G20 HUBRIS

For my readers in other countries, you probably were bemused by the lecture recently given to the statesmen and women at the G20 by the Australian Prime Minister. For many of us here, it made us cringe. This woman is an old style British socialist from the valleys of South Wales (UK). She will only ever be a footnote to history as the first female PM in Australia, for destroying her very reputable predecessor (Kevin Rudd), and lying to the electorate.

What her admonishments at the G20 omitted was the chaos in Australian economic policy. This chaos is being masked by the booming resources sector, without which Australia would be headed down the European road right now. So called climate change policy is destroying large swathes of manufacturing with massive job losses. Banks will not finance electricity generators. What does she do? She gives large amounts of taxpayers money to companies which otherwise would have to sack their workforces so that they can pay her carbon tax she said she would not introduce. Similarly, a return to industrial relations policies which belong to another age where “workers” doffed their caps to “bosses” is scything through the SME sector.

Australia today, readers, is like an obese person who does not want to get on the scales to see how heavy they are. There is a heap of bad news out there, masked only by iron ore, coal and LNG exports to China and India. If that slows, there will be no option but to get on the scales and take the medicine.

There have been recent Australian statesmen who should proudly and properly address the G20, from both sides of politics. She isn’t one of them. Sorry.

IS THIS AUSTRALIA'S INDIAN (CHINESE) SUMMER?

One of the more sober assessments of the European situation came this week from the New Zealand Prime Minister, John Key, speaking from Berlin. Key is a smart and very experienced operator and worth listening to. He commented that Greece is such a small economy that is it not likely to cause the collapse of the euro. Nor is it likely that Greeks will vote to leave the Eurozone. This contrasts with much of the hype in the Australian media.

That hype went into overdrive this week on the release of the Australian economic data. What it misses, but has been picked up a little by Alan Kohler, also an experienced operator, is that you must look behind the aggregate GDP data. If you do, you see a much different picture. As Peter Switzer commented in the Weekend Australian, if the economy is so good, why don’t we have inflation?

By far the bulk of the reported GDP gains were in resources extraction and from a relatively small group of people. Hence the per capita productivity data reported this week. Take out resources (and i suspect some of the GDP growth should be reported as GSP growth since whilst it may be Australian companies that are reporting, there is a huge amount of imported capital equipment which you can see affecting the current account data), and you see a very different economy.

Is this Australia’s Indian Summer?

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THE VALUE OF LOW SOVEREIGN RISK

Last week, the German government was able to issue bonds (“Bunds”) with a yield of 0.07%. That is a negative real interest rate. Few countries can do this: the United States can when it issues Treasuries. What does this mean for business capital costs. Typically the cost of raising capital for companies is a function of the so-called risk free rate (government bond rate). If you an Australian business you therefore pay substantially higher debt cost than a German or United States business since Australian Commonwealth bonds are considerably higher yielding. That means there are fewer Australian businesses that can attract capital since resulting hurdle rates are higher in Australia than those other two countries.

What we now see is business credit constrained by the adoption of Basel 3 rules etc. because of that tighter prudential regulation and more costly because of higher Australian sovereign risk.