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.

<<..We are experiencing the mother of all commodity booms.>>.WRONG..the commodities are in yanki-dollars..which id falling[and commodities priced in a devalued currency...RISE IN THAT CURRENCY...but in terms of assie-dollars is FALLING..

by all means --Tax the hell out of coal
and other commodity exports but SPEND THE REVENUE...on tax cuts for low income wage earners [whos basic wage has fallen through the floor
[why..because tv/vidios/import.. {luxury goods] is falling...but basic service charges...water/power/toll's food in aussie dollars prices are going though the roof

DONT--Place the proceeds of the taxes in an offshore "future fund".
thats a clever way of loosing value..by all means spend it on the now cheaper imports...but fund managers love having pools of funds to manage for their high managment fees

we have been shafted for far too long...mr howhard took 10 percent of our wage increase to create a 'super'/SCEME..for his invester manament mates to get nice bonus to by up lots of stuff...worse with the income stream..BORROWED heavilly..most of the super goes to paying intrest...and the second the debt is cleared they get yet more debt...its a lovely scam...they gamble with your COMPULSORY super

ADD the EXTRA burden of GST...
[only another 10 percent CUT IN THE BASIC WAGE]
you soon see the big scam..[sceme]

next you get a big new tax
carbon tax sold on deception and lie

[seeing a pattern here...
like who will suck on that cash cow?

manage it for nice bonus?

lets recall the DUTCH tulip boom
were now in a global buy up scam
using your super funds...and their bonus.. chews up any proffits

somehow they dont even pay tax...

BRING BACK DEATH DUTIES
to whom so much was given -so much more is to be expected

[yeah i know my writing is hard to read
but its hard to count and create]

im so over the con jobs..scams
let the sleepers sleep
they dont care
why should i

A much easier way to handle the Dutch disease is found in Deut 10. It is far less stressful than worrying about all the things that might go wrong which will lead to a premature death.

how can the instructions to building an arc
fix things here ...ritchie 10

i try to restore the alter into the temple

not the temporal
http://forum.onlineopinion.com.au/thread.asp?discussion=4008&page=0

but to what end
there are more self serving or serving the masters adgendas

yet not realising that created in the temporal
has permant fruits

[im dutch] outcast to these great southern lands
my people have one foot on the sea
and made their own land...

the lessons of the tu-lip BOOM
rever-berate mankind through out time

what the use to hold the ten commands holy
yet adulterate their intente
[..i prefere DUE-11...]

Pericles

Retrospectivity is certainly an issue. New taxes should be phased in gradually for existing mines – say over a period of five years.

Note that the tax itself would tend to reduce the value of the Australian dollar. Even the prospect of a tax would do that. It works like this.

Most commodities are priced in US dollars. But most of the operational expenses of operating a mine in Australia are in Australian dollars. The value of the Aussie dollar at the moment seems to be driven mainly, not entirely, by commodity prices and the profits to be made from operating mines here. Therefore the mere prospect of a tax should move the A$ down so as to restore profit margins.

In fact I would say that the mere prospect of a tax would in and of itself help ameliorate the main symptom of Dutch disease which is a currency so overvalued that non-commodity businesses become uncompetitive.

The futures fund would not be a pot of money lying idle. It would, as I’ve said, be invested mainly in productive enterprises all over the world. Historically most index funds have provided a reasonable return.

I understand the risks in what I propose. But the GREATER RISK seems to me to do nothing and be left in a precarious position when the commodity boom ends. And they all end.

I don't think what I'm proposing is at all like Chavez. Chavez is using revenue from PetroVen to fund CURRENT expenses and handouts. That is a recipe for disaster and is why I am so adamant that the revenues from commodities taxes should not be spent. Even the interest and dividends should not be spent but used to reduce taxes for non-commodity businesses.

However I'm always open to suggestion. If you accept my diagnosis of Dutch disease WHAT TREATMENT WOULD YOU SUGGEST.

Let's leave the "how to extract value for the community" problem on the table for the moment, stevenlmeyer.

Taxation is certainly one option. But it is a seriously blunt instrument, that often has consequences that offset the perceived benefit. For example, changing the ROI value of a project, which increased taxation would inevitably involve, will impact new investment. So while you might raise revenue from existing facilities, you would be throttling the golden-egg layer.

It is possible to find an appropriate balance. But quite frankly, I wouldn't trust a bunch of public servants, who have never seen the inside of a real business, or been responsible for anything more challenging than where to go for lunch, to be able to negotiate a tax position that would be anything less than destructive.

I was actually more interested in your concept of an investment portfolio.

>>The futures fund would not be a pot of money lying idle. It would, as I’ve said, be invested mainly in productive enterprises all over the world. Historically most index funds have provided a reasonable return.<<

That defines "idle", in my book.

While it may be benefitting financially from "productive enterprises all over the world", it does not change one single aspect of our own economy.

Think about it this way. You discover oil in your back yard. You get someone else to work it, and take a percentage. You stop work, have a great life, right up until the oil runs out. Then you live off the stash you have invested overseas.

What do you do then? You are by now both fat and lazy, unable to learn a new trade, accustomed to living off the cheque that comes through every month.

What you now realize that you should have done, is to use the money to start a new business. Or, given you have a lot of money, new businesses. Or even, buy up overseas companies so that you can earn revenue, and not just dividends, once your oil runs out.

Do you have any idea how difficult our government makes each of those options?

I agree the index funds are successful, but they still have the
disadvantage that they put off doing what we should be doing now.
They could be used while, awaiting tenders, awaiting completion of
contracts etc, but I do not think we have a need long term investing.
We need to stop spending on roads and start spending on infrastructure
for a time of low growth and a severe shortage of liquid fuels.

I suggest that all read the following URL.
It is US orientated, but there are some extraordinary similarities
between the US and Australia.
We both have less than 50% of our own oil.
Both have significant coal supplies.
Both have annihilated our manufacturing base.
We both have significant agricultural production.
We both have significant minerals production.
So I believe that this URL has some thoughts for us all.

http://www.thestreet.com/story/10889286/1/energy-crisis-there-is-no-plan-b.html

There are four pages to the link.

It is only the scale that is different.
Additionally, it is more likely that we will be elbowed out of a tight
international oil market than the US will.

ONG, read Deuteronomy chapter 10 not Genesis chapter 6
You will find that the title of the article is The Australian Dutch Disease, I was not making fun of people from Holland.