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Future Fund, Sovereign Wealth Fund (SWF) and Modern Monetary Theory (MMT); Would a sovereign wealth fund preserve Australia's golden era when the mining boom ends?
Topic Started: 27 Aug 2011, 09:40 PM (11,461 Views)
Alex Barton
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Fragile economy is the new normal

Stuart Washington
August 27, 2011

Tim Brimelow gained early insight into how China is creating a divide between winners and losers in Australia. Melbourne-based Brimelow spent the late 1980s selling equipment to small manufacturers across the south of Australia.

He remembers the (now closed) Simpson washing machine factory in Adelaide and a major factory of Morlynn Ceramics, producing many of the porcelain insulators for electricity power poles. By the mid 1990s Brimelow, 49, used to think of himself as living a ''Tattslotto existence'': he would win big if he had the right price for his customers. And just like a lottery, Brimelow was more often the loser.

Read more: http://www.smh.com.au/business/fragile-economy-is-the-new-normal-20110826-1je7w.html
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Alright Jack
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Whilst our need for energy and metals is real, corporations and politicians are rarely honest about the negative impact of mining. They prefer to present mining as Australia’s Santa Clause, all gifts and no downside (dutch disease, environmental damage, land alienation, climate change).

Perhaps its time for us to move away from an unquestioned 'mining is great' position and acknowledge that the mining industry has serious downside?

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Dutch disease or China blight?

August 27, 2011

TIM Brimelow gained early insight into how China is creating a divide between winners and losers in Australia. Melbourne-based Brimelow spent the late 1980s selling equipment to small manufacturers across the south of Australia.

He remembers the (now closed) Simpson washing machine factory in Adelaide and a major factory of Morlynn Ceramics producing many of the porcelain insulators for electricity power poles.

By the mid 1990s Brimelow, now 49, thought of himself as living a ''Tattslotto existence'': he would win big if he had the right price for his customers.

And, just like in a lottery, Brimelow was more often the loser.

The winning numbers were increasingly held by Chinese imports, as their lower price made the products Brimelow sold less competitive.

As Brimelow's career moved into sales for Taiwanese injection moulding equipment and European plastics handling machines in the late 1990s, his Tattslotto existence continued. Then he started to see many of his manufacturing customers facing the same problem: ''A lot of my customers were closing up,'' he says.

In retrospect, Brimelow can be seen as being at the birthplace of a two-speed economy that is continuing to transform corporate Australia.

The changes wrought by China and, to a lesser extent, a less confident Australian consumer, were demonstrated by headlines this week about BHP Billiton's record $22 billion profit juxtaposed with 1000 job losses at BlueScope Steel.

Just as has occurred to manufacturers across Victoria, there are winners and losers as great changes continue. And the trick for Australia will be to ensure that there are more winners than losers.

An analysis by BusinessDay of the most recent results posted by 50 of Australia's largest companies shows that a two-speed economy of winners and losers is now entrenched.

BusinessDay examined the most recent outlook statements released by the top 50 Australian companies, assessing whether their future growth (or lack of it) against five major economic themes.

Read more: http://www.smh.com.au/business/dutch-disease-or-china-blight-20110826-1jehv.html#ixzz1WEAexwqf

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apex
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As our resources run out, the income from a sovereign wealth fund would alleviate the requirement for higher taxes to support aging baby boomers. The Australian economy is unbalanced and fixing it will hurt. If we implement a mining tax to mitigate Dutch disease or de-industrialise the broader economy, the cash should go to a sovereign wealth fund to be invested internationally and remove excess liquidity from the system. This would help the AUD stay low and rates wouldn't need to rise as much.
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Alex Barton
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Investing in a wealth fund will help when commodities cycle turns

Josh Frydenberg
From: The Australian
August 29, 2011 12:00AM

Treasury estimates the mining boom will produce a windfall of $30bn for the government in the current financial year. Picture: AFP Source: The Australian

IT was Mark Twain who said "I was seldom able to see an opportunity until it had ceased to be one". It is a warning the Gillard government would do well to heed.

On the back of China and India's historic industrialisation, Australia is enjoying a once in a generation mining boom. Our terms of trade are at a 140-year high and the Australian dollar is at levels not seen since a floating exchange rate was adopted in 1983.

Treasury estimates that the mining boom will produce a windfall of $30 billion for the government in the current financial year on top of the $65bn that has already flowed since Labor's election in 2007.

Read more: http://www.theaustralian.com.au/business/opinion/investing-in-a-wealth-fund-will-help-when-commodities-cycle-turns/story-e6frg9if-1226123958441
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Alex Barton
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http://www.macrobusiness.com.au/2011/08/how-an-swf-works/

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How an SWF works

Posted by Houses and Holes in Australian Economy on Aug 30th, 2011

Several commenters have asked me to explain how I see an Australian sovereign wealth fund and resource rent tax actually working. Several others have questioned the wisdom of an SWF held offshore when Australia runs a current account deficit (CAD). That is, so long as we invest more than we save, we don’t have any money to stick in a fund. Further, they argue, that owing to the irrefutable laws of sectoral balances, any removal of savings from the private economy will necessarily mean it must shrink or borrow more. All true.

However, what these learned commenters overlook is that I’m not interested in the current account deficit at this point.

I’m interested in preventing a high risk venture into resource export dependency. That is, I wish to preserve a more balanced export mix. The CAD can wait (only until later in this discussion).

Introducing a large resource rent tax and offshore sovereign wealth fund achieves three things at three different levels.

The first level is the real economy. A large enough tax on mining (perhaps around the size proposed in the RSPT) will dent the mining investment boom. It won’t prevent the boom nor prevent the investment forever but it will slow it down at the margin as less economic projects are shelved. That takes pressure off the entire economy as the capital and labour being sucked in by mining diminishes. There will be less inflationary pressure and more capital available to other enterprise as the Rybczynski effect declines a little.

The second level is capital markets and structures. Less inflationary pressure will mean lower interest rates. That, in turn, will lower the currency somewhat through a reduced interest rate differential with the rest of the world and a reverse flow of savings into the offshore fund. Of course, that lower dollar will translate into two further effects. The first will be rocketing resource company profits as the suppressing effect of the high currency is lifted. But those profits are then taxed heavily and the proceeds sent offshore once more so that the boom does not accelerate. The second effect will be to boost the competitiveness of all non-resource export sectors, including manufacturing, and they will resume growth, filling any gap left behind through the removal of savings from the private sector.

The third level of effect is in global meta-finance. The realm of meta-finance is, by and large, governed bysignals and symbols not the real economy or even real economics. These markets are semiotic. To me, that’s why QE had such a powerful effect on debasing the $US and raising commodity prices. Not because there’s necessarily squillians of new dollars to rationalise the price movements but because, according to markets, it’s SUPPOSED to happen, they anticipate it happening, and hence it does happen.

The symbolic value of a move by Australia to suppress the dollar via an SWF could have a powerful effect. To date, we’ve had a parade of senior officials blessing the currency’s rise, which has made speculation on the Aussie a no-brainer. The carry trade into the Aussie would be dented by both a declining interest rate differential and a shift in symbolism towards fiscal control of the boom and currency. The Aussie would fall further.

Thus, what the offshore SWF creates is a kind of “dirty float” of the Australian dollar. The currency no longer acts as the solitary external pricing signal for the economy, rising during the boom dramatically to control inflation but also preventing the nation from accumulating a great deal of foreign wealth by denting resources profits. Instead, with an and SWF, a much greater amount of those profits flows through but they are recycled outwards as national wealth collected through the resource rent tax.

In effect, an offshore SWF shifts the super profits of the boom away from currency speculators and towards our children.

And what of the current account deficit? Well, it’s much the same. But there are crucial differences in other economic settings. You have a big pot of foreign savings you otherwise would not have. And, most importantly from my point of view, you preserve a better industry mix in the external sector. You have, in effect, de-risked the CAD. Then, when China busts, you have life beyond resources and you don’t have to endure quite so hellish a current account crisis.

But, there is a problem. Some of you will have already begun to wonder what the other consequences of these new macroeconomic settings will be. The primary problem I see is that the lower interest rates that result from the RRT and SWF will be exploited by the banks. They are very likely to fill the economic space vacated by mining with lending to households, for housing speculation. There’s not much point in supplanting productive investment in mining with unproductive speculation in houses is there?

So, to work as required, as I wrote yesterday, an SWF would also need changes to the fiscal settings that stoke housing speculation. In other words, we are looking at something rather like the Henry Review (+SWF).
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Alex Barton
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Wealth fund would preserve golden era

September 8, 2011

It is maybe a considerable blow to our national pride that the Philippines boasts the world's biggest crocodile, but when it comes to the national accounts Australia can stand tall.

While other Western economies are ailing, ours is plodding along quite nicely at 1.2 per cent, according to the second-quarter gross domestic product numbers.

Mind you, that's well below the 3.2 per cent trend, and it's before August ructions on global markets and the recent slather of downgrades in Europe and the US.

Still, it surpassed expectations and sparked the strongest rise in the sharemarket in a year. Here was evidence, against the prevailing and bearish tide of economic punditry, that things were not too bad.

Really, not too much to whinge about - and certainly a superior performance to that of our peers.

Read more: http://www.smh.com.au/business/wealth-fund-would-preserve-golden-era-20110907-1jxv9.html
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b_b
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A sovereign wealth fund is an absurd concept for Australia.

Why do we need to "save" in a currency we can issue / produce at any time?

The Future Fund simply uses Sovereign issued currency to compete for assets against its own citizens.

Sheer Madness.
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Olmule
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b_b
8 Sep 2011, 10:57 AM
A sovereign wealth fund is an absurd concept for Australia.

Why do we need to "save" in a currency we can issue / produce at any time?

The Future Fund simply uses Sovereign issued currency to compete for assets against its own citizens.

Sheer Madness.
at the moment the government blows the money back into the economy in the form of middle class welfare treats / vote buying and it has the same end effect wrt pushing up asset prices. How is that better?

Norway's sovereign fund is 100% invested overseas. They effectively swap oil for international assets. Not madness, actually very clever.

But I guess if they ever did run out of money they could have just issued more, being the sole issuer of their currency. They could be just like Zimbabwe.
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b_b
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Olmule
8 Sep 2011, 11:13 AM
b_b
8 Sep 2011, 10:57 AM
A sovereign wealth fund is an absurd concept for Australia.

Why do we need to "save" in a currency we can issue / produce at any time?

The Future Fund simply uses Sovereign issued currency to compete for assets against its own citizens.

Sheer Madness.
at the moment the government blows the money back into the economy in the form of middle class welfare treats / vote buying and it has the same end effect wrt pushing up asset prices. How is that better?

Whats that got to do with saving in a currency that you can issue at any time?

Quote:
 
Norway's sovereign fund is 100% invested overseas. They effectively swap oil for international assets. Not madness, actually very clever.

Depends on the assets I guess. Accumulated another Countries paper money does not seem to smart to me. Nor does acquiring assets in a legislative environment that you can not control.

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But I guess if they ever did run out of money they could have just issued more, being the sole issuer of their currency. They could be just like Zimbabwe.

What's Zimbabwe got to do with anything? Zimbabwe's problems are production related. For more read this.

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Zimbabwe is the new Weimar Republic. Not! Zimbabwe is the front-line evidence that shows that government deficits will generate hyper-inflation. Not! Zimbabwe is the demonstration of the folly of a fiat monetary system. Not! Zimbabwe is an African country with a dysfunctional government. Yes!

http://bilbo.economicoutlook.net/blog/?p=3773
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Olmule
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what does Aus produce? rocks and dirt.

much else? nope

what happens once that is gone? we can just issue our own currency...we are the sole issuer so we can do that forever
Edited by Olmule, 8 Sep 2011, 11:44 AM.
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