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ExposAsia No 02/2012, One Size Fits All, shows how two sectors of the Australian economy - residential housing and commodity extraction - have come to dominate economic activity and, in particular, capital spending. We conclude that both sectors are driven by outside influences and domestic complacency: inappropriate monetary policies in the rest of the world that have not been sufficiently neutralised in Australia by the authorities (and which have been actively promoted and encouraged by the banking sector) and the great investment boom in China which is itself partly the result of these loose monetary policies globally. Now, more than ever, Australia is beholden to global money flows and global monetary policy.
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ExposAsia No 21/2011, Currency Games, shows just how vulnerable the Australian economy is to a reversal of fortunes in the capital flows that saw the Aussie dollar peak at over A$1.1/US$1 just a few weeks ago. Like so much in economics, any potential reversal in money flows - or risk aversion panic - will have widespread ramifications for the fragile Australian economy that lies outside the hyper-driven commodity sector.
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Money Madness looks at institutions and how they can influence incentives and distort the self-interested actions of individuals. Using the case of Australia, it examines how certain institutional structures can indirectly cause very real structural problems in an economy.
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Posted on May 05, 2011 by Justin
ExposAsia No 3/2011, When the Tide Changes, looks at the relationship between house prices and the current account balance (the corollary of which is the capital account inflow or outflow). We conclude that capital inflow – much of it wholesale market borrowing by the banking system – is in large part channelled into the Australian property market.
We argue that the evidence for a growing asset bubble is clearly available in Australia but that neither the government nor the Reserve Bank is willing to address the issue in any meaningful way. That means when the bust comes it will be because one of the bubble drivers e.g., high commodity prices, goes into reverse and then leads to a vicious spiral of reversing capital flows and collapsing Australian asset prices. Such is the evidence from Australian history.
In essence, the picture painted is of a country that has hitched its wagon to China and is now completely dependent on perceptions of that country as well as Beijing’s willingness to fuel its own giant inflationary boom. If that reverses Australia will be helpless to prevent its own asset prices and, probably, economic meltdown.
Apocalyptic stuff but, as usual, it is all in the timing. While China refuses to face its own malinvestment issues Australia can keep on growing hers – for now.
We would conclude that Australian assets and the Australian currency are particularly dangerous places to be parked right now even as global equity risk loving is at extreme levels. Once sentiment reverses – and there are plenty of political, economic and valuation reasons for that to happen sooner rather than later – the warrants on growth and risk-taking will be particularly hard hit. Australia is at the top of that warrant list.
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Posted on Feb 18, 2011 by Justin
The last ExposAsia of 2010, One Trick Pony? looks at Australia's current commodity boom and compares it with previous episodes of commodity euphoria in the country. These have all ended badly.
These days as the Australian government is apparently attempting to replicate the problems of the late 19th Century by also encouraging a new wave of financing sources that will keep not only the commodity boom firing but also the housing market - and both are intrinsically linked with each other. Recent legislation to create a 'fifth pillar' in financing, introduce permanent deposit insurance and allow financial companies to issue covered bonds are all worrying at this late stage in the cyclical game.
It is difficult to determine the timing of the downturn commodity/housing downturn in Australia but we believe that it is all bound up with real demand, and sentiment, from China.
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Posted on Dec 19, 2010 by Justin
Ausnomics #5, One Trick Pony, is now available for download for eligible subscribers (pre-release version only - full release will be distributed later this week) in the members section!
Posted on Dec 13, 2010 by Justin
Ausnomics #4: Ruinous Nation was published in ExposAsia No 27/2010.
Betting against the Australian equity market and the Australian dollar has been about as profitable as betting against Japanese JGBs and the yen - both currencies and both asset classes continue to defy gravity. But while, in our view, there is a logical rationale behind the yen's strength and the Japanese population's needs, the same cannot be said for Australia.
Truth be told, Australia is a warrant on China, pure and simple. Its fortunes are intrinsically bound up with those of the Mainland and, by extension, those of the US. In asset markets at the moment that chain of interconnection is good for equity prices and the Aussie dollar (cheap US money and the prospect of more of it flooding into the Chinese economy to further destabilise and unbalance production but at least produce activity which, in turn, raises the demand for Australian commodities).
Australian activity benefits from the straight line extrapolation of demand in China that is being drawn by commodity companies (thus raising capital expenditure commitments) and the money rush benefits to Australian domestic speculators who - like their American counterparts - have bought property and forced up prices like there is no tomorrow.
This is unbalancing the Australian economy in the same way as China and the US before it. All it will take is a catalyst to bring that whole edifice down.
To understand the plight and precisely why and how the Australian economy might implode, you will have to read the full paper in ExposAsia No 27/2010, Ruinous Nation. In this precarious world in which we live, the triggers could come from many directions. For those of the view that the monetary Ponzi-scheme that lies behind the enthusiasm for all things paper and all things emerging is destined to end in tears, Australia is the natural home for the shorts to make the most money - albeit not necessarily in the next several months.
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Posted on Oct 20, 2010 by Justin
Ausnomics #4, Ruinous Nation, is now available for download for eligible subscribers (pre-release version only - full release will be distributed next week) in the members section!
Go get it!
Posted on Oct 15, 2010 by Justin
Ausnomics #3: The Illusion of Prosperity was published in ExposAsia No 22/2010.
The debate over the correct course of policy action has erupted again. Nobel Laureates, led by Joseph Stiglitz, are rallying to the banner of more Keynesian stimulus. They believe that there was nothing flawed in the previous credit-crazed boom. Their version of economics makes no mention of capital hetrogeneity or of the scope for making mistakes in the capital structure because of pricing and incentive distortions (themselves caused by government intervention and the actions of popularity-loving central bankers). Stiglitz recently visited Australia and described its response to the current (it is ongoing after all) global recession as 'the best in the world'. Coming from that source alone tells us that Australia is in deep trouble.
In ExpoAsia No 22/2010, Justin Pyvis describes just how that trouble is likely to manifest itself. Indeed, the beginning signs are there with a disconnect emerging between end-users of property and investors. One indicator has also signaled the first glimpse of house price falls. But it is the trigger for the property market downturn that Justin is interested in. Read on.
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Posted on Aug 10, 2010 by Justin
Ausnomics #2: The Great Australian Bubble was published in ExposAsia No 12/2010.
In ExposAsia No 12, Justin Pyvis takes a look at the housing market down under. Much effort was expended during the 2008 financial crisis to keep the housing market from imploding. The result is that Australian household indebtedness has continued to grow and affordability has been pushed to new lows. The bubble bursting may be some way off but the actions of the RBA make a correction in Australia's overheated housing market inevitable while the rest of the economy will just have to suffer under higher long-run interest rates and a huge debt load.
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Posted on Apr 08, 2010 by Justin
Today marked the preliminary launch of the Ausnomics website! Expect an announcement in the next few months about what services we are going to provide. For now, please continue to enjoy free economic commentary at our blog, Aussienomics.
Posted on Mar 14, 2010 by Justin
Ausnomics #1: Fool's Paradise was published in ExposAsia No 7/2010.
In ExposAsia No 7, Fool's Paradise, Justin Pyvis of Ausnomics examines the credit conditions in Australia and the response of the banks to the global credit crunch. He finds that through government stimulus measures and central bank support the banking system has fuelled yet another leg of the Australian housing bubble. In turn, the avoidance of technical recession in Australia has come about because of low quality, unproductive sector growth related to housing and construction.
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Posted on Feb 19, 2010 by Justin