Opinion: Bernard Hickey asks if John Key has a Plan B if peak oil, aging workforces and little technical progress create a growthless global economy.

It hasn't dawned on John Key, but the idea that growth in the developed world may have stalled for more than a year or two is now dawning on central bankers, economic thinkers and protestors around the world.  

The realisation that real and sustainable growth may not have happened in the developed world for the last 20 years is even more unsettling.

Here's the thinking. Oil production essentially peaked around a decade ago. Technical innovation has been stagnant for at least 20 years. Populations began ageing. This meant that per-capita growth in output was much slower than in the post-war years up to the 1970s.
See more here from Peter Thiel on The End of the Future.

Any growth that was produced was gobbled up by the richest 5 percent of the population as the financialisation of the economy shuffled more profits to banks, traders, executives and their shareholders. A relaxation of the Depression-era rules stopping investment banks from joining up with commercial banks, along with an increasing focus on rewarding executives many multiples of average incomes accelerated the surge of income to the top tiers.

This non-growth and the increasing inequality of incomes was essentially disguised, particularly for the middle classes in developed economies such as the UK, the US and New Zealand, by borrowing from the savings in export-rich economies such as China, Japan and Germany.

The debt crunch we are now seeing in Europe and America is essentially the moment of truth for this strategy. When debts grow faster than income this eventually ends in unserviceable debts. Greece and the Eurozone is trying to control that moment of truth right now and is failing.

The debt can't be sustained without some sort of debt jubilee, where debts are forgiven, or by a burst of inflation. Regular savers want a debt jubilee where bank shareholders and bond holders take the pain. Borrowers want inflation where regular savers take the pain.
They can destroy banks and their bondholders and shareholders by forcing them to forgive the now unsustainable debts.Or they can bail out the banks and shift the debt onto the balance sheets of taxpayers while encouraging inflation. This spreads and delays the debt problem, an eventually ends with sovereign credit rating downgrades and ultimately the bankruptcy of countries. That's what we're seeing now in Greece.

So far politicians in the United States, backed by their political funders in the banking sector, have chosen to bail out the banks and shift the burden to taxpayers generally while inflating away the value of money. This is fueling much of the anger and has created a monster moral hazard problem, along with banking monsters that are even more dangerous and too big to fail.

Unending strong growth in the developed world cannot be sustained. There isn't enough oil, young workers and technical innovation to sustain it.

So what is New Zealand's Plan B?

Link -
http://www.interest.co.nz/opinion/56214/opinion-bernard-hickey-asks-if-john-key-has-plan-b-if-peak-oil-aging-workforces-and-li
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The Truth is, I doubt that any of the Politicians or Central Bankers, have any Plan B!

France and Germany have reached agreement to boost the eurozone's rescue fund to €2tn (£1.75tn) as part of a "comprehensive plan" to resolve the sovereign debt crisis, which this weekend's summit should endorse, EU diplomats said.

The growing confidence that a deal can be struck at this Sunday's crisis summit came amid signs of market pressure on France following the warning by the ratings agency Moody's that it might review the country's coveted AAA rating because of the cost of bailing out its banks and other members of the eurozone. The leaders of France and Germany hope to agree a deal that will assuage market uncertainties or, worse, volatility, in the run-up to the G20 summit in Cannes early next month.

France would now have to pay more than a percentage point – 114 basis points – over the price paid by Germany to borrow for 10 years as the gap between the two country's bond yields widened to their highest level since 1992.

The news cheered US investors. All the major stock markets surged, with the Dow Jones Industrial Average rising 250 points, or 2.2%, to 11,651, after earlier falling by 101 points earlier in the day.

Berlin had dampened down prospects of a full-scale deal, although EU diplomats close to the talks say the Franco-German agreement covers boosting the financial firewalls for eurozone members to withstand the threat of a "credit event" or sovereign debt default in weaker countries.

This takes two forms. First, the main bailout fund, the European financial stability facility, will be given additional levers enabling it to offer first-loss guarantees for bondholders, be they private or public. Senior diplomats say this will deliver a fivefold increase in the fund's firepower – giving it more than €2tn compared with the current €440bn lending capability. The EFSF will in effect become an insurer, thereby overcoming European Central Bank resistance to the idea of turning into a bank.

Second, Berlin and Paris have agreed that Europe's banks should be recapitalised to meet the 9% capital ratio that the European Banking Authority is demanding after its re-examination of the exposure levels of 60 to 70 "systemic" banks. The EBA has marked these exposures much closer to current market values.

Berlin and Paris are also said by those close to the negotiations to be edging nearer to agreeing on the increased scale of private sector involvement in the second rescue package (€109bn) for Greece. This was set at a voluntary 21% "haircut" in the July package but, under worsening overall economic conditions and a likely restructuring of Greek debt, Germany has been pushing for losses of up to 50%. France, backed by the ECB, has resisted the idea, while EU officials have clearly indicated that a range of 30 to 50% is being considered.

http://www.guardian.co.uk/business/2011/oct/18/france-and-germany-move-towards-2...
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This story reminds me of a scene from one of the Superman movies.

Lois Lane falls off a building and Superman, on seeing this, flies up & catches Lois, then says, "don't worry Lois, I've got you"!
Lois then looks down and says, "You've got me, BUT WHO'S GOT YOU?

More to follow.

ECONOMIST John Hewson, architect of the GST, has predicted the world faces economic gloom for possibly more than a decade.

Dr Hewson, who led the federal Liberal Party in the 1990s after having worked as an economist for the Reserve Bank of Australia, the International Monetary Fund and Treasury, also warned that Australia's heavy reliance on the Chinese economy was unhealthy.

"It doesn't make good governance at all to be so deeply in debt to China," he said.

"Our minerals boom can evaporate and in any case that boom is not of much benefit to the economy generally."

Dr Hewson said "profits from mining are largely going offshore and are not staying onshore".

"One day, China will stop paying high prices for commodities, like Japan and Korea did before them."

He recommended Australia "diversify to other parts of the world, such as the Arab world".

On global economic volatility, Dr Hewson said he had never seen a "more uncertain set of factors before".

"I believe we are in for a fairly difficult period for the next five or 10 or more years," he said at an Australia Arab Chamber of Commerce and Industry function in Melbourne last Friday night.

"The chances of a credit squeeze like the one in 2008 is not high, but there is a risk of one," Dr Hewson said, describing the current global volatility as worse than the Depression of the 1930s.

For Australia, he forecast "very flat economic growth for a decade or two" and a real chance that the European banking sector's problems could land Down Under.

"It's a systemic problem and it can spread internationally, and that is where Australian banks can hit the wall."

He said the spiralling sovereign debt crisis had led to people losing confidence in governments' ability to deal with major issues.

"The failure of governments at all levels, whether it is the bureaucrats or politicians, has diminished their ability to govern in their own right," Dr Hewson said.

"That is why you see unity and coalition governments springing up everywhere, from the UK to Australia and this week in Greece, with Italy being next."

Link -
http://www.heraldsun.com.au/business/great-threat-of-china-economist-john-hewson...
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Hewson, like another former Liberal leader (Malcolm Fraser), is now a little "on the nose", with some current Liberals & their supporters!

Whilst not agreeing with all of his comments, I would suggest it would be unwise for OZ to rely too much on Mining & too much on China!

Hewson also goes part way, by describing the current global volatility as worse than the Depression of the 1930s.

But, in my opinion, the Truth is that Hewson falls short and thereby does the OZ POublic a dis-service, by not saying that the Macro factors, which are currently directing the future of the Global & the local (OZ) Economy, are likely to result in a hard landing, sometime, in the not too distant future!