Economics Made Easy, written by former Rio Tinto (ASX: RIO) Chairman and Chief Executive Sir Roderick Carnegie, highlighted some interesting points of the economy in the 1980s that are still relevant to us today. Car manufacturers that lay on 'feather beds', the idea that governments control exchange rates and the mining boom were central to his discussion of the Australian economy – and not much has changed.
In the economy – as in life – the toughest decisions are usually the ones that are the most important to us. A promise of a 'return to surplus' seems long gone with the mining and construction booms, the high Australian dollar and now super taxes are all taking effect on our economy one way or another. Something has to change.
The past and current climate in the Australian finance and economic realm is the result of a few factors which need to be understood to help investors invest better and understand the way the economy works.
- Governmental control
You don't have to be an investor to know that the government controls interest rates and taxes. Every time rates go higher, I hear my friends say "there's another 40 dollars I've got to find every week" but for every action there is a reaction. Mortgages become more painful but then again interest-bearing accounts become more enticing, nonetheless both prompt people to save money which curbs inflation. Inflation is that little thing we have to blame for the price of a small coffee being $3.50 today when it was $2.50 10 years ago. - Cost of living
A recent article from the Sydney Morning Herald's Adele Ferguson revealed that Australia's cost of living is spiralling out of control. Deutsche Bank (NYSE:DB) conducted a survey which showed the cost petrol, technology, cars and even a Big Mac from McDonald's (NYSE: MCD) are more expensive in Australia than other countries. Opponents to this will argue that we get paid more so that explains why it costs more, but which came first the chicken or the egg? If costs go up so too must wages. - Labour rates
Labour rates in Australia have elevated to levels that seemed a world away 30 years ago and we're especially lucky when we compare ourselves to countries in Europe that face levels of unemployment near 25%. Motley Fool General Manager Bruce Jackson is not one to focus on booms and busts but even he has said "Australia faces a period of higher taxes, lower middle-class welfare, the end of the mining boom, and higher unemployment". High labour rates and foreign exchange are two things that are not productive for the economy but can be for your portfolio. - High Australian dollar
We know Flight Centre (ASX: FLT) will do well with a high dollar and BHP Billiton (ASX: BHP) will do even better with a low dollar, but continued high levels of foreign exchange will be detrimental to our economy. Many countries throughout the world have been accused of currency manipulation to increase their economy' competiveness on the world stage, a move that's hard to prove and can be done using indirect or direct tactics. - GDP
Roughly GDP can be calculated by adding consumption, investment, government spending and net exports. Net exports are exports minus imports. At 2012 estimates, exports were approximately $263.9 billion and imports $258.1 billion, showing that we import more than we export. The mining 'black hole' that will cost us $20 billion should be no surprise when our top exports are crude petroleum, LNG, copper, coal, iron ore, gold and meat. Is it any wonder that Australia is in budget deficit when the mining boom is coming to an end?
Through low interest rates, the RBA is seeking to stimulate growth and the government is swooping in with proposed taxes to recover some of the lost budget. With manufacturing already headed offshore, retail products offshore, cars imported, technology imported and foreign companies buying our farms, we need to ask ourselves what we'll have left when our children need jobs.
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The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool contributor Owen Raszkiewicz owns shares in Rio Tinto.
