‘I think all of this is God’s way of telling us to slow down. We were going so fast. But we are not the first. The Pharaohs…Egypt…civilization has collapsed before. This would not be the first time. We need to get back to the older ways.’
We were listening to our cab driver on the five-minute taxi ride between the domestic terminal and the hotel near the international terminal. The airport typically has a shuttle bus. Or the hotel runs one every 15 minutes. But these are not normal times.
More about our trip from Melbourne back to the US below. We’ve barely begun it. And already we can see the politicians have either no clue or are up to no good. There can be nothing ‘phased’ about living life and travelling. You’re either all in — and fully at risk — or staying ‘safe’ at home. But first…
Last week we mentioned that economies are not model airplanes you can smash up into a million pieces and then expect them to be put back together easily. They are complex adaptive systems. People make decisions — rational, emotional, spontaneous — based on their preferences, their experience, and their rather individual calculation of probabilities. Should you buy that house? That luxury watch you’ve had your eye on? An extra donut with your coffee?
How quickly the economy gets back to ‘normal’ will depend on how much damage has been done to the ‘animal spirits’ of the Australian public. On the ominous side, some people seem to have taken a shine to ‘lockdown’ life. If you’re being paid, have your food delivered and can work in your dressing grown, life isn’t so bad.
But if you’re one of the more than 600,000 Australians who lost their jobs last week, life is not good. The nation’s unemployment rate rose from 5.2% to 6.2% according to the Australian Bureau of Statistics. But nearly half a million people have dropped out of the calculation because they’re no longer looking for work at all. If you count them, the unemployment rate is already closer to 10%.
A broader measure of unemployment that includes those who are nominally ‘working’ but getting zero hours (on JobKeeper, for example), puts the rate closer to 19%, according to investment bank UBS. And even THAT may not tell the full story. One in four Australian workers may ALREADY be sitting idle at home.
We talked with Vern Gowdie on the weekend. That half-hour discussion, by the way, should be available to Vern’s readers and readers of The Bonner-Denning Letter later this week. Our colleague Bill Bonner joined us from his remote location in Argentina. But back to the data…
What if China tries to punish Australia?
Vern said the actual numbers of unemployed and underemployed in Australia are closer to 3.5 million. That’s 24.7% of the workforce. That’s according to calculations from Roy Morgan. The difference stems from the ABS reducing the size of the work force in its calculation. That made it possible, statistically, for 594,000 people to lose their jobs. But for only 104,000 of them to be listed as unemployed.
How many of those lost jobs will ever come back? Vern thinks it may be four out of ten. Bill agrees. Movies….retail…dining…travel….tourism…these are industries that could take years to recover from the sudden stop in economic activity.
A certain percentage of the population simply won’t have the money to spend. A further percentage won’t have the will to go out their front door and put their health at risk (so effective has been the campaign to scare the public into compliance with the new rules).
A full discussion of the correct public policy to deal with a pandemic is beyond the scope of this essay. Only time and history will tell. But in the meantime, one big question mark is Australia’s relationship with China. Will the big red dollar save the day again?
We say again because it was China’s trillions on infrastructure spending in 2009 that cushioned the blow for Australia during the great recession. Demand for bulk commodities (iron ore and coal), metals (aluminium and copper), energy (LNG), and precious metals (gold) supported Australia’s economy and capital investment. So did Chinese tourism, Chinese demand for Australian property, Chinese students in Australia’s universities, and Chinese demand for Australian beef, wine, and barley.
But what if China tries to punish Australia for its support of an international inquiry into the origins of the coronavirus? Chinese officials aren’t taking Australia’s calls when it comes to trade matters, according to a report from the ABC. They’re even considering slapping an 80% tariff on Australian barley, which, while important to barley growers, seems a lot less drastic than, say, iron ore.
Australia believes the tariffs are in retaliation for the Morrison government’s backing of a global panel to look at where the Wuhan flu came from. It doesn’t seem an especially radical idea. In fact, in makes sense to figure out where the first modern global pandemic came from and how we can handle the next one without causing a greater depression.
But we’ve entered the stage where the virus has become a political tool. In the US, Donald Trump is running for President in November. His opponents in the Democratic party know that the longer the economy is shut down and the more blame the president receives because of it, the worse it hurts his chances for re-election. Trump recently claimed Chinese hackers were attempting to steal US research on a vaccine for coronavirus in order to profit from it.
Trump’s base is angry and looking for someone to blame. China fits the bill. Last week the President speculated that maybe it’s time to just ‘cut off the whole thing.’ He didn’t elaborate. But we assume this means bringing back factories to the US, shortening supply chains for critical goods and technologies, and not putting hundreds of billions of dollars in the pocket of the Chinese Communist Party.
This is the kind of ‘economic distancing’ Vern Gowdie first mentioned in late March. But for Australia, the question is how far away the country can move from China without catching cold. The ‘red dollar’ may be a lot more important to Australia’s economic future than the Greenback. That it comes with strings attached — refraining from criticising China on the international stage — may be the price to pay.
We’ll keep following events as they play out. Keep in mind that indicators like the iron ore price and the exchange rate of the Australian dollar are a lot more useful than reading the political tea leaves. With Brazil having a spike in coronavirus infections, China may not have as much flexibility on sourcing iron ore as it would like Australia to believe. And you can bet that real estate agents and property developers are keen to welcome back wealthy Chinese to Melbourne and Sydney with open arms (and wallets).
But maybe our cab driver was right. Maybe it was going too fast. Maybe de-globalisation is the cyclical response to globalisation. And maybe it will be like this for longer than any of us expect.
Until next time,
PS: How might politicians be ‘up to no good?’ They know there can’t be any serious economic recover unless you return to a free enterprise system. A system where people are free to move, work, spend, and sell without permission from the government every step of the way. But some of them clearly realise this is the greatest chance in human history to put the free enterprise system under the boot of the State. If the cost is million unemployed, depressed, and hopeless about the future, it will be well worth it. More on that next week.