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We are like tenant farmers chopping down the fence around our house for fuel when we should be using Nature’s inexhaustible sources of energy — sun, wind and tide. … I’d put my money on the sun and solar energy. What a source of power! I hope we don’t have to wait until oil and coal run out before we tackle that.

Thomas Edison, 1931

Natural resources and prosperity can often be a curse. Nor does money buy wisdom or foresight.

Note that Joseph Stiglitz mentions the Resource Curse in the following recorded talk (at 17:20) that having mining resources inhibits growth in a nation:

Joseph Stiglitz: Public talk in Paris on the Global Economy

And, Australia is clearly cursed in this respect, because, just as Stiglitz says, this has caused the Australian dollar to be overvalued, thus inhibiting the growth of manufacturing. Part of what has also been inhibited is the fossil fuel independent energy manufacturing sector. Every effort is made to prevent the growth of competition from sectors that look set to overtake fossil fuel based energy sources.

One of the most interesting insights of late has come from economist Nouriel Roubini, who accurately predicted the US subprime mortgage crisis. He was ridiculed at first for his predictions, but the chilling accuracy of his predictions has earned him the moniker of Dr Doom. Paul Krugman was to write his praises in Time magazine:

Nouriel Roubini was right. At a time when the likes of Alan Greenspan were dismissing concerns about excessive home prices and declaring that banks were stronger than ever, Roubini warned that there was a monstrous bubble in the housing market and that the bursting of that bubble would cause much of the financial system to collapse.

And so it has turned out, with even the most seemingly outlandish of Roubini’s predictions matched or even exceeded by reality.

Roubini now predicts that the profoundly misguided austerity measures imposed by the Australian Liberal government budget perfectly mistimed to exactly when the mining boom wanes, will help to precipitate a crash in the Australian economy. Exactly the same prediction I also made in a previous post about the likely outcome of the effects of the Liberal government’s imposition of austerity measures in the federal budget.

Roubini also predicts a 20% fall in the value of the Australian dollar. In the classic study of boom-bust cycles, Manias, Panics and Crashes—A History of Financial Crises Kindleberger and Aliber tell us that periods of currency overvaluation are often followed by a swing towards undervaluation. Driven by the mining boom, the Australian dollar has gone through a prolonged period of overvaluation. Soon overvaluation risks a counter-reaction in the opposite direction, when the US ends its programme of quantitative easing, and the US dollar once again becomes a more attractive target for investors — all exactly timed to the point that the mining boom wanes. The flow of reinvestment away from the Australian dollar, back in the US dollar will lead to a sharp drop in Australia dollar.

There is a danger that rapid undervaluation of the Australian dollar may precipitate a liquidity crisis amongst Australian banks, especially if it occurs precisely as the mining boom collapses, and the Australian economy falters under as asset bubbles burst.

ManiasPanicsCrashes

It is merely a matter of time before Australia’s 24 year recession free run will come to an end. A whole generation has grown up without knowing what a recession even looks like. The worst case scenario would be a prolonged recession, extending into a depression with dragging stagnant deflation. Then the mining boom would really look like a resource curse.

Of particular concern is the degree to which the Big Four banks have become over leveraged. If you look at the Big Four’s cash asset to debt ratio, it looks rather like Lehman Brothers before the GFC. This table comes from Lindsay David’s book, Australia: Boom to Bust:

DavidLindsay_BanksOverleveraged

Due to the astronomical price of housing, households are frequently burdened with mortgages that are now up to ten times their annual household income: worse than what the US reached before the GFC. The historical house price is more like 5-6 times the annual income, and real estate bubbles usually start to pop when the ratio reaches around 7-8. Even leading economists such as Ross Garnaut now publicly state that there is a housing price bubble. Christopher Joye, a former staunch housing bubble denier, has even made an about turn and is loudly trumpeting the dangers of a US styled housing crisis crashing the economy.

Now, with the Australian dollar and iron ore prices on free fall, accompanied by equal falls in Big Four bank share prices, and an escalating unemployment rate, it seems a crash is beginning to look imminent. Nor will China bail out Australia again as they did after the GFC, since it has grossly overbuilt in the real estate sector, construction in which had up till now driven a seemingly insatiable hunger for Australian iron ore. With eerie ghost cities everywhere, vast urban jungles with nobody in them, China has already announced that it will not invest in another construction stimulus project:

When economists write about this era in retrospect, they may well write that the neoliberal reform era that started in the 1980-90s universally conspired to blow housing bubbles, unsustainable capitalist bubbles engendered by money made from money, in a global scale neoliberal Ponzi scheme sold to the gullible as a source of infinite economic prosperity.

The US and Japan are merely ahead of everyone else in going through the consequences of a real estate boom and bust cycle. Here are the US and Japanese housing bubbles overlayed on top of one another:

JapanVSAmerica_Bubble

In both cases, the bubble reaches a peak before housing prices return to something closer to historical averages. This is how the Australian real estate bubble looks:

realhousepriceindexUSA_AUST

It looks like it is only a matter of time before the Australian curve starts to look like the US and Japanese curves.

At the end of the day, reliance on real estate as a source of income is a dead end that merely returns us back to the feudal era. You end up in a world like Jane Austen’s where the Haves were aristocratic landowners reliant on rent income, and the Have-Nots were renters, namely commoners. Sadly, that also describes the Australia of today and how unaffordable housing prices have become for the average Australian. The only way this situation can change is if there is economic collapse, so that recession runs like a wildfire through property investment portfolios.

The problem for post-mining boom Australia then becomes one where it will soon become painfully apparent how little Australia has invested in planning for a post-mining boom economy. The Liberal government, reduced to a puppet of mining company interests, seems to think that the mining boom will last forever, and that selling carbon emission producing energy sources such as coal will keep Australia the lucky country for all time. It is a delusion stemming direclty from Australia’s resources curse. Sadly, selling and investing in fossil fuels is like investing in dial-up modem technology. Carbon fuels are dinosaur fuels, and in many sectors, the technology that goes with it is gradually turning into a dinosaur technology.

Whoever holds the key to power in the future will be whoever owns the technology patents for new energy technology, and not who holds political hegemony over Middle Eastern oil fields, or who owns Australian coal mines. By failing to collect a tax on carbon to reinvest in new energy technology development, Australia will be left behind in the dark ages peddling a dinosaur product that fewer and fewer buyers will pay profitable amounts of money for.

Soon Australia will be forced to play catch up in a big way. More likely it will by then have found itself to be a nation that has missed the boat, and that it must pay other nations money for use of new energy technology patents. Then, instead of owning the license to print money, it will have to pay others for the privilege.

For in a sense, clean energy technology is a license to print money. It is a license that fools give up because the printing press costs too much money to set up. You can make the equivalent of oil and coal literally out of thin air: wind and sun. You don’t even have to dig it up. Solar energy is also the original form of fusion nuclear energy technology. The sun, after all, is a massive fusion nuclear reactor, 109 times larger than planet earth. Whoever ignores those who have, like the philosopher’s in Plato’s cave, seen the light will be judged by history as being even more dimwitted than the Beverley Hillbillies, who at least were smart enough to recognise the value of what they were sitting on:

Only a fool would fail to invest in harnessing energy that is literally falling on our heads in spades. Yet, sadly, the money made from the resource curse turns thinking people in abject fools.

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