2010 the year and the decade to come.

Warning, there is an unintended outbreak of seriousness ahead

"What can go wrong?"

"What am I not seeing?"

"Does my butt look big in these jeans?"

If you ask yourself either of the first two questions you're not a sad git. You are in fact conducting a rough form of risk analysis. If you ask yourself the last one, seriously, do more exercise or see someone about your paranoia. For the men out there the answer to this last question is always an enthusiastic and emphatic "NO!"

By now you are probably wondering where this is going (if you do know can you let me in on the secret? - Ed). It's that time of the year when all and sundry display their magnificence and proclaim "behold and be amazed as I lay out the future before your very eyes!".

Sorry to burst your bubble people but us humans are rubbish at prediction. It's been scientifically proven that we would be far better off concentrating on easier things like curing cancer than continue with the farce that we can predict the future. The problem is that life is too damn complex and the future has an infinite number of possibilities that have to turn into a single present. This is why your footy tipping is always derailed by the regular and inevitable "round of upsets".

Add to that various psychological foibles like over confidence and our preference for information that tends to confirm our views of ourselves and you have a recipe for disaster every time we say "2010 will be the year of ...." or "we will see the rise of .... over the next decade".

So why do we bother. Well for starters it's fun. Secondly due to luck or sufficient vagueness you can appear to have correctly predicted something and in the right circumstances this can be very profitable. So just in case we get lucky we thought we would have a go at the prediction game ourselves.

Rather than fall into the trap of making specific predictions and looking like a goose at the end of the year (PJ is attempting his first half marathon in September so he has 'looking like a goose in 2010' nailed already - Ed) we prefer to do some risk analysis.  We prefer this approach because too many people assume that the past is a reliable guide to the future - which it is until it isn't. 

There are too many trends and issues to cover here but we can pick some of the more problematic and see what impact they might have in the next 10 years.

'Bartman' V 'The Hodge'

2010 will be dominated by politics, three state elections and a federal one will ensure that the 'believers' and political groupies have a year to remember. However, the way politics is practiced here in Australia is reactive and dominated by furious debate over the superficial or marginal.

In Tasmania we will have front row seats to the 'epic contest' between our incumbent Premier 'Bartman' and the hope of the Liberal party 'The Hodge'. Will it be a real battle of ideas or more arguing over minor differences? Former Liberal Premier Robin Gray thinks it will be the latter. He was quoted recently as saying that there is no difference between the Tasmanian Labour and Liberal parties and that they should merge.

Robin Gray could also have been talking about the federal scene. In 2010 we will have our socially conservative, church going, economically responsible prime minister (Kevin Rudd) up against a socially conservative, church going, economically responsible leader of the coalition (Tony Abbott). Even the supposed domination of the federal Liberal party by the 'climate sceptics' doesn't really indicate a fundamental difference. Our Prime Minister was labelled a climate sceptic and denier by other attendees of the recent Copenhagen Climate Change conference.

Of course the Greens, independents and possibly the Democrats will be floating about but lets face it, they are unlikely to 'trouble the scorers' to any significant degree. So the trend of short term focus, spin doctoring and issue avoidance politics is likely to continue into the coming decade.

This may be ok in a situation of benign economics and relatively stable foreign relations but are our political leaders ready or capable of handling more difficult times? While we are better off than a lot of other nations at the moment there are a couple of issues that pose serious risks in the future.

Climb that debt mountain

The last two years has been more than a little exciting economically speaking. Almost every 'advanced' economy has learnt that when people can't pay back the money you lend them all hell tends to breaks loose. We have also seen what happens when the ignorant and lazy let the greedy have a field day. Somehow a decade of financial innovation doesn't seem to have turned out as well as say a decade of technical or medical innovation.

But is the recent debt fuelled unpleasantness a real surprise? Victoria experienced it's first debt fueled housing boom during the gold rush years in the 1800's and it ended badly. More recently we had the antics of Alan Bond and his fellow entrepreneurs in the 1980's. Westpac nearly went broke lending to those titans of capitalism. Interspersed was The Great Depression and various other recessions in which high levels of debt were a contributing factor.

So have we learnt our lessons? In a word - no. Australia's private debt has been rising at an increasing rate since the mid 1990's and really accelerated over the last few years to the point that we have more household debt than the US. It's official we are now living beyond our means (again or is it still? - Ed). As the world experiences a crisis caused by too much debt and is busy paying it off we are cheerfully racking up an increasing amount of the stuff. 

According to our pollies and economists this is not a problem because the value of our 'assets' (mostly shares, homes and the odd shack) exceed the amount of our debt. There are two problems with this line of thinking. One, most mainstream trained economists don't believe debt has any impact on the economy. However normal people, and a few 'rogue' economists like Steven Keen, know that the more you owe the less you have to spend. 

Australia is a consumer driven economy and debt fuels consumption (1000 days interest free purchases anyone? - Ed) until you get to a point that people cannot take on any more and they have to cut back. When this happens consumption falls - always and without fail. The only question is when and at what debt level that point is reached.

The second problem is that shares and houses have valuations, which isn't real money until you go to sell them. How many shares have hung on to their value since August 2007? Even after the most recent rally Australian shares are, on average, 25% off their peak in 2007. Similarly house prices have fallen in some parts of Australia. For asset prices to continue to rise someone must be able and willing to buy it off you for more than you paid for it. Search for 'Ponzi schemes' on the Net. This will give you some idea of how this can play out.

Debts on the other hand are real money right from the start and remain no matter what the 'valuation' of an asset is doing. Interest rates haven't been this low in a generation so what happens when they return to more average levels?

The official government view is that debt is irrelevant or will have no lasting effect on consumer spending. But what if they are wrong?

Growth, growth, growth!

The foundation of economic thought for at least the last 30 years is that a 'healthy' economy is one that grows  each year. The thinking is that for us to prosper we, or someone, has to consume more than the year before. If you have a plasma you must regularly buy a newer, bigger and more advanced one. Better yet, just buy more of them one for each bedroom, one for the kitchen, one for the poolroom, one for the .....

As with all good 'economic theory' the trouble begins when you try it out on the real world. If you want people to continually buy more then either things have to get cheaper or people's incomes have to rise (the alternative is what we have experienced debt fuelled growth). Oh and resources cannot run out or become uneconomical to obtain - not ever. 

Looking at the last 10 years some things are becoming uncomfortably clear. While globalisation has delivered some price falls it's impact has also been to make our economy more dependent on finances, real estate and resources. The first two don't produce real wealth and rely on 'valuations'. The last one also has limitations. The share market in most advanced economies has not delivered a positive return after inflation. People's incomes, except for the rich, have not expanded at a rate sufficient to maintain sustainable economic growth. Lastly, Earth's resources are still finite last time we checked.

At some point we will have to abandon or modify the notion of a healthy economy being an ever expanding one. Time will tell if we reach that point in the next decade but some people believe we will see the peak of production in a number of critical resources in the next couple of years. Oil (peak oil) is the one most often nominated. The impact of a consistent increase in the price of oil would have major implications for Australia's economy. 

The official government view on peak oil specifically and resource depletion generally is that this will never happen or if it does it will be a problem for our grand children to sort out. But what if they're wrong?

So what does it all mean?

Good question and we wish we had the answer.  

Business as usual

If our concerns over debt and the fallacy of an ever expanding economy are wrong the next 10 years will be extremely favourable for the Tassie wine industry.

Under this scenario you would expect that sales of Tasmanian wine will continue to rise. More labels will appear and those that already exist will continue to improve the quality of their product. Along with greater market share we will also see more Tasmanian winemakers gaining recognition like Andrew Hood and Nick Glaetzer.  If Gill Christian is correct then by the end of the decade Tasmania will be regarded the home of Australian sparkling and will be the equal of the French variety (well in everyone's mind except the French! - Ed).

The dead hand of debt

However history shows that the impact of massive levels of debt has been to cause recessions or depressions. History also shows that previous responses by governments have not prevented these outcomes.  Our government's response has been to create demand by incurring more debt. The stimulus packages delivered so far have turned a multi-billion dollar surplus into a multi-billion dollar deficit and to give them their due the stimulus packages have meant that Australia has not technically fallen into recession. However they have done nothing to address the underlying issue of private debt. 

Once stimulus is withdrawn economic demand will probably fall. At this point our government will probably launch another stimulus then withdraw it and then reinstate it. However at each point debt rises ever higher. 

The official government expectation is that a return to 'normal economic growth' will result in a future surplus which presumably means that the debt can start to be repaid. Economists like Prof Keen believe that this 'recovery' will not occur until debt levels return to sustainable levels. He argues that this will take years and current policy responses are making things worse by extending the time it will take to reduce our debt levels.

Under this scenario we can expect the next 10 years to be quite difficult for the Tassie wine industry as any disposable income is used to pay off their debts leaving little or none to be spent on wine. Similarly we would see a fall in the number of tourists coming to Tasmania which would reduce the numbers of people going to cellar doors.

Less stuff to go around

The next 10 years should reveal whether or not resource depletion is going to be a problem. The peak in production of any resource isn't apparent until after it has occurred. While some argue that the peak in oil production was reached in 2005 others don't expect it until later this decade. Either way the more data we have the more likely it will be that any peak will be obvious. If resource depletion has reached the point that it's effects are felt then watch the prices of the resource. 

Under this scenario input costs for vineyards and winemaking will increase rapidly. There may also be spot shortages. The implications for the profitability of the industry are obvious. A critical question will be whether, and to what extent, Tasmanian wine a 'price maker' product. 

Price maker products are those where increased costs can be passed on to consumers without noticeable reductions in sales. Commodity products are those purchased primarily on the basis of cost. Fortunately because Tassie wine is a premium product it may have sufficient price making characteristics.

Well thanks for making us depressed!

The point of this is not to argue that the difficult scenarios will eventuate. We certainly hope they do not. But we feel it is important for the industry to consider them while they are still risks rather than reality. In fact such consideration may well be happening but no one seems to be talking about it publicly. 

Public debate in Australia seems to be based on the quaint notion that discussing potentially negative outcomes is the same as 'talking the industry/ economy/ country down' and is somehow unpatriotic. Preparing for both the best and the worst is an adult response to uncertainty and is preferable to the alternative.

We intend to keep an eye on the risks we have discussed to see what eventuates but no matter what the next 10 years will be great, scary, interesting or a mixture of them all.

What do you think? Send us a comment

Steven Keen is one of only 12 or so economists who 'predicted' what is now known as the Global Financial Crisis. He is one of the few economists in Australia to monitor and comment on the state of private debt in this country. He has a blog (debtwatch) and writes extensively on the problems associated with current economic thinking and why it is resulting in such poor policy from both major political parties. 

While some of the material is so complex that it will result in your head exploding there is plenty of other well written and easily understandable content. Prof Keen's approach will open your eyes and is a fantastic alternative point of view to the normal guff you get in the mainstream media. 

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