those publishing the figures have introduced a note of confusion, in that the Reserve Bank economists have re-evaluated their method of assessing debt and GDP. This reassessment starts slowly from about four years ago, and has its major impact for the historical debt and equity figures for the past year.

Let me demonstrate this point, by looking at the recent Net Foreign Liabilities figures.

 

	Net Foreign Equity	Net Foreign Debt	Net Foreign Liabilities	Net Foreign Liabilities as%ofGDP	AnnualInc NetFLiab as%ofGDP
	A$billions	A$billions	A$billions
Jun04	63.840	389.487	453.326	49.6
Jun05	71.114	435.324	506.438	53.9	4.3
Jun06	37.734	502.918	540.652	55.9	2.0
Jun07	78.971	547.412	626.383	62.7	6.8
Sep07	60.171	581.246	641.417	63.5	6.1
Dec07	77.223	595.281	672.505	65.9	5.1
Mar08	82.684	604.491	687.175	66.8	5.3
Jun08	92.185	599.953	692.138	66.8	4.1

Let us consider the column Net Foreign Liabilities as a % of GDP. Foreign Liabilities refer to debt + equity (assets owned by foreigners). Net Foreign Liabilities refers to the amount by which foreigners control Australian debts and assets, in excess of the amount Australians control overseas debts and assets. If debt owed by Australians to overseas interests gets too difficult to handle, then Australian multinationals can always withdraw money they have lent overseas to balance the books. But if net foreign liabilities as a % of GDP starts to increase exponentially, that is a sign that the hedge funds are starting to eat into the Australian dollar, which therefore will be on the point of collapsing.

 

In what way have the Reserve Bank re-evaluated their manner of assessing foreign debt and equity? Let us compare the net figures this quarter with figures published in the previous Recent Australian Economic Trends, three months ago. Here are the comparable figures for three months ago:

 

 

	Net Foreign Equity	Net Foreign Debt	Net Foreign Liabilities	Net Foreign Liabilities as%ofGDP	AnnualInc NetFLiab as%ofGDP
	A$billions	A$billions	A$billions
Jun04	63.840	389.487	453.326	49.6
Jun05	75.386	430.291	505.678	53.8	4.2
Jun06	51.792	500.779	552.571	57.1	3.3
Jun07	105.495	549.193	654.687	65.5	8.4
Sep07	99.451	587.710	687.161	67.9	9.3
Dec07	116.191	607.130	723.320	70.8	9.1
Mar08	113.389	616.098	729.487	70.7	7.1

 

 

	Net Foreign Equity	Net Foreign Debt	Net Foreign Liabilities	Net Foreign Liabilities as%ofGDP	AnnualInc NetFLiab as%ofGDP
	A$billions	A$billions	A$billions
Jun04	63.840	389.487	453.326	49.6
Jun05	71.114	435.324	506.438	53.9	4.3
Jun06	37.734	502.918	540.652	55.9	2.0
Jun07	78.971	547.412	626.383	62.7	6.8
Sep07	60.171	581.246	641.417	63.5	6.1
Dec07	77.223	595.281	672.505	65.9	5.1
Mar08	82.684	604.491	687.175	66.8	5.3
Jun08	92.185	599.953	692.138	66.8	4.1

 

A year ago, the Net Foreign Liabilities as a % of GDP had increased by an alarming 6.8% of GDP, but this last quarter, there was no increase at all, the figure remaining stationary at 66.8% of GDP. This has never happened before. If we examine the Net Foreign Liabilities data for the past 20 years, we will notice it is steadily increasing year by year. But now it is stationary. Why? Perhaps it is an effect of the slow down in the global (and hence also Australian) economy.

 

Gross Data

    

 

Date	GDP $Billions	F Equity %ofGDP	F Debt %ofGDP	F Liab %ofGDP	Dom Cr %ofGDP	TotLiab %ofGDP	AnnInc %ofGDP
Jun-04	913.666	47.6	71.9	119.5	119.3	238.8
Jun-05	939.691	45.5	76.8	122.4	132.3	254.7	15.9
Jun-06	967.454	53.4	88.2	141.7	146.6	288.3	33.6
Jun-07	999.686	65.1	99.0	164.1	163.8	327.9	39.6
Sep-07	1010.744	67.7	100.9	168.6	168.2	336.7	40.0
Dec-07	1021.062	67.1	100.1	167.2	173.3	340.5	33.3
Mar-08	1029.350	62.1	103.4	165.5	177.0	342.5	25.4
Jun-08	1036.312	62.3	103.5	165.8	180.0	345.7	17.8

 

Notice that the figures for Gross Foreign Liabilities as a % of GDP has plateaued at around 166% of GDP. It is only Domestic Credit as a % of GDP that continues to blow out. I wonder why? I get the feeling this is the calm before the storm. Hedge funds simply are not yet taking an interest in the Australian economy. They remain focussed upon the American economy. Yet this period of relative good times cannot last. There is insufficient cash flow in international markets, and the money speculators are beginning to panic.

---

 

APPENDIX

From April 2002, I have been producing analyses every three months, and sending these assessments out in a quarterly publication Recent Australian Economic Trends which is available by email to anyone contacting me and requesting to be placed upon the email distribution list.

Any assessment of Australian financial management and bank regulatory policy, must begin with an assessment of the current state of Australia’s financial affairs. In particular, it is vital that we analyse such significant national financial indicators as Gross Domestic Product, Gross Foreign Equity, Gross Foreign Debt, Gross Foreign Liabilities, Domestic Credit, and Total Australian Liabilities. Figures for these data are available on Internet at the website for the Reserve Bank of Australia (http://www.rba.gov.au/statistics/ ). In this article, I have taken quarterly data from June 2004. You can confirm these data by looking up Gross Foreign Debt, Gross Foreign Equity and Gross Foreign Liabilities on Reserve Bank table H4, seasonally adjusted Domestic Credit on table D2, and Gross National Product on table G10, and Net Foreign Liabilities (Equity and Debt) from table H5.

 

These figures are provided by the Australian Reserve Bank every quarter, now 3 months late. On 19/September/08, the Australian Reserve Bank published the June 2008 figures for table H4, and so now we have available all the information for all these statistical categories up until the end of June 2008.

 

I simply rearrange the Reserve Bank figures which helps with comparison and trend analysis, and so it can be easily understood by the lay person. I add together the figures for Gross Foreign Equity, Gross Foreign Debt and Domestic Credit to come up with an overall figure of “Total Australian Liabilities”.

These three-monthly analyses tend to forecast turbulent weather ahead, much in the manner of a barometer.

 

Table A

In Table A, the "Date" refers to quarterly figures provided by the Reserve Bank.

"F Equity" refers to total Gross Foreign Equity (foreign ownership of Australian assets).

"F Debt" refers to total Gross Foreign Debt.

"F Liabilities" refers to Gross Foreign Liabilities = Gross Foreign Equity + Gross Foreign Debt.

"saDomCr" refers to seasonally adjusted Domestic Credit.

"TotalLiab" refers to Total Australian Liabilities = Gross Foreign Equity + Gross Foreign Debt + Domestic Credit.

 

Date	F Equity A$billions	F Debt A$billions	F Liabilities A$billions	SaDomCr A$billions	Total Liab A$billions
Jun-04	434.6	657.1	1091.7	1089.9	2181.6
Sep-04	441.3	662.9	1104.2	1124.9	2229.1
Dec-04	479.1	696.7	1175.8	1164.3	2340.1
Mar-05	489.2	698.2	1187.4	1198.4	2385.8
Jun-05	427.9	722.1	1150.1	1243.4	2393.5
Sep-05	458.8	742.7	1201.4	1278.1	2479.5
Dec-05	481.5	777.2	1258.7	1321.8	2580.5
Mar-06	512.7	826.1	1338.8	1369.6	2708.4
Jun-06	517.1	853.5	1370.5	1418.7	2789.2
Sep-06	530.5	892.8	1423.3	1465.6	2888.9
Dec-06	576.2	924.2	1500.4	1510.6	3011.0
Mar-07	616.1	952.1	1568.3	1569.0	3137.3
Jun-07	651.0	989.7	1640.7	1637.1	3277.8
Sep-07	683.9	1019.8	1703.7	1699.8	3403.5
Dec-07	685.2	1021.7	1706.9	1769.8	3476.7
Mar-08	639.0	1064.8	1703.8	1822.0	3525.8
Jun-08	645.3	1072.5	1717.8	1865.1	3582.9

 

Table B

 

In Table B the figure I quote for annual GDP (Gross Domestic Product) represents the four most recent (to that month) quarterly figures added up. For example the December 2007 annual GDP represents the quarterly GDP figures for March/07 + June/07 + September/07 + December/07 all added together to get an annual figure.

 

 

Then the figures for Gross Foreign Equity, Gross Foreign Debt, Gross Foreign Liabilities, seasonally adjusted Domestic Credit and Total Australian Liabilities are provided as a percentage of annual GDP.

 

“AnnInc” refers to the Annual Increment of Total Australian Liabilities.

 

Date	GDP $Billions	F Equity %ofGDP	F Debt %ofGDP	F Liab %ofGDP	Dom Cr %ofGDP	TotLiab %ofGDP	AnnInc %ofGDP
Jun-04	913.666	47.6	71.9	119.5	119.3	238.8
Sep-04	922.449	47.8	71.9	119.7	121.9	241.7
Dec-04	927.996	51.6	75.1	126.7	125.5	252.2
Mar-05	933.043	52.4	74.8	127.3	128.4	255.7
Jun-05	939.691	45.5	76.8	122.4	132.3	254.7	15.9
Sep-05	946.258	48.5	78.5	127.0	135.1	262.0	20.3
Dec-05	954.080	50.5	81.5	131.9	138.5	270.5	18.3
Mar-06	961.758	53.3	85.9	139.2	142.4	281.6	25.9
Jun-06	967.454	53.4	88.2	141.7	146.6	288.3	33.6
Sep-06	973.591	54.5	91.7	146.2	150.5	296.7	34.7
Dec-06	980.218	58.8	94.3	153.1	154.1	307.2	36.7
Mar-07	989.476	62.3	96.2	158.5	158.6	317.1	35.5
Jun-07	999.686	65.1	99.0	164.1	163.8	327.9	39.6
Sep-07	1010.744	67.7	100.9	168.6	168.2	336.7	40.0
Dec-07	1021.062	67.1	100.1	167.2	173.3	340.5	33.3
Mar-08	1029.350	62.1	103.4	165.5	177.0	342.5	25.4
Jun-08	1036.312	62.3	103.5	165.8	180.0	345.7	17.8

 

Table C

AnnualInc NetFLiab As % of GDP refers to the annual increment in the net foreign liabilities (net foreign equity + net foreign debt) as a % of GDP.

 

	Net Foreign Equity	Net Foreign Debt	Net Foreign Liabilities	Net Foreign Liabilities as%ofGDP	AnnualInc NetFLiab as%ofGDP
	A$billions	A$billions	A$billions
Jun04	63.840	389.487	453.326	49.6
Sep04	74.509	400.194	474.702	51.5
Dec04	70.648	416.044	486.691	52.4
Mar05	75.051	424.343	499.394	53.5
Jun05	71.114	435.324	506.438	53.9	4.3
Sep05	65.949	451.669	517.618	54.7	3.2
Dec05	57.322	474.409	531.731	55.7	3.3
Mar06	36.549	492.264	528.813	55.0	1.5
Jun06	37.734	502.918	540.652	55.9	2.0
Sep06	43.088	516.007	559.096	57.4	2.7
Dec06	64.235	531.967	596.202	60.8	5.1
Mar07	68.898	539.941	608.839	61.5	6.5
Jun07	78.971	547.412	626.383	62.7	6.8
Sep07	60.171	581.246	641.417	63.5	6.1
Dec07	77.223	595.281	672.505	65.9	5.1
Mar08	82.684	604.491	687.175	66.8	5.3
Jun08	92.185	599.953	692.138	66.8	4.1

 

 

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