Dredding the Future of the Australian Economy

In today’s Markets and Money, I’ll return to the topic of Judge Dredd. What lessons about the future of civilisation can be extracted from that film? And what implications for law and civil order arise when a man has the audacity to claim ‘I am the law’? Are central banks a law unto themselves in the economy?

But before I take up those important questions, it’s all happening now in Australia’s economy! For starters, the country’s current account deficit blew out to $13.74 billion in the June quarter. While it was dishing out the bad news, the Australian Bureau of Statistics also reported that the first quarter deficit had been revised up to $7.8 billion from $5.7 billion.

This massive data set is the curtain raiser for tomorrow’s GDP figure. But you can learn a few things from it anyway. First, iron ore should be ashamed of itself. The fall in iron prices — as predicted in this space — is putting a dent in national income. With the iron ore price now under $90 and at a five-year low, you begin to sense a new trend toward lower national income.

Really, though, it’s simple: Wealth comes from production, not consumption. If you’re not making things and selling them, you’re not generating income to save, invest, build, and grow. The one-off mining boom generated a windfall. But it’s what you do with a windfall that matters. If you don’t convert it into productive assets that generate new incomes and jobs, you’re just digging up dirt, adding very little value to it, and selling it to pay for houses and beer.

In economic terms, a recurring current account deficit means you’re gradually becoming a debtor. Your consumption and investment is financed by money you borrow from foreigners. Sustain this unsustainable behaviour long enough and you get something like the chart below.

Net Foreign Liabilities
Click to enlarge
Source: Reserve Bank of Australia


A debt problem isn’t just an economic problem. It’s a lifestyle problem. If you’re constantly in debt, your life is really out of your control. You depend on the kindness of strangers. And strangers aren’t generally kind. They’re usually in it for the money.

Speaking of your money, spare a thought for the superannuation industry today. There is great wailing and gnashing of teeth in the press by the rent seekers in the super industry. They are reacting to yesterday’s decision by the government to push back the increase in compulsory superannuation to 12% until 2025.

Oh woe is them!

The original plan was to gradually increase your compulsory super contribution from 9% to 12% by 2019. But in order to scrap the mining tax, the government had to make a deal with Clive Palmer’s gang to delay the increase in super. As a result, the enormous policy failure that was the mining tax is now gone and the super increase won’t come into effect for another 11 years.

According to the super industry, that’s a disaster for Australian workers. The Financial Services Council — an industry group — reckons the delay in the increase in compulsory super will cost Australian workers about $128 billion in retirement benefits. Industry Super Australia chairman David Whitely says Australian workers will be ‘demonstrably worse off’.

That is largely a bunch of self-serving crap. The only people who are demonstrably worse off today because of yesterday’s decisions are the people in the superannuation industry. Each year, they get to clip the ticket on $140 billion of compulsory superannuation contributions that must come into the system. They were dying for the increase to 12% because it was even more money they could earn fees from without having to be accountable for performance.

Earnings fees from compulsory superannuation cash flows, without adding any real value, is what economists call rent seeking. An economic rent is income you receive without doing anything productive. You receive it by virtue of your location, which is often privileged.

In this case, the location isn’t physical (like land). It’s economic. As a wage earner, you have to pay into the superannuation system. That means someone has to take your money. The people managing your money don’t have to work for it. It’s completely natural for them to want more of it without having to do work.

What is not ‘demonstrably’ true is that Australian workers will be worse off with lower compulsory superannuation contributions. For starters, they will have the benefit of keeping more of their money now, to do with as they please today. In most places, we call this ‘freedom’. Having more of it is usually a better thing.

But the super industry would have you believe that if you aren’t made to save and turn your money over to someone else, you aren’t smart enough or diligent enough to pay for your own retirement. They’ve also conveniently left out the fact that the money in the superannuation system is overwhelmingly exposed to Australian stocks. The stock market is not a retirement machine.

Regardless of whether super will actually pay for everyone’s retirement — it’s too soon to tell — it’s the principal of self-determination that matters. And it’s the way people learn to take care of themselves that matters. The superannuation system is designed to ensure that Australian’s have a properly funded retirement. A properly funded retirement doesn’t put any strain on the government pension system.

That’s all fine in public policy theory. But it’s arrogant and wrong. You can’t make people care about their financial future. It’s something they have to care about themselves. The more responsibility they take for their own affairs, the more likely they are to make responsible decisions about saving for the future.

In fact, the more you create the impression that someone’s financial future will be secure without requiring any active thought on their part, the more likely that person is to be destitute and broke at retirement age. At the very least, they’ll be financially illiterate and at the mercy of a retirement system they view as an ATM. Trying to protect people from their own poor planning is a loser’s game. Only rent seeking parasites would disagree.

That said, there is a certain rationality in being a rentier and not a renter. If I understand Phil Anderson  correctly, this is also his position. If you know how the economy works, you are better off profiting from it than being victim of it. Phil, of course, is referring to the fact that land prices capture the increase in economic value before any other asset class.

Does that make Australia’s national obsession with housing a rational decision? Probably not. If you’re spending money you borrowed from a foreigner to buy an asset you hope to sell to a greater fool, you’re not doing anything productive. You’re just speculating. You may win. But not everyone can win.

Granted, my position is radically sceptical and probably un-Australian. But think and discuss, and send your own thoughts to letters@marketsandmoney.com.au!

In the meantime, ANZ Chairman David Gonski has fired a broadside across the bow of the housing bulls. ‘The fact is, anyone who believes prices always go up is, I think, a fool,’ Gonski told the Australian British Chamber of Commerce in a speech. ‘There will come a time when there will be a correction,’ he added.

Is now that time? No one can ever know. Anecdotally, more cases are surfacing of an increase in low-doc and no-doc housing loans made to Australians. These are people who don’t know what they’re getting into and are clearly being taken advantage of by mortgage brokers and lenders who are only in it for the fees and commissions. But I’m sure there’s no housing bubble in Australia…because human nature is different on this side of the planet.

Now, let’s return to Judge Dredd. And if you’re looking for any further practical, useful investment insights from today’s Daily Reckoning (assuming you got any above), you can stop looking now. What follows are a couple of comments on law, civilisation, and technology. Proceed with caution. You have been warned.

First off, the megacities of the future will only be governable through the application of brute force and pervasive surveillance technology. In the 1995 version of the movie, starring Sylvester Stallone, the story is set in the 2080s. Most of the earth has been reduced to an unliveable wasteland. The world’s population is concentrated in mega-cities of 500 million people or more.

Justice isn’t a commodity in that future. But the roles of judge, jury, police officer and executioner have all been combined into the role of ‘Judge’. Hence, Stallone bellowing out ‘I am the law!’ several times during the film. It’s a dark version of the future. Why?

When a single man can make the law, you no longer have a just and free society. And without justice and liberty, you don’t really have a civilisation worth defending (or aspiring to). The Rule of Law is the idea that Right should triumph over Might. Or as John Adams put it, we should be a ‘nation of laws, not men’.

In Dredd’s world, and in today’s world, men and women use the law to pursue their own narrow self-interests. The legislature has become the tool for coercing other people into sharing your value by brute legal force and the tools of technological compliance. The law does not apply to everyone equally.

The concentration of power into the executive — and remember, Judges are both jury AND executioner in Dredd’s world — is dangerous for civilisation. It leads to lawlessness. In economics, this concentration of power can be seen in the role played by central banks. True, they only set the price of money. But this affects the allocation of labour, capital, and resources.

That brings me to another point about Dredd’s world. In that world, the only solution to the concentration of large populations is the tight control of them through technology and authority. Does that sound familiar? What is a mega city but a large, open-air prison? Welcome to the police state future.

Finally, Dredd’s world is a radical, but logical, extension of Abenomics. Once the State takes the central role in allocating resources, and once growth reaches its demographic limits, you’ll get massive, centralised living arrangements. These living arrangements aren’t natural in the sense that they form out of voluntary choices made by free individuals.

In tomorrow’s Markets and Money, I’ll show you that centrally organised civilisations are prone to exhausting their resources. Once the whole planet does that, we’re well and truly doomed. But there is hope. There is always hope! Until tomorrow.

Dan Denning
For Markets and Money

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Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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