I want to know how, at the one time, we can have:
- a strong economy (apparently) and budget surpluses
- high interest rates
- the cost of stuff being really high and getting higher, to the point where wages aren't keeping up
Strong economy and budget surpluses is a combination of several factors.
Strong economy is due to a huge growth rate in terms of productivity, that is, as we move more toward a service economy each and every one of us is producing more of value than ever before. In short, the economy is growing because more paid outcomes are occurring.
This drives a higher level of transactions and revenue and ultimately taxation that goes to teh government. Combine that with teh GST which covers pretty much every retail financial transaction and all of a sudden there are less opportunities for the "black economy" (cash economy if you prefer) to take place. Whilst I doubt that all the transactions in your local food hall make it on to the books and pay GST other businesses don't have the same opportunity to avoid this tax (the taxman jailed a clothes business ownerfor tax evasion revealed by sudden changes in declared income as a result of GST reorting) the GST brought in an extra $4 billion or so that wasn't expected.
Having put a concerted effort to pay off an inherited $91billion of debt that in turn freed up about $9billion a year in interest payments which makes a huge difference. Imagine a household with the credit card interest eating up 10% of your total income versus the same household with that extra 10% available.
That gives a very strong economy with huge surpluses.
Now we get to point 3 (point 2 comes later). As we each do more and more productive work (i.e. increasing supply) we get nerer and nearer our theoretical maximum efficiency and we no longer deliver increased productivity, i.e. our output is still high but no longer improving at the same rate. In order to improve that rate and boost supply additional capital must be spent, additional labour must be found etc.
We have now reached a point where the economy is heavily constrained by the unavailability of labour (equally there is now NO reason for people to receive unemployment benefits for more than 6 months) and also the lack of infrastructure to readily increase supply even if extra labour becomes available. So we are becoming supply constrained. At the very same time we are also, because we are becoming more productive, earning more and thus buying more and increasing demand.
Which brings us back to your basic supply v demand statement and how it is getting out of kilter.
Now, we have known about this for some time. But as we have all been having a field day soaking up the extra capacity in the economy and we have all been getting better off we haven't really worried too much about it. Problem is neither have our politicians. Federally JHo and crew established the conditions for growth, for labour flexibility to deliver maximum productivity and maximum reward and having paid off all debt they have pumped a shedload of money back into the economy via Federal programs but more significantly by giving the States more money then they have ever had. And the States, faced with the GST windfall PLUS the huge mountain of property transaction taxes comepletely blew it. Money has been wasted everywhere, a once in a generation opportunity to really fix infrastructure isses (primarily a state based issue as it is a matter of geography) has been lost and, as much as you will disagree with me, public service cost blowouts are scandalous.
Peace has been bought with various public service unions, this imposes an ongoing cost on the public forever (salaries rarely go backwards) with no real additional productive output. But it does create extra spending power.
So, all that extra money in the hands of employees builds demand.
For a fair period of time that demand was sated by imports, and the Chinese helped us out enormously by producing goods at a much lower price than we could so for a long time the extra demand was hidden by the huge and cheap Chinese supply. Sure some things went up, but so many manufactured goods went down that inflation figures were supposedly under control when in fact they were not - super cheap China kept us looking good with no need to cool the economy.
Problem is, we're now buying so much and the goods from China are no longer getting cheaper that increases are hitting the inflation numkbers and the RBA needs to cool the economy. Bear in mind that this is a direct result of the RBA NOT taking acion earlier becasue the overall rate was below their 3% target whereas inflation was really higher than that, it was just temporarily offset by the China effect. And how does the RBA cool the economy to reduce that demand? They need to take money off the "average" Australian so the "average" demand decreases. They do this by increasing interest rates and sucking some money (and thus demand) out of the system.
Problem is it's a very blunt instrument (as many others havesaid elsewhere) that only targets people with borrowings, currently that's about 46% of the country. So if you're in the 54% you can continue to spend like mad whilst the RBA makes the 46% pay for your sins.
Feeling good yet? It gets better.
Who makes up that 54%? Generally older people who have had the chance to pay off their mortgage, very few young people own a house outright. Very few young people have teh accumulated wealth of an older person - certainly on AVERAGE your wealth increases with age. So not only are the RBA hitting the 46% who havemortgages, that 46% are generally the lesser net worth individuals so the RBA effectively has to hit them more than twice as hard as they would have to hit the entire population in order to have the same effect. Higher interest rates help higher net wealth people as it increases their COMPARATIVE spending power simply beacuse they aren't repaying as much on the mortgage.
And for the final kicker: imagine youare a young person wanting to buy a house. You want a mortgage, you want to start building wealth for the future but becasue the RBA is increasing rates you either can't afford to get in or you can't borrow as much so you settle for a lesser house.
All in all, booming economies lead to booming demand which can only be met for a period of time after which demand must be reduced and the only mechanism available for that currently is to increase interest rates.
Imagine if the GST was variable and the RBA could control inflation like that - everyone who buys stuff pays equally, the money is sucked out of the system twice as quick as hitting 46% of the population, and if you choose not to purchase the goods at the higher price (as a result of higher GST) then you're also taking demand out of the economy.
Why are we, the little people, hit with high interest rates on our homes and high petrol prices and high food prices, without receiving an equal increase in wages...
An equal increase in wages simply fuels more inflation and has no net effect, that's the whole reason for increasing rates above wage increases.
...while business execs are on ridiculous levels of pay: http://www.smh.com.au/news/national/a-whole-parliament-gets-paid-the-same-as-one-executive/2008/02/17/1203190653956.html
When you're a wealth generator for people like Moss or Dixon or King then people are generally happy to pay you $10 million or so if you are generating $200 million for them (collectively).
SG
