The primary role of government is to protect its people. To do this it must first appreciate the major risks facing the country, then design a plan for eliminating or mitigating those risks.
So, what are our major risks? Some would say China, Trump, climate change, Islamism, the far-left, the far-right, or the apathetic middle. While there is some merit in all those concerns, I don’t see any of them to be existential threats or as impoverishing us as a nation.
I appreciate that we are becoming increasingly socialist as a nation and am convinced that won’t end well for any of us, not even for those politicians and senior bureaucrats will just be ‘more equal’ than the rest of us. That said, I can’t reasonably expect our socialist (State and Federal) governments to embrace free markets. But I do expect them to recognise and plan for the other major risks we face.
The risks I am concerned about are, in no particular order of priority are, as follows:
- The rapid development of Ai and robotics
This has the world on the cusp of the biggest social and economic upheaval since the Last Ice Age or at least since the Industrial Revolution. If predictions are even remotely accurate, it could lead to mass unemployment amongst both white- and blue-collar workers within as little as 5 to 7 years. I recently read that McKinsey, PWC and the World Economic Forum estimate that 40% to 60% of current work activities could be automated by 2030. That’s a staggering figure. Ai and robotics do however present fabulous opportunities for those countries and people who can best pursue them. What plans do our State and Federal governments have for getting us through this change, leaving us stronger on the other side of it? None that I know of. Do any of our major political parties have a plan? Apparently, not.
- A major drop in the demand for our largest exports (iron ore, coal and gas)
Our economy is heavily dependent on export sales of iron ore, coal and gas to China and Japan. If demand and prices were to plummet our economy will be in grave danger. Why – because we have allowed ourselves to suffer the ‘Dutch disease’ where the success of our natural resources sector led to a decline in other sectors, and the ‘curse of plenty’, resulting in poor fiscal management and a bloated public service. If prices and volumes dropped considerably our economy will be up a creek without a paddle. But is this downturn likely or unlikely? Since China’s is experiencing significant debtor defaults on its belt and Road projects, a highly indebted property sector with some very large insolvencies, infrastructure development slowdown, heavily indebted banks (from funding property development), President Xi pulling back on free market initiatives and an unofficial government debt of 280% to 320% of GDP, a major drop in demand by China is more likely than unlikely. Japan is also concerning, but for different reasons. Its problems are a declining and ageing population. Does our government appear to recognise this risk? Apparently not. Does any other political party? Apparently not.
- Severed shipping lanes
Australia relies heavily on imports, particularly of fuels and fertilisers. Without fuel and fertilizers our famers will not be able to grow crops, and any crops they are able to grow could not be transported for storage and processing or to retailers or directly to consumers. Similarly, farm animals could not be transported for processing and any meat processed could not be transported to markets or to consumers. So, if fuel and fertiliser ships could not reach our ports, we would starve. A horrible thought! But is it realistic that our shipping could be stopped? I would like to think that is unlikely, but it is probably as likely as China launching a military operation to take control of Taiwan. That could bring the USA and Japan into conflict with China, which conflict would close the South China Sea and stop crude oil deliveries to refineries in Singapore and Malaysia. If we join the US and Japan, China with their huge navy could stop all our shipping. That would be catastrophic for us, so it is not worth that risk. Has our government a plan to deal with this eventuality? No, it hasn’t – that recently became apparent. Do any of our major political parties recognise the risk and have a plan for it? Apparently not.
- Currency debasement
Many governments around the world, including ours, are living beyond their means. Their expenses exceed their income, resulting in their having to borrow to fund the shortfall. This does two things. One is, it adds to money supply, which causes inflation, reducing the buying power of their money. For example, the buying power of the Australian dollar has dropped by about 20% over the past 6 years, since 2020. The other consequence is that those borrowings need to be repaid (or continually refinanced) and interest is payable on them. With our government showing no signs of reining in its expenses and living within its means, further debasement and borrowings are inevitable. So, as both borrowings and interest rates increase, our interest obligations also increase – as an amount and as a proportion of government expenditure, creating a vicious cycle leading to ever increasing borrowings and currency debasement. No country in history has become prosperous by continually debasing the value of its money, while there are plenty of examples of government impoverishing their people by doing so. Our current Labour government is showing no signs of having any intention to reduce debt, and nor are the other major political parties. It will take a significant boost in economic activity together with austerity measures – severely cutting government expenditure. Since our career politicians have only two objectives – one is to be elected and the other is to be re-elected – so it is highly unlikely any will implement the austerity measures needed to bring government’s books back into the black. So it is hard not to conclude that we are on a trajectory to impoverishment, to become another Venezuela.
- A collapse in the international currency of trade, the USD
Throughout history, from the Kingdom of Lydia (late-7th to mid-6th century BC) the first civilisation to mint gold and silver coins through to modern times, all once powerful city states and empires (with one exception) collapsed after debasing their currencies. That included the Roman, Byzantium, Ottoman, British and the various French Empires. The exception was the Persian Empire, which endured for the longest, some 1200 years. The Byzantium Empire, which endured for some 700 years resisted the temptation to debase their coinage for centuries, then succumbed to the temptation and collapsed.
In the decades leading up to 1914, world trade accelerated at unprecedented levels and so did the increase in human prosperity. The world’s global economies pegged their currencies to a fixed weight of gold with London serving as the central clearinghouse for the world’s gold supply. The outbreak of World War I brought that to an end. The global economies decoupled from gold and to fund their war efforts debased their currencies by increasing money supply through borrowing. Britain’s national debt increased 11-fold through the war. It emerged from the war considerably weaker and as a debtor nation – primarily to the USA. While Britain largely avoided hyperinflation, Russia and Germany didn’t. Their printing presses continued rolling, resulting in the Russian revolution, the rise of Nazism and World War II. At the tail end of that dreadful war, 44 countries accepted the Bretton-Woods system, under which countries pegged their currencies to the USD, and the USD could be converted (by foreign countries) into gold at $35 an ounce. Due to increasing money supply to fund domestic programs and its war in Vietnam, countries became concerned about whether the USA had sufficient gold reserves, so the French called on the conversion to gold. This triggered the USA, in 1971 under Nixon, to abolish the right to convert USD into gold – and that gave rise to what’s referred to fiat currencies – money not backed by anything, just trust in government. US national debt has skyrocketed from $400 billion in 1971 to $39 trillion in 2026 – and is predicted to double over the next 10 years. Its debt-to-GDP has also skyrocketed, from under 40% in 1971 to currently about 125%, and that is predicted to continue increasing, and so is its interest expenses as a proportion to its total expenditure.
The question our government should be addressing is, at what point do international traders lose confidence in the USD and then what follows. Will this be the next major financial crisis? I have not heard any of our politicians or our Reserve Bank considering these questions. We expect our politicians and senior bureaucrats to be focussed on identifying and planning how to handle major risk events. It appears none are, and that’s worrying, very worrying.
Written by: Mark M.J. Morris