Aug 25, 2014

Why Australia’s business boffins need to stop worshipping the confidence fairy

If Australia's esteemed economics experts are looking for a confidence problem, they shouldn't blame risk-averse businesses. The answer is much closer to home ...

The rise and rise of Pasconomics, otherwise known as the worship of the confidence fairy, is fast choking off the flow of oxygen to the Australian brains trust. Following the RBA’s refrain in Parliament last week, the whining about confidence has reached fever pitch across the media. In just one example, entrepreneur Josh Liberman recently told The Australian the business culture in this country was risk-averse:
“'Government should be identifying what competitive ­advantages Australia has as a ­nation. And, based on that, backing industries where we have that competitive advantage as a world leader,' he tells The Weekend Australian in a rare interview. "… But, more importantly, Liberman wants to see more risk-­taking in the Australian eco­n­omy, something he believes is dangerously lacking right now in the mindset of governments. "That theme was a key focus at the [Australian Davos Connection] Forum’s recent Australian Leadership Retreat, which was attended by Liberman and a host of top chief executives, thought leaders and policy­makers as well as local and ­international academics and entrepreneurs. "The theme of the retreat was A Culture for Prosperity, and in that context one of the key ­debates centred on the current contradiction in Australia and the world -- while there is currently great risk appetite in the financial markets, there is still a huge reluctance to take risks by investing in the 'real economy' to bolster ­productivity."
Let’s explore a few home truths here. Why are Australian companies not investing in the real economy? This is why:

Unused supply side capacity is sitting at recessionary highs. Companies aren’t investing because they have no need to. They have too much floor space, too many empty factories, too many idle machines and too many staff. Bashing them up for lacking confidence is some weird kind of moral socialism. Are these charities or businesses? The only reason to invest in this environment is to increase efficiency, and that’s only going to make the problem worse in aggregate. Why is that? Because the supply side slack is emanating from a paucity of demand relative to what was expected when the capacity was all installed. It doesn’t take Einstein to figure out why:

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7 thoughts on “Why Australia’s business boffins need to stop worshipping the confidence fairy

  1. Scott

    Sometimes the correct response is to do nothing…

    The reason the Australian dollar is overvalued is because the US dollar is undervalued, mainly due to the QE process keeping interest rates low.

    The search for yield means Investors are looking at Australia’s jucy 3.4% 10-year bond yields vs the Yanks 2.4%. More demand for Australian dollars (to buy Australian dollar denominated bonds) means the Australian dollar goes up, as it is in this case. Nothing is going to change until the US 10 year bond yield increases, tempting investors back to US dollars.

    Macro prudential policies will not have a great effect, so the Reserve is correct in not going there.

    Just hang in there are be patient. Janet will eventually turn off the QE and raise rates, and all will be well.

  2. bushby jane

    Surely the mining boom has had something to do with the high value of the dollar.
    Isn’t it funny that the scrapping of the carbon tax hasn’t improved business confidence, we were told that it was going to fix the world.

  3. klewso

    It’s getting harder to blame Labor for everything wrong?

  4. Itsarort

    One also has to assume there is a plausible and calculable plan that deals with these relatively complex multidimensional financial suppositions. The reality is that beyond the two-dimensional basics, prosperity is more good luck than good management. And it is also the main reason why economists can proudly deconstruct the past but fail dismally en masse when it comes to predicting the future.

  5. WelBil

    I’ve banged-on about this before but consumer confidence started to slide when it became obvious that Abbott was going to waltz into government.

    I’ve given up on the ‘government’ starting to say that the economy is okay. That’ll happen when they realise that the blame game has run its course; they can’t because it’s the lazy way out and these turkeys are nothing if not lazy.

  6. [email protected]

    Clearly, paying people (tax rebates) to bid up the price of housing isn’t helping the situation.

    Perhaps some new infrastructure would help cover our REER?
    What about a lovely, full-speed NBN?

  7. Liamj

    The punters don’t feel as rich as stats keep telling us we are, something to do with high oil prices, falling wages and insecurity of employment maybe.

    I love Scotts certainty that the US Fed.Rsv will stop printing money & raise interest rates – either somebody has invented a virus to give bankers morals or its time to loot the rubes again.

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