Getting into trouble

OUR monetary system issues money proportional to the amount of new debt created in the private sector via the banks. The assumption is that growth and increases in wealth will follow the creation of debt because new value will be created and the loan repaid.

This worked as long as the debts were able to be repaid – in other words the new money created was backed up by actual repayments.

We’re now in a situation where much of the debt created over the last 10 years or so, cannot be repaid. In other words, the total pool of money issued exceeds what we’re actually worth.

Unless we start loaning money to animals, we’ve reached ‘Peak Debt’.

The case of the UK is illustrative.

Britain has foreign reserves of under $61bn dollars (£43.7bn), less than Malaysia or Thailand. The foreign liabilities of the UK banks are $4.4 trillion – or twice annual GDP – according to the Bank of England. (1)

UK banks are owed $4.4 trillion that is unlikely to be repaid while the UK government, which has ‘guaranteed’ to support the banks, only has $61 bn to back them up!

When you think about it, the proposition that increasing debt is worth real money is deeply flawed. It amounts to saying that the more debt we have, the better off we are!

Those that believe this kind of proposition (like JWH) became excited by the potential – limitless growth fuelled by limitless debt will create limitless wealth. Like a kind of religion.

We’ve also biased our economy into a ‘service’ economy – as opposed to producing real goods and items of value. In fact much of our economy is based on entertainment, sport and administration yet societies can somehow manage to exist without any of these activities.

We operate a system where a gardener who works the soil and produces food for several people gets paid $20,000 to $40,000, while a golfer who wins a tournament gets $1,000,000. We do not account for environmental costs of waste, we subsidise the removal of our remaining forests, we reward entertainers millions and read avidly about their petty personal crises.

We create Wall-e scale waste (2), pay near useless middlemen millions, elevate inept politicians to celebrity status, attack other countries that can survive off near desert conditions, despoil our waters and waterways with pollutants and create a mountain of debt that we cannot repay and bequeath the problem to our children.

We have drifted from having an economy to having a profligacy.

Economy (3)

a. Careful, thrifty management of resources, such as money, materials, or labor: learned to practice economy in making out the household budget.
b. An example or result of such management; a saving.

Profligate (4)

1. Given over to dissipation; dissolute.
2. Recklessly wasteful; wildly extravagant.

Labour is conservative

Federal Labor is talking about ‘tough times’ and offering ‘bail out’ packages to commercial property groups, the car industry and others. Their economic ‘conservatism’ seems to mean that they’ll accept the same Treasury economic models that got us into this mess, indeed they’re the same models that Gunns used in its pulp mill IIS.

If much of the world goes bankrupt, are we really going to still need new shopping centres and high rise buildings? Will we still be driving cars and trucking food all over the country?

If ever there were signals that we needed to change our lifestyles, we’re surely experiencing them now.

Australia has a foreign debt of over $850 billion and every year we purchase $43 billion more from overseas than we sell (current account deficit). This cannot go on, particularly when foreign countries get tired of lending us money.

How are we going to repay these debts if money becomes suspect as a negotiable? Perhaps we’ll entertain Saudi Arabia in exchange for oil. Or perhaps China will provide us with cars, computers and tractors if we beat them at tennis and win athletic competitions. Or perhaps we can offer to do all of their administration for them?

If we cannot repay our debts, then a collapse in the value of our currency is likely, indeed some forecasters have suggested an $A worth US$0.45 this year. Another double hit – as our dollar sinks in value so the amount we owe increases because it is owed to overseas interests.

Remembering the table in the CIA World Fact Book, we find China, Germany, Japan, Saudi Arabia and Russia at the top with current account balances between $97 bn and $368 bn, and the ‘coalition of the willing’ at the very bottom, with negative current accounts between -$43 bn (Aus) and -$568 bn (USA).

The countries at the top of the list gain more than they lose in international trade, those at the bottom lose more than they gain and are sinking into debt.

What will the countries at the top of the list do with all of their money?

They will probably buy up ‘bargain basement’ companies, resources and other valuable items (e.g. water, land) from the ‘broke’ economies. That’s us.

As we ‘sell the farm’, so we will become more dependent on others, less in control of our own affairs.

These are the inevitable effects of ‘globalisation’ when our policies lead to exporting our manufacturing and skilled services industries to other countries, then depending upon those countries for products essential to us.

In this light, the 35 million hectares of tree plantations for carbon sequestration may be a last desperate throw of the dice for Australia to have something to offer the rest of the world.

If foreign investors end up owning our big resource companies, then we probably won’t get paid very much for our coal, gas and minerals.

We need to get a grip and start to create products and services for ourselves. Remove the absurd layers of government regulation that make us uncompetitive and stimulate entrepreneurs to create new companies that can help wean us off imports, or at least start cutting our current account deficit.

The federal government isn’t sending out good signals on this, particularly when they can pay their staff substantial rises from our pockets (6) while exhorting us to manage without an increase.


Watch this space

Mike Bolan
http://www.abetteraustralia.com
Mike is a complex systems consultant, change facilitator and executive/management coach.

1. http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/4299883/UK-cannot-take-Icelands-soft-option.html
2. http://au.youtube.com/watch?v=UblUO0LjPUg
3. http://www.answers.com/main/ntquery?s=economy+definition&gwp=13
4. http://www.answers.com/profligate%20definition?ff=1
5. https://www.cia.gov/library/publications/the-world-factbook/rankorder/2187rank.html
6. http://www.smh.com.au/news/national/appeal-for-wage-restraint-ignored/2009/01/24/1232471656484.html

Note. The author welcomes constructive criticism and new information that adds to our understanding of these matters.

Mike Bolan

If foreign investors end up owning our big resource companies, then we probably won’t get paid very much for our coal, gas and minerals.

We need to get a grip and start to create products and services for ourselves. Remove the absurd layers of government regulation that make us uncompetitive and stimulate entrepreneurs to create new companies that can help wean us off imports, or at least start cutting our current account deficit.