You might not know it, but the big brown land down under has issues. When Paul Hogan slipped that shrimp on the barbeque, he reinforced our national stereotype as the relaxed land of the long weekend (LOTLW). True, we have just twenty million people spread over an island continent only slightly smaller than the US. We also have more ounces of gold, silver and base metals in the ground per person of population than probably any country in the world.
Despite this abundance of natural wealth, we are also blessed with a current account deficit of over 7% of GDP, net foreign debt of four hundred billion dollars plus, median house prices of over six times average annual earnings and one of the highest levels of casual employment in the OECD.
Donald Horne once famously described Australia as a lucky country run by second-rate people who share its luck. Could this be true? Our political masters once described us as "relaxed and comfortable" about our station in life. Are we convinced by smooth talk telling us what we want to hear, or are the words of Horne closer to the truth?
Origins
Terra Australis was first noted by Portuguese and Dutch explorers. The name translates as the great south land of the Holy Spirit. Currently, there would be less than 10% of the non-catholic population that might be contemplating this each Sunday. But religious origins aside, gold has strongly influenced our development in the brief two hundred years of settlement. Our first intrepid white settlers were ingloriously dumped here as a last ditch penal outpost by the British in 1788.
The first involuntary settlers would likely have benefited from a sound de-briefing after their "assisted passage" halfway around the world. Forced incarceration by the State and a re-location 10,000 miles across hazardous oceans in leaking boats can be detrimental to your mental and physical health. Of the convicts who survived their economy class passage, some behaved and "redeemed themselves." These were eventually written pardons. These newly liberated men (and women) and a small number of free settlers set out to do the usual thing of a free people – survive and thrive.
Without recounting the details of our history (see for example, here or here), it is safe to say that the early settlers were survivors. From nearly starving, the growth of industry, agriculture, farming and grazing helped an infant economy to grow and to prosper a resilient populace. Sure, there was the occasional drought, economic downturn, and mixed fortunes of all capitalist countries. There was even an interesting period during which rum was used as the preferred currency of choice. But it is the freedoms enjoyed by those early settler citizens (those not still in literal chains to the State) that would likely surprise many of us familiar with the civility of today's LOTLW.
In our current era of democratic "freedom", Australians are accustomed to inflation, taxes, surrendering firearms, using a fiat currency, displaying de-facto national identity numbers and enduring compulsory voting in elections.
It wasn't always like this. Gold played a pivotal part in the story of our national development, and we are much the poorer for its withdrawal from our national consciousness. Its contribution to our development is rarely acknowledged. Like the relatives you know you have, but don't talk about much. Gold stars as a major celebrity in the story of our national history, in strong contrast to the walk-on bit parts it currently captures.
Gold Rushes
The land down under is still today one of the world's biggest producers of the shiny yellow metal. In 2004 Australia produced 261mt of gold, second only to South Africa. Yet this is hard to appreciate by a cursory look at our financial indices. Of the dozens of listed gold companies, only a few actually mine, produce and smelt the majority of our gold production. So we can easily under-estimate gold's influence on the development of a modern Australia.
Gold was discovered at various sites in Victoria, New South Wales, Western Australia and Queensland beginning in the early to mid 1800s. These discoveries had a dramatic effect. During the gold rushes of the 1850's alone, the national population nearly trebled, from about 440,000 to nearly 1.2 million souls.
Large groups of people literally "rushed" from one area of excitement to another, in the hope of striking it rich. Thousands of people literally put down their tools, left their families and hiked their way to the fields. In our contemporary world of electronic banking, on-line accounts and virtual money, it is hard to contemplate the effect that gold had.
Our cities suffered the normal growing pains of many a teenage adolescent; oddly shaped new growths appeared as if from nothing. The provision of services was a difficult task; the cost of building materials and the resultant reliance on cheap timbers often meant that fire was an ongoing risk to permanence. The difficulty of obtaining a reliable water supply might have meant that a burning timber structure was readily abandoned. After all, there was plenty more timber where it had came from.
But in areas near the fields where gold money flowed, there were many fine stone buildings constructed. Visit any of the big former gold mining towns such as Charters Towers, Bendigo or Ballarat, and you will be struck by the permanence of much of the main street frontage, still there today in these regional towns.
The goldfields themselves were chaotic; think of a large but leaderless group all seeking the same end product. The irresistible lure of gold drew men away from their labours, and the law of supply and demand priced their wages accordingly. Labour shortages appeared across many industries.
Many of the hopeful were ultimately disappointed by the quick disappearance of shallow alluvial patches of gold. As the shallow near-surface gold was exhausted, underground mining became necessary to continue extracting the rich veins of gold. Companies were formed to acquire the capital and infrastructure required of a mining operation. The numbers of men working the shallow surface scratching of individual claims declined.
Whilst the workers continued to chase their fortunes, many of the capitalist elite feared what gold might do to their labour force and the social strata of the community. According to these folks, accumulated wealth was fine provided you ran in the right circles and knew the right people. But give a working man the chance to grow rich, and he would become u2018pernicious, demoralised, and succumb to a form of gross self-centred materialism.' Or so was said.
To the contrary, the tremendously positive effect of gold is little recognised nor realised by most Australians. Gold is largely responsible for the impetus of much of our development. Literally, it was the discovery and extraction of gold that helped propel the country into one of the highest standards of living in the world by the early 1900s. Although we continue to move forward, it is interesting to note our relative performance has slipped quite dramatically ever since Federation. Of course, the formation of a central government in 1901, the central bank that followed in 1911 and our subsequent decline on the OECD standards of living table for the last one hundred years, might have just been coincidental. Maybe.
Tensions and Taxes
Being true to nature, Governments sought to profit from the productive wealth being claimed from the earth by the industrious. Permits to mine gold were imposed by law. The disquiet of the miners eventually resulted in an unpopular government enforcing law, order and taxes at the point of a gun. This event was later dubbed the Eureka stockade of 1854. Ideological ownership of what took place has been in dispute ever since; suffice to say that libertarian ideals took quite a battering. See here for a fuller coverage of this fascinating episode in Australian history. It was only the second armed insurrection in Australian history, the first being some fifty years earlier.
Yet in the 1850s, it was more than libertarian ideals that experienced pain. The recent racial tensions of Cronulla-Sutherland (Sydney) have nothing on the racial tensions experienced one hundred and fifty years ago. The gold rushes had prompted a surge of immigrants to Australia from countries all over the world. Foreign languages were commonly heard. As the shallow alluvial gold was exhausted, non-Caucasians were blamed for "stripping the goldfields of their wealth, to the injury of the colonists" (Readers interested in further examples of self-interest can refer to "Petition from the Meroo", Votes and Proceedings of the NSW Legislative Assembly, 1858, vol. 2, p. 947).
Chinese immigrants were often targeted for blame. Originally brought here as indentured workers for pastoralists, many succumbed to the lure of gold. By the mid 1850's, the increasing numbers of Chinese immigrants had become an easy target for scapegoating, as a result of the Royal Commission into the Eureka Stockade. Once again, leviathan demonstrated its ability to deflect blame from itself. In addition to "normal" arrival taxes, an additional "landing fee" was imposed on all Chinese immigrants.
In 1858, one ship of Chinese immigrants was met by stone-throwing youths. Some newspaper commentaries described the new settlers as being "unchristian, immoral people" who would "contaminate" the character of existing European settlers.
At several gold fields in the 1860s, Chinese settlers were forcibly directed to remove their camps from other settlers. The Lambing Flat gold field saw the formation of the "Miners Protective League", a group self-defining its membership as "men of all nations, except Chinamen." In tense standoffs, Chinese miners were driven off various mining sites during 1861. Tensions continued until 30 June 1861, when Chinese in the Lambing Flat area were attacked and their pigtails, a symbol of the Manchu culture and the Qing dynasty, shamefully cut off. Over 1200 Chinese fled, leaving their camping gear behind, which was subsequently gathered and burnt in several large bonfires by the several-thousand-strong crowd.
Following the riot, the colonial separatists succeeded in forcing restrictions on immigration by Chinese nationals. During the following decades, the numbers of Chinese on Australian soil gradually declined. For those remaining acceptance was a slow process; Australian law excluded Chinese from the more recently discovered gold fields that offered better prospects for shallow alluvial mining. Crossing the boundaries to these newer gold fields resulted in fines or jail time for Chinese "offenders."
By 1867 the bill that virtually halted Chinese immigration was repealed. Many gold fields were now workable only by underground techniques, methods beyond the resources of individual men. Chinese immigration was minimal until sparked by further gold discoveries in the 1870s and 1880s.
Current Economic Status
Jump forward to the present. Contemporary Australia has its share of problems; we have a housing boom, a stock market bubble and a declining manufacturing base. Our dollar is known as a commodity currency, a status that is usefully blamed for our boom and bust growth cycles; in reality these are normal outcomes of a fiat-fuelled post-industrial society. Any Austrian economist could explain this; sadly, we're stuck with mostly Australian ones. Despite the similarity in spelling, Australian economists have little in common with their Austrian counterparts. Our local number crunchers have been all too willing to repeat the mistakes of their industrialised cousins. Just like the Britons, our sophisticated central bank sold 167 tonnes of our gold just three years ago, near the twenty-year bottom of the gold market.
Central bankers in this country have a rather tarnished image as bad guys. They are seen as the men in suits who raise interest rates to make houses more expensive. Raising interest rates will make housing loans unaffordable cry the ill-informed voices. Never mind the actual ticket price of admission to the housing market; it's the monthly payment that matters to the financially illiterate.
In the last ten years Australia has experienced double-digit credit creation. Amongst other things, this has contributed to double-digit house price increases. It is common for media scribblers to complain less about housing prices than about the last "recession we had to have." This sentiment simply fuels the incorrect supposition that rising house prices are tantamount to economic prosperity. Who in their right mind wouldn't want their house to go up so they could feel rich? And then borrow against it to confirm the illusion?
Australia has suffered fifteen years of economic expansion; many people would praise this as a positive outcome. It is tempting to agree; but closer examination of the details should correct first impressions. Banks have borrowed overseas to support a housing boom; most of the participants were existing home owners intent on playing musical chairs. All the while, many people lost financial ground whilst incurring larger mortgages and acquiring newer cars at generationally-low interest rates. This outcome was achieved because in the land of the long weekend, the Adjustable Rate Mortgage (ARM) is king. The monthly payment is the only figure of concern; the actual debt size amount seems of less relevance.
In a time of lower interest rates, Australians have managed to increase their personal indebtedness. This is in contrast to previous behaviours. Most people used to avoid being so heavily in debt. Paying the house off used to evoke celebrations; now it provokes a flood of offers to refinance.
Our first credit cards were introduced in the early 1970's. This coincided with a noticeable loss of blue-collar employment. Job loss for white-collar workers trended up with the downsizing of the eighties. Like most post-industrial countries, this has resulted in people who want full-time jobs having trouble finding one. This is particularly true since the last recession of the early nineties; the structural component of our unemployment became much more noticeable.
During the full employment era of the 1960's, to be long-term unemployed meant you were out of work for maybe twelve weeks. The current definition of Long-term unemployment is to be out of work for 52 weeks or more. Government "assistance" barely covers the cost of renting in most major cities; being out of work is now more financially damaging than ever before. The increased take-up of personal credit for discretionary purchasing to maintain living standards also leaves the out-of-work vulnerable to defaulting on their credit card balances.
Not realising it is often the cause of the unemployment problem, Government decided to do something a few years ago. After the tech bust of 2000, a change to capital gains taxes prompted a nationwide housing boom which boosted jobs for builders, mortgage brokers and real estate agents.
Parents no longer wanted their children to grow up and become cowboys; jobs in the blue-collar trades suddenly became fashionable, at least for males. But career pathways to the trades have eroded over time. Socialist central planners of Canberra had seen to that by reforming and regulating apprenticeship training schemes. The resulting low supply of tradespeople soon resulted in the six-figure home makeover as the demand for skills raced ahead of supply. The moral hazard of financing it all at low interest rates was ignored.
Frisking for Fiat
Wikipedia defines moral hazard as increased risk of problematical (immoral) behavior and a negative outcome (“hazard”) because the person who caused the problem doesn’t suffer the full (or any) consequences, or may actually benefit. One might argue that moral hazards become recognised when the unintended consequences of policies such as low interest rates or capital gains tax concessions become apparent in housing bubbles and spiralling personal indebtedness.
Unintended consequences abound in socialist democracies. The source of many of these edicts is our own national capital. For a large country with the population of New York State, Canberra is an expensive luxury. As a tourist stop, Canberra has all the museums, bikeways and places of interest you could wish for. The city came about in 1901 because the citizens of Sydney and Melbourne could not overcome their traditional rivalry; instead of ditching the whole Federation idea (as would have been sensible), they instead decided to spend our loot on creating a new national capital city somewhere between the two. It was to be away from the coastline to be safe from enemy shipping fire. In retrospect, this is a quaint idea in the age of the ICBM.
The formation of Canberra, now a city of several hundred thousand public servants, was described as "a good sheep paddock ruined." But we implicitly support the bureaucratic edicts that spring forth from this upgraded paddock. For example, some might say we need Canberra to help us fight terrorism by snooping into money flows in, out and between our shores. Australian law calls this money laundering. This has nothing to with washing machines; it refers to the movement of cash suspected as being from the black economy, from trafficking of drugs, or being the proceeds of crime. At our airports, we are all under suspicion, as ordinary people are the suspects in this bizarre game. Here's how it works.
We used to have a gold standard. This died and was put to rest in 1931. With our increasing sophistication, we apparently need just the funny money, the unbacked fiat paper. Our erudite readers will know that fiat currencies are inflated over time and they progressively lose their purchasing power. To buy the same goods, the purchaser needs to present increasing amounts of the same currency. Under a gold standard, gentle deflation was the norm. But under fiat, the opposite is the case. Whether the inflation is gentle or otherwise simply reflects the rate at which the "money" loses value.
Travellers commonly take credit cards for many of their purchases. But they also need cash for those times when nothing else will do. When the phone lines are down, or to keep an innkeeper happy, cash is priceless. But be warned about how much cash you have with you. If you bring too many unbacked promises into the LOTLW, or try to take too many out, official people will get upset and you'll be in trouble.
This came about in the year of our two hundredth birthday of white settlement; we celebrated by giving away some of our freedoms. This was achieved through the enactment of the Financial Transaction Reports Act of 1988. The principal object of this Act was to "facilitate the administration and enforcement of taxation laws." Transactions of $10,000 and over are reported to the Australian Transaction Reports and Analysis Centre. "Suspicious" multiple transactions just under this limit can also be noted to AUSTRAC.
When arriving and departing the LOTLW, there are apparently plenty of signs that tell you 'fess up if you are carrying "excess" currency. Anything that converts to more than $10,000 or more in the local fiat is classed as "excessive." When the FTRA was introduced, ten thousand dollars was a lot of money. It could buy a new car, or put a deposit on a house. Now, it is barely enough to pay your teenagers annual phone bill.
The rather odd observation that can be made about this situation is that the funny paper money is subject to restrictions. Yet anybody with a pulse can leave the country with their bags laden with gold and silver with few questions asked. Under our burgeoning police state, how long will it be until precious metals dealers are required by law to keep customer registers?
When travelling in or out of the LOTLW, tick the right boxes for the kindly folks at the customs barrier if the total of your cash is equivalent to AUD$10,000 or over. The smiling officials will take your details but will leave your unbacked fiat promises intact to travel.
Conclusion
From the penal colony at the end of the world, Australia has evolved from a harsh gaol to a soft, socialistic nanny-state democracy. It might be fairly said that our citizens are highly indebted, use fiat paper as though it were real money, and have forgotten the golden catalyst of much of their national heritage.
Our national origin was as a penal colony. In some ways this is little changed. New police powers include recently enacted stop and search capabilities; you may be frisked by officials for appearing suspicious. Curiously, there is little dissent to these laws. Civil libertarians are viewed with suspicion; vocalising dissent to the loss of liberty merely gets you labelled as "un-Australian."
Not all of us are happy with this state of affairs. Some act out their frustrations. Racial tensions were blamed for recent disquieting riots. But the financial inequities experienced by high unemployment in low socio-economic areas continue to be ignored. Forced wealth redistribution will not fix this problem.
Our fair brown land has been in the grip of a housing mania, fed by cheap credit and relaxed capital gains laws. This will soon end. When the credit-rich generation realise their "assets" are brick and mortar albatrosses, the stampede for the exits will begin. This may take some time. Australians have a cultural affinity to bricks and mortar. They have forgotten how to differentiate an asset from a liability.
Whether this decline of the housing market feeds into a new metals boom is impossible to predict. Since the Reserve Bank began a cycle of rising interest rates almost three years ago, the Australian stock market has leapt 50%. Yet metals shares are yet to see anything like the comparable growth of their US counterparts over the same period.
Regardless of the short to medium term outcome for investors, gold bugs and conspiracy theorists, gold will very likely continue to offer asset protection for the long term. We used to appreciate the shiny yellow metal a lot more then we do now; like distant cousins, we barely remember what it looks like.
But it is time that we did: we are becoming older, more indebted than ever, and more susceptible to the deceptions of our rulers. The concentration of wealth in fewer hands is no accident; we need to cease the futile berating of the rigged capital markets that brought it about. Instead of talking, we need to take action.
Our future lies not in selling houses to each other; our future lies in recognising the necessity of living within our means. Incurring debt is not the road to riches that many think; capital gains tax laws that made investment housing popular can be changed before you can say "Parliamentary recall."
Earlier I stated that we as a nation have issues. One of our chief issues is that we fail to appreciate the financial dangers of debt. This is the Australian cultural notion of "she'll be right, mate." If all the stars align, maybe we will be. But the dangers to our financial well-being are not just from outside our borders.
“By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”
~ John Maynard Keynes, Economic Consequences of the Peace (1920)
We are a small number of highly indebted people. There are nearly three billion savers joining the first world in our generation. We ignore their appreciation of all things precious at our own peril.
January 18, 2006
