Gary,
it's all projection of their anxieties of their own looming defeat. According to Lenore Taylor in the AFR even the most optimistic in the Liberal Party are talking about best case scenarios in which they might just hang on. If they can maintain their position in WA and contain losses in Queensland, then they hang on with the narrowest of margins. That's the professional spin.

ANOP pollster Rod Cameron reckons the Coalition has given up on all seats below 4 per cent, except for Bennelong (Howard) and Wentworth (Turnbull) in NSW , Hasluck and Stirling in WA and Solomon in the NT. That's 10 seats conceded. Hence the defensive strategy in Queensland.

Wow!
Surf's up!
And unless this writer is mistaken, that pointed looking surfboard ridden by Tin-Tin looks aimed fair on a trajectory straight at Costello's big mouth, unless Hockey or some other club footed drone manages to stumble into its oncoming path.
"Eehhhhhh, wipe out!", at this stage.

Nan,
Paul Krugman in the New York Times says the fallout from the subprime housing market in the US continues.

A new report from Congress’s Joint Economic Committee predicts that there will be two million foreclosures on subprime mortgages by the end of next year. That’s two million American families facing the humiliation and financial pain of losing their homes.

At the same time, investors who bought assets backed by subprime loans are continuing to suffer severe losses. Everything suggests that there will be many more stories like that of Merrill Lynch, which has just announced an $8.4 billion write-down because of bad loans — $3 billion more than it had announced just a few weeks earlier.

Nothing was done to head off this disaster, even though it was clear that the US had a serious housing bubble. Why so? Krugman says:

the laissez-faire ideologues ruling Washington — a group that very much included Mr. Greenspan — ... were and are men who believe that government is always the problem, never the solution, that regulation is always a bad thing.Unfortunately, assertions that unregulated financial markets would take care of themselves have proved as wrong as claims that deregulation would reduce electricity prices.

Gary,

Have you noticed the mantra changed very quickly from 'economic management' to 'full employment'? That strikes me as rather silly, given that every time somebody mentions employment somebody else mentions WorkChoices.

Nan,

At the same time as the Liberals are working at retaining a very small number of seats, Labor have been working all year at gaining seats with much larger margins of up to 10%. The Libs haven't bothered and probably can't afford it.

Gary,
In his blog Paul Krugman says

The final stages of the [housing] bubble were marked by a large number of subprime loans, many of them probably made to borrowers who didn’t understand what they were getting into; these loans were then sliced and diced into securities that were, in turn, sold to investors who also didn’t know what they were getting into

He has some great graphs that highlight just how bad things are.

Merrill-Lynch. Now that's a name to conjure with. When the biggest and smartest of them are bleeding it does become a teensy bit worrying, doesn't it?

Paul,
it is likely that the Federal Reserve will cut interest rates to prevent the deepening housing crisis and tight credit markets causing the US economy to slide into recession.

The US dollar continues to weaken against the euro (and a host of currencies) thereby threatening the dollars status as the world's currency. Since a lot of currences are pegged to the US dollar--- an exchange rate regime pegged to the US dollar---what hapens if the US dollar's weakness is prolonged?

Peter,
one thing it could mean is that the Chinese financing of the US twin deficits would probably disappear. Why should they buy US dollars anymore when their current US Treasury reserve holdings are diminishing in value due to the dollar's weakening?

They may allow the yuan to rise in value vis-a-vis the US dollar to get some return on their US Treasury holdings. No one is forcing the world's central banks to extend an unconditional line of credit to the US; tis their own policy choice.

The euro, and commodity currencies such as the Australian dollar, are bearing the brunt of the dollar’s fall and the erosion of their trade competitiveness.

Peter S,
Costello's tsunami view is at odds with the consensus opinion in the US, which remains unshaken that there will be only minor macro effects from the bursting US housing bubble. This is the 'soft landing' consensus--eg., the Bush administration and the Federal Reserve--- which holds that economic growth will recovery in soft landing territory next year.

They talk in terms of a “slump”, not a recession, and that such slump would “bottom out” soon; repeat the mantra of subprime as a “niche problem” that would “remain contained”; dismissed concerns about a severe financial contagion and the risk of a liquidity and credit crunch; and kept on predicting sustained growth rates above 3% while the economy sharply slowed down.

What if this were the worst US housing bust ever ---eg., 20% fall in home prices---and that the macro effects would be severe (financial turmoil, credit crunch) with a high risk of a hard landing recession, and that the rest of the rest of the world will not decouple from such a hard landing.

Can this be dismissed as the view from the moon, or the lunatic fringe? There has been a fall in US house prices, financial turmoil due to reckless lending practices in subprime and mortgage markets, and a credit crunch.

The view that the rest of the world could decouple from a US landing recession is conditional on a US soft landing. An alternative scenario is the rest of the world would not experience a full fledged recession as in the US but it would experience a serious growth slowdown.

Gary,
the US has a problem with China. The Chinese sell the US goods and US sells the Chinese debt. It is an odd relationship. How long can it continue?

We can contrast Lawrence Summers view in the Financial Times to Costello's tsunami view. Summers says that the dollar’s decline may provoke anxiety but it should not be a surprise to anyone who has followed the global economy in recent years:

History suggests that periods when a country’s economy turns down, short-term interest rates are declining and financial strains are increasing are likely to be periods when a nation’s currency depreciates. Moreover the US current account has for years now been financing consumption rather than investment, with the financing coming increasingly from debt rather than equity and shorter rather than longer-term debt.There is nothing very new about a decline in currency of a country running a large current account deficit and whose economy is softening.

He does qualify this by saying that in important respects the situation of the dollar is almost without precedent.

The vast majority of the US current account deficit is now being funded by central banks accumulating reserves as they seek to avoid appreciation of their home currencies. While the US dollar is usually viewed as a floating rate currency, substantial and critical parts of the world economy operate with currencies pegged to dollar parities or at least managed with them in mind.

He adds that this suggests the need for rethinking traditional approaches to dollar policy at a time when the global economy is more vulnerable than it has been since 1998.

Gary: It's good you are looking at Chinese economic policy and the effects on Australia, and worth noting that the Chinese are now moving at least some of their trillions of US dollars in reserve to create something akin to the commercial investment wing of the Singaporean government. I've written on these in China and Blackstone - Communists to control capitalism and Wargamer's view of Shanghai market jitters.
This cartoon from The Economist discussing the real cause of tension between China and the US is a beauty.