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Paul Keating's Recession We Had To Have Was 22 Years Ago; Australia has gone 21 years without a recession. How much longer?
Topic Started: 29 Nov 2012, 04:52 PM (3,347 Views)
Alex Barton
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Poor white trash becomes national treasure

Stephen Koukoulas
Published 7:41 AM, 29 Nov 2012

It was 22 years ago today that Treasurer Paul Keating said Australia is in recession and that “this is a recession that Australia had to have”. He was commenting on the national accounts data that had been released earlier that day, which showed a thumping 1.6 per cent fall in GDP in the September quarter of 1990.

Keating was right.

One only has to look at the economic performance of Australia that has followed the nasty recession of the early 1990s to see how it cleansed the economy of inflation, high interest rates, stagnant real wages and asset price bubbles. It is unlikely that this would have happened without the recession.

Singapore’s President Lee Kuan Yew had made waves about a decade before the recession when he said that Australia was on track to become “the poor white trash of Asia”. Among the reasons Lee could have cited were industry featherbedding, automatic wage indexation, high tariffs, a lack of competition, tax inefficiencies and a slothful business culture in what was a harsh but probably fair assessment.

To move from trash to treasure, Australia not only needed to implement a raft of policy reforms, the economy needed to have a final purge of the structural rigidness and inefficiencies that had held Australia back during the 1960s, 1970s and early 1980s.

The recession fostered that purge.

The early 1990s recession saw inflation fall sharply. After a couple of years of low inflation, RBA Governor Bernie Fraser saw an opportunity for Australia to join the low-inflation countries and in 1993, he started to articulate an inflation target of 2 to 3 per cent. That target is still the prime focus for the RBA today.

In terms of policy success, annual inflation has averaged 2.5 per cent over the last 20 years – slap bang in the middle of the target range. In the 20 years up to the early 1990s, the average annual inflation rate was a corrosive 9.2 per cent.

The low inflation environment was a vital legacy of the recession as it altered investment incentives, saw a structural lowering in interest rates and underscored real wage increases.

In terms of interest rates, the cash rate set by the RBA has not been above 7.5 per cent since 1992 and has averaged 5.3 per cent over those two decades. In the period from 1980 to 1991, the interbank interest rate averaged a bruising 13.8 per cent and spent many years above 15 per cent.

It is arguable that the early 1990 recession-induced smashing of inflation lowered average interest rates by 8.5 percentage points. We should all be grateful for that.

The destructive power of high inflation meant that real wages fell in every year from 1985 to the start of the 1990 recession. To be sure, the structural change in the labour market, brought about by the policy consensus that came with the ground breaking prices and incomes accord, was a critical factor holding back wage gains, but somewhat perversely, in the near two decades after the recession, real wages have risen strongly in all but three and a half years.

Perversely because the recession drove the unemployment rate to 11 per cent, which might normally be a factor dampening wage claims. Rather than that, it furthered enterprise bargaining, wage rises were increasingly linked to productivity and there was some long overdue flexibility given to the labour market.

In the decade prior to the recession, the unemployment rate had only three months below 6 per cent and it in fact averaged 8.1 per cent, not counting three years during and immediately after the recession where the unemployment was above 10 per cent.

In the aftermath of that recession, the unemployment rate ratcheted down. The fact that the last time the unemployment rate reached 8 per cent was in January 1998 is clear evidence of this; it has not been above 7 per cent since 1999 and for every month since July 2003, the unemployment rate has been below 6 per cent. In the last decade, the unemployment rate has averaged a world beating 5.1 per cent.

The decade prior to the early 1990s recession was truly a miserable economic picture of high inflation, high unemployment and falling wages. Asset prices were surging, distorting investment away from productive uses and while many structurally important policy changes had been made in the prior few years, an active ingredient was needed to make them work.

This was the recession.

And the last word on the consequences of the recession should probably go to Lee. During a visit to Australia in 2007, in reference to his “poor white trash” comments a quarter of a century earlier, he said: “There are some words sometimes thrown in the heat of the argument which perhaps at that time was warranted. You have changed.”

Indeed Australia has changed. Its economy is the envy of the world, Australians have never been richer in absolute terms and relative to the rest of the world. These are the legacies of the recession that Australia had to have.

Read more: http://www.businessspectator.com.au/bs.nsf/Article/Paul-Keating-recession-GDP-interest-rates-inflatio-pd20121129-2GQSF
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Gossamer
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44th most prolific poster on APF

I remember that like it was yesterday. For some it was almost impossible to find work in 1991.
Common sense is a curse - those who have it need to suffer dealing with those who don't have it.
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Pig Iron
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Bogan scum

it was only the recession we had to have because of the labor governments policy's of the previous 8 years.

the eerie part is that the current government has the same mind set that they are helping us as they wreck everything.
I am the love child of Tony Abbott and Pauline Hanson
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BeerHoliday
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Keating recapitilized the banking system, separated traditional banking from speculation and forced austerity "the recession we had to have". But he did it 20 years before the banking and soveregn debt crisis. Now the US, Europe, Japan will have to try to do the same in the middle of a crisis.

Paul Keating on lateline 2008: (full transcript)

PAUL KEATING: is a much different event. Then we had two common things; an exuberance of bank lending, which was about to blow inflation rate out of the water again. So that was common, except inflation is not really a risk this time. What we're seeing at the moment is a disintegration of the international financial system. That's not what we had in 1990. We had a world recession in 1990. It was a business recession. That means business investment fell. A normal cyclical business recession. What we have here is the advanced disintegration of the international financial system.

LEIGH SALES: So are there lessons, then, that can be drawn from Australia's last recession and applied now?

PAUL KEATING: Well I think if we hadn't had had the recession in 1990 we wouldn't have banks as strong as this today. You know, they'd be all be cot cases like the Americans ones. I mean, we pulled them into line, set up the balance sheets. I mean, I had the ANZ and Westpac in the sort of humidicrib for three or four years, and got their balance sheets back together again. And I think that lesson has been learned by the current generation of Australian bank executives. But that lesson was not learned in the United States.

Edited by BeerHoliday, 29 Nov 2012, 05:58 PM.
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miw
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Gossamer
29 Nov 2012, 05:06 PM
I remember that like it was yesterday. For some it was almost impossible to find work in 1991.
Damn right. In the middle of 1992 we put out an ad for a graduate engineer at relatively crap wages. We had 40 applicants, several of whom had first-class honours. A little bit later we advertised for a newgrad programmer and got 125 applicants, over 50 of whom were qualified. Fast forward to 1998 and we advertised for similar positions and did not get a single qualified applicant.
The truth will set you free. But first, it will piss you off.
--Gloria Steinem
AREPS™
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Alex Barton
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Recession won't be found in a mining pit

Stephen Koukoulas
5 hours ago

To be sure, there is some chance that Australia will fall into recession. There is also some chance that annual GDP growth will surge to 5 per cent. There is also some chance that the ASX will drop 50 per cent in the next year or will rise 50 per cent the year after.

Make any of these projections and you will be sure to grab the headlines.

In terms of the economy, the risks of either a bust (recession) or a boom (5 per cent GDP growth) are very low and the case for either scenario is flimsy, faulty and frankly a little bit mischievous.

It is the recession call or forecast that has gained some traction and headlines in recent days based, it seems, on the obvious assessment that mining investment is set to weaken sharply in the next few years.

Before we get to mining, the recession calls were most vocal after the national accounts were released and they showed GDP growing, yes growing, by 0.6 per cent in the June quarter and 2.5 per cent over the year. For some context, the average quarterly rate of GDP growth over the past decade has been 0.74 per cent with the annual growth rate at 2.97 per cent.

So the head-long plunge towards recession is starting from a point where the quarterly GDP growth was about 0.15 per cent below the long run average and the annual growth rate was about 0.5 per cent below the long run average.

Growth is a touch below trend, but recession?

Looking forward, as a source of the next recession, a fall in mining investment does not compute.

Importantly, mining investment makes up only about 6 per cent of GDP. If it fell 25 per cent in the next year, it would obviously subtract around 1.5 percentage points from GDP. If the other 94 per cent of the economy was growing even at a tepid 2.5 per cent, bottom line GDP would still be 1 per cent – weak for sure, but no recession.

But to think that in a climate of a slump in mining investment nothing else would change is unrealistic. And wrong.

This is because in reaction to the obvious mining investment fall that is underway, the Reserve Bank has be cutting interest rates, the Australian dollar is heading back to realistic levels and the government sector is no longer striving for fiscal settings that will knee-cap economic growth.

These three issues will offset any mining investment fall to the point where we are already seeing the interest rate sensitive sectors of the economy picking up the mining investment slack.

In the March quarter, household consumption growth had its strongest lift since the June quarter last year as clear signs the interest rate cuts are working. While 0.6 per cent growth is hardly shooting the lights out, a recession when over half of GDP is growing at an annualised rate of 2.5 per cent is tough to deliver, even with the bluntest pencil on the back of the biggest envelope.

Also supporting the thesis of interest rate sensitive sectors gaining traction is the 4.3 per cent total rise in dwelling investment in the last three quarters, even if there was no growth in the March quarter due to a temporary dip in alterations and additions. We know that house building approvals jumped over 9 per cent in April so the early signs for June quarter dwelling investment looks particularly rosy.

While it is difficult to parlay the monthly current price data from the monthly international trade data to a net export contribution to real GDP, there has been an unambiguous surge in export growth from the levels in the second half of 2012 while imports are lower over that time.

The trade deficits averaged around $1.7 billion per month in the second half of 2012. Over the last three months, the average surplus, yes surplus, has been around $250 million a month. The lower Australian dollar will, in time, see these surpluses go up and up and up via exports.

For the recession doom merchants, the trade data also means that the hefty 1 percentage point contribution to GDP in the March quarter from net exports is likely to have a follow up 0.5 percentage point or so contribution in the June quarter when the national accounts are released in early September.

Of course, mining investment might fall 50 per cent next year or the level of inventories may be further depleted and therefore subtract from growth or wages and profit growth might fall precipitously. A new Abbott government may cut spending aggressively in his bid to return to budget surplus which would also subtract from GDP growth. But these speculative musings sit in contrast to the hard data over the past month which has been more or less as the Reserve Bank and Treasury forecasts them so recently (Australia’s stocktake reveals a healthy ledger, May 22).

Of course, the low Australian dollar could spark a rebound in tourism and other exports while household consumption could rise strongly as consumers use their high savings and deleveraged balance sheets to spend. If exports boom off the back of a stronger global economy towards the end of this year, GDP growth will surge to 4 or even 5 per cent.

In its latest forecasts in the Statement on Monetary Policy, the Reserve Bank includes a scenario where GDP growth hits 4 per cent by mid-2015. The Reserve’s worst case for GDP growth over the next two years is 2 per cent.

I'll back the Reserve Bank over those musing about a recession, any day.

Read more: http://www.businessspectator.com.au/article/2013/6/7/economy/recession-wont-be-found-mining-pit
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Ralph
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People pooh-poohed Keating at the time, but he’s been proven right. Too many years of taking the easy options have gotten us to this point. It’s hard to blame them though – it would be very difficult to choose the difficult option when we had China on the doorstep prepared to pay silly prices for our resources. There was always a future government to clean up the mess.

Well now that’ll be Abbott’s job. I’m looking forward to seeing how he handles it. He was probably hoping for a cushy rerun of the Howard years but now I’m sure he realises that it’s going to be quite different. I’ve seen no evidence that the Coalition are ready to take the tough decisions. Almost everything Abbott says in public suggests the opposite – that he’ll be a convictionless populist. But difficult times bring out the best in some people. Abbott may well surprise us all.
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themoops
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miw
29 Nov 2012, 06:50 PM
Damn right. In the middle of 1992 we put out an ad for a graduate engineer at relatively crap wages. We had 40 applicants, several of whom had first-class honours. A little bit later we advertised for a newgrad programmer and got 125 applicants, over 50 of whom were qualified. Fast forward to 1998 and we advertised for similar positions and did not get a single qualified applicant.
That might be because not as many people are doing real work anymore? No point when you can just do HR or marketing or teach third grade for nearly as much or more money. Some of the job ads out there for engineering are disgusting. I'm glad I dropped out of it.
stinkbug omosessuale


Frank Castle is a liar and a criminal. He will often deliberately take people out of context and use straw man arguments.
Frank finally and unintentionally gives it up and admits he got where he is, primarily via dumb luck!
See here
Property will be 50-70% off by 2016.
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Alex Barton
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The recession we want to have?

Jessica Irvine
14 June 2013

Australians have been trying, and failing, to talk ourselves into recession for five years now. Will this be the year we finally crack?

In November 2008, in the wake of the collapse of Lehman Brothers, Reserve Bank governor, Glenn Stevens, warned about the need to go about business with a “quiet confidence” in our prospects. “Given the underlying strengths of the economy, about the biggest mistake we could make would be to talk ourselves into unnecessary economic weakness.”

But that quiet confidence has been hard to detect recently, with surveys showing consumer skittishness and businesses in the doldrums.

Certainly the tone of national political debate hit a new high note of hysteria this week. The week that gave us blue tie-gate, menu-gate and now radio-talk show-hosts-sometimes-ask-stupid-questions-gate also heralded the return of the dreaded “r” word into public discourse about the economy.

Of course the real gloomy talk began last week after national accounts showed state final demand in Western Australia shrinking for two consecutive quarters. Recession! screamed the headlines, ignoring two things. First, Western Australia has not, to my knowledge, seceded from the mainland. And second, state final demand is a limited measure of state economic health, capturing only the spending by households and business, not income earned on interstate exports. For Australia’s major exporting state, you’d think this might be important. And by the way, on this measure, South Australia is also in recession, having state final demand contract for three consecutive quarters in a row. Although as SA Premier, Jay Weatherill, assured me at last week's budget, weak final demand figures have for the past few years translated into stronger gross state product figures once inter-state exports are counted.

Anyway, national gross domestic product rose 2.5 per cent – below trend – but a long way from recession. But the slowing in growth means Goldman Sachs now predicts there is a one in five chance of recession, earning it the wrath of Treasurer Wayne Swan.

This guy can’t catch a break. People complain about interest rates being too high and then, when they fall, they worry it’s a sign of weakness. The dollar hits eye-watering highs, hurting exporters and import competing firms.

But when it falls, people replace those worries with concerns the dollar’s fall portends some economic evil. A grey lining to every silver cloud.

Yesterday’s tepid jobs report was met with similar confusion. Jobs growth was not as weak as expected. But at 1000 new jobs a month, nor is the economy creating enough jobs to keep up with population growth. The jobs market has weakened, and noticeably so, but has so far defied the more gloomy predictions. Good news or bad news? Depends on your point of view.

Goldman Sachs’ central forecast, by the way, is for growth to slow to 2 per cent this calendar year and 1.9 per cent in 2014 as the mining investment boom wanes and the dollar remains relatively high. The base case remains that recession is avoided.

“While a recession in Australia is possible we believe there is still time for the economy to respond to the combination of better global growth, domestic policy stimulus, and a lower Australian dollar.”

I have faced many questions over the past five years about the role of the media in reporting economic news.

You only report the bad stuff! I’m told. To which my response is – this is nothing new. The media is selling a product. And literally centuries of experience has taught editors that people are more inclined to pick up newspapers to read about potential threats than to hear the latest heart-warming tale. Journalists, of course, have a duty to report the facts. Headline writers, however, have a commercial responsibility to pick out the juiciest tidbits for big bold font. That is what happened this week with the reports of Goldman Sachs.

Today’s newspaper reading citizenry are as well informed and sceptical as they have ever been. If the media is more shrill, readers are in general also more equipped to cast a critical eye over media stories than ever before.

The potential for the viral transmission of fear is there, but it stops with the critical skills of readers.

Ever since the onset of the global financial crisis, we’ve been fretting about talking ourselves into recession. We haven’t yet and I doubt we will.

Ultimately it’s the fundamentals that matter: the rate at which households can borrow and the price at which foreigners can buy our goods. And both those things are moving in the right direction.

Animal spirits exist. But the real economy matters more.

The rest is just noise

Read more: http://www.businessspectator.com.au/article/2013/6/14/economy/recession-we-want-have
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Thatguy
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Pig Iron
29 Nov 2012, 05:32 PM
it was only the recession we had to have because of the labor governments policy's of the previous 8 years.

the eerie part is that the current government has the same mind set that they are helping us as they wreck everything.
You're exactly right, but of course it was these SAME policies which set us up for the subsequent 20 years of prosperity. It certainly WASN'T Howard, who made a small contribution by adding the GST but at a watered down 10% rather than the 15% tried a decade earlier.
miw
29 Nov 2012, 06:50 PM
Damn right. In the middle of 1992 we put out an ad for a graduate engineer at relatively crap wages. We had 40 applicants, several of whom had first-class honours. A little bit later we advertised for a newgrad programmer and got 125 applicants, over 50 of whom were qualified. Fast forward to 1998 and we advertised for similar positions and did not get a single qualified applicant.
So 1992 is a lot like 2013 ?
Edited by Thatguy, 14 Jun 2013, 06:06 PM.
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