World Economy

Australia Faces Danger as Global Bubble Looms Large

Australia Faces Danger as Global Bubble Looms Large Australia Faces Danger as Global Bubble Looms Large

Australians are now deep in bubble territory. Australia's sense of its own prosperity floats in large part on a property bubble while the global economy floats on an unprecedented liquidity created by governments.

"Low rates, almost by definition, build bubbles–stock market bubbles, real estate bubbles, even bubbles in the art market," warns Carl Icahn, one of the world's most prominent financial magnates, NewsNow reported.

Last week, Icahn took the unusual step of releasing a 14-minute documentary video on YouTube entitled Danger Ahead, to warn of a coming financial storm: "I don't think it's if it will happen, it's when it will happen."

He regrets his reticence in 2007, when he believed a financial storm was building and acted on his fears, but did not think he was public enough about his concerns.

"If more respected investors had warned about the market in '07, we might have avoided the crisis in '08. I've been worried for the past five, six months about the market, and the economy, and the dangerous spot we're in." He is not making that mistake twice.

If Icahn is even half right, it is worth noting that the alternative government of Australia, led by Bill Shorten, intends to fight the next election on the issues of penalty rates, higher taxes, class warfare and subverting the Free Trade Agreement with China, all relying on union financing and manpower in campaign for marginal seats.

This is not an election strategy, it's a suicide note.

If Labor wins on this mandate, Australia loses. It is Rudd II. But if the electorate decides it does not want a union-dominated government to manage Australia through global financial stress, then Labor loses. It's a high-risk strategy.

The world economy is already a dangerous place for Australia. The crash in the global commodities markets is as precipitous as the general stock market crash of 2008.

Precipitous Decline

Canada, another wealthy, resourced-based economy, is in recession. In three years the Canadian dollar has gone from parity with the US dollar to 75¢, the lowest in 11 years.

Australia's dollar has seen an even more precipitous decline. In April 2013, it was worth $1.05. It has since declined to 69¢, a 34% decline in 29 months.

This year, $11 trillion has been wiped off the value of global stock markets, or more than 10 times the size of Australia's gross domestic product. At the center of that decline has been the commodities crash.

Icahn thinks worse is to come. He blames corporate greed and a dysfunctional political culture in Washington.

He argues that the enormous liquidity, at near-zero interest rates, pumped out by the Federal Reserve and other central banks, is building pressure into the global system. "If low interest rates were a simple panacea, we would never have recessions."

Financial Engineering

"The irony of lower interest rates is that while you think it's going to help to create jobs and make workers more productive, it's not happening… The Federal Reserve balance sheet has mushroomed from less than $1 trillion to over $4.5 trillion. This is a huge, almost unbelievable move, and all that money, it crowds out the little guy, the middle-class investor. There's nowhere to go with their money but into the stock market or, even more concerning, high-yield bonds that are very risky ... It's financial engineering at its height."

Icahn offers a series of protective measures to release the pressure.

"One obvious problem the government should have fixed a long time ago is the carried interest tax loophole … Not having to pay full taxes on money that you are earning is an absurdity."

He also believes the world's largest economy, which the world needs as an economic locomotive, has locked up $2.2 trillion in corporate cash sitting on the sidelines because US companies will not pay 35% tax on income that has already been taxed abroad.

"No other country demands that from their companies. It's absurd. Because these companies are willing to pay a tax."