Behind The Economic Curtain

With so many domestic and international issues at play, it is difficult to pick the most pressing.

Internationally, the UK has a new Prime Minister who will be charged with leading his nation out of the socialistic and bureaucratic European Union. He will also need to frame a suitable response to the war-like provocations of Iran, who recently pirated a UK ship.

Actually, Iran is a problem that the civilised world must deal with. Their nuclear industry, empowered under the hapless Obama presidency, cannot be allowed to continue. They already pose a threat to world peace and armed with a nuclear device, their menace will only grow.

China continues to colonise the Asia Pacific region through infrastructure investment in impoverished nations and building military bases on atolls.

Russia seems busy poking whatever bears it can find and recently flew a couple of fighters into South Korean airspace, prompting some warning shots from the Koreans.

Domestically, the government is pursuing its policy agenda and having some success in the parliament. However, that success needs to roll out across the country which is in the grip of a slowing economy. After 28 years of economic growth (largely due to high immigration figures), millions of Australians would never have experienced an economic recession. When it comes, I expect it will be a brutal shock to many.

During a recession, jobs dry up, asset values fall, credit becomes harder to come by and it becomes harder to make ends meet. During Keating’s “recession we have to have” of the early 90s, interest rates were in the high teens, state governments nearly went broke and assets were being sold for cents in the dollar. I recall there were serious questions as to the viability of some banks with the Bank of South Australia being divided into the ‘good’ bank and the ‘bad’ bank.

It took years for the bad bank to come good.

The big question is what can be done to avoid such a circumstance from happening again? I suspect not much. There are means of delaying the business cycle of boom and bust but no way to avoid it completely. Australia has successfully kicked the economic can down the road by subduing the cycle but the levers of submission are not sustainable.

Previously I mentioned immigration as one such lever. More people coming into the country means more people buy things and hence the economy grows on a national level. However, this is a simple Ponzi scheme that relies on ever-increasing numbers of people coming here to maintain the ‘prosperity’. At some stage, the bubble must burst.

So too must the bubble of debt-funded government stimulus burst. One cannot perpetually borrow your way to prosperity. Our government and our populace are heavily indebted and eventually, those debts must be repaid or defaulted on. Repayment is made easier by inflating the debts away and this is why the focus for many governments is to kick start the inflationary cycle. It is the only way many can see to reduce the economic enslavement of debt at home and abroad.

Whether their efforts to kick-start inflation will work or not remains to be seen but eventually the people will see there is no magic wizard behind the economic curtain; only the iron-fisted laws of supply and demand.