G'day again,
For those of you who missed Wynne Godley's latest; it's compellingly
summarised here. For those of you interested in comparisons between
Australia's 'boom' and America's; here 'tis. For those of you who have a
view about how legal across-the board import duties would be under WTO and
how advisable they'd be as a way to minimise the danger of runaway imports;
here's your chance to educate me on the matter.
Cheers,
Rob.
Why the debt binge must stop
TIM COLEBATCH
*THE (Melbourne) AGE*
Tuesday 5 December 2000
>"Freedom of mind requires not only ... the absence of legal constraints
>but the presence of alternative thoughts. The most successful tyranny is
>not one that uses force to ensure uniformity but the one that removes the
>awareness of other possibilities, that makes it inconceivable that other
>ways are viable."
>
>- Allan Bloom,The Closing of the American MindWHEN historians look back on
>this chapter of Australia's unfolding story, they will wonder why, what
>should have been so obvious at the time, went unnoticed. How did so many
>clever, well-meaning people overlook the fatal flaw in Australia's
>economic performance?
>
>How did they let pressure build up until it could escape only by severely
>deflating the whole economy, causing massive unemployment and business
>collapses? Why did they not see the warning signs earlier, and recast
>policy while there was time?
>
>When Reserve Bank Governor Ian Macfarlane went to Wagga Wagga last Friday
>to deliver his "no worries" spiel to Federal Parliament's economics
>committee, his statement did not mention Australia's spiralling foreign
>liabilities, although they have grown by almost $1billion a week in the
>past year to a record $410billion - 64per cent of GDP. Nor did he mention
>private debt, although bank lending to the private sector has soared by
>$65billion in the past year to $672billion, or more than Australia's
>annual output. Nor did he mention that households increased their net
>borrowing by $41billion, which the banks in turn are borrowing overseas.
>
>There was nothing unusual in that. Political correctness, as practised by
>ministers, economic bureaucrats and commentators, dictates that you don't
>talk about these things unless you have a positive spin to put on them.
>You do not admit that they are a serious flaw in Australia's economic
>performance. You do not admit that this decade of growth has been financed
>by borrowing and selling off assets. And you do not admit that you offer
>no solution other than to let them unravel however they will.
>
>One man who has stared hard into the role of debt in the '90s boom is
>former Cambridge economist Professor Wynne Godley, now at the Jerome Levy
>Economic Institute in the United States. Godley's focus is on the US, but
>his analysis translates directly to the very similar performance of
>Australia's economy.
>
>His latest analysis, "Drowning in debt" (at www.levy.org) makes four key
>points about the US boom:
>
>1. The US expansion in the '90s has been unusually long, but not unusually
>fast: its average growth rate of 3.7per cent is only slightly above the
>post-war average. Similarly, Australia's average growth rate since 1991
>has been 3.9per cent, just below the 50-year average of 4per cent.
>
>2. Private sector spending has grown much faster than GDP (4.6per cent in
>the US, 4.5per cent in Australia). This has been possible only because the
>balance of payments has deteriorated to allow import growth averaging
>10.4per cent a year (8.3per cent in Australia).
>
>3. The private sector has been able to increase spending faster than the
>economy is growing only by taking on debt. By 1999 the net flow of credit
>was augmenting private disposable income by about 15per cent (11per cent
>in Australia).
>
>4. Net private saving has fallen from a historic average of 3per cent of
>disposable income to minus 7per cent by early 2000. (In Australia, the
>parallel fall has been far less dramatic: from 7per cent in 1993-94 to
>3per cent now.)
>
>As in Australia, the orthodoxy has replied by arguing that as asset prices
>rise, the net worth of households has risen relative to disposable income,
>and thus households can afford their increased debt. But Godley points out
>the fallacy of this: asset prices are an unstable base for debtors to rely
>on.
>
>"It is income rather than net worth that is ultimately the criterion of
>creditworthiness, since in a crisis it may be impossible for everyone to
>realise assets simultaneously," he argues. And he might have added a
>second limitation: I can't sell your assets to pay my debt.
>
>The bottom line of his analysis is blunt: the US private sector will not
>keep borrowing at this pace. The debt binge must stop, and when it does,
>the rush for the exits on financial markets could bring the whole economy
>to a stop, plunging the US into a severe recession.
>
>Australia could escape if policy is reoriented to focus on industry
>development, as advocated in a new book, Rekindling the Flame, by the
>Society for Australian Industry and Employment. It advocates an
>across-the-board import duty (legal under world trade rules) to restore
>balance to the balance of payments and to finance an industry policy with
>muscle.
>
>It is the logical, inescapable solution. But the tyranny of orthodox
>thinking means it will be ignored. Our officials would rather see the
>problem build to a crisis than solve it by using tariffs and industry
>policy.
>
>Future historians will wonder how political correctness ever took a nation
>so much in its hold.
>
>Tim Colebatch is economics editor of The Age. E-mail:
>[EMAIL PROTECTED]
