If you were to read the papers over the past month, or listen to mainstream economists, you could be forgiven for thinking Australia (and the world) was well on the path to economic recovery. Stimulus packages across the globe (and quantitative easing in the US and Europe) have cured the fundamental problem of too much debt. Even a Nobel Prize-winning economist (Joseph Stiglitz) has publicly claimed that the reason the US is in danger of a double-dip recession is because there hasn’t been enough stimulus or money printing. This is a bit like saying the way to cure someone’s common cold is by giving them the flu.
Ostensibly, confidence is rising — a survey conducted by Westpac and the Melbourne Institute apparently showed that consumer sentiment in Australia climbed 5.4%. Exactly how consumer sentiment can be measured in percentage terms has always remained a mystery to this writer, but in any event, that is assuming that ordinary people have any idea what’s going on when highly paid experts tend to struggle with even the most basic of forecasting (virtually no economist, other than those from the Austrian School, saw the GFC coming).
Perhaps all those increasingly confident consumers should look a little but more closely at what is actually happening in the economy.
Yesterday, Telstra shares dropped by almost 10% as the company announced a 4.7% slump in profits (and a 2.2% fall in sales) as it struggles with lower fixed-line revenues. Telstra had previously stated that it will be cutting 1200 positions to try to maintain margins in the face of strong competition from the likes of Optus, iiNet and TPG. Somewhat less surprising was Qantas’ pedestrian result, with the airline’s earnings statements continuing to prove that it is first and foremost a very successful frequent-flier business that also happens to fly the odd plane.
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The previously well-performed Computershare on Wednesday told investors that earnings would fall by 5%-10% next year (leading to a 10.6% decrease in the company’s share price), while Boom Logistics blamed difficult market conditions for a 66% drop in underlying net profit. Even fashionable Ed Hardy, provider of T-shirts to the likes of Britney Spears and Madonna (which was owned by a former son-in-law of billionaire, John Gandel), was forced to appoint administrators to the business (after shutting four of its 10 outlets on Monday). Ed Hardy joined recent retail basket cases Makers Mark, Figgins, BabyCo and yesterday cleaning company Reflections into financial oblivion. They may soon be followed by REDGroup Retail, the owner of Borders and Angus & Robertson, which is currently in discussions with lenders after fears that the private equity-owned business is about to breach banking covenants.
On the bright side, the finance industry appears to remain in a state of prosperous bliss, with the Commonwealth Bank on Wednesday delivering a record $6.1 billion in cash earnings for 2009/10. While CBA boss Ralph Norris claimed that “there’s nothing worse for a country than having banks that don’t make a profit … you only have to look at the UK and the US, where banks failed and taxpayers had to bail them out” such an argument is self-fulfilling.
The reason Australian banks are delivering high profits is because Australia’s economy has remained robust (largely thanks to China’s recent demand for Australian minerals and our continued housing bubble).
In reality, the CBA’s profit is symptomatic of the structural problems facing Australia’s economy. The CBA’s rivers of gold largely conceal the fact that there is too much debt supporting local asset (especially residential property) prices. As Steve Keen very accurately pointed out in Business Spectator earlier this week, “the record $6 billion in cash earnings that the Commonwealth Bank has announced … is a sign of an economy that has been taken over by Ponzi finance. Fundamentally, banks make money by creating debt”.
To follow Keen’s analysis further, the CBA has $313 billion ($41 billion of which was picked up in its 2008 Bankwest acquisition) in loans made to fund residential property (compared with only about $35 billion in equity). That is, of course, eminently common in modern day fractional banking, but highlights the risks for financiers (and ultimately, taxpayers) of asset bubbles. If there is a correction in Australia’s over-geared residential property market, this will have a profound effect on the country’s financial institutions and economy. Suddenly, Australia’s highly leveraged financial institutions, which would feasibly need taxpayer assistance (like they received in 2008/09) will become pariahs, rather than saviors.
In global news, US markets have slumped by more than 3.3% in the past two days as investors fear a double-dip recession and digest the effect of moves by the Federal Reserve to purchase government bonds in order to strengthen the economy. Meanwhile, the US trade deficit, a measure of manufacturing strength, fell to $US49.9 billion in June, its lowest level in almost two years. The news was no better in Europe, which is also supposed to be exiting from economic gloom, with output falling by 0.1% during June. Economists had been expecting a 0.6% rise.