Why Australia is more vulnerable to coronavirus

Why Australia is more vulnerable to coronavirus

Prior to this emergency, however, the serpent’s eggs of a possible economic catastrophe were also traceable in Satyajit Das’s second best-selling book, A Banquet of Consequences.

This pointed out that affluent countries were having too much of a good thing, accumulating all sorts of arcane debt instruments at an alarming rate.

Published five years ago, it will be reissued later this year, including a new section on the global impact of the Covid-19 contagion.

The crisis has exposed Australia’s over-reliance on “things like imported goods,” he says.

Since the ’80s, Australia has pursued an open economy model, ”and that is going to make it problematic”.

Moreover, warns the native of the sprawling Indian city of Kolkata with Bollywood matinee idol looks to boot, “there’s always in the Australian psyche underlying seeds of xenophobia”.

The not-quite fully articulated concern seems to be that in a time of turbulence, including massive job losses, the great Australian multicultural society will be tested.

Indeed, there’s little of the typical Bollywood song-and-dance routine about the current state of the world economy, according to Das, who was also a one-time corporate treasurer for Transport group TNT and has also worked for Citigroup.

Strict adherence to liberal economic dogma, the debt binge, and the hubris of high-risk players in finance markets – those called “masters of the universe” by American novelist Tom Wolfe – have led to what he terms “a lack of buffers”.

This “lack of buffers” has made the world more vulnerable to the ravages of the coronavirus contagion.

“Over the last decade or more, most economic actors did not build enough reserves against shocks,” Das says.

“Public health systems were neglected and underfunded through a mixture of austerity, privatisation, and poor policy reducing our capacity to deal with a major pandemic.

“Corporations convinced themselves that they could access cheap capital at will, reducing shareholders’ equity and increased refinancing risk. Households reduced savings and went into debt to consume and purchase houses.”

This process was compounded by low-wage growth, lack of job security and inequality.

The US Federal Reserve found that many would struggle to raise $US400 ($650) in an emergency, according to Das.

In Australia, the Grattan Institute reported that 10 per cent of households have less than $90 for emergencies and about half the population has less than $7000.

“Government banks and central banks steadily eroded their war chests, leaving them with limited ability to deal with a major dislocation.”

Exacerbating the problem is a post-globalisation era of “fragmented manufacturing motivated purely by cost consideration” and “vulnerable to interruptions in transport links”.

Supply chain problems “are compounded by the lack of inventory. Manufacturers and retailers boasted that they kept minimal stocks.

“This extended to health equipment and services, where there was a belief that you could scale up at will to meet ‘surge’ capacity. It is only as good as the weakest link in the chain.”

A just-in-time approach “underestimated the time and cost of acquiring resources and staff in an emergency. After all, you can’t produce trained medical personnel at will.”

Meanwhile, the global economy shifted to consumption and services, and away from investment and manufacturing.

This meant more reliance on restaurants, bars, tourism, health care and education services to generate revenue.

Two of those – education and tourism – were, until just six weeks ago, among Australia’s biggest export-earners after iron ore and coal.

As the Covid-19 contagion hit from the beginning of this year, it also became obvious that “these sectors are especially vulnerable to social distancing, lockdowns and limits on human movement”, Das says.

The dark shadow hanging over everything is debt. A man who normally thrives on conversational nuance, Das says bluntly: “The world is generally gravely over-indebted.”

Without this debt drag “a fall in revenue is problematic but manageable”.

According to Das, massive central bank interventions, corporate borrowings and increased personal spending at a time of stagnant wages meant global debt as a percentage of GDP rose from around 250 per cent in 2007 to 325 per cent in 2019.

Current debt levels are triple what they were in 1999, he says.

Post the global financial crisis (GFC), economic policymakers boosted the values of financial assets in what Das calls “the everything bubble”.

High asset prices reflected high leverage “in the form of leveraged loans for private equity or structured investments such as Collateralised Loan Obligations (CLOs). Toxic layers of debt were heavily exposed to significant revenue downturns.”

The result is that businesses and households “face an existential struggle to meet large financial commitments.”

“Debt and savings are two sides of the same coin. So, if debt cannot be serviced – even the interest, let alone repayment of the principal – at some stage it must be written off. If the saver cannot be paid, then there is obviously a loss of wealth and a loss of consumption which reduces economic activity.

“At the moment, artificially engineered low interest rates through QE (quantitative easing) and other forms of financial magic mean it is relatively cheap to borrow.”

But this penalises savers, inflates asset prices and distorts markets, Das says.

Complicating the matter, “the position of all countries is not the same.”

The US, for example, can issue more debt because the greenback remains the world’s reserve currency.

Australia, on the other hand, “faces greater challenges. It is a capital importing nation. If debt increases to the point where the Australian dollar is undermined, foreign investors would be reluctant to finance the country.”

“The Reserve Bank has got away with devaluing the currency by 50 per cent (from US$1.11 to the recent low of around US55¢) but it is not a viable long-term strategy.”

Australia’s Covid-19-stricken economy has significant similarities with the Great Depression.

The economy was less sophisticated and there was heavy protection for a small manufacturing sector.

However, it was also a relatively open trading nation, relying on the export of raw wool, wheat and sugar.

A sharp Depression-generated global contraction resulted in a dramatic plunge in Australia’s terms of trade by one third. Unemployment soared past 20 per cent and Australia fared relatively worse than the US or the UK.

Confidence ran dangerously low among Australian government debt holders in London.

The slump lasted for just about a decade and the United Australia Party government’s reaction was to tighten spending.

Dealing with the current contraction, Das questions the conventional wisdom that Australian government debt is low.

This “may be misleading”, he says, pointing out that Australia’s ballooning semi-government debt and off-balance sheet obligations must also be taken into account.

“We are finding out, in a crisis, (that) the government effectively underwrites large swatches of commercial debt to ensure that the entire financial system does not collapse. Australia’s self-proclaimed strong fiscal position overstates its actual flexibility.”

Major global crises over the recent past have led to large-scale government borrowing, and this crisis is unlikely to prove an exception.

“Rescue packages of 10-20 per cent of GDP would not be surprising.”

Indeed, what Prime Minister Scott Morrison calls an “economic lifeline”, including the $1500 a fortnight JobKeeper payment, adds up to $214 billion allocated towards stimulus and support measures for the Australian economy.

These are in three separate packages announced in less than three weeks and total about 11 per cent of GDP.

Asked to describe the likely shape of a post-contagion Australia, Das counters that “it depends on what you want. There’s a trade-off between a resilient economy and living standards.”

Lifting local production is areas like manufacturing may shelter Australia, somewhat from supply chain disruption, making the Australian economy more resilient.

“But that will inevitably lead to some pressure on living standards. The issue is how people will decide the trade-off. That is not so much an economic question as a political and social question.

“In the short run, people will be very supportive of each other. It doesn’t pay to be divisive.

“In the longer run people’s interests will diverge. There’s an innate inertia about human society as we have seen from previous crises.

“Memories are very short. I’ve learnt in my life that things happen but you just have to deal with them.”

“One of the curious things that I find is that politicians have become very addicted to using slogans and analogies to war. This is curious.

“There are massive losses and sacrifices in war and decisions have to be made about who lives and who dies and what is important.”

Hopefully, that doesn’t extend to contemplating Generation-X’s “boomer remover” description of the impact of Covid-19 on 62-year-old Das – or, for that matter, on this reporter.

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