Change is the essence of capitalism
Back in 1942, Joseph Schumpeter popularised the idea that creative destruction of economies, and/or sectors of economies, was critical to prosperity and growth. He posited that progress in a capitalist system relied on the destruction of an existing economic order to make room for the next. Capitalism was, essentially, an evolutionary process of continuous innovation.
Agents of this creative destruction range from the opening up of new markets to revolutionary technologies like steam engines, electricity, the combustion engine, and the internet.
Right now, creative destruction is very evident in retail as more and more shopping moves online. Businesses with old fashioned bricks and mortar models, like the book seller Borders or clothing retailer Fletcher Jones, are history, while mainstays like David Jones and Myer are playing catch up in a game with all-new rules.
But these guys are not alone. The rise of online shopping has caught many other major retailers by surprise. It was only six years ago that one such retailer, let’s call him Norman Harvey, assured investors that the internet would never significantly impact his business. After issuing those words of wisdom, he persevered with selling flat screen TVs, mobile phones and appliances over the counter. The rest is history.
With capital now moving into the next wave, and away from these “old models”, we have a classic example of creative destruction. Old, inefficient businesses are being outsmarted by new, better, more innovative business models, unshackled by bricks, mortar and leases.
Added to this structural change in how we shop is a growing frugality amongst consumers who are putting more of their disposable income into debt reduction and less into keeping up with the Jones’s (see Is savings the new black?). Recent RBA figures show that over the past year the average credit card limit only grew by 0.7%—the lowest figure in 20 years.
If you’re reading this and you’re in retail, I feel your pain. The only consolation I can offer is that if you can survive, you’ll be one of only a handful left standing.
A mining boom has three stages
Each with different economic benefits and payoffs.
- Design stage This kicks it all off after miners first detect a surge in demand and scramble to plan new project. It continues until they decide exactly what to build and where. It’s usually accompanied by rising commodity prices and rising terms of trade. Importantly it doesn’t bring much to the economy aside from a few jobs in engineering and geology. Australia entered this stage around 2005 after it become clear Asian demand for Aussie dirt was soaring.2.
- Development stage This stage covers our investment boom that’s just ending. Miners taking advantage of rising prices and demand set about to build and expand mines and related infrastructure ie rail, airports, ports etc. Foreign investment flows in and armies of construction and engineering types fly in fly out of regional towns near mine sites. It also generates what economists call ‘backwards multipliers’ which in plain English refers to the multiplier effect also known as carry-through effects of miners buying huge amounts of engineering and mining equipment from local suppliers. We entered this stage in 2007 and of all the stages this one brings the most direct benefit to the economy. But this stage also played havoc sending the dollar through the roof, decimating export exposed industries and leaving us with a patch work economy.
- Operational stage We’re transitioning into this stage now. Mining companies that have spent billions building mines are seeking a ROI as they transition from being mine builders to mine operators and begin producing dirt for export. During this stage announcements of new capital expenditure by mining companies taper off , heaps of high paying mining jobs disappear, and once thriving regional communities start returning to quieter times pre 2005. The rest of us meanwhile start enjoying higher share dividends, and the benifits ofthe governments get a surge in company taxes to build (hopefully) roads, airports, train lines and so on. Interestingly both Rio and BHP have just announced record iron ore production rates signalling the emergence of this final stage.
Well that’s all folks and while I am at it, let’s not forget the world is also a stage.
House hold savings….and the new normal
From the 1960s to the late ’80s Aussie families saved around 15% of what they earned. It seems the proverbial
‘rainy day’ had a little more brevity then. But with the sharp rise in house prices, as well as available credit and relaxed lending standards, household debt began to grow. From the early-to-mid-1990s, as people began to consume with unparalleled vigour, household saving rates (the difference between a household’s income and what it spends) declined sharply.
It seemed, at that point, that credit was no biggie, something to worry about another day – after all, house prices are going to rise forever, there’s heaps of jobs, loads of new opportunities, and pigs are actually flying north for the winter! In the period leading up to the GFC, household savings got so low that Aussie households actually spent nearly .05% more than they earned, all of which pretty much went on the old credit card, until …
Enter the GFC dragon
With the great recession ‘we had to have’ the spend-trend reversed, and household saving rates increased sharply. Today, Oz households save about 10% of their income: a figure that is, apparently, the new norm. RBA information shows that home-owners put up to 90% of the windfall from the past two years of interest-rate cuts towards paying off mortgage debt ahead of schedule. Instead of embarking on another designer-label shopping spree, Australians are building ’mortgage buffers’ and a little more respect for that rainy day.
All this goes some way to explaining why, despite rates hovering at 60-year lows, retail spending remains softer than a wheel of Camembert in Cairns.
Inflation basics: What, why, where, how, etc.
Inflation is the increase in the general price of goods and services. As it rises, every dollar in your wallet/purse/man bag/imagination buys you less. For example, if the annual rate of inflation is 2%, then in a year’s time a $1 widget will cost $1.02, on average. Australia’s inflation is measured by the quarterly Consumer Price Index, often just referred to as the CPI. To get this data, the Australian Bureau of Statistics measures price rises in a ‘basket’ of typical goods and services, stuff like milk, butter, clothes, education and beer/dusty WA red.
The Reserve Bank tries to keep inflation at 2% to 3% and, although to less effect more recently, achieves this using interest rates. This is called monetary policy and works thusly: higher interest rates means people have less discretionary income to spend on stuff because so many of us have a mortgage. Higher rates also crimp business borrowing and therefore business investment. This all combines to slow economic activity, which slows inflation.
There are two types of inflation …
Cost-push inflation: When taxes, wages and import prices go up so does the cost of making things. To maintain their profits, companies pass on these costs in the form of prices rises.
Demand-pull inflation: If the demand for typical goods and services is growing faster than the supply of those goods and services, prices increase as per the timeless laws of supply and demand. This often occurs in developing economies that have an emerging aspirational class without the resources and industries to supply that class with goods and services.
Other things to know …
Deflation: This is the opposite of inflation, i.e., prices are falling and inflation is below 1%.
Disinflation: People often confuse disinflation with deflation because they think disinflation sounds like the opposite of inflation. BUT IT’S NOT! Disinflation is just the slowing down of inflation, i.e., prices aren’t rising as fast as they were.
Stagflation: This is a particularly nasty phenomenon where you have rising unemployment and rising inflation. In other words, prices are going up but the economy is going down. It’s a bugger to fight because the normal method of raising interest rates doesn’t help (you just further slow an already tanking economy). The term was coined during the inflationary period of the 1970s, when recessed growth combined with the oil shock. It was a global problem back then, and some reckon it sealed the fate of the Whitlam government.
Could Europe’s history of bloody conflict be what saves it?
Violence in the streets, hostility in parliaments, grim demands of austerity. Hmm … another day, another euro.
But hold the baguette! I reckon the union and the euro will survive this annus horribilis. We’ll probably see a few defaults as sovereign debt – what each country owes its creditors – is written down or off. (My money’s on Greece, Portugal and Spain, in that order. If Italy goes, all bets are off.)
While battered to within an inch of its life, the euro and the European Union (EU) will surprise us all and live on to smoke those super strong cigarettes and neck double espressos for breakfast.
The reason? The EU stands to lose much more from a break-up than it would gain. Originally a French/German idea, the EU was seen as a way to bind the region following the collapse of the USSR. 20th century Europe had torn itself to shreds twice and a union presented a historical opportunity to create a metaphorical scabbard for those sabres, while also opening up new markets for everyone.
A chaotic European collapse might generate waves of resentment and recrimination that could end in feuding economic blocs or, even worse, bloody conflict. And while they may complain the loudest, the BSD’s – Germany, France and the Netherlands – have done pretty well so far in terms of trade volumes. They know what side their croissant is buttered on.
Fate may be on the EU’s side. Data out of the U.S. is starting to paint a pretty picture of recovery. Sure it’s all finger-painted stick figures at this stage but employment is rising, inflation is stabilising, housing is bottoming and, thanks to the declining dollar, exports are up. Meanwhile, the latest NAB report on the Chinese economy points to a soft landing.
And although the year will be a shocker for Europe no matter what, we may not have to worry. If the Mayans are right, we’ll all be gone by December 21.
Further to my recent blog Cyber-structural unemployment, an artificial intelligence researcher in Singapore has developed a robot with a virtual mouth. The “Kissinger” is the size and shape of a cricket ball with touch-sensitive lips that can detect and copy how your partner kisses. An extra touch of intimacy to a long-distance relationship or or just plain weird?
The Austerity question
To spend or not to spend?
British Conservative leader and now Prime Minister, David Cameron, proclaimed the “Age of Austerity” in 2009. Miriam-Webster dubbed it the word of the year in 2010. Europe grappled mightily with austerity through 2011. And by 2013, our Labor Government, in a tip of the hat to austerity, has promised to balance the budget.
But now, in little ‘ole 2012, we are starting to see some of the results of all this austerity. And those results are not great.
First, let’s back up and take a stab at a definition. Austerity, as an economic policy, aims to cut government deficits by reducing spending, services and benefits.
With our economy doing pretty well, government cuts have been relatively painless. But in countries like Greece and Spain and Italy and Ireland … well, we’re talking strikes, mass protest, civil disobedience and disaffection.
The belief in Europe is that if governments slash spending and balance their budgets they can bolster private-sector confidence and hence confidence in a European government’s ability to pay its debts.
Counter to this thinking is the traditional economic wisdom that during a recession governments should stimulate the economy with extra spending, even if they must borrow to do so. Think GFC stimuli by Obama, Rudd and Chinese Politburo.
Sure, the thinking goes, balanced budgets in the long term will reduce interest rates (encouraging growth) and lead to smaller debt repayments allowing tax cuts, which also increase growth. But austerity in the short term lowers income and raises unemployment because all that stimulating government spending is removed from the economy.
The thinking continues that a weaker economy generates less tax revenue, which offsets the initial savings benefit from the austerity. Therefore, austerity in times of recession can actually make it harder to balance the budget, not easier.
But the austerity crowd, including much of Europe’s policy elite and many in the U.S., is unbowed. It insists that “expansionary austerity” is the key because confidence is the key. Some have even urged Obama to “do a Cameron”, meaning implement strict, British-style austerity.
So, how’s austerity going? To borrow a phrase from Nobel Prize winning economist Paul Krugman, has the “confidence fairy” materialized?
Not so, according to British think tank, the National Institute of Economic and Social Research. These pointy heads took changes in real GDP since this recession began, and compared it to past recessions. The results were alarming.
It seems Britain grew faster during the Great Depression than it is now. Four years into the Depression, Britain had recovered to its previous GDP peak. Four years into this recession, Britain isn’t even close to recovering its lost ground.
Meanwhile, recent employment figures in the U.S. have been surprisingly good. So perhaps it’s lucky for Obama he didn’t “do a Cameron”?
China Economic Update
Things are slowing slowly and that’s a good thing.
With the trouble in Europe and the sluggish U.S. economy, an orderly Chinese slowdown is preferable to a crash.
The data from the latest NAB report on the Chinese economy shows that tighter monetary policy over the past year has achieved its goal of a soft landing. Domestic activity eased and GDP growth dipped slightly to end the December quarter at 8.9%, the slowest rate in more than two years. (GDP in 2010 was about 10%.)
Inflation ended 2011 at 4.4%, a little higher than the central bank’s target of 4% (our target is 2% to 3%). Inflation is important because too much of it reduces the central bank’s ability to use interest rates to stimulate demand.
On the subject of inflation, the pointy heads at NAB have two main concerns for 2012. First, a lot of money has been injected into the economy over recent years and this may become a problem. Second, rising incomes may push up prices. An interesting side bar is ongoing power shortages, caused by adverse weather conditions and low prices conspiring to ramp up consumption. The fix is in; the government put up electricity prices in 2011, but this is putting further pressure on inflation.
Europe accounts for more than a fifth of China’s exports, so it’s not surprising that those exports declined steadily over 2011. But imports also softened, leaving the trade surplus a little higher at US$16.5 billion. Surprisingly, retail sales in the December quarter were up nearly 18.1% on a year ago, despite the headwinds of tight credit, slowing growth and inflation.
Over all it’s a good outcome for Australia. Our major trading partner is continuing to grow but not at a scary pace, and it still has wiggle room to ease interest rates to fire up growth. Oh and happy Chinese NY, apparently this is a big one. Jeez, I hope it doesn’t dragon.
I’ll leave you with an unrelated thought from Alan Kohler of Business Spectator: “These days big government is ascendant and capitalism is in crisis, thanks to an excess of debt plus the fragmenting, democratising, pirating effect of the Internet. In fact, the way central banks in Europe and the United States are controlling the financial system these days with their emergency liquidity programs, we virtually have a centrally planned economy in the West. Meanwhile, the world’s most successful economy is a communist dictatorship.”
The robots are coming…
The concept of robots arose in the early 20th century; storytellers imagined how these mechanical workers would help us out. Since the late 20th century, robotic technologies have created everything from automated production lines to cute robot dogs. And now we’re putting robots on the battlefield. Better them than us, eh?
Let’s blow our minds a little: pundits reckon the robotics industry is about where the personal computer revolution was in the early 1970s. For some perspective, imagine being transported from 1975 to the present, and seeing people talking to invisible friends on tiny, brightly coloured, mobile computers that boast apps for everything.
According to a group of experts assembled for The Economist’s ‘The World in 2012′ series, robotics will impact our economy in unexpected ways over the next 25 years. And the coming generation of robots won’t just be hardware; it’ll include a software layer that will replace a lot of jobs.
Take Google or Facebook, which have very few employees relative to their size and impact. Robots and intelligent systems pretty much do the job. At the supermarket, self-service machines are replacing checkout chicks, ATMs mean less work for bank tellers, and voice recognition means virtual assistants can answer the phone 24 hours a day without the need for a ciggy break.
There’s even a robot out there reviewing evidence and transcripts, set to replace armies of paralegals and lawyers. Then there are the 200,000 robot-assisted surgeries a year involving tiny incisions that create less tissue damage and hence a quicker recovery.
As Discern Analytics managing director Paul Saffo said, “We’re all waiting for the robotics revolution. It’s just over the horizon … Over the next few years you can expect to hear the term, ‘cyber-structural unemployment’ and it won’t be a cyclical downturn, but structural, permanent.”
Did I just hear the Chinese bubble bursting? I’m afraid so. And before it’s done deflating, we might hear a lot more: thunderous landslides, screams of panic, etc.
Alarmist? Maybe. But when the stakes are this high, even a “maybe” warrants genuine concern.
Of course, this bubble started with China’s mother of all stimulus plans in 2008/2009. Gordon Chang, an international lawyer and China analyst, has spent much of the past 30 years living and working in China. He puts it this way: by 2009 the Politburo had dumped about $1.1 trillion into a then $4.3 trillion economy. (He’s referring to an easing of lending, in addition to direct stimulus.)
These mind bogglingly huge inputs created growth, but also created a stock market bubble, a property bubble and inflation. And the faster something goes up, the faster it comes down.
How fast? Inflation, at a modest 1.5% in January 2010, rose to 6.5% by July 2011. But that’s just for starters.
The property agent, Homelink, reports that new home prices in Beijing dropped by 35% in November. You heard that right, folks. More than a third in a month. Another property agency, Centaline, estimates developers have 21 months of unsold inventory in Shanghai and 22 months in Beijing.
According to Gordon Chang, in mid-2010, the state electricity grid in China reported that 64.5 million apartments showed no electricity usage for more than six consecutive months. That’s enough housing for 200 million people. Most of it empty.
If these astronomical numbers don’t convince you, consider the surveys that show the rich and super rich in China are, in growing numbers, thinking of leaving the country. That means getting passports and ensconcing their families in comfortable Western cities. That’s what Gordon Chang calls a leading indicator.
If things are going pear shaped fast, what does it mean for us Aussies? To paraphrase and twist the old sin city adage, what happens in China doesn’t stay in China. The real estate collapse is already nailing the construction industry. Since mid-year, steel production in China is down about 15%. And where do we sell most of our iron ore? I don’t need to answer that, do I?
The big question is whether the Politburo can engineer a soft landing. But imminent political change in China isn’t helping. At the end of 2012, the Communist Party will start changing the members of the Politburo Standing Committee. Those guys are the top of the pops. And change means uncertainty, which means weakness, which means power struggles and so on.
So if we don’t get a soft landing and the real estate crisis spreads through the Chinese economy, contagion style, then it’ll be more than steel that tanks. Demand for commodities – our economic specialty – will go off a cliff, taking a chunk of our prosperity with it. Alarmist? I certainly hope so.
Andrew Pegler – 13 January 2012
Do you feel lucky?
If you’ve travelled, you’ve probably realized that Australia can be expensive.
Cars cost a motza. Food isn’t cheap. And real estate prices just plain hurt. It’s enough to strain our cherished notions of the lucky country.
The Centre for Independent Studies (CIS) has recently taken up the cause with a report on why many of our prices are too high, why the government is to blame, and what the government should do about it.
First the caveat: the CIS is a pro-business organisation. Like many of its ilk, the CIS is quick to blame the government for our woes, but not so eager to praise it when things go well.
With that in mind, let’s proceed. The CIS finds that Sydney is the sixth most expensive city in the world – more expensive than New York, Rome or London. Further, Australian house prices have climbed from three times the median household income in the 1980s to nine times the household income in Sydney.
But we all know Sydney is expensive. What about the rest of the country?
The CIS takes aim at bananas, of which imports are banned for quarantine reasons. It says the ban contributes to the $13.98/kg price as of April, 2011. Whoa there! Cyclone Yasi had a bit to do with that. As an aside, the report mentions that bananas were $2.30/kg before the cyclone, only marginally more than America’s $2.16/kg.
Books and cars are also in the firing line. The report says the Copyright Act 1969 results in books that cost two to three times the price of overseas equivalents, while failing to drive sales to Australian authors. No disagreement from me: cheap books means more readers, and last time I put a coin in the Common Sense Machine, it said the more literate a population the better.
Similarly, the CIS suggests scrapping the remaining import duties on cars, abolishing the luxury car tax and allowing the private importation of certain used vehicles.
All in all, some good suggestions. Most of us, after all, find it hard to make ends meet.
But if we’re trying to gauge whether Australians really have it worse, we need to consider the other side of the ledger. Comparing median household income is a good place to start. In 2007, the Aussie median was AUD$66,820. Two years later, in 2009, America’s median was a much lower AUD$49,777.
Low-cost public health is another factor. We only spend 8.7% of GDP on healthcare. That compares to 9.8% in the UK, 11.4% in Canada and a whopping 17.4% in America.
I could go on (higher minimum wages, family tax benefits, the ability to study at university without paying upfront fees, etc.).
So are we really worse off than so many other countries? It’s a big and complicated question. For what it’s worth, here’s my gut feeling: sure, we should make some tough decisions in pursuit of lower prices, but it’ll take more than a survey or three to disavow me of the notion that we’re the lucky country.
Andrew Pegler – 6 January 2012