First Flit

Having lived through the 70s in America, I know the signs of inflation.
When I first wandered into Australia about 8 years ago, coffeehouse conversation often turned to how the country had changed. I was the newcomer, and from America. It seemed like everyone wanted to be the first to tell me how Australia was becoming like America.Image by Getty Images via Day
I would look closely, and listen, to try to tell if the person thought that was a good thing or a bad thing.
In time, I came to realize that Australians had an easy way to assign blame for anything that went wrong: they just blamed America and Americans. It saved a lot of thinking and worrying about the things they could change.
America was to blame, so .. Why worry? Be Happy.

The changes aussies blamed on America were kind of obvious to me:

• high and rising prices;
• rabid consumer credit;
• smaller portions and lower quality goods were more expensive;
• service cutbacks because of personnel reductions;
• and fees on everything.

They were the consumer signals of inflation and hyperinflation. I recognized them in an instant.
When I said this stuff to aussies, the response was universal. A grim shrug, then some sort of comment blaming America.
A lot of times the comment wasn't even about prices or the economy. Aussies simply took my conversational comments as an attack on Australia, and turned to an attack on America.
The thinking seemed to be there was no sense in being negative (about Australia), there was always the US to blame.

When it came time to decide to stay, I got interested in the Australian economy.
It didn't take a whole long time to figure out where the inflation was coming from. The new Liberal administration had been elected because of the aging aussie homily: "Liberals create surpluses and Labour spends the country into poverty." The new Liberal administration was fueling inflation to pay off the national debts.
Mr Howard simply started paying something to everyone. Within a year, the direct payments into the economy tripled as a portion of the GNP - from 1% to over 3%. You had to make 6 figures in Australia not to be eligible for some sort of payout.
In America, that'd be catastrophic. But Australia is a small country with a small economy. In perspective, the recent Wall Street bailout is larger than the total GNP of Australia by $100billion USD.
Converted at the current exchange rate, that's be about $163billion AUD.
And that's after all the bloating inflation in Australia for 8 years or so.

The same consumer inflation signals continued for 8 years, only getting worse and worse. The inflation rate was underreported to the population. It was supposedly 4%. The real figure was closer to 10 or 12%.
Denial is not something unique to Australia. Just look at the idiocy of the sub prime mortgages in the US.
Consumers only really became concerned, as in the US in the 70s, when the cost of petrol went through the roof. The speculators that are blamed were only reacting to real market forces. There was room for the increase and they saw it.

I got the stories. A house had cost only $60,000 in the neighborhood only two years ago. Now it was $85,000. And that was nothing compared to prices across the whole metro area, where the average house was (then) $220,000. It was much worse in Sydney.
My comments were: This is still a suburb. It's a long ways into the city. But it looks like that's changing with the plans for new freeway. This would be a good time to buy that $85,000 house. -- It's obviously going to go up a lot.
The responses from the local Australians registered their incredulity: "These houses were old. They can't get much more expensive. It'd be better to tear them down and build new houses. Houses out here will never be over $100,000."
Within 4 years, just a year or so after I heard that comment last, the same house sold for $180,000. Two years later, it was on the market for $240,000.

The market value of that old, unrenovated 1970s military housing house had tripled in 6 years. And the freeway went into service just after it was sold.

Now Rudd government has to support the inflation. So they have gone even farther than the Howard government ever dared. All bank deposits are guaranteed. More than that, all loans between banks are guaranteed. And there will be a $10.4billion payout to spark Christmas spending on December 8th.
Weirder than fiction, the Assistant Prime Minister thinks this will not be inflationary.
And just two months ago, the RBA raised interest rates to combat inflation. This month, the RBA dropped interest rates from 7.0% to 6.0%, and more cuts are expected.
Nothing inflationary in all that. Nahhhhh....

Oh, the average house in the metro area is now $385,000. In Sydney, it's over $400,000.

The Breifing

Image via WikipediaI'm trying to picture how Kevin Rudd and the new government was breifed on the economic crisis.

Someone had to orchestrate this presentation for them to have made such outlandish decisions so quickly.
Let's see.
You want them excited, but not thinking too clearly. This is not a time for real leadership. This is an opportunity.
Who would you choose to give the presentation? A dour banker type would just offend Rudd. They guy would look and sound too much like Rudd himself. No, you choose a woman.
Rudd has shown he likes women with ample bust. So, a tall blonde. Tight skirt. Heels. She'd appear in a very businesslike suit. A woman that walks like a man even in heels. It may sound impossible, but aussie women can march like troupers in heels.
Yes. That would keep them excited and just enough concentration to hear what was going to be said.
The women would feel intimidated. The men would be looking at her curves. Her demeanor would keep them all guessing. And keeping their eyes off her curves would be just the right distraction for all.

Now, what's she gonna say?
"Mr Rudd, as you know, over 65% of the Australian GNP is consumer spending. We talk up the resources sector as much as we can, but it's really only 15% of the GNP. Australia really doesn't have an agricultural or manufacturing sector of consequence compared to the consumer sector."
(Pause. Give them all a chance to nod knowingly and let their fantasies subside a little.)

"Consecutive administrations came to realize that Australia had one real resource of any consequence: Land."
"Most land in Australia would be considered prime real estate in other countries. So much of it is near business centres and the beaches, there was a lot to work with."
"The Australian consumer sector is financed by inflated land prices and building. Building creates new jobs. Good paying jobs that don't require a great deal of training."
"Profitable sales create new wealth which is then recycled through the economy as consumer spending. That consumer spending is leveraged as credit. Credit cards. Personal loans. All based on higher and higher mortgages on rapidly increasing real estate sales."
(Again pause. This is news to some around the table. The Australian capacity for denial is astounding.)

"The Howard administration saw the power of consumer spending. It keeps people happy to feel they have money in their pockets. That happiness translates into purchases of all sorts."
"To support the creation of weatlth from real estate, the Howard administration offered all sorts of incentives. Investment property tax breaks fueled new land purchases. The first home buyer grants allowed families to buy property they couldn't otherwise afford."
"When the property went up in value, the new equity was used to buy investment property. - And the cycle continued."
"In addition, in order to support the ensuing inflation, the Howard government increased the direct payments to consumers."
"In fact, even as the GNP doubled, the Howard administration paid more and more. Within two years, direct payments had tripled as a percentage of the GNP. Mr Howard wisely maintained this level throughout his 11 years in office."
"Of course, direct payments from government to consumers is always inflationary, but that was the goal of the Howard government. Mr Howard was seeking to pay off the debts of previous administrations by inflating his way out of them."
"He succeeded. Soon the government was in surplus. - Which always sounds good to the public, as you know." (Wry smile. Let those sharp blue eyes roam the room gurl...)

She's got them in the palm of her hand.
A fly on the wall would see all the little political minds whirling madly, thinking of how to make this information into political capital.

"Mr Howard never had to fear raising taxes, or any other decision in his term of government because of the increasing wealth at all levels in the country. People were happy. The quality of life was better. They could see a bright, wealthy future for themselves and their children."
"Anyone who dared to say it wouldn't happen was dismissed quickly. Such people were said to be either lazy or stupid. Or just living too well on the dole. -- As the Americans say it: 'It's the economy, stupid.' "
(Pause. Let it all sink in. Faces reveal silently the jealousy.)

"Australia created jobs from land. Those jobs created other jobs. Working people were happy and their wealth increased as though they were financial geniuses."
"And all those jobs meant taxes at all levels of government which in turn could be spent on new infrastructure and education. Australia could afford to train millions into new skills and professions."
(A quick pause looking at the Prime Minister, whose wife made her fortune from the training programs.)

"As you can see, Australia can ill afford to let this process cease."

"Japan is a case in point. The opposite of inflation is deflation. The Japanese economy slipped into a deflationary spiral in the 1990's. Prices lowered. There was no sense in buying a new home today since it would cost less next month. Japan slipped from the second largest economy to the 16th, even lower than Australia in GNP."

"Growth, and controlled inflation, is the only direction for Australia."
(Long pause. Letting it all sink in. And watching the nervous eyes around the room as ministers squirm in their seats. - They know they're caught like fish in a net.)

"Mr Rudd, and all ministers present, Australia must guarantee all bank deposits." (A quick assessment around the room)
"And further, Australia must guarantee all loans between banks."
"Australia must save Australia to preserve the lifestyle of ordinary citizens."

"Mr Rudd, further, Australia must increase the federal subsidy for new home buyers. We cannot let builders stop building, Mr Rudd. Those jobs are vital to the economy."
"If we let home values decrease, it will destroy the banking system and the future of all Australians."
(She's got to take a long breath here. Her breasts heave, pressing into her blouse and suit jacket. That was the real kill stroke: tying the health of the banks to the well-being of every Australian. - But a quick look around the room is reassuring: They all seem to agree.)