Australia’s Economy is a House of Cards

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By Matt Bar­rie & Craig Tin­dale.

I recent­ly watched the fed­er­al trea­sur­er, Scott Mor­ri­son, proud­ly pro­claim that Aus­tralia was in “sur­pris­ing­ly good shape”. Indeed, Aus­tralia has just snatched the world record from the Nether­lands, achiev­ing its 104th quar­ter of growth with­out a reces­sion, mak­ing this achieve­ment the longest streak for any OECD coun­try since 1970.

Aus­tralian GDP growth has been trend­ing down for over forty years
Trad­ing Eco­nom­ics, ABS

I was pret­ty shocked at the com­pla­cen­cy, because after twen­ty six years of eco­nom­ic expan­sion, the coun­try has very lit­tle to show for it.

For over a quar­ter of a cen­tu­ry our econ­o­my most­ly grew because of dumb luck. Luck because our coun­try is rel­a­tive­ly large and abun­dant in nat­ur­al resources, resources that have been in huge demand from a close neigh­bour.

That neigh­bour is Chi­na.

Out of all OECD nations, Aus­tralia is the most depen­dent on Chi­na by a huge mar­gin, accord­ing to the IMF. Over one third of all mer­chan­dise exports from this coun­try go to Chi­na- where ‘mer­chan­dise exports’ includes all phys­i­cal prod­ucts, includ­ing the things we dig out of the ground.

Source: Austrade, IMF Direc­tor of Trade Sta­tis­tics

Out­side of the OECD, Aus­tralia ranks just after the Demo­c­ra­t­ic Repub­lic of the Con­go, Gam­bia and the Lao People’s Demo­c­ra­t­ic Repub­lic and just before the Cen­tral African Repub­lic, Iran and Liberia. Does any­thing sound a bit fun­ny about that?

Source: Austrade, IMF Direc­tor of Trade Sta­tis­tics

As a whole, the Aus­tralian econ­o­my has grown through a prop­er­ty bub­ble inflat­ing on top of a min­ing bub­ble, built on top of a com­modi­ties bub­ble, dri­ven by a Chi­na bub­ble.

Unfor­tu­nate­ly for Aus­tralia, that “lucky” free ride is just about to end.

Soci­ete Generale’s Chi­na econ­o­mist Wei Yao said recent­ly, “Chi­nese banks are look­ing down the bar­rel of a stag­ger­ing $1.7 trillion?—?worth of loss­es”. Hya­man Capital’s Kyle Bass calls Chi­na a “$34 tril­lion exper­i­ment” which is “explod­ing”, where Chi­nese bank loss­es “could exceed 400% of the U.S. bank­ing loss­es incurred dur­ing the sub­prime cri­sis”.

A hard land­ing for Chi­na is a cat­a­stroph­ic land­ing for Aus­tralia, with hor­rif­ic con­se­quences to this country’s delu­sions of eco­nom­ic grandeur.

Delu­sions which are all unfold­ing right now as this quadru­ple lever­aged bub­ble unwinds. What makes this espe­cial­ly dan­ger­ous is that it is unwind­ing in what increas­ing­ly looks like a glob­al reces­sion- per­haps even depres­sion, in an envi­ron­ment where the U.S. Fed­er­al Reserve (1.25%), Bank of Cana­da (1.0%) and Bank of Eng­land (0.25%) inter­est rates are pret­ty much zero, and the Euro­pean Cen­tral Bank (0.0%), Bank of Japan (-0.10%), and Cen­tral Banks of Swe­den (-0.50%) and Switzer­land (-0.75%) are at zero or neg­a­tive inter­est rates.

Sum­ma­ry of Cur­rent Inter­est Rates from Cen­tral Banks (16th Octo­ber 2017). Source:

As a quick refresh­er of how we got here, after the Glob­al Finan­cial Cri­sis, and con­se­quent reces­sion hit in 2007 thanks to delin­quen­cies on sub­prime mort­gages, the U.S. Fed­er­al Reserve began cut­ting the short-term inter­est rate, known as the ‘Fed­er­al Funds Rate’ (or the rate at which depos­i­to­ry insti­tu­tions trade bal­ances held at Fed­er­al Reserve Banks with each oth­er overnight), from 5.25% to 0%, the low­est rate in his­to­ry.

When that didn’t work to curb ris­ing unem­ploy­ment and stop growth stag­nat­ing, cen­tral banks across the globe start­ed print­ing mon­ey which they used to buy up finan­cial secu­ri­ties in an effort to dri­ve up prices. This process was called “quan­ti­ta­tive eas­ing” (“QE”), to con­fuse the aver­age per­son in the street into think­ing it wasn’t any­thing more than con­jur­ing tril­lions of dol­lars out of thin air and using that mon­ey to buy things in an effort to dri­ve their prices up.

Sys­tem­at­ic buy­ing of trea­suries and mort­gage bonds by cen­tral banks caused the face val­ue of on those bonds to increase, and since bond yields fall as their prices rise, this buy­ing had the effect of also dri­ving long-term inter­est rates down to near zero.

Both short and long term rates were dri­ven to near zero by inter­est rate pol­i­cy and QE. Source: Bloomberg, CME Group

In the­o­ry mak­ing mon­ey cheap to bor­row stim­u­lates invest­ment in the econ­o­my; it encour­ages house­holds and com­pa­nies to bor­row, employ more peo­ple and spend more mon­ey. An alter­na­tive the­o­ry for QE is that it encour­ages buy­ing hard assets by mak­ing peo­ple freak out that the val­ue of the cur­ren­cy they are hold­ing is being coun­ter­feit­ed into obliv­ion.

In real­i­ty, the abil­i­ty to bor­row cheap mon­ey was main­ly used by com­pa­nies to buy back their own shares, and com­bined with QE being used to buy stock index funds (oth­er­wise known as exchange trad­ed funds or “ETFs”), this pro­pelled stock mar­kets to hit record high after record high even though this wasn’t jus­ti­fied the under­ly­ing cor­po­rate per­for­mance.

Almost all flows into the equi­ty mar­ket have been in the form of buy­backs. Source: BofA Mer­rill Lynch Glob­al Invest­ment Strat­e­gy, S&P Glob­al, EPFR Glob­al, Con­vex­i­ty Maven

In lit­er­al­ly a “WTF Chart of the Day” on Sep­tem­ber 11, 2017, it was report­ed that the cen­tral bank of Japan now holds 75% of all ETFs. No, not ‘owns units in three out of four ETFs’?—?the Bank of Japan now owns three quar­ters of all assets by mar­ket val­ue in all Japan­ese exchange trad­ed funds.

In today’s world Hugo Chavez wouldn’t need to nation­alise assets, he could have just print­ed mon­ey and bought them on the open mar­ket.

Bank of Japan now owns 75% of all Japan­ese ETFs. Source: Zero­hedge

Europe and Asia were dragged into the cri­sis, as major Euro­pean and Asian banks were found hold­ing bil­lions in tox­ic debt linked to U.S. sub­prime mort­gages (more than 1 mil­lion U.S. home­own­ers faced fore­clo­sure). One by one, nations began enter­ing reces­sion and repeat­ed attempts to slash inter­est rates by cen­tral banks, along with bailouts of the banks and var­i­ous stim­u­lus pack­ages could not stymie the unfold­ing cri­sis. After sev­er­al failed attempts at insti­tut­ing aus­ter­i­ty mea­sures across a num­ber of Euro­pean nations with mount­ing pub­lic debt, the Euro­pean Cen­tral Bank began its own QE pro­gram that con­tin­ues today and should remain in place well into 2018.

In Chi­na, QE was used to buy gov­ern­ment bonds which were used to finance infra­struc­ture projects such as over­priced apart­ment blocks, the con­struc­tion of which has under­pinned China’s “mir­a­cle” econ­o­my. Since nobody in Chi­na could actu­al­ly afford these apart­ments, QE was lent to local gov­ern­ment agen­cies to buy these emp­ty flats. Of course this then led to a tsuna­mi of Chi­nese hot mon­ey flee­ing the coun­try and blow­ing real estate bub­bles from Van­cou­ver to Auck­land as it sought more afford­able prop­er­ty in cities whose air, food and water didn’t kill you.

QE was only intend­ed as a tem­po­rary emer­gency mea­sure, but now a decade into print­ing and the cen­tral banks of the Unit­ed States, Europe, Japan and Chi­na have now col­lec­tive­ly pur­chased over US$19 tril­lion of assets. Despite the low­est inter­est rates in 5,000 years, the glob­al eco­nom­ic growth in response to this mon­ey print­ing has con­tin­ued to be anaemic. Instead, this stim­u­lus has served to blow asset bub­bles every­where.

Total assets held by major cen­tral banks. Source: Haver Ana­lyt­ics, Yardeni Research

This mon­ey print­ing has last­ed so long that the US eco­nom­ic cycle is immi­nent­ly due for anoth­er down­turn- the aver­age length of each eco­nom­ic cycle in the U.S. is rough­ly 6 years. By the time the next cri­sis hits, there will be very few levers left for cen­tral banks to pull with­out get­ting into some real­ly fun­ny busi­ness.

It wasn’t until Sep­tem­ber 2017 that the U.S. Fed­er­al Reserve final­ly announced an end to the cur­rent pro­gram, with a plan to begin sell­ing-off and reduc­ing its own US$4.5 tril­lion port­fo­lio begin­ning in Octo­ber 2017.

How these cen­tral banks plan to sell these US$19 tril­lion in assets some­day with­out com­plete­ly blow­ing up the world econ­o­my is anyone’s guess. That’s about the same in val­ue as try­ing to sell every sin­gle share in every sin­gle com­pa­ny list­ed on the stock mar­kets of Aus­tralia, Lon­don, Shang­hai, New Zealand, Hong Kong, Ger­many, Japan and Sin­ga­pore. I would think a pri­ma­ry school stu­dent would be able to tell you that this is all going to end up going hor­ri­bly wrong.

To put into per­spec­tive how per­vert­ed things are right now, in Sep­tem­ber 2017, Aus­tria issued a 100 year euro denom­i­nat­ed bond which yields a pathet­ic 2.1% per annum. That’s for one hun­dred years. The buy­ers of these bonds, who, on the bal­ance of prob­a­bil­i­ty, were most like­ly in high school or uni­ver­si­ty dur­ing the glob­al finan­cial cri­sis, think that earn­ing a minis­cule 2.1% per annum every year over 100 years is a bet­ter invest­ment than well any­thing else that they could invest in- stocks, real estate, you name it, for one hun­dred years. They are also bet­ting that infla­tion won’t be high­er than 2.1% on aver­age for one hun­dred years, because oth­er­wise they would lose mon­ey. This is even though in 20 years time they’ll be hold­ing a bond with 80 years left to go to be paid out in a cur­ren­cy that may no longer exist. The only way the val­ue of these bonds will go up is if the world con­tin­ues to fall apart, caus­ing the Euro­pean Cen­tral Bank to cut its inter­est rate fur­ther and keep it low­er for 100 years. Since the ECB refi­nanc­ing rate is cur­rent­ly zero per­cent, that would mean that if you want­ed to bor­row mon­ey from the Euro­pean Cen­tral Bank, it would lit­er­al­ly have to pay you for the plea­sure of bor­row­ing mon­ey from it. The oth­er impor­tant thing to remem­ber is that on matu­ri­ty, every­one that bought that bond in Sep­tem­ber will be dead.

So if one naive­ly were look­ing at mar­kets, par­tic­u­lar­ly the com­mod­i­ty and resource dri­ven mar­kets that tra­di­tion­al­ly dri­ve the Aus­tralian econ­o­my, you might well have been tricked into think­ing that the world was back in good times again as many have ral­lied over the last year or so.

The ini­tial ral­ly in com­modi­ties at the begin­ning of 2016 was caused by a bet that more eco­nom­ic stim­u­lus and indus­tri­al reform in Chi­na would lead to a spike in demand for com­modi­ties used in con­struc­tion. That bet rapid­ly turned into full blown mania as Chi­nese investors, starved of oppor­tu­ni­ty and restrict­ed by gov­ern­ment clamp downs in equi­ties, piled into com­modi­ties mar­kets.

This saw, in April of 2016, enough cot­ton trad­ing in a sin­gle day to make a pair of jeans for every­one on the plan­et, and enough soy­beans for 56 bil­lion serv­ings of tofu, accord­ing to Bloomberg in a report enti­tled “The World’s Most Extreme Spec­u­la­tive Mania Unrav­els in Chi­na”.

Mar­ket turnover on the three Chi­nese exchanges jumped from a dai­ly aver­age of about $78 bil­lion in Feb­ru­ary to a peak of $261 bil­lion on April 22, 2016?—?exceeding the GDP of Ire­land. By com­par­i­son, Nasdaq’s dai­ly turnover peaked in ear­ly 2000 at $150 bil­lion.

While vol­ume explod­ed, open inter­est didn’t. New con­tracts were not being cre­at­ed, vol­ume instead was churn­ing as the hot pota­to passed between spec­u­la­tors, most com­mon­ly in the night ses­sion, as con­sumers trad­ed after work. So much so that some­times ana­lysts won­dered whether the price of iron ore is set by the mar­ket ten­sions between iron ore min­ers and steel pro­duc­ers, or by Chi­nese taxi dri­vers trad­ing on apps.

Aver­age futures con­tract hold­ing times for var­i­ous com­modi­ties. Source: Bloomberg

In April 2016, the aver­age hold­ing peri­od for steel rebar and iron ore con­tracts was less than 3 hours. The Chief Exec­u­tive of the Lon­don Met­al Exchange, said “Why should steel rebar be one of the world’s most active­ly-trad­ed futures con­tracts? I don’t think most peo­ple who trade it know what it is”.

Steel, of course, is made from iron ore, Australia’s biggest export, and fre­quent­ly the country’s main dri­ver of a trade sur­plus and GDP growth.

Aus­tralia is the largest exporter of iron ore in the world, with a 29% glob­al share in 2015–16 and 786Mt export­ed, and at $48 bil­lion we’re respon­si­ble for over half of all glob­al iron ore exports by val­ue. Around 81% of our iron ore exports go to Chi­na.

Unfor­tu­nate­ly, in 2017, Chi­na isn’t as des­per­ate any­more for iron ore, where close to 50% of Chi­nese steel demand comes from prop­er­ty devel­op­ment, which is under stress as house prices tem­per and cred­it tight­ens.

In May 2017, stock­piles at Chi­nese ports were at an all time high, with enough to build 13,000 Eif­fel Tow­ers. Last Jan­u­ary, Chi­na pledged “sup­ply-side reforms” for its steel and coal sec­tors to reduce exces­sive pro­duc­tion capac­i­ty. In 2016, capac­i­ty was cut by 6 per­cent for steel and and 8 per­cent for coal.

In the first half of 2017 alone, a fur­ther 120 mil­lion tonnes of low-grade steel capac­i­ty was ordered to close because of pol­lu­tion. This rep­re­sents 11 per­cent of the country’s steel capac­i­ty and 15 per­cent of annu­al out­put. While this will more heav­i­ly impact Chi­nese-mined ore than gen­er­al­ly high­er-grade Aus­tralian ore, Chi­nese demand for iron ore is nev­er­the­less wan­ing.

Over the last six years, the price of iron ore has fall­en 60%.

Iron ore fines 62% Fe CFR Futures. Source:

While the price of iron ore briefly ral­lied after the U.S. elec­tion in antic­i­pa­tion of increas­ing­ly less like­ly Trumpo­nom­icsDBS Bank expects that glob­al demand for steel will remain stag­nant for at least the next 10–15 years. The bank fore­casts that prices are like­ly to be range­bound based on esti­mates that Chi­nese steel demand and pro­duc­tion have peaked and are declin­ing, that there are no economies to buffer this slow­down in Chi­na, and that major steel con­sum­ing indus­tries are also fac­ing over­ca­pac­i­ty issues or are expect­ed to see low­er growth.

Australia’s sec­ond biggest export is coal, being the largest exporter in the world sup­ply­ing about 38% of the world’s demand. Pro­duc­tion has been on a tear, with exports increas­ing from 261Mt in 2008 to 388Mt in 2016.

Aus­tralian Coal Exports by Type 1990–2035 (IEA Core Sce­nario). Source: Inter­na­tion­al Ener­gy Agency, Min­er­als Coun­cil of Aus­tralia

While exports increased by 49% over that time peri­od, the val­ue of those exports has col­lapsed 38%, from $54.7 bil­lion to $34 bil­lion.

The only bright side for Aus­tralian coal in 2017 was that, unex­pect­ed­ly, Cyclone Deb­bie wiped out sev­er­al rail­roads and forced the clo­sure of ports and min­ing oper­a­tions, which has caused a tem­po­rary spike in coal prices.

Aus­tralian Ther­mal Coal Prices. (12,000- btu/pound, <1% sul­fur, 14% ash, FOB Newcastle/Port Kem­bla, US$ / met­ric ton). Source: IMFQuan­dl

Aus­tralian Pre­mi­um Cok­ing Coal FOB $/tonne. Source:

There are two main types of coal- ther­mal coal, which is burnt as fuel, and cok­ing coal, which is used in the man­u­fac­ture of steel. The prospects for cok­ing coal are obvi­ous­ly tied to the prospects of the steel mar­ket, which are not par­tic­u­lar­ly good.

Ther­mal coal, on the oth­er hand, is sub­stan­tial­ly on the nose, and while usage is still climb­ing in non-OECD nations, it is already in ter­mi­nal decline in OECD nations. Recent­ly, in April 2017, the Unit­ed King­dom expe­ri­enced its first day with­out burn­ing coal for elec­tric­i­ty since the indus­tri­al rev­o­lu­tion in the 1800s.

World Coal Con­sump­tion by Region 1980–2040 (fore­cast). Source: US Ener­gy Infor­ma­tion Admin­is­tra­tion

Australia’s main export mar­kets for coal are Japan and Chi­na, two mar­kets in which the use of coal is fore­cast to decline through 2040.

Australia’s top export mar­ket for coal is Japan, and the unfor­tu­nate news is that the ramp up in coal exports here is a short lived adap­ta­tion after pow­er com­pa­nies idled their nuclear reac­tors in the wake of the Fukushi­ma dis­as­ter. Between a zom­bie econ­o­my and fer­til­i­ty lev­els far below the replace­ment rate, Japan’s pop­u­la­tion is shrink­ing and thus nat­u­ral­ly net elec­tric­i­ty gen­er­a­tion has also been declin­ing in Japan since 2010.

Japan net elec­tric­i­ty gen­er­a­tion by fuel 2009–15. Source: US Ener­gy Infor­ma­tion Admin­is­tra­tion

Coal con­sump­tion in Chi­na has dropped three years in a row, and in Jan­u­ary 2017, 100 coal fired pow­er plants were can­celled. Chi­na has announced that it is spend­ing a whop­ping $360 bil­lion on renew­ables through 2020, and this year is imple­ment­ing the world’s biggest cap-and-trade car­bon mar­ket to curb emis­sions.

Blind to the real­i­ty of this sit­u­a­tion, Aus­tralia is ramp­ing up coal pro­duc­tion while Chi­na com­mits to end­ing coal imports in the very near future in what can only be described as a last-ditch “dig it up now, or nev­er” sit­u­a­tion.

Major Export Mar­kets for Aus­tralian Coal (2014). Source: Wikipedia

Coal Con­sump­tion in Chi­na, the US and India 1990–2040. Source: US Ener­gy Infor­ma­tion Admin­is­tra­tion

Coal exports rely on sub­stan­tial invest­ment by investors who build sig­nif­i­cant infra­struc­ture, like ports and rail, the cost of which is shared among users accord­ing to vol­ume. If a coal com­pa­ny defaults then the remain­ing coal com­pa­nies pay extra to col­lec­tive­ly cov­er the loss. A sin­gle fail­ure can sig­nif­i­cant­ly increase the cost to the oth­er users and can in turn cause pres­sure on the remain­ing part­ners. As this hap­pens, their bonds get down­grad­ed caus­ing bal­ance sheet ero­sion that ulti­mate­ly can impact project via­bil­i­ty.

Moodys recent­ly down­grad­ed the rat­ings of sev­er­al Aus­tralian coal ports- includ­ing Adani’s Abbot Point- after U.S. coal min­er Peabody Ener­gy, which ships through these ports, default­ed on sev­er­al of its bonds.

Despite all of this, some in gov­ern­ment can’t get their head around why the Big Four banks and major invest­ment banks includ­ing, Cit­i­group, JPMor­gan, Gold­man Sachs, Deutsche Bank, Roy­al Bank of Scot­land, HSBC and Bar­clays are not keen to fund the gar­gan­tu­an Carmichael coal project in Queensland’s Galilee Basin.

The now for­mer deputy Prime Min­is­ter of Aus­tralia, Barn­a­by Joyce, a New Zealand-Aus­tralian politi­cian who served uncon­sti­tu­tion­al­ly as the Deputy Prime Min­is­ter of Aus­tralia, wants Aus­tralian tax­pay­ers to be the lenders of last resort to Adani, an Indi­an min­er, for $900 mil­lion to build a rail line from their pro­posed Carmichael Ther­mal Coal Mine to the port at Abbot Point, where it would be shipped to India. Adani is look­ing for a hand­out because, unsur­pris­ing­ly, the banks knocked them back because the project was too risky and the pub­lic back­lash against the project has been over­whelm­ing. If it does go ahead, it is like­ly to be a rail line to nowhere, because by the time it opens, there is a chance that the project will be unvi­able.

Unless the gov­ern­ment steps in, it’s increas­ing­ly more like­ly that the project will go the way of the Wig­gins Island coal export ter­mi­nal, the fraught devel­op­ment orig­i­nal­ly con­ceived by Glen­core and sev­en oth­er project part­ners in 2008, at the lit­er­al top of the mar­ket for coal. Since con­cep­tion, three of the project’s orig­i­nal pro­po­nents?—?Cale­don CoalBan­dan­na Ener­gyand Cock­a­too Coal?—?have gone into admin­is­tra­tion. Only one of the project’s three stages has been com­plet­ed, at twice the esti­mat­ed cost. The five remain­ing take-or-pay own­ers have been left with more than US$4 bil­lion in debt to repay and hope is fad­ing on any any chance of refi­nanc­ing before it all falls due.

What makes the Adani project so absurd is that India has recent­ly can­celled more than 500 gigawatts of planned coal projects and the Indi­an gov­ern­ment has said, how­ev­er real­is­tic that may be, that it intends to phase out ther­mal coal imports- pre­cise­ly the type of coal Carmichael pro­duces- entire­ly by 2020.

It’s even more per­plex­ing when you con­sid­er that 2016 was the year that solar became cheap­er than coal, with some coun­tries gen­er­at­ing elec­tric­i­ty from sun­shine for less than 3 cents per kilo­watt-hour (which is half the aver­age glob­al cost of coal pow­er) and by Octo­ber 2017, wind pow­er is now cheap­er than coal in India.

Fur­ther­more, glob­al pol­i­cy to lim­it the rise in tem­per­a­tures by 2% could result in a 40% drop in the trade of ther­mal coal, which would cut Australia’s exports of such by 35%, accord­ing to a study by Wood Macken­zie. In 2014, ther­mal coal was 51% of our coal exports by vol­ume, and this is pre­cise­ly the type of coal that will be mined by Adani at Carmichael.

Giv­en that Baarnaby’s ser­vice was ruled invalid, one can only hope that his actions regard­ing Gov­ern­ment fund­ing for the Adani project might also be inval­i­dat­ed and we can put this flawed project to bed.

Recent events have giv­en man­i­fest life to Mark Carney’s land­mark 2015 speech in which Car­ney, the Gov­er­nor of the Bank of Eng­land, warned that if the world is to lim­it glob­al warm­ing to below 2 degrees, then the esti­mates for how much car­bon the world can burn makes between 66% and 80% of glob­al oil, gas and coal reserves unus­able.

In an essay last year, David Fick­ling wrote “More than half the assets in the glob­al coal indus­try are now held by com­pa­nies that are either in bank­rupt­cy pro­ceed­ings or don’t earn enough mon­ey to pay their inter­est bills, accord­ing to data com­piled by Bloomberg. In the U.S., only three of 12 large coal min­ers trad­ed on pub­lic mar­kets escape that igno­min­ious club, sep­a­rate data show”.

So while our politi­cians gaze wist­ful­ly in par­lia­ments at a lump of coal, undoubt­ed­ly the days are clear­ly num­bered for our sec­ond largest export.

Los­ing coal as an export will blow a $34 bil­lion dol­lar per annum hole in the cur­rent account, and there’s been no fore­sight by suc­ces­sive gov­ern­ments to find or encour­age mod­ern indus­tries to sup­plant it.

Aus­tralian Trea­sur­er Scott Mor­ri­son gazes wist­ful­ly at a lump of coal. Source: AAP, Lukas Coch

What is more shock­ing is that despite the gar­gan­tu­an amount of mon­ey that Chi­na has been pump­ing into the sys­tem since 2014, Australia’s entire min­ing indus­try- which is com­plete­ly depen­dent on Chi­na- has strug­gled to make any mon­ey at all.

Across the entire indus­try rev­enue has dropped sig­nif­i­cant­ly while costs have con­tin­ued to rise.

Chi­na cred­it impulse leads its man­u­fac­tur­ing index (which in turn fuels com­modi­ties). Source: PIMCO

Accord­ing to the Aus­tralian Bureau of Sta­tis­tics, in 2015–16 the entire Aus­tralian min­ing indus­try which includes coal, oil & gas, iron ore, the min­ing of metal­lic & non-metal­lic min­er­als and explo­ration and sup­port ser­vices made a grand total of $179 bil­lion in rev­enue with $171 bil­lion of costs, gen­er­at­ing an oper­at­ing prof­it before tax of $7 bil­lion which rep­re­sent­ing a wafer thin 3.9% mar­gin on an oper­at­ing basis. In the year before it made a 8.4% mar­gin.

Col­lec­tive­ly, the entire Aus­tralian min­ing indus­try (ex-ser­vices) would be loss mak­ing in 2016–17 if rev­enue con­tin­ued to drop and costs stayed the same. Yes, the entire Aus­tralian min­ing indus­try.

Col­lec­tive­ly, the entire Aus­tralian min­ing indus­try (ex-ser­vices) would be loss mak­ing in 2016–17 if rev­enue con­tin­ued to drop and costs stayed the same. Source: Aus­tralian Bureau of Sta­tis­tics

Our “eco­nom­ic mir­a­cle” of 104 quar­ters of GDP growth with­out a reces­sion today doesn’t come from dig­ging rocks out of the ground, ship­ping the by-prod­ucts of dead fos­sils and sell­ing stuff we grow any more. Min­ing, which used to be 19% of GDP, is now 6.8% and falling. Min­ing has fall­en to the sixth largest indus­try in the coun­try. Even com­bined with agri­cul­ture the total is now only 10% of GDP.

Oper­at­ing prof­it before tax by Aus­tralian Indus­try- the entire small and medi­um min­ing indus­try col­lec­tive­ly has been loss mak­ing from 2014–16 on an oper­at­ing basis. Source: Aus­tralian Bureau of Sta­tis­tics

Min­er­al pro­duc­tion in region­al West­ern Aus­tralia, where 99% of Australia’s iron ore is minedcon­tributed only 6.5 per­cent to Australia’s GDP growth in 2016.

To make mat­ters worse, in 2017 there has been a sharp down­turn in Chi­nese cred­it impulse (rate of change), which is com­bined with a neg­a­tive, and falling glob­al cred­it impulse. Accord­ing to PIMCO’s Gene Fried “the ques­tion now is not if Chi­na slows, but rather how fast”. This will cause even more prob­lems for Australia’s flag­ging resources sec­tor.

China’s con­tri­bu­tion to the glob­al cred­it impulse (mar­ket GDP weight­ed). Source: PIMCO

The “eco­nom­ic mir­a­cle” of GDP growth is also cer­tain­ly not from man­u­fac­tur­ing, which has col­lapsed in the last decade from 10.8% to 6.6% of Gross Val­ue Add, and has grown by… neg­a­tive 275,000 jobs since the 1990s.

Indus­try share of Gross Val­ue Add 2005–6 ver­sus 2015–6. Source: Aus­tralian Bureau of Sta­tis­tics

This is even before the exit of Australia’s last two remain­ing car man­u­fac­tur­ers, Toy­ota and Hold­en, who both shut up shop in 2017. Ford closed last year.

Aus­tralian Man­u­fac­tur­ing Employ­ment and Hours Worked. Source: AI Group

In the 1970s, Aus­tralia was ranked 10th in the world for motor vehi­cle man­u­fac­tur­ing. No oth­er indus­try has replaced it. Today, the entire out­put of man­u­fac­tur­ing as a share of GDP in Aus­tralia is half of the lev­els where they called it “hol­lowed out” in the U.S. and U.K.

In Aus­tralia in 2017, man­u­fac­tur­ing as a share of GDP is on par with a finan­cial haven like Lux­em­bourg. Aus­tralia doesn’t make any­thing any­more.

Man­u­fac­tur­ing val­ue add (% of GDP) for Aus­tralia. Source: World Bank & OECD

With an econ­o­my that is 68% ser­vices, as I believe John Hew­son put it, the entire coun­try is basi­cal­ly sit­ting around serv­ing each oth­er cups of cof­fee or, as the Chief Sci­en­tist of Aus­tralia would pre­fer, smashed avo­ca­do.

David Llewellyn-Smith recent­ly wrote that this is unsur­pris­ing as “the Aus­tralian econ­o­my is now struc­tural­ly uncom­pet­i­tive as cap­i­tal inflows per­sis­tent­ly keep its cur­ren­cy too high, usu­al­ly chas­ing land prices that ensure input costs are amaz­ing­ly inflat­ed as well.

Wider trad­ables sec­tors have been hit hard as well and Aus­tralian exports are now a lousy 20% of GDP despite the largest min­ing boom in his­to­ry.

The oth­er major eco­nom­ic casu­al­ty has been mul­ti­fac­tor pro­duc­tiv­i­ty (the mea­sure of eco­nom­ic per­for­mance that com­pares the amount of goods and ser­vices pro­duced to the amount of com­bined inputs used to pro­duce those goods and ser­vices). It has been vir­tu­al­ly zero for fif­teen years as cap­i­tal has been con­sis­tent­ly and mas­sive­ly mis-allo­cat­ed into unpro­duc­tive assets. To grow at all today, the nation now runs chron­ic twin deficits with the cur­rent account (val­ue of imports to exports) at ‑2.7% and aBud­get deficit of ‑2.4% of GDP.”

The Reserve Bank of Aus­tralia has cut inter­est rates by 325 basis points since the end of 2011, in order to stim­u­late the econ­o­my, but I can’t for the life of me see how that will affect the fun­da­men­tal prob­lem of gyrat­ing com­mod­i­ty prices where we are a price tak­er, not a price mak­er, into an over­sup­plied mar­ket in Chi­na.

This leads me to my next ques­tion- where has this growth come from?

Suc­ces­sive Aus­tralian gov­ern­ments have achieved eco­nom­ic growth by blow­ing a prop­er­ty bub­ble on a scale like no oth­er.

bub­ble that has last­ed for 55 years and seen prices increase 6556% since 1961, mak­ing this the longest run­ning prop­er­ty bub­ble in the world (on aver­age, “upswings” last 13 years).

In 2016, 67% of Australia’s GDP growth came from the cities of Syd­ney and Mel­bourne where both State and Fed­er­al gov­ern­ments have done every­thing they can to fuel a run­away hous­ing mar­ket. The small area from the Syd­ney CBD to Mac­quar­ie Park is in the mid­dle of an apart­ment build­ing fren­zy, alone con­tribut­ing 24% of the country’s entire GDP growth for 2016, accord­ing to SGS Eco­nom­ics & Plan­ning.

Accord­ing to the Rid­er Lev­ett Buck­nall Crane Index, in Q4 2017 between Syd­ney, Mel­bourne and Bris­bane, there are now 586 cranes in oper­a­tion, with a total of 685 across all cap­i­tal cities, 80% of which are focused on build­ing apart­ments. There are 350 cranes in Syd­ney alone.

Crane Activity?—?Australia by Key Cities & Sec­tor. Source: RLB

By com­par­i­son, there are cur­rent­ly 28 cranes in New York, 24 in San Fran­cis­co and 40 in Los Ange­les. There are more cranes in Syd­ney than Los Ange­les (40), Wash­ing­ton DC (29), New York (28), Chica­go (26), San Fran­cis­co (24), Port­land (22), Den­ver (21), Boston (14) and Hon­olu­lu (13) com­bined. Rid­er Lev­ett Buck­nall counts less than 175 cranes work­ing on res­i­den­tial build­ings across the 14 major North Amer­i­can mar­kets that it tracked in 3Q17, which is half of the num­ber of cranes in Syd­ney alone.

Accord­ing to UBSaround one third of these cranes in Aus­tralian cities are in post­codes with ‘restrict­ed lend­ing’, because the inhab­i­tants have bad cred­it rat­ings.

This can only be described as com­plete­ly “insane”.

That was the exact word used by Jonathan Tep­per, one of the world’s top experts in hous­ing bub­bles, to describe “one of the biggest hous­ing bub­bles in his­to­ry”. “Aus­tralia”, he added, “is the only coun­try we know of where mid­dle-class hous­es are auc­tioned like paint­ings”.

An Auc­tion­eer yells out bids in the mid­dle class sub­urb of Cam­mer­ay. Source: Reuters

Our Fed­er­al gov­ern­ment has worked real­ly hard to get us to this point.

Many oth­er parts of the world can thank the Glob­al Finan­cial Cri­sis for pop­ping their real estate bub­bles. From 2000 to 2008, dri­ven in part by the First Home Buy­er Grant, Aus­tralian house prices had already dou­bled. Rather than let the GFC take the heat out of the mar­ket, the Aus­tralian Gov­ern­ment dou­bled the bonus. Trea­sury notes record­ed at the time say that it wasn’t launched to make hous­ing more afford­able, but to pre­vent the col­lapse of the hous­ing mar­ket.

Trea­sury Exec­u­tive Min­utes. Source: Trea­sury, The First Home Owner’s Boost

Already at the time of the GFC, Aus­tralian house­holds were at 190% debt to net dis­pos­able income, 50% more indebt­ed than Amer­i­can house­holds, but then things real­ly went crazy.

The gov­ern­ment decid­ed to fur­ther fuel the fire by “stream­lin­ing” the admin­is­tra­tive require­ments for the For­eign Invest­ment Review Board so that tem­po­rary res­i­dents could pur­chase real estate in Aus­tralia with­out hav­ing to report or gain approval.

It may be a stretch, but one could pos­si­bly argue that this move was cun­ning­ly cal­cu­lat­ed, as what could pos­si­bly be wrong in sell­ing over­priced Aus­tralian hous­es to the Chi­nese?

I am not sure who is get­ting the last laugh here, because as we sub­se­quent­ly found out, many of those Chi­nese bor­rowed the mon­ey to buy these hous­es from Aus­tralian banks, using fake state­ments of for­eign income. Indeed,accord­ing to the AFR, this was not sophis­ti­cat­ed documentation?—?Australian banks were being tricked with pho­to­shopped bank state­ments that can be bought online for as lit­tle as $20.

UBS esti­mates that $500 bil­lion worth of “not com­plete­ly fac­tu­al­ly accu­rate” mort­gages now sit on major bank bal­ance sheets. How much of that will go sour is anyone’s guess.

Llewellyn-Smith writes, “Five prime min­is­ters in [sev­en] years have come and gone as stan­dards of liv­ing fall in part owing to mas­sive immi­gra­tion inap­pro­pri­ate to eco­nom­ic cir­cum­stances and oth­er prop­er­ty-friend­ly poli­cies. The most recent nation­al elec­tion boiled down to a vir­tu­al ref­er­en­dum on real estate tax­a­tion sub­si­dies. The vic­tor, the con­ser­v­a­tive Coali­tion par­ty, betrayed every mar­ket prin­ci­ple it pos­sess­es by mount­ing an extreme fear cam­paign against the Labor party’s pro­pos­al to remove neg­a­tive gear­ing. This tax pol­i­cy allows more than one mil­lion Aus­tralians to engage in a neg­a­tive car­ry into prop­er­ty in the hope of cap­i­tal gains. In a nation of just 24 mil­lion, 1.3 mil­lion Aus­tralians lose an aver­age of $9,000 per annum on this strat­e­gy thanks to the tax break.”

The astro­nom­i­cal rise in house prices cer­tain­ly isn’t sup­port­ed by employ­ment data. Wage growth is at a record low of just 1.9% year on year in 2Q17, the low­est fig­ure since 1988. The aver­age Aus­tralian week­ly income has gone up $27 to $1,009 since 2008, that’s about $3 a year.

Pri­vate sec­tor wage price index (annu­al per­cent­age). Source: SMH, Aus­tralian Bureau of Sta­tis­tics

House­hold income growth has col­lapsed since 2008 from over 11% to just 3% in 2015, 2016 and 2017. This is one sixth the rate that hous­es went up in Syd­ney in the last year.

Employ­ment growth is at an anaemic 1% year on year in 4Q16, and the unem­ploy­ment rate has been trend­ing up over the last decade to 5.6%.

Unem­ploy­ment rate and Employ­ment growth. Source: ABS, RBA, UBS

For­eign buy­ing dri­ving up hous­ing prices has been a major fac­tor in Aus­tralian hous­ing afford­abil­i­ty, or rather unaf­ford­abil­i­ty.

Urban plan­ners say that a medi­an house price to house­hold income ratio of 3.0 or under is “afford­able”, 3.1 to 4.0 is “mod­er­ate­ly unaf­ford­able”, 4.1 to 5.0 is “seri­ous­ly unaf­ford­able” and 5.1 or over “severe­ly unaf­ford­able”.

Demographia Inter­na­tion­al Hous­ing Afford­abil­i­ty Sur­vey. Source: Demographia

At the end of July 2017, accord­ing to Domain Group, the medi­an house price in Syd­ney was $1,178,417 and the Aus­tralian Bureau of Sta­tis­tics has the lat­est aver­age pre-tax wage at $80,277.60 and aver­age house­hold income of $91,000 for this city. This makes the medi­an house price to house­hold income ratio for Syd­ney 13x, or over 2.6 times the thresh­old of “severe­ly unaf­ford­able”. Mel­bourne is 9.6x.

Syd­ney House val­ues by Sub­urb. Source: Core Log­ic

This is before tax, and before any basic expens­es. The aver­age per­son takes home $61,034.60 per annum, and so to buy the aver­age house they would have to save for 19.3 years- but only if they decid­ed to for­go the basics such as, eat­ing. This is neglect­ing any inter­est costs if one were to bor­row the mon­ey, which at cur­rent rates would approx­i­mate­ly dou­ble the total pur­chase cost and blow out the time to repay to around 40 years.

Ex-deputy Prime Min­is­ter Barn­a­by Joyce recent­ly said to ABC Radio, “Hous­es will always be incred­i­bly expen­sive if you can see the Opera House and the Syd­ney Har­bour Bridge, just accept that. What peo­ple have got to realise is that hous­es are much cheap­er in Tam­worth, hous­es are much cheap­er in Armi­dale, hous­es are much cheap­er in Toowoom­ba”. Fair­fax, the own­er of Domain, or more accu­rate­ly, Domain, the own­er of Fair­fax, also agrees that“There is no hous­ing bub­ble, unless you are in Syd­ney or Mel­bourne”.

Now prob­a­bly unbe­knownst to Barn­a­by, who might be more famil­iar with the New Zealand hous­ing mar­ket, in the Demographia Inter­na­tion­al Hous­ing Afford­abil­i­ty sur­vey for 2017 Tam­worth ranked as the 78th most unaf­ford­able hous­ing mar­ket­ing in the world. No, you’re not mis­tak­en, this is Tam­worth, New South Wales, a region­al cen­tre of 42,000 best known as the “Coun­try Music Cap­i­tal of Aus­tralia” and for the ‘Big Gold­en Gui­tar’.

Accord­ing the Aus­tralian Bureau of Sta­tis­tics, the aver­age income in Tam­worth is $42,900, the aver­age house­hold income $61,204 but the aver­age house price is $375,000, giv­ing a price to house­hold income ratio of 6.1x, mak­ing hous­ing in Tam­worth less afford­able than Tokyo, Sin­ga­pore, Dublin or Chica­go.

If you used the cur­rent data, which has the aver­age house price at $394,212, or 6.6x, Tam­worth would be in the top 40 most unaf­ford­able hous­ing mar­kets in the world. Yes, Tam­worth. Yes, in the world. Unfor­tu­nate­ly for Barn­a­by, Armi­dale and Toowoom­ba don’t fare much bet­ter.

Tam­worth, which at cur­rent prices would be in the top 40 most unaf­ford­able hous­ing mar­kets tracked by Demographia in the world. Real­ly? Source: GP Syn­er­gy

Out of a total of 406 hous­ing mar­kets tracked glob­al­ly by Demographia, eight (or 40%) of the twen­ty least afford­able hous­ing mar­kets in the world were in Aus­tralia, includ­ing in addi­tion to Syd­ney and Mel­bourne such exot­ic places as Wing­caribbee, Tweed Heads, the Sun­shine Coast, Port Mac­quar­ie, the Gold Coast, and Wol­lon­gong. Look­ing at all region­al Aus­tralian hous­ing mar­kets, they found 33 of 54 mar­kets “severe­ly unaf­ford­able”.

The 20 most unaf­ford­able hous­ing mar­kets in the world. Source: Demographia,13th Annu­al Demo­graph­ic Inter­na­tion­al Hous­ing Afford­abil­i­ty Survey:2017

If you bor­rowed the whole amount to buy a house in Syd­ney, with a Com­mon­wealth Bank Stan­dard Vari­able Rate Home Loan cur­rent­ly show­ing a 5.36% com­par­i­son rate (as of 7th Octo­ber 2017), your repay­ments would be $6,486 a month, every month, for 30 years. The month­ly post tax income for the aver­age wage in Syd­ney ($80,277.60) is only $5,081.80 a month.

Com­mon­wealth Bank Stan­dard Vari­able Rate Home Loan for the aver­age house. Source: CBA as of 7th Octo­ber 2017

In fact, on this aver­age Syd­ney salary of $80,277.60, the Com­mon­wealth Bank’s “How much can I bor­row?” cal­cu­la­tor will only lend you $463,000, and this amount has been drop­ping in the last year I have been look­ing at it. So good luck to the aver­age per­son buy­ing any­thing any­where near Syd­ney.

Fed­er­al MP Michael Sukkar, Assis­tant Min­is­ter to the Trea­sur­er, says sur­pris­ing­ly that get­ting a “high­ly paid job” is the “first step” to own­ing a home. Per­haps Mr Sukkar is talk­ing about his job, which pays a base salary of $199,040 a year. On this salary, the Com­mon­wealth Bank would allow you to just bor­row enough– $1,282,000 to be pre­cise- to buy the aver­age home, but only pro­vid­ed that you have no expens­es on a reg­u­lar basis, such as food. So the Assis­tant Min­is­ter to the Trea­sur­er can’t real­ly afford to buy the aver­age house, unless he tells a porky on his loan appli­ca­tion form.

The aver­age Aus­tralian is much more like­ly to be employed as a trades­per­son, school teacher, post­man or police­man. Accord­ing to the NSW Police Force’s recruit­ment web­site, the aver­age start­ing salary for a Pro­ba­tion­ary Con­sta­ble is $65,000 which ris­es to $73,651 over five years. On these salaries the Com­mon­wealth Bank will lend you between $375,200 and $419,200 (again pro­vid­ed you don’t eat), which won’t let you buy a house real­ly any­where.

Unsur­pris­ing­ly, the CEOs of the Big Four banks in Aus­tralia think that these prices are “jus­ti­fied by the fun­da­men­tals”. More like­ly because the Big Four, who issue over 80% of res­i­den­tial mort­gages in the coun­try, are more exposed as a per­cent­age of loans than any oth­er banks in the world, over dou­ble that of the U.S. and triple that of the U.K., and remark­ably quadru­ple that of Hong Kong, which is the least afford­able place in the world for real estate. Today, over 60% of the Aus­tralian banks’ loan books are res­i­den­tial mort­gages. Hous­ton, we have a prob­lem.

Res­i­den­tial Mort­gages as a per­cent­age of total loans. Source: IMF (2015)

It’s actu­al­ly worse in region­al areas where Bendi­go Bank and the Bank of Queens­land are hold­ing huge port­fo­lios of mort­gages between 700 to 900% of their mar­ket cap­i­tal­i­sa­tion, because there’s no oth­er mean­ing­ful busi­ness­es to lend to.

Aus­tralian banks’ mort­gage expo­sure as a per­cent­age of mar­ket cap­i­tal­i­sa­tion. Source: Roger Mont­gomery, Com­pa­ny data

I’m not sure how the fun­da­men­tals can pos­si­bly be jus­ti­fied when the aver­age per­son in Syd­ney can’t actu­al­ly afford to buy the aver­age house in Syd­ney, no mat­ter how many decades they try to push the loan out.

Mort­gage Stress Trends to Oct 2017. Source: Dig­i­tal Finance Ana­lyt­ics

Indeed Dig­i­tal Finance Ana­lyt­ics esti­mat­ed in a Octo­ber 2017 report that 910,000 house­holds are now esti­mat­ed to be in mort­gage stress where net income does not cov­er­ing ongo­ing costs. This has sky­rock­et­ed up 50% in less than a year and now rep­re­sents 29.2% of all house­holds in Aus­tralia. Things are about to get real.

Prob­a­bil­i­ty of default in 30, 90 days across Aus­tralian demo­graph­ics in Octo­ber 2017. Source: Dig­i­tal Finance Ana­lyt­ics

It’s well known that high lev­els of house­hold debt are neg­a­tive for eco­nom­ic growth, in fact econ­o­mists have found a strong link between high lev­els of house­hold debt and eco­nom­ic crises.

This is not good debt, this is bad debt. It’s not debt being used by busi­ness­es to fund cap­i­tal pur­chas­es and increase pro­duc­tiv­i­ty. This is not debt that is being used to pro­duce, it is debt being used to con­sume. If debt is being used to pro­duce, there is a means to repay the loan. If a busi­ness bor­rows mon­ey to buy some equip­ment that increas­es the pro­duc­tiv­i­ty of their work­ers, then the increased pro­duc­tiv­i­ty leads to increased prof­its, which can be used to ser­vice the debt, and the bor­row­er is bet­ter off. The lender is also bet­ter off, because they also get inter­est on their loan. This is a smart use of debt. Con­sumer debt gen­er­ates very lit­tle income for the con­sumer them­selves. If con­sumers bor­row to buy a new TV or go on a hol­i­day, that doesn’t cre­ate any cash flow. To repay the debt, the con­sumer gen­er­al­ly has to con­sume less in the future. Fur­ther, it is well known that con­sump­tion is cor­re­lat­ed to demo­graph­ics, young peo­ple buy things to grow their fam­i­lies and old peo­ple con­sol­i­date, down­size and con­sume less over time. As the aging demo­graph­ic wave unfolds across the next decade there will be sig­nif­i­cant­ly less con­sumers and sig­nif­i­cant­ly more savers. This is wors­ened as the new gen­er­a­tions will car­ry the debt bur­den of stu­dent loans, fur­ther reduc­ing con­sump­tion.

Par­o­dy of Syd­ney real estate, or is it?

So why are gov­ern­ments so keen to inflate hous­ing prices?

The gov­ern­ment loves Aus­tralians buy­ing up hous­es, par­tic­u­lar­ly new apart­ments, because in the short term it stim­u­lates growth?—?in fact it’s theonly thing real­ly stim­u­lat­ing GDP growth.

Aus­tralia has around $2 tril­lion in uncon­sol­i­dat­ed house­hold debt rel­a­tive to $1.6 tril­lion in GDP, mak­ing this coun­try in recent quar­ters the most indebt­ed on this ratio in the world. Accord­ing to Trea­sur­er Scott Mor­ri­son 80% of all house­hold debt is res­i­den­tial mort­gage debt. This is up from 47% in 1990.

Aus­tralia House­hold Debt to GDP. Source: Bank for Inter­na­tion­al Set­tle­ments, Macro Busi­ness

Australia’s house­hold debt ser­vic­ing ratio (DSRties with Nor­way as the sec­ond worst in the world. Despite record low inter­est rates, Aus­tralians are fork­ing out more of their income to pay off inter­est than when we had record mort­gage rates back in 1989–90 which are over dou­ble what they are now.

Everyone’s too busy watch­ing Net­flix and cash strapped pay­ing off their mort­gage to have much in the way of any dis­cre­tionary spend­ing. No won­der retail is col­laps­ing in Aus­tralia.

Gov­ern­ments fan the flame of this ris­ing unsus­tain­able debt fuelled growth as both a source of tax rev­enue and as false proof to vot­ers of their poli­cies result­ing in eco­nom­ic suc­cess. Rather than mod­ernising the econ­o­my, they have us on a debt fuelled hous­ing binge, a binge we can’t afford.

We are well past over­time, we are into injury time. We’re about to have our Min­sky moment: “a sud­den major col­lapse of asset val­ues which is part of the cred­it cycle.”

Such moments occur because long peri­ods of pros­per­i­ty and ris­ing val­u­a­tions of invest­ments lead to increas­ing spec­u­la­tion using bor­rowed mon­ey. The spi­ral­ing debt incurred in financ­ing spec­u­la­tive invest­ments leads to cash flow prob­lems for investors. The cash gen­er­at­ed by their assets is no longer suf­fi­cient to pay off the debt they took on to acquire them. Loss­es on such spec­u­la­tive assets prompt lenders to call in their loans. This is like­ly to lead to a col­lapse of asset val­ues. Mean­while, the over-indebt­ed investors are forced to sell even their less-spec­u­la­tive posi­tions to make good on their loans. How­ev­er, at this point no coun­ter­par­ty can be found to bid at the high ask­ing prices pre­vi­ous­ly quot­ed. This starts a major sell-off, lead­ing to a sud­den and pre­cip­i­tous col­lapse in mar­ket-clear­ing asset prices, a sharp drop in mar­ket liq­uid­i­ty, and a severe demand for cash.

The Min­sky Cycle. Source: Eco­nom­ic Soci­ol­o­gy and Polit­i­cal Econ­o­my

The Gov­er­nor of the People’s Bank of Chi­na recent­ly warned that extreme cred­it cre­ation, asset spec­u­la­tion and prop­er­ty bub­bles could pose a “sys­temic finan­cial risk” in Chi­na. Zhou Xiaochuan said “If there is too much pro-cycli­cal stim­u­lus in an econ­o­my, fluc­tu­a­tions will be huge­ly ampli­fied. Too much exu­ber­ance when things are going well caus­es ten­sions to build up. That could lead to a sharp cor­rec­tion, and even­tu­al­ly lead to a so-called Min­sky Moment. That’s what we must real­ly guard against”. A Min­sky moment in Chi­na would be an extreme event for the par­a­site on the vein of Chi­nese cred­it stim­u­lus- the Aus­tralian econ­o­my.

Today 42% of all mort­gages in Aus­tralia are inter­est only, because since the aver­age per­son can’t afford to actu­al­ly pay for the aver­age house- they only pay off the inter­est. They’re hop­ing that val­ue of their house will con­tin­ue to rise and the only way they can prof­it is if they find some oth­er mug to buy it at a high­er price. In the case of West­pac, 50% of their entire res­i­den­tial mort­gage book is inter­est only loans.

Per­cent­age of inter­est only loans by bank. Source: JCP Invest­ment Part­ners, AFR

And a stag­ger­ing 64% of all investor loans are inter­est only.

Share of new loan approvals for Aus­tralian banks. Source: APRA, RBA, UBS

This is rapid­ly approach­ing ponzi financ­ing.

This is the final stage of an asset bub­ble before it pops.

Today res­i­den­tial prop­er­ty as an asset class is four times larg­er than the share­mar­ket. It’s illiq­uid, and the $1.5 tril­lion of lever­age is rough­ly equiv­a­lent in size to the entire mar­ket cap­i­tal­i­sa­tion of the ASX 200. Any time there is illiq­uid­i­ty and lever­age, there is a recipe for dis­as­ter- when prices move south, equi­ty is rapid­ly wiped out pre­cip­i­tat­ing pan­ic sell­ing into a freefall mar­ket with no bids to hit.

The risks of illiq­uid­i­ty and lever­age in the res­i­den­tial prop­er­ty mar­ket flow through the entire finan­cial sys­tem because they are direct­ly linked; today in Aus­tralia the Big Four banks plus Mac­quar­ie are rough­ly 30% of the ASX200 index weight­ingEvery month, 9.5% of the entire Aus­tralian wage bill goes into super­an­nu­a­tion, where 14% direct­ly goes into prop­er­ty and 23% into Aus­tralian equi­ties- of which 30% of the main equi­ty bench­mark is the banks.

ASX200 by mar­ket cap­i­tal­i­sa­tion, Big 4 banks top and Mac­quar­ie on the left (arrows). Source: IRESS

You don’t read objec­tive report­ing on prop­er­ty in the Aus­tralian media, whichLlewe­lyn-Smith from Macro Busi­ness calls “a duop­oly between a con­ser­v­a­tive Mur­doch press and lib­er­al Fair­fax press. But both are loss-mak­ing old media empires whose only major growth prof­it cen­tres are the nation’s two largest real estate por­tals, and Domain. Nei­ther report real estate with any objec­tive oth­er than the fur­ther infla­tion of prices. In the event that the Aus­tralian bub­ble were to pop then Aus­tralians will cer­tain­ly be the last to know and the pro­pa­gan­da is so thick that they may nev­er find out until they actu­al­ly try to sell.”

Take, for exam­ple, this recent head­line from the Fair­fax owned Syd­ney Morn­ing Her­ald on March 1st 2017, “Meet Daniel Walsh, the 26-year-old train dri­ver with $3 mil­lion worth of prop­er­ty”. It appeared in the prop­er­ty sec­tion, which for Fair­fax today sits on the home­page of their mast­head pub­li­ca­tions, such as the Syd­ney Morn­ing Her­ald, imme­di­ate­ly below the top head­lines for the day and above State News, Glob­al Pol­i­tics, Busi­ness, Enter­tain­ment, Tech­nol­o­gy and the Arts. The arti­cle holds up 26 year old Daniel, who ser­vices five mil­lion dol­lars worth of prop­er­ty with a train driver’s salary and $2,000 a week of pos­i­tive cash flow.

This is what the Aus­tralian press more com­mon­ly holds up as a role mod­el to young peo­ple. Not a young engi­neer who has devel­oped a rev­o­lu­tion­ary new prod­uct or break­through, but an over lever­aged train dri­ver with a prop­er­ty port­fo­lio on most­ly bor­rowed mon­ey where a 1% move in inter­est rates will wipe out the entire­ty of this cash flow.

Yet this young train dri­ver isn’t an iso­lat­ed case, there are lit­er­al­ly hoards of these young folk par­lay­ing one prop­er­ty debt onto anoth­er in the mis­tak­en belief that prop­er­ty prices only ever go up. Jen­nifer Duke, an “audi­ence-dri­ven reporter, with a back­ground in real estate and finance” from Domain, also pro­motes Robert, a 20 year old, who had man­aged to accu­mu­late three prop­er­ties in two years using an ini­tial $60,000 gift from his mum. Jere­my, a 24 year old accoun­tant, has 8 prop­er­ties with a loan to val­ue ratio of 70%, Edward, a 24 year old cus­tomer ser­vice rep­re­sen­ta­tive, has 6 prop­er­tiesdespite a debt lev­el of 69% and a salary under $50,000, and Taku, the Uber dri­ver, has 8 prop­er­ties, with plans for 10 cov­ered by a net equi­ty posi­tion of only $1 mil­lion by Novem­ber 2017.

How a train dri­ver can ser­vice five mil­lion dol­lars of prop­er­ty on $2,000 a week of pos­i­tive cash flow comes through the mag­ic of cross-col­lat­er­alised res­i­den­tial mort­gages, where Aus­tralian banks allow the unre­alised cap­i­tal gain of one prop­er­ty to secure financ­ing to pur­chase anoth­er prop­er­ty. This unre­alised cap­i­tal gain sub­sti­tutes for what nor­mal­ly would be a cash deposit.This house of cards is described by LF Eco­nom­ics as a “clas­sic mort­gage ponzi finance mod­el”. When the hous­ing mar­ket moves south, this unre­alised cap­i­tal gain will rapid­ly become a loss, and the whole port­fo­lio will become undone. The sim­i­lar­i­ties to under­es­ti­ma­tion of the prob­a­bil­i­ty of default cor­re­la­tion in Col­lat­er­alised Debt Oblig­a­tions (CDOs), which led to the Glob­al Finan­cial Cri­sis, are strik­ing.

Fairfax’s pre-IPO real estate web­site Domain runs these sto­ries every week across the cap­i­tal city main mast­heads entic­ing young peo­ple into prop­er­ty flip­ping as a get rich quick scheme. All of them are young, with low incomes, lever­ag­ing one prop­er­ty pur­chase on to anoth­er.

At Fairfax?—?whose lat­est half year 2017 finan­cial results had Domain Group EBITDA at $57.3 mil­lion and the entire Aus­tralian Metro Media which includes Australia’s pre­mier mast­heads Aus­tralian Finan­cial Review, Syd­ney Morn­ing Her­ald, the Age, Dig­i­tal Ven­tures, Life and Events EBITDA at $27.7 million?—?property is clear­ly the most impor­tant sec­tion of all.

In between hold­ing up this 26 year old train dri­ving prop­er­ty tycoon as some­thing to aspire to, Jen­nifer has penned oth­er note­wor­thy arti­cles, such as “No sur­prise the young sup­port lock-out laws” which par­rot­ed incred­u­lous pro­pa­gan­da claim­ing that young peo­ple sup­port­ed laws designed to shut down places where young peo­ple go?—?Sydney’s major enter­tain­ment dis­tricts.

As if the Aus­tralian econ­o­my need­ed fur­ther head­winds, the devel­op­er-enam­oured evan­gel­i­cal right have cru­ci­fied NSW’s night time econ­o­my. Reac­tionary puri­tans and oppor­tunists alike seized on some unfor­tu­nate inci­dents involv­ing vio­lence to sim­ply close the econ­o­my at night. NSW State Gov­ern­ment, City of Syd­ney, Casi­nos, NSW Police, pub­lic health nan­nies, prop­er­ty-crazy media and, of course, prop­er­ty devel­op­ers had the col­lec­tive inter­est to man­u­fac­ture and blow up a fake health & safe­ty issue to cre­ate lock­out laws?—?and then insti­tut­ed broad night time eco­nom­ic ter­raform­ing poli­cies designed to herd patrons to large casi­nos so they could become per­ma­nent monop­oly own­ers of the night time econ­o­my in Syd­ney and Bris­bane, while con­ve­nient­ly dam­ag­ing the bal­ance sheets of small busi­ness­es locat­ed in com­pet­ing enter­tain­ment areas, so the prop­er­ty could be demol­ished and turned into apart­ment blocks.

Prop­er­ty watch­ing at Fair­fax has become a fetish. Almost on a dai­ly basis Lucy Mack­en, Domain’s Pres­tige Prop­er­ty Reporter, pub­lish­es a gos­sip col­umn of who bought what house, com­plete with the full address and pho­tos of the exte­ri­or and inte­ri­or and any finan­cial infor­ma­tion she can glean about them. I know of one per­son whose house was robbed?—?completely cleaned out?—?shortly after Mack­en pub­lished their full address. Per­haps that was a coin­ci­dence, but I am utter­ly amazed that Fair­fax senior man­age­ment allows this col­umn to exist giv­en the risks it pos­es to the peo­ple whose hous­es and pri­vate details are splashed across its pages.

Fair­fax, to be fair, is not with­out its fair share of great jour­nal­ists, albeit a species rapid­ly becom­ing extinct, who are very well aware of what is real­ly going on. Eliz­a­beth Far­rel­ly writes, “Just when you thought the gov­ern­ment couldn’t get any mad­der or bad­der in its over­ar­ch­ing Mis­sion Destroy Sydney?—?when it seemed to have flogged every flog­gable asset, breached every demo­c­ra­t­ic prin­ci­ple, whit­tled every beloved park, dis­em­pow­ered every sig­nif­i­cant munic­i­pal­i­ty and betrayed every promise of decen­cy, implic­it or explicit?—?it now wants to remove coun­cil plan­ning pow­ers. The excuse, nat­u­ral­ly, is ‘pro­bity’. Some­how we’re meant to believe that local­ly elect­ed peo­ple are inher­ent­ly more cor­rupt than those elect­ed at state lev­el, and that this puts local deci­sion-mak­ing into the greedy mitts of Big Devel­op­ers”.

How­ev­er, despite the pic­ture Domain would like to paint, young peo­ple with jobs aren’t respon­si­ble for dri­ving house prices up, in fact their own­er­ship is at an all time low.

In 2015–16 there were 40,149 res­i­den­tial real estate appli­ca­tions from for­eign­ers val­ued at over $72 bil­lion in the lat­est data by FIRB. This is up 244% by count and 320% by val­ue from just three years before.

To put this 40,149 in com­par­i­son, in the lat­est 12 months to the end of April 2017, accord­ing to the Aus­tralian Bureau of Sta­tis­tics, a total of 57,446 new res­i­den­tial dwellings were approved in Greater Syd­ney, and 56,576 in Greater Mel­bourne.

Even more shock­ing, in the month of Jan­u­ary 2017, the num­ber of first home buy­ers in the whole of New South Wales was 1,029?—?the low­est lev­el since mort­gage rates peaked in the 1990s. Half of those first home buy­ers rely upon their par­ents for equi­ty.

The 114,022 new res­i­den­tial dwellings in Syd­ney and Mel­bourne in 2015–16 should also be put in com­par­i­son to a net annu­al gain of 182,165 over­seas immi­grants to Aus­tralia of which around 75% go to New South Wales or Vic­to­ria.

This brings me onto Australia’s third largest export which is $22 bil­lion in “edu­ca­tion-relat­ed trav­el ser­vices”. Ask the aver­age per­son in the street, and they would have no idea what that is and, at least in some part, it is an $18.8 bil­lion dol­lar immi­gra­tion indus­try dressed up as “edu­ca­tion”. You now know what all these tin­pot “eng­lish”, “IT” and “busi­ness col­leges” that have popped up down­town are about. They’re not about pro­vid­ing qual­i­ty edu­ca­tion, they are about gam­ing the immi­gra­tion sys­tem.

In 2014, 163,542 inter­na­tion­al stu­dents com­menced Eng­lish lan­guage pro­grammes in Aus­tralia, almost dou­bling in the last 10 years. This is through the boom­ing ELICOS (Eng­lish Lan­guage Inten­sive Cours­es for Over­seas Stu­dents) sec­tor, the first step for fur­ther edu­ca­tion and per­ma­nent res­i­den­cy.

This whole process doesn’t seem too hard when you take a look at what is on offer. While the fed­er­al gov­ern­ment recent­ly removed around 200 occu­pa­tions from the Skilled Occu­pa­tions List, includ­ing such gems as Amuse­ment Cen­tre Man­ag­er (149111), Bet­ting Agency Man­ag­er (142113), Goat Farmer (121315), Dog or Horse Rac­ing Offi­cial (452318), Pot­tery or Ceram­ic Artist (211412) and Parole Offi­cer (411714)?—?you can still immi­grate to Aus­tralia as a Natur­opath (252213), Bak­er (351111), Cook (351411), Librar­i­an (224611) or Dieti­cian (251111).

Believe it or not, up until recent­ly we were also import­ing Migra­tion Agents (224913). You can’t make this up. I sim­ply do not under­stand why we are import­ing peo­ple to work in rel­a­tive­ly unskilled jobs such as kitchen hands in pubs or cooks in sub­ur­ban cur­ry hous­es.

At its peak in Octo­ber 2016, before the sum­mer hol­i­days, there were 486,780 stu­dent visa hold­ers in the coun­try, or 1 in 50 peo­ple in the coun­try held a stu­dent visa. The grant rate in 4Q16 for such stu­dent visa appli­ca­tions was 92.3%. The num­ber one coun­try for stu­dent visa appli­ca­tions by far was, you guessed it, Chi­na.

Num­ber of Stu­dent Visa Appli­ca­tions by Coun­try 2015–16. Source: Depart­ment of Immi­gra­tion and Bor­der Pro­tec­tion

While some of these stu­dents are study­ing tech­ni­cal degrees that are vital­ly need­ed to pow­er the future of the econ­o­my, a cyn­ic would say that the major­i­ty of this pro­gram is designed as a crutch to prop up hous­ing prices and gov­ern­ment rev­enue from tax­a­tion in a flag­ging econ­o­my. After all, it doesn’t look that hard to bor­row 90% of a property’s val­ue from Aus­tralian lenders on a 457 visa. Quot­ing direct­ly from one mort­gage lender, “you’re like­ly to be approved if you have at least a year on your visa, most of your sav­ings already in Aus­tralia and you have a sta­ble job in sought after profession”?—?presumably as sought after as an Amuse­ment Cen­tre Man­ag­er. How much the banks will be left to car­ry when the mar­ket turns and these stu­dents flee the bur­den of neg­a­tive equi­ty is anyone’s guess.

In a sub­mis­sion to a sen­ate eco­nom­ics com­mit­tee by Lind­say David from LF Eco­nom­ics, “We found 21 Aus­tralian lend­ing insti­tu­tions where there is evi­dence of people’s loan appli­ca­tion forms being fudged”.

The ulti­mate cost to the Aus­tralian tax­pay­er is yet to be known. How­ev­er the sit­u­a­tion got so bad that the RBA had to tell the Big Four banks to cease and desist from all for­eign mort­gage lend­ing with­out iden­ti­fied Aus­tralian sources of income.

Ken Say­er, Chief Exec­u­tive of non-bank Mort­gage House said “It is much big­ger than every­one is mak­ing it out to be. The num­bers could be astro­nom­i­cal”.

So we are build­ing all these dwellings, but they are not for new Aus­tralian home own­ers. The West­pac-Mel­bourne Insti­tute has over­all con­sumer sen­ti­ment for hous­ing at a 40 year low of 10.5%.

Instead we are build­ing these dwellings to be the new Swiss Bank account for for­eign investors.

Share of con­sumers say­ing ‘wis­est place for sav­ing’ is real estate. Source: ABS, RBA, West­pac, Mel­bourne Insti­tute, UBS

For­eign invest­ment can be great as long as it flows into the right sec­tors. Around $32 bil­lion invest­ed in real estate was from Chi­nese investors in 2015–16, mak­ing it the largest invest­ment in an indus­try sec­tor by a coun­try by far. By com­par­i­son in the same year, Chi­na invest­ed only $1.6 bil­lion in our min­ing indus­try. Last year, twen­ty times more more mon­ey flowed into real estate from Chi­na than into our entire min­er­al explo­ration and devel­op­ment indus­try. Almost none of it flows into our tech­nol­o­gy sec­tor.

Approvals by coun­try of investor by indus­try sec­tor in 2015–6. Source: FIRB

The total num­ber of FIRB approvals from Chi­na was 30,611. By com­par­i­son. The Unit­ed States had 481 approvals.

For­eign invest­ment across all coun­tries into real estate as a whole was the largest sec­tor for for­eign invest­ment approval at $112 bil­lion, account­ing for around 50% of all FIRB approvals by val­ue and 97% by count across all sectors?—?agriculture, forestry, man­u­fac­tur­ing, tourism?—?you name it in 2015–16.

In fact it doesn’t seem that hard to get FIRB approval in Aus­tralia, for real­ly any­thing at all. Of the 41,450 appli­ca­tions by for­eign­ers to buy some­thing in 2015–16, five were reject­ed. In the year before, out of 37,953 appli­ca­tions zero were reject­ed. Out of the 116,234 appli­ca­tions from 2012 to 2016, a total of eight were reject­ed.

Appli­ca­tions for FIRB con­sid­er­a­tion, approved ver­sus reject­ed 2012–13 to 2015–6. Source: FIRB

Accord­ing to Cred­it Suisse, for­eign­ers are acquir­ing 25 per­cent of new­ly com­plet­ed hous­ing sup­ply in NSW, worth a total of $39 bil­lion.

Demand for Prop­er­ty from For­eign Buy­ers in NSW (% of total, unstacked). Source: NAB, SBS

In some cir­cum­stances, the num­bers how­ev­er could be much high­er. Lend Lease, the Aus­tralian con­struc­tion goliath with over $15 bil­lion in rev­enue in 2016, stat­ed in that year’s annu­al report that over 40% of Lend Lease’s apart­ment sales were to for­eign­ers.

I wouldn’t have a prob­lem with this if it weren’t for the fact that this is all a byprod­uct of cen­tral bank mad­ness, not true sup­ply and demand, and peo­ple vital for run­ning the econ­o­my can’t afford to live here any more.

What is also remark­able about all of this is that tech­ni­cal­ly, the Chi­nese are not allowed to send large sums of mon­ey over­seas. Cit­i­zens of Chi­na can nor­mal­ly only con­vert US$50,000 a year in for­eign cur­ren­cy and have long been barred from buy­ing prop­er­ty over­seas, but those rules have not been enforced. They’ve only start­ed crack­ing down on this now.

Despite this, up until now, Aus­tralian prop­er­ty devel­op­ers and the Aus­tralian Gov­ern­ment have been more than hap­py to accom­mo­date Chi­nese mon­ey laun­der­ing.

After the crack­down in cap­i­tal con­trols, Lend Lease says there has been a big upswing with between 30 to 40% of for­eign pur­chas­es now being cash set­tled. Oth­er devel­op­ers are report­ing that some Chi­nese buy­ers are pay­ing 100% cash. The laun­der­ing of Chi­nese cash into prop­er­ty isn’t unique to Aus­tralia, it’s just that Trans­paren­cy Inter­na­tion­al names Aus­tralia, in their March 2017 report as the worst mon­ey laun­der­ing prop­er­ty mar­ket in the world.

Aus­tralia is not alone, Chi­nese “hot mon­ey” is blow­ing gigan­tic prop­er­ty bub­bles in many oth­er safe havens around the world.

But com­bined with our lack of future proof indus­tries and exports, our econ­o­my is com­plete stuffed. And it’s only going to get worse unless we make a major trans­for­ma­tion of the Aus­tralian econ­o­my.

We can’t rely on prop­er­ty to pro­vide for our future. In 1880, Mel­bourne was the rich­est city in the world, until it had a prop­er­ty crash in 1891 where house prices halved caus­ing Australia’s real GDP to crash by 10 per cent in 1892 and 7 per cent the year after. The depres­sion of the 1890s caused by this crash was sub­stan­tial­ly deep­er and more pro­longed than the great depres­sion of the 1930s. Macro Busi­ness points out that if you bought a house at the top of the mar­ket in 1890s, it took sev­en­ty years for you to break even again.

Aus­tralia CQ Real Hous­ing Price Index 1890–2016. Source: LF Eco­nom­ics, Macro Busi­ness

Instead of rely­ing on a prop­er­ty bub­ble as pre­tense that our econ­o­my is strong, we need seri­ous struc­tur­al change to the com­po­si­tion of GDP that’s sub­stan­tial­ly more sophis­ti­cat­ed in terms of the indus­tries that con­tribute to it.

Australia’s GDP of $1.6 tril­lion is 69% ser­vices. Our “eco­nom­ic mir­a­cle” of GDP growth comes from dig­ging rocks out of the ground, ship­ping the by-prod­ucts of dead fos­sils, and stuff we grow. Min­ing, which used to be 19%, is now 7% and falling. Com­bined, the three indus­tries now con­tribute just 12% of GDP thanks to the glob­al col­lapse in com­modi­ties prices.

If you look at busi­ness­es as a whole, Com­pa­ny tax hasn’t moved from $68 bil­lion in the last three years?—?our com­pa­nies are not mak­ing more prof­its. This coun­try is sick.

Indeed if you look at the bud­get, about the only thing going up in terms of rev­enue for the fed­er­al gov­ern­ment are tax­es on you hav­ing a good time- tax­es on beer, wine, spir­its, lux­u­ry cars, cig­a­rettes and the like. It would prob­a­bly shock the aver­age per­son on the street to dis­cov­er that the gov­ern­ment col­lects more tax from cig­a­rettes ($9.8 bil­lion) than it col­lects from tax on super­an­nu­a­tion ($6.8 bil­lion), over dou­ble what it col­lects from Fringe Ben­e­fits Tax ($4.4 bil­lion) and over thir­teen times more tax than it does from our oil fields ($741 mil­lion).

Turn­bull is increas­ing the tax on cig­a­rettes by 12.5% a year for the next four years. In the lat­est fed­er­al bud­get, the gov­ern­ment fore­casts that by 2020 that it will col­lect $15.2 bil­lion from tax­es on tobac­co per annum. This is four times the amount that the gov­ern­ment col­lects from the entire coal indus­try per annum.

Just com­pare these num­bers: $15 bil­lion is over dou­ble what the gov­ern­ment projects it will col­lect from petrol excise in that year ($7.15b), 21 times what it will col­lect from lux­u­ry car tax ($720m), 27 times what it will col­lect from tax­es on import­ed cars ($560m) and 89 times what it will col­lect from cus­toms duty on tex­tile and footwear imports ($170m).

As a sign of how addict­ed to tax­ing you the gov­ern­ment has become, look at the myr­i­ad of tax­es on cars?—?high import duties, stamp duty and a lux­u­ry car tax?—?these were designed to pro­tect a car man­u­fac­tur­ing indus­try which doesn’t exist any­more. Yet the gov­ern­ment is still increas­ing them. We closed the last fac­to­ry this year. These tax­es are not only bla­tant cash grabs but serve to sti­fle the deploy­ment of elec­tric cars, which have hit a dead end in Aus­tralia. Like­wise, the tax­es on tex­tile and footwear imports were orig­i­nal­ly designed to pro­tect our tex­tiles, an indus­try that has now col­lapsed and that lost 30% of its man­u­fac­tur­ing work­ers this year.

If you look through fed­er­al bud­get fore­casts, tax­es on cig­a­rettes is the only thing prac­ti­cal­ly float­ing the fed­er­al government’s finances oth­er than wish­ful think­ing in for­ward pro­jec­tions. Which is, of course, some oth­er future administration’s prob­lem.

How they think they can raise $15 bil­lion in tax­es per year on cigarettes?—?a prod­uct that costs a cent per stick to make and will retail for almost $2 a stick in 2020?—?without cre­at­ing a thriv­ing black mar­ket, anoth­er Pablo Esco­bar and throw­ing hun­dreds, per­haps thou­sands of peo­ple in jail, who will decide unwise­ly to par­tic­i­pate in that black mar­ket, astounds me. But that’s how the gov­ern­ment decides to plug the hole in its accounts instead of cut­ting spend­ing.

Of course like so many things this all gets sold to you, the gen­er­al pop­u­la­tion, under the ban­ner of “health and safe­ty”- and it’s easy to sell because all you need to do is parade out a few patro­n­is­ing doc­tors. The truth is that it’s real­ly just for the health and safe­ty of the gov­ern­ment bud­get, because the econ­o­my is real­ly, real­ly sick.

If the gov­ern­ment wants to fix the bud­get, I would have thought the most prac­ti­cal way to do it would be to find ways to grow the econ­o­my. You’ll nev­er wean the gov­ern­ment off waste­ful spend­ing no mat­ter who is in pow­er. The politi­cians, after all, need to keep that up in order to buy votes through prof­li­gate poli­cies such as wel­fare for the mid­dle class.

But instead of think­ing of intel­li­gent ways to grow the econ­o­my, the focus is pure­ly on find­ing more ways to tax you. Just think of all the times over the last cou­ple of years, all the ran­dom thought bub­bles, that var­i­ous politi­cians have pro­posed rais­ing tax­es on super­an­nu­a­tionhigh earn­ersbanks, prop­er­ty, tripling fines for cycliststripling fines for com­pa­niesthe GST to 15% or 20%the GST on low val­ue importsthe GST on dig­i­tal goodsstamp dutyalco­holsug­arred meat, it’s end­less.

They are even propos­ing ban­ning the $100 note, so that when the RBA dri­ves inter­est rates neg­a­tive, you won’t be able to with­draw your hard earned funds in cash so eas­i­ly. You’ll either have to spend it or have the rude shock of the bank tak­ing mon­ey out of your account each month rather than earn­ing inter­est.

Here’s a crazy idea: the dom­i­nant gov­ern­ment rev­enue line is income tax. Income tax is gen­er­at­ed from wages. Edu­ca­tion has always been the lubri­cant of upward mobil­i­ty, so per­haps if we find ways to encour­age our cit­i­zens to study in the right areas?—?for exam­ple sci­ence & engineering?—?then maybe they might get bet­ter jobs or cre­ate bet­ter jobs and ulti­mate­ly earn high­er wages and pay more tax.

Instead the gov­ern­ment pro­posed the biggest cuts to uni­ver­si­ty fund­ing in 20 years with a new “effi­cien­cy div­i­dend” cut­ting fund­ing by $1.2 bil­lion, increas­ing stu­dent fees by 7.5 per­cent and slash­ing the HECS repay­ment thresh­old from $55,874 to $42,000. These changes would make one year of post­grad­u­ate study in Elec­tri­cal Engi­neer­ing at the Uni­ver­si­ty of New South Wales cost about $34,000.

We should be encour­ag­ing more peo­ple into engi­neer­ing, not dis­cour­ag­ing them by mak­ing their degrees ridicu­lous­ly expen­sive. In my books, the expect­ed net present val­ue of future income tax receipts alone from that per­son pur­su­ing a career in tech­nol­o­gy would far out­weigh the short sight­ed sug­ar hit from mak­ing such a degree more costly?—?let alone the expect­ed net present val­ue of wealth cre­ation if that per­son decides to start a com­pa­ny. The tech­nol­o­gy indus­try is inher­ent­ly entre­pre­neur­ial, because tech­nol­o­gy com­pa­nies cre­ate new prod­ucts and ser­vices.

Speak­ing of com­pa­nies, how about as a coun­try we start hav­ing a good think about what sorts of indus­tries we want to have a mean­ing­ful con­tri­bu­tion to GDP in the com­ing decades?

For a start, we need to elab­o­rate­ly trans­form the com­modi­ties we pro­duce into high­er end, high­er mar­gin prod­ucts. Man­u­fac­tur­ing con­tributes 5% to GDP. In the last ten years, we have lost 100,000 jobs in man­u­fac­tur­ing. Part of the prob­lem is that the man­u­fac­tur­ing we do has large­ly become com­modi­tised while our labour force remains one of the most expen­sive in the world. This cost is fur­ther exac­er­bat­ed by our trade unions?—?in the case of the car indus­try, the gov­ern­ment had to sub­sidise the cost of union work prac­tices, which ulti­mate­ly failed to keep the indus­try alive. So if our peo­ple are going to cost a lot, we bet­ter be man­u­fac­tur­ing high end prod­ucts or using advanced man­u­fac­tur­ing tech­niques oth­er­wise oth­er coun­tries will do it cheap­er and nat­u­ral­ly it’s all going to leave.

Last year, for exam­ple, 30.3% of all man­u­fac­tur­ing jobs in the tex­tile, leather, cloth­ing & footwear indus­tries were lost in this coun­try. Yes, a third. Peo­ple still need clothes, but you don’t need expen­sive Aus­tralians to make them, you can make them any­where.

That’s why we need to seri­ous­ly talk about tech­nol­o­gy, because tech­nol­o­gy is the great wealth and pro­duc­tiv­i­ty mul­ti­pli­er.

How­ev­er the think­ing at the top of gov­ern­ment is all wrong.

I recent­ly heard a speech by the Chief Sci­en­tist of Aus­tralia where he held up a smashed avo­ca­do on toast as a prime exam­ple of Aus­tralian inno­va­tion. Yes, smashed avo­ca­do on toast. I am not sure which Aus­tralian com­pa­ny has the patent on smashed avo­ca­dos on toast?—?it’s too sur­re­al to even think about.

Aus­tralian Inno­va­tion accord­ing to the Chief Sci­en­tist of Aus­tralia. Source:

In the same speech, he said that an Aus­tralian iron ore mine is every bit as inno­v­a­tive as a semi­con­duc­tor fab­ri­ca­tion plant. My mind was seri­ous­ly blown.

You can throw as much automa­tion, AI and robot­ics at an iron ore mine as tech­no­log­i­cal­ly pos­si­ble, but it doesn’t change the fact that mines are, and always will be wast­ing assets that out­put a com­mod­i­ty for which we are a price tak­er, not a price mak­er, into what is cur­rent­ly an over­sup­plied glob­al mar­ket. An iron ore mine, not mat­ter how advanced, is not a long term scal­able pro­duc­tiv­i­ty mul­ti­pli­er; it is a resource to be extract­ed with finite sup­ply. Once it’s gone, the robots will be dor­mant.

A semi­con­duc­tor fab­ri­ca­tion plant on the oth­er hand, makes automa­tion of the mine pos­si­ble. It pow­ers the robot­ics, the AI and the software?—?not just for the iron ore mine, but fac­to­ries and busi­ness­es all over the world. It’s the real pro­duc­tiv­i­ty and wealth mul­ti­pli­er. It’s a long term sus­tain­able, com­pet­i­tive advan­tage. Smart and effi­cient resource extrac­tion is just an appli­ca­tion of this tech­nol­o­gy.

That’s why we shouldn’t get con­fused about what is a tech­nol­o­gy com­pa­ny, because there is no oth­er indus­try that can cre­ate such immense wealth, with such cap­i­tal effi­cien­cy and long term ben­e­fit to the world, as the tech­nol­o­gy indus­try.

Today, the largest pub­lic com­pa­ny in the world, Apple, is a tech­nol­o­gy com­pa­ny. Apple’s mar­ket cap­i­tal­i­sa­tion of $810 bil­lion is big­ger than the entire US retail mar­ket sec­tor. Its rev­enue of over $215 bil­lion gen­er­ates over US$2 mil­lion dol­lars per employ­ee per year. And that’s just the com­pa­ny direct­ly. Think of all the busi­ness, jobs, wealth cre­ation and ben­e­fits to soci­ety that have come indi­rect­ly from using the company’s com­put­ers, mobile devices, soft­ware, ser­vices and prod­ucts.

The largest four com­pa­nies by mar­ket cap­i­tal­i­sa­tion glob­al­ly as of the end of Q2 2017 glob­al­ly were Apple, Alpha­bet, Microsoft and Ama­zon. Face­book is eight. Togeth­er, these five com­pa­nies gen­er­ate over half a tril­lion dol­lars in rev­enue per annum. That’s equiv­a­lent to about half of Australia’s entire GDP. And many of these com­pa­nies are still grow­ing rev­enue at rates of 30% or more per annum.

These are exact­ly the sorts of com­pa­nies that we need to be build­ing.

With our pop­u­la­tion of 24 mil­lion and labour force of 12 mil­lion, there’s no oth­er indus­try that can deliv­er long term pro­duc­tiv­i­ty and wealth mul­ti­pli­ers like tech­nol­o­gy. Today Australia’s econ­o­my is in the stone age. Lit­er­al­ly.

By com­par­i­son, Australia’s top 10 com­pa­nies are a bank, a bank, a bank, a mine, a bank, a biotech­nol­o­gy com­pa­ny (yay!), a con­glom­er­ate of mines and super­mar­kets, a monop­oly tele­phone com­pa­ny, a super­mar­ket and a bank.

We live in a mon­u­men­tal time in his­to­ry where tech­nol­o­gy is remap­ping and reshap­ing indus­try after industry?—?as Marc Andreessen said “Soft­ware is eat­ing the world!”?—?many peo­ple would be well aware we are in a tech­nol­o­gy gold rush.

And they would be also well aware that Aus­tralia is com­plete­ly miss­ing out.

Most wor­ry­ing to me, the num­ber of stu­dents study­ing infor­ma­tion tech­nol­o­gy in Aus­tralia has fall­en by between 40 and 60% in the last decade depend­ing on whose num­bers you look at. Like­wise, enroll­ments in oth­er hard sci­ences and STEM sub­jects such as maths, physics and chem­istry are falling too. Enrol­ments in engi­neer­ing have been ris­ing, but way too slow­ly.

This is all while we have had a 40% increase in new under­grad­u­ate stu­dents as a whole.

Women once made up 25 per­cent of stu­dents com­menc­ing a tech­nol­o­gy degree, they are now clos­er to 10 per­cent.

All this in the mid­dle of a his­toric boom in tech­nol­o­gy. This sit­u­a­tion is an absolute cri­sis. If there is one thing, and one thing only that you do to fix this indus­try, it’s get more peo­ple into it. To me, the most impor­tant thing Aus­tralia absolute­ly has to do is build a world class sci­ence & tech­nol­o­gy cur­ricu­lum in our K‑12 sys­tem so that more kids go on to do engi­neer­ing.

In terms of maths & sci­ence, the sec­ondary school sys­tem has declined so far now that the top 10% of 15-year olds are on par with the 40–50% band of of stu­dents in Sin­ga­pore, South Korea and Tai­wan.

For tech­nol­o­gy, we lump a cou­ple of hor­ren­dous sub­jects about tech­nol­o­gy in with wood­work and home eco­nom­ics. In 2017, I am not sure why teach­ing kids to make a wood­en pho­to frame or bake a cake are con­sid­ered by the depart­ment of edu­ca­tion as being on par with soft­ware engi­neer­ing. Yes there is a lit­tle bit of change com­ing, but it’s most­ly lip ser­vice.

Mean­while, in Esto­nia, 100% of pub­licly edu­cat­ed stu­dents will learn how to code start­ing at age 7 or 8 in first grade, and con­tin­ue all the way to age 16 in their final year of school.

At my com­pa­ny,, we’ll hire as many good soft­ware devel­op­ers as we can get. We’re lucky to get one good appli­cant per day. On the con­trary, when I put up a job for an Office Man­ag­er, I received 350 appli­cants in 2 days.

But unfor­tu­nate­ly the cur­ricu­lum in high school con­tin­ues to slide, and it pays lip ser­vice to tech­nol­o­gy and while kids would love to design mobile apps, build self-dri­ving cars or design the next Face­book, they come out of high school not know­ing that you can actu­al­ly do this as a career.

I’ve come to the con­clu­sion that it’s actu­al­ly all too hard to fix?—?and I came to this con­clu­sion a while ago as I was writ­ing some sug­ges­tions for the incom­ing Prime Min­is­ter on tech­nol­o­gy pol­i­cy. I had a good think about why we are fun­da­men­tal­ly held back in Aus­tralia from major struc­tur­al change to our econ­o­my to dri­ve inno­va­tion.

I kept com­ing back to the same points.

The prob­lems we face in ter­raform­ing Aus­tralia to be inno­v­a­tive are sys­temic, and there is some­thing seri­ous­ly wrong with how we gov­ern this coun­try.

There are prob­lems through­out the sys­tem, from how we choose the Prime Min­is­ter, how we gov­ern our­selves, how we make deci­sions, all the way through.

For a start, we are chron­i­cal­ly over gov­erned in this coun­try. This coun­try has 24 mil­lion peo­ple. It is not a lot. By com­par­i­son my web­site has about 26 mil­lion reg­is­tered users. How­ev­er this coun­try of 24 mil­lion peo­ple is gov­erned at the State and Fed­er­al lev­el by 17 par­lia­ments with 840 mem­bers of par­lia­ment. My com­pa­ny has a board of three and a man­age­ment team of a dozen.

Half of those par­lia­ments are sup­posed to be rep­re­sen­ta­tives direct­ly elect­ed by the peo­ple. Frankly, you could prob­a­bly replace them all with an iPhone app. If you real­ly want­ed to know what the peo­ple thought about an issue, tech­nol­o­gy allows you to poll every­one, every­where, instant­ly. You’d also get the results basi­cal­ly for free. I’ve always said that if Mark Zucker­berg put a vote but­ton inside Face­book, he’d win a Nobel Peace Prize. Instead we waste a colos­sal $122 mil­lion on a non-bind­ing plebiscite to ask a yes/no ques­tion on same sex mar­riage that shouldn’t need to be asked in the first place, because those that it affects would almost cer­tain­ly want it, and those that it doesn’t affect should real­ly butt out and let oth­ers live their lives as they want to.

Instead these 840 MPs spend all day jeer­ing at each oth­er and think­ing up new leg­is­la­tion to churn out.

In 1991, the late and great Ker­ry Pack­er said “I mean since I grew up as a boy, I would imag­ine, that through the par­lia­ments of Aus­tralia since I was 18 or 19 years of age till now, there must be 10,000 new laws been passed, and I don’t real­ly think it’s that much bet­ter place, and I would like to make a sug­ges­tion to you which I think would be far more use­ful. If you want to pass a new law, why don’t you only do it when you’ve repealed an old one. I mean this idea of just pass­ing leg­is­la­tion, leg­is­la­tion, every time some­one blinks is a non­sense. Nobody knows it, nobody under­stands it, you’ve got to be a lawyer, they’ve got books up to here. Pure­ly and sim­ply just to do the things we used to do. And every time you pass a law, you take somebody’s priv­i­leges away from them.”

Last year the Com­mon­wealth par­lia­ment alone spewed out 6,482 pages of leg­is­la­tion, adding to over 100,000 pages already enact­ed. That’s not even look­ing at State Gov­ern­ments.

In Aus­tralia, the aver­age per­son in the street might think that the way that you get into the Prime Minister’s office is by being elect­ed by the peo­ple. Since 1966, this has only been true about 40% of the time.

In fact, of the 15 Prime Min­is­ters since Men­zies, only six have come into the office via being elect­ed by the peo­ple. Yes, only six since 1966. They were Gough Whit­lam in 1972, Bob Hawke in 1983, John Howard in 1996, Kevin Rudd in 2007 and Tony Abbott in 2013 and Mal­colm Turn­bull in 2016.

The typ­i­cal way to get into the Prime Minister’s office in Aus­tralia is not by being vot­ed in, but by stab­bing the incum­bent in your own par­ty in the back. Or in the case of Mal­colm Fras­er, get­ting the Gov­er­nor Gen­er­al to do your dirty work for you. That’s how 60% of our Prime Min­is­ters have got­ten into office since we stopped using pounds Ster­ling as cur­ren­cy. It’s crazy.

In the tech­nol­o­gy indus­try we had high hopes for num­ber fif­teen but it looks like we might be onto our six­teenth very short­ly.

I say it looks like we might be onto num­ber 16 short­ly as the Aus­tralian gov­ern­ment is cur­rent­ly in the grips of a major polit­i­cal cri­sis. A cri­sis for the absurd rea­son that a large num­ber of our politi­cians do not know they were a dual cit­i­zen of anoth­er coun­try (or worse, they tried to hide it)! In Aus­tralia this is not allowed under sec­tion 44 of the Con­sti­tu­tion. On almost a dai­ly basis, mem­bers of par­lia­ment across the polit­i­cal spec­trum have been found to be dual cit­i­zens of oth­er coun­tries. This has hap­pened to such an extent that the coali­tion gov­ern­ment has now lost its major­i­ty and is tee­ter­ing at the brink of col­lapse.

The lev­el of incom­pe­tence from these politi­cians that spend all day dream­ing up rules about how we all should live our lives and stan­dards to that our busi­ness­es must sub­mit to is astound­ing, not to men­tion their par­ties. I would have thought that the first page of the “So you want to be a politi­cian?” check­list that each par­ty hand­ed out to bright young recruits would have said “Have you stolen any mon­ey? Are you a drug addict? Have you fid­dled with any kids? Are you a cit­i­zen of anoth­er nation? Then the career of a politi­cian prob­a­bly isn’t for you!”.

It’s not like this hasn’t hap­pened before, either.

Now how the six­teenth Prime Min­is­ter will pick their team is com­plete­ly crazy. The prob­lem is sec­tion 64 of the Con­sti­tu­tion. This is the part that says that fed­er­al Ministers?—?members of the executive?—?must sit in Par­lia­ment. This is nuts.

Not so long ago the for­mer Min­is­ter of Trade for Indone­sia, Tom Lem­bong, vis­it­ed my com­pa­ny. Tom’s entire career has been in pri­vate equi­ty and bank­ing. He’d nev­er been in pol­i­tics before- Jokowi sim­ply asked him to be Min­is­ter of Trade. Sim­i­lar­ly the Min­is­ter for Com­mu­ni­ca­tions, Rudi­antara, spent his entire career run­ning telecom­mu­ni­ca­tions com­pa­nies. In Indone­sia they vote for the Pres­i­dent & Vice Pres­i­dent, and then sep­a­rate­ly for the leg­is­la­ture. The Pres­i­dent can pick his own team for the exec­u­tive. This is how you get good peo­ple in gov­ern­ment, because you can pick peo­ple with real world domain exper­tise to run a port­fo­lio. In Aus­tralia we end up with lawyers, evan­gel­i­cals or career politi­cians. Peo­ple who don’t have a clue about their port­fo­lio. Imag­ine try­ing to run a com­pa­ny, but instead of of being able to pick the best engi­neer to be Vice Pres­i­dent of Engi­neer­ing, you have to pick it from a pool of lawyers, crazy peo­ple or card car­ry­ing polit­i­cal hacks. How can we have a sci­ence, tech­nol­o­gy and engi­neer­ing focused agen­da, which the coun­try crit­i­cal­ly needs, when this is how cab­i­net gets cho­sen?

Then we have the prob­lems that are a result of reg­u­la­to­ry dupli­ca­tion, con­fu­sion and dupli­ca­tion of respon­si­bil­i­ties or the mind­less pop­ulism of absurd poli­cies of the State Gov­ern­ments. Here I think we have some of the biggest prob­lems.

I end­ed up doing Elec­tri­cal Engi­neer­ing com­plete­ly by acci­dent. I went to one of the best pri­vate schools in the coun­try. When I grad­u­at­ed, at careers day, nobody talked about engi­neer­ing. In fact, nobody even men­tioned the word engi­neer­ing through­out my entire school­ing. I hon­est­ly thought it had some­thing to do with dri­ving a train.

I was dis­heart­ened to go back to that same school, Syd­ney Gram­mar, to talk at careers day. The stu­dents still thought that engi­neer­ing had some­thing to do with dri­ving a train.

This is com­plete­ly nuts, when I told the stu­dents that by work­ing in engi­neer­ing you get to design satel­lites, self dri­ving cars, vir­tu­al real­i­ty hel­mets, design rock­ets like those SpaceX will one day send to Mars or build the next Face­book, many in the room got excit­ed. Just they didn’t have a clue how to head towards a career in engi­neer­ing because it wasn’t men­tioned once to them in thir­teen years of school­ing. It’s not just my old school, almost all the schools are like this.

So how do you fix K‑12 edu­ca­tion in this coun­try so that we can dri­ve inno­va­tion in the future? It’s the remit of the bureau­cra­cy of the State Gov­ern­ments.

Try­ing to get them to all agree to mod­ernise the econ­o­my is an exer­cise in futil­i­ty. Since tak­ing pow­er, the NSW Gov­ern­ment has sold 384 Depart­ment of Edu­ca­tion prop­er­ties. That is despite leaked Depart­ment of Edu­ca­tion doc­u­ments that report NSW is fac­ing an influx of 15,000 school stu­dents a year, and will require $10.8 bil­lion in fund­ing for 7,500 new class­rooms and build­ings over just 15 years.

If you look at their prof­it & loss state­ments you’ll see the bizarre way in which State Gov­ern­ments think.

The biggest rev­enue gen­er­a­tor for NSW is pay­roll tax. In NSW com­pa­nies pay $8.4 bil­lion dol­lars as a result of this idi­ot­ic tax which is basi­cal­ly a penal­ty imposed on you for hir­ing a lot of peo­ple. $8.4 bil­lion that could be bet­ter used employ­ing more peo­ple. If I hire a lot of peo­ple, I should get a dis­count, not a penal­ty.

The sec­ond is stamp duty & land tax. NSW col­lects $7.8 bil­lion of stamp duty. This is a tax that sim­ply makes it expen­sive to trans­act. The stamp duty on an aver­age house in Syd­ney is $42,000, or about 70% of the aver­age NSW cit­i­zens’ post tax annu­al income. The aver­age per­son has to work for most of year just to be able to trans­act in the hous­ing mar­ket. The illiq­uid­i­ty this tax caus­es will be one of the biggest pain points behind a hous­ing crash.

The State Gov­ern­ment then tries to build a road between all these apart­ments, and because prop­er­ty and con­struc­tion costs are too high, West­con­nex, a 33 kilo­me­ter road, will cost between $20 and $40 bil­lion. Trump’s wall, which is 1600 km long is cost­ed at around $15 bil­lion.

When the NSW gov­ern­ment pro­pos­es to build a 14 kilo­me­ter tun­nel to Man­ly, it’s cost­ed at $14 bil­lion dol­lars. That’s $1 mil­lion dol­lars per metre just to build. At $14 bil­lion, that’s about the same price Got­thard tun­nel cost, which is the deep­est and longest tun­nel in the world which goes for 57 kilo­me­ters under the Swiss Alps, 2.3 km below the sur­face of the moun­tains above and through 73 dif­fer­ent kinds of rock at tem­per­a­tures of up to 46 degrees. Yet a tun­nel to Man­ly costs New South Wales the same price.

This is the absur­di­ty of how State Gov­ern­ments think and oper­ate.

Some­thing is clear­ly very wrong.

New South Wales also col­lects $2.4 bil­lion in fees for access to roads, and fines for actu­al­ly using them. Fines which are errat­i­cal­ly enforced through the strate­gic place­ment of cam­eras in areas of max­i­mal rev­enue, ran­dom busts on jay­walk­ers, through to the ridicu­lous 350% increase in fines on cyclists for not wear­ing a hel­met, when all the pub­lic health pol­i­cy glob­al­ly says it’s bet­ter to have your cit­i­zens ride bikes and get healthy.

It’s so absurd that in NSW a kid rid­ing home on his bike with­out a hel­met now gets fined more ($319) than the speed­ing dri­ver doing almost 80kms/hr in a 60 zone that ran over him ($269).

Of course, this gets sold to you again under the ban­ner of “health and safe­ty”. But that’s all a load of crap. The only health and safe­ty it’s ensur­ing is the health and safe­ty of gov­ern­ment finances.

This is why I wouldn’t hold your breath for the deploy­ment of elec­tric cars in Aus­tralia. State gov­ern­ments will get a rude shock when all of a sud­den car own­er­ship col­laps­es and there are no more fines from speed­ing, red light cam­eras or poor dri­ving, let alone a crash in fees from park­ing meters and park­ing levies. State gov­ern­ments sim­ply won’t let it hap­pen. They’ll also find an excuse to still stop and search your car even though dri­ving under the influ­ence won’t be an ade­quate excuse any­more.

Why is this impor­tant? Well if you are try­ing to attract young smart peo­ple to come back to Aus­tralia to join the tech­nol­o­gy indus­try, it’s a bit hard when the hash­tag #nan­nys­tate is trend­ing on Twit­ter.

After that, all you are left with of any size are gam­bling and bet­ting tax­es. In NSW this is $2.1 bil­lion. The NSW Gov­ern­ment is so addict­ed to gam­bling rev­enue that it has shut down most of Sydney’s nightlife in order to boost this line item by fun­nel­ing peo­ple into the casi­no or pok­ies rooms, which has the added ben­e­fit that they can turn those enter­tain­ment areas into apart­ment blocks for more stamp duty & land tax.

Again, of course, the gen­er­al pub­lic has all been tak­en for fools because once more it has been sold to you under the guise of “health and safe­ty”. It’s a bit hard to enact struc­tur­al change in the econ­o­my by build­ing a tech­nol­o­gy indus­try when every sec­ond twen­ty year old wants to leave because you’ve turned the place into a derelict bump­kin coun­try town.

A lit­tle while ago I was sent an essay by Paul Gra­ham of YCombi­na­tor, the great­est tech­nol­o­gy incu­ba­tor in the world enti­tled “How to make Pitts­burgh into a Start­up Hub”. The main the­sis of this essay was to make it some­where that 25–29 year olds want to live?—?build restau­rants, cafes, bars and clubs- places that young peo­ple want to be.

About young peo­ple he said:

I’ve seen how pow­er­ful it is for a city to have those peo­ple. Five years ago they shift­ed the cen­ter of grav­i­ty of Sil­i­con Val­ley from the penin­su­la to San Fran­cis­co. Google and Face­book are on the penin­su­la, but the next gen­er­a­tion of big win­ners are all in SF. The rea­son the cen­ter of grav­i­ty shift­ed was the tal­ent war, for pro­gram­mers espe­cial­ly. Most 25 to 29 year olds want to live in the city, not down in the bor­ing sub­urbs. So whether they like it or not, founders know they have to be in the city. I know mul­ti­ple founders who would have pre­ferred to live down in the Val­ley prop­er, but who made them­selves move to SF because they knew oth­er­wise they’d lose the tal­ent war.

He then went on to say:

It seems like a city has to be very social­ly lib­er­al to be a start­up hub, and it’s pret­ty clear why. A city has to tol­er­ate strange­ness to be a home for star­tups, because star­tups are so strange. And you can’t choose to allow just the forms of strange­ness that will turn into big star­tups, because they’re all inter­min­gled. You have to tol­er­ate all strange­ness.

Syd­ney will nev­er be a tech­nol­o­gy hub if all the young peo­ple want to flee over­seas.

You’re kid­ding your­self if you think they are going to come back one day. In the last 18 years that I have been run­ning tech­nol­o­gy com­pa­nies in Aus­tralia, out of the scores that have left I’d esti­mate that less than 10 per­cent come back. They are at the time of their lives where when they go over­seas they usu­al­ly meet a boy or a girl and even­tu­al­ly set­tle down.

Not so long ago the top­ic of Inno­va­tion was dis­cussed on ABC’s Q&A.

Stephen Mer­i­ty asked: “I’m an Aus­tralian pro­gram­mer work­ing on machine learn­ing and arti­fi­cial intel­li­gence in San Fran­cis­co after study­ing at Har­vard. I want to return to Aus­tralia but I fear it won’t ever be the right choice. Research and edu­ca­tion­al fund­ing has been slashed, the FTTP NBN has been abol­ished, and my most com­pe­tent engi­neer friends have been left with the choice of leav­ing home for oppor­tu­ni­ties or stunt­ing them­selves by stay­ing in Aus­tralia. Even if all that was fixed, it’s not enough to just pre­vent brain drain, we need to attract the world’s best tal­ent to Aus­tralia. Does the Lib­er­al gov­ern­ment tru­ly believe their lack­lus­tre poli­cies can start fix­ing this divide?”

The response from Labor’s Ed Husic was “Okay. So on the issue of the brain drain, you can take it two ways. Obvi­ous­ly you can, as Stephen was say­ing, there is some neg­a­tive fac­tors that drove him away and I’ve had a father email me of a son who said “I had to leave because I didn’t have oppor­tu­ni­ties, I had to go else­where to pur­sue”, in terms of his sci­ence career, you know, pur­sue oppor­tu­ni­ty else­where. I actu­al­ly also see the pos­i­tive in that, you know, a lot of the start-ups, a lot of peo­ple that are mov­ing over­seas are pur­su­ing oppor­tu­ni­ty to grow and they’re going to gain expe­ri­ence and poten­tial­ly come back and replen­ish our pool. The key for us is if peo­ple are leav­ing, what’s being done to back­fill the places? What’s being done to replen­ish the tal­ent pool?”

This is like a busi­ness say­ing well we have no cus­tomer reten­tion because our prod­uct is crap, so let’s go find some new cus­tomers.

I taught Stephen Mer­i­ty here at the Uni­ver­si­ty of Syd­ney. He also worked for me at Free­lancer. He’s one of the top grad­u­ates in com­put­er sci­ence that this Uni­ver­si­ty and coun­try has ever pro­duced. He’s nev­er com­ing back.

What about try­ing to attract more senior peo­ple to Syd­ney?

I’ll tell you what my expe­ri­ence was like try­ing to attract senior tech­nol­o­gy tal­ent from Sil­i­con Val­ley.

I called the top recruiter for engi­neer­ing in Sil­i­con Val­ley not so long ago for Vice Pres­i­dent role. We are talk­ing a top role, very high­ly paid. The recruiter that placed the role would earn a hefty six fig­ure com­mis­sion. This recruiter had placed VPs at Twit­ter, Uber, Pin­ter­est.

The call with their prin­ci­pal last­ed less than a minute “Look, as much as I would like to help you, the answer is no. We just turned down [anoth­er bil­lion dol­lar Aus­tralian tech­nol­o­gy com­pa­ny] for a sim­i­lar role. We tried plac­ing a split role, half time in Aus­tralia and half time in the US. Nobody want­ed that. We’ve tried in the past look­ing, nobody from Sil­i­con Val­ley wants to come to Aus­tralia for any role. We used to think maybe some­one would move for a lifestyle thing, but they don’t want to do that any­more.

It’s not just that they are being paid well, it’s that it’s a back­wa­ter and they con­sid­er it as two moves?—?they have to move once to get over there but more impor­tant­ly when they fin­ish they have to move back and it’s hard from them to break back in being out of the action.

I’m real­ly sor­ry but we won’t even look at tak­ing a place­ment for Aus­tralia”.

We have seri­ous prob­lems in this coun­try. And I think they are about to become very seri­ous. We are on the wrong tra­jec­to­ry.

I’ll leave you now with one final thought.

Har­vard Uni­ver­si­ty cre­at­ed some­thing called the Eco­nom­ic Com­plex­i­ty Index. This mea­sure ranks coun­tries based upon their eco­nom­ic diver­si­ty- how many dif­fer­ent prod­ucts a coun­try can pro­duce- and eco­nom­ic ubiq­ui­ty- how many coun­tries are able to make those prod­ucts.

Where does Aus­tralia rank on the glob­al scale?

Worse than Mau­ri­tius, Mace­do­nia, Oman, Moldo­va, Viet­nam, Egypt and Botswana.

Worse than Geor­gia, Kuwait, Colom­bia, Sau­di Ara­bia, Lebanon and El Sal­vador.

Sit­ting embar­rass­ing­ly and awk­ward­ly between Kaza­khstan and Jamaica, and worse than the Domini­can Repub­lic at 74 and Guatemala at 75,

Aus­tralia ranks off the deep end of the scale at 77th place.

Australia’s rank­ing in the Har­vard Eco­nom­ic Com­plex­i­ty Index 1995–2015. Source: Har­vard

77th and falling. After Tajik­istan, Aus­tralia had the fourth high­est loss in Eco­nom­ic Com­plex­i­ty over the last decade, falling 18 places.

Aus­tralia keeps good com­pa­ny in the Har­vard Eco­nom­ic Com­plex­i­ty Index at posi­tion #77. Source: Har­vard

Thir­ty years ago, a time when our Eco­nom­ic Com­plex­i­ty ranked sub­stan­tial­ly high­er, these words rocked the nation:

We took the view in the 1970s?—?it’s the old car­go cult men­tal­i­ty of Aus­tralia that she’ll be right. This is the lucky coun­try, we can dig up anoth­er mound of rock and some­one will buy it from us, or we can sell a bit of wheat and bit of wool and we will just sort of mud­dle through … In the 1970s … we became a third world econ­o­my sell­ing raw mate­ri­als and food and we let the sophis­ti­cat­ed indus­tri­al side fall apart … If in the final analy­sis Aus­tralia is so undis­ci­plined, so dis­in­ter­est­ed in its sal­va­tion and its eco­nom­ic well being, that it doesn’t deal with these fun­da­men­tal prob­lems … Then you are gone. You are a banana repub­lic.”

Looks like Paul Keat­ing was right.

The nation­al con­ver­sa­tion needs to change, now.

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About Craig Tindale

CEO in the software and technology industry qualifications economics and computer sciences well read on Minksy, Marx, Fisher , Schumpeter , Veber and dozens of of others