How to become poor
Recently I have been ramping up the discussion about a serious fix we need for our business. The business of Australia requires motivated staff, great products and services, and a lid to be kept on costs.
Looking at our balance of payments however, you can see that we are a profligate country, spending more than we earn and selling off assets to pay for it. Keep going and eventually all our assets will be owned by foreigners from whom we will rent the properties, sending our income offshore at an even faster rate.
There are solutions. For example, fix the Balance of Payments’ current account deficit by adding value to our exports. To do that we need to make it cheaper to run businesses and compete. We need to incentivise activity that adds value to our exports.
There are many ways to do this, but giving politicians a stick with which to choose those industries is a mistake. Making energy cheaper is also a solution, but neither is likely in the next four years and as William suggests in his comment below after reading my column in The Weekend Australian, its seems nothing will change for a long time…
Your article rang bells from 20 years ago, when I made several friutless visits to Canberra, which had the objective of getting some tax concessions to get a $1B project off the ground, which would have allowed mineral sand products to be exported as semi finished materials, without embedded environmental problems, rather than ores. To use a very old analogy, not wool, but cloth! Captive markets in NE Asia were and are huge, and added values of 50 to 400percent were possible, but we endured endless drivel about level playing fields. Profitability, after the first seven years, would have delivered 50 years of tax rvenues to Federal and State governments
Eventually we gave up (sorry kids) and Singapore went ahead with a similar, but much smaller project. They had mimimal natural advantages, except for far sighted politicans, who looked to the next generation, not the next election.
Please keep hammering away at this, they may eventually wakeup, but I fear for the future of my grandchildren, who deserve a better future than that which we are currenting designing through our collective incompetence, and inability to realise that we must make our own luck.
William Jones
Read my column here.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
Matt Mushalik
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How to become oil & gas poor
Queensland plans to export more than 10 times the gas NSW needs (part 3)
http://crudeoilpeak.info/queensland-plans-to-export-more-than-10-times-the-gas-nsw-needs-part-3
Howard’s wrong decisions on offshore gas exports start to hit transport sector now
http://crudeoilpeak.info/howards-wrong-decisions-on-offshore-gas-exports-start-to-hit-transport-sector-now
NSW gas as transport fuel. Where are the plans?
http://crudeoilpeak.info/nsw-gas-as-transport-fuel-where-are-the-plans
Roger Montgomery
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Thanks Matt,
I am always wary of any forum where zealots frequent as it is vital in investing to have an open mind. Hopefully your links are to a balanced site.
josh.ng.perth
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PETER SULLIVAN said on APRIL 15, 2013 AT 4:47 PM that “I don’t think we can blame all our problems on the mining industry,after all it helped us through the recent world recession.”
I always have this feeling that Australia’s luck in the mining boom during the GFC only buy us time from what will hit us eventually – the ripple effects of the advanced economies great recession/depression (depending on how you look at it)
What is missed is the windows of opportunity for the minority Fed government to learn from these advanced economies and turn Australia’s economy to better shield the economy from the debt malaise.
Perhaps I am expecting too much from a government to look beyond the next election or to do transformational changes. I personally experienced Singapore’s post 1985 Recession transformation, and saw how Singapore totally avoid the 1997 Asian Financial Crisis.
Roger Montgomery
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You can’t sustainably grow when you bet everything on something that is unsustainable.
Peter Sullivan
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After reading the above comments, I have a mixture of agreement and disagreement.There seems to be an agreement on the problems facing Australia but I don’t agree with the solutions presented. I don’t think we can blame all our problems on the mining industry,after all it helped us through the recent world recession.I agree that it would be preferable to value add to our exports but we cannot because our costs are too high and we cannot compete with lower cost countries without Government subsidies and we know that ends up in disaster.
The last two years I have spent a little time in the USA and Canada and I was surprised to find their wages are about half ours and Canada at least has simlar industries to us.So we are at a competitive disadvantage.
I have a brother inlaw who has moved most of his businesses to China ,Singapore, Indonesia,Dubai, and South Africa because of the costs here.
It is easy to blame Governments and in most cases you are right.You only have to look around the world today to see the results of poor political governance.As the Oricle of Omaha-Warren Buffett, has famously said, “When the tide runs out you will see who has been swimming naked”. When the Banks started to collapse through greed and poor governance.Countries,especially in Europe,started to collapse through too much debt.I am afraid it will take some time for some of them to clear their debts as it isn’t politically easy to make the cuts required to get them back in balance.I think the USA will recover quicker as they have the flexibility
in their workforce to do so.
As for ourselves, we should get on with it,ignore the Government, because if you rely on them you are a born loser.Improve our education and gain knowlege as this will overcome any problems that should arise.
My family have been successful farmers in this country for 170 years and they have adapted to all the changes that have taken place in those years and have succeeded.The present day families have moved on to modern day occupations both here and overseas. I personally have spent eighteen years in the oil and Gas industries after having trained as an accountant earlier in life but never practiced as one.
Paul Audcent
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Well Roger you certainly have opened the flood gates! But what you say is true, having worked in Britain, New Zealand and Australia I can confirm it is the owners of the businesses who are the ones keen to sell. Surely its a question of money, their money, they want it back!. There does not seem to be the same loyalty to the Country or any foresight. Most of the projects I and my colleagues were involved in ultimately led to the company sell off, as soon as they became more profitable they were sold to business overseas.
James Alexander
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The latest issue of Time magazine has an article, “Made in the USA” about the resurgence of manufacturing in the US. I saw an excerpt in The Big Picture blog and it made me think about this discussion. Particularly this quote from the article:
“The ability to make things is fundamental to the ability to innovate things over the long term,” says Willy Shih, a Harvard Business School professor and co-author of Producing Prosperity: Why America Needs a Manufacturing Renaissance. “When you give up making products, you lose a lot of the added value.” In other words, what you make makes you.”
I know I’m not keen on being a hole in the ground.
Rod McConchie
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Thanks Roger, keep it up. I recall someone (Barry Jones perhaps) pointing out several decades ago that four advanced economies had failed to change substantially in the twentieth century from an agricultural/mining base – Argentina, Russia, New Zealand, and Australia. Despite the best efforts of the Cochlears and CSLs, has anything changed very much since then? Selling a tree for 10 bucks as wood-chips rather than selling it for 10,000 as fine furniture is not the most insightful or visionary strategy. We are the ‘barbeque today beats banquet tomorrow’ country.
matthew.connors2
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Sorry one more point to tack on to the response below.
1. The govt spending on the car industry.
It looks as if the $12B spent has only delayed the inevitable. Imagine if the govt had invested that 12B in an industry that is growing rather then shrinking, ie bio science, solar, wind, renewable energy, building ports, etc…. Instead of saving, what amounts to “zero jobs in the end” we would have probably created thousands of jobs that the govt would never have had to contribute another cent towards….
Spending money on dying industries is like investing in a dud company. It might feel good to be able to help, but ultimately your just delaying the inevitable and going to get a massively negative return on investment.
Where as spending money to accellerate the growth of an industy would likely return the govt money in taxes, jobs, productivity and even as dividends if they structured it correctly.
matthew.connors2
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Our problem is that our wages are just too high for our productivity. ie the car industry. We simply cannot compete.
We need several things to happen.
1. The govt needs to heavily invest in education at all levels, to push push push our smartest thinkers to new levels , rather then have them regress to the norm, which is what we currently do, by requiring people to fullfill courses based on time attended rather then outcomes met and exceeded. If someone is hard working and bright enough they should be able to have 3 deegrees and a HSC by age 17. Or be able to do a 4 year uni course in 17 months etc…..but we insist our bright people regress to the norm , over and over….our whole philosphy of time based education needs to be over hauled.
2. Our minimum wage needs to stop increasing. There are simply too many people that are not productive enough to warrrant $638 per week….(i will get attacked on this, but please consider this before responding, while ever our minimum wage is $638, jobs that require higher productivity then $638 for 38 hours, will continue to flow offshores. Its simple maths. If you need 38 hours worth of work done for $500 to be able to compete with cheap imports, then you cant get Australians to do the job, you have to take the job to another country. Im sure there are many jobless Aussies that would prefer to take a job for $500 a week and be employed, then see the job go offshoes and be out of a job. Whilever we keep increasing the minimum wage, based on nothing more then attendance hours at work, we will continue to see Aussie job losses to other countries.
3.A govt rethink on where they spend thier money. ie The govt needs a serious rethink on what they spend on. ie if they spend on NBN which by far exceeds most peoples needs, then we are pouring money into wasted resources and again reducing our productivity, thus exporting jobs. If we spend on education, and infrastructure that improves productivity in areas where we have bottle necks and waste then we can help keep jobs here. eg build and NBN that allows people to get huge speeds where required, not just served to everyone. Build more lanes on the city motorways so workers can spend less time stuck in traffic. Imagine if every tradie and mobile workermber could get around sydney fast enough to do 10 jobs a day instead of 4. Improve our ports so that we dont have 50 ships sitting empty waiting to be loaded at newcastle and wollongong…. Its not rocket science , if we can boost our productivity, by spending in the right areas, we can all live more comfortably and keep more jobs here…. But whilever we focus on wage increases and poorly targeted govt spending we will continu to see Aussie jobs go overseas…
rmassera
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I suggest this entire discussion be forwarded to the leaders of our nation, they evidently need to refocus away from petty domestic political point scoring. Countries with vision like Singapore are overtaking Australia and we seriously risk being left behind. There are huge emerging opportunities & we should be focused on seizing these over the next 50 years.
Roger Montgomery
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Hi Rob,
We’ve already been left behind. And watching Garrett and Pyne argue about who is investing the least in the education of our future population demonstrates that you cannot leave the future competitiveness of a country to socialists.
xiao fang xu
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“Looking at our balance of payments however, you can see that we are a profligate country, spending more than we earn and selling off assets to pay for it. Keep going and eventually all our assets will be owned by foreigners from whom we will rent the properties, sending our income offshore at an even faster rate.”
-this is similar article like your http://economyincrisis.org/solutions
-change where it say US and use Australia
-Most economists are of the view that the ever-growing US trade deficit and the subsequent expanding foreign debt pose a threat to the well-being of Americans. What is then required, so it is held, is to set in motion policies that will help curtail the widening trade imbalances between the United States and the rest of the world. Focusing on the trade deficit as the supposedly major problem of the US economy only diverts the attention from the real culprit, which is the US central bank.
-in the fiat-money era, balance of payments deficits are truly meaningless
-the absurdity of worrying about the balance of payments is made evident by focusing on inter-state trade. For nobody worries about the balance of payments between New York and New Jersey, or, for that matter, between Manhattan and Brooklyn, because there are no customs officials recording such trade and such balances.
-We can look back upon the “classical” gold standard, the Western world of the 19th and early 20th centuries, as the literal and metaphorical Golden Age.
-The international gold standard meant that the benefits of having one money medium were extended throughout the world. One of the reasons for the growth and prosperity of the United States has been the fact that we have enjoyed one money throughout the large area of the country. We have had a gold or at least a single dollar standard within the entire country, and did not have to suffer the chaos of each city and county issuing its own money, which would then fluctuate with respect to the moneys of all the other cities and counties. The 19th century saw the benefits of one money throughout the civilized world. One money facilitated freedom of trade, investment, and travel throughout that trading and monetary area, with the consequent growth of specialization and the international division of labor.
It must be emphasized that gold was not selected arbitrarily by governments to be the monetary standard. Gold had developed for many centuries on the free market as the best money; as the commodity providing the most stable and desirable monetary medium. Above all, the supply and provision of gold was subject only to market forces, and not to the arbitrary printing press of the government.
-The international gold standard provided an automatic market mechanism for checking the inflationary potential of government. It also provided an automatic mechanism for keeping the balance of payments of each country in equilibrium.
-all this is written by person much more smart than me
thanks Ned.
-It all comes back to the honest money, equality in the front of the law and morality.
Roger Montgomery
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My Friend and Associate AShley Owen writes:
Should the government impose strict “budget austerity” to “balance the budget”? Or is the solution even more “deficit spending”, even more debt, and seemingly endless “money printing”?
There is no one right or wrong set of policies that work at all times and in all situations. Inflationist full employment targeting, deficit spending and government intervention sounded like a good idea in the 1930s depression but economies collapsed in a mire of high inflation, high unemployment and stagnation in the 1970s (although it is probably unfair to sheet home the malaise of the 1970s to Keynes)
Hard money policies of money supply targeting, deregulation and freer markets sounded like a good idea after the 1970s. Inflation was brought down and the economy and stock market boomed, but it trade deficits and foreign debt soared. Low interest rates and deregulation produced a string of asset bubbles and collapses culminating in the sub- prime crash and sovereign debt crisis. (Likewise it is probably unfair to blame the current crisis on Hayek and Friedman).
Severe economic, financial and political crises provide the catalyst for radical policy changes and, even when they are successful, often contain the seeds of the next crisis.
Trying to balance the budget through piecemeal budget cuts and/or tax hikes generally just makes the deficit and debt worse, as tax revenues fall and welfare spending rise in the resultant slowdown – as was the case in 1936-8 globally and more recently in the UK and the PIIGS. It is also politically unpopular and hard to sustain in the face of popular backlashes.
Generally it requires a very serious crisis in order to provide the catalyst and the political mandate for radical change. It generally requires either a deep external devaluation (large-scale currency depreciation, which is not possible with a fixed currency like the Euro or a strong currency like the US dollar) or deep internal devaluation (savage cuts to spending, wages and working conditions).
There are precedents for successful turnarounds – in the Eurozone and in US States (including large states like California and Texas)
“What if the government hits the debt ceiling and has to stop paying wages or pensions?” and “Will the government need to shut down?”
This has happened in the recent past and has been brushed off by markets – both the US dollar and US stock market kept rising strongly after the crisis.
It will probably happen again in the current crisis. Already payments to suppliers and tax refunds have been delayed. If this escalates further it may become serious enough to create a public backlash that could provide the catalyst for real action, like it was in the 1995-6 federal government shutdown crisis.
“What if the government defaults on its debt?”
The Federal government has also missed payments on interest and maturing debt in the recent past, and this is another likely outcome in the current crisis. If it is selective and temporary it is likely to be brushed off by markets as it has been in the past. The government has plenty of ways to come up with cash to keep the current process of short term delays and quick fixes going for some time yet.
The sooner it escalates into a major crisis the sooner radical action will be need to be taken, and the sooner the real problem can be tackled and solved.
“What happens when the level of government debt is above 100% of GDP?”
This threshold was passed in 2012, but the US has been there before – in the mid-1940s.
There are two key differences this time. The first is that the debt is now increasingly owned by foreigners, and so the US government is at the mercy of foreign lenders – mainly China and Japan. (Japan has a large foreign debt – more than twice as large as the US debt as a % of its GDP, but almost all of it is owned by the Japanese themselves, so it is an internal problem not an external problem with foreign lenders in control)
The second difference is that the US has been running huge trade deficits since the 1980s after the 1970s decline in the US dollar was halted. However not even the decline in the dollar in the 2000s was enough to engineer a trade surplus.
There is hope for American exporters even with a relatively strong dollar – with declining wages, declining energy costs, declining commodity input costs, low debt levels and low interest rates, and explosive growth in emerging market middle classes who clamour for American brands and technology, the future is looking relatively bright for American exporters.
“Will it ever get the economy growing again?”
Yes, the US has suffered far more severe economic contractions and financial crises in the past. Markets rebound out of the depths of the crises when pessimism is greatest and all hope seems lost.
“Is the current level of debt too high / unsustainable?”
No. The interest burden on the government debt is only moderate. Interest costs have been running at around 9-10% of budget outlays since 2003, despite the rising debt level. This is around the same interest burden from 1950 to the late 1970s, and so should be entirely manageable. The share of budget outlays has remained flat despite rising debt levels because national output and tax revenues have also been rising.
Likewise, interest cost as a percentage of GDP is between 1.5% and 2%, similar to what it was in the 1950s to the late 1970s.
In real terms after inflation, the interest paid on government debt ($230b) is lower than it has been since 1984, and is 35% lower than it was at its peak in 1996.
Even four years of trillion dollar deficits since 2009 did not increase these debt servicing ratios, because interest rates remained low and the economy grew.
However, as the economy improves and the Fed winds back and even reverses the bond-buying programs, yields will rise and the cost of refinancing treasuries will rise, so the clock is ticking on solving the problem.
Roger Montgomery
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And Chris writes:
Roger,
You are right. Ashley Ormond said the same thing about four years ago, that we export iron ore at $100 a tonne and buy it back as mobile phones, cars etc. at $20,000 a tonne. Real smart (!).
We do not “value add” here and when we have “smart” people, they are cut down as being “bigheads” or “try hards”, but if you’re good at sport, then you’re a winner. Or at least, Bob Catter seems to think so, and you should get an alternative tax rate to the majority of other people.
So, the smart people leave those companies or Australia entirely, and take their IP with them (Shi Zhengrong was a PhD research student who was turned down for his solar panels IP by BP Australia, because there was “no prospect” for solar energy here, so he left and listed the company on the NASDAQ instead). If you go bust here in business, everyone laughs at you. If you go bust in business in the USA, you’re a hero for trying and you can always try again.
We need tax breaks for R+D full stop, not just “IT”. We have no IT or pharmaceutical industry here, when compared with the USA and Europe (respectively), and even the size of our gas and oil industries are laughable when compared against companies in both (ExxonMobil, Royal Dutch Shell, BP), yet that is an extractive industry (which can easily value add), but you saw that Shell Geelong is getting closed down. That refinery takes crude oil and makes pretty much all of our aviation fuel here, 30% of SA’s fuel, plus a lot of petrochemicals and bitumen. That is a value adding business which will also make handsome ROEs if handled correctly. When you can “value add”, your suite of products = your income streams grows markedly, which can mean more profits. If you are a café and all you sell is a cheese sandwich, you are not going to make much money.
Most of our politicians are lawyers and have never run a business in their life (except Malcolm Turnbull), therefore, they have NO idea of what it actually takes to run a budget or a business successfully.
It’s alright Roger, if it’s not “service industries”, we can rely on ever escalating house prices to save us all (!). (Read Michael Lewis, Boomerang).
My fear is that you, like Steve Keen with his infamous Mount Kosciusko walk, will get shot down by politicians who wish to discredit those people who would speak the truth. By propping up an ailing housing market with massive stimulus, they effectively bought themselves some time and managed to discredit Prof. Keen because he spoke the truth. That’s my opinion anyway.
Chris.
David Swift
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Gary Gray’s comment about increasing extraction of ore as being the solution to a fall in price is reminiscint of US farmers in the depression who reacted to falling grain prices by opening up more and more marginal land.When prices completely collapsed and there was no market for the huge quantities of grain, all that was left was ruined land, massive dust storms and economic refugees.In every area we seem to be content to send stuff overseas with no added value -this includes live animal exports- which will always leave us open to competition with lower cost exporters. Sadly the world does not owe us a living.
Peter Kruckow
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Hi David
Without getting into a debate on the virtues of the live export here on Roger’s site, I’d like to clear up few misnomers regarding the subject. Contrary to popular belief the Live Cattle Export industry exist purely because it is not viable to run a meatworks in the north due the monsoon season, although a couple of players want to give it a go. Geoff Teys of Teys Bros. has said that a meatworks in the north needs to run for 12 months a year to have any chance of being viable and at best the most they can average is about 10 months ,sometimes less depending on the severity of the wet season. It is physically impossible to store the required numbers for the 2 – 3 month shortfall, which is why Teys Bros. shut down their meatworks at Innisfail and why the likes of Cape River and the likes shut down in the earlier times. I hope the Elders project in Darwin and the consortium in Richmond get off the ground , but as they say history repeats and we still get a monsoon season.
Regards
Peter
Steve Baron
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So are we to assume Roger,that if some wealthy foreign investment firm wanted to buy out your business that you would not sell it because this would be bad for Australia? Based on this logic neither should Australia allow foreigners to buy stocks on the Australian stock exchange? The alternative of course could be a communist state and that all Australians would share in all the wealth? Individuals obviously must make decisions that best suit them personally as must listed companies.Adding value though is an opportunity to make enough money to buy foreign businesses and bring back profits to Australia.
Roger Montgomery
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No of course not. Thats nonsense as is your suggestion of the only alternative being a communist state. It is all about the current account deficit. That is all. M&A transactions would still occur but we would have the excess capital to make more overseas ourselves, raising the market value of our businesses. I always suggest inverting a problem to solve it but your inversion has resulted in a perversion. So go back to the source..
Andrew Legget
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Bravo Roger, i am fighting back the urge to give you a standing ovation for these comments as i know it is futile seeing i am in front of a computer in Martin Place.
I have never been one to share Australias love with resource companies, the complete “commodities” just don’t really interest me and i can’t see how you can build a successful and sustainable growing economy around such commodity products without a lot of luck. Step in China…..
I am also a believer in innovation and bold businesses/products. I have never been a fan of the belief that Australia is small and insignificant so why should we bother. ARB, Cochlear and Wi-Fi is proff of what we can do with the right minds.
You are right in your comments about it not being structural, with smart policy we can change this. The issue is with the political climate, politicians are easy to blame but they change their spots based on what the public feels. The general Australian population lacks vision. The ability to look past short term negatives and see the wider and grater long term benefits.
A recent example is a labor staffer having a go at his own party for paying money to lure a big-budget Disney movie to be filmed in Australia. Yes it may cost an MRI machine in the short term, but this movie will be huge and bring in extra taxes that would arguably be higher than the money paid out and also help open this part of the economy again.
I also remembering you mention, Roger, about the government refusing tax breaks to Deutche Bank setting up headquarters here. This move makes sense, it is not as if Singapore has benefitted from global financial services companies setting up shop and employing thousands……oh wait…
We are as a whole, very risk averse and it is to Australias detriment as it means capital for start ups and potentially daring and great value adding businesses and ventures.
I would happily forego a few years taxes if it meant we had the next Apple come through in Australia.
This links back to Dominoes “game changer” campaign, they obviously thought that Australia would consider this a bold initiative. I am thankful that it was panned as it means that perhaps there is hope. If Australia saw square pizzas as a “game changer” then we are in the stone age when it comes to innovation.
Sadly, whatever happens on September 14 (we all have our references and they may be polar opposites), there will be no change. As i said, politicians change their spots to match the public so until the public stops being so risk averse we will continue to see the same small targets, the lack of vision and bold decisions that better the Australian economy and will continue to dig up rocks at declining prices and wonder what went wrong. We will then blame the politicians again.
I can’t disagree with anythng you have written here Roger. Perhaps one day, we will see a change, i can only hope for the sake of all of us.