Australia in no Position to Lecture on Trade, Innovation and Investment

There’s nothing like a G20 meeting to give you a good old chuckle. This is where assorted windbags from the largest 20 economies in the world get together and emit enough hot air to get Phileas Fogg around the world.

The latest meeting is taking place in Chengdu, China. The Financial Review reports on the hilarity:

Global policymakers must “double-down” against the threat of Brexit — or Trump-style isolationism by shunning the cheap sugar hit of more monetary or fiscal stimulus and deliver a fresh focus on trade, investment and innovation, says Treasurer Scott Morrison.’

What the…?

Don’t you love it when politicians talk about what others ‘must’ do, even though they don’t have any intention of doing it themselves?

Yes, governments around the world should focus on long term structural reform, rather than sitting back and demanding an easy hit from monetary policy, or thinking they should direct the economy via fiscal policy.

Australia is in no position to lecture on this front. Successive governments have sat back and allowed the RBA to do the heavy lifting. Lowering interest rates simply exacerbates a flawed economic structure. It does nothing to improve long term economic wellbeing. In fact, as you’ll see in a moment, it does long term damage, both socially and economically.

But let’s have a look at Australia first. Here’s the Treasurer saying we need to focus on trade, innovation and investment to stop socially divisive events like Brexit and the rise of Donald Trump.

It’s true. We do need to focus on those things. But does Morrison practice what he preaches? Spending up on an ad campaign and calling it the ‘ideas boom’ is not a substitute for innovation. Having an iPad is not a sign of an innovative society.

How Australia’s Economy Stacks Up

As far as investment goes, much of that comes down to tax policy. Australia is a high taxing and high spending government. It’s bad under the Coalition, and would have been even worse under Labor.

The incentives encoded in Australia’s taxation laws don’t encourage innovation. They encourage capital to flow into land at the expense of nearly everything else.

Firstly, that’s because we tax labour (wages, payroll tax) and capital (company profits, capital gains), while we pretty much leave land alone. You can sit on a piece of land for years and watch its value increase, for example, by the provision of public transport nearby, provided by the State at no cost to you.

It’s a sweet deal for landholders, and that’s why Aussies are so desperate to get their piece of land. It’s protected by governments, and probably always will be.

The government had a chance to go to the polls with decent reforms around this area, but it chose not to do so. Labor promised negative gearing reform, which would have taken some incentives away from property investment, but it couldn’t sell the idea to a nervous public.

But that doesn’t mean the current government should sit back and do nothing because the electorate doesn’t like change. The world is changing before our eyes. It’s becoming darker. Unless we change too, all of a sudden we’ll wake up one day and realise the world has moved on without us.

Iron ore will no longer be in great demand, and foreign creditors will only buy our assets if the dollar is substantially lower (which is why you should read this).

That will drive inflation higher, and the RBA won’t be able to magically push the interest rate stimulus button. And then the government will really have to walk the walk. But it will be too late…

The problem with Scott Morrison’s ‘should do this’ comments is that they are so spot on, yet will be completely ignored. The reliance on monetary policy to fix every one of the world’s apparent ailments is creating so many more.

When you cheapen money, you cheapen a society’s values and morals. You fix one problem and create 10 others. Easy money favours the lucky few, at the expense of the many. Eventually, the ‘many’ get fed up and revolt. This happens in complex and varied ways.

Mark MacKinnon, writing in The Globe and Mail, sums it up nicely:

Rarely, it seems, has the world spun so rapidly, have events felt so out of control.

The headlines blur into one another, feeding the sense of a world in chaos. The war in Syria bleeds into the refugee crisis. The refugees’ march into Europe boosts politicians on the nationalist right. The truck attack in France is followed by the shooting of police in Louisiana. Then it’s a man with an axe on a train in Germany. On Friday, it was a shooting at a mall in Munich. “Brexit” in the United Kingdom is knocked from the top of the news by a putsch attempt in Turkey.

They seem like disconnected events. But what links the British who voted to quit the European Union with the Turks who gathered in a public square on Wednesday to cheer the imposition of a state of emergency is their anger at how the system has worked until now.

As I mentioned earlier, the world is becoming darker. There is a lot of hate around…and fear and anxiety. The system is no longer working for the majority.

Until our politicians, and the unelected global elite, see this, and try to change the structure of the global economy (which will change how the economic pie is sliced), we’ll continue heading down this path of violence.

My fear is that we’re already too far down the rabbit hole. Turning around from here would require too much faith in the global elites to give up their vested interests for the greater good. The history of the world (or the history of human nature) says that is just not going to happen.


Greg Canavan,
For Markets and Money

Greg Canavan is a Contributing Editor at Markets & Money and Head of Research at Port Phillip Publishing. He advocates a counter-intuitive investment philosophy based on the old adage that ‘ignorance is bliss’. Greg says that investing in the ‘Information Age’ means you now have all the information you need. But is it really useful? Much of it is noise, and serves to confuse rather than inform investors. And, through the process of confirmation bias, you tend to sift the information that you agree with. As a result, you reinforce your biases. This gives you the impression that you know what is going on. But really, you don’t know. No one does. The world is far too complex to understand. When you accept this, your newfound ignorance becomes a formidable investment weapon. That’s because you’re not a slave to your emotions and biases. Greg puts this philosophy into action as the Editor of Crisis & Opportunity. He sees opportunities in crises. To find the opportunities, he uses a process called the ‘Fusion Method’, which combines charting analysis with more conventional valuation analysis. Charting is important because it contains no opinions or emotions. Combine that with traditional stock analysis, and you have a robust stock selection strategy. With Greg’s help, you can implement a long-term wealth-building strategy into your financial planning, be better prepared for the financial challenges ahead, and stop making the same mistakes that most private investors do every time they buy a stock. To find out more about Greg’s investing style and his financial worldview, take out a free subscription to Markets & Money here. And to discover more about Greg’s ‘ignorance is bliss’ investment strategy and the Fusion Method of investing, take out a 30-day trial to his value investing service Crisis & Opportunity here. Official websites and financial e-letters Greg writes for:


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