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beyond economic election twitter « Previous | |Next »
November 9, 2007

If we move behind the twitter of the election campaign and the political chatter about who won the weeks campaign to governance, then we have problems looming on the horizon, which will shape how things will change and the policies required to address them.

resourceboom.jpg
Nicholson

The unprecedented resources boom, which is currently dominating the Australian economy and shaping government revenue and polices, will continue due to the charging economies of China and India. So what happens when the boom ends? The campaign twitter and chatter is mostly about the past, a strange rewriting of history that ignores the then regulated economy, and a fetish about interest rates as the sign of economic competence and good governance.

Do not the signs point to adverse economic circumstances?

If rising interest rates do mean more pain for heavily mortgaged households, then those optimists at the Australian Financial Review who write the editorials, say that the interest rate increases do need to be kept in perspective:

a booming economy and a roaring jobs market will make it easier for households to afford them [increased interest rates] by taking on extra employment. Indeed bipartisan welfare to work and tax-cut policies are aimed at making it more attractive for welfare recipients and low and middle income earners to increase their hours of work. Work choices also boosted the supply of unskilled jobs, at least until the fairness test came along.

No worries. We just need some real spending cuts. And climate change? Or upskilling Australians so they can participate in a global information economy? Or developing new green manufacturing industries. Or poverty and social exclusion?

John Quiggin gives a different perspective in an op-ed in the AFR. He says that it seems likely that the long period of cheap money that has driven the Australia's housing boom is drawing to an end, thereby creating a situation where high levels of debt becoming unsustainable and consumer spending and demand is reduced. This tightening process, which is already happening in the twin deficit US, will be influenced by the tightening credit and instability in the US, due to the subprime mortgage fallout.

Nouriel Roubini paints a bleak picture with his argument that the credit crunch in the US is getting much worse and its financial and real fallout will be severe:

The amount of losses that financial institutions have already recognized - $20 billion – is just the very tip of the iceberg of much larger losses that will end up in the hundreds of billions of dollars. At stake – in subprime alone – is about a trillion of sub-prime related RMBS and hundreds of billions of mortgage related CDOs. But calling this crisis a sub-prime meltdown is ludicrous as by now the contagion has seriously spread to near prime and prime mortgages. And it is spreading to subprime and near prime credit cards and auto loans where deliquencies are rising and will sharply rise further in the year ahead. And it is spreading to every corner of the securitized financial system that is either frozen or on the way to freeze:

He adds that the reality is that most financial institutions – banks, commercial banks, pension funds, hedge funds – have barely started to recognize the lower “fair value” of their impaired securities.

Of course US optimists, such as Robert Samuelson, whose weekly Washington Post column regularly appears in the AFR, says the slowdown in the US is not all doom and gloom. There are lots of benefits to a mild recession in a self-adjusting market.

| Posted by Gary Sauer-Thompson at 5:46 AM | | Comments (18)
Comments

Comments

so according to the AFR, they think that my spending capacity will increase because of higher employment? and tax cuts around or below inflation mean that i'm going to work longer hours for the pay i already receive, or go out and get a second job?

what utter codswallop! this analysis doesn't have a leg to stand on. it's embarrassing to be treated with such contempt and just highlights that the journalists peddling this nonsense either don't know what they're talking about or are in cahoots with the political parties to dupe the public.

Kez,
the AFR did talk in terms of 'households'--implying( I'm unpacking their argument here) that women currently working part-time cos of the kids can get better jobs. They can either shift to better paid part-time jobs or make the transition to full time jobs.They can afford the child care and private school fees.

Bright entrepreneurial individuals like yourself, with a good education, have a myriad of opportunities in a booming economy to get a better paid job. The future is open to them to use their brain power to step up.

So you will be able to afford to buy that good house/apartment in upmarket Canberra suburb that you desire and easily afford the high repayments.

This is the best of all possible worlds.

Gary,
so an economic boom solves everything re struggling households, according to the editorial in the AFR? What if you live in the regions outside the mining boom states?

Nan,
you can always embrace a fundamentalist Christian way to living in a secular society: ---adopt a spiritual solution to a material problem, place God not man at the centre of the universe, and escape from reason to faith.

Aren't the regions bursting with an energized Australian evanglicalism these days; an evanglicalism that has its roots in the theological wars of the 1920s and 1930s.Don't they hold the one big idea that God has revealed himself to us through the Bible?

Isn't this what many Christians have done?

kez,
The AFR editorialists are into the 'opportunity society'; one in which everyone has a chance to work or to start a business and become enterprise workers of the 21st century. Whilst rising interest rates may hamper this, restoring union rights as the ALP proposes, will cause real damage.

Underneath this AFR view is a view that extreme inequality is an inevitable byproduct of robust economic growth in a globalized age . Inequality----ie., what is unjust about the Australian economy---is covered over by the alluring image of ' the opportunity society'.It is Howard's image --ie.,

there is no reason Australia cannot enjoy strong economic growth; why we can't drive unemployment lower towards 3 %; why we can't make the transition to the opportunity society where people not only have a job the job of their choice

There is a reason, of course. It's called inflation and it has been fuelled by Howard's own fiscal policy (budget cuts).

This indicates that it is political choices, not economic laws, that have made Australia a nation of the very rich, the very poor and an increasingly fragile middle class.

Its later than we think?
Oorp!
Well they NEVER elect Labor except on the eve of a downturn, when the bloodsucking of the elite has finally reduced the system to disfunctionality.

Gary,
re Samuelson's panglossian 'slowdown' and 'mild recession'.

Those words hardly describe a situation where the US dollar is hitting record lows this week amidst fears that the mortgage-market meltdown will spread to other parts of the economy and as the Chinese government signaled that it might slow its purchases of U.S. assets and made noises about moving more of their investments into euros.

It is the underlying dynamics of the American economy -- continued massive trade deficits and a whopping budget deficit-- that have put the dollar in such a precarious position.

Yet Bush continues to talk in terms of a strong dollar.

Peter
isn't the basic issue with the US that sooner or later foreigners--eg China-- will stop lending America the money to spend more than it earns?

A falling US dollar will facilitate that as it devalues Chinese dollars holdings. That's why they are considering shifting to the Euro.

Peter,
Thanks for the tongue in cheek advice. I prefer to read Mark Latham instead of Christian fundamentalists obsessed with their culture war against a secular liberal society.

Latham has an interesting article in the Review section of todays AFR. It is called 'Merging into Nothing.' He says that:

...the two trends, the rise of globalism and self-reliant individualism, have hollowed out the role and effectiveness of the nation state. It has less work to do. And with less work, there is less to argue about across the party political divide. In large part, this explains why the great ideological struggles of the postwar decades have disappeared, replaced by the modern pattern of policy convergence and manageralism.

That makes good sense to me.

Nan,

If I understand it right (and there's only a slim chance of that) Howard's economic policies have contributed to the situation Latham describes. Pandering to our materialism while undercutting our ability to deal with debt in both the short and long term.

Gary,

Am I right in thinking this leaves us more exposed to what George Megalogenis predicts will be uncontrollable inflation?

Lyn,
The tighter credit conditions in the US means that it is more expensive for the 4 Australian banks and nonbanking financial institutions to borrow money in the US so they have money to lend to us for our businesses and mortgages.They have to pay more now. That means we have to pay more. So interest rates will increase---by more than the last rate rise. It's just a question of when.

The "uncontrollable inflation" scenario--I'm not sure what that scenario is--- is caused by the capacity constraints--(lack of skilled workers) in an economic boom, lots of consumer spending on credit and an expansive fiscal policy (lots of tax cuts). "Uncontrollable" is a misrepresentation of what is happening---rising inflation that is being squeezed.

Lyn,
Latham's argument is about policy convergence and the need for the political parties to manufacture crises so as to ensure differences.

Gary,

I may be about to make a total git of myself here, but why do financial institutions have to borrow American money? Why not Euros or something?

Nan,

I wonder whether it's even possible for them to do anything else but converge and still expect to get elected.

Peter, S/Gary,

i take your point. unfortunately, i am not amongst the majority of australian's who believe the government shouldn't do anything about the increasing gap between rich and poor.

i am not one of Howard's aspirationals. I do not believe that personal or societal wealth has a direct proportional relationship to quality of life.

I don't believe that a society where large slums surround small enclaves of mcmansions equates to a higher standard of living. Perhaps in this i am not in the minority, but it seems self-interest outweighs community interest.

Lyn,
simple.Money is cheap in the US.Interest rates are around 4.5% whilst in Australia they are 6.75%. Interest rates are like a beacon to profit hungry bankers whose appetite for high yields knows no bounds.

The Euro is overtaking the US dollar as the preferred means of international exchange. The euro may well replace the dollar as the world's reserve currency of choice. Even Alan Greenspan, the former US Federal Reserve Chairman, thinks this is a good possibility.

When a Brazilian super model--Gisele Bundchen--demands to be paid in euros not dollars, then we know a fundamental shift is taking place.

The hedge funds, who operate with an ethos of the trend is your friend, are sniffing blood in the water, and are betting that the dollar will head downward.

Its getting close to investing in US electronic equipment--in the window between now and when the Australia dollar starts to fall.

Gary,

Of course. Doh.

I thought the same thing when I read about the Brazilian supermodel. Hopefully she'll fare better than Saddam Hussein did when he tried the same thing.

If they want us to buy their electronic equipment over the net they're going to have to quit whacking a small fortune in postage on everything. It's a shame. Cars excepted, American industrial design is amazing.

Kez,
just how many households have an annual income above $749,000?

Gary,
I see that Glenn Milne in the Australian is talking about the big downturn courtesy of Peter Costello. Milne says maybe the sky is about to fall in.In

the real world, and the knock-on effects for the global economy are obvious....And it would be crisis. Consider the elements: a US recession, slower global growth, higher bank lending costs in Australia pushing retail rates up outside the cash rate cycle and a weakening US dollar driving the Australian currency to levels that make it export uncompetitive. Look up. That sound you hear may just be the sky falling. The question on November 24 for Australia is who will be there to catch it?

He says that in campaign mode in Australia, Costello's warnings are written off as election fearmongering. And the Opposition rejects any suggestion of a looming disaster for fear of underwriting those same warnings, a concession that would also legitimise potential voter doubts about the capacity of an untried incoming Labor team to handle such a crisis.

He's forgotten about the resources boom and Australia's go for growth trade with China.