CONCLUSIONS
In March 2007 when Premier Wen Jibao of China uttered the 4 ‘UNs’ at the National People’s Congress we assumed he was talking about the Chinese economy being ‘unbalanced, unstable, uncoordinated and unsustainable.’ Perhaps in his Confucian wisdom he was also talking about the global economy. Whatever, these 4 UNs have now permeated most of Europe and are well in evidence in the USA, and evolving in Australia. About 50% of world GDP is under threat or experiencing significant volatility.
However, at a time of greater crisis, after the end of World War 2, led by the economic architecture promoted by Eisenhower and Churchill, the world recovered. The induced austerity of war-time shortages and putting the people to work in re-building Europe and other war-torn areas created large debt loads from the required massive infrastructure spend. Things changed because they had to, as they must now. But all change is incremental and ineffective local and global leadership is not helping. A dose of truth, less innuendo and obfuscation might help.
Ecinya finds it inconceivable that the current bust, after it runs its course, will not lead to another economic boom. The de-leveraging process is nearing an end, the economic skeletons are coming out of the closet, and will be dealt with. A cyclical recovery should not be far away. The current global pressures are a combination of social engineering and financial engineering within a context of globalisation, bringing about an extra 3 billion persons over the past 30 years from emerging nations into the global economy, mainly in manufacturing but also in services such as telecommunications and information technology. Economies that have given up a host of employment will have to regain their enthusiasm for hard work, a shift in the education and training focus, and reduced levels of imports that have created many jobs in China and Asia and other smaller parts of the globe. China, for its part will have to engineer a shift away from export led growth to domestic consumption.
This is not to say that volatility will not persist. Progress will not be linear. Markets have yet to have their capitulation phase. The missing ingredients revolve around politics (especially America), structural reforms in welfare and taxation, and some mitigation of defence spending.
THOUGH THE FOCUS in this paper is on item 5 (highlighted below) from our executive summary of our 2012 Overview paper, many of the other themes are important to full realisation of the global opportunities as the world overall is in better shape today than in the past. Ecinya is of the view that America will re-invent itself and lead a global recovery. BUT a lot of thought leading to full recognition of its problems/ opportunities must be made. Welfare and warfare create vast bureaucracies that we now can ill afford in context of global banking and debt problems and other imbalances The symbol economy is money and credit and the real economy is the production of goods and services. The symbol economy tail has been wagging the real economy dog for far too long.
EXECUTIVE SUMMARY – ECINYA’s 2012 OVERVIEW
- Australia needs a new Federal government. The current trends are unmistakably bad. The middle class is pressured. It is a worry that Ecinya regards Mr Swan as our second worst post WW2 Treasurer at a time when he carries the trophy for World’s Best Treasurer.
- The opposition needs to lift its economic game and credentials. Scott Morrison or Malcolm Turnbull should become shadow treasurer. Paul Fletcher could assume a more prominent role in Communications & Media. Good policy work is being undertaken by Andrew Robb, but if populism triumphs over policy our exposure to negative external developments moves to major risk level.
- The Henry Committee should be re-convened and its terms of reference widened to include the GST. About 80% of the Henry Report was ignored and only the expedient positions embraced as the budget surplus had been totally squandered.
- Industrial relations has regressed and needs to be reformed. Proper reform would assist both unions and the nation.
- The world needs more work, less welfare, and less warfare. The modern democracies have moved too far to the left. Unemployed youth, poorly targeted and poorly administered welfare, is sapping economic opportunity. Accumulated problems from warfare (Iraq, Afghanistan) have stressed sovereign budgets. The left believe in legislation and the right have a diminished ethical base, so there is fault on both sides of the debate. Wikipedia identifies about 30 wars in every decade since 1945. Refugees are developing into an economic problem rather than just a serious social problem.
- The current ownership of the US Federal Reserve needs to be disclosed, its role and relationship with the federal government and Wall Street needs to be examined. It should become more independent.
- Europe and America need a large dose of tax reform.
- America needs a President who is more of a manager and less of a messiah. The George W Bush swing to the right was an ambiguous failure and the Obama experiment has failed.
- The jury is still out on US state and municipal insolvencies.
- ‘Balanced free enterprise’ needs to replace ‘capitalism’ and ‘socialism’. The role of government should be examined in terms of its share of national economies. We target inflation but not the exponential growth in government expenditures.
- ‘Beneficial trade’ should replace ‘free trade’.
- Elections should be funded through an Electoral Bank in the democracies to mitigate crony capitalism and crony socialism.
- America can re-invent itself and Europe should muddle through after it creates an enduring bail-out institution before addressing some of its structural problems.
- The Euro treaty and constitution needs to be re-visited. It is interesting that the Italian technocrats seem to be receiving favourable reviews.
- China should seek to become an adult member of the international community in word and deed. For our part changing the name of The Chinese Communist Party to ‘The China Central People’s Party’ would be a sound initial step. Removal of the word ‘communist’ would mitigate cheap shots from the radical American right. China is not yet ready for democracy.
- America in particular and the world generally needs a large dose of education and infrastructure spend.
- The world generally needs a genuine debate on taxation, population, infrastructure and the way we govern ourselves.
BACKGROUND
Almost 3 years ago, when the US and Euro Banking Crisis hit – the USEBC- our editor purchased the BBC Audio discs "The end of the beginning: Winston Churchill’s Greatest Speeches". Note we refuse to call it the GFC which was a convenient excuse for Kevin Rudd’s government to abandon all economic principles.
The assumption was that an understanding as to how a real crisis was handled by statesmen leaders would engender confidence to overcome the prevailing gloom, inertia and malaise.
Today, the electoral cycle within the developed economies has led to mediocrity, unintended consequences, and stupid policy positions including a massive war in Iraq and Afghanistan that has gone over time and over budget. An excess of lawyer-politicians, and bureaucrats have stifled the spirit that enabled the West to win a difficult war and then an expansion of opportunities that ushered in a period of prosperity to surpass any period before it. That prosperity and camaraderie is now under short-term threat from a myopic approach at the institutional level that stifles creativity, entrepreneurship, encourages systemic rorting, and impedes the economic velocity that leads to balanced outcomes.
When America went to war in Iraq George W Bush knew that wars were costly affairs, but he did not realise that winning the war was even more costly as the repair of a broken nation had to be redressed in the name of humanitarianism and good intentions. Thus he entered into an unholy alliance with Alan Greenspan that the American voter had to be placated and encouraged to support the war. Greenspan thus delivered a false prosperity based on easy credit and massive asset appreciation. Prosperity at home would offset any negatives arising from wars abroad.
The Bush-Greenspan-Wall Street Bubble (BGWSB) was exported to an unsuspecting Europe fully immersed in the entitlement society. The BGWSB in America resulted in the Troubled Asset Relief Program (TARP) and the bailing out of various ‘Too Big to Fail’ financial institutions plus the saving of the domestic auto industry. Obviously this had to be done and just as obviously we now have to pay for it. But far too much of that payment is falling on the world’s aspirational middle class where true and sustainable growth emanates. Europe falling victim to the same economic misjudgements now have various sovereign debt problems plus the need to recapitalise a failed banking system. Those that missed out on the BGWS received massive welfare handouts. An indirect cost of war has been ongoing terrorism prevention expenditure and assimilation of refugees.
Common sense economic disciplines disappeared and the ghost of Lord Beveridge, the father of ‘cradle to the grave welfare’ re-appeared. After a hard WW2 the world had gone soft in the head and mind except for the work ethic embedded in the German psyche and the long-dormant ambitions of sleeping tiger China and a colourful and populous India possessed of a strong entrepreneurial sector.
America could easily afford its reckless policy positions as the world’s financial engineer with the world’s reserve currency, and Australia had a mining boom to offset adverse economic repercussions.
THE BOTTOM LINE FOR AUSTRALIA
America and the European Union may be ungovernable, Australia is merely dysfunctional.
Australia has a narrow and deep export base and a broad and deep import base and huge capital expenditure requirements, mainly in minerals development.
Despite a mining boom and the most favourable terms of trade ever our federal and state debts are now over circa $300 billion and growing exponentially via a plethora of mythical ‘reforms’ over the past 4 years after having been close to zero in 2007. Additionally, interest rates are too high, income taxes are too high, too many taxes are still hidden embedded in the price of goods and services, confidence is too low, and corporate earnings are under pressure. Additionally, the population is ageing and their superannuation is being decimated.
INTRODUCING
WINSTON CHURCHILL (November 1874 – January 1965) was twice prime minister of the United Kingdom, 1940-1945 and 1951-1955). He was a noted statesman and orator, on officer in the British Army, an historian, a writer, and an artist. He received the Nobel Prize in Literature and was the first person to be made an Honorary Citizen of the United States. It is worth noting that his father was a British aristocrat and his mother, Jenny, was an American socialite. As a soldier he saw action in British India, the Sudan, the Second Boer War and the First World War.
DWIGHT D EISENHOWER (October 1890 – March 1969) was 34th President of the United States from 1953 until 1961. Previously he was a West Point graduate who became Supreme Commander of the Allied Forces in Europe during the Second World War. Eisenhower was of Pennsylvania Dutch ancestry, reared in a large family in Kansas by parents with a robust work ethic and as one of five sons was conditioned by a competitive atmosphere which instilled self-reliance.
CHURCHILL – focus on the end of the British class system, expanded and accelerated education spend, competition and the opportunity society
In 1942 William Henry Beveridge (later Lord Beveridge) had published his report Social Insurance and Allied Services which many still claim gave rise to the welfare state in England, and perhaps also in broader Europe. The Beveridge report identified five ‘giant evils in society – squalor, ignorance, want, idleness and disease’ and the policy prescriptions were meant to provide for UK residents "from the cradle to the grave". Without referring to Beveridge at all Churchill gave a speech in March 1943 at a time when the European phase of the Second World War was ending and the hardships and deprivations of the war years (1940 -1943) were coming to an end and a future could be talked about with a degree of certainty.
The Beveridge Report was adopted by the British Labour Party and war-time Prime Minister Churchill was defeated in a landslide by Clement Attlee in 1945. Attlee was a devotee of John Maynard Keynes tax and spend policies and adopted the central tenets of the Bevridge Report. Attlee was then was defeated by Churchill in 1951. Ecinya is firmly of the view that Keynes has become a convenient scapegoat for tax and spend policy. Keynes would not have adopted the robust and manic policy positions that his devotees are pursuing today. We now let Churchill speak for himself. Highlights are ours to capture the emphasis in his speech.
This is an edited transcript of BBC Audio’s ‘The End of the beginning: Winston Churchill’s Greatest Speeches’ Volume 2, Track 8.
We must beware of trying to build a society in which nobody counts for anything except a politician or an official, a society where enterprise gains no reward, and thrift no privileges. I say trying to build because of all the races in the world our people will be the last to consent to be governed by a bureaucracy. Freedom is our lifeblood. These two great wars, surging and harrowing men’s souls have made the British nation master in its own house. The people have been rendered conscious that they are coming into their inheritance. The treasures of the past, the toil of the centuries, the long built up conceptions of decent government and fair play.
The tolerance which comes from the free working of parliamentary and electoral institutions. The great colonial possessions for which we are trustees in every part of the globe. All these constitute parts of this inheritance and the nation must be fitted for its responsibilities and high duty.
Human beings are endowed with infinitely varying qualities and dispositions, and each one is different from the other. We cannot make them all the same; it would be a pretty dull world if we did. It is in our power, however ,to secure equal opportunities for all. The facilities for advanced education must be evened out and multiplied. No one who can take advantage of a higher education should be denied his chance. You cannot conduct a modern community except with an adequate, nay an ample supply of persons upon whose education whether humanitarian, technical, or scientific, much time and money has been spent.
We must make plans for part time release from industry so that our young people may have the chance to carry on their general education and also to obtain specialised education which will fit them the better for their work. Under our ancient monarchy, that bulwark of British liberties, that barrier against dictatorships of all kinds, we intend to move forward in a great family. Preserving the comradeships of the war, free forever from the class prejudice, and other forms of snobbery, from which in modern times we have suffered less than most other nations, and from which we are now shaking ourselves entirely free.
Britain is a fertile mother, natural genius springs from the whole people, we have made great progress but we must make far greater progress. We must make sure that the path to the higher functions throughout our society and empire is really open to the children of every family. Whether they can tread that path will depend upon their qualities tested by fair competition. All cannot reach the same level but all must have their chance. I look forward to a Britain so big that she will need to draw her leaders from every type of school and wearing every kind of tie. Tradition may play its part, but broader systems must now rule.
EISENHOWER – focus on peace and the dangers of the military-industrial complex
World military spending for 2011 was US$1.63 trillion, with America accounting for $711billion (41%), China $143bn (8%) and the next 8 countries in total accounting for $499bn (29%). American spendt $70bn more than that of the next 9 countries. This seems to be a severe misallocation of resources. $1.6 trillion of total spend is about the current size of the Australian economy in GDP terms.
Extracts from an address by President Dwight D. Eisenhower "The Chance for Peace" delivered before the American Society of Newspaper Editors, April 16, 1953.
This way was faithful to the spirit that inspired the United Nations: to prohibit strife, to relieve tensions, to banish fears. This way was to control and to reduce armaments. This way was to allow all nations to devote their energies and resources to the great and good tasks of healing the war’s wounds, of clothing and feeding and housing the needy, of perfecting a just political life, of enjoying the fruits of their own free toil.
Every gun that is made, every warship launched, every rocket fired signifies, in the final sense, a theft from those who hunger and are not fed, those who are cold and are not clothed. This world in arms in not spending money alone. It is spending the sweat of its laborers, the genius of its scientists, the hopes of its children.
The cost of one modern heavy bomber is this: a modern brick school in more than 30 cities. It is two electric power plants, each serving a town of 60,000 population. It is two fine, fully equipped hospitals. It is some 50 miles of concrete highway. We pay for a single fighter with a half million bushels of wheat. We pay for a single destroyer with new homes that could have housed more than 8,000 people.
Eisenhower is really talking about opportunity cost, an economic concept, that says if you spend money and resources on one thing the cost is the opportunity foregone to spend on another. Three years out of eight President Eisenhower achieved a balanced budget. Lyndon Johnson achieved one , and Bill Clinton (thanks to Newt Gingrich) achieved four out of eight. There are always competing agendas in government, but overall Eisenhower was a conservative and prudent fiscal manager of prosperity.
In his farewell address on 17 January, 1961 Eisenhower surprised the nation by warning his fellow countrymen of the dangers of the military-industrial complex. The following extracts indicate the depth and tone of that speech:
America’s leadership and prestige depend, not merely upon our unmatched material progress, riches, and military strength, but on how we use our power in the interests of world peace and human betterment.
We have been compelled to create a permanent armaments industry of vast proportions. Added to this, three and a half million men and women are directly engaged in the defence establishment. We annually spend on military security alone more than the net income of all United States Corporations….. The total influence – economic, political, even spiritual – is felt in every city, every statehouse, every office of the federal government. We recognise the imperative need for this development. Yet we must NOT fail to comprehend its grave implications……. In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex. The potential for the disastrous rise of misplaced power exists and will persist.
There are some who believe that America is always looking for the next war to fight. On 7 June 2012 China and Russia vowed to step up joint military exercises raising fears of a regional arms race after Washington declared the US Navy was bolstering its presence in the Asia Pacific. Australia has recently granted space to an American force resident in the Northern Territory and China has reacted by saying that cold war attitudes are unwelcome. It should be stated that war with China is not an option nor is it likely. But we stress that peace requires pervasive prosperity because there is always a politician somewhere that will blame some other country for its own failings. A cranky populace is easily susceptible to propaganda from a stupid and myopic politician. Our fundamental concern is that we should be wary of misallocating resources in pursuit of ridiculous ends.