04/09/2012 - 09:04

Analysis: the damage done by sugar-highs

04/09/2012 - 09:04

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The problem with sugar as an energy source is that its effects are short-lived and often followed by feeling lethargic, and while it is an odd comparison it is interesting to think about how sugar works and how the Australian economy is not working.

Yesterday’s news, that country-wide retail sales in Australia declined by 0.8 per cent in July, was a small example of what happens when the “sugar high” of government cash hand-outs fades.

The 10.2 per cent crash in department store sales was proof that sugar-highs never do anybody (or any country) any good.

More than stunning, the collapse in spending at department stores (mainly of the discount variety) was the figure most directly linked to the end of the Australian Government’s attempt at a vote-winning bribe, promoted as compensation for the carbon tax and topped-up with a school-child bonus.

What happened is that cash was dispensed. Recipients experienced a sugar high in the pub, in the TAB, and in discount department stores.

And, just as suddenly, the cash was gone, with no lasting benefit to the economy, just as sugar leaves no lasting benefit to the human body.

While thinking about what just happened in Australia, keep that sugar-high image in your mind and look overseas where the “sugar high” theory can be seen at work (or not at work, to be more accurate) in other countries where quick fix remedies such cash hand-outs are not producing any lasting benefits.

The U.S., for example, has had two doses of QE (quantitative easing), boffin talk for printing extra money without actually producing anything of substance in the economy to underpin the new paper money.

In Europe, much the same trick is being tried with much the same result; a quick sugar high, followed by a retreat back into depression – of the mental and financial sort.

In Britain, the sugar high has been delivered in three forms. Firstly as a variation of QE, in the form of Queen Elizabeth’s Jubilee Jamboree, followed by a gigantic Olympics bash, and finished with a smaller Paralympics party.

No prize for guessing that Britain will wake to the mother-of-all hangovers with the country destined to experience another of its infamous “winters of discontent”, a sluggish economy, and parties that are just memories.

Australia too will be punished for indulging in sugary financial mismanagement.

Rather than saving cash when there was a boom the country is entering a period with its resources sector in retreat, major projects cancelled (with more cancellations to come) and with the international community passing judgment on the country in the form of a collapsing exchange rate.

Welcomed by some exporters the falling dollar is a precursor to rising inflation and higher (not lower) interest rates as the Reserve Bank is forced to keep Australian rates high or risk suffering a dramatic currency outflow.

First flush of foreign investors withdrawing money from Australia to avoid a currency loss as our dollar falls can be seen in the market for gold shares.

While the gold price in U.S. dollars was rising last week, and rising even further on conversion to Australian dollars, share prices in the Australian gold sector fell, thanks to British and American investors withdrawing funds from Australia.

In the U.S., another sign has emerged that indicates a decline in the value of the Australian currency. Speculative positions on Chicago’s International Monetary Market are matching a record set six years ago with analysts saying this points to a sharp fall in the near future.

The problem for Australia, and much of the western world, remains unfixed. It is, quite simply, excess debt, and while Australia was not as badly positioned as the U.S., Europe or Britain, the days of cash hand-outs to create a sugar high are over.

As a final example of the difficulties confronting the Australian economy consider yesterday’s report that we are on track to hit our national “debt ceiling” of $250 billion, the total amount the government is allowed to borrow, by law, within four years.

In other words, as the government was handing out cash to voters the country’s debts continued to rise, putting Australia on a collision course with the rest of the western world which is even more debt-ridden.

What a cocktail of trouble!

Debts rising. Revenue falling. Resources boom over. No savings, and reliance on sugar highs created by issuing more debt.

It can’t go on, that much is obvious. The only question is whether Australia “enjoys” a slowdown, or hits a recessionary wall.

 

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