Australia is suffering a bad case of "Dutch Disease".

I can't improve on the IMF explanation which I'll quote here:

>>"Dutch disease," a term that broadly refers to the harmful consequences of large increases in a country's income….

In the 1960s, the Netherlands experienced a vast increase in its wealth after discovering large natural gas deposits in the North Sea. Unexpectedly, this ostensibly positive development had serious repercussions on important segments of the country's economy, as the Dutch guilder became stronger, making Dutch non-oil exports less competitive….">>

http://www.imf.org/external/pubs/ft/fandd/2003/03/ebra.htm

We are experiencing the mother of all commodity booms. This causes the Australian dollar to soar making non-commodity industries uncompetitive.

But every commodity boom in the last 500 years has ended in a bust leaving the exporting country high and dry. This one will be no different. There is a reason why hard commodity prices have trended downwards in real terms for the past half millennium. It's called "technology". Better technology does three things.

-Improves exploration making it easier to find new ore bodies.

-Enables us to exploit previously uneconomic ore bodies

-Enables us to do more with less. Eg better quality steels reduce the demand for iron ore and coking coal.

There is a cure to Dutch Disease. I'll call it the Norwegian cure.

http://notendur.hi.is/gylfason/Trinidad2006.pdf

Following Norway here's what we should be doing.

--Tax the hell out of coal and other commodity exports but DO NOT SPEND THE REVENUE.

--Place the proceeds of the taxes in an offshore "future fund". It has to be offshore to curtail the appreciation of the Australian dollar. This helps maintain the competitiveness of Australian non-commodity businesses. The government can spend the interest and dividends earned on the fund but not the principle,

--Mostly use the earnings from the future fund to cut business taxes thus further enhancing the competitiveness of Australian non-commodity business.

When the commodity boom ends, as it will, the future fund provides a cushion giving the economy time to adapt.

Steven, just where would you invest/park your future fund?

Interesting. I must say it's nice to see a suggested solution to the apparent peril that comes with an economic boom. Based on the comments on a range of news websites, I'm surprised suicide rates didn't spike when our dollar reached parity with the US - you'd swear it was the apocalypse from all the whingeing that went on.

I'm no economic expert (just ask my banker), so I can't really offer comment on the viability of your suggestions. It does make sense to me, however, to implement forward-thinking policies that mitigate effects of the inevitable downturn at the end of the boom. Broadening the economy, strengthening non-commodities based businesses and avoiding spending sprees "while we have the money" all sound reasonable to me. It just might save our government from canning proposed infrastructure developments, pawning its assets and short-changing its citizens in the future.

Hasbeen asks

>>Steven, just where would you invest/park your future fund?>>

I would spread it as widely as possible by region, country, industry, company and type of asset. I would not try to guess which region, country, industry, company or type of asset would perform best.

In effect it would be an “index fund” investor on a global scale.

To get the concept of index funds see:

http://en.wikipedia.org/wiki/Index_fund

Broadly speaking an index fund does not try to manage investments or “beat the market”. It follows an index such as the Dow, ASX 200 or whatever,

Index funds exist for stocks, bonds, property and just about any asset you can imagine. In effect for the futures fund I would construct a global index involving all types of asset.

The advantages of an index fund are:

--Low cost – you’re not trying employing a lot of investment “experts” to lose your money

--No corruption – no one can bribe you to invest in their shonky scheme,. Index funds are largely run by computer which have to allocate incoming funds according to set rules

Index funds operate on the principle that you win some, lose some but generally make a net gain.

Index funds do impressively well because, although their performance is by definition AVERAGE, their costs are so low that the investor gets an extra 1 – 1.5% over so-called “managed” funds.

Steven, I think we are too close to depletion time to invest it in
other countries. I believe we should put it into electrifying the
interstate railways, reopen closed branch lines, prepare our food
system for shorter delivery routes.
Put money into electrical storage systems.
Public transport will need massive upgrading.
Just those few things would eat up all the available funds for the
next ten years I should think.

There is another problem;
China's growth cannot continue at the present rate as in less than
10 years it will be double the size it is now.
The energy and materials to do that are simply not available.
Therefore the Chinese economy must stop its expansion.
That will solve the problem with what to do with the money.

I'm intrigued by your proposed "solution" stevenlmeyer.

We have absolutely no disagreement, you and I, that Norway's stance, that the oil is owned by the people, therefore the rents from it belong to the people, is totally appropriate.

Unfortunately, that is a position that is impossible to implement retrospectively. And the alternative you suggest - belated and presumably swingeing taxation - is in effect a fine imposed on the shareholders of the companies who have invested their money into the various ventures.

For a capitalist economy, Not A Good Look.

It puts us in the same category as Hugo Chavez, Venezuela's very own cowboy Trotskyite dicta... err, sorry, president.

http://www.marxist.com/chavez-trotskyist-president120107.htm

But apart from all that...

>>I would spread it as widely as possible by region, country, industry, company and type of asset. I would not try to guess which region, country, industry, company or type of asset would perform best. In effect it would be an “index fund” investor on a global scale.<<

Then what will you do, stevenlmeyer?

You've run out of minerals to dig up, as you predicted.

Now you've got a pot of money that has been lying idle, in what is effectively a low-interest deposit account, and you will... do what with it?

Money only has value when it moves. It moves best when developing businesses and industries that will provide some kind of long-term rewards to the economy as a whole.

Otherwise, your "pot of gold" will simply be spent, and will run out, just as surely as your minerals did.