In June 1986, as the newly elected MHR for Burke I had the great privilege of standing beside Paul Keating on that fateful morning he declared that Australia “could become a banana republic” if we did not squarely face up to our economic problems.
Paul had arrived at the Kismet Park Reception Centre in Sunbury (just north of Melbourne) to address a breakfast function my team had put together. The audience of about 150 included a wide cross section of business and community leaders, ALP Branch members and even some senior high school economics students.
Our office had helped Paul’s office with the speech. It had a nice local flavour (and lots of praise of me) in it. Imagine my shock when he emerged from the car and told me “Neil – we have to change the script – can I try out a few lines on your people?”
Apparently, Treasury officials were deeply concerned about the overnight collapse of the new floating dollar and felt Paul needed to make a statement to avoid panic in the markets.
I was rapt! I said “Paul – go for it – that’s why these people are here – they want to hear it straight from the horse’s mouth!”
Apart from the magic “one -liner” nothing in the speech was novel. Most of it was the recurring “value add” theme that Barry Jones had been pushing since the publication of his book “Sleepers Wake”. The audience loved it. Paul received a standing ovation. That gave him the confidence to include the “banana republic” in the John Laws radio interview he then did from a wall phone in the kitchen area of the reception centre.
That interview set the cat among the pigeons. The impact was dramatic. By lunchtime ticker tapes around the world were declaring Australia a banana republic. It set a tone that told everyone that Australia had embarked on a rocky road and there was no turning back. The rest is history – I don’t need to repeat any of it – we came through and now enjoy the fruits of those dramatic reforms right across our economy and lifestyles.
But it is useful to know that at the time Australia’s public sector debt was at a ratio of 24% of our national GDP. Which brings me to my question above; if we were a basket case at 24% of GDP what does that mean for the USA which is now at 98% of GDP and rising?
It seems ridiculous to think in terms of the USA defaulting on debt – or just printing money to fill in the gaps – but there is little evidence that the USA is prepared to go through the structural pain that represented Australia’s transition from an isolated and protected economic backwater to an open “value adding” exporter of more than just minerals, wheat and wool.
The trend in the USA seems to be moving the other way. Protectionism and isolation seem to be the forces now driving future direction. The social safety net which was crucial to acceptance of crushing change in Australia is being weakened – not strengthened – in the USA.
Redistribution of wealth to achieve improved levels of equity is scoffed at as “rampant socialism” and the trend is almost certainly towards widening the gap between the rich and poor – not narrowing it.
China – the big danger!
It is difficult to imagine China being unprepared for the proposed increase in tariffs which Trump will have to deliver to retain credibility. I think the reaction will be to cut Chinese imports from the USA, facilitate export elsewhere and increase domestic consumption. This will be accompanied by a move to begin calling in the massive debt the USA owes China.
The USA will have to source these funds elsewhere; leading to higher interest rates and embedded inflation.
Historical context
My AI Bot tells me that while the USA’s debt-to-GDP ratio is high, it is not unprecedented either in its own history or compared to other developed nations. For instance, during World War II, the USA’s debt surpassed 100% of GDP but was subsequently reduced through economic growth and prudent fiscal policies. Similarly, countries like Japan and Italy have faced higher debt-to-GDP ratios without being classified as banana republics.
The USA boasts a robust financial system, a highly skilled workforce, and a dynamic private sector that drives innovation and economic growth. Additionally, the rule of law, property rights, and effective governance structures have in the past provided a level of stability that underpins investor confidence.
But the USA continues to refuse to back away from insane annual expenditure on the war machine and military capacity. In the past conquering empires took the riches, enslaved people and often expanded their territory as the rewards of military imperialism. Now the winner pays to fix it all up to keep it from happening again! None of this adds any value to the equation or the debt to GDP ratio.
What are the chances of the USA achieving the massive internal structural reform over the next 25 years to reverse the situation? The alternative is isolationist – with a new international model for a reserve currency – and probably debt default in the end. Not a pretty picture for Australia – with so much of our policy making transfixed on the relationship with the USA.
We could be the ones caught without the chair when the music stops!
Neil O'Keefe is the former MHR for Burke (1984 -2001). Factionally, a Victorian independent mentored by John Button and Michael Duffy, he admired Barry Jones and backed his economic model to the hilt. In 1986 Neil created and drove the "Australian Made" campaign, later becoming
a forceful public advocate of compulsory superannuation which he believes was the great "game changer" after the devaluation in 1983.
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