Friday, July 31, 2009

Waiting for the second shoe to drop

Economics is as much, or more, about sentiment than it is the various statistics and indices. Vis-a-vis the global economic crisis the sentiment is increasingly that it was a bad scare, but no so bad really. That is why leaders like Rudd and Obama talk up recovery, but even they must be dreading the second shoe dropping – the corporate debt bomb.

When the current financial crisis broke it was pretty much driven by the predictable failure prime lending and dodgy financial instruments. What didn’t show up then was the corporate loan sector and few people seem to have the big collapse on the radar.

Consumer and sovereign debt are bad enough, though they are fairly transparent and quick to manifest. Corporate debt, for which we can thank those overpaid and over clever bastards who bought you the global financial disaster, is far easier to hide – for a while.

CORPORATE Australia is sitting on a $200 billion debt bomb that needs to be refinanced over the next three years…

Quoting from a recent article the corporate bubble is set to start bursting soon and continue over the next three years. Sound as it is Australia is no a big economy like the US, but it is a good indicator:

Right now, a block east of Times Square, the National Debt Clock is ticking: $19,000 per second, $1.1 million per minute, $66 million per hour. …the total rises to $33 trillion. As a percentage of gross domestic product, the grand total of U.S. debt outstanding, now 294 percent, exceeds the previous record of 270 percent set during the Great Depression.

Here is how it works in Australia: Infrastructure is the biggest worry, with more than $31bn in refinancing fall due - Property is also vulnerable, with more than $26bn of near-term debt due - Construction is next, with a total of $15bn of debt coming up in the next three years, then telecommunications, mining, and healthcare

Governments have already increased overall debt levels bailing out banks and some corporations. The basic reasoning is sound, retaining jobs and preventing social dislocation, as was the case with finding alternatives when the ABC learning Centres collapsed. Each of these interventions becomes a debt multiplier, so doubtless other remedies are frantically being sought.

In the US there is a growing feeling that bankruptcy should be the first course for corporations in trouble. I expect the sink or swim idea is tempered by the belief that the corporate vultures out there will compensate to a degree on job losses. I can’t see it personally, but miracles do happen.

Don’t make anything anymore

Back in the 1980s Paul Keating assured Australia we’d be on a level playing field if we adopted the rules of the global market. Then we proceeded to divest ourselves of manufacturing, taking it and jobs offshore to low income markets. So what is left? Nothing much productive or useful, but lots of mining.

Apparently Australia has sufficient coal reserves to export for the next 300 years. All very well, but if the rest of the world survives all that carbon input Australia is unlikely to survive the ravages of extraction.

The latest licenses issued are for potential mines on the rich black soil region of the Liverpool Plains in NSW, fertile soil fed by a massive aquifer. True the fertile soils here have been degraded by cotton farming, but rehabilitation is well under way. Coal mining will destroy both the soil and ground water, but members of the NSW government should do well from consultancies and directorships.

We need to get back to the concept of a broad based economy; one where we grow thing and make things beyond just notional money. The smart nation wasn’t so smart after all and we need to recalibrate aspirations to meet the realities.

Doubtless Rudd is doing well to drive positive sentiment, but the downside now is debate and political engagement is being stifled; sadly the great public think that is wonderful.


Kvatch said...

Apparently Australia has sufficient coal reserves to export for the next 300 years.

Ironic, isn't it? The US may not be rich in many things--not much oil anymore, some timber, food-stuffs only where we irrigate like crazy--but we do have a lot of coal!

Cart said...

Yup, you have coal, but you are an ocean away from the major market. That means about $30 a ton extra for delivery I understand, a lot for a dirty, stinking resource.

lindsaylobe said...

Where economists are letting us down I (including the OECD) is to analysis GDP without considering in more detail its largest single past driver - debt!!
It’s the movement in Debt, or more precisely the creation of credit that had been he catalyst for past growth/ boom / bust and any curtailment could have unforeseen consequences.

Australia has seen a number of recent large scale capital raisings due to the fact debt markets have become more restrictive. This will need to increase in the future, which in turn translates into the need for increased saving to avoid the debt trap. Increased savings will be necessary – both private, government and corporate!

The road ahead is going to be made much more difficult unless we have inspired leadership to create a savings mentality and investment in future facilities that are sustainable- not to rely on just resources.
Best wishes

Cart said...

Lindsay, given you share with Ross Gittens the role of tutor in affairs economic, I hope I’m showing some signs of absorbing the concepts of the complex discipline.
What is fascinating me is the repeated lack of economic/market discipline. A new concept, or revived concept appears to swing straight to the extremes. You were no doubt direct witness to the swing to JIT inventory (and everything else) management.
Now China is leading the push to commodity hoarding. Both are probably fine in stable markets, but dangerous all round in the volatile markets with us now. Call me na├»ve, but in all areas I would have thought limiting exposure was a key to long term success. I must be wrong, because it doesn’t seem to work like that at all.