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economic forebodings « Previous | |Next »
December 19, 2006

So what happens to highly indebted households when the economy slows? It will slow eventually. Wiill the slowdown be no worse than a "soft landing"? Or will it be the imbalances on the financial side that will do us in, as happened in the early 1990s?

Tanya Lake

In the Sydney Morning Herald Ross Gittens says:

Just think how vulnerable we'll be to a severe recession if our heavily indebted household sector is joined by a highly geared corporate sector. Anything that frightens the horses will have both consumers and businesses pulling in their horns.

Is this a possibility? Is it likely? I'm going to read the 2006 Boyer lectures, delivered by Ian Macfarlane entitled The Search For Stability, as these are about how we have struggled to find a means of ensuring a stable growth path for the economy. Macfarlane says that we had it, lost it disastrously, half-regained it, then we fully regained it. He asks: Is there a new set of challenges waiting to trap us?

So what does Gitten say? He gives a very dialectical answer:

When you fix one source of economic mismanagement and instability you encourage imbalances to emerge in other areas. Stabilise the real economy and you unwittingly invite problems in the financial economy because stability encourages people to risk gearing up in pursuit of higher profits.Every period of stability fosters the seeds of its own destruction.

Its the kind of answer I'm partial to.

| Posted by Gary Sauer-Thompson at 5:46 PM |