The Decade Long Depression for Australia By James Reed

Zeihan notes that Australia has a basic economy with little value-added production. This leaves us especially exposed to swings in Chinese commodity demand.

Zeihan also claims that Australia has a sub-prime mortgage problem that is five times worse than America’s in the lead-up to the Global Financial Crisis.

On the upside, Australia has most of the stuff that the world needs, which will ultimately save it economically.

Edited Transcript:

Australia is capable of a relatively two-faced foreign economic policy. They are tight allies with the United States, but at the same time, they will ruthlessly exploit any economic opportunities that the American led security order has offered.

Of all of the western nations, Australia is absolutely the one that has gotten into bed the deepest with the Chinese economically, primarily as a raw commodities producer, whether it is boxite, iron ore, natural gas, or lithium, China has been far and away their number one customer for most of these things.

For most of the last 40 years, those numbers have only gone up.

That’s going to be a problem moving forward because a lot of the Chinese demand has never been economically viable.

The Chinese have a hyper-financialisation system which basically prints money and confiscates bank deposits in order to fuel industrial development even if it’s not something the Chinese are good at.

Something like that is fairly price insensitive and they will buy almost anything at any price if it furthers whatever the political goal is, which is usually to build infrastructure and industrial plant.

Australia has been arguably the single largest supplier to the Chinese this entire time. When that goes away, and the Australians have to sell to more economically sane folks, it’s not like the market’s going to collapse completely but this balls to the wall price in sensitive expansion that they’ve seen in most of their spaces for the last few decades, that’s just not going to carry on.

They will be able to replace the Chinese demand with demand elsewhere, especially as the US reindustrialises and that Southeast Asia kind of steps into some of those roles. But collectively, that won’t be nearly as big as what the Chinese have pulled from the Australian economy this whole time, so that’s going to be a pretty harsh adjustment when it comes.

The second problem is that the Australians never moved up the value added scale in the raw materials industry. They’ve always been a raw commodities provider whether that has been the iron ore: they don’t produce steel. The lithium: they don’t produce batteries. The natural gas: they don’t produce chemicals. The wheat: they don’t produce flour.

So basically, the stuff has grown or been pulled out of the earth and shipped off. And that’s the end of the story. And that industrial plant that the rest of the world has to build to replace China, some of that really needs to happen in Australia as well.

The time to start working on that was probably 1989. They are so far behind. In fact, it’s only in the last year with the inflation reduction act in the United States where the Australians have negotiated to kind of join the subsidies regime.

So some American money will come into Australia to help build out the industrial plant for processing. But they should have been doing this in absolutely every product set that they produced decades ago.

And so when the processing capacity, which is concentrated in China, goes offline even if there is demand for the raw commodities other places are going to have to build the processing capacity first.

So that adjustment down in a post China environment is going to be a lot worse than it needs to be.

The third problem is entirely homegrown. You guys remember subprime? Well the Australians had something that was much worse.

The problem is they never fixed it. So you can say what you want about the American approach to subprime. We forced people who had made decisions whether they were banks or homeowners to eat some of the losses in order to qualify for restitution funds from the federal government.

The Australians didn’t. They just guaranteed everyone’s loans and so everything has just gotten deeper and has festered for the last 15 years.

Arguably, I think conservatively you could say that their subprime problem now is at least a factor of five in relative terms worse than what the United States went through.

So when that finally cracks, and I would argue that a sharp de-globalisation shock or de-Chinafication would be more than enough to trigger a financial crisis in that sort of environment.

They’re going to have something that’s at least a factor of five worse than what the United States went through with subprime.

And all three of these things unfortunately are probably going to hit them all at the same time. So, it’s not that Australia is looking at a recession it’s that they’re looking at a depression that’s probably going to last a half a decade. And that’s going to be horrible.

Let’s focus on the upside. This is the post- American Series. This is what the world looks like when the United States steps back from maintaining sea lanes and lets a lot of its alliances drop.

Australia is not going to be dropped. Australia has always proven to be a creative and capable ally. They’ve formed international coalitions to unofficially achieve American policy. They were with us in Korea, they were with us in Vietnam, they were with us in Iraq and Afghanistan.

They’ve always been among the first to belly up to the bar realising that the world that they live in and the security they have and the economy they have is only possible because of the strategic overwatch the United States has granted.

That means Australia is also one of only very few countries who have ever gotten a free trade agreement with the United States. Not because we were sacrificing for security reasons. We granted it to them because they had been such a great friend for so long.

When we move into the post American world, it’s not that the United States isn’t going to do anything. We are going to have some allies where the balance of commitment from us and the benefits of commitments from them make sense.

At the very top of that list is Australia. Above Japan, above Singapore, above Canada, above Great Britain. Australia is first. And so no matter what shape the world takes as globalisation ends, the Aussies know that we will have their backs because we know that they have ours.

That means no matter how bad the economic adjust is going to be rooted in a free trade relationship now with the United States, we know they will grow out of it because they have stuff that the world needs.

They have stuff that we need. And I have no doubt that an ally as creative and capable as Australia is going to be able to apply that capability and that creativity to their own economic restructuring.

The question is whether they will start that process before the bottom falls out.”