Last night Mark and I sat on our deck chewing the fat for a few hours. As it happens one of the questions raised was which politician in Australia truly had the vision to lead us in these uncertain times?
The name that instantly came to mind was one PJK.
As it happens, Paul Keating was on Lateline last night providing evidence of the truth of this notion in conversation with Tony Jones. Do yourself a favour and go watch, listen or read.
Keating believes that the current situation is a “catastrophe”.
He believes that what the world needs is a completely new political and economic settlement, one that involves the ’surplus’ countries and emerging economic powers such as China, India and Russia as full stakeholders and decision makers. The G7 is made up of debtor countries. The IMF is a an American Treasury run institution with the Americans and Europeans holding sway. We need an organisation that is truly representative of world power. The Americans and the IMF can’t fix the present problem.
Americans see China as a competitor rather that as an essential building block needed in partnership to construct a new international financial structure.
He thinks that the American action of piling on debt in sufficient measure to stimulate the economy back to growth is insufficient, unsustainable and won’t work. A budget deficit of 15% of GDP for 2-3 years is simply is simply too large. There is the real prospect of an American default.
Keating thinks that it will take at least 6-7 years to sort things out.
Turning to the Australian situation, Keating carefully avoided criticising the Rudd Government. He thinks the question of an Australian budget deficit is a sideshow.
On the funding to prop up the property market, he said that none of us have the wisdom to say which sector should be supported. The biggest problem at present is the unavailability of credit to fund infrastructure. What we need is not talk of ideologies but fiscal pragmatism. Fortunately we are blessed with now having a flexible economy and BTW four of the top 15 banks in the world, courtesy of policies introduced by a former Labor government.
The US economy won’t go into default because of the status of the $US as a reserve currency and the extent of holdings of US Treasury bonds by other sovereign governments (e.g. China, Saudi Arabia). Its one thing to be Iceland and spend beyond your means, but another thing to be the US and do so.
On the other hand, states within the US could be in serious trouble. California is absolutely the one to be watched here, as the state government may be insolvent by end-Feb. Given that California is among the world’s ten largest economies, the ramifications of this remain to be seen.
aint democracy a bitch?
Nothing wrong with the US that a good dose of hyper-inflation won’t fix. And with what they’ve done to the money supply lately, that’s exactly what they’re going to get.
Anyone got a bit of bullion they’d like to sell me?
Brian,
There is no prospect of a US default for a very, very, simple reason. All of their debt is USD denominated, so all they have to do to repay it is to print more money. The inflatioary result would be pretty dire so I would expect them to do all they could to avoid it but if it came down to a decision on whether to default or to suffer some inflation then I do not think the decision would be a difficult one.
Keatings machpolitik would see the world dominated by red-fascist China and Islamofascist oil-states. Corrupt crony capitalism would become an even bigger problem when allied with censorious police states. Bugger that for a joke.
I think Au has to play the India card hard, the Cairns group card, the old commonwealth card, the Apec card all at once and try and rustle up a coalition of all the willing democracies in order to ease out all the fascist hegemonists at once.
All hands on deck
Andrew, I have no opinion on these matters, as is appropriate given my own knowledge (or otherwise). But what do you think of the other questions Keating raised?
Can the US resolve the situation without a restructure of international financial architecture that includes the emerging economic powers as major stakeholders?
Who will buy the US bonds?
Ah, well, it wouldn’t be the first time. They were in deep trouble during and after the American Revolution.
On PJK. Well, yes and no. Part of him was a true Labor man (patronage of the arts, the redforn speech, Aboriginal land rights/native title etc., etc, and that part of him I loved.
But, and its a very big but, he and Hawkie laid the groundwork for all, repeat, all of Howard’s nastiness – detention centres, massive deregulation, fees at universities, persecution by welfare, industrial relations, and those are just the ones I can think of off the top of my head. Without Hawke and Keating, we could never have had the Howard Years. And that’s something I’ll never forgive them for.
Andrew,
Coming at this from total ignorance in matters financial, I don’t believe that is any longer the case. Quite a few countries and industries shifted their dealings over to the Euro, which is what Saddam was going to do and one reason given for the invasion.
I can’t remember the source but a percentage of the money the US owes is in Euros, and that is growing. On that portion of the debt it is not a one for one payback but a considerable percentage increase.
Come back PJK – all is forgiven and god knows we could do with some straight talking right now
Yer right, “this was the depression we were meant to have”.
Paul Burns:
“But, and its a very big but, he and Hawkie laid the groundwork for all, repeat, all of Howard’s nastiness – detention centres, massive deregulation, fees at universities, persecution by welfare, industrial relations, and those are just the ones I can think of off the top of my head. Without Hawke and Keating, we could never have had the Howard Years. And that’s something I’ll never forgive them for.”
Add to those things the sale of the People’s Bank.
When does a 6-7 year recession become a depression?
“When does a 6-7 year recession become a depression?”
I imagine it depend whether you are in Govt or Opposition…
E tu Brian, I found Keating very compelling, particularly on the China/India/Middle East future reticence to be bound by the US dollar. As PJK colourfully expressed it: Obama’s Treasury secretary browbeating the PRC premier at Davos to continue to bankroll the huge US deficit and pay allegiance to the IMF. If there is another Bretton Woods type get-together to change the world’s financial landscape then I think Rudd should include the old headkicker as the negotiating ‘bad cop’.
Rudd’s been losing me but today’s press conference was a big turn around. And 1 to 2% of GDP spending is way below spending worldwide but well targeted and reasonable all round. Go Kevvie!
One reason for a better take on Kev is that I felt that he addressed his audiences previously without regard to the fact that his audience is supposed to be ordinary Australia. Today I think they may have heard him. The link to PJK reminded me of how speaking to ordinary people can be made a word picture that isn’t turned off ’til the end.
Adrian,
If they have a proportion of debt in EUR it will not be a large amount.
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Brian,
It is difficult to outline a new world financial system in a blog comment – but I would tend to agree that the hang-over institutions from the original Bretton-Woods agreements are not really much use at the moment and are counter-productive. I am not convinced, though, that replacing them with something that gives one of the most oppressive governments in the world a large say in the economies of others is a good idea. India in the past has also not exactly been a paragon of economic good sense. Like many other governments, I would see them as using their increased say on these bodies to help friendly governments rather than to pursue altruistic goals designed to help global stability.
China’s record in this regard is hardly any good – assisting Iran and Sudan is not the greatest of track records.
I would prefer to see the World Bank and IMF wound up and not replaced. I think PJK just tends to see a government solution to any problem. Pity he seems to have regressed since 1983.
This is true but like the Get out of Gaol Free card in Monopoly it can be used once only. If the US were to crank up the printing presses, the US would forfeit, probably forever, their status as de facto controller of world finance.
Interestingly, the rise in value of the US dollar against most other currencies during the course of this crisis indicates that the weight of money rejects the possibility that the US will take the inflationary road to solving its massive foreign debts. But then again, the weight of money has backed the wrong horse more than once in recent months.
I guess if all governments inflated their currencies at more or less the same rate, then currency relativities could be maintained but old debts could more easily be paid with new, debased coin. The big losers would be creditors but imbalances would be restored.
Could it also be that the rush of investment to the US dollar, and treasury bonds in particular, is because the chance of default is low. ie. Too big to fail?
I think Keating put his finger on it. What meeds to come out of the current crisis is a re-structuring of the world’s basic economic and financial order. And I believe this will be the result, simply because it represents the only way out.
The US and Europe cannot simply borrow their way out, as some have suggested, because no-one will lend them the dosh. Why would they?
One commenter above refers to the US borrowing more and simply printing more money to avoid defaulting on its debts. Great move, that. As Keating pointed-out who’d invest in US Treasury Bonds when the real value of your investment is going to be sunk by an inflated dollar? Sure, they can print more money, but every extra dollar printed reduces the value of the currency. And the Chinese are too canny to agree to be paid-back in Bongo Bucks.
Nope, the days of the US and Europe setting the rules are over. And they’d better get used to it, if they ever want to come out of the current recession. The IMF, the G5, they’re all in for an overhaul
I reckon we’re in for a total re-alignment.
The US looks to me to be in pretty-much the same position as Britain was just after WW1. It’s hit it’s economic zenith and is on the way down. That truth just hasn’t sunk in yet, but it will. Just as soon as they try to borrow from China again to fund their deficit.
Ooh yes please!
Katz,
You are right, it is a one use only card – but it has been used before in international finance (by the UK). As a default would probably have a worse impact I would see that printing money would be more likely than a default, though.
OTOH if they did it over a long period (say 10 to 20 years) the impact could be contained. I am not saying this is a good option, but if default were the other one then this one is (IMHO) a preferable one. If nothing else, it solves the “Who is going to buy the bonds” question at a single stroke.
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As for China taking over, I would be skeptical on this point as China is, I feel, likely to undergo a revolution within a generation. If it is a (largely) bloodless handover of power (or, less likely, a gradual one) then this may only be a temporary problem, but if it is a full scale civil war the outcome is unpredictable.
Once there is a democratic government in place it is unlikely to continue with a situation where the people are systematically deprived of goods and services so that the government can build up a pile of foreign assets.
A few points:
I’d be wary of paying too much attention to PJK’s forecasting. I loved the man when he was Treasurer, but he is also the person that referred to the national accounts in March 1990 showing that the Australian economy had contracted as a “beautiful set of numbers”. He had no idea that we were heading into an extraordinarily deep recession.
I presume the 6-7 years he is referring to is the period that he thinks the negative output gap will persist for? Or did he directly say 6-7 years of negative growth? I’d be surprised if the latter occurred, and if it did, it would of course be a depression.
There is little prospect of an American default on government debt. Not only do they borrow in their own currency, but public debt as a share of GDP is way under a half of what it is in many European countries and Japan – the latter has a public debt to GDP ratio of over 100% and hasn’t defaulted!! At current long-term bond rates (which have actually fallen during the GFG because of the flight to “quality”) and current debt levels, debt servicing costs are just over 1% of GDP – pretty small stuff…Sure debt is increasing and will do so for some time, but there is little evidence that it cannot be financed. After WW2 the UK had a public debt ratio of around 150% of GDP and managed not to default. As for who will buy the bonds – basically anyone that wants to invest in an asset that is safer than most – it doesn’t have to be only foreigners either – the Japanese public debt is mainly held by the Japanese private sector – so if the US household sector increased its saving rate significantly, much of that savings could be used to purchase government bonds. Investors may well demand a higher premium than before, but again, that wouldn’t risk default unless bond yields trebled from their current levels.
None of that is to say that there aren’t significant imbalances in the global economy, and a global financial architecture that isn’t suited to managing or resolving them, but we shouldn’t get too carried away.
Also, lets not forget that China has a number of major imbalances of its own, not to mention significant internal political problems. Its domestic saving rate is too high, the government over-invested in US dollar denominated assets, it is highly dependent on other countries for importing raw inputs into production, its export led growth strategy makes it highly sensitive to the global business cycle, it had its own share price and property bubble, and its banking sector is rotten to its core. If they attempted to dump US dollar denominated assets, it would hurt them more than it would help them.
Paul B – Without Hawke and Keating, we could never have had the Howard Years. And that’s something I’ll never forgive them for.
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Some of the things you list were gratuitous and, in my mind hard to justify, but if we’d remained the little post-colonial bastion of protectionism we probably would’ve started going down the spout smartly in the 80s. Maybe not. But thus far my reading says that that is so. Hard fact.
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Also Howard’s success was partially due to the backlash against Keating’s ‘luvvie’ agenda. Blaming Howard for the Great Reaction doesn’t really cut it. He was an avatar of the Oz hoi poloi.
Also, lets not forget that Australia has a number of major imbalances of its own. Its domestic saving rate is too low, the government over-invested in middle-class welfare, it is highly dependent on other countries for exporting raw inputs into production, its commodities led growth strategy makes it highly sensitive to the global business cycle, it had its own share price and property bubble, and it has a chronic current account deficit despite the best terms of trade in a generation.
Correct, LO. China is still substantially weaker than the US and it will take a long time to address that. Its internal weaknesses are partially hidden by the use of heavy repression.
Carbon – I’ve responded to those points before. It is Australia’s household saving rate that has been low, not Australia’s national saving rate. The high CAD was largely the result of a surge in investment – it is precisely what one would expect in a terms of trade boom – Treasury wrote a paper about it some years back – you should read it. You think there is a property bubble – not everyone would agree with you. Australia has been less sensitive to the global business cycle than most other countries for nearly two decades now – the Australian recession, if it occurs, is expected to be far less deep than the US, Japan and Europe – all of which will contract by 3% or more in 2009.
But lets not get into all of that again – we will have our answer to your speculations in the next 12 months.
Anyway, my point was not about Australia, it was merely to point out that this idea that imbalances only exist in the west is not supported by the evidence.
Andrew Reynolds – There is no prospect of a US default for a very, very, simple reason. All of their debt is USD denominated, so all they have to do to repay it is to print more money.
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Well there a people that say differently. America has a lot of creditors and if the US started printing money it would devalue those holding US currency. How would they react?
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I would prefer to see the World Bank and IMF wound up and not replaced.
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Well I’d rather not level accusations of libertarian denialism at you but the vogue for liberalization is over. From an interview with Chinese banker Gao Xiqing:
http://www.theatlantic.com/doc/200812/fallows-chinese-banker
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Thing is of course that the World Bank and the IMF are props for American hegemony. Gao’s little kumbayah might really be a declaration that China is willing to use its position to convert the BWIs into truly global organizations undermining the apparatus of American hegemony.
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And there’d be a lot of states around the world who wouldn’t exactly shed tears of blood at the prospect. Altho’ I’d wager they’ll feel positively nostlagic for US hegemony when faced with Chinese or Russian overlords.
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Whatever. I’m not sure that printing more money is an option. And not just because of inflation. The US reserves held by others will necessitate a reaction. A demand of repayment in Euros? The US has been living in debt and the bill’s in.
And also: Why doesn’t Paul Keating just dry up and take up fishing. For fuck’s sake Keating.
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IT’S OVER!!!!
Adrien, why on earth would you want to be repaid in Euros when many European countries are at greater risk of default than the US? Have you seen what has happened to spreads on long-term government bonds in countries like Ireland, Spain, Portugal, Italy and Greece lately? The ratio of public debt to GDP is higher in Europe than it is in the US, and the euro area is likely to grow even more slowly than the US over the next two years.
LO – Yes so I’ve been told. But if the situation was to be exacerbated by the increased printing of US dollars that would lead to a devaluation of the dollar (yes?) then the Euro might start to look good. Kinda. It’s a precarious situation. But there are economists who predicted this mess in detail. They were called nuts. One of them, I forget who, predicted a run on the US dollar this month.
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So I guess we’ll see.
Right now, deflation is a more realistic possibility than excessive inflation. Moreover, like the Fed, the Eurosystem has also increased its balance sheet significantly over the past 6 months. You should also note that to date, the expansion in the Fed’s balance sheet has been largely through so called qualitative easing policies that seek to free up the availability of credit in markets where it currently hard to attain it rather than printing money. That is not to say that the end-game of such non-traditional measures might not be rapid inflation, but it is a distant prospect at the moment and somewhat unlikely to cause a run on the dollar in the short-term.
Adrien,
I think I dealt with that at #22.
There was an interesting column in the Fin Review yesterday by Geoffrey Barker indicating that China and Russia are playing a geopolitical game on this one. He begins:
He says that there were no senior Obama officials in Davos.
He also points out some of the hypocrisies in Putin’s speech and warns that it is important to resist the siren calls of authoritarian regimes claiming special insights.
Importantly, he reckons that the Russian and Chinese have different geopolitical agendas wrt to the US. That is, they are not in cahoots.
And neither has the capacity to replace the wounded hegemon.
But it does seem that they are both gaming the situation to their advantage. So the question of who will buy the bonds might become a chip in the game.
One of the interesting bits of information mentioned by Keating was that the top 200 financial institutions in the world had suffered a decline in value of 74%. His concern was how to rebuild necessary confidence in the system to allow the expansion of credit.
I’ve just been looking at the All Ords chart here. The market closed at 3449 today. That’s about 50% down from the 6850 it was on 1 November 2007. As late as 19 May last year it was at 6035.
Now it seems to be trying to form a base at the level where it peaked in 2002. Let’s hope it does because the next line of support seems to be 2670 which it first reached in 1997 and bounced off in March 2003.
If you were smart and got out of the market (I didn’t) no-one can tell you right now whether it’s time to get back in, but the evidence seems to be that people are tipping their toes into the water.
“But it does seem that they are both gaming the situation to their advantage.”
Seem!!!?? Who isn’t trying to game the current situation? It’s a chaotic time ahead. Or as Sean O’Casey memorably phrased it “a state of chassis”.
In the coming confusion, Australia has two cards to play. A transparent and trustworthy business and IP law system and too much food to consume locally.
Of course water may be tricky. On the other hand we’re a lot close to the South Pole’s iceypole wonderland than most other countries. I can see it now “Australian Idol Live” from an iceberg being chivvied up the Derwent.
Anyway, as I’ve mentioned before, keep an eye on Antarctica. It’s the global resources geo-political canary. The moment tentacles of nation-states or economic blocs start taking potshots at eachother across the icefields there, it’s time to swallow your gold coins and head for the FNQ hinterlands with a crate of Aeroguard and a well stocked Kindle with a solar panel.
And then go all Randall Flagg.
Good top see the risk of deflation being accepted at last.
If there is to be a default it will be as a consequence of something very dramatic – like a run on the dollar or a sovereign default in Europe aa a catalyst to general pandemonium.
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As others have commented elsewhere the likelihood of China or Russia leading the rest of the world’s economies anywhere is remote – they don’t have even a fig leaf of coverage for respect for the rule of law.That totally disengages them from any active role other than as creditors .
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And if you ask why will they keep buying US bonds , as LO mentioned what else would these countries buy of comparable safety ?
They are still purchasing US Govt 30 year bonds which are currently paying 3.15 % or so. Over 30 years that has be worse than inflation and reflects the fact they are powerless in international credit markets to do otherwise.
Murph, I’ve listened to the interview maybe half a dozen times. Keating was factoring in the notion that the Americans would have to cop a fair dose of inflation and was concerned about these ’safe’ bonds halving their value over say 4 or 5 years.
But certainly the Chinese in particular have a stake in keeping the American consumer economy afloat so they can sell their stuff.
But the risk of sovereign default in Europe was something Tony Jones mentioned as being spoken about in Europe. The Japanese, as I understand it, in the 1990s kept throwing money at the problem to find that it didn’t work. Apart from them being in deep sh*t again now, it seems that the Brits are not well-placed.
Behemoth, there are some dreadful but realistic scenarios from about 2030 over contestation over water and failing food production capacity, for example in the arc from Pakistan to northern China and the grain belts in North America, which I’m almost bound to post about this year sometime. My ambition is to live until 2030, when I’ll be 90 to see how things are shaping up. There’s a fair chance that I’ll be happy to move on then.
Damn these short life spans that condemn our species to repeated stupidity huh B!!
PJK is incapable of being boring. It doesn’t mean he’s right, of course. In particular, his urge to defend his record leads him to some very selective views of events. Creating a banking oligopoly aint something to be proud of, even if it is proving fortuitously handy just at the moment.
It’s true that while the US is the world’s reserve currency they can make others pay for their consumption – what de Gaulle called the “extraordinary privilege” of paying their debts in their own currency (of which, of course, they can print as much as they like). The trouble is that this approach – debauching your currency to make your past IOUs to foreigners worthless – is as good as a default in its effects. Done just once, it would very rapidly lead to the greenback losing its reserve status.
So either way, PJK is right on this – it looks like the end of the US’ ability to shape the structure of world finance to its own advantage.
Time is a funny thing, cowgirl. I recall vividly heading off to UQ and seeing the inscription on the main building “Truth is great and mighty above all things”. I thought, yep, I’ve come to the right place.
That was about 50 years ago, but seems like the blink of an eye. OTOH the way Brisbane and our ‘lifeworld’ was way back then seems like about 200 years ago.
I think things are going to be quite a bit different by 2030, and probably in ways that will challenge any lingering ideas of automatic ‘progress’.
Brian: we’ll see. I remain an optimist, and still do so despite the events of the past year.
dd, I think PJK’s words were, the US can’t any longer reflate the world economy on its own. Obama is spruiking American ‘leadership’. This is from Wallerstein’s latest commentary:
Brian,
No US President could get away with telling the US people that he wants to follow. The US people expect to lead and it would take much, much more than some economic problems (shared by many in the world) to convince them otherwise.
Andrew – I think I dealt with that at #22.
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As in China will undergo a revolution?
I was kinda thinking myself that Obama’s speech could have been for the masses, whereas we will have to judge him by his deeds. Yet there is a position between leading and following. Obama gets high marks for inclusiveness and a collaborative approach. This is what Wallerstein has been recommending for the US for years now as reflecting the realities of power as well as being pragmatically sensible. I guess we’ll see how Hillary handles things.
I notice that Satyajit Das on LNL said that the Americans would be going to the market for $1.8 trillion, about four times previous loan raisings. He said that there was no automatic reason why the Japanese and Chinese would show up with their cheque books.
According to Planet Wall Street, the Obama administration has already decided to inflate the US dollar to pay the nation’s debts with devalued dollars.
Further, according to the same source, the Chinese are keen to spend their soon-to-be devalued mountain of dollars on hard assets, such as iron ore mines, etc.
If this is true then we are in a whole new ball game.