Wednesday, May 20, 2009

Nobody Saw The Financial Crisis Or An Australian Recession Coming?


By Darryl Mason

There seems to be more and more people popping up in the media claiming "nobody saw it coming", the IT being an Australian recession, plunging house prices, a global financial crisis.

But it's not true. You just probably didn't see it coming if you were only reading the business sections of supposedly reputable Australian newspapers, or believing the guff that flowed from so many now discredited financial experts on the evening news, always promising that everything was okay, that stocks were the safest place to park your money, and it still wasn't too late to take out yet another loan on your heavily mortgaged home to buy another $20,000 worth.

If I could see it all coming back in 2006, why didn't the financial experts? That the world was heading for a major, if not unprecedented, financial crisis wasn't exactly a big secret, and you didn't have to search too long or hard to find the stories that told the blindingly obvious truth about what was coming. You just didn't find many of them in the mainstream media, particularly not in that media's business sections.

I published the following story near right on three years ago at the Your New Reality blog :

US Faces "Impending Financial Disaster"

"Tremors Through The Global Financial System"

May 16, 2006

By Darryl Mason

Those kinds of headlines are exactly the words you want to see in a news story about the US Dollar and US stock markets and the growing loss of global market faith in both.

The US, like Australia, has been borrowing more from central bankers than the value of the goods and services it produces.

The US and Australia has been living on vast credit, and now the international lenders look like they're going to start calling in some of the debts, as stock markets in the US and Australia go through an "adjustment", or "downturn".

Is the US on the brink of a recession? Yes. It hasn't tipped over into recession yet, but it's on the brink.

The rush to turn US dollars into gold, and even copper, is the simplest and most obvious sign that the US Dollar is fading rapidly. Gold is regarded as a faithful standard during years of economic turmoil, and some predict it may even reach an incredible $1000 per ounce with the next six to twelve months.

Mind-blowing. A few years back, the first websites I saw that pitched the positives of turning dollars and savings into gold were the alternative news ones.

That was less than two years ago when gold was still at $325 an ounce. Buy gold, buy gold, 'radical' economists chanted, while Bloomberg, Forbes and the Wall Street Journal sniffed at and quickly dismissed the likelihood of gold rising dramatically anytime soon.

So much for the experts.

One of these so-called radical, or alternate, new rhythm economists is Paul Craig Roberts. He's an older, wiser gentlemen of vast experience with the US economy, having served as the Assistant Secretary of the US Treasury during Ronald Reagan's administration.

Here's what he's thinking today :

The US current account deficit as a percent of Gross Domestic Product is unprecedented.

As more jobs and manufacturing are moved offshore, Americans become more dependent on foreign made goods.

This year the deficit could reach $1 trillion.The US pays its current account deficit by giving up ownership of its existing assets or wealth. Foreigners don't simply hold the $800 billion in cash. They use it to acquire US equities, real estate, bonds, and entire companies.American consumers are heavily indebted.

The growth of consumer debt is what has been fueling the this the economic picture of a superpower that can dictate to the world, or is it the picture of a second-rate country dependent on foreigners to finance its consumption and the operation of its government?

You could say virtually the exact same thing about Australia today (not including the word 'superpower').

We, too, depend heavily on foreign lenders to help fuel our recent economic booms. Australians were allowed to borrow vast sums of money to buy houses, cars that depreciated spectacularly and consumer goods that took years longer to pay off than their warranties lasted.

Unlike the US, however, we've had a massive wave of mineral markets boom-time, which sadly is now drawing to a close.

The Howard government collected more than $100 billion in "extra" taxes, over the past four years, on the back of the minerals boom, and blew most of it on the War On Terror, the War On Iraq, meeting superannuation commitments for former politicians and government workers and tax cuts for the richest of all Australians.

The Howard government used virtually none of it for major infrastructure projects or new technical training schemes. The state governments were just as wasteful.

So now we don't have a human stockpile of skilled workers, or the manufacturing facilities for them to work in, we don't yet have a national broadband system (the one alleged to be coming is still years away), and our roads and train lines couldn't cope with all the plugged-in, high-tech workers even if they existed.

What is unique about the Howard government is that they were so brilliantly able to bamboozle the media and the public at large that Australia was one of the leaders of the global economy and, at the same time, convince most Australians (with a spectacular program of propaganda and double-speak) that interest rates were not going to rise.

Of course, Howard actually asked "Who do you trust to keep interest rates low?" But his minions made sure the public understood that to mean "Who do you trust to stop interest rates from rising?"

If you walk out of the casino with $10,000 in cash, but you owe the casino $100,000, you are not a winner, and they will catch up with you. Sooner, rather than later.

For the average credit-card using, mortgage paying, $50,000 per year earning Australian family, the worst is well and truly yet to come.

Hundreds of thousands of Australian families got suckered into the home ownership scam of the past four years, when house prices were over-valued by tens of thousands of dollars, from Brisbane all the way down to Melbourne (with the exception of most rural and country towns).

And, at the same time, they were tossed credit cards to buy white goods to fill those huge homes and to purchase mega-wide screen TVs as fast as China could churn them out.

More than 100 houses a week are now being repossessed by the banks and average credit card debts are spiraling well above $5000. Average household debts, outside of the mortgage, are racketing up to between $10,000 and $15,000.

For a few thousand Australian families, a further half a percent rise in interest rates will mean ruin. For tens of thousands of Australian families, a two or three per cent rise in interest rates will be absolutely devastating. Even if both parents manage to hold onto their jobs. In a recession, their wages will be cut, of course, and with the recent IR reforms there will be little they can do to stop that from happening to them. And if they protest too much about working a 60 hour week, they can now be fired without recourse.

In a recession, you are not rich if you are you paying off a house that has lost 20-30% of its value in the past two years, or if you are struggling to the meet the interest payments alone on credit card debts. And families will be using them, of course, to pay the phone bill and to buy groceries.

And you are certainly not rich, even if it may feel like it, if you own a $10,000 mega-wide screen TV and surround sound system that isn't worth a tenth of that at a hock shop less than year after you purchased it on low interest credit. It might take you five to ten years to pay off that TV, but there will be 3D holographic TV soon enough.

In a recession era economy, you are as good as rich if you are debt-free, regardless of the accumulation of possessions in your rented home.

Debt-free and freedom become virtually one and the same when the economy stumbles and falls and the true value of the dollars you earn drops, as your wages drop and interest rates rise.

Australians are being told that we must "be more competitive" with international rates of pay and productivity levels.

The problem for Australian workers is that the powerhouse of productivity today is China, where 70 and 80 hour work weeks are not unusual and the average hourly rate of pay there is a mere 57 cents.

Actually, forget what I said about the mega-wide screen TVs. For the average Australian worker, with a crippling mortgage to pay off, kids to put through school and a mountain of credit card debt to deal with, a mega-wide screen TV with surround sound might be just the thing to take the edge off after a 14 hour workday.
That is, if you can afford to buy the fuel you need to drive those traffic-clogged roads to work because there are not enough engineers to keep the buses, trains and ferries running on time.

But that's another story altogether.

Brrr. A Cold Wind.