The How of Fiscal Armageddon: Part I:How Governments pandered to political interests while Central Banks ran out of Fiscal ‘ammunition’

During and immediately after the deep Recession of the 1980s, First World Governments began to cede economic control to Central Banks. In part, governments realised that there were political constraints on what measures democratically elected administrations could actually carry through, and remain in power. There appeared to be a realisation, within the political class, that government couldn’t be trusted with the levers of interest rate manipulation and power, because of the contradictions around carrying out of  economically logical policies, and the political policies constraints that ensured their continuance in power. Most politicians outsourced economic control to unelected bureaucrats in Central Banks, thereby abrogating their responsibilities to the people.

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For two decades this strategy seemed to work after a fashion. There were the nominal rise and fall in economic indicators but politicians trusted the Central Bankers not to wreck the ship of State. Alas it also absolved the political class from any serious attempt at Economic Policy initiatives and regulation. For twenty years pressure grew as Central Bankers battled economic harbingers with a very limited set of fiscal tools, and Politicians did nothing to fix underlying economic problems. The 2007’s crisis came and went, as a band-aid of public money postponed any real requirement to fix the underlying economic problems. Then Central Bankers’ limited set of fiscal tools began to run dry. This is where we find the world’s economy in 2016.

If you manage to corner a member of the Political Elite in a moment of candour, they will probably admit that governments know what to do; know how to do it; but don’t know how to get re-elected after they do what is economically necessary.

Technology over the past quarter century has boomed and we live in an environment we couldn’t even imagine two decades ago.The metrics of Economic Performance however are the same old set that we have used for centuries. The prime indicator has been Gross Domestic Product as a measure of economic success. That GDP metric in a technologically advancing world is useless, but Nation States continue to use it as their measure of economic success. More fool them !

In an economy of:-

  • Low Growth
  • Low Commodity Prices
  • Stagnant wage growth
  • Falling Real National Income growth
  • Low or negative real wage growth
  • Low and stagnant Company Profits
  • Permanent government deficit Budget financing through debt
  • Significant export growth but falling Incomes

GDP no longer represents a true and accurate model of a Nation’s finances. A better metric of a Nation’s economic viability is Gross National Income, or GNI. To give an example the photography industry employed millions 30 years ago and was a massive contributor to GDP metrics. Technology has changes all of that. The cameras, film,retail staff in specialist stores, technicians, processing, consumables, developing tools and technologies, printing, and even photograph albums was a multi-billion dollar industry and it showed up in GDP metrics. No more. Yet people take more photos than ever … electronically.

People now take a hundred times the number of photos than they did in the 1980s and the cost now is less than 1/100th of what it cost then. A million percentage decrease in the economic cost of photography and a whole multi-billion industry is now almost absent from inclusion in GDP metrics. Technology has changed in the way we measure economic success. Not just in this old industry but across the whole economy.

Looking at the Australian economy as a model, the growth of the massive mining and commodities boom feeding the insatiable Chinese industrial expansion of the past two decades masked a dirty secret. A high dollar, massive wage and cost growth, decreases in productivity, and cost increases,  made for a plunge on competitiveness in the forgotten part of the two tier economy. Massive growth in Public Sector largess, especially in health and welfare, plus an influx in immigrants in a Low Growth economy masked the coming Bust. More people taking a share in a national ‘cake’ means less for everyone. A booming minerals industry allowed that two speed economy to develop. Necessary government economic policy initiatives, required for the rest of the economy, were never carried through, by a timid political elite, who were afraid to do what was required, as they hid behind a booming Mining sector income wave.

The Central Banking ‘apparatchniks’ seemed able to manage the economy, and economic reform was postponed yet again by the political class, intent on maintaining their power. The pigeons are now coming home to roost.

The Central Banks have used all of their ‘Fiscal Ammunition’ to little avail and the political class have abrogated their responsibilities to reform the economy. The spectre of Stagnation and Negative interest rates haunt the corridors of power. The necessary economic reform, in the ‘good times’ of the Mining Boom, was never carried out by the governing elites.

In an economy, where the Commodity Sector is marking time with decreasing volumes and low world commodity prices, the only real economic growth is in Public and Government Services and in the general low end Service Industry sector. Food, technology and industrial outputs are a shadow of their former selves as whole industries have become uncompetitive after years of government abrogation of their economic duties to the nation.

With the current Australian GDP in excess of 3.6% all would appear to be under control. That is NOT the case however because GDP is now a aberrant metric to gauge the true economic viability of an economy. Indeed Australia is suffering a deep and extended Gross National Income (GNI) Recession. The man in the street experiences this recession in his pocket through the lack of Income Growth. Minimal Income Growth effects both the nation’s standard of living as well as livelihood.

GNI Recession is experienced with:-

  • Low inflation or even negative inflation growth
  • Low wages
  • Low company profits even as actual throughput may increase
  • Weak government reserves.
  • A lack of Capital Investment.

It is felt by the populous as:-

  • Nothing left in one’s pocket to spend
  • Living from pay-packet to pay-packet
  • No new hires
  • No capital expenditures driving hiring
  • No investment
  • Real estate bubbles expanding
  • Low Product turnover

GDP might be up but GNI is falling away quickly.

Don’t think the world can depend on China to pull the rest out of this economic mire. China is NOT the solution to ‘spending out way out of debt’. It is part of the problem. ‘China has shot its economic bolt‘. We will discuss the realities of the Chinese Market separately.