By David Keane, 22 January 2009

 

Delay in Release

My apologies for the delay in release of this latest issue of Recent Australian Economic Trends. The data from which this issue is provided, had been released by the Australian Reserve Bank on Thursday 18/December/2008, now a month ago. I normally take only a few days to rearrange this data and release a copy of Recent Australian Economic Trends. This time however, my attention has been focussed upon the tragically unfolding situation in Zimbabwe, and it is only now that I can write and release this newsletter.

Upgrading of Historical GDP

    Since the release of the previous Australian Reserve Bank statistics in December/09 to September/09, all historical figures for GDP have been upgraded by about 4.6%.

    For example, let us take the data for June/04. When the Reserve Bank published these figures in Sep/08, the GDP for June/04 read as AUD$913.666 billion. But when the Reserve Bank published these figures again in Dec/08, the GDP for June/04 read as AUD$956.018 billion. That is an unexplained increase in GDP of 4.635%.

    For a further example, let us take the data for June/08. When the Reserve Bank published these figures in Sep/08, the GDP for June/08 read as AUD$1036.312 billion. But when the Reserve Bank published these figures again in Dec/08, the GDP for June/08

read as AUD$1089.010 billion. That is an unexplained increase in GDP of 4.596%.

    If we look at any of the historical data for GDP, we notice that they all have been increased by roughly 4.6%. This is not an increase of real wealth of the nation. It is simply a reassessment of how the Australian Reserve Bank works out our GDP. The higher wealth figures make us look more wealthy on paper, but it is all an illusion. 

    But even this tinkering of figures by the Reserve Bank cannot veil the fact that the days are well and truly gone when Australia’s Foreign Debt has been under the level for one year’s GDP.

    So when we look at this quarter’s figures, let us compare all the figures as released by the Australian Reserve Bank in December/08, not with figures released in previous quarters. In this way, we shall get a good understanding of Australia’s recent economic trends.

 

Gross Data

Let us look at the most recently released gross data compared with the GDP.

 

Date	GDP $Billions	F Equity %ofGDP	F Debt %ofGDP	F Liab %ofGDP	Dom Cr %ofGDP	TotLiab %ofGDP	AnnInc %ofGDP
Jun-04	956.018	45.5	68.7	114.2	114.0	228.2
Jun-05	982.786	43.5	73.5	117.0	125.9	243.0	14.8
Jun-06	1012.269	51.1	84.3	135.4	140.2	275.6	32.6
Jun-07	1045.674	62.3	94.6	156.9	156.6	313.5	37.9
Sep-07	1056.547	64.5	97.3	161.9	160.9	322.7	39.2
Dec-07	1067.383	64.0	96.7	160.7	165.9	326.5	33.1
Mar-08	1076.166	59.0	100.2	159.1	169.3	328.5	25.7
Jun-08	1083.942	59.5	100.9	160.5	172.2	332.7	19.2
Sep-08	1089.010	54.9	108.4	163.3	174.9	338.1	15.4

The first thing we notice is that the Gross Foreign Debt as a % of the GDP has well and truly established itself as well over 100% of GDP and once again is increasing rapidly, by 7.5% of GDP this last quarter. This figure is slightly balanced by the decrease of Gross Foreign Equity as a % of GDP, which decreased by 4.6% of GDP.  Overall, therefore, the Gross Foreign Liabilies increased by only 2.8% of GDP in the quarter. This is still an alarming increase but not quite as alarming as it might have been without the reduction in Gross Foreign Equity. 

    Australia's Domestic Credit continues to blow out. In the last quarter it increased by 2.7% of GDP, equivalent to an annual increase in Domestic Credit of 10.8% of GDP over a year (four quarters).

In the first 15 months of its hold on power, the Rudd Labor government has made absolutely no inroads in Australia’s level of escalating Domestic Credit. This is a recipe for an economic disaster for the generation of Australian children who are still at school.

 

Escalating Foreign Debt and Fall in Australian Dollar

    For the first year in government, the Rudd government seemed to have a hold on keeping Foreign Debt in check. But this last quarter, the Foreign Debt started to blow out again. This is as a direct result of the collapse in the Australian Dollar.

    The Australian dollar seems to be collapsing in direct proportion to the collapse in the global economy, the principal indicator of which is America’s Dow Jones Industrial Index. This collapse has happened only since mid 2008. Let us have a look at the way the collapse has happened.

 

Date	Aus dollar buys	Dow Jones
30/6/08	US$0.9564	11,350
15/7/08	US$0.9801	10,962
30/9/08	US$0.7904	10,850
31/12/08	US$0.6980	8,776
22/1/09	US$0.6587	8,228

 

The date 15 July 2008, was when the Australian dollar reached its highest value ever against the US dollar. It then could buy US$0.98, just short of parity. Ever since then, the Aussi dollar has been in steep decline.

    Half of this decline in the Aussi dollar so far had been registered by 30 Sep 2008, (a 15 cents fall from June to September) the date to which the recent Reserve Bank figures have taken into account. There is at least a further 15 cents fall that must be taken into account in the next two quarterly releases from the Reserve Bank. 

    Now most of Australia’s Foreign Debt is contracted in US dollars. This means that whenever the Aussi dollar falls against the US dollar, then Australia’s Foreign Debt increases proportionately. And so in the next two quarters we must witness a further increase of Australia’s Foreign Debt, as the Reserve Bank statistics take into account the further fall of the Aussi dollar. So far, they have only factored in half of the fall to date.

    And as the Aussi dollar continues its free fall, (America’s sub-prime mortgage debt is only about a third exposed yet, the remainder inevitably will be exposed over the coming two years), then Australia’s Foreign Debt must also continue to blow out. At now well over 100%, Australia’s Foreign Debt is becoming like a millstone around the neck of the Australian economy.

The Way Out

    I proposed a comprehensive way out in a letter to all Senators dated 16 July 2007, sent out several months before the 2007 Federal election in which Kevin Rudd became Prime Minister. I received a few replies from Labor Senators (including the then opposition Treasurer) complimenting me on the depth of research and information, yet also affirming that a change of government would be the ideal solution. Such letters would then provide numerous reasons why Labor’s economic policy of the time would address Australia’s future economic challenges.

    Well the Labor Party won the later 2007 Federal elections, but Australia’s economy seems to be in an ever increasing mess. The Rudd government has put in place a huge spending package to allay panic in the markets, but such a spending package in no way addresses the long term problems facing the Australian economy. The long-term answer was suggested in my article to Senators of 16 July 20/07.  That article can be accessed on Internet through

http://recenteconomictrends.pbwiki.com/FrontPage

    I have been pondering whether or not I should send out another letter to Senators. There is no doubt that the Australian economy is in an awful mess and that urgent action is required. But I ask myself, why should I send out another letter when the first letter to Senators brought no fundamental shift of government economic policy, even with a change to a Labor government. The essence of the problem it seems to me lies in the often repeated statement by Prime Minister Kevin Rudd, that “the fundamentals of the Australian economy are sound”. The fundamentals of present Australian economic policy are in fact based upon dangerously unsustainable illusion. How can we present a case to the Prime Minster so that he begins to think in terms of developing a sustainable economy?

    I think my second letter to Senators must address three central issues.

1)Global debt is increasing at a rate of roughly 6% a year. A global economy based upon usury (compound interest) is like a pyramid bank scheme. It is totally unsustainable, and the fundamental philosophy of a debt driven economy must be completely abandoned.

2)Our present recession is not like other recessions. In previous recessions, the global economy grew again through cultivating a huge speculative bubble in some direction. But this recession is for the first time in modern history biting deep into the wealth of the First World middle class. That is the group that in previous recessions were feeding the new speculative bubble. But the First World middle class are now hurting too much to think of anything but survival.

There is not going to be a new huge speculative bubble emerging to redeem the stock markets. And the infrastructure to increase productivity has been declining for forty years. There is simply no way to emerge from this recession except through radical abandonment of a debt driven economy and the principles of usury, and replacing it by principles for a sustainable economy.

3)Australia is going to experience massive layoffs and increased unemployment over the coming two years. The problem is not going to go away by waiting the recession out, as Kevin Rudd seems to want to do. It will only go away by radically addressing and implementing the fundamental principles for a sustainable economy. Only when this is done, will a long term policy to restore full employment become possible. I think Kevin Rudd is very sensitive to the problem of continuing unemployment. My letter to Senators must embrace a well thought through agenda with respect to restoring full employment for the Australian economy.

I am thinking of writing and releasing my next letter to Senators, discussing these three points, in about six months. Perhaps by then the Rudd government will be sufficiently concerned by the deteriorating state of the World and Australian economies to begin to think these vital matters through. 

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 18 December 2008, the Australian Reserve Bank published the September 2008 figures for table H4, and so now we have available all the information for all these statistical categories up until the end of September 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	1125.0	2229.2
Dec-04	479.1	696.7	1175.8	1164.5	2340.3
Mar-05	489.2	698.2	1187.4	1198.0	2385.4
Jun-05	427.9	722.1	1150.1	1237.6	2387.7
Sep-05	458.8	742.7	1201.4	1278.2	2479.6
Dec-05	481.5	777.2	1258.7	1322.1	2580.8
Mar-06	512.7	826.1	1338.8	1368.9	2707.7
Jun-06	517.1	853.5	1370.5	1418.9	2789.4
Sep-06	530.5	892.8	1423.3	1465.6	2888.9
Dec-06	576.2	924.2	1500.4	1510.9	3011.3
Mar-07	616.1	952.1	1568.3	1568.0	3136.3
Jun-07	651.0	989.7	1640.7	1637.3	3278.0
Sep-07	681.6	1028.5	1710.1	1699.8	3409.9
Dec-07	682.8	1032.1	1714.9	1770.6	3485.5
Mar-08	634.5	1078.2	1712.7	1822.2	3534.9
Jun-08	645.3	1094.2	1739.5	1866.9	3606.4
Sep-08	597.6	1180.5	1778.1	1904.3	3682.4

 

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	956.018	45.5	68.7	114.2	114.0	228.2
Sep-04	965.176	45.7	68.7	114.4	116.6	231.0
Dec-04	970.930	49.3	71.8	121.1	119.9	241.0
Mar-05	976.060	50.1	71.5	121.7	122.7	244.4
Jun-05	982.786	43.5	73.5	117.0	125.9	243.0	14.8
Sep-05	989.659	46.4	75.0	121.4	129.2	250.6	19.6
Dec-05	997.725	48.3	77.9	126.2	132.5	258.7	17.7
Mar-06	1005.821	51.0	82.1	133.1	136.1	269.2	24.8
Jun-06	1012.269	51.1	84.3	135.4	140.2	275.6	32.6
Sep-06	1019.008	52.1	87.6	139.7	143.8	283.5	32.9
Dec-06	1026.174	56.2	90.1	146.2	147.2	293.4	34.7
Mar-07	1035.666	59.5	91.9	151.4	151.4	302.8	33.6
Jun-07	1045.674	62.3	94.6	156.9	156.6	313.5	37.9
Sep-07	1056.547	64.5	97.3	161.9	160.9	322.7	39.2
Dec-07	1067.383	64.0	96.7	160.7	165.9	326.5	33.1
Mar-08	1076.166	59.0	100.2	159.1	169.3	328.5	25.7
Jun-08	1083.942	59.5	100.9	160.5	172.2	332.7	19.2
Sep-08	1089.010	54.9	108.4	163.3	174.9	338.1	15.4

 

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	47.4
Sep04	74.509	400.194	474.702	49.6
Dec04	70.648	416.044	486.691	50.1
Mar05	75.051	424.343	499.394	51.2
Jun05	71.114	435.324	506.438	51.5	4.1
Sep05	65.949	451.669	517.618	52.3	2.7
Dec05	57.322	474.409	531.731	53.3	3.2
Mar06	36.549	492.264	528.813	52.6	1.4
Jun06	37.734	502.918	540.652	53.4	1.9
Sep06	43.088	516.007	559.096	54.9	2.6
Dec06	64.235	531.967	596.202	58.1	4.8
Mar07	68.898	539.941	608.839	58.8	6.2
Jun07	78.971	547.412	626.383	59.9	6.5
Sep07	52.505	588.964	641.468	60.7	5.8
Dec07	68.742	602.842	671.584	62.9	4.8
Mar08	70.049	612.707	682.756	63.4	4.6
Jun08	82.877	614.643	697.520	64.4	4.5
Sep08	51.615	657.961	709.576	65.2	4.5

 

 

download .pdf of this article