Australia lurches into crisis: a workers' plan needed!

Submitted by martin on 26 October, 2008 - 11:41 Author: Martin Thomas

On 22 October Glenn Stevens, governor of the Reserve Bank of Australia, said that the worst of the global financial crisis had passed. In the next few days the Australian dollar plunged downwards, reaching 58 yen where it was 104 yen earlier this year.

Financial tumult continues on a big scale. And it is pretty certain that it will be followed by a serious downturn in trade and production in Australia, as across the world.

In the workplaces and on the streets - as distinct from in the financial pages - what we've seen so far is only a small beginning. In September 2008, the average unemployment rate in Australia was still only 0.1% up on September 2007.

But the credit implosion caused by the financial tumult makes it almost certain that trade and production will turn down much further.

The Australian economy is heavily dependent on exports (equivalent to 22% of output), and especially on commodity exports. Coal, iron ore, and gold are the big three. The main export markets are China, Japan, South Korea, and the USA (49% of all exports between them).

Until recently Australian capital was helped by the relatively high level of commodity prices, and by Chinese industry still growing fast.

Now Chinese growth has slackened, and Japan, South Korea, and the USA face big economic problems. And commodity prices have turned down again.

"Oct. 20 (Bloomberg) -- Power station coal prices at Australia's Newcastle port, a benchmark for Asia, fell for a ninth week and dropped to a nine-month low amid declining freight rates and falling oil prices that cut demand for coal.

The weekly index for power-station coal prices at the New South Wales port fell $7.20, or 6.4 percent, to $104.70 a metric ton in the week ended Oct. 17...

Newcastle coal... is 46 percent off a record $194.79 set for the week ended July 4..."

ABC, 27 October: "Iron ore miners from Western Australia's Pilbara are locked in negotiations with Chinese steel mills over price.

BHP Billiton, Rio Tinto and FMG lock in most of their sales on forward contracts, but the world-wide economic slowdown is expected to force the price down. Any drop will come off unprecedented highs..."

Gold went up to US $1000 an ounce in March 2008, but is now down to little over US $700.

The slide of the A$ softens the impact of these falling world prices. Australian commodity exporters' income may not be down much measured in A$ rather than in US$. But the slide brings its own problems.

The other thing that has softened the impact in trade and production in Australia so far is that Australia's capitalist firms still have a fair amount of "fat". An increase in the rate of exploitation of labour has allowed them to grab high profits, keep their cash stashes plump, avoid big debts. Australian Bureau of Statistics: "The profits share (based on gross operating surplus for financial and non-financial corporations) of total factor income reached 27.2% in 2006-07 and this represents the highest share recorded since 1959-60".

None of the offsetting factors looks sufficient to stop Australia's trade and production sliding downwards as a result of the world credit implosion and the pressures on Australia's export income.

Workers in Australia will face rising prices (as a result of the decline of the A$, and thus an increase in A$ terms of the price of imported goods); pressure to keep wage rises down; job cuts; and maybe a surge of house repossessions.

The labour movement cannot be content with the Rudd government's bailout for financiers and big business. It must demand inflation-protection guarantees for wages; a shorter working week without loss of pay, and expansion of public services and public service jobs; the taking into public ownership of the whole financial sector, and its conversion into a public banking, mortgage, and finance service, run under democratic control and oriented to social provision, not private profit.

To free its hands for self-defence in the crisis, the labour movement should also demand the full and complete repeal of WorkChoices and the Building and Construction Industry Improvement Act (the law that set up the ABCC), and legal guarantees for the right to strike.

The organised working class and the unions need to break politically from Rudd and Gillard and fight to reshape the Labor Party so that it is capable of creating a workers' government, accountable to the labour movement and capable of carrying out the measures necessary in the interests of the working-class majority in this crisis.

It is probable that the crisis will be used as an excuse to shelve "green" measures. The labour movement should demand that the reconversion measures required to reduce carbon emissions be speeded up - under democratic and workers' control - not slowed down.

The big unknown which could make the downturn in Australia much deeper is the housing market.

Although Australia, like the USA, the UK, and Spain, has had a house-price "bubble" in recent years, so far that bubble is deflating much more slowly than in the USA, and more slowly than in the UK. On the latest figures, the three months to August 2008, prices were on average down only 1.18% on the previous three months, though there are bigger falls in some areas.

Steve Keen of the University of Western Sydney argues that the house-price bubble is likely to implode catastrophically.

His basic argument is that Australia, like the USA, has an unsustainable level of household debt. The ratio of private debt to GDP (output) has risen from about 25% in 1960 to over 160%. "The ratio of debt to GDP can't keep on rising forever. It has to at least stabilise". By now the increase in debt each year accounts for a sizeable proportion of total spending (16% in 2007, Keen says). So even a levelling off of debt means a collapse of effective demand on the market, and consequently a severe downturn.

Australia's housing bubble, Keen says, is bigger than the USA's. Since 1987 Australian house prices have increased by a factor of 4.6 - 1.4 times bigger than the factor of increase for US house prices to their peak in 2006, and 2.5 bigger than the factor of increase of the general Australian consumer price index. Paying the interest on outstanding mortgage debt consumes 13% of all household income, up from 3.5% in 1987.

Over a very long historical term, house prices increase a bit faster than prices generally, because technological change is slower in house-building than in other industries, and because ground-rent becomes a bigger factor as cities expand.

But the housing market is part of the financial markets - part of the business of putting in $x today in order to get $x+y tomorrow - as much or more as it is part of the consumer-goods markets (where you put in $x in order to get food, or clothes, or whatever). When people buy houses, they do it not only, and sometimes not even, to live in them, but with the hope of selling them again at a higher price.

Therefore housing prices can get caught up in the same sort of "bubbles" as, for example, share prices. Rising house prices (unlike rising prices for ordinary consumer goods) generally produce increased market demand for houses, as more and more people try to "get on the property ladder" or "trade up" to a bigger house whose value will increase faster.

Just as a share price can increase out of proportion to the underlying economic reality (the future stream of dividends realistically likely from the company), so also house prices can "bubble". Simultaneously the debts owed by households to the banks and mortgage firms also "bubble".

That the Australian house-price "bubble" must shrink some day is certain. That it will burst explosively, rather than deflating gradually, and that it will burst now, are not certain. Relatively high immigration into Australia, including immigration by people well-off enough to buy houses, is a factor keeping market demand up. But Keen's warnings are worth keeping in mind.

This crisis has shown - by way of the reluctant actions of capitalist governments across the world, starting with the most gung-ho free-marketist of them all, in the USA - that social regulation of the economy is necessary.

The governments are going for the minimum of social regulation. Even if the banks are nationalised, they are still run by the same, or almost the same bosses, on the same principles. They want it for the minimum time. As soon as things look settled again, the governments will sell off their holdings in the banks.

While they admit that they have to nationalise the banks or insurance companies or mortgage companies, the governments still propose privatisation and contracting-out as good policy for public services and utilities.

But their central dogma is discredited. Hundreds of thousands, if not millions, of people have been jolted into thinking anew about how society is run, and how it should be run.

The job of socialists is to offer new answers to their new questions. Yes, we need social regulation of the economy. It should be comprehensive social ownership regulation of the big banks and firms, though not of course an attempt to control every small enterprise.

The economic regulation should be democratically controlled, by a government accountable to the majority, and by the workers in each enterprise. The aim which shapes it should be social provision for need, not private profit for a few.

In short, the labour movement needs to rouse itself to fight for a workers' government, and for a world run by a cooperative network of workers' governments.

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