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Thread: Sadly, I have something in support of the doom n gloomers: double-dip recession fears

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    Featured Member flickad's Avatar
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    Default Sadly, I have something in support of the doom n gloomers: double-dip recession fears

    "With businesses sitting on their hands and consumers saving rather than spending, market economists have been downgrading forecasts for the current three-month period to just 1 per cent growth or less. Some fear the economy may have already headed into reverse, after economic reports revealed a sharp fall in new home sales, tepid manufacturing data and mixed jobless claims.

    Even at current rates, economic growth is too modest to create enough jobs to shift America’s stubbornly high unemployment rate, stuck above 9 per cent."

    http://www.theage.com.au/business/fe...828-13wqo.html

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    Banned Melonie's Avatar
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    Default Re: Sadly, I have something in support of the doom n gloomers: double-dip recession f

    ^^^ it seems clear that Australia is rapidly headed for ( another ) economic downturn ...



    (snip)"Mining tax in limbo with Australian election results

    Billions of dollars worth of future projects and profits are in limbo for some of the world’s major miners after no clear winner emerged from the weekend’s Australian election, which was to decide the fate of a controversial new tax on its robust resource sector.

    Australia, the world’s largest exporter of coal and iron ore, faces several days of uncertainty as the two main parties scramble to win over independents to help form the country’s first minority government in 70 years.

    That leaves big-name miners such as Australian-based BHP Billiton Ltd., Anglo-Australian firm Rio Tinto Group and Canada’s Barrick Gold Corp., all with significant operations in the country, waiting to see whether or not they will be forced to pay billions in new taxes. "(snip)

    (snip)"Australia has become a key stronghold for the world’s largest mining firms as they try to satisfy the strong demand for resources in China, as well as India. Miners have been pouring billions into Australia as a result of its seemingly stable tax and investment regime. The rebound in commodities coming out of the global economic downturn even helped Australia shake off a recession, posting a national jobless rate which now sits at about 5.3 per cent, almost half that of the United States.

    Arguing mining companies weren’t sharing the wealth from the resource boom, the incumbent centre-left Labor party proposed a new 40-per-cent tax on producers in late April, to take effect in 2012. That caused a huge uproar among the powerful mining firms, whose backlash led in part to a party coup that put Julia Gillard in the prime minister’s chair in June.

    Within days, she negotiated a new proposal with BHP, Rio and London-based Xstrata PLC, agreeing to water down the tax to 30-per-cent. Weeks later, she called an election.

    Opposition Liberal leader Tony Abbott campaigned to axe the tax, which is estimated to generate about $10.5-billion Australian ($9.8-billion Canadian) in its first two years.

    Now that neither leader has won enough seats to form a government, each will need to broker deals with independents to pass any proposed legislation. That makes the fate of the mining tax more uncertain, given that the third-place Greens leader Bob Brown wants to see the levy renegotiated to raise another $2-billion (Australian). "(snip)


    Like it or not, mining industries have provided huge numbers of very well paying jobs for Australian 'middle class' workers - who arguably will be unable to find equal paying jobs in any other Australian industry (if they are able to find jobs at all) should mining operations be cut back - a situation now common to American workers but not yet experienced by Australian workers.

    As a result of the recent elections, the third-place Greens are now sitting in the 'driver's seat' in terms of imposing an Australian mining tax and/or Australian carbon tax, thus creating uncertainty about future costs of doing business which will now wreak havoc on Australia's mineral and coal mining operations ! Businesses being uncertain about potential major increases in their future costs of doing business is also something becoming common in America which Australian businesses have so far avoided having to face ( well, with the brief exception of a few days of carbon tax fears after Kevin Rudd's election a couple of years ago anyhow).

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    Featured Member flickad's Avatar
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    Default Re: Sadly, I have something in support of the doom n gloomers: double-dip recession f

    Difficult for me to believe, as we averted recession the first time around. Our major trading partner is China, not the States. Further, not even this rather pessimistic (and not entirely accurate) Canadian article indicated in any definite sort of way that the Australian economy as a whole is in any sort of serious trouble. The local media certainly does not support such a prediction. We are, in fact, seeing signs of growth. Therefore, my conclusion is that it seems far from clear that any sort of economic downturn looms ahead for us, let alone rapid economic downturn. However, time will tell.

    I suspect the mining tax will not go ahead. We have a hung parliament as of last Saturday (in my view because the major parties have grown too close together in ideological terms; this article from the same source is fairly spot on with regard to that narrowing of the policy gap http://www.theglobeandmail.com/news/...rticle1680561/; though it is inaccurate as to the levels of support some of Labor's more conservative policies enjoy from middle Australia; local polls consistently suggest that a large majority of Australians support same-sex marriage rights, for instance, and do not support Labor's proposed mandatory internet filter - Labor has gone off on a tangent of its own rather than changed to reflect public opinion, as the results of last week's election and opinion polls over the last twelve to twenty four months show), and even if Labor forms minority government, they will have to do so with independent MPs who are against the tax. The Green House of Reps member, Adam Bandt, will be unlikely to tip the balance of power given that he is outnumbered by rural independents of a conservative bent. Even if it does go ahead, it will do so in highly modified form. Prime Minister Gillard brokered a compromise almost immediately after she took over from Rudd (which you would probably not be aware of as I doubt it made international headlines). The article states that the tax was lowered to 30%. While true, this is not the whole picture. The tax will be on certain resources only and is likely to be accompanied by a cut in company tax. Rudd's proposed tax was to be across the board. Further, mining companies will find it difficult to pick up and go elsewhere, since the resources are in the ground in specific areas and mining businesses are thus not mobile in the same way as manufacturing is. Obviously if they are over-taxed the exercise will no longer be a profitable one, but the watered-down proposal is unlikely to amount to over-taxing.

    For the record, I don't support the tax as it is unlikely to encourage further investment, even if it does not upset the existing market.
    Last edited by flickad; 08-28-2010 at 09:13 AM.

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    Banned Melonie's Avatar
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    Default Re: Sadly, I have something in support of the doom n gloomers: double-dip recession f

    Even if it does go ahead, it will do so in highly modified form. Prime Minister Gillard brokered a compromise almost immediately after she took over from Rudd (which you would probably not be aware of as I doubt it made international headlines). The article states that the tax was lowered to 30%
    Our major trading partner is China, not the States
    Further, mining companies will find it difficult to pick up and go elsewhere, since the resources are in the ground in specific areas and mining businesses are thus not mobile in the same way as manufacturing is.
    Well, in basic terms, Australia's main 'mined' export products iron and coal are also mined in many other countries ... including China itself, South America, North America, Eastern Europe + Russia etc. As long as aggregate world demand does not equal maximum aggregate worldwide supply - which it won't if the US, China, and/ or Western European 'consumer' economies ( continue to ) experience a double dip slowdown in real estate and auto / other durable goods manufacturing activities - the world market 'export' prices of commodities like coal and iron cannot simply be increased by Australian miners in order to allow them to pass on payment of a new 30% Audstralian tax.

    Thus potential low profit levels and low ROI levels for future Australian mining operations ( due to their higher cost structure under new Australian taxes ) could quickly swing them toward the 'untenable' in the same way that many US mining operations for more exotic minerals have already been shut down in the face of lower cost offshore mine production. Or put another way, it doesn't cost THAT much extra to ship coal from the USA to China or to ship South American iron to China versus shipping from Australia. And as was the case with the gradual 'offshoring' of durable goods manufacturing capacity away from America, if low cost mining opportunities in say South America received heavy capital investment their production capacity could be significantly expanded over the course of a few years - such that future world buyers of coal and iron could still have their expanding future needs met without resorting to more expensive Australian sources of coal and iron. This could result in the same sort of paradigm shift that left US auto / appliance / exotic mineral mining production capacity permanently under-utilized ( and left American workers in those industries permanently without a similarly well paying job).


    market economists have been downgrading forecasts for the current three-month period to just 1 per cent growth or less. Some fear the economy may have already headed into reverse
    As this was your original point, I would add that a ton of discussion / commentary along these lines is now taking place at J-Hole ! As touched on in a bunch of other threads, over the past few weeks virtually ALL of the 'darling of mainstream media' economists who had been calling for US economic improvements are being forced to admit that they were wrong now that 'real world' data is falling far short of their earlier estimates. Nouriel Roubini just summed up the situation very concisely on Bloomberg Sat TV ... by pointing out that earlier US gov't based economic stimulus measures ... from new home buyer tax credits, to 'cash for clunkers' new auto subsidies, to energy efficient new applicance subsidies ... only served to artificially draw US consumer demand forward to take advantage of that gov't largesse ( in reality growing US gov't bond debt with the borrowed money spent to finance these subsidies ). Now that these programs have terminated, remaining levels of demand are even lower than they otherwise might have been had earlier gov't subsidy motivated buyers not been incentivized to 'spend their money' earlier. Or put another way, the US gov't subsidies that provided an economic 'tail wind' in earlier quarters has now turned into an economic 'head wind' instead.




    Roubini's comments basically summarize something that many of the 'tin foil hat' economists as well as Eric Stoner and myself have been posting about for months ... that, reduced to ultimate truth, the only component of US GDP that has consistently provided any positive growth over the past year and a half has been the growth in government spending ( of borrowed money ) ! However, as is already the case with the gov't incentive programs discussed above, the growing interest payments and principle repayments resulting from that gov't spending ( of borrowed money ) is increasingly acting as an economic 'head wind' as well.

    But unlike any potential normalization of consumer housing / auto / appliance demand which will probably reassert itself after 2-3 years without additional gov't incentives being available, the 'head wind' effect of additional US gov't bond debt will be present in the American economy until those bonds are paid off ( and also until any newly issued future bonds required to 'roll over' existing bond debts are paid off ) . This is likely to require somewhere between 7 and 20 years AFTER the mountain of US gov't debt actually stops growing larger ! Unfortunately, despite coming US tax rate increases, there's zero prospect of reduced US gov't spending levels falling below actual levels of US tax revenue collections such that US gov't debt levels could stop growing larger, not in the immediate future anyhow. This of course is the basic undercurrent of the 'FED and Uncle Ray' thread.

    For these and many other reasons, as your OP pointed out, the US economy is indeed likely to get worse before it gets better ! Like you I'm hoping that Australia isn't about to set the same sort of negative economic conditions in motion that Americans did during their recent trips to the voting booth.

    ~
    Last edited by Melonie; 08-28-2010 at 07:36 PM.

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