I must be one of the few people who interpreted Australia's recent GDP growth as a warning sign rather than a positive return to 'trend'. Sure, on the surface 3.3% YoY GDP growth (1.2% in the June quarter) looks impressive, but it loses its gloss when we examine what contributed to this 'growth'.

The four main contributors to growth were: government spending; household consumption; dwelling investment; and net exports. Let's take a look at each one of these 'positives':

Government Spending

Government spending, while increasing GDP, does not add anything productive or generate any wealth in the economy. It merely delays the necessary restructuring process and in fact further distorts it, allocating resources to areas determined by bureaucratic decree rather than market forces (consumers). Real income can only be increased by working harder or more efficiently, saving more, investing more, and producing more. Government spending detracts from all of those requirements. Thus, the 'positive' contribution to GDP by government spending is, on the contrary, a negative for future growth prospects in Australia.

Household Consumption

Consumption spending was the largest contributor to GDP growth, supported by a decline in the savings rate and heavy discounting by retailers desperate to offload inventories in this environment. Prey, how is a further decline in savings and more consumption a positive for the economy? It is real savings that are the only road to prosperity. Consumption is nothing but a destroyer of wealth and, while essential (why work productively if you cannot reward yourself?), should not be praised as a driver of 'growth'. It should be recognised for what it is, a consumption of scarce resources that generates zero wealth and generates no real income to the economy. This, like government spending, should be recorded as a negative for future growth prospects and not something to celebrate in a time when Australians are heavily indebted and consuming above their means.

Dwelling Investment

Housing, like the above two 'investments', cannot increase the wealth of a nation in and of itself. It is consumption, albeit more distant consumption, and not a generator of wealth. While it can enable wealth generating activities (people need a place to live so they do not die!) and while it may generate income for it's proprietor, it adds nothing to the revenue of the nation as a whole. To quote Adam Smith, ..."revenue, however, which is derived from such things [housing] must always be ultimately drawn from some other source of revenue." More consumption spending in the ponzi-scheme that is Australian dwelling investment is NOT something that should be celebrated!

Net Exports

This is the only positive to come from the recent data and I remain skeptical as to how long it can continue. All of the above 'positive' contributors to GDP must, by their very nature, derive their revenue from 'true' production, which in Australia's case is resources. Australia is a resource-rich, commodity based economy that has so far avoided the resources 'curse' by following five steps to success (relative to countries that have fallen into the resources trap): (1) low taxes; (2) balanced budgets; (3) free trade; (4) a respect for property rights; and (5) monetary restraint. Unfortunately, we seem to be moving further and further away from all 5, something that will be exacerbated if Labor win another term. How long can the world (read: China) sustain her demand for Australian commodities? Only time will tell, but the game is getting closer to running out and if Australia continues to move away from the five points above, when time is eventually called on the resources boom, the illusory prosperity in Australia will come crashing down. If the mining boom ends there is only so much consumption of the existing capital stock that is possible and it certainly cannot go on forever. As Adam Smith said, "...there is a great deal of ruin in a nation," implying that it takes a lot of waste (government) to ruin a wealthy nation with a large capital stock. Sadly, we are moving further and further in that direction as the resources boom hides the true effect government policy is having on Australia.

This is why I am not celebrating the recent GDP data in the same way that the majority of political and economic pundits are.

I'm actually quite happy with the state of Australian politics at this very moment.  We have a 'hung' parliament, basically a tie with 2 independents & 1 Greens minister as the major power brokers.  To form the majority government, both major parties have been haggling and negotiating for nearly 2 weeks.  I've noticed many people frustrated at the drama on TV and I can't help but respond with 'I'm loving this!'

Why do I love this... well for starters, Australia has had a 2 week reprieve from either party passing legislation that resumes the looting of our private property & further restricting our freedoms.  Secondly, the drama will have a greater chance of convincing people about the soundness of libertarianism more than any blog post.

What is frustrating though, is seeing these independents take their private wish list to both parties.  These ministers are essentially holding the formation of an Australian government hostage with their list of demands to the party elites.  In a twist of sick irony, not even the Australian public has this privilege.

This does raise a larger question about the nature of government.  These minister are treating government as their own genie in a bottle.  But what does this reveal about the government.  Government is a monopoly privilege of force where any seizure of private property can be justified by complicated writing on a piece of paper called a 'Bill'.  Government is a monopoly privilege of force that can imprison you for not violating the natural rights of your neighbours.  Government is a monopoly privilege of force that will fine and imprison you for not participating in the selection of new looters every 4 years or sooner.  Finally, government is a monopoly privilege of force that we use to steal from our neighbours for our own private interest.

The benefit of the democratic process is that the public is one step closer to writing the Christmas list.  But as we've seen with the backstabbing of Kevin Rudd and the Hung Parliament, occasionally we're reminded that the Christmas list belongs to the adults and not the children.

It appears that 'helicopter Ben' will live up to his name after announcing that he would fire his inflationary guns to prevent a double-dip recession.  What are these guns exactly?  The promise to purchase more government debt & additional financial assets while lowering the interest rate charged on bank-reserves.

This is hardly surprising, Bernanke has promised as much before.  It appears that the Holy Grail of Full Employment will justify any inflationary extreme.  In response to the inflation concern, he says: "... inflation doesn't seem to be a risk at this point and at this stage, the probability of additional disinflation appears to be low".

Well Ben, the expansion of MONEY and CREDIT is the very definition of inflation.  Does it seem somewhat contradictory for you to disregard the 'threat' of inflation in the same speech where you promise to be its architect?  Of course we know you refer to asset price inflation.  Yet if rising asset price inflation (due to actual inflation) 1) preceded and built the BOOM, & 2) the BOOM's unsustainable inflationary growth caused the inevitable BUST, why must we return to our inflationary folly like a dog to it's vomit?

Think of the children Ben... think of the children.

Wall Street shares rally on Ben Bernanke's promise | The Australian

Bernanke Says Fed Will Do `All It Can' to Ensure U.S. Recovery ...

From the Mises.org blog:

A small set of ideas does most of the heavy lifting in economics. “Ten Principles of Economics” or “Ten Big Ideas” or “Ten Key Elements of Economics” are pretty standard in most introductory economics books. Here’s my version, based on Chapter 1 of The Economic Way of Thinking.

1. People Act. People choose goals (ends), and they choose ways to achieve those goals (means). One of your goals, presumably, is to obtain a well-rounded liberal education. Taking econ 100 is one of the means you have chosen to that end. This also implies subsidiary means-ends relationships. Suppose one of your goals is “pass econ 100.” Reading the textbook, doing the assignments, coming to class, visiting office hours, and visiting the peer tutor are means to that end.

2. Every Action Has a Cost. When you do one thing, you give up the opportunity to do another. For example, you have an almost limitless range of options right now. You could be eating, sleeping, working, or chatting with your friends, but you have chosen instead to read this assignment. Your next best alternative is the cost you have incurred in order to read the assignment. If preparing for the first class takes five hours and your next best alternative is working for $8 per hour, then preparing for class has cost you the opportunity to earn $40 (we will shorten this periodically and say that “preparing for class” cost you $40). You will also hear people say “there is no such thing as a free lunch,” and indeed, free stuff isn’t free. If you spend thirty minutes in line waiting for a slice of free pizza and your next best alternative would be working for $8 per hour, then that slice of pizza has cost you the opportunity to earn $4.

3. People Respond to Incentives. Incentives motivate people to action. People will do more of something as the cost falls, and they will do less of it as the cost rises (the law of demand). Similarly, they will try to supply more of something that gets more remunerative and less of something that gets less remunerative (the law of supply). Prices are some of the most important incentives in economics. The price is the number of dollars that have to be traded for something ($2 for a cup of coffee, for example). Market prices emerge from the interactions of buyers and sellers.

4. People make decisions at the margin. People make trade-offs. Economic analysis is incremental: when people make decisions, they compare the costs and benefits of a little bit more or a little bit less of something. You don’t usually make sweeping categorical decisions about what is good or what is bad. You generally won’t decide that studying economics is Always Good (otherwise, you would study economics 24 hours a day) or Always Bad (otherwise, you would not study economics at all). You will compare, for example, the cost of an additional evening spent studying physics to the benefit of and additional evening studying economics. Generally, people will do everything for which the marginal benefit exceeds the marginal cost and nothing for which the marginal cost exceeds the marginal benefit. The decisions you should make ultimately depend on your goals and values. Economics as such cannot tell you whether you should spend the next minute, the next hour, or the next day studying economics, studying physics, updating your Facebook page, or sleeping, but it can tell you that you’re making a trade-off.

5. Trade makes people better off. Trade is a kind of voluntary cooperation, and it makes us wealthier. This happens in two ways. First, we know that since people act, they will only do things if they expect it to make them better off. If you trade $100 for a ticket to see the Jonas Brothers and Hannah Montana, we infer that it is because you expect to prefer the concert to anything else you could have done with the $100. This is not to say that people won’t make mistakes from time to time—we have all rented a terrible movie or ordered something at a restaurant that we didn’t like—but in general, trade will make us better off. The second way trade makes us better off is by increasing our productivity. According to the law of comparative advantage, when people specialize and trade, they can produce more output with the same inputs. Similarly, they can produce the same outputs with fewer inputs. In either case, people have more resources with which to attain their goals. This has an important implication that echoes a thought originally expressed by Adam Smith: people are more likely to help you achieve your goals if you help them achieve theirs.

6. People are Rational. This is a lot more controversial than it should be. When we say that people are rational, we mean that they will tend to do things that they expect to provide them with net benefits. We don’t mean that they will always make the right decision, that they have complete information, or that they will never make mistakes. We mean that they have goals, they tend to choose the means that they believe are appropriate to achieve them, they respond to incentives, and they learn from mistakes.

7. Using markets is costly, but using government can be costlier still. Transaction costs are the costs of measuring the valuable attributes of goods and services as well as the costs of specifying and enforcing contracts. Since trade is costly, there may be situations in which people do not make trades that would have made them better off. In principle, governments can correct these “market failures.” However, people working for the government respond to incentives, as well. Government policies like price controls, taxes, and subsidies also prevent people from making trades. Because of the incentives they face, government actors often have incentives to make things worse whether they intend to do so or not.

8. Profits tell businesses that they are helping others, while losses tell businesses that they are wasting resources. When private property rights are secure, profits and losses are the market’s feedback mechanism. You earn profits by providing people with goods and services they want at prices they find attractive. You earn losses when you provide people with goods and services they don’t want at prices they find unattractive. The invisible hand of the marketplace will tend to weed out businesses that make people worse off: it tells these businesses that the resources they are using could be better used in another enterprise. Resources will tend to flow of out of enterprises that are unprofitable and toward enterprises that are profitable.

9. We shouldn’t ignore the long-term and unintended consequences of policies and actions. Careful economic analysis is, in part, the process of asking “and then what?” about any policy or action. In his book Applied Economics, Thomas Sowell calls this “thinking past stage one,” and in his classic Economics in One Lesson, Henry Hazlitt defined “the art of economics” as tracing the effects of actions and policies and seeing how they affect everyone rather than just particular groups. The Economic Way of Thinking defines economics as “a theory of choice and its unintended consequences,” and indeed, most applied economic analysis consists of isolating and exploring the unintended consequences—whether they are good or bad—of actions and policies.

This is the introduction from a recent piece I wrote for Ausnomics.

"When the gates are all down and the signals are flashing the whistle is screaming in vain; and you stay on the tracks ignoring the facts well you can't blame the wreck on the train," Don McLean, Can’t Blame The Wreck on The Train

We recently attended a lecture on the global crisis by Nobel Laureate Joseph Stiglitz and were left shaking our heads in dismay at the state of the economics profession. In between attacks on his (straw man) interpretation of capitalism and the free market were the usual Keynesian cries for global stimulus to support 'aggregate demand' (capital is homogenous after all, right?); income redistribution to reduce savings and boost consumption; more regulation; a tax on countries that save too much (Germany); and a conclusion implying that the ideal solution would be for a global government with a global fiat currency with the 'right people' (Stiglitz) in charge. Only then can we abolish scarcity and live out our days in a wonderful Keynesian utopia!

Now, Stiglitz did manage to dedicate a small part of his talk (about 2 minutes out of 90) to Australia and the response of the government to the crisis – what he described as a "best in the world," well structured and timely stimulus package that worked to save Australia from depression. We are of a differing opinion and believe that while the stimulus probably did keep Australia out of statistical recession for the time being (when looking at aggregate GDP numbers), it means the eventual bust will be all the more painful.

The truth is that Australia is not different. Australia is neither special nor smarter than everyone else and the property bubbles that have burst in other countries will burst in Australia as well. The dream world that people like Stiglitz live in – one with a strict focus on aggregate demand – leads them to believe that all we need is enough government spending, regulation and income redistribution for everything to be hunky-dory. If only it were so easy. Unfortunately, back in the real world, the Australian government that gloats about how it "…successfully navigated their country through the biggest economic downturn in 75 years," must face the laws of economic science and no matter how much you say, wish or hope to the contrary, economic reality will eventually bite; and bite hard it will.

I don't frequent Steven Keen's blog very often but I happened to have a look today to see his thoughts on the recent falls in house prices, lending and unemployment only to be immediately reminded as to why I generally keep away. In his post, Bank Profits a sign of economic sickness, not health, Keen states that:

"...banks make money by creating debt, and the amount of debt we've been enticed into taking on is the sign of a sick economy rather than a healthy one."

Fair enough: banks do make money by loaning out funds they have acquired through deposits (and some thanks to our fractional reserve fiat currency system), but to conclude from this that the economy is sick is false. This debt is private and there is nothing wrong with private debt in a healthy economy. It is the same as any trade on a free market, both parties benefit and no one loses (otherwise why would the transaction take place, right?). However, if we take a deeper analysis, to ask "why" private debt is so high - don't get me wrong, the economy is absolutely sick, but this is just another example of Keen drawing the correct conclusion from incorrect reasoning and thus coming up with harmful policy prescriptions - we would see that it is the banks' ability to lend far above the amount of currency it stores in deposits, along with various government schemes (the moral hazard of deposit guarantees; wholesale funding guarantees; or at the worst case a full bailout) that causes private debt to reach levels well above what it would be on a free market. If you were a banker staring at a transaction that has been manipulated by these factors (and there are many more!), factors that have made money 'cheap' AND you are relatively insulated from all possible negative side effects - of course you are going to expand the money supply and provide cheap loans for housing speculation. Who wouldn't?

What I am trying to say is that the only reason private debt was able to get so far out of hand is because of government meddling in the market. Credit that is unbacked by growth in real savings is then issued by the banks which gets funneled into the share market and housing speculation, two things that Keen so despises. It is when this credit expansion is reversed that we see a crisis, not when, as Keen puts it, "...both workers and capitalists suffer as bank income goes through the roof—leading to a Depression."

Rising bank income and falling worker income is merely a symptom not a cause of the crisis.

Keen finishes with:

"This is the real debt story of our economy right now. As the first chart above indicates, private debt is far higher than Government debt, even after the increase last year due to Rudd’s stimulus package. Government debt is currently 5.5% of GDP, whereas private debt—even though it has fallen slightly due to business deleveraging—is over 150% of GDP: 27 times the size of Government debt. The so-called debate that the major parties are having over the size of Government debt is an embarrassment."

This is where Keen's true colours show. By only seeing a symptom - the 'evil' bankers pushing credit - he misses the real culprit, the government who enabled this to happen in the first place and bails out the bankers. Ironically, this is the same entity that he forgives for having debt of their own and no doubt will call upon to fix the 'private debt crisis' through regulation, profit taxes, price controls and so on!

Finally, just because private debt is "27 times the size of government debt," that does not mean people correctly questioning the size of the debt are an "embarrassment." On the contrary, public debt is very different from private debt. Instead of a normal free market transaction between a creditor with a low time preference exchanging money with a high time preference debtor, the government offers to pay back the creditor through the taxpayer via taxes or inflation. Public debt is dangerous no matter how much interest the government is paying on it or how large it is: all government spending diverts resources out of the private sector towards areas determined by bureaucrats. While private debt creates wealth (aside from when the government manipulates the interest rate and other factors and leads them to err, as we see with the housing bubble), public debt merely destroys it (and crowds out the private sector in the process).

It's not the debate on government debt but Keen's dismissal of the government's debt that's the embarrassment.