I've uploaded an excellent paper by Edward Chancellor which highlights concerns that I and a lot of others are having about China. Given the close ties China has to the Australian economy and how dependent we are on Chinese demand for our natural resources, a downturn in China would spell disaster for our "lucky country."

In Australia, interest rates are still almost as low as they have ever been historically and the next move is going to be up. Even if we drop into crisis mode and Stevens the Keynesian in charge of the RBA slashes rates again, we may just get a US/Japan style situation where banks keep loans "performing" by lowering the borrower's rate to almost nothing and just require interest-only payments (still making a small profit on the spread) to stay in business (no hit to capital). That's all hunky dory but they certainly won't be making loans to businesses or any other private parties so the economy will just stagnate. We will end up excessive government debt and our mighty four-pillar banks reduced to zombies.

Back to the article, I especially like the Mills quote from 1867, "Panics do not destroy capital; they merely reveal the extent to which it has been previously destroyed by its betrayal in hopelessly unproductive works," which is exactly why bailouts do nothing to help the poor taxpayer or 'economy' but merely transfer wealth from them to the politicians buddies (large campaign contributors, former colleagues, etc).

Malinvestment is certainly rife in China as it always is under central planning. Resources are allocated sub-optimally and often arbitrarily by planners which may make for a great GDP figure but can hardly be called wealth creation when individuals don't actually want it. They have papered over the cracks with massive monetary inflation over the past few years which makes these (mal)investments look better than they actually are, but as Hayek said that can only be maintained with an ever-increasing rate of inflation. Thus, the income bonuses Australia has received over the past decade from the unsustainable natural resource demand in China are exactly that, unsustainable. They are being driven by monetary inflation and bank credit expansion. Malinvestment is rife and, as the article states, there are red flags everywhere.

As is always the case with bubbles, the hardest thing to predict is the timing. Take for instance the data: recall the Soviets boasting about their excellent 'free' healthcare system. Each hospital was allowed a certain number of deaths per annum and doctors were rewarded based not on profit or how well they treated their customers but on death statistics. So doctors did what they had to to avoid punishment: they would either fudge the statistics; refuse to treat people near death; and sometimes would simply wheel existing patients out the doors if they looked like dying. While the context and severity is different, a Chinese banker would be faced with a similar situation: choose between recording a 'death' in a loan or manipulate the data for as long as possible. The whole process can take a very long time to unravel and reveal the true state of the country and how much malinvestment really exists.

Unfortunately, Australia is tethered to the ship that is China and if she goes down we're going down with her, unless of course something else doesn't sink us before then (as the article mentions, when you have a state-run economy you can delay the inevitable for an unbelievably long time). When this happens government and businesses that have been relying on high commodity prices and demand from China will suffer. Governments find it very very very difficult to cut spending when revenue falls and thus this will result in an expansion in the unproductive government sector relative to the whole economy. We might be in deficit for some time to come.

Click here to download China's Red Flags, a March 2010 GMO White Paper by Edward Chancellor.

I watched the highlights of the healthcare debate and as I predicted, I was not impressed.  

I saw the two most influential politicians in this country argue the best way for government to run the healthcare system.  This is nothing new for the Prime Minister, we should expect this as he is the quintessential social democrat who shed his free market sheep's clothing in late 2008.  This was however, an epic fail for Tony Abbott, as the leader of the opposition demonstrated that his party is nothing more than 'Labor Lite', 'Diet Labor' or 'I can't believe it's not Labor'.

The liberal party is supposed to espouse the principles of small government, individual liberty, natural rights and private property... Mr Abbott demonstrated that he has nothing but contempt for these 'quaint' ideas.  Oh how I would long for a politician to stand up in front of the cameras and make the case for something we have NEVER seen before: a free market in healthcare.  Dispel the myths, the silly misunderstandings and misconceptions, correct historical inaccuracies that we've been indoctrinated by within government-run schools and expose the source of the current healthcare crisis: the government.

Will that day ever come, I certainly hope so.  But I won't be holding my breath for the liberal party anymore.

It seems overpopulation is scaring everyone and politicians, not being ones to miss an opportunity to target and exploit the fears of the populace, are calling for an enquiry into our population to examine the "...environmental, social and economic sustainability of Australia's population and report back by July 1, 2011, after the next election."

Now a lot of the concerns being raised are about things such as water, electricity, transport infrastructure and so on running out - utilities that are currently owned/managed/operated/regulated by the state. This is indeed a problem and if this is allowed to continue along with the forecast population increase then we will get more water rations, more power outages and more congestion on our roads. But before we start panicking and respond with some knee-jerk anti-birth or anti-immigration policy, we need to ask ourselves: why? Shortages, congestion and rationing, for some reason, never occur in the private sector yet are inevitable when the public sector is in charge. For a crude example, when was the last time you saw bottled water being rationed out at the supermarket? The reason why this problem is isolated to the public sector is that if there is an increased demand for a good in the private sector, consumers are willing to pay more for the product and investors invest more in its supply or in alternatives, thus clearing the market to everyone's satisfaction. In the meantime, while investors and entrepreneurs come up with new solutions to solve said problems, higher prices ensure that the available resources are allocated to their most urgent uses. In the public sector, on the contrary, an increased demand for a good (e.g. water) will result in complaints about how we are wasting precious resources, rationing, queues and higher taxes to "solve" these "issues of national significance."

With my little rant on public ownership of goods out of the way, I'm going to borrow from the late economist Julian Simon who throughout his career was generally optimistic about the benefits humans bring to the planet and about man's prospects for the future. He felt that overpopulation wasn't something that we had to worry about; his future outlook was that "...first, humanity's condition will improve in just about every material way. Second, humans will continue to sit around complaining about everything getting worse." How true.

Simon's central premise was that people are the ultimate resource, "...human beings are not just more mouths to feed, but are productive and inventive minds that help find creative solutions to man's problems, thus leaving us better off over the long run." He argued that mankind would rise to any challenges and problems by devising new technologies to not only cope, but thrive. "Whatever the rate of population growth is, historically it has been that the food supply increases at least as fast, if not faster."

To solve the 'problem' of overpopulation, we merely need to unleash the ingenuity of mankind - through the mechanism that is the unfettered market - and enjoy the marvels of human achievement in their fullest. 

So with that said, here’s a lengthy quote from Simon's book, The Ultimate Resource:

"A conceptual quantity is not finite or infinite in itself. Rather, it is finite or infinite if you make it so–by your own definitions. If you define the subject of discussion suitably, and sufficiently closely so that it can be counted, then it is finite–for example, the money in your wallet or the socks in your top drawer. But without sufficient definition the subject is not finite–for example, the thoughts in your head, the strength of your wish to go to Turkey, your dog's love for you, the number of points in a one-inch line. You can, of course, develop definitions that will make these quantities finite, which shows that the finiteness inheres in you and your definitions rather than in the money, love or one-inch line themselves. There is no necessity either in logic or in historical trends to state that the supply of any given resource is "finite," and to do so leads to error.

Someone coined the label "cornucopians" for those who believe that the natural resources are available in practically limitless abundance, to contrast with "doomsters." But the stream of thought that I represent here is not cornucopian. I do not suggest that nature is limitlessly bountiful. Rather, I suggest that the possibilities in the world are sufficiently great so that with the present state of knowledge–even without the additional knowledge that human imagination and human enterprise will surely develop in the future–we and our descendants can manipulate the elements in such fashion that we can have all the raw materials that we desire at prices ever smaller relative to other goods and to our total incomes. In short, our cornucopia is the human mind and heart, and not a Santa Claus natural environment. So has it been throughout history, and therefore so is it likely to be in the future."

Hey guys,

As per my last post, I've done some more work on the economic flowchart of the Australian economy that I have posted below.  Feel free to comment to suggest sectors of the economy to add or if you have numbers for some boxes.

God bless,

Washo

PS  Sorry that there's so much white space, it will be probably be filled with more stuff over time.

There's a great (and short!) video online on why profit is so important for a well functioning price system and economy.

Tom Woods (author of Meltdown) has an excellent article up at lewrockwell.com which succinctly demonstrates why it is not the free market that is to blame for the crisis but rather the government and central bank - the very institutions that are being hailed as our saviours. It is my view that the 'fool's paradise' that is Australia will be exposed for what it is at some point this year and this article explains in part why (in particular read the part about Greenspan and the 2001 U.S. recession). Here is Woods's summary of Hayek's point on why we have boom-bust cycles:

Scenario 1 [housing expansion on a free market]. Consider what happens when the public increases its savings. Since banks now have more funds to lend (namely, the saved funds deposited by the public), the rate of interest it charges on loans will fall. The lower interest rates, in turn, stimulate an expansion in long-term investment projects, which are more sensitive to interest rates than short-term projects are. (Think of the difference in the decline in monthly payments that would occur between a 30-year mortgage and a 1-year mortgage if interest rates came down by even 2 percentage points.)

Lower-order stages of production are those stages closest to finished consumer goods: retail stores, services, and the like. Wholesale and marketing are examples of higher-order stages. Mining, construction, and research and development are of still higher order, since they are so remote from the finished good that reaches the consumer. When people’s consumption spending contracts, it is a perfect time for higher-order stages of production to expand: because of people’s additional saving, there is relatively less demand for consumer goods, and the resulting contraction of lower-order stages of production will release resources for use in the higher-order stages.

Scenario 2 [housing expansion with artificially manipulated fiat currency]. Government-established central banks have various means at their disposal to force interest rates lower even without any corresponding increase in saving by the public. Just as in the case in which public saving has increased, the lower interest rates spur expansion in higher-order stages of production.

The difference, though, is a critical one and guarantees that these artificially low interest rates will not yield the happy outcome we saw in Scenario 1. For in this case, people have not decreased their consumption spending. If anything, the low interest rates encourage further consumption. If consumption spending is not constricted, the lower-order stages of production do not contract. And if they do not contract, they do not release resources for use in the higher-order stages of production. Instead of harmonious economic development, there will instead ensue a tug of war for those resources between the higher and lower stages. In the process of this tug of war, the prices of those resources (labor, trucking services, et cetera) will be bid up, thereby threatening the profitability of higher-order projects that were begun without the expectation of this increase in costs.

As the workers in the newly expanded higher-order stages of production begin to spend their incomes, they spend according to the same saving-to-consumption ratio they did in the past. Their desire to save, and thereby to sustain all this long-term investment, turns out to be not as great as the distorted structure of interest rates led entrepreneurs to believe. It becomes ever clearer that society is not prepared to support the expansion of time-consuming higher-order stages of production. They do not wish to save enough resources to make the completion of all the new projects possible. The lower-order stages will win the tug of war. Expansion in the higher-order stages will have to be abandoned. Some of the resources deployed there will be salvageable; others will have been squandered forever or will be of little to no use in later stages of production.

I suggest reading the whole article - there is a great quote near the end on why regulation cannot fix banking from Guido Hülsmann's The Ethics of Money Production.