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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.
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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!!