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about CAD « Previous | |Next »
December 28, 2005

I 'm a CAD kind of guy. I reckon that Australia's current account deficit (it exceeds 6% of GDP and rising, despite strong resource exports to China) is a problem. You can call me old fashioned, if you like. I'm singing yesterdays tune.

The current position amongst economic policy makers is that CAD not a problem, let alone a crisis. It was in the 1980s. But not now

Why not? Isn't it a problem of Australia's own making? How come it's being shrugged off?

Well, the current reasoning goes that flexible exchange rates and efficient international capital markets have solved the problem of yesteryear. It's not the government's problem as most of the debt is private debt.

Maybe. Peter Urban, writing in the Australian Financial Review, says that:

CAD crises only seem to be a thing of the past...Most obviously, today the current account constraint appears as an interest premium, with countries with large CADs usually having higher interest rates than countries with low CADs or current account surpluses. And while the "price" of CADs has been low for some time, we shouldn't assume it wil always be low.

Urban adds that:
Like musical chairs, the question of our game of growing current account imbalances is not whether the music will stop, but when, and what should we do when it does.

Wisely said.

| Posted by Gary Sauer-Thompson at 8:26 PM | | Comments (2)
Comments

Comments

spot on.

The reputation that Howard et al have acquired as sound economic managers has been achieved via massive hits on the national plastic. There was an article that i read somewhere recently about economic "dark matter" being the reason that CADs don't matter. Voodoo economics!!

Barney,
Yes household debt is very high. This report says:

Over the past decade, the debt of the
household sector has increased at an average
annual rate of 14 per cent, which is well in
excess of the growth of household income. As
a result, the ratio of household debt to
household disposable income in Australia has
risen from a level that was low by international
standards to one that is in the upper end of
the range of other industrial countries.

The Reserve Bank would have to be worried. A loss of job or a n increase in interest rates is going to hit hard.