What is Wrong in the Australian Economy? - Three Observations

There have been many comments in the media about the situation in which we find ourselves today as a result of the rampant greed displayed by financial institutions and the idiotic responses by assorted bureaucrats and politicians.

This article is the first of three commenting on various aspects of the current crisis as applicable to Australia.

Political Stupidity & its Part in the Economic Crisis

Many years ago John Maynard Keynes was held out as an economic guru and he remarked as follows about the veracity of politicians:

“Why has the world been so credulous of the unveracities of politicians? If an explanation is needed, I attribute this particular credulity to the following influences in part.
In the first place, the vast expenditures of the war, the inflation of prices, and the depreciation of currency, leading up to a complete instability of the unit of value, have made us lose all sense of number and magnitude in matters of finance.

What we believed to be the limits of possibility have been so enormously exceeded, and those who founded their expectations on the past have been so often wrong, that the man in the street is now prepared to believe anything which is told him with some show of authority, and the larger the figure the more readily he swallows it.”

Keynes theories are largely responsible for the current economic mess, in that they encourage political interference and over-regulation.

This in turn increases the cost burden to the individual taxpayer by having to comply with a plethora of petty laws and regulations and support unnecessary government departments.

It also erodes savings by the insidious effect of inflation caused by the enthusiastic use of the printing press by governments, which has a side effect of encouraging oversupply of credit.

Of course, the most recent example of this in Australia is the Resources Super Profits Tax, although its initials have given rise to an assortment of rather more appropriate names.

Even foreigners couldn't believe the stupidity of it. US commentator Dennis Gartman described it as being more typical of a South American autocrat such as Hugo Chavez, and said 'Never did we expect such nonsense from Australia. Shame on Rudd, he really should know better'.

Canada has been chortling quietly on the sidelines in anticipation of the benefits it will gain by being a more competitive place for mining investment. Other overseas companies interested in our mineral wealth will take the opportunity, if this tax is introduced, to buy into our mining sector and export any profits overseas.

What Rudd, a former bureaucrat, & his advisors, who would also seem never to have had any significant exposure to the private sector, clearly don't realise is that about A$100 million is spent in exploration costs for every economically viable deposit found and many projects in the pipeline have recently been put on hold in consequence. After all, who in their right mind would spend such large sums for a paltry 6% return?

About 41% of voting-age Australians are invested in shares. The resource sector makes up about 33.4% of the $1400 billion total market cap for the entire Australian market and superannuation funds hold around $120 billion, or 11%, invested in our resource sector.

Crippling the present and future value of the resource sector is going to make a big difference to the total value of these funds, and everyone will feel it, with voters being well placed to make their voices heard.