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living high on the hog? « Previous | |Next »
March 28, 2005

From what I can gather the US Federal Reserve is worried about inflation in the US economy, and it has signalled that it could well quicken the pace of interest rates rises. That is what the Australian newspapers --eg., the Australian Financial Review---tell me.

Is this the beginning of the end of cheap money in a highly levered and dependent system? You don't enough information in the AFR these days to be able to make such a judgement.

Stephen Roach tells me a lot more. He says that we have a confluence of rising interest rates, a record current account deficit (6.3% of GDP), a disaster from General Motors (the demise of US manufacturing?) and another new high for oil prices ($56 a barrel with a declining dollar).

The significance of this? Roach says that the US is continuing to extend its imperial military reach at time when its economic power base is weakening. Of course Washington is not going to acknowledge this. It is much easier to point the finger at China. They are the ones upsetting the established order of things.

And there are other indications of economic weakness in the US.

The US is taking on external debt, not to invest in new export industries, but rather to fund its budget deficit. And as the East Asian financing of the US current deficit continues, low US interest rates allow US consumers to borrow against their rising home values to keep on living high on the hog. What's more, US consumers are withdrawing their mortgage equity in their homes to finance their taste in foreign consumer products and automobiles.

And this is the dynamic economy that Australia had, of necessity, to plug into in order to ensure continued economic growth?

Remember all that El Dorado rhetoric about the time of the signing of the FTA with the US? More wealth is better, the politicians said. The US economy will enable us to have a higher standard of living.

Now the economic story has had a new twist added. The so-called Liberal backbench tax ginger group says that we now need income tax cuts to reward us for our hard work and initiative.

The Liberal backbench ginger group, led by Mitch Fifield and Sophie Panopou are pushing to use the Senate majority to deliver a great big personal tax cut that would bring the top tax brackets of 42 and 47 per cent down to 30 per cent. That will cost $13 billion a year, and it would benefit everyone earning more than $63,000. They need more incentive for them to work harder.

Only some of the 'we' will be included, as this kind of tax cuts would give nothing to the four out of five taxpayers below that threshold. And some of the backbenchers are aiming to reduce the big $13 billion cost of the top end tax cut by making it more cost neutral.They are saying we need to reduce, or even eliminate, tax free threshold. Removing that threshold would save $9.6 billion, and people would rightly pay tax on every dollar they earned.

No need to worry though. We have a FTA with the US. So we too can max the credit card, withdraw the equity on the home to buy a new car, and cut some property deals. Money is cheap and plentiful. Preumably that means there is no need to worry about spending public money on fixing some of Australia's chronic social problems---mental health, Aboriginal health---- and investing in major infrastructure projects.

| Posted by Gary Sauer-Thompson at 1:36 PM | | Comments (0)