Australia’s “Black Swan Moment”

“The result of Libs talking down Oz Economy.”

By Lindsay David, Australia, author of Print: The Central Bankers Bubble, founder of LF Economics:

Wayne Swan,  Treasurer of Australia from 2007 to 2013, Deputy Prime Minister and the Deputy Leader of the Labor Party from 2010 to 2013, who thought he saved the Australian economy but just delayed the inevitable, is now blaming everyone but himself for the downward spiral:

image source: Twitter

Image source: Twitter

As I argued in my book Australia: Boom to Bust, Australia will eventually see a significant economic recession in the not too distant future. And all the data points are clearly indicating my worst fears on where the Australian economy is headed. But we have to ask who is responsible for this economic downturn, and which policy makers helped line Australia up for the collapse in capital expenditure.

Well, we can all try to blame Joe Hockey, Treasurer in the now defunct Abbott Government from September 2013 until September 2015, even though his approach was most definitely the icing on the cake, but unfortunately he was not Treasurer at the time Australia’s political elite truly made what could be two of the greatest (yet laughable) economic related mistakes in the history of Australian economics. And the blame lies with Wayne Swan, alongside the Reserve Bank of Australia (RBA), Treasury, and Australian Prudential Regulation Authority (APRA).

Mistake 1. Flawed Calculations

Crummy Forecast

As per the chart above from the 2012 ‘Australia in the Asian Century White Paper,’ If there was ever such a stupid miscalculation by Australians, it was the forecast on how much iron ore Australia would need to extract from the ground to export to emerging nations such as China to fulfill their long term consumption requirements.

Essentially when you calculate how much iron ore would have to be used by China to construct residential dwellings for its economy not to falter, Team Swan alongside the RBA forecast that China would construct a residential dwelling for every one of its citizens….and more. In other words, more apartments than people. Not to mention China’s private sector accumulating an extra $52 trillion in debt over the next several years in order to stop its Ponzi economy from hitting a brick wall.

China USA Debt

Yet, Australians and various stakeholders of the Australian economy took Swan’s word and in unity agreed with the then Treasurer that China would indeed consume several billion tonnes more Aussie iron ore than mathematically required over the next decade and a half, thus apparently making a first world country an economic powerhouse by digging for rocks whilst society flipped houses to each other.

Hence there was a rapid expansion in capital expenditure during the period Swan was Treasurer. One that today has come back to haunt Australia. Had Swan and the RBA considered what China would look like if it actually did consume as much iron ore as they suggested, the planet Cybertron from the Transformers movie comes to mind. Hence today we would not be dealing with the same challenges that still lay ahead for the Australian economy as the mining boom goes bust and capital expenditure falls off a cliff.

Mistake 2. Not allowing households to deleverage in 2008/9. 

The other grave mistake that Wayne Swan made was not allowing Australian households to deleverage back in 2008/9. It was the first and last real opportunity for Australian households to have what would have been a difficult yet manageable fall in house prices due to the all but 100% guarantee the mining boom would continue until at least 2012 and flank a depressed housing market as the housing bubble would have burst.

The end result would have been affordable housing and a nation forced to diversify its economy and spend more on building innovative new businesses. But Swan chose to save the housing market so the bubble would simply burst under someone else’s watch. And if I were Scott Morrison (the new Treasurer), I would be clearly reminding people of this.

Wayne Swan thought he saved the day when Aussie households back in September 2008 owed creditors $1.265 trillion. Chump change compared to the $1.9+ trillion households owe creditors today, leaving this nation with an impossible economic mess to deal with as the Australian economy moves further into Wayne Swans’ Black Swan moment.By Lindsay David, founder of LF Economics, author of Australia: Boom to Bust and Print: The Central Bankers Bubble.  

Australia’s housing market is now set for the mother of all corrections. Read… First the Miners, now the Banks, then Property? Going to be a Hard Landing for… Australia

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  20 comments for “Australia’s “Black Swan Moment”

  1. d'Cynic says:

    Australia – Canada of the south.
    Canada – Australia of the north.
    Do you wanna swap places?

    • Nick Kelly says:

      Really no comparison, except from a superficial “commodities’ POV.
      The Canadian economy, as well as being larger, is FAR more diversified. Believe it or not there have been times when car production in Canada exceeded US. Sure they were often from subsidiaries of the Big Three, but the jobs were in Canada.
      Not as good today but no one is predicting the end of production as we now know will happen in Aus as of 2017.
      Canada has a world wide transport co- Bombardier, and a world wide construction outfit SNC Lavalin. The latter has issues true but there is no Aus equivalent with or without issues.
      And Aus, it has to be said, from the viewpoint of the Anglo- sphere, and Europe- you are in the middle of nowhere. To be brutal, (and this is not to Canada’s credit)
      we are next to the world’s largest STABLE market for commodities and Aus isn’t.
      As an Aus supporter, I wish you the best, but unions are for defense not offense.
      The class based ‘Us or them’ unions almost took Britain out of the First World in the 70’s. Only member of the G5 ( now the G8) to EVER have to come running to the IMF for an emergency loan.
      The working man in Germany is doing very well based on a cooperative
      rather than a confrontational model. Do they have strikes? Of course they have strikes but in 1970’s Britain, one large car maker only had two uninterrupted weeks of work.
      Aus is fond of distinguishing itself from Britain, but how much of the ‘us versus them’ is really British?

  2. Vespa P200E says:

    Aussie lib brethren progressive libs in USA are not any better enamored in Keynesian wetdream of QE to infinity other than enriching their handlers in the Wall St and 1%’ers. That said GW got hoodwinked by no ther than ex-Government Sacks Paulsen bailout his pals via TARP and lest we forget AIG.

    So what ammo does old yeller Yellen have up her sleeves compared to 2008 with ZIRP and muted QE impacts even if she unleashed QE4 (mind you after 1.5 yrs of QE3)?

    • d'Cynic says:

      I know you mean it well, but mentioning Keynes with QE is just unfair. If he had a miraculous resurrection, he would be confused with all the new terms he never heard about. Educated man as he was, he would reluctantly reach for the dictionary, confident that he mastered all the relevant terms in the previous 4000 years of human history. But he would discover that he is woefully behind.

      • Winston says:

        Correct. QE, in it’s forms up to now, has just been an asset swap designed to lower interest rates and increase asset prices, and it achieved its goal.

        It is a rebalancing of existing portfolios, but does not add net new dollars to the economy, and so should not be classed as ‘printing money’ (notwithstanding the fact that the swapped assets were not marked to market). It is therefore a tool of monetary policy.

        Keynesian policy, I believe, would involve fiscal policy to add net new dollars to the economy, the idea being to improve the real economy, rather than just bailing out Wall St.

  3. rich black says:

    He nailed it in 1916:

    “Typical of the old capitalism, when free competition held undivided sway, was the export of goods. Typical of the latest stage of capitalism, when monopolies rule, is the export of capital.”

    Vladimir Ilyich Lenin

    • Nick Kelly says:

      Right and capitalism will end up in the ‘dust bin of history’
      But it won’t be first.

  4. michael says:

    Vespa, well said. I dont think any country is going to avoid pain. I also suspect that Yellen’s plan B is not QE but to deflect responsibility to the disfunctional federal government (not that they do not also deserve blame).

  5. Shawn says:

    What is the end game for housing in Australia? How low can you go?

    • hidflect says:

      The average property investor in Oz has 6 properties. So as the bubble bursts, first they go into denial, refusing to sell properties for dollars below their fervent dream price. Then they hive off their worst cr@pshack to keep the others afloat, all the time convincing themselves they’re now in it for the “long term” which in property is about 20 years. Since not so many Ozzies are too highly leveraged, it is possible they can flatten the dip with this approach but the result will be a looong, slooow slide downwards of about 20-35% depending on area. Bad news for punks like me with cash waiting for prices to drop. What I pay in rent about matches the fall.

  6. OutLookingIn says:

    “The Black Swan Moment”.

    Which Swan? There is a complete flock of swans circling overhead. As soon as one lands, the others also come in to land. The coming black swan storm will be one for the record books, to say nothing of the historical accounts.

    The western so-called democracies, are nothing more than oligarchic plutocracies. Wholly owned and run by the multi-national mega-corporations, which in turn are owned by the 0.01% of the worlds population that own the vast majority of the earths wealth. Nothing happens without their say so.

    • Vespa P200E says:

      Call it large flock of black swans continuously raining down their excrements and diving to attack like Alfred Hitchcock movie.

  7. ERG says:

    My $0.02 on what I think Yellen is doing. The talk of raising rates serves two purposes: [1] it lets some air out of the bubbles they’ve blown over the last 7 years, and [2] given the right circumstances, there is always the chance they will actually do it, though not likely any time soon (aint gonna be in 2015).

    The problem with this ‘strategy’ is that instead of a moderate release of pressure, what we may get is a drop off a cliff right into an official recession – as opposed to the ACTUAL recession we’ve been in non-stop since 2008/09. At the same time, the Fed gets caught with nothing left to do but go with NIRP or QE4ever, or some other name that sends us head-first into a currency crisis.

  8. JJ says:

    As an American, living in Australia….here’s my perspective:

    The bad:
    1) this is a lucky country, not an intelligent country….before I did my medical degree, I got an economic degree
    2) the politicians are mostly amateurs
    3) there is a predominant overvalued idea about housing….honestly people are obsessed with their houses….which either brand new or fibreboard are poor quality by American or European standards…single pane Windows?! On a newly built home?
    4) Infrastructure spending is a joke….try driving, taking a train between cities
    5) people are unprepared for a recession mentally , and are debted to their gills.

    Ok the good:
    1) Low government debt (relatively)
    2) ethical government and institutions
    3) fantastic healthcare (I am American doctor…who chooses to live in OZ)
    4) more resources to dig up for generation after generation into the future
    5) some of the nicest people I have ever known

    Black Swan events are what is oblivious in plan sight. I agree that the housing market will fail, partly due to poor governance, and collective greed. And a good old recession are in order. This time is not different.

    • Lee says:

      “4) Infrastructure spending is a joke….try driving, taking a train between cities”

      Where do you live? I’m doing a SWAG and saying Sydney…………..

      Trains a joke? Try the trains in Melbourne – the ones going out to the suburbs.

      How about piss poor pathetic. Yeah, got off work 10 minutes early on Thursday, ran to the train station (Amazing I can still do that!!), and actually managed to get on the ‘early’ train home and what was even more amazing that it departed on time…………….First time that happened last week.

      So much for that.

      It only took 58 minutes to get to my station………25 minutes longer than the scheduled travel time of 33 minutes. Then had to wait in the parking lot to pick up the kid. That train was late too.

      Trains cancelled, departure platforms changed, differing data between arriving/departing trains and the announcement board, wrong datea displayed on the ‘next station’ boards in the trains, no announcements, wrong announcements, and the ‘mind the gap’ crap.

      What is ‘mind the gap’ crap?

      Well guess what? Evidently there are a number of different type train carriages on the system and some of these create a ‘gap’ between the train and the platform which results in people falling and often breaking limbs.

      And then there is the ticketing system: myki. What a joke. One of the state Labor governments spent around A$1.5 billion – yep you read that right – A$1.5 BILLION on it. The next liberal state governemtn spent another couple of hundred million to try and fix it. It still doesn’t work right!

      It doesn’t work well and the ‘best’ part of the system are the ticket inspectors and fines for not having a ‘valid’ ticket.

      To ride the trains/busees you have to fork out to buy a plastic credit card type ticket which believe it or not actually expires in a couple of years. Then you have to buy a new one. (Must have been a labor buddy’s company that got the contract for that!)

      Once purchased you then have to load it with money.

      Oh the fun and games! You need to to do that even if you are are visitor. No card and you ride and get caught you get a fine. How much? On the spot fines, in which you give up your right to appeal, is IIRC A$75; not paid ‘on the spot’ fines are A$225 if you go to court.

      So you tap on when you enter the station and hope that the system works. Tap on and not ‘registered’ and get caught even though it is no fault of your own: fined.

      Load your card with money, get a receipt, tap on and sometimes the transaction fails showing no money on your card……….get inspected and guess what? Yep…………….get fined. You did everything right and the systems fails: it is your fault.

      And lastly how about being ‘on time’? Well herein Oz and in Melbourne being ‘on time’ is different from actual world reality when it comes to the trains.

      The company running the trains gets hit with a penalty if it fails to run the system’on time’.

      So what does ‘on time’ mean? Well, if the trains arrives/departs within (IIRC) 4 minutes and 59 seconds of the scheduled time then it is ‘on time’.

      What a joke.

      • Wolf Richter says:

        This is hilarious! Well, for us reading it, not for you living it. I can feel your pain. Reminds me of our system here in San Francisco.

    • Peter says:

      The problem is the debt created by the private central banks. They create money out of thin air lend it out at compound interest. According to the American constitution the government can create it’s own money interest free. So why not do it and jail the Rothchild’s crooks?

  9. Lee says:

    The property ‘investors’ that are going to running for the exits are those that used DEBT to:

    1. buy into the huge building boom in the various CBD unit/apartment markets.

    2. buy in the various mining boom towns in Queensland and Western Australia.

    Banks here are already putting the brakes on lending in these areas.

    Detached housing in most areas is doing quite well and will continue to do so as long as, and how many times do I have to repeat this, the population of Australia increases.

    These doom and gloomers seem to forget that simple law of supply and demand. Too many units being built in the CBD areas cause the prices to fall. Increasing demand for houses in the Melbourne suburbs causes prices to increase.

    Flow on effects are simple to see as one area increases in price results in other close suburbs also increasing in price.

    In my little corner of the Melbourne suburbs the market is doing just fine. Houses are being listed and selling in a short period of time. I know of only one house in the local area that failed to sell and this is a repeat performance of a few years ago when it also failed to sell. They either want too much or there is something wrong with the house.

    Townhouses around here are selling like hot cakes. Two recent sales down the road were in the A$800,000 area. The price of townhouses is often higher than detached houses showing the demand for these types of properties in the area.

    One street has a had a huge number of houses sold next to each other which will no doubt be knocked down and developed into more townhouses over the next year.

    Unfortunately development like this completely changes the character of the area, increases the population, pollution, and crowding on the roads. I guess it won’t be long before the area is mainly townhouses with a few detached houses thrown in completely reversing the housing mix.

    The roads can not handle the traffic now and it is only going to get worse.

    Luxury is selling as well with one house north of us going for A$1.7 million and another to the east of us for A$2.1 million.

    What little vacant land in the village is also selling. A one acre block went for A$865,000 (can not be sub-divided), and a 565 square metre block for around the A$435,000 price range (not flat). One nice flat block just south of us went for $A670,000 (850 sq metres).

    The only way to increase the amount of ‘land’ is already being undertaken with existing houses being sold, knocked down and subdivided for townhouses.

  10. Julian the Apostate says:

    I hated that Hitchcock movie. Darn fool didn’t finish it and stopped in the middle. Maybe some clever Ag manufacturer can market a Black Swan feeder – could be bigger than Pet Rocks! Then all those green business parks that now have resident geese and ducks could also have Black Swans. How about trendy Black Swan fashion clothes, guaranteed to be made in the best Asian sweatshops? They can ship them out on all that overbuilt container shipping and I will cheerfully haul it to Walmart!

  11. MG says:

    Blaming it all on Swan is a bit rich although I get the hypocrisy. No government in Australia wants to see house prices fall as they will not get re-elected. Yes Swan boosted the first home buyers grant during the GFC but it was the Reserve Bank that dropped interest rates that really gave the housing market the rocket.

    The most important variable for the bubble is interest rates and it wasn’t Swan setting those. Go back to the deregulation of the 80s and 90s to see the real determinants to the debt explosion. If there wasn’t the leveraging there wouldn’t be a need for deleveraging.

    Our politicians of both parties have followed economic advice of the bureaucrats and those bureaucrats have not been saying anything about debt as they don’t think it is a problem.

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