Australia faces the future
10 March 2008 - Planet Wall Street

As a rule I am reluctant to write about the Australian economy, concentrating usually on the US, English or sometime the “Anglo-Celt” domination of the world economy that has prevailed for some 300 years. But a study of Australia by Morgan Stanley, details of which appeared in today’s The Australian newspaper makes it difficult not to pause. And one could extrapolate. But what is going to happen in Australia has scary implication for the world.

Planet Wall Street has suggested for some time that the Australian, indeed any nation dependent on flogging off its resources to Asia might face peril if the US economy becomes unstuck. Well it is unstuck. Suddenly that which seemed solid is soft. Confidence has evaporated. The world is tumbling down.

Australia’s world has been built around exports, in principal to China. As Morgan Stanley points out, “basic raw metal prices could all by 40 per cent and bulk commodities by 15 per cent. Recession in the US, Japan, Britain and a “slow down” in Europe could doom a nation that has put to many eggs in the Chinese basket. “… we (Australia) are one of the world’s largest issuers of capital, with the most overpriced finance sector in the developed world and a rickety housing sector.

Start at the end. Like Britain and much of Europe, Australia has enjoyed an orgy of private wealth based, in part, on home price values. It, like Europe, has not seen a serious fall in home prices in a generation. US housing suffered terribly in the early nineties while the other compatible nations experienced a mere dip and housing prices ran far above wages, the fundamental that underpins a home's value. It is now apparent the US experience will be followed by Australia and perhaps the entire Anglo Celt world.

Morgan suggested a financial “Armageddon” for Australia due to the “panic” on the world’s credit markets. Right or wrong the market is making its judgment and it doesn’t like what it sees. “Dislocation in the credit markets puts a cloud over the economy and over equity.”

This is not a good time to be amongst the world’s leading debt nations. Australia is in deep debt. On the home front, literally, Australian has more leverage than the US did before the crash that is currently driving millions of Americans from their homes. They suffer from a housing stock that Morgan believes is far more expensive than the American equivalents. “The moment unemployment starts to rise, people will start defaulting on their housing loans.”

And they will. Unlike the Americans who were reticent to “walk” from the homes when they saw their values drop Australians, I suggest, have no such problems. The entire US economy was built on credit, while the Australian economy was built on debt; there's no difference - it's a matter of perception. Australians do not have the same moral compunctions over credit as their American cousins who, until recently guarded their credit as they would their…might I say their home. Finally the America home dweller started throwing in the towel. I don’t believe Australians will be reluctant to “walk” when they see that the party is over. Fundamentally, as the politicians like to say, the Australian economy is based on “selling off the farm.” It always has been. And the country has always had something to sell. Since WW11 the “lucky country” has “ridden on the sheep's back”, beef, wheat, mining booms, and, in recent years a combination of all – throw in a protected manufacturing industry, some tourism and a financial services industry which has been, until today, remarkably profitable. It has endured one of the country's most savage droughts with little more than a shrug. Australians have become, to use their own word “cocky”, about their destination and have long forgotten their utter dependence on the world, which, they have come to think is a place one goes for holidays. Having ignored Asia for most of its Anglo Celt existence – the past 200 years – only in the last 25 years have Australians travelled to Asia. Asia has now become their backyard, a place to be explored and enjoyed.

But the minerals based boom is hollow, lacking in substance. For too many years Australians have been told they cannot maintain their standard of living by selling their resources. But they have, and in doing so have come believe they can. But the boom of world trade is now collapsing before the nation's eyes and, while it is yet to see it, Australia is facing a situation not unlike that of Argentina almost 100 years ago when it fell from being the wealthiest land on earth to a third world outpost.

60-70% of China's growth is based on domestic consumption.

In the survey Australia ranks number one in the list of the most expensive nations in the world in which to purchase a home relative to income...for locals living and working within the Australian economy this is frightening news.

throw in a protected manufacturing industry

only in the last 25 years have Australians travelled to Asia