The Mining Tax and the PM's Downfall

I’ve been neglecting my blog, focusing on the fortunes of Australia, Germany and Brazil at the World Cup.

However, events in Canberra this week inspired me to post.

I woke up on Thursday morning intending to watch the last roar of the defiant Soccerroos as they fought for a desperate and ultimately pointless victory against Serbia.

There is something sublime about fighting for a lost cause, but I’ll leave that for another day to dissect.

Instead I woke to a leadership spill in the Australian Federal Government that was executed with brutal speed and efficiency and which left a former loyal deputy standing over the political corpse of her former leader. Indeed the numbers so lopsided, the move so irresistible Rudd didn’t even contest the ballot.

Looking back, Rudd might reflect on the fact that his downfall was caused in part by the backlash against his proposed Resources Super Profits Tax.

He was so confident about this being popular, he was prepared to take it to an election.

He must have viewed this as a way that the government could collect more revenue without increasing tax on the ordinary people of Australia, thinking “Surely voters will see that a tax on very rich miners will benefit them”?

Instead of being viewed positively, the proposal sent his popularity plummeting to the point where his own team dumped him.

In my view, this reaction is a predictable outcome if you think in terms of Public Choice Theory.

Public Choice Theory is one of my personal favourite tools for explaining democratic politics. It posits that political decisions are marketable commodities that can be bought and sold with money, influence and lobbying.

In such an environment small well funded groups competing for concentrated gains will triumph over large disparate groups where the gains to any member are relatively small.

RSPT pitted a very small, very powerful group of mining magnates defending a huge amount of personal wealth against the entire nation fighting for at best a very small amount of personal gain should the tax go ahead. Whether in practice the tax would have benefitted the majority of Australians or not, I’ll leave for others to debate, however, the one thing it was certain do was reduce the profits of the big miners like BHP Billiton, Rio Tinto and Fortescue Metals Group

Their reaction was predictable: They fought it with all the power and strength their considerable resources and influence could bring.

If Rudd predicted this, he might have comforted himself with the notion that voters vote with their hip pockets and would reward his policy because, it would not involve a tax on the ordinary person. However, his timing was lousy. You don’t pick a fight with powerful interest groups in the run up to an election. It means you have to defend a policy rather than a detailed plan.

A policy lacks detail, which allows your enemies to create hypothetical detail and then attack it. In the US they saw this with their recent health care debates, with Republicans predicting that the legislation would create death panels and that people would be allocated doctors rather than seeing their own GPs.

What US President Obama understood (and Rudd didn't) was that if you are going to face entrenched opposition from powerful groups, you need to have time to get out a structured plan. Even then, his health reform bill went right down to the wire.

RSPT suffered from the same problem. Without a clearly detailed explanation of the tax, those opposed were free to predict disastrous consequences to whip up pubic fear.

So we saw little old men on television saying “you know, I’m just an ordinary street sweeper, but this mining tax will kill my superannuation and wreck my life”. A little fear goes a long way in the public’s mind.

The miners' relentless ad campaign successfully reframed the debate from a discussion as to where the tax burden should fall in Australia, to whether the RSPT would destroy the prosperity of Australia.

With the public offside, the polls falling and the Prime Minister unsupported, it was a quick and easy hatchet job for the power brokers in the party.

I don’t think in their wildest dreams that Twiggy Forrest and Marius Kloppers thought they would bring down the Prime Minister in their campaign or even wanted to, however, the response from the miners to the RSPT was a key factor in pushing the ALP down in the polls to the point where an internal coup was possible.

The General takes a bullet, the Toad eats crow

Well there’s no denying it. However the Thailand situation resolves itself, the Toad was wrong: The Thai government managed to clear the Red Shirts from their Bangkok fortress and hold on to power.

While I don’t deny my prediction was incorrect, I’m trying to understand the shift in the battle that permitted this end game.

The government’s actions on 19 May don’t seem to be any more ruthless than their efforts of 10 April. So why did the Red Shirts send the troops packing a month ago, but were flushed out with only six causalities this time?

Obviously there are lots of things happening with the power structures in Bangkok that your humble blogger isn’t privy to. However, from the known facts, its possible to speculate a little.

Back in April, when the army went in for round one, it was far from clear that the Thai army was a united force. There was plenty of speculation that the loyalty of certain key units was with the Red Shirts.

The informal leader of the Red Shirts defences was Major General Khattiya Sawasdipol, formerly part of Thai Internal Security Operations Command, but demoted and suspended for pro Red Shirt statements.

A hard man by any definition with experience in counter insurgency operations, he had the personal loyalty of troops within elite units such as the Rangers and enjoyed celebrity status. I expect he maintained close ties with fellow officers still serving who provided intelligence on the government’s plans and orders even after he was kicked out.

We can be pretty sure that one or more senior officers were feeding intelligence to General Khattiya, as its really the only way to explain how the Red Shirt leaders could have escaped the raid on their hotel back on 16 April.

It seems logical to me that General Khattiya would have been making deals with old buddies advising them that he would be generous to those who sabotaged the efforts of the government once the Red Shirts came to power and would punish those who stood against them

With real prospects of the Red Shirts forcing the government out, field officers would be forgiven for hedging their bets so that, whichever side won, they wouldn’t be purged.

This would explain the disconnect between the Prime Minister’s order on 10 April to clear the street by any means necessary and the army’s inability to push out unarmed civilians.

However, everything changed on 13 May 2010, when a sniper took out General Khattiya with a single shot to the head. It had three immediate and significant consequences:

1. It ended the relationship between the Red Shirts command and the army making informal communication between them impossible;

2. It made any deals between General Khattiya and army commanders in a post election world null and void; and

3. It served notice on commanders that the government was prepared to liquidate its enemies.

The change in the government, Red Shirts and army was immediate and profound. On 19 May the government was so confident the army would clear the streets, it could afford to ignore any further calls for negotiation or discussion from the Red Shirts. The army seemed more determined, moving confidently to clear the protest site with troops and APCs. The Red Shirts seemed sure the army would use all the force necessary to clear the streets and the protesters melted away rather than face the troops.

Perhaps with a single bullet the government undermined a popular protest movement that had held the centre of Bangkok for two months and, at least for now, has succeeded in holding power.

But Thais should ponder that what goes around, comes around. Once you authorise targeted killing of your political opponents, you open Pandora’s box. General Anupong Paochinda and Prime Minister Abhisit Vejjajiva should carefully consider all trips past tall buildings and book repositories for the foreseeable future.

The stock market and the Schlieffen Plan

The stock market incident of 6 May 2010 reminded me of the Franco Prussian war of 1870.

Hang on...hear me out:

In 1870 the French and the Prussians went to war over the trivial matter of the succession of the Spanish throne.

Indeed it was such a trivial matter that the French doubted there would be a war.

The Germans didn't.

In 18 days the Prussian army mobilised 380,000 soldiers into effective combat units and marched west. The French mobilisation on the other hand was tentative, poorly planned and poorly executed. The result was decided before the first shot had been fired. The German armies, concentrated, supplied and supported swept away their brave, well trained but disorganised opposition in every battle, besieging Paris within two months. The legend of Teutonic efficiency and martial skill was born.

The war brought home to every European power the lesson that planning, aggression and rapid mobilisation and execution were the new keys to success. Delay was fatal.

44 years later, the French and Germans went to war over an equally trivial assassination of the Arch Duke of Austria-Hungry by a nobody from Bosnia.

It was hardly a cause to plunge Europe and eventually the rest of the world into a war that would last more than four years and consume nearly 40 million in dead, wounded and missing. However, the premium on rapid mobilisation with the hope of attacking an unready enemy was too high for any power to wait around while cooler heads prevailed. Within a month the Germans had unleashed their Schlieffen Plan looking to repeat their previous rapid campaign. However, the allies and France in particular had learned from the past and had mobilised as instantly and effectively as the Germans, halting the axis push at the first battle of Marne. The First World War had begun.

The crash in August 2008 was a bit like the 1870 war. Companies and investors were slow to react to the growing threat of the crash and before anyone had really taken any action Lehman Bros, Northern Rock, Bear Sterns and dozens of other banks had collapsed and the rest of the market were squealing like stuck pigs for a government bailout.

For all the talk about financial reforms since then, there have been no substantial changes to the practices on Wall Street, in the city of London or any of the other world financial markets, with perhaps one exception.

Bot trading programs now, more than ever before, handle buys and sells for many of the big players, allowing them to make decisions and execute trades faster than humanly possible. And it appears they are programmed for a dump and run scenario.

Like the French in 1914, it seems the big investors are not about to wait around for all information, or even for a coherent picture to develop in the face of a crisis. At the first sign of trouble they have standing plans to ditch stock and flee to safe harbours like dollars and gold. I kind of think that’s what happened on 6 May.

When the market got the jitters on that day, even though there seemed no reason for it, the bots executed their pre-programmed missions....get the investors the hell out. The Dow Jones plunged nearly 1000 points (that’s about a trillion dollars in share value) in less than half an hour. It then recovered in an equally inexplicable manner.

The event is of itself not significant, but what it may tell us about the state of mind of the big players is. Perhaps it indicates that the big players know what I suspect: the stock markets are massively over priced. They know that the despite the talk about the resurgent US economy, there has been no real increase in jobs or economic activity.

They know that the US deficient has grown about 30% since 2008 to stand at nearly $13 trillion and is now so high the US Federal Reserve doesn't have the capacity for another bailout.

I’ve mentioned before the crisis in Greece. The realists in Europe know that issues in that country also plague the rest of the PIIGS – Portugal, Ireland, Italy and Spain. They also know the UK is set for severe spending cuts which will likely cause recession

I’ve discussed how the Chinese economic miracle seems to be built on exports to the US and a massive property bubble; both seem unsustainable. Without China’s growth the World economy is in deep crisis.

The system is buckling. The markets are waiting for a signal to dump and run. When it comes, I believe it will trigger a second and greater crisis than the GFC. 6 May was something like a dress rehearsal.

Perhaps this is the way Sir Edward Grey felt at the start of the First World War: The lamps are going out all over the World, we shall not see them lit again in our lifetime.