australianvoice (australianvoice) wrote,

This is taken from an article "Waging a War on Growth" by Vern Gowdie for The Daily Reckoning.(1) It has been edited by removing some material and adding headings for posting here on Australian Voice. They are totally a-political, only interested in providing investment advice based on their understanding of the financial world.

When is Australia’s budget (allegedly) returning to surplus? The government’s Mid-Year Economic and Fiscal Outlook’s brave-optimistic-foolish-delusional forecast tells us black ink will be all over the budget in 2020/21. According to ABC News:

"Federal budget deficits will increase by more than $10 billion in coming years as the Government battles low wage growth and falling company profits, but it insists it will still return a surplus in 2020/21."

ABC News reports that, at a glance, the Mid-Year Economic and Fiscal Outlook concludes:

-Tax receipts are predicted to be $30.7 billion lower over four years;
-Tax receipts are down, despite recent bounces in key commodity prices;
-Sluggish wage growth and non-mining company profits are dragging down tax receipts.

Company and personal incomes are experiencing glacial growth. This private-sector freeze also impacts government tax receipts. Yet, in spite of this sombre outlook, the Treasury boffins can somehow torture the numbers to transform the budget from red to black in the space of four years.


In reality, the forecast surplus is nothing more than an accounting ‘pea and thimble’ trick. According to The Australian:

"The Coalition’s wafer-thin projected 2020-21 surplus, the linchpin of the nation’s AAA rating, is achieved entirely by a change in accounting for the Future Fund headed by Peter Costello — the man responsible for the last budget surplus in 2007-08.
"The projected budget surplus of about $1.1 billion will be achieved only because of a reclassification of about $4bn in Future Fund earnings in that year, not because of any improvement in underlying budget performance."

Rubbery figures don’t alter the underlying income trend. (...) The Western world has pretty much had a free kick on economic growth since the Second World War. But that’s all changed. The ‘rest’ want what the West has been enjoying and taking for granted. There’s nothing like spirited competition to keep prices (including wages) down. Ironically, the more that wages are suppressed, the more that consumers will gravitate towards cheaper imports to make their dollar stretch further. Companies get squeezed. Costs — primarily staff — are cut. A vicious feedback loop is created. This dynamic has been in play in the US for some time.

An article published in the Financial Times on 17 December, 2016, is titled: ‘US social mobility gap continues to widen — Data show about half of 30-year-olds in 2016 earn less than their parents at same age’. Income stagnation is a glacial trend. It’s taken decades for it to materialise. That wage freeze (in the US) is hitting our shores and budget bottom line. To keep up with the Joneses, households bridged the gap between income and desired living standard with debt…another glacial trend. For decades, debt levels steadily increased, while, on the other side of the financial see-saw, interest rates fell.

If wages stagnate and today’s 30-year-olds (who earn less than what their boomer parents did at the same age AND have student loans to repay) are reluctant to take on more debt, what happens to GDP per capita? Governments could boost the GDP numbers by taking on more debt, but, with shrinking tax revenues and rising entitlement costs, how do they service the higher debt load…especially if ratings agencies downgrade their credit rating and bond rates increase? Oh what a tangled web of debt, overpromise and underfunding we have created.


But not everyone is caught in the wages freeze. By comparison, the fortunate 1% is enjoying the warmth of rapidly rising incomes. Any guesses on which profession dominates the top 1%? Finance. The bankers who run Wall Street’s casinos are doing very well from the debt-funded consumption model. The peddlers of debt, dubious advice and dynamite-packed products have been clear winners from a system made up of 90% losers.

Running in tandem with income inequality is wealth inequality. In the US (and a trend being played out in other Western countries), it’s reached the (ludicrous) stage where 0.1% of the population possesses the same level of wealth as the bottom 90%. The last time this top-heavy trend happened was in the Roaring Twenties…and we know how that imbalance was corrected.

There are powerful trends at play that have major ramifications for society. Western-world wages are stagnating (and could even fall), and there appears to be no circuit breaker to reverse this trend. Protectionism is not the answer…it’s proven to be an economic disaster. Entitlement spending is increasing, while government tax receipts are falling. No prize for guessing what gives way in this equation…

With the wage-constrained masses suffering from a severe case of over-indebtedness, how can asset prices (that make the rich richer) continue to rise? The debt-dependent economic growth model we’ve built is waging a war on itself. Something has to give. What will it be…either the rich get poorer, or the poor get richer? The 1930s provide the answer to this question.


Vern Gowdie,
For The Daily Reckoning

1. The original article can be found here:
The Daily Reckoning is produced by Port Phillip Publishing. On their web site they describe themselves as follows:

"If you suspect that what you read in the papers and see on the television is just one part of the story in the financial world—and maybe not even the most interesting or useful or even accurate part–you need The Daily Reckoning in your life.
"Edited by Greg Canavan, one of Australia’s foremost authorities on investing, and multi-award winning financial planner, Vern Gowdie, and with contributions from Bill Bonner, Matt Hibbard, Callum Newman, and Jim Rickards, The Daily Reckoning digs deeper than your newspaper ever dares – to bring you a take on the financial world you won’t find anywhere else. Whether it’s about the stock market, gold, oil, inflation, China, the future of house prices, you’re guaranteed a different, irreverent, and refreshingly alternate point of view." (

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