Australian economy faces the perfect storm
The sense of gloom among everyday Australians seems to be spreading. So too is the sense of disillusionment in their government. Optimism in the future is outweighed by pessimism about the direction in which the country is heading.
Among the younger families, particularly those weighed down by mortgages, there is a growing concern about how to keep paying the bills. As utility and food prices rise and are forecast to continue to do so, wages simply don’t keep up with the cost of living.
There is upward pressure too on interest rates brought about by too much government-led stimulus spending, which compounds the financial woes of those that owe.
For those who overcommitted to big mortgages under the assumption that interest rates would remain low, negative equity has now become a real possibility. This is where more is owed on the home than it could be sold for. With house prices dropping in most markets this prospect is a daunting one for those suffering from mortgage stress.
Among the more mature demographic, those with spare money are saving. Some recent research indicates that our net saving rate has moved from a negative position to a positive ten per cent. This is an extraordinary turnaround and helps to explain the parlous state of our domestic retail industry.
The slowdown in retail sales limits employment growth and strangles the lifeblood of our economy – small business.
Of course there are exceptions. One insolvency practitioner told me recently that business is booming. However I hardly think an insolvency-led recovery is on the cards.
That said, the principle behind how insolvency practices operate is one that all governments need to heed. Sometimes good businesses, just like good economies, get into trouble. Most often this is through debt and unforeseen circumstances. During these times it can seem impossible for the operators to get out of their financial malaise whilst complying with the law.
This is where the insolvency practitioner comes to the fore. They can take control of the business and manage the debt position to help ensure its continued operation. Yes, other firms are sometimes left out of pocket (more often than not the biggest creditor is the tax office) but such are the risks of commercial enterprise. In effect, the insolvency practitioner dishes out some tough medicine to help ensure that jobs are maintained and the best result can be achieved.
There are some exceptions to the scenario above, but the principle is sound.
National economies also sometimes find themselves subject to excesses. Once again, this is mostly due to over borrowing by individuals or through a lack of planning for the future.
Busts follow every boom just as a boom will eventually follow a previous bust. It is due entirely to human nature and the fear and greed that dominates the investment rationale of most of us.
However, unlike the insolvency practitioners, most governments don’t like people to wear the pain of their own decisions. So they seek to smooth the business cycle through fiscal policy decisions. This probably has as much to do with the electoral cycle as anything else!
Regrettably, the decisions of government that seek to postpone the day of reckoning will inevitably make the problem much bigger and more dangerous. This is the risk that now confronts us all.
Those who have lived through recessions and consolidations recognise that they are the price we pay for working excesses through the system. Where governments seek to delay such cyclical actions by incurring huge levels of debt and through irresponsible spending, it ensures that the inevitable is only going to be worse than before.
Outside of the mining economy, Australia now faces the perfect economic storm. We have falling asset prices, high levels of government debt, flagging consumer confidence, a strengthening dollar, growing inflation and rising interest rates.
These problems can be traced back to the last three years of poor government stewardship and without any reasonable prospect of changing the crew in the near term, it looks like our economy is going to get worse before it gets better.
Senator Cory Bernardi is the Shadow Parliamentary Secretary Assisting the Leader of the Opposition and a Senator for South Australia. This article is courtesy of his personal blog which can be found at http://www.corybernardi.com.