The Bumpy Road Down, Part 5: More Trends in Collapse

21 02 2018

IrvMillsIrv Mills has published the fifth and last part of his 5 part series called ‘The Bumpy Road Down’, previous instalments being available here.

 

 

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In my last post I started talking about some of the changes that will happen along the bumpy road down and the forces and trends that will lead to them. (The bumpy road down being the cyclic pattern of crash and partial recovery that I believe will characterize the rest of the age of scarcity). These changes will be forced on us by circumstances and are not necessarily how I’d like to see things turn out.

The trends I covered last time were:

  • our continued reliance on fossil fuels
  • the continuing decline in availability, and surplus energy content, of fossil fuels
  • the damage the FIRE industries (finance, insurance and real estate) will suffer in the next crash, and the effects this will have
  • the increase in authoritarianism, as governments attempt to optimize critical systems and relief efforts during and after the crash

Oscillating overshoot with declining carrying capacity

I’ve once again included the stepped or “oscillating” decline diagram from previous posts here to make it easier to visualize what I’m talking about. This diagram isn’t meant to be precise, certainly not when it comes to the magnitude and duration of the oscillations, which in any case will vary from one part of the world to the next.

The trends I want to talk about today are all interconnected. You can hardly discuss one without referring to the others, and so it is difficult to know where to start. But having touched briefly on a trend toward increased authoritarianism at the end of my last post, I guess I should continue trends in politics.

MORE POLITICAL TRENDS

Currently there seems to be a trend towards right wing politics in the developed world. I think anyone who extrapolates that out into the long run is making a basic mistake. Where right wing governments have been elected by those looking for change, they will soon prove to be very inept at ruling in an era of degrowth. Following that, there will likely be a swing in the other direction and left wing governments will get elected. Only to prove, in their turn, to be equally inept. Britain seems to be heading in this direction, and perhaps the U.S. as well.

Another trend is the sort of populism that uses other nations, and/or racial, ethnic, religious and sexual minorities at home as scapegoats for whatever problems the majority is facing. This strategy is and will continue to be used by clever politicians to gain support and deflect attention from their own shortcomings. Unfortunately, it leads nowhere since the people being blamed aren’t the source of the problem.

During the next crash and following recovery governments will continue to see growth as the best solution to whatever problems they face and will continue to be blind to the limits to growth. Farther down the bumpy road some governments may finally clue in about limits. Others won’t, and this will fuel continued growth followed by crashes until we learn to live within those limits.

One thing that seems clear is that eventually we’ll be living in smaller groups and the sort of political systems that work best will be very different from what we have now.

Many people who have thought about this assume that we’ll return to feudalism. I think that’s pretty unlikely. History may seem to repeat itself, but only in loose outline, not in the important details. New situations arise from different circumstances, and so are themselves different. Modern capitalists would never accept the obligations that the feudal aristocracy had to the peasantry. Indeed freeing themselves of those obligations had a lot to do with making capitalism work. And the “99%” (today’s peasantry) simply don’t accept that the upper classes have any right, divine or otherwise, to rule.

In small enough groups, with sufficient isolation between groups, people seem best suited to primitive communism, with essentially no hierarchy and decision making by consensus. I think many people will end up living in just such situations.

In the end though, there will still be a few areas with sufficient energy resources to support larger and more centralized concentrations of population. It will be interesting to see what new forms of political structure evolve in those situations.

ECONOMIC CONTRACTION

For the last couple of decades declining surplus energy has caused contraction of the real economy. Large corporations have responded in various ways to maintain their profits: moving industrial operations to developing countries where wages are lower and regulations less troublesome, automating to reduce the amount of expensive labour required, moving to the financial and information sectors of the economy where energy decline has so far had less effect.

The remaining “good” industrial jobs in developed nations are less likely to be unionized, with longer hours, lower pay, decreased benefits, poorer working conditions and lower safety standards. The large number of people who can’t even get one of those jobs have had to move to precarious, part time, low paying jobs in the service industries. Unemployment has increased (despite what official statistics say) and the ranks of the homeless have swelled.

Since workers are also consumers, all this has led to further contraction of the consumer economy. We can certainly expect to see this trend continue and increase sharply during the next crash.

Our globally interconnected economy is a complex thing and that complexity is expensive to maintain. During the crash and the depression that follows it, we’ll see trends toward simplification in many different areas driven by a lack of resources to maintain the existing complex systems. I’ll be discussing those trends in a moment, but it is important to note that a lot of economic activity is involved in maintaining our current level of complexity and abandoning that complexity will mean even more economic contraction.

At the same time, small, simple communities will prove to have some advantages that aren’t currently obvious.

CONSERVATION

All this economic contraction means that almost all of us will be significantly poorer and we’ll have to learn to get by with less. As John Michael Greer says, “LESS: less energy, less stuff, less stimulation.” We’ll be forced to conserve and will struggle to get by with “just enough”. This will be a harshly unpleasant experience for most people.

DEGLOBALIZATION

For the last few decades globalization has been a popular trend, especially among the rich and powerful, who are quick to extol its many supposed advantages. And understandably so, since it has enabled them to maintain their accustomed high standard of living while the economy as a whole contracts.

On the other hand, as I was just saying, sending high paying jobs offshore is a pretty bad idea for consumer economies. And I suspect that in the long run we’ll see that it wasn’t really all that good for the countries where we sent the work, either.

During the crash we’ll see the breakdown of the financial and organizational mechanisms that support globalization and international trade. There will also be considerable problems with shipping, both due to disorganization and to unreliable the supplies of diesel fuel for trucks and bunker fuel for ships. I’m not predicting an absolute shortage of oil quite this soon, but rather financial and organizational problems with getting it out of the ground, refined and moved to where it is needed.

This will lead to the failure of many international supply chains and governments and industry will be forced to switch critical systems over to more local suppliers. This switchover will be part of what eventually drives a partial recovery of the economy in many localities.

In a contracting economy with collapsing globalization there would seem to be little future for multi-national corporations, and organizations like the World Bank and the IMF. While the crash may bring an end to the so called “development” of the “developing” nations, it will also bring an end to economic imperialism. At the same time, the general public in the developed world, many of whom are already questioning the wisdom of the “race to the bottom” that is globalization, will be even less likely to go along with it, especially when it comes to exporting jobs.

Still, when the upcoming crash bottoms out and the economy begins to recover, there will be renewed demand for things that can only be had from overseas and international trade will recover to some extent.

DECENTRALIZATION

Impoverished organizations such a governments, multi-national corporations and international standards groups will struggle to maintain today’s high degree of centralization and eventually will be forced to break up into smaller entities.

Large federations such as Europe, the US, Canada and Australia will see rising separatism and eventually secession. As will other countries where different ethnic groups have been forced together and/or there is long standing animosity between various localities. If this can be done peacefully it may actually improve conditions for the citizens of the areas involved, who would no longer have to support the federal organization. But no doubt it will just as often involve armed conflict, with all the destruction and suffering that implies.

RELOCALIZATION

The cessation of services from the FIRE industries and the resulting breakdown of international (and even national) supply and distribution chains will leave many communities with no choice but to fend for themselves.

One of the biggest challenges at first will be to get people to believe that there really is a problem. Once that is clear, experience has shown that the effectiveness of response from the victims of disasters is remarkable and I think that will be true again in this case. There are a lot of widely accepted myths about how society breaks down during disaster, but that’s just what they are: myths. Working together in groups for our mutual benefit is the heart of humanity’s success, after all.

Government response will take days or more likely weeks to organize, and in the meantime there is much we can do to help ourselves. Of course it helps to be prepared… (check out these posts from the early days of this blog: 12) and I’ll have more to say on that in upcoming posts.

The question then arises whether one would be better off in an urban center or a rural area such as a small town or a farm. Government relief efforts will be focused on the cities where the need will be greatest and the response easiest to organize. But just because of the millions of people involved, that response will be quite challenging.

Rural communities may well be largely neglected by relief efforts. But, especially in agricultural areas, they will find fending for themselves much more manageable.

I live in a rural municipality with a population of less than 12,000 people in an area of over 200 square miles (60 people per sq. mile, more than 10 acres per person). The majority of the land is agricultural, and supply chains are short, walking distance in many cases. Beef, dairy and cash crops are the main agricultural activities at present and they can easily be diverted to feed the local population. Especially if the food would go to waste anyway due to the breakdown of supply chains downstream from the farm.

So I think we’re likely to do fairly well until the government gets around to getting in touch with us again, probably sometime after the recovery begins.

In subsequent crashes the population will be significantly reduced and those of us who survive will find ourselves living for the most part in very small communities which are almost entirely relocalized. The kind of economy that works in that situation is very different from what we have today and is concerned with many things other than growth and profit making.

REHUMANIZATION

The move toward automation that we’ve seen in the developed world since the start of the industrial revolution has been driven by high labour costs and the savings to be had by eliminating labour from industrial processes as much as possible. That revolution started and proceeded at greatest speed in Britain where labour rates where the highest, and still hasn’t happened in many developing nations where labour is very cheap.

Sadly, the further impoverishment of the working class in Europe and North America will make cheaper labour available locally, rather than having to go offshore. During the upcoming crash, and in the depression following it, impoverished people will have no choice but to work for lower rates and will out compete automated systems, especially when capital to set them up, the cutting edge technology needed to make them work, and the energy to power them are hard to come by. Again, the economic advantages of simplicity will come into play when it is the only alternative, and help drive the recovery after the first crash.

THE FOOD SUPPLY AND OVERPOPULATION

In the initial days of the coming crash there will be problems with the distribution systems for food, medical supplies and water treatment chemicals, all of which are being supplied by “just in time” systems with very little inventory at the consumer end of the supply chain. To simplify this discussion, I’ll talk primarily about food.

It is often said that there is only a 3 day supply of food on the grocery store shelves. I am sure this is approximately correct. In collapse circles, the assumption is that, if the trucks stop coming, sometime not very far beyond that 3 day horizon we’d be facing starvation. There may be a few, incredibly unlucky, areas where that will be more or less true.

But, depending on the time of year, much more food than that (often more than a year’s worth) is stored elsewhere in the food production and distribution system. The problem will be in moving this food around to where it is needed, and in making sure another year’s crops get planted and harvested. I think this can be done, much of it through improvisation and co-operation by people in the agricultural and food industries. With some support from various levels of government.

There will be some areas where food is available more or less as normal, some where the supply is tight, and other areas where there is outright famine and some loss of life (though still outstripped by the fecundity of the human race). In many ways that pretty much describes the situation today but supply chain breakdown, and our various degrees of success at coping with it, will make all the existing problems worse during the crash.

But once the initial crash is over, we have a much bigger problem looming ahead, which I think will eventually lead to another, even more serious crash.

With my apologies to my “crunchy” friends, modern agriculture and the systems downstream from it supply us with the cheapest and safest food that mankind has known since we were hunters and gatherers and allows us (so far) to support an ever growing human population.

The problem is that this agriculture is not sustainable. It requires high levels of inputs–primarily energy from fossil fuels, but also pesticides, fertilizers and water for irrigation–mostly from non-renewable sources. And rather than enriching the soil on which it depends, it gradually consumes it, causing erosion from over cultivation and over grazing, salinating the soil where irrigation is used and poisoning the water courses downstream with runoff from fertilizers. We need to develop a suite of sustainable agricultural practices that takes advantage of the best agricultural science can do for us, while the infrastructure that supports that science is still functioning.

The organic industry spends extravagantly to convince us that the problem with our food is pesticide residues and genetically engineered organisms, but the scientific consensus simply does not support this. The organic standards include so called “natural” pesticides that are more toxic than modern synthetic ones, and allow plant breeding techniques (such as mutagenesis) that are far more dangerous than modern genetic engineering. Organic standards could certainly be revised into something sustainable that retains the best of both conventional and organic techniques, but this has become such a political hot potato that it is unlikely to happen.

As I said above, during the upcoming crash one of the main challenges will be to keep people fed. And I have no doubt that this challenge will, for the most part, be successfully met. Diesel fuel will be rationed and sent preferentially to farmers and trucking companies moving agricultural inputs and outputs. Supplies of mineral fertilizers are still sufficient to keep industrial agriculture going. Modern pesticides actually reduce the need for cultivation and improve yields by reducing losses due to pests. It will be possible to divert grains grown for animal feed to feed people during the first year when the crisis is most serious.

Industrial agriculture will actually save the day and continue on to feed the growing population for a while yet. We will continue to make some improvement in techniques and seeds, though with diminishing returns on our efforts.

This will come to an end around mid century with the second bump on the road ahead (starting at point “g” on the graph), when a combination of increasing population, worsening climate, and decreasing availability and increasing prices of energy, irrigation water, fertilizer, pesticides and so forth combine to drastically reduce the output of modern agriculture.

Widespread famine will result, and this, combined with epidemics in populations weakened by hunger, will reduce the planet’s human population by at least a factor of two in a period of a very few years. Subsequent bumps as climate change further worsens conditions for farming will further reduce the population, resulting in a bottleneck towards the end of this century. Without powered machinery, synthetic fertilizers and pesticides and with drastically reduced water for irrigation, agricultural output will fall off considerably. And our population will fall to match the availability of food. I do think it unlikely that the human race will be wiped out altogether, but our numbers will likely be reduced by a factor of ten or more.

TURNING TO VIOLENCE AS A SOLUTION

It is a sad fact that many people, communities and nations, when faced with the sort of challenges I’ve been talking about here, will respond with violence.

In the remaining years leading up to the next crash, I think it is likely that even the least stable of world leaders (or their military advisors) will remain well aware of the horrific consequences of large scale nuclear war, and will manage to avoid it. As has been the case since the end of WWII, wars will continue to be fought by proxy, involving smaller nations in the developing world, especially where the supply of strategic natural resources are at issue.

War is extremely expensive though and, even without the help of a financial crash, military spending already threatens to bankrupt the U.S. As Dmitry Orlov has suggested, after a financial crash, the U.S. may find it difficult to even get its military personnel home from overseas bases, much less maintain those bases or pursue international military objectives.

But even in the impoverished post-crash world, I expect that border wars, terrorism, riots and violent protests will continue for quite some time yet.

MIGRATION AND REFUGEES

Whether from the ravages of war, climate change or economic contraction many areas of the world, particularly in areas like the Middle East, North Africa and the U.S. southwest, will become less and less livable. People will leave those areas looking for greener pastures and the number of refugees will soon grow past what can be managed even by the richest of nations. This will be a problem for Europe in particular, and more and more borders will be closed to all but a trickle of migrants. Refugees will accumulate in camps and for a while the situation will find an uneasy balance.

As we continue down the bumpy road, though, many nations will lose the ability to police their borders. Refugees will pour through, only to find broken economies that offer them little hope of a livelihood. Famine, disease and conflict will eventually reduce the population to where it can be accommodated in the remaining livable areas. But the ethnic makeup of those areas will have changed significantly due to large scale migrations.

IN CONCLUSION

I’ve been talking here about some of the changes that will be forced upon us by the circumstances of collapse. I’ve said very little about what I think we might do if we could face up to the reality of those circumstances and take positive action. That’s because I don’t think there is much chance that we’ll take any such action on a global or even national scale.

It’s time now to wrap up this series of posts about the bumpy road down. At some point in the future I intend to do a series about of coping with collapse locally, on the community, family and individual level. I think there is still much than can be done to improve the prospects of those who are willing to try.

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Post-work: the radical idea of a world without jobs

23 01 2018

As you may know if you read this blog often enough, I am completely anti jobs and growth. So many jobs are ‘bullshit jobs’ these days, and so much automation is coming on board – like Amazon opening a store with almost no staff as one prime example – that the future of work is hardly well defined, especially as we head into a low energy future. Just this week, I was pointed to a book and an article on these issues that I thought I’d shara and comment on, and as always, your comments are more than welcome…..

Utopia for Realists : and how we can get there - Rutger BregmanThe book I was pointed to is one Geoff Lawton is currently reading, or so he tells me…..  it’s called “Utopia for Realists”. It certainly looks interesting to me, and I might just buy it, even if the Guardian gives it a caning

This is a book with one compelling proposition for which you can forgive the rest. It is utopian visions that have driven humanity forwards. It was the hope we could fly, conquer disease, motorise transport, build communities of the faithful, discover virgin land or live in permanent peace that has propelled men and women to take the risks and obsess about the new that, while not creating the utopia of which they dreamed, has at least got us some of the way. Celebrate the grip that utopia has on our imagination. It is the author of progress.

But if this is the book’s big insight, much of the rest fluctuates from the genuinely challenging to politically correct tosh. My biggest beef is the idea that increasingly grips liberal thinkers desperate for anything radical – the concept of a universal income for all. Financially, behaviourally and organisationally bonkers, this idea is gaining traction on the bien pensant left. The proposition is that because a rogue capitalism is going to automate away most of our jobs, human wellbeing can only be assured by everyone receiving a universal basic income.

I don’t know what this book critic thinks people with no jobs will spend to keep the economy going……  maybe he’ll find out when he loses his job, as journalism is one of the trades under serious threat this century.

Apart from the fact that human needs are infinite, so that today’s predictions of the end of work will prove as awry as those of previous centuries, a universal basic income is no more likely to succeed than communism.

That’s where he really lost me…….  using that word infinite. On a finite planet. Whose tosh are we reading now ?

Fortunately, there are some realist journos at the Guardian, like Andy Beckett, who are able to produce much more interesting and open views……

Work is the master of the modern world. For most people, it is impossible to imagine society without it. It dominates and pervades everyday life – especially in Britain and the US – [the rest of the world don’t count it seems…] more completely than at any time in recent history. An obsession with employability runs through education. Even severely disabled welfare claimants are required to be work-seekers. Corporate superstars show off their epic work schedules. “Hard-working families” are idealised by politicians. Friends pitch each other business ideas. Tech companies persuade their employees that round-the-clock work is play. Gig economy companies claim that round-the-clock work is freedom. Workers commute further, strike less, retire later. Digital technology lets work invade leisure.

As a source of subsistence, let alone prosperity, work is now insufficient for whole social classes. In the UK, almost two-thirds of those in poverty – around 8 million people – are in working households. In the US, the average wage has stagnated for half a century.

As a source of social mobility and self-worth, work increasingly fails even the most educated people – supposedly the system’s winners. In 2017, half of recent UK graduates were officially classified as “working in a non-graduate role”. In the US, “belief in work is crumbling among people in their 20s and 30s”, says Benjamin Hunnicutt, a leading historian of work. “They are not looking to their job for satisfaction or social advancement.” (You can sense this every time a graduate with a faraway look makes you a latte.)

The young French wwoofer working with me at the moment tells me that most of his peers are fast becoming totally cynical of the work ethic, and, interestingly, also seem to be very much aware of the possibilities and consequences of collapse…. I have to say, this has been the case with most of the French wwoofers who’ve been here over the past couple of years, unlike the American ones who have no idea..!  He even tells me there is a growing movement of young people in France leaving cities and going back to the land….

As a source of sustainable consumer booms and mass home-ownership – for much of the 20th century, the main successes of mainstream western economic policy – work is discredited daily by our ongoing debt and housing crises. For many people, not just the very wealthy, work has become less important financially than inheriting money or owning a home.

Whether you look at a screen all day, or sell other underpaid people goods they can’t afford, more and more work feels pointless or even socially damaging – what the American anthropologist David Graeber called “bullshit jobs” in a famous 2013 article. Among others, Graeber condemned “private equity CEOs, lobbyists, PR researchers … telemarketers, bailiffs”, and the “ancillary industries (dog-washers, all-night pizza delivery) that only exist because everyone is spending so much of their time working”.

Precisely…….  could not agree more. Of course, the collapse of the ERoEI of our energy sources – ALL of them – does not get a mention when he writes “The argument seemed subjective and crude, but economic data increasingly supports it. The growth of productivity, or the value of what is produced per hour worked, is slowing across the rich world – despite the constant measurement of employee performance and intensification of work routines that makes more and more jobs barely tolerable.” Of course, like most people, he may not be aware, let alone know of, the energy cliff…… human

I have to say, this bit was rather interesting…

In Britain in 1974, Edward Heath’s Conservative government, faced with a chronic energy shortage caused by an international oil crisis and a miners’ strike, imposed a national three-day working week. For the two months it lasted, people’s non-work lives expanded. Golf courses were busier, and fishing-tackle shops reported large sales increases. Audiences trebled for late-night BBC radio DJs such as John Peel. Some men did more housework: the Colchester Evening Gazette interviewed a young married printer who had taken over the hoovering. Even the Daily Mail loosened up, with one columnist suggesting that parents “experiment more in their sex lives while the children are doing a five-day week at school”.

The economic consequences were mixed. Most people’s earnings fell. Working days became longer. Yet a national survey of companies for the government by the management consultants Inbucon-AIC found that productivity improved by about 5%: a huge increase by Britain’s usual sluggish standards. “Thinking was stimulated” inside Whitehall and some companies, the consultants noted, “on the possibility of arranging a permanent four-day week.”

Of course…… nothing came of it as the North Sea oil was discovered and exploited, everyone back to work, we have a planet to pillage. But it certainly makes you think about what will happen when the oil crisis finally becomes permanent. This article, which I consider a gem and well worth the read, ends with..:

Creating a more benign post-work world will be more difficult now than it would have been in the 70s. In today’s lower-wage economy, suggesting people do less work for less pay is a hard sell. As with free-market capitalism in general, the worse work gets, the harder it is to imagine actually escaping it, so enormous are the steps required.

But for those who think work will just carry on as it is, there is a warning from history. On 1 May 1979, one of the greatest champions of the modern work culture, Margaret Thatcher, made her final campaign speech before being elected prime minister. She reflected on the nature of change in politics and society. “The heresies of one period,” she said, always become “the orthodoxies of the next”. The end of work as we know it will seem unthinkable – until it has happened.

All I can say is that the orthodoxies of the next era will be full of surprises, that’s for sure.





AUSTRALIA’S ‘DUMB LUCK’ ABOUT TO RUN OUT WITH ECONOMY ON THE BRINK OF COLLAPSE

4 01 2018

I recently tried to republish this on DTM, but it gave me so much heartache, I gave up. Now I’ve found a new source that hopefully allows more friendly copy/paste……. I hasten to add I disagree with much of what he has to say at the end of this lengthy article, and I could have edited it out, but there you go…… you make up your own mind.

Written on the 15 November 2017 by Matt Barrie, CEO Freelancer.com

AUSTRALIA'S 'DUMB LUCK' ABOUT TO RUN OUT WITH ECONOMY ON THE BRINK OF COLLAPSE

I RECENTLY watched the federal treasurer, Scott Morrison, proudly proclaim that Australia was in “surprisingly good shape”.

Indeed, Australia has just snatched the world record from the Netherlands, achieving its 104th quarter of growth without a recession, making this achievement the longest streak for any OECD country since 1970.

I was pretty shocked at the complacency, because after twenty six years of economic expansion, the country has very little to show for it.

“For over a quarter of a century our economy mostly grew because of dumb luck. Luck because our country is relatively large and abundant in natural resources, resources that have been in huge demand from a close neighbour.”

That neighbour is China.

Out of all OECD nations, Australia is the most dependent on China by a huge margin, according to the IMF. Over one third of all merchandise exports from this country go to China – where ‘merchandise exports’ includes all physical products, including the things we dig out of the ground.

Outside of the OECD, Australia ranks just after the Democratic Republic of the Congo, Gambia and the Lao People’s Democratic Republic and just before the Central African Republic, Iran and Liberia. Does anything sound a bit funny about that?

“As a whole, the Australian economy has grown through a property bubble inflating on top of a mining bubble, built on top of a commodities bubble, driven by a China bubble.”

Unfortunately for Australia, that “lucky” free ride is just about to end.

Societe Generale’s China economist Wei Yao said recently, “Chinese banks are looking down the barrel of a staggering $1.7 trillion worth of losses”. Hyaman Capital’s Kyle Bass calls China a “$34 trillion experiment” which is “exploding”, where Chinese bank losses “could exceed 400 per cent of the US banking losses incurred during the subprime crisis”.

A hard landing for China is a catastrophic landing for Australia, with horrific consequences to this country’s delusions of economic grandeur.

Delusions which are all unfolding right now as this quadruple leveraged bubble unwinds. What makes this especially dangerous is that it is unwinding in what increasingly looks like a global recession- perhaps even depression, in an environment where the US Federal Reserve (1.25%), Bank of Canada (1.0%) and Bank of England (0.25%) interest rates are pretty much zero, and the European Central Bank (0.0%), Bank of Japan (-0.10%), and Central Banks of Sweden (-0.50%) and Switzerland (-0.75%) are at zero or negative interest rates.

As a quick refresher of how we got here, after the Global Financial Crisis, and consequent recession hit in 2007 thanks to delinquencies on subprime mortgages, the US Federal Reserve began cutting the short-term interest rate, known as the ‘Federal Funds Rate’ (or the rate at which depository institutions trade balances held at Federal Reserve Banks with each other overnight), from 5.25 per cent to 0 per cent, the lowest rate in history.

When that didn’t work to curb rising unemployment and stop growth stagnating, central banks across the globe started printing money which they used to buy up financial securities in an effort to drive up prices. This process was called “quantitative easing” (“QE”), to confuse the average person in the street into thinking it wasn’t anything more than conjuring trillions of dollars out of thin air and using that money to buy things in an effort to drive their prices up.

Systematic buying of treasuries and mortgage bonds by central banks caused the face value of on those bonds to increase, and since bond yields fall as their prices rise, this buying had the effect of also driving long-term interest rates down to near zero.

In theory making money cheap to borrow stimulates investment in the economy; it encourages households and companies to borrow, employ more people and spend more money.

“An alternative theory for QE is that it encourages buying hard assets by making people freak out that the value of the currency they are holding is being counterfeited into oblivion.”

In reality, the ability to borrow cheap money was mainly used by companies to buy back their own shares, and combined with QE being used to buy stock index funds (otherwise known as exchange traded funds or “ETFs”), this propelled stock markets to hit record high after record high even though this wasn’t justified the underlying corporate performance.

Europe and Asia were dragged into the crisis, as major European and Asian banks were found holding billions in toxic debt linked to US subprime mortgages (more than 1 million US homeowners faced foreclosure). One by one, nations began entering recession and repeated attempts to slash interest rates by central banks, along with bailouts of the banks and various stimulus packages could not stymie the unfolding crisis. After several failed attempts at instituting austerity measures across a number of European nations with mounting public debt, the European Central Bank began its own QE program that continues today and should remain in place well into 2018.

In China, QE was used to buy government bonds which were used to finance infrastructure projects such as overpriced apartment blocks, the construction of which has underpinned China’s “miracle” economy. Since nobody in China could actually afford these apartments, QE was lent to local government agencies to buy these empty flats.

“Of course this then led to a tsunami of Chinese hot money fleeing the country and blowing real estate bubbles from Vancouver to Auckland as it sought more affordable property in cities whose air, food and water didn’t kill you.”

QE was only intended as a temporary emergency measure, but now a decade into printing and the central banks of the United States, Europe, Japan and China have now collectively purchased over US$19 trillion of assets. Despite the the lowest interest rates in 5,000 years, the global economic growth in response to this money printing has continued to be anaemic. Instead, this stimulus has served to blow asset bubbles everywhere.

So if one naively were looking at markets, particularly the commodity and resource driven markets that traditionally drive the Australian economy, you might well have been tricked into thinking that the world was back in good times again as many have rallied over the last year or so.

The initial rally in commodities at the beginning of 2016 was caused by a bet that more economic stimulus and industrial reform in China would lead to a spike in demand for commodities used in construction. That bet rapidly turned into full blown mania as Chinese investors, starved of opportunity and restricted by government clamp downs in equities, piled into commodities markets.

This saw, in April of 2016, enough cotton trading in a single day to make a pair of jeans for everyone on the planet, and enough soybeans for 56 billion servings of tofu, according to Bloomberg in a report entitled “The World’s Most Extreme Speculative Mania Unravels in China”.

Market turnover on the three Chinese exchanges jumped from a daily average of about $78 billion in February to a peak of $261 billion on April 22, 2016 — exceeding the GDP of Ireland. By comparison, Nasdaq’s daily turnover peaked in early 2000 at $150 billion.

While volume exploded, open interest didn’t. New contracts were not being created, volume instead was churning as the hot potato passed between speculators, most commonly in the night session, as consumers traded after work. So much so that sometimes analysts wondered whether the price of iron ore is set by the market tensions between iron ore miners and steel producers, or by Chinese taxi drivers trading on apps.

Steel, of course, is made from iron ore, Australia’s biggest export, and frequently the country’s main driver of a trade surplus and GDP growth.

Australia is the largest exporter of iron ore in the world, with a 29 per cent global share in 2015-16 and 786Mt exported, and at $48 billion we’re responsible for over half of all global iron ore exports by value. Around 81 per cent of our iron ore exports go to China.

Unfortunately, in 2017, China isn’t as desperate anymore for iron ore, where close to 50 per cent of Chinese steel demand comes from property development, which is under stress as house prices temper and credit tightens.

In May 2017, stockpiles at Chinese ports were at an all time high, with enough to build 13,000 Eiffel Towers. Last January, China pledged “supply-side reforms” for its steel and coal sectors to reduce excessive production capacity. In 2016, capacity was cut by 6 per cent for steel and and 8 per cent for coal.

In the first half of 2017 alone, a further 120 million tonnes of low-grade steel capacity was ordered to close because of pollution. This represents 11 per cent of the country’s steel capacity and 15 pe rcent of annual output. While this will more heavily impact Chinese-mined ore than generally higher-grade Australian ore, Chinese demand for iron ore is nevertheless waning.

Over the last six years, the price of iron ore has fallen 60 per cent.

Australia’s second biggest export is coal, being the largest exporter in the world supplying about 38 per cent of the world’s demand. Production has been on a tear, with exports increasing from 261Mt in 2008 to 388Mt in 2016.

While exports increased by 49 per cent over that time period, the value of those exports has collapsed 38 per cent, from $54.7 billion to $34 billion.

Losing coal as an export will blow a $34 billion dollar per annum hole in the current account, and there’s been no foresight by successive governments to find or encourage modern industries to supplant it.

“What is more shocking is that despite the gargantuan amount of money that China has been pumping into the system since 2014, Australia’s entire mining industry – which is completely dependent on China – has struggled to make any money at all.”

Across the entire industry revenue has dropped significantly while costs have continued to rise.

According to the Australian Bureau of Statistics, in 2015-16 the entire Australian mining industry which includes coal, oil and gas, iron ore, the mining of metallic & non-metallic minerals and exploration and support services made a grand total of $179 billion in revenue with $171 billion of costs, generating an operating profit before tax of $7 billion which representing a wafer thin 3.9 per cent margin on an operating basis. In the year before it made a 8.4 per cent margin.

Collectively, the entire Australian mining industry (ex-services) would be loss making in 2016-17 if revenue continued to drop and costs stayed the same. Yes, the entire Australian mining industry.

Our “economic miracle” of 104 quarters of GDP growth without a recession today doesn’t come from digging rocks out of the ground, shipping the by-products of dead fossils and selling stuff we grow any more. Mining, which used to be 19 per cent of GDP, is now 6.8 per cent and falling. Mining has fallen to the sixth largest industry in the country. Even combined with agriculture the total is now only 10 per cent of GDP.

In the 1970s, Australia was ranked 10th in the world for motor vehicle manufacturing. No other industry has replaced it. Today, the entire output of manufacturing as a share of GDP in Australia is half of the levels where they called it “hollowed out” in the US and UK.

In Australia in 2017, manufacturing as a share of GDP is on par with a financial haven like Luxembourg. Australia doesn’t make anything anymore.

 

“With an economy that is 68 per cent services, as I believe John Hewson put it, the entire country is basically sitting around serving each other cups of coffee or, as the Chief Scientist of Australia would prefer, smashed avocado.”

The Reserve Bank of Australia has cut interest rates by 325 basis points since the end of 2011, in order to stimulate the economy, but I can’t for the life of me see how that will affect the fundamental problem of gyrating commodity prices where we are a price taker, not a price maker, into an oversupplied market in China.

This leads me to my next question: where has this growth come from?

“Successive Australian governments have achieved economic growth by blowing a property bubble on a scale like no other.”

A bubble that has lasted for 55 years and seen prices increase 6556 per cent since 1961, making this the longest running property bubble in the world (on average, “upswings” last 13 years).

In 2016, 67 per cent of Australia’s GDP growth came from the cities of Sydney and Melbourne where both State and Federal governments have done everything they can to fuel a runaway housing market. The small area from the Sydney CBD to Macquarie Park is in the middle of an apartment building frenzy, alone contributing 24 per cent of the country’s entire GDP growth for 2016, according to SGS Economics & Planning.

According to the Rider Levett Bucknall Crane Index, in Q4 2017 between Sydney, Melbourne and Brisbane, there are now 586 cranes in operation, with a total of 685 across all capital cities, 80% of which are focused on building apartments. There are 350 cranes in Sydney alone.

By comparison, there are currently 28 cranes in New York, 24 in San Francisco and 40 in Los Angeles. There are more cranes in Sydney than Los Angeles (40), Washington DC (29), New York (28), Chicago (26), San Francisco (24), Portland (22), Denver (21), Boston (14) and Honolulu (13) combined. Rider Levett Bucknall counts less than 175 cranes working on residential buildings across the 14 major North American markets that it tracked in 3Q17, which is half of the number of cranes in Sydney alone.

According to UBS, around one third of these cranes in Australian cities are in postcodes with ‘restricted lending’, because the inhabitants have bad credit ratings.

This can only be described as completely “insane”.

That was the exact word used by Jonathan Tepper, one of the world’s top experts in housing bubbles, to describe “one of the biggest housing bubbles in history”. “Australia”, he added, “is the only country we know of where middle-class houses are auctioned like paintings”.

Our Federal government has worked really hard to get us to this point.

Many other parts of the world can thank the Global Financial Crisis for popping their real estate bubbles. From 2000 to 2008, driven in part by the First Home Buyer Grant, Australian house prices had already doubled. Rather than let the GFC take the heat out of the market, the Australian Government doubled the bonus. Treasury notes recorded at the time say that it wasn’t launched to make housing more affordable, but to prevent the collapse of the housing market.

Already at the time of the GFC, Australian households were at 190 percent debt to net disposable income, 50 per cent more indebted than American households, but then things really went crazy.

“The government decided to further fuel the fire by “streamlining” the administrative requirements for the Foreign Investment Review Board so that temporary residents could purchase real estate in Australia without having to report or gain approval. It may be a stretch, but one could possibly argue that this move was cunningly calculated, as what could possibly be wrong in selling overpriced Australian houses to the Chinese?”

I am not sure who is getting the last laugh here, because as we subsequently found out, many of those Chinese borrowed the money to buy these houses from Australian banks, using fake statements of foreign income. Indeed, according to the AFR, this was not sophisticated documentation – Australian banks were being tricked with photoshopped bank statements that can be bought online for as little as $20.

UBS estimates that $500 billion worth of “not completely factually accurate” mortgages now sit on major bank balance sheets. How much of that will go sour is anyone’s guess.

The astronomical rise in house prices certainly isn’t supported by employment data. Wage growth (see graph below) is at a record low of just 1.9 per cent year on year in 2Q17, the lowest figure since 1988. The average Australian weekly income has gone up $27 to $1,009 since 2008, that’s about $3 a year.

Foreign buying driving up housing prices has been a major factor in Australian housing affordability, or rather unaffordability.

Urban planners say that a median house price to household income ratio of 3.0 or under is “affordable”, 3.1 to 4.0 is “moderately unaffordable”, 4.1 to 5.0 is “seriously unaffordable” and 5.1 or over “severely unaffordable”.

At the end of July 2017, according to Domain Group, the median house price in Sydney was $1,178,417 and the Australian Bureau of Statistics has the latest average pre-tax wage at $80,277.60 and average household income of $91,000 for this city. This makes the median house price to household income ratio for Sydney 13x, or over 2.6 times the threshold of “severely unaffordable”. Melbourne is 9.6x.

This is before tax, and before any basic expenses. The average person takes home $61,034.60 per annum, and so to buy the average house they would have to save for 19.3 years but only if they decided to forgo the basics such as, eating. This is neglecting any interest costs if one were to borrow the money, which at current rates would approximately double the total purchase cost and blow out the time to repay to around 40 years.

If you borrowed the whole amount to buy a house in Sydney, with a Commonwealth Bank Standard Variable Rate Home Loan currently showing a 5.36% comparison rate (as of 7th October 2017), your repayments would be $6,486 a month, every month, for 30 years. The monthly post tax income for the average wage in Sydney ($80,277.60) is only $5,081.80 a month.

In fact, on this average Sydney salary of $80,277.60, the Commonwealth Bank’s “How much can I borrow?” calculator will only lend you $463,000, and this amount has been dropping in the last year I have been looking at it. So good luck to the average person buying anything anywhere near Sydney.

Federal MP Michael Sukkar, Assistant Minister to the Treasurer, says surprisingly that getting a “highly paid job” is the “first step” to owning a home. Perhaps Mr Sukkar is talking about his job, which pays a base salary of $199,040 a year. On this salary, the Commonwealth Bank would allow you to just borrow enough- $1,282,000 to be precise- to buy the average home, but only provided that you have no expenses on a regular basis, such as food. So the Assistant Minister to the Treasurer can’t really afford to buy the average house, unless he tells a porky on his loan application form.

The average Australian is much more likely to be employed as a tradesperson, school teacher, postman or policeman. According to the NSW Police Force’s recruitment website, the average starting salary for a Probationary Constable is $65,000 which rises to $73,651 over five years. On these salaries the Commonwealth Bank will lend you between $375,200 and $419,200 (again provided you don’t eat), which won’t let you buy a house really anywhere.

Unsurprisingly, the CEOs of the Big Four banks in Australia think that these prices are “justified by the fundamentals”. More likely because the Big Four, who issue over 80 per cent of residential mortgages in the country, are more exposed as a percentage of loans than any other banks in the world, over double that of the US and triple that of the UK, and remarkably quadruple that of Hong Kong, which is the least affordable place in the world for real estate. Today, over 60 per cent of the Australian banks’ loan books are residential mortgages. Houston, we have a problem.

It’s actually worse in regional areas where Bendigo Bank and the Bank of Queensland are holding huge portfolios of mortgages between 700 to 900 per cent of their market capitalisation, because there’s no other meaningful businesses to lend to.

“I’m not sure how the fundamentals can possibly be justified when the average person in Sydney can’t actually afford to buy the average house in Sydney, no matter how many decades they try to push the loan out.”

Indeed Digital Finance Analytics estimated in a October 2017 report that 910,000 households are now estimated to be in mortgage stress where net income does not covering ongoing costs. This has skyrocketed up 50 per cent in less than a year and now represents 29.2 per cent of all households in Australia. Things are about to get real.

It’s well known that high levels of household debt are negative for economic growth, in fact economists have found a strong link between high levels of household debt and economic crises.

This is not good debt, this is bad debt. It’s not debt being used by businesses to fund capital purchases and increase productivity. This is not debt that is being used to produce, it is debt being used to consume. If debt is being used to produce, there is a means to repay the loan.

If a business borrows money to buy some equipment that increases the productivity of their workers, then the increased productivity leads to increased profits, which can be used to service the debt, and the borrower is better off. The lender is also better off, because they also get interest on their loan. This is a smart use of debt. Consumer debt generates very little income for the consumer themselves. If consumers borrow to buy a new TV or go on a holiday, that doesn’t create any cash flow. To repay the debt, the consumer generally has to consume less in the future.

Further, it is well known that consumption is correlated to demographics, young people buy things to grow their families and old people consolidate, downsize and consume less over time. As the aging demographic wave unfolds across the next decade there will be significantly less consumers and significantly more savers. This is worsened as the new generations will carry the debt burden of student loans, further reducing consumption.

So why are governments so keen to inflate housing prices?

The government loves Australians buying up houses, particularly new apartments, because in the short term it stimulates growth – in fact it’s the only thing really stimulating GDP growth.

Australia has around $2 trillion in unconsolidated household debt relative to $1.6 trillion in GDP, making this country in recent quarters the most indebted on this ratio in the world. According to Treasurer Scott Morrison 80 per cent of all household debt is residential mortgage debt. This is up from 47 per cent in 1990.

Australia’s household debt servicing ratio (DSR) ties with Norway as the second worst in the world. Despite record low interest rates, Australians are forking out more of their income to pay off interest than when we had record mortgage rates back in 1989-90 which are over double what they are now.

“Everyone’s too busy watching Netflix and cash strapped paying off their mortgage to have much in the way of any discretionary spending. No wonder retail is collapsing in Australia.”

Governments fan the flame of this rising unsustainable debt fuelled growth as both a source of tax revenue and as false proof to voters of their policies resulting in economic success. Rather than modernising the economy, they have us on a debt fuelled housing binge, a binge we can’t afford.

We are well past overtime, we are into injury time. We’re about to have our Minsky moment: “a sudden major collapse of asset values which is part of the credit cycle.”

Such moments occur because long periods of prosperity and rising valuations of investments lead to increasing speculation using borrowed money. The spiraling debt incurred in financing speculative investments leads to cash flow problems for investors. The cash generated by their assets is no longer sufficient to pay off the debt they took on to acquire them. Losses on such speculative assets prompt lenders to call in their loans. This is likely to lead to a collapse of asset values.

Meanwhile, the over-indebted investors are forced to sell even their less-speculative positions to make good on their loans. However, at this point no counterparty can be found to bid at the high asking prices previously quoted. This starts a major sell-off, leading to a sudden and precipitous collapse in market-clearing asset prices, a sharp drop in market liquidity, and a severe demand for cash.

Today 42 per cent of all mortgages in Australia are interest only, because since the average person can’t afford to actually pay for the average house- they only pay off the interest. They’re hoping that value of their house will continue to rise and the only way they can profit is if they find some other mug to buy it at a higher price. In the case of Westpac, 50 per cent of their entire residential mortgage book is interest only loans.

And a staggering 64 per cent of all investor loans are interest only.

 

“This is rapidly approaching ponzi financing. This is the final stage of an asset bubble before it pops.”

Today residential property as an asset class is four times larger than the sharemarket. It’s illiquid, and the $1.5 trillion of leverage is roughly equivalent in size to the entire market capitalisation of the ASX 200. Any time there is illiquidity and leverage, there is a recipe for disaster – when prices move south, equity is rapidly wiped out precipitating panic selling into a freefall market with no bids to hit.

The risks of illiquidity and leverage in the residential property market flow through the entire financial system because they are directly linked; today in Australia the Big Four banks plus Macquarie are roughly 30 per cent of the ASX200 index weighting. Every month, 9.5 per cent of the entire Australian wage bill goes into superannuation, where 14 per cent directly goes into property and 23 per cent into Australian equities – of which 30 per cent of the main equity benchmark is the banks.

In 2015-16 there were 40,149 residential real estate applications from foreigners valued at over $72 billion in the latest data by FIRB. This is up 244 per cent by count and 320 per cent by value from just three years before.

Even more shocking, in the month of January 2017, the number of first home buyers in the whole of New South Wales was 1,029 – the lowest level since mortgage rates peaked in the 1990s. Half of those first home buyers rely upon their parents for equity.

This brings me onto Australia’s third largest export which is $22 billion in “education-related travel services”. Ask the average person in the street, and they would have no idea what that is and, at least in some part, it is an $18.8 billion dollar immigration industry dressed up as “education”. You now know what all these tinpot “english”, “IT” and “business colleges” that have popped up downtown are about. They’re not about providing quality education, they are about gaming the immigration system.

In 2014, 163,542 international students commenced English language programmes in Australia, almost doubling in the last 10 years. This is through the booming ELICOS (English Language Intensive Courses for Overseas Students) sector, the first step for further education and permanent residency.

This whole process doesn’t seem too hard when you take a look at what is on offer. While the federal government recently removed around 200 occupations from the Skilled Occupations List, including such gems as Amusement Centre Manager (149111), Betting Agency Manager (142113), Goat Farmer (121315), Dog or Horse Racing Official (452318), Pottery or Ceramic Artist (211412) and Parole Officer (411714) – you can still immigrate to Australia as a Naturopath (252213), Baker (351111), Cook (351411), Librarian (224611) or Dietician (251111).Believe it or not, up until recently we were also importing Migration Agents (224913).

You can’t make this up. I simply do not understand why we are importing people to work in relatively unskilled jobs such as kitchen hands in pubs or cooks in suburban curry houses.

At its peak in October 2016, before the summer holidays, there were 486,780 student visa holders in the country, or 1 in 50 people in the country held a student visa. The grant rate in 4Q16 for such student visa applications was 92.3 per cent. The number one country for student visa applications by far was, you guessed it, China.

While some of these students are studying technical degrees that are vitally needed to power the future of the economy, a cynic would say that the majority of this program is designed as a crutch to prop up housing prices and government revenue from taxation in a flagging economy. After all, it doesn’t look that hard to borrow 90 per cent of a property’s value from Australian lenders on a 457 visa. Quoting directly from one mortgage lender, “you’re likely to be approved if you have at least a year on your visa, most of your savings already in Australia and you have a stable job in sought after profession” – presumably as sought after as an Amusement Centre Manager. How much the banks will be left to carry when the market turns and these students flee the burden of negative equity is anyone’s guess.

In a submission to a senate economics committee by Lindsay David from LF Economics, “We found 21 Australian lending institutions where there is evidence of people’s loan application forms being fudged”.

The ultimate cost to the Australian taxpayer is yet to be known. However the situation got so bad that the RBA had to tell the Big Four banks to cease and desist from all foreign mortgage lending without identified Australian sources of income.

Ken Sayer, Chief Executive of non-bank Mortgage House said “It is much bigger than everyone is making it out to be. The numbers could be astronomical”.

“So we are building all these dwellings, but they are not for new Australian home owners. We are building these dwellings to be the new Swiss Bank account for foreign investors.”

Foreign investment can be great as long as it flows into the right sectors. Around $32 billion invested in real estate was from Chinese investors in 2015-16, making it the largest investment in an industry sector by a country by far. By comparison in the same year, China invested only $1.6 billion in our mining industry. Last year, 20 times more more money flowed into real estate from China than into our entire mineral exploration and development industry. Almost none of it flows into our technology sector.

“The total number of FIRB approvals from China was 30,611. By comparison. The United States had 481 approvals.”

Foreign investment across all countries into real estate as a whole was the largest sector for foreign investment approval at $112 billion, accounting for around 50% of all FIRB approvals by value and 97% by count across all sectors – agriculture, forestry, manufacturing, tourism – you name it in 2015-16.

In fact it doesn’t seem that hard to get FIRB approval in Australia, for really anything at all. Of the 41,450 applications by foreigners to buy something in 2015-16, five were rejected. In the year before, out of 37,953 applications zero were rejected. Out of the 116,234 applications from 2012 to 2016, a total of eight were rejected.

According to Credit Suisse, foreigners are acquiring 25 per cent of newly completed housing supply in NSW, worth a total of $39 billion.

In some circumstances, the numbers however could be much higher. Lend Lease, the Australian construction goliath with over $15 billion in revenue in 2016, stated in that year’s annual report that over 40% of Lend Lease’s apartment sales were to foreigners.

“I wouldn’t have a problem with this if it weren’t for the fact that this is all a byproduct of central bank madness, not true supply and demand, and people vital for running the economy can’t afford to live here any more.”

What is also remarkable about all of this is that technically, the Chinese are not allowed to send large sums of money overseas. Citizens of China can normally only convert US$50,000 a year in foreign currency and have long been barred from buying property overseas, but those rules have not been enforced. They’ve only started cracking down on this now.

Despite this, up until now, Australian property developers and the Australian Government have been more than happy to accommodate Chinese money laundering.

After the crackdown in capital controls, Lend Lease says there has been a big upswing with between 30 to 40% of foreign purchases now being cash settled. Other developers are reporting that some Chinese buyers are paying 100% cash. The laundering of Chinese cash into property isn’t unique to Australia, it’s just that Transparency International names Australia, in their March 2017 report as the worst money laundering property market in the world.

Australia is not alone, Chinese “hot money” is blowing gigantic property bubbles in many other safe havens around the world.

“But combined with our lack of future proof industries and exports, our economy is completely stuffed. And it’s only going to get worse unless we make a major transformation of the Australian economy.”

Instead of relying on a property bubble as pretense that our economy is strong, we need serious structural change to the composition of GDP that’s substantially more sophisticated in terms of the industries that contribute to it.

Australia’s GDP of $1.6 trillion is 69 per cent services. Our “economic miracle” of GDP growth comes from digging rocks out of the ground, shipping the by-products of dead fossils, and stuff we grow. Mining, which used to be 19 per cent, is now 7 per cent and falling. Combined, the three industries now contribute just 12 per cent of GDP thanks to the global collapse in commodities prices.

If you look at businesses as a whole, Company tax hasn’t moved from $68 billion in the last three years – our companies are not making more profits. This country is sick.

Indeed if you look at the budget, about the only thing going up in terms of revenue for the federal government are taxes on you having a good time – taxes on beer, wine, spirits, luxury cars, cigarettes and the like. It would probably shock the average person on the street to discover that the government collects more tax from cigarettes ($9.8 billion) than it collects from tax on superannuation ($6.8 billion), over double what it collects from Fringe Benefits Tax ($4.4 billion) and over thirteen times more tax than it does from our oil fields ($741 million).

But instead of thinking of intelligent ways to grow the economy, the focus is purely on finding more ways to tax you.

Here’s a crazy idea: the dominant government revenue line is income tax. Income tax is generated from wages. Education has always been the lubricant of upward mobility, so perhaps if we find ways to encourage our citizens to study in the right areas – for example science & engineering – then maybe they might get better jobs or create better jobs and ultimately earn higher wages and pay more tax.

Instead the government proposed the biggest cuts to university funding in 20 years with a new “efficiency dividend” cutting funding by $1.2 billion, increasing student fees by 7.5 percent and slashing the HECS repayment threshold from $55,874 to $42,000. These changes would make one year of postgraduate study in Electrical Engineering at the University of New South Wales cost about $34,000.

We should be encouraging more people into engineering, not discouraging them by making their degrees ridiculously expensive. In my books, the expected net present value of future income tax receipts alone from that person pursuing a career in technology would far outweigh the short sighted sugar hit from making such a degree more costly – let alone the expected net present value of wealth creation if that person decides to start a company. The technology industry is inherently entrepreneurial, because technology companies create new products and services.

Speaking of companies, how about as a country we start having a good think about what sorts of industries we want to have a meaningful contribution to GDP in the coming decades?

For a start, we need to elaborately transform the commodities we produce into higher end, higher margin products. Manufacturing contributes 5 per cent to GDP. In the last 10 years, we have lost 100,000 jobs in manufacturing. Part of the problem is that the manufacturing we do has largely become commoditised while our labour force remains one of the most expensive in the world. This cost is further exacerbated by our trade unions – in the case of the car industry, the government had to subsidise the cost of union work practices, which ultimately failed to keep the industry alive. So if our people are going to cost a lot, we better be manufacturing high end products or using advanced manufacturing techniques otherwise other countries will do it cheaper and naturally it’s all going to leave.

Last year, for example, 30.3 per cent of all manufacturing jobs in the textile, leather, clothing & footwear industries were lost in this country. Yes, a third. People still need clothes, but you don’t need expensive Australians to make them, you can make them anywhere.

“That’s why we need to seriously talk about technology, because technology is the great wealth and productivity multiplier. However the thinking at the top of government is all wrong.”

The largest four companies by market capitalisation globally as of the end of Q2 2017 globally were Apple, Alphabet, Microsoft and Amazon. Facebook is eight. Together, these five companies generate over half a trillion dollars in revenue per annum. That’s equivalent to about half of Australia’s entire GDP. And many of these companies are still growing revenue at rates of 30 per cent or more per annum.

These are exactly the sorts of companies that we need to be building.

With our population of 24 million and labour force of 12 million, there’s no other industry that can deliver long term productivity and wealth multipliers like technology.

“Today Australia’s economy is in the stone age. Literally. “By comparison, Australia’s top 10 companies are a bank, a bank, a bank, a mine, a bank, a biotechnology company (yay!), a conglomerate of mines and supermarkets, a monopoly telephone company, a supermarket and a bank.”

We live in a monumental time in history where technology is remapping and reshaping industry after industry – as Marc Andreessen said “Software is eating the world!” – many people would be well aware we are in a technology gold rush.

And they would be also well aware that Australia is completely missing out.

Most worrying to me, the number of students studying information technology in Australia has fallen by between 40 and 60 per cent in the last decade depending on whose numbers you look at. Likewise, enrollments in other hard sciences and STEM subjects such as maths, physics and chemistry are falling too. Enrolments in engineering have been rising, but way too slowly.

This is all while we have had a 40 per cent increase in new undergraduate students as a whole.

Women once made up 25 percent of students commencing a technology degree, they are now closer to 10 percent.

All this in the middle of a historic boom in technology. This situation is an absolute crisis. If there is one thing, and one thing only that you do to fix this industry, it’s get more people into it. To me, the most important thing Australia absolutely has to do is build a world class science & technology curriculum in our K-12 system so that more kids go on to do engineering.

In terms of maths & science, the secondary school system has declined so far now that the top 10% of 15-year olds are on par with the 40-50% band of of students in Singapore, South Korea and Taiwan.

For technology, we lump a couple of horrendous subjects about technology in with woodwork and home economics. In 2017, I am not sure why teaching kids to make a wooden photo frame or bake a cake are considered by the department of education as being on par with software engineering. Yes there is a little bit of change coming, but it’s mostly lip service.

Meanwhile, in Estonia, 100% of publicly educated students will learn how to code starting at age 7 or 8 in first grade, and continue all the way to age 16 in their final year of school.

At my company, Freelancer.com, we’ll hire as many good software developers as we can get. We’re lucky to get one good applicant per day. On the contrary, when I put up a job for an Office Manager, I received 350 applicants in 2 days.

But unfortunately the curriculum in high school continues to slide, and it pays lip service to technology and while kids would love to design mobile apps, build self-driving cars or design the next Facebook, they come out of high school not knowing that you can actually do this as a career.

I’ve come to the conclusion that it’s actually all too hard to fix – and I came to this conclusion a while ago as I was writing some suggestions for the incoming Prime Minister on technology policy. I had a good think about why we are fundamentally held back in Australia from major structural change to our economy to drive innovation.

I kept coming back to the same points.

The problems we face in terraforming Australia to be innovative are systemic, and there is something seriously wrong with how we govern this country. There are problems throughout the system, from how we choose the Prime Minister, how we govern ourselves, how we make decisions, all the way through.

For a start, we are chronically over governed in this country. This country has 24 million people. It is not a lot. By comparison my website has about 26 million registered users. However this country of 24 million people is governed at the State and Federal level by 17 parliaments with 840 members of parliament. My company has a board of three and a management team of a dozen.

Half of those parliaments are supposed to be representatives directly elected by the people. Frankly, you could probably replace them all with an iPhone app. If you really wanted to know what the people thought about an issue, technology allows you to poll everyone, everywhere, instantly. You’d also get the results basically for free. I’ve always said that if Mark Zuckerberg put a vote button inside Facebook, he’d win a Nobel Peace Prize. Instead we waste a colossal $122 million on a non-binding plebiscite to ask a yes/no question on same sex marriage that shouldn’t need to be asked in the first place, because those that it affects would almost certainly want it, and those that it doesn’t affect should really butt out and let others live their lives as they want to.

Instead these 840 MPs spend all day jeering at each other and thinking up new legislation to churn out. Last year the Commonwealth parliament alone spewed out 6,482 pages of legislation, adding to over 100,000 pages already enacted. That’s not even looking at State Governments.

“What about trying to attract more senior people to Sydney? I’ll tell you what my experience was like trying to attract senior technology talent from Silicon Valley.”

I called the top recruiter for engineering in Silicon Valley not so long ago for Vice President role. We are talking a top role, very highly paid. The recruiter that placed the role would earn a hefty six figure commission. This recruiter had placed VPs at Twitter, Uber, Pinterest.

The call with their principal lasted less than a minute “Look, as much as I would like to help you, the answer is no. We just turned down [another billion dollar Australian technology company] for a similar role. We tried placing a split role, half time in Australia and half time in the US. Nobody wanted that. We’ve tried in the past looking, nobody from Silicon Valley wants to come to Australia for any role. We used to think maybe someone would move for a lifestyle thing, but they don’t want to do that anymore.

“It’s not just that they are being paid well, it’s that it’s a backwater and they consider it as two moves they have to move once to get over there but more importantly when they finish they have to move back and it’s hard from them to break back in being out of the action.

“I’m really sorry but we won’t even look at taking a placement for Australia”.

We have serious problems in this country. And I think they are about to become very serious. We are on the wrong trajectory.

I’ll leave you now with one final thought.

Harvard University created something called the Economic Complexity Index. This measure ranks countries based upon their economic diversity- how many different products a country can produce – and economic ubiquity – how many countries are able to make those products.

Where does Australia rank on the global scale?

Worse than Mauritius, Macedonia, Oman, Moldova, Vietnam, Egypt and Botswana.

Worse than Georgia, Kuwait, Colombia, Saudi Arabia, Lebanon and El Salvador.

Sitting embarrassingly and awkwardly between Kazakhstan and Jamaica, and worse than the Dominican Republic at 74 and Guatemala at 75.

“Australia ranks off the deep end of the scale at 77th place. 77th and falling. After Tajikistan, Australia had the fourth highest loss in Economic Complexity over the last decade, falling 18 places.”

Thirty years ago, a time when our Economic Complexity ranked substantially higher, these words rocked the nation:

“We took the view in the 1970s it’s the old cargo cult mentality of Australia that she’ll be right. This is the lucky country, we can dig up another mound of rock and someone will buy it from us, or we can sell a bit of wheat and bit of wool and we will just sort of muddle through In the 1970s we became a third world economy selling raw materials and food and we let the sophisticated industrial side fall apart If in the final analysis Australia is so undisciplined, so disinterested in its salvation and its economic well being, that it doesn’t deal with these fundamental problems Then you are gone. You are a banana republic.”

Looks like Paul Keating was right.

The national conversation needs to change, now.

(This is an edited version of Matt Barrie’s “House of Cards” opinion feature and was co-authored with Craig Tindale)





Richard Wolff on the coming crash…….

30 05 2015

Of course, zero mention of Limits to Growth here………





George Monbiot on Money

19 02 2015

George-Monbiot-LUnlike the vast majority of journalists, George Monbiot does his own research rather than repeat parrot fashion what others in his trade throw at the sheeples as ‘news’.  It’s a pity he hasn’t included resource depletion in the pot as a problem for growth and therefore debt servicing, but there are enough new concepts in this to make it a most worthwhile read.  Lifted from the Guardian.

 

A maverick currency scheme from the 1930s could save the Greek economy

Compare the terms demanded of the Greek government to those offered to the banks. Eurozone ministers now insist upon unconditional surrender: a national abasement that makes a mockery of democracy. But when the banks were bailed out, governments magicked up the necessary money almost unconditionally. They shyly requested a few token reforms, then looked away when the bankers disregarded them.

The German government, now crushing the life out of southern Europe, merely tickled its own banks. As the New York Times reported, though the corrupt German banking system “required a bailout bigger than the one American banks received”, “there is little appetite for change in Germany because the banking system is so deeply intertwined with its politics, serving as a rich source of patronage and financing for local projects”.

When the Greeks complain that they have been reduced to colonial subjects, they are right, but the colonial masters are not the northern members of the eurozone. They are the private banks. The governments that seem determined to destroy a sovereign state for its impudence are merely the intermediaries of power.

None of this is to deny the corruption and fiscal promiscuity of previous Greek administrations. But while the banks have got away with far worse, the bullies of the eurozone insist on extracting every last drop of blood from people who had no role in their governments’ deceptions.

Greece is stuffed: or so almost everyone asserts. Perhaps. Or perhaps there are possibilities we have scarcely begun to examine. I should warn you that no one in their right mind would take financial advice from me.  (Or, for that matter, from most financial advisers) I seek only to suggest that there may be some possibilities of hope among the ruins.

One of these radical ideas was proposed a few months ago by Martin Wolf in the Financial Times. He suggests stripping private banks of their remarkable power to create money out of thin air. Simply by issuing credit, they spawn between 95% and 97% of the money supply. If the state were to assert a monopoly on money creation, governments could increase their supply without increasing debt. Seigniorage (the difference between the cost of producing money and its value) would accrue to the state, adding billions of pounds to national coffers. The banks would be reduced to the servants, not the masters, of the economy.

An entirely different approach is proposed by Ann Pettifor, in Just Money. She argues that governments have failed to understand what money is. It should not be seen as a commodity, she says, but as a social relationship based on trust. Unusually for a radical critic of finance, she sees the creation of money by private banks as “a great civilisational advance”, freeing nations from the usurers who once monopolised and restricted wealth.

The supply of money is, in effect, unlimited: as long as there is sufficient productive activity to absorb it there is no obvious restraint on the amount of money that can be issued. So when governments and central bankers tell you that the money has run out, Pettifor argues, they are either deceiving us or deceiving themselves. What holds back economic activity is an unnecessary and artificial restriction of the medium of exchange.

Banking’s great civilisational advance has been all but destroyed through deregulation, whose result is a new system of usury, speculation and exploitation. Private banks borrow cheap and lend dear, forcing us to work ever longer hours and to inflict ever more damage on the natural world to service our debts. Pettifor suggests that governments should reassert control over interest rates at every level of lending.

But perhaps the biggest transformation could happen at the local level. Greece already has set up some local currencies that have kept money circulating in several towns and cities as it cannot be siphoned away. (There are similar systems in Britain, such as the Bristol Pound). But strangely they do not make use of the thrilling, transformative system that almost saved Europe from fascism; the currency developed by the economist Silvio Gesell called stamp scrip. It is explained in Bernard Lietaer’s magnificent book The Future of Money.

In its original form, stamp scrip was a piece of paper on which a number of boxes were printed. The note would lose its validity unless a stamp costing 1% of its value was stuck in one of the boxes every month. In other words, the currency lost value over time, so there was no incentive to hoard it. Stamp scrip projects took off across Germany and Austria after national currencies collapsed in the early 1930s. In 1932, for example, the Austrian town of Wörgl was almost broke, unable to finance public works or to support its destitute population, until the mayor heard of Gesell’s proposal.

This little pot of money kept circulating, enabling Wörgl to repave the streets, rebuild the water system

He put up the town’s tiny remaining fund as collateral against the same value of stamp scrip, and used it to pay for a building project. The workers then passed on the currency as quickly as they could. Like the magic pudding, this little pot of money kept circulating, enabling Wörgl to repave the streets, rebuild the water system, construct houses, a bridge and even a ski jump. In the 13 months of the experiment, the 5,500 scrip schillings in circulation were spent 416 times, creating between 12 and 14 times as much employment as the standard currency would have done. Unemployment vanished, and the stamp fees paid for a soup kitchen feeding 220 families.

The governments of Germany and Austria, profoundly threatened by the success of these projects, shut them down and employment collapsed once more. When the US economist Irving Fisher examined these experiments he concluded that “the correct application of stamp scrip would solve the depression crisis in the US in three weeks!”. Roosevelt’s government, aware that such currencies could invoke a massive loss of federal power, promptly banned it.

Could these ideas be useful to Greece? Could they be of relevance in other parts of Europe? Even perhaps in Scotland, where the currency issue was unimaginatively fudged before the referendum? I don’t know. But if Greece leaves the eurozone, it could open up a world of possibility to which other nations have closed their minds.

Twitter: @georgemonbiot. A fully referenced version of this article can be found at Monbiot.com





On abandoning effluence

23 12 2014

Some of you might remember that if ever there was a book that changed my life, it was Ted Trainer’s “Abandon Affluence”.  These days, I have a tendency to call it “Abandon Effluence”, as the planet chokes on waste of all kinds produced by our effluent civilisation, be it CO2 in the air or plastic in the ocean….

Today, an article in the Sydney Morning Herald prompted me to comment further on this.  Titled “Miserly Newstart keeps unemployed further away from jobs”, I could not help thinking “thank god for the unemployed”.  For two fundamentally and totally contradictory reasons.  Poor people can’t consume the planet to death, and poor people keep the economy afloat…  You won’t read that in mainstream media…

The morons in charge of our country right now seem to take great pleasure in denigrating the unemployed (and the disabled, and the sick, and anyone else who may have fallen on hard times) for not doing any of the “heavy lifting”.  The media loves to tell us that these dole bludgers live off our taxes (all monopoly money created out of thin air let us not forget) and we should therefore look down upon them as inferior people.  From the SMH:

Australia’s Newstart was comparable to benefits provided in the Southern European nations of Greece, Spain and Portugal, which have all been rocked by the global financial crisis and sovereign debt problems. So we’ve got southern European generosity even though Australia is richer than those nations and escaped the financial crisis relatively unscathed.

What the morons keep forgetting is that whilst these unemployed people may not be paying income tax, they do pay GST on almost everything they buy with their $500 a fortnight (including food, as most of these people probably buy processed food rather than fresh), and rent to their landlords who profit handsomely.  When you earn such paltry amounts of money, everything you get gets ploughed back into the economy and is counted as GDP.  I believe that the main reason the unemployed are so derided is because they don’t actually participate in growth, they simply don’t get enough to consume like those who work!  And they cannot get in debt, except with high interest rate credit cards…. and no doubts the banks love cashing in on that one, even if there are a few defaulters among them.

Unfortunately for the unemployed, nearly all of them do not realise what an opportunity unemployment really is.  They have been so brainwashed into thinking the Matrix is the only modus operandi that they find it impossible to think outside that box.  To be fair, none of the employed do either!

Imagine this…:  next month, all the unemployed wake up to themselves and decide to abandon the Matrix.  They each find one of the 800,000 houses that are empty at any one time in Australia, and squat there.  After all, Australia has a tradition of squatting, that’s how this nation began…!  Using their last dole payment (or two or three), they buy chickens and seeds, a few gardening implements, and start growing their own food.  They won’t need electricity because they won’t be watching TV or charging their smart phones.  They would surely have enough clothing already to keep warm if it’s cold, and most of them would quite likely own essentials like bedding etc….

Now I realise this is pure fantasy, but just bear with me a little longer…..  what would happen to the economy?

According to the ABS, there are 777,700 unemployed people at the moment in Australia, representing 6.2% of the 12,500,000 who make up ‘the work force’.  The underemployed number 14.8%, or another 1.8 million people, for a total 2.6 million people who presumably earn their $500 a fortnight’s worth of pound of flesh.  I make that out to be a total of (in round numbers) 33.8 billion dollars a year.  What, exactly, would happen to the economy if that much spending/consumption was removed from the economy?  Or the 3.4 billion in GST for that matter?  What of all those landlords who suddenly lose their tenants, causing a crash in the housing bubble?  What of the power companies that suddenly find themselves having to shut down 10% of their power stations?  Were the government to exile the unemployed, it would cause an instant depression…….

The reason of course there is any unemployment at all, is due to the very market forces the morons in charge constantly push on us.  If there were no unemployment, it would be an employee’s market instead of the current employers’.  In a labour shortage situation, any potential employee applying to fill a vacant position would be able to name his price (wages) and desperate employers would have little choice but to accept.  And we can’t have that now, can we…..  the labour market will not pay any more than is absolutely necessary.  So the morons in charge continue denigrating the very socio-economic sector they and their precious Capitalism created, even ensuring they mostly cannot get a job even…….  according to the SMH:

Morris and Wilson argue Australia’s current approach is counterproductive. Their study into the implications of life on Newstart found many recipients were so deprived they were ill-equipped to get work. Newstart’s very low rate was “scarring” the unemployed and making it more difficult for them to find a job.

If there were jobs to be had of course.  Furthermore, my imaginary scenario above will one day come to fruition; it’s only a matter of when really.  So many pundits are proclaiming that it will all start next year, like Paul Craig Roberts…

We need a reboot, no doubt about it, but first, we have to rid ourselves of the morons in charge.  Before it’s too late.  If it isn’t already of course, they all have their heads in the sand.





Running out of Time…….

4 03 2013

Are we running out of time?  I sure as hell feel like I am….  The illusion of economic stability we are bombarded with from the media and governments of all flavours has convinced most people that the great economic crisis of 2008 was just a blip and that things are just fine again….  Well, it’s not like that at all…  The truth is that the crash of 2008 was just the first wave of our economic tsunamis.  We have not even come close to recovering from that wave, and the second wave of the economic collapse is fast toiletpapermoneyapproaching.  Think of the exponential curve…. and we are on the vertical bit.  The number of crises is growing exponentially.  Capitalism is like a gigantic global sand castle built on a foundation of debt and toilet paper currency.  As each wave of the crisis hits us, the solutions that our dear leaders will present us will will involve even more debt and even more toilet paper printing.  And every time we wipe our collective arses, everything gets worse.  Right now, events are unfolding in Europe and in the US that are pushing us toward the next crisis….

The following is a list of 12 things that were published on Zero Hedge that only too clearly show the next wave of the economic tsunami is almost here…

#1 According to TrimTab’s CEO Charles Biderman, corporate insider purchases of stock have hit an all-time low, and the ratio of corporate insider selling to corporate insider buying has now reached an astounding 50 to 1….

#2 On Friday we learned that personal income in the United States experienced its largest one month decline in 20 years…  Personal income decreased by $505.5 billion in January, or 3.6%, compared to December (on a seasonally adjusted and annualized basis). That’s the most dramatic decline since January 1993, according to the Commerce Department.

#3 In a stunning move, Michigan Governor Rick Snyder says that he will appoint an emergency financial manager to take care of Detroit’s financial affairs…  If this does not work, Detroit will almost certainly have to declare bankruptcy.  If that happens, it will be the largest municipal bankruptcy in U.S. history.

#4 On Friday it was announced that the unemployment rate in Italy had risen to 11.7 percent.  That was a huge jump from 11.3 percent the previous month, and Italy now has the highest unemployment rate that it has experienced in 21 years.

#5 The youth unemployment rate in Italy has risen to a new all-time record high of 38.7 percent.

#6 On Friday it was announced that the unemployment rate in the eurozone as a whole had just hit a brand new record high of 11.9 percent.

#7 On Friday it was announced that the unemployment rate in Greece has now reached 27 percent, and it is being projected that it will reach 30 percent by the end of the year.

#8 The youth unemployment rate in Greece is now an almost unbelievable 59.4 percent.

#9 On Saturday, hundreds of thousands of protesters filled the streets of Lisbon and other Portuguese cities to protest the austerity measures that are being imposed upon them.  It was reportedly the largest protest in the history of Portugal.

#10 According to Goldman Sachs, bank deposits declined all over Europe during the month of January.

#11 Over the weekend, the deputy governor of China’s central bank declared that China is prepared for a “currency war“…

#12 Italy is an economic basket case at this point, and the political gridlock in Italy is grillocertainly not helping matters.  Former comedian Beppe Grillo’s party could potentially tip the balance of power one way or the other in Italy, and over the weekend he made some comments that are really shaking things up over in Europe.  For one thing, he is suggesting that Italy should hold a referendum on the euro…  In addition, Grillo is also suggesting that Italy’s debt has gotten so large that renegotiation is the only option…  He’s my man, renegotiation means CANCELLATION!!

The so called “sequester cuts” in the US ($95 billion) have now gone into effect, and they will definitely affect on the U.S. economy.  And of course we all know the U.S. economy has already been showing plenty of signs of tanking lately.  If you doubt this, read “Consumer Spending Drought: 16 Signs That The Middle Class Is Running Out Of Money“.

So what comes next?  Keep your fingers and toes crossed……  trust me, there are no solutions to this mess.  Except for Grillo’s and mine!