We all understand the wisdom of Professor Michael Pettis.
Today, he returns to discuss the implications for Australia of a severe China adjustment.
“I don’t think overly emphasising commodity production is good for long-term growth because I don’t think productivity growth in commodity production compares with productivity growth in manufacturing,” he says.
“Many people see real estate prices as a good thing. You’re getting richer, but you’re really not. The wealth of Australians, like of any other country, is simply the total value of goods and services that you produce. So when real estate prices go up, the question is, does that cause you to produce more or less? Probably less because high real estate prices are a tax for businesses.”
“So I think these rising real estate prices have to be addressed. I think the further they go on, the more strain they put on the economy. They hide the strain by this creation of fictitious wealth, but they are a real strain.”
I have long said that the Great Australian Property Bubble will not end until every lever that can be pulled to support it has been jerked so many times, so furiously, that they have all snapped off, seized up, or been bent to uselessness.
This is because the only true competitive advantage that the bubble has is not the tax system, the population, or monetary policy settings.
The most important bubble support is the pliable values of the ruling caste. Some would call it pragmatism. It is closer to control fraud. They will sell the nation and its children to keep the bubble inflated.
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So, the Aussie elite need to run out of options before there is any hope of the thing deflating.
A true China adjustment would do it, given it would gut the budget, interest rates and the currency all at once, shunting Australia into a kind of external crisis in which fiscal policy was tightened into a recession.
But, anything short of that, monetary policy can adopt unconventional tools while immigration is ramped up to support the bubble.
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The funny part is, the adjustment is underway right now as investment craters.
Will China rescue it again with more debt? Probably.
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But, one of these days, it won’t.
